Ritchie Capital Mgmt., L.L.C. v. BMO Harris Bank, N.A.

• Decision Date: 17 August 2017
• Docket Number: No. 16-1968,16-1968
• Citation: 868 F.3d 661
• Parties: RITCHIE CAPITAL MANAGEMENT, L.L.C.; Ritchie Capital Management, Ltd.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investments I, L.L.C.; Ritchie Capital Structure Arbitrage Trading, Ltd., Plaintiffs-Appellants, v. BMO HARRIS BANK, N.A., as successor to M&I Marshall & Ilsley Bank, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

868 F.3d 661

RITCHIE CAPITAL MANAGEMENT, L.L.C.; Ritchie Capital Management, Ltd.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investments I, L.L.C.; Ritchie Capital Structure Arbitrage Trading, Ltd., Plaintiffs-Appellants,
v.
BMO HARRIS BANK, N.A., as successor to M&I Marshall & Ilsley Bank, Defendant-Appellee.

No. 16-1968

United States Court of Appeals, Eighth Circuit.

Submitted: February 8, 2017
Filed: August 17, 2017

Counsel who presented argument on behalf of the appellant was Nancy Gertner, of Cambridge, MA. The following attorney(s) appeared on the appellant brief; Alexandra A.E. Shapiro, of New York, NY., Eric S. Olney, of New York, NY., Matthew J. Craig, of New York, NY.

Counsel who presented argument on behalf of the appellee was Joshua D. Yount, of Chicago, IL. The following attorney(s) appeared on the appellee brief; Keith Solomon Moheban, I, of Minneapolis, MN., Joshua D. Yount, of Chicago, IL., Adine S. Momoh, of Minneapolis, MN., Lucia Nale, of Chicago, IL., Debra L. Bogo-Ernst, of Chicago, IL., Nancy Gertner, of Cambridge, MA.

Before LOKEN, COLLOTON, and KELLY, Circuit Judges.

COLLOTON, Circuit Judge.

This suit arises out of the collapse of Thomas Petters's massive Ponzi scheme. Ritchie Capital Management, one of Petters's creditors, appeals the district court's dismissal of its claims against BMO Harris, the successor-in-interest to M&I Bank. Ritchie seeks damages from BMO based on M&I's alleged collusion with Petters and his companies. The district court abstained from exercising jurisdiction and then dismissed Ritchie's claims. We affirm the district court's decision to abstain, but vacate the judgment dismissing the case and remand for the court to enter a stay.

I.

Petters's Ponzi scheme involved convincing investors to loan him money on the pretense that Petters would purchase and resell wholesale consumer merchandise. Petters fabricated purchase orders from big-box retailers to make it appear that his

868 F.3d 663

company, Petters Company, Inc. (PCI), was generating profits from these resales. Instead of purchasing merchandise, PCI rerouted the money through M&I bank accounts back to other PCI entities and to Petters. From 2001 to 2008, PCI used at least one M&I checking account exclusively for fraudulent transactions.

Ritchie was one of the investors that bought into Petters's scheme. In 2008, Ritchie made a series of loans to Petters and his companies totaling $150 million. One of the loans, $31 million disbursed in March 2008, was allegedly made so that PCI could purchase a bulk order of Sony PlayStations. For the PlayStation transaction, PCI, Ritchie, and M&I entered into a deposit account control agreement, under which M&I agreed to administer a separate account for PCI to collect payments and direct the proceeds to Ritchie. PCI never repaid the loans. In September 2008, Petters's scheme collapsed; a few weeks later, PCI filed for bankruptcy.

Eager to recover some of its losses, Ritchie filed proofs of claim for more than $200 million in PCI's bankruptcy proceedings. The PCI Trustee filed an adversary proceeding against Ritchie in the bankruptcy court to, among other things, have Ritchie's proofs of claim disallowed based on what the Trustee claimed was Ritchie's actual notice of the fraudulent scheme. The PCI Trustee also filed an adversary proceeding against BMO based on M&I's purported role in the fraud, claiming that M&I and Petters were part of a civil conspiracy and that M&I aided and abetted Petters's fraud and breach of fiduciary duty.

The case before us began in February 2014, when Ritchie sued BMO in New York state court alleging fraud and misrepresentation, aiding and abetting fraud, and civil conspiracy. As the appeal concerns an order granting a motion to dismiss, we recite the facts as alleged by Ritchie. Ritchie claimed that M&I had actual knowledge of Petters's fraud, because the bank knew that retailers were not making payments to PCI and that PCI's stated business model could not have generated the amount of money that was transferred into and out of PCI's accounts. Ritchie also claimed that M&I substantially assisted Petters by entering into deposit account control agreements with investors like Ritchie, who allegedly extended loans to PCI in reliance on M&I's assurances.

BMO removed the suit to federal court, successfully moved to transfer it to the District of Minnesota, and then moved to dismiss for failure to state a claim. In the alternative, BMO requested that the district court abstain from hearing Ritchie's claims in light of the ongoing bankruptcy proceedings. The district court granted BMO's motion to dismiss on abstention grounds, concluding that there was "substantial overlap" between this case and the Ritchie and BMO adversary proceedings. The court reasoned that although the parties and claims in the two cases were not identical, the issues common to both cases—including whether M&I knew about Petters's fraud, whether M&I's conduct amounted to substantial assistance, and whether Ritchie was on actual notice of Petters's fraud—rendered them sufficiently similar to warrant abstention. The district court noted that although Ritchie requested a stay in lieu of dismissal, Ritchie did not explain why a stay would be preferable, so the court dismissed the action.

A few weeks after the district court granted BMO's motion to dismiss, the PCI Trustee and Ritchie settled the Ritchie adversary proceeding. Ritchie received a $163 million unsecured claim against Petters's estate, with a $6 million reduction from whatever amount the estate would otherwise pay on Ritchie's allowed claim. A

868 F.3d 664

few days after the settlement, Ritchie...