Ritchie Capital Mgmt., L.L.C. v. Gen. Elec. Capital Corp.

• Decision Date: 04 August 2015
• Docket Number: No. 14 Civ. 8623(PAE).,14 Civ. 8623(PAE).
• Citation: 121 F.Supp.3d 321
• Parties: RITCHIE CAPITAL MANAGEMENT, L.L.C., et al., Plaintiffs, v. GENERAL ELECTRIC CAPITAL CORP., Defendant.
• Court: U.S. District Court — Southern District of New York

121 F.Supp.3d 321

RITCHIE CAPITAL MANAGEMENT, L.L.C., et al., Plaintiffs,

v.GENERAL ELECTRIC CAPITAL CORP., Defendant.

No. 14 Civ. 8623(PAE).

United States District Court, S.D. New York.

Signed Aug. 4, 2015.

James T. Kim, Leonel V. Leyva, Cole Schotz Meisel Forman & Leonard, PA, Hackensack, NJ, Jed Matthew Weiss, Cole, Schotz, Meisel, Forman & Leonard, P.A., New York, NY, Adam Raymond Bowers, Gary Anthony Grasso, Grasso, Bass & Williams, P.C., Burr Ridge, IL, for Plaintiffs.

Miles Norman Ruthberg, Robert John Malionek, Roger G. Schwartz, Tyler Ulrich Nims, Latham & Watkins LLP, New York, NY, Sean M. Berkowitz, Latham & Watkins LLP, Chicago, IL, for Defendant.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge.

Between 1998 and 2001, defendant General Electric Capital Corporation ("GECC") had a lending relationship with two entities affiliated with Minnesota businessman Thomas Petters. In 2008, Ritchie Capital Management, LLC and the other five plaintiffs¹ (collectively, "Ritchie") also invested with Petters. In fall 2008, law enforcement officials discovered that Petters was operating a Ponzi scheme. In 2009, Petters was convicted of fraud for operating a $3.65 billion Ponzi scheme, and was sentenced to, inter alia, a term of 50 years' imprisonment.

Ritchie, which allegedly lost $157 million from its 2008 investments with Petters, now sues GECC. Ritchie principally alleges that GECC had discovered Petters' Ponzi scheme in 2000, but chose not to disclose the fraud in order to ensure that GECC would recover its investment. Ritchie brings three state-law causes of action against GECC: aiding and abetting fraud, civil conspiracy to commit fraud, and negligence.

GECC now moves to dismiss the Complaint in its entirety. For the reasons that follow, the Court grants GECC's motion.

I. Background

A. Factual Background²

Ritchie's allegations are set out in detail below, but it is useful first to summarize Ritchie's core allegations, which are: (1) "By October 2000, GECC had uncovered (and could have ended) what would turn out by September 2008 to be the third largest Ponzi scheme in U.S. business history" ; (2) instead of exposing Petters' fraud, GECC joined it to ensure that it "would be paid and make a large profit"; (3) thereafter, GECC allowed Petters to "use GECC's business stature, recommendations and UCC–1 filings to victimize many more lenders including Plaintiffs"; and (4) "Had GECC not conspired with Petters and aided and abetted Petters' fraud, Petters and his companies would not have been able to defraud Plaintiffs." Compl. ¶¶ 1–2.

1. Petters' Scheme

Petters began his Ponzi scheme in 1998. Id. ¶ 5. The scheme was a "fraudulent purchase order financing scheme," in which Petters solicited loans from private investors ostensibly to enable his companies to finance the purchase of brand-name consumer electronics merchandise. Id. ¶ 18. Petters represented to these lenders that their loans would be repaid when his companies sold these electronics to big-box retailers like Costco Wholesale Corporation ("Costco"). Id. ¶ 19. To induce lenders to make the requested loans, Petters would provide a copy of a purported purchase order, pursuant to which a Costco subsidiary, National Distributors, would buy the electronics as soon as Petters Company, Inc. ("PCI") had the goods. Id. ¶ 20. The authorities eventually discovered—in fall 2008—that this was all a Ponzi scheme. Id. ¶¶ 1, 5

2. GECC's Lending Relationships with Petters, and GECC's Discoveries

On March 26, 1998, GECC entered into a credit agreement with another Petters corporation, Petters Capital, Inc. Id. ¶ 24. Specifically, GECC entered into a revolving credit facility ("the Petters Capital Line") to fund Petters Capital's purchases of electronics for resale to big-box retailers like Costco. Id. In exchange for providing funding, GECC received various fees, including a "success fee" ranging from 10 to 30 percent of Petters Capital's gross profit margin on the sale of merchandise. Id. ¶ 25.

