Ritchie Capital Mgmt., LLC v. Stoebner

• Decision Date: 10 March 2015
• Docket Number: No. 14–1154.,14–1154.
• Parties: RITCHIE CAPITAL MANAGEMENT, LLC, as administrative and collateral agent; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investments I, L.L.C.; Ritchie Capital Structure Arbitrage Trading, Ltd., Appellants v. John R. STOEBNER, Trustee, Appellee. JPMorgan Chase Bank, N.A., Amicus Curiae. Douglas A. Kelley, as Chapter 11 Trustee; The Official Committee of Unsecured Creditors of Petters Company, Inc. and Petters Group Worldwide, LLC; National Association of Bankruptcy Trustees, Amici on Behalf of Appellee(s).
• Court: U.S. Court of Appeals — Eighth Circuit

779 F.3d 857

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

v.John R. STOEBNER, Trustee, Appellee.

JPMorgan Chase Bank, N.A., Amicus Curiae.

Douglas A. Kelley, as Chapter 11 Trustee; The Official Committee of Unsecured Creditors of Petters Company, Inc. and Petters Group Worldwide, LLC; National Association of Bankruptcy Trustees, Amici on Behalf of Appellee(s).

No. 14–1154.

United States Court of Appeals,

Eighth Circuit.

Submitted: Oct. 7, 2014.

Filed: March 10, 2015.

Thomas K. Cauley, Jr., argued, Brian A. McAleenan, Michael J. La Mare, Chicago, IL, James M. Jorissen, Minneapolis, MN, on the brief, for Appellant.

Terrence J. Fleming, argued, George Singer, Sandra S. Smalley–Fleming, Mark S. Enslin, on the brief, Minneapolis, MN, for Appellee.

Kevin Martin Decker, Benjamin Everett Gurstelle, John R. McDonald, Minneapolis, MN, James J. White, Ann Arbor, MI, David J. Woll, Isaac Rethy, New York, N.Y., for Amicus brief of JPMorgan Chase Bank, NA.

Steven E. Wolter, Minneapolis, MN, David Runck, Connie A. Lahn, Eden Prairie, MN, for Amicus brief of Douglas Kelley, as Chapter 11 Trustee and the Official Committee of Unsecured Creditors of Petters Company, Inc., and Petters Group Worldwide, LLC.

Ronald R. Peterson, Chicago, IL, for Amicus brief of the National Association of Bankruptcy Trustees.

Before RILEY, Chief Judge, WOLLMAN and BYE, Circuit Judges.

RILEY, Chief Judge.

This case marks yet another dispute stemming from Tom Petters's multi-billion dollar fraud. The bankruptcy trustee for Polaroid Corporation (Polaroid)—a Petters company—succeeded in the bankruptcy court ¹ in avoiding as fraudulent the transfer of several Polaroid trademarks to the appellants—Ritchie Capital Management, L.L.C.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investments, I, L.L.C.; and Ritchie Capital Structure Arbitrage Trading, Ltd.² On appeal, the district court ³ affirmed the bankruptcy court's decision. Ritchie appeals, and having jurisdiction under 28 U.S.C. § 158(d)(1), we now affirm.

I. BACKGROUND

The specifics of Petters's Ponzi scheme ⁴ and the numerous resulting civil disputes have been described in detail in several of this court's other opinions. See, e.g., United States v. Petters, 663 F.3d 375, 379–80 (8th Cir.2011); Ritchie Capital Mgmt., L.L.C. v. Jeffries, 653 F.3d 755, 758–60 (8th Cir.2011); Ritchie Special Credit Invs., Ltd. v. U.S. Trustee, 620 F.3d 847, 850–51 (8th Cir.2010). We recite only those facts most relevant to the instant appeal. Petters, through his company Petters Company, Inc. (PCI), purported to run a “diverting” business that purchased electronics in bulk and resold them at high profits to major retailers. The business was a sham, and the only influx of money came from loans or investments. Petters was convicted of multiple counts of mail fraud, wire fraud, and money laundering perpetrated through PCI and PGW and was sentenced to fifty years in prison.

In 2005, Petters, as PGW's sole board member, directed PGW to purchase Polaroid, becoming the 100% beneficial owner of Polaroid stock, and Petters became the sole member and “Chairman” of Polaroid's board of directors. Although a subsidiary of PGW, Polaroid operated as an independent, stand-alone corporation and engaged in legitimate business operations. On at least two occasions, Petters took several million dollars from Polaroid to satisfy PCI debts.

In late 2007 and early 2008, Petters's companies—including Polaroid—began to experience “major” financial difficulty. On January 31, 2008, a broker for PGW approached Ritchie about obtaining a loan. The next day, Ritchie loaned PGW $31 million to pay off Polaroid and PGW debts. The loan bore an 80% annual interest rate and was to be repaid within ninety days. Petters personally guaranteed the loan, but Ritchie was told the loan would also be “backed by the entire Polaroid corporation.” The note stated, “[T]he parties shall endeavor, as soon as reasonably practicable, to secure this Note ... by a pledge of 100% of the capital stock of ... the Polaroid Corporation.” Throughout February, Ritchie extended a number of additional loans, totaling $115 million, under the same terms.⁵ On May 9, 2008, Ritchie lent PGW and PCI an additional $12 million to be repaid in three weeks and bearing 362.1% annual interest. Polaroid was not a signatory on any of the loans, and although the initial loan was used to repay a Polaroid debt, the proceeds of the loans did not go to Polaroid.

