Ritchie Capital Mgmt., L.L.C. v. Jeffries

• Decision Date: 02 February 2012
• Docket Number: Civil No. 10–668 ADM/JJG.
• Parties: RITCHIE CAPITAL MANAGEMENT, L.L.C.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investments, I, LLC; and Ritchie Capital Structure Arbitrage Trading, Ltd., Plaintiffs, v. Mary JEFFRIES and Camille Chee–Awai, Defendants.
• Court: U.S. District Court — District of Minnesota

849 F.Supp.2d 881

67 Collier Bankr.Cas.2d 253

RITCHIE CAPITAL MANAGEMENT, L.L.C.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investments, I, LLC; and Ritchie Capital Structure Arbitrage Trading, Ltd., Plaintiffs,

v.Mary JEFFRIES and Camille Chee–Awai, Defendants.

Civil No. 10–668 ADM/JJG.

United States District Court,

D. Minnesota.

Feb. 2, 2012.

Thomas C. Cronin, Esq., Cronin & Co., Ltd., and Steven S. Shonder, Esq., Law Offices of Steven S. Shonder, Chicago, IL, on behalf of Plaintiffs Ritchie Capital Management, L.L.C.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investments, I, LLC; and Ritchie Capital Structure Arbitrage Trading, Ltd.

Andrew S. Birrell, Esq. and Jeffrey S. Storms, Esq., Gaskins Bennett Birrell Schupp LLP, Minneapolis, MN, on behalf of Defendant Mary Jeffries.

Gregory Simpson, Esq., Meagher & Geer, PLLP, Minneapolis, MN, on behalf of Defendant Camille Chee–Awai.

MEMORANDUM OPINION AND ORDER

ANN D. MONTGOMERY, District Judge.

I. INTRODUCTION

On November 21, 2011, the undersigned United States District Judge heard oral argument on defendants Mary Jeffries (“Jeffries”) and Camille Chee–Awai's (“Chee–Awai”) (collectively, “Defendants”) Motions to Dismiss [Docket Nos. 92, 97]. Plaintiffs Ritchie Capital Management, L.L.C.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investments, I, LLC; and Ritchie Capital Structure Arbitrage Trading, Ltd. (collectively, “Ritchie”) oppose the Motions. Following the hearing, at the Court's request the parties provided supplemental briefing [Docket Nos. 111, 112]. For the reasons set forth below, the Motions to Dismiss are granted.

II. BACKGROUND¹

The Ritchie entities are investment funds who loaned money to companies owned by Minnesota businessman Thomas J. Petters (“Petters”). Compl. [Docket No. 1] (“RICO Compl.”) ¶¶ 1, 16. Like many Petters investors and creditors, Ritchie suffered severe losses when it was discovered that Petters was operating a $3.65 million Ponzi scheme.²Ritchie Capital Mgmt., L.L.C. v. Jeffries, 653 F.3d 755, 757 (8th Cir.2011).

Defendants are officers within corporations wholly owned by Petters. Id. at 758. Jeffries is the President and Chief Operating Officer of Petters Group Worldwide (“PGW”), Chief Operating Officer of Petters Company, Inc. (“PCI”), and Chief Executive Officer of Polaroid Corporation (“Polaroid”), a wholly-owned subsidiary of PGW. Id. Chee–Awai is the Chief Executive Officer of Petters Capital, LLC, which is also a subsidiary of PGW. Id. Ritchie alleges Defendants conspired with Petters and others to fraudulently induce Ritchie into making loans to PGW by representing the loans would be adequately secured by the stock and assets of Polaroid. RICO Compl. ¶¶ 1–4, 17–44, 50–78, 81. Ritchie contends Defendants failed to formalize Ritchie's security interests in Polaroid as promised, re-pledged Polaroid assets to another creditor, and later placed Ritchie's security interests into doubt by asserting Ritchie was a creditor of PCI and not of PGW. Id. ¶¶ 8, 57–60, 108, 111–115. Ritchie is suing Defendants in their individual capacities, alleging Defendants received millions of dollars in bonuses for their cooperation in the conspiracy. Id. ¶¶ 30, 102. Ritchie alleges violations of Racketeer Influenced and Corrupt Organizations Act (RICO), see18 U.S.C. § 1962(a),(c)-(d), common law fraud, and tortious interference with contract. The claims are based on the following events.

A. Loan Transactions

On February 1, 2008, Ritchie provided a $31 million loan to PGW to enable Polaroid to repay an existing loan from JP Morgan Chase & Co. (“JP Morgan”). RICO Compl. ¶ 3. The JP Morgan loan was secured by a lien on Polaroid's stock and assets. Id. Petters and Defendants allegedly promised Ritchie that after the JP Morgan loan had been repaid and its liens were released, Ritchie would be given a lien on Polaroid's stock. Id. As additional security, Petters personally guaranteed the $31 million loan. Id. Defendants represented Petters' personal guarantee would remain in place until Polaroid's stock certificates were delivered to Ritchie. Id. The promissory note underlying the $31 million loan states:

This Note is guaranteed personally by Thomas J. Petters, the owner of all of the issued and outstanding stock of the Borrower; provided, however, that the parties shall endeavor, as soon as reasonably practicable, to secure this Note (along with all other Notes of this tranche, pari passu) by a pledge of 100% of the capital stock of Polaroid Holding Company, LLC and the capital stock of its one hundred percent subsidiary the Polaroid Corporation (collectively, the “Polaroid Companies”).

