Petters Grp. Worldwide, LLC v. Opportunity Fin., LLC (In re Petters Co.)
| Decision Date | 19 May 2016 |
| Docket Number | 08–45329 GFK,08–45392 GFK,08–45328 GFK,08–45371 GFK,Court File No. 08–45257,Court File Nos: 08–45258 GFK,08–45330 GFK,08–45327 GFK,ADV 10–4301,08–45331 GFK,08–45326 GFK |
| Parties | In re: Petters Company, Inc., et al, Debtors. (includes: Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc. Edge One LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.) Douglas A. Kelley, in his capacity as the court-appointed Chapter 11 Trustee of Debtors Petters Company, Inc.; PC Funding, LLC; and SPF Funding, LLC, Plaintiff, v. Opportunity Finance, LLC; Opportunity Finance Securitization, LLC; Opportunity Finance Securitization II, LLC; Opportunity Finance Securitization III, LLC; International Investment Opportunities, LLC; Sabes Family Foundation; Sabes Minnesota Limited Partnership; Robert W. Sabes; Janet F. Sabes; Jon R. Sabes; Steven Sabes; Deutsche Zentralgenossenschaftbank AG ; West Landesbank AG; and The Minneapolis Foundation, Defendants. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota |
Adam C. Ballinger, Kirstin D. Kanski, Mark D. Larsen, James A. Lodoen, Jeffrey D. Smith, Daryle Uphoff, Lindquist & Vennum LLP, Minneapolis, MN, for Plaintiff.
Jefferey D. Bailey, Jonathan M. Landy, Christopher J. Mandernach, Joseph G. Petrosinelli, Williams & Connolly LLP, Washington, DC, Kari Berman, Benjamin Gurstelle, Max C. Heerman, John R. McDonald, Briggs and Morgan, P.A., David L. Mitchell, Robins Kaplan LLP, Eric R. Sherman, Monica L. Clark, Elizabeth A. Hulsebos, Thomas O. Kelly, III, Patrick J. McLaughlin, Dorsey & Whitney LLP, Michael Rosow, Winthrop & Weinstine, Minneapolis, MN, for Defendants.
West Landesbank AG, New York, NY, pro se.
This adversary proceeding was commenced in the Chapter 11 cases of Debtor Petters Company, Inc., and the other Debtor-entities related to it. It is before the court for a ruling on an issue posed by Defendants Opportunity Finance, LLC, et al (collectively, “the Opportunity Finance defendants”) in their motion for dismissal.1 In 2013, substantive consolidation was ordered in the underlying bankruptcy cases, as to the estates of all of the Debtors except Petters Group Worldwide, Inc. (“PGW”). The issue at bar is how that grant of substantive consolidation affects the capacity of the Plaintiff (“the Trustee”) to sue the Opportunity Finance defendants under 11 U.S.C. § 544(b)
and Minnesota's fraudulent transfer laws, on the range of transfers he seeks to avoid. Oral argument for the Opportunity Finance defendants was presented by Christopher J. Mandernach of Williams & Connelly, LLP and John R. McDonald of Briggs and Morgan, P.A. James A. Lodoen and Mark D. Larsen of Lindquist & Vennum, PLLP argued for the Trustee. H. Peter Haveles, Jr. of Kaye Scholer LLP argued for Defendant DZ Bank. This memorandum sets forth the ruling on the issue. The Opportunity Finance defendants' motion for dismissal raised other issues that will receive separate rulings.
The underlying cases were commenced in October, 2008, after the collapse of a massive Ponzi scheme perpetrated by Thomas J. Petters, the principal of the Debtors. This adversary proceeding was one of some 200 in a docket of avoidance litigation commenced in the cases. It is one of the most prominent within the docket—both for the magnitude of the judgment sought by the Trustee and in the scope and complexity of the subject matter, i.e. hundreds of transactions that featured the subject transfers.2
Early in this litigation, the Opportunity Finance defendants moved for dismissal under Rule 12(b)(6) in lieu of filing an answer. Numerous defendants in other adversary proceedings in the docket did the same.
This adversary proceeding was among a small number that presented substantial legal issues distinct to it—more involved and specific to particular parties-defendant.3 Further judicial attention to this and other such matters was deferred pending the issuance of three sets of rulings on issues common across the litigation docket.4
Around the same time, another proceeding was judicially assigned higher priority for litigation, trial, and decision: a motion the Trustee brought in the main cases, for the substantive consolidation of the estates of all of the Debtors but one.5 The Opportunity Finance defendants vigorously opposed the Trustee on the merits of that motion. They were joined by other defendants in the Trustee's litigation, including DZ Bank and WestLB. A lengthy decision on the Trustee's motion was entered, published as In re Petters Company, Inc., 506 B.R. 784 (Bankr.D.Minn.2013)
.