On December 17, 1999, GECC entered into a $55 million line of credit with a second Petters affiliate, Red Tag ("the Red Tag Capital Line"). Id. ¶ 29. This revolving credit facility had "the similar purpose" of funding electronics purchases. Id.

a. The Petters Capital Line

Around this time, Petters drafted and presented a generic letter of recommendation (about himself) to Richard Menczynski, a GECC executive in charge of the Petters accounts. Id. ¶¶ 28, 30. Petters asked that GECC issue this letter of recommendation. Id. ¶ 30. GECC complied: It issued the recommendation letter on its letterhead, dated January 4, 2000, and addressed "To Whom It May Concern" (the "January 2000 recommendation letter"). Id. ¶¶ 30–31. The letter described Petters Capital as "an excellent customer" that had "performed well" and described Petters "[o]n a personal level ... to be of high character and possessing strong moral values."Id. ¶ 31. Ritchie alleges that "[e]ven after GECC discovered Petters' fraudulent purchase order financing scheme, GECC never told Petters to cease his use of the January 2000 Letter nor asked with whom it had been shared." Id. ¶ 32.

By October 2000, Petters owed GECC more than $45 million under the Petters Capital Line. Id. ¶ 38. On October 23, 2000, with payments owed to GECC past due, Paul Feehan of GECC contacted Costco to request verification of the amounts Costco owed Petters Capital. Id. ¶ 39. Costco replied that its records did not confirm the amounts set forth by GECC. Id. GECC then sent Costco copies of the National Distributors purchase orders.

Id. 40. In a follow-up phone call, a Costco representative informed Feehan that those purchase orders were not valid National Distributors purchase orders. Id. Petters quickly learned that GECC had contacted Costco; he immediately called GECC's Feehan "and complained angrily" that Feehan had contacted Costco and jeopardized Petters' relationship with his largest customer. Id. ¶ 41. "Feehan accused Petters of fraud and threatened to destroy Petters' business." Id. ¶ 42.

Although Petters Capital owed GECC more than $45 million that was due October 27, 2000, Ritchie's Complaint alleges that Feehan (on behalf of GECC) agreed to an extension "in order to give Petters time to induce third parties to make loans to PCI that would be used to pay off GECC." Id. ¶ 44. Specifically, the Complaint alleges:

These conversations culminated in GECC's tacit agreement to knowingly and voluntarily participate in a common scheme to fraudulently induce third parties to loan PCI the money that was needed to pay debts owed to GECC by using false transaction documents, and to conceal PCI's fraudulent Costco purchase order financing scheme from present and future lenders to PCI and related companies, in consideration for Feehan's knowing and voluntary participation in this common scheme. Petters represented to Feehan: "I tell you what, I'll make you look like a hero, I promise you, on the Petters [Capital] situation and the RedTag situation."

Feehan knew and understood from the plain meaning of the words used in his conversations with Petters between October 24 and October 27, 2000, that Petters was offering to obtain the approximately $45 million needed to pay Petters Capital's debts to GECC by means of PCI's fraudulent purchase order financing scheme that GECC had obtained actual knowledge of as a result of the Costco Discovery and make Feehan look like a hero, in consideration for Feehan's voluntary participation and complicity in a common scheme to use false purchase order transaction documents and intentional misrepresentations about Petters' relationship with GECC to fraudulently induce prospective lenders to loan PCI at least $45 million and for GECC's assistance in concealing PCI's fraudulent Costco purchase order financing scheme from current and prospective lenders.

Feehan and GECC accepted Petters' offer and entered into a corrupt agreement with Petters, PCI and Petters Capital under which GECC agreed to take concerted action for the unlawful purpose of allowing PCI to perpetuate its fraudulent Costco purchase order financing scheme and to use money obtained by PCI by means of using false transaction documents to promptly pay the approximately $45 million owed by Petters Capital to GECC as of October 24, 2000, and "earn" GECC a windfall in the form of substantial "success fees" on transactions that GECC knew were not legitimate. Feehan agreed to do just that and play ball with Petters to benefit GECC to the detriment of future Petters lenders such as Plaintiffs.

Id. ¶¶ 45–47.

As for repayment of the Petters Capital Line, Ritchie alleges that, on October 24, 2000, Petters sent GECC "at least seven worthless checks in the amount of $5 million each and one check in the amount of $3.5 million." Id. ¶ 48. GECC agreed to hold those checks until Petters told GECC that he had obtained sufficient funds for those checks to clear. Id. However, Ritchie also alleges that, the same day, Petters sent Feehan nine checks, each for $5 million (for a total of $45 million). Id. ¶ 49. GECC then gave Petters a "release" instrument stating that Petters Capital had paid off its debts under the Petters Capital Line. Id. 50. As part of its agreement with Petters, the Complaint alleges, GECC "kept silent about Petters' fraud [ ]" after October 27, 2000. Id. ¶ 51.

The Complaint further alleges that, on October 27, 2000, "Petters and GECC fraudulently induced" Universal Capital Partners ("Universal Capital") to loan PCI $15 million based on misrepresentations about an agreement between Petters and Circuit City. Id. 52. Specifically, Petters "falsely represented" that PCI had the opportunity to buy $50 million worth of consumer goods from Circuit City for $28 million. Id. "To induce Universal Capital to request a $15 million loan from GECC under Universal Capital's credit agreement with GECC, ... Petters intentionally misrepresented to Universal Capital that PCI would be contributing the $13...