Id. ¶ 58.

In the weeks following the initial $31 million loan, Ritchie made seven additional loans for a total of over $100 million by February 19, 2008. Id. ¶ 52. The additional loans were made in reliance on the representations by Defendants and their co-conspirators that the loans were more than adequately collateralized by Polaroid. Id. The February loans are documented by promissory notes (the “February Notes”) and a February 19, 2008 Note Purchase Agreement executed by Ritchie, Petters and PGW. Id. ¶ 58.

On or about February 15, 2008, JP Morgan released its lien on Polaroid's stock and assets and returned the stock certificates to Polaroid Holding Company, a wholly-owned subsidiary of PGW. Id. ¶ 57. Thereafter, without Ritchie's knowledge, PGW granted a lien on many of Polaroid's assets to another lender, Acorn Capital Group LLC (“Acorn”). Id. ¶ 60.

In May 2008, based on Defendants' representations as to the value of Polaroid's assets, Ritchie extended the maturity date on the February Notes to “late July/early August” of 2008, and provided additional loans (the “May Notes”) to PGW. Id. ¶ 66. Defendants informed Ritchie the May loans would be used for PGW's working capital needs. Id.

In August 2008, Ritchie learned of Acorn's asserted security interests in Polaroid. Id. ¶ 74. Also in August, Petters requested an extension on the February and May Notes. Id. ¶ 75. Ritchie responded by demanding that its security interests in Polaroid be documented. Id.

On September 19, 2008, following several weeks of negotiations, Ritchie agreed to extend the maturity dates on the February and May Notes to December 19, 2008 in exchange for: (a) an agreement (the “Trademark Security Agreement”) memorializing Ritchie's security interests in Polaroid's trademarks in Brazil, India, and China (the “Polaroid Trademarks”), and (b) two agreements (the “Intercompany Note Agreements”) pledging as security to Ritchie a number of intercompany notes (the “Intercompany Notes”) issued by Polaroid in favor of PCI, Petters Capital, and Thomas Petters, Inc. Id. ¶¶ 76–78. One Intercompany Note Agreement was executed on September 19, 2008, and the other on September 26, 2008. Id. ¶ 78. According to Ritchie, some of the Intercompany Notes are “secured by all or substantially all of the assets of Polaroid.” In re Polaroid Corp., 08–bk–46617 (Bankr.D.Minn.) [Claim No. 154–1] Ex. A ¶¶ IV, V.

B. Petters' Ponzi Scheme Revealed, Criminal and Receivership Cases Commenced

On September 24, 2008, five days after the Trademark Security Agreement was signed and two days before the second Intercompany Note Agreement was executed, federal authorities conducted criminal search warrants on Petters' home and corporate office. Id. ¶ 83. On October 2, 2008, the United States Attorney (the “Government”) filed a criminal complaint alleging a massive fraud scheme perpetrated by Petters. United States v. Petters, 08–364 RHK/AJB (D.Minn.) (“Petters Criminal Case”). Ultimately, a jury found Petters guilty of wire fraud, mail fraud, money laundering, and other crimes relating to the fraudulent scheme. Jury Verdict, Dec. 2, 2009 [Petters Criminal Case Docket No. 361]. Petters was sentenced to fifty years in prison, and a money judgment of $3,522,880,614.10 and forfeiture were ordered. Sentencing J., Apr. 8, 2010 [Petters Criminal Case Docket No. 400]. The Government's request for a restitution order was denied, because the burden restitution would have imposed on the court outweighed the benefit victims would have realized on their restitution claims. Order, June 3, 2010 [Petters Criminal Case Docket No. 459]. Instead, victims were allowed a recovery through the remission of forfeited assets. Id. at 9–11.

Simultaneously with the filing of the criminal case, the Government filed a civil action under the Fraud Injunction Statute, 18 U.S.C. § 1345, to preserve Petters' assets for victims of the fraud. United States v. Petters, 08–5348 ADM (D.Minn.) (“Receivership Case”). A receivership and asset freeze were imposed over all assets and entities wholly owned and controlled by Petters, including PGW, PCI, and Polaroid. Order, Dec. 8, 2008 [Receivership Case Docket No. 127] (“Receivership Order”) at 7–18. Douglas A. Kelley (“Receiver Kelley”) was appointed as receiver. Id. at 13. The Receivership Order includes a stay of litigation against the individuals and assets subject to the receivership. Id. at 19–20. Ritchie twice moved to intervene in the Receivership Case, first to request Receiver Kelley be replaced by a receiver selected by Ritchie, and next to argue the receivership should be vacated as to PGW and Polaroid. See Receivership Case Docket Nos. 14, 225. Both requests for intervention were denied by this Court, and the denials were affirmed by the Eighth Circuit Court of Appeals. United States v. Ritchie Special Credit Inv., Ltd., 620 F.3d 824 (8th Cir.2010).

C. Bankruptcy Proceedings

Following the collapse of Petters' Ponzi scheme, several of Petters' companies filed for bankruptcy protection, including PGW, PCI, Polaroid, and Petters Capital. See In re Petters Co., Inc., 08–bk–45257 (Bankr.D.Minn.); In re Polaroid Corp., 08–bk–46617 (Bankr.D.Minn.); In re Petters Group Worldwide, LLC, 08–bk–45258 (Bankr.D.Min...