By September 1, 2008, all of the loans were past due, and Ritchie began demanding collateral to secure the overdue loans. On September 19, five days before Petters was raided by the Federal Bureau of Investigation (FBI), Petters executed a Trademark Security Agreement (TSA) giving Ritchie liens on several Polaroid trademarks as consideration for Ritchie's extensions of the loans' repayment dates.

Polaroid's CEO, Mary Jeffries, objected to the TSA because she feared it would impede Polaroid's ability to raise new capital for the company. Although Polaroid had valuable assets such as trademarks, it had a cash shortage and was having trouble paying its creditors. The TSA did include a carve-out permitting Polaroid to grant first-priority liens on the trademarks to secure up to $75 million in working capital.

On September 24, 2008, the FBI, suspecting Petters's fraud, raided Petters's offices and home—a raid that would lead to his eventual conviction. Shortly thereafter, Ritchie sent notice that Petters was in default and accelerated the amounts due on all of the loans. Polaroid filed for Chapter 11 reorganization on December 18, 2008.

Polaroid sued Ritchie arguing, among other things, the TSA was unenforceable because it resulted from an actual fraudulent transfer under both federal and Minnesota bankruptcy law. Polaroid's proceeding was thereafter converted to a Chapter 7 bankruptcy, and John R. Stoebner was appointed trustee (trustee) and substituted as a party. See In re Polaroid Corp., 420 B.R. 484, 486 n. 1 (Bankr.D.Minn.2009). The trustee filed a motion for partial summary judgment on the actual fraudulent transfer claim based on the “Ponzi scheme presumption.” The bankruptcy court stayed proceedings on the remaining claims and, applying both the Ponzi scheme presumption approach and, alternatively, the traditional “badges of fraud” inquiry, presumed Petters executed the liens with fraudulent intent. The bankruptcy court also found Ritchie could not rebut this presumption because Ritchie had not received the liens in good faith and for value. The bankruptcy court then granted the trustee's motion for summary judgment.

Ritchie appealed to the district court, challenging the bankruptcy court's presumption of actual fraudulent intent and the admission of expert testimony from accountant Theodore Martens. Ritchie did not challenge the bankruptcy court's finding that Ritchie had not received the liens in good faith and for value. The district court determined the bankruptcy court had not abused its discretion in admitting the expert testimony, upheld the bankruptcy court's application of the Ponzi scheme presumption, and did not address the badges of fraud analysis. Ritchie appeals.

II. DISCUSSION

This court reviews de novo the bankruptcy court's grant of summary judgment. See In re Cochrane, 124 F.3d 978, 981 (8th Cir.1997). “Summary judgment was properly granted if, assuming all reasonable inferences favorable to the non-moving party, there is no genuine [dispute] as to any material fact and the moving party is entitled to judgment as a matter of law. Where [as here] the unresolved issues are primarily legal rather than factual, summary judgment is particularly appropriate.” Id. at 981–82 (internal citations omitted). Given the particular legal issues involved in this case, a discussion of background principles is warranted.

“Under 11 U.S.C. § 548(a), the Trustee is given authority to avoid transfers ... on the ground of actual fraud or on the ground of constructive fraud.” Lovell v. Mixon, 719 F.2d 1373, 1376 (8th Cir.1983); see11 U.S.C. § 548(a)(1) (“The trustee may avoid any transfer ... incurred by the debtor[ ] that was made or incurred on or within 2 years before the date of filing of the petition.”). Here, the bankruptcy court addressed only the trustee's actual fraud claim, which requires the trustee to show the transfer was made “with actual intent to hinder, delay, or defraud any entity to which the debtor was or became ... indebted.” 11 U.S.C. § 548(a)(1)(A); see alsoMinn.Stat. § 513.44(a)(1) (“A transfer ... is fraudulent ... if the debtor made the transfer or incurred the obligation ... with actual intent to hinder, delay, or defraud any creditor of the debtor.”). “Because proof of actual intent to hinder, delay or defraud creditors may rarely be established by direct evidence, courts infer fraudulent intent from the circumstances surrounding the transfer.” In re Sherman, 67 F.3d 1348, 1353 (8th Cir.1995).

“Since the time of Queen Elizabeth I, the courts have recognized that certain factual situations are so unfair as to be evidence of the actors' fraudulent intent.” Jackson v. Star Sprinkler Corp. of Fla., 575 F.2d 1223, 1237 (8th Cir.1978).

English courts ... developed the doctrine of “badges of fraud”: proof by a creditor of certain objective facts (for example, a transfer to a close relative, a secret transfer, a transfer of title without transfer of possession, or grossly inadequate consideration) would raise a rebuttable presumption of actual fraudulent intent. Every American bankruptcy law has incorporated a fraudulent transfer provision; the 1898 Act specifically adopted the language of the Statute of 13 Elizabeth. Bankruptcy Act of July 1, 1898, ch. 541, § 67(e), 30 Stat. 564–565.

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