The Opportunity Finance defendants and other respondents took appeals from that order. They elected to have the appeals proceed in the district court. Judge Patrick J. Schiltz was assigned to the appeals.6 Ultimately, Judge Schiltz dismissed the appeal for lack of appellate standing in the Opportunity Finance defendants and its allies. WestLB AG v. Kelley, 531 B.R. 783 (D.Minn.2015)
. The Eighth Circuit Court of Appeals has just affirmed Judge Schiltz's decision. Opportunity Finance, LLC v. Kelley, 822 F.3d 451, No. 15–2061, 2016 WL 2848587 (8th Cir. May 16, 2016).
Some months after the appeal to the district court was made, the Trustee began asserting in this adversary proceeding that one of the keystone aspects of the Opportunity Finance defendants' motion for dismissal was ripe for decision due to the grant of substantive consolidation. That point was the defense's contention that the Trustee had no litigable claim against them for avoidance of fraudulent transfers under Minnesota state law, as to payments that had been made by the Debtor-entities that had no statutorily-qualified creditors when they were put into bankruptcy. On such transfers, the Opportunity Finance defendants insisted, the Trustee lacked a figurative predecessor from which to take the derivative standing under 11 U.S.C. § 544(b)
that he asserted when he invoked Minnesota state law as a substantive basis for avoidance. For the Trustee's case against the Opportunity Finance defendants, the Debtor-transferors in question were PC Funding, LLC and SPF Funding, LLC.
The Opportunity Finance defendants resisted having this issue scheduled for submission. At various times they suggested that proceeding here would infringe on appellate jurisdiction due to an overlap of issues; at others they cited “prudential considerations” to argue for deferral until the issue of the ultimate forum was resolved through their motion for withdrawal of reference.
However, the issue was set for argument.7 And now it is indisputably ripe for a ruling.
Before getting into the merits, it is necessary to lay out the issue presented—specific to its genesis (the Trustee's pleading) and the vehicle through which it is raised (the defense's motion for dismissal).
The Trustee sued the Opportunity Finance defendants to avoid transfers of money they had received in repayment of loans they had made to the Petters enterprise structure.8 As the Trustee pled it, these transactions were documented as loans to fund the business in which the Petters enterprise structure was ostensibly engaged: the facilitation of sales of consumer merchandise inventory outside more standard distribution channels, i.e. directly between wholesaler- or retailer-providers and retailer-purchasers. The Trustee's forensic-accounting investigation revealed that there were few or no underlying transactions in such goods over a decade or more, and the Petters structure's receipt and use of lenders' cash infusions was parlayed as a Ponzi scheme.9
The Trustee sues the Opportunity Finance defendants on claims of fraudulent transfer. In part, he relies on the Minnesota enactment of the Uniform Fraudulent Transfer Act (“MUFTA”), Minn.Stat. §§ 513.41
–513.51 (2014), via the empowerment of 11 U.S.C. § 544(b).10 He relies on both statutory theories of fraudulent transfer, i.e. actually- and constructively-fraudulent.
For such empowerment, however, § 544(b)
requires a trustee to prove that the debtor for whose estate he sues, in fact had a creditor of the sort identified in the statute, one with a right to payment from the debtor, in order for the trustee to invoke the same state-law avoidance remedies that such a creditor could have used on the date of the bankruptcy filing and in the absence of the bankruptcy filing. In re Petters Company, Inc., 494 B.R. at 440–441 ; In re Petters Company, Inc., 495 B.R. at 895–896. To make a more concrete metaphor for it, a right of avoidance for a bankruptcy estate under § 544(b)
must be anchored to the debtor's pre-bankruptcy past—based on actual pre-petition facts in which that debtor features as a participant, linked directly to the pre-petition right of a creditor of that debtor.
Absent such a predicate creditor, a trustee lacks derivative standing to sue under § 544(b)
. In re Wintz Cos., 230 B.R. 848, 859 (8th Cir. BAP1999). And further, to meet the plausibility standard for fact-pleading under current Supreme Court precedent,11 a trustee must identify in his complaint, by name, one or more such predicate creditors. In re Petters Company, Inc., 495 B.R. at 895–901.
When the Trustee originally sued out this adversary proceeding, the pleading addressed to this point was minimal:
141. At all times material hereto, there was and is at least one or more creditors who held and who hold unsecured claims against the Debtors that were and are allowable under Bankruptcy Code § 502
or that were and are not allowable only under Bankruptcy Code § 502(e). The PC Funding Transfers are avoidable under applicable nonbankruptcy law by a creditor holding an unsecured claim in the bankruptcy case.
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