Stoebner v. Opportunity Fin., LLC

• Decision Date: 23 December 2016
• Docket Number: Civil Case No. 16–314 (SRN)
• Parties: John R. STOEBNER, Trustee, Appellant, v. OPPORTUNITY FINANCE, LLC; Opportunity Finance Securitization, LLC; Opportunity Finance Securitization II, LLC; Sabes Minnesota Limited Partnership; Robert W. Sabes; Janet F. Sabes; Jon R. Sabes; Steven Sabes; DZ Bank AG Deutsche Zentral–Genossenschaftsbank, Frankfurt Am Main ; and John and Jane Does 1–30, Appellees.
• Court: U.S. District Court — District of Minnesota

562 B.R. 368

John R. STOEBNER, Trustee, Appellant,

v.OPPORTUNITY FINANCE, LLC; Opportunity Finance Securitization, LLC; Opportunity Finance Securitization II, LLC; Sabes Minnesota Limited Partnership; Robert W. Sabes; Janet F. Sabes; Jon R. Sabes; Steven Sabes; DZ Bank AG Deutsche Zentral–Genossenschaftsbank, Frankfurt Am Main ; and John and Jane Does 1–30, Appellees.

Civil Case No. 16–314 (SRN)

United States District Court, D. Minnesota.

Signed December 23, 2016

Richard T. Thomson, John R. Stoebner, Amy L. Schwartz, and Rosanne H. Wirth,

Lapp, Libra, Thomson, Stoebner & Pusch, Chartered, 120 South Sixth Street, Suite 2500, Minneapolis, MN 55402, for Appellants

Joseph G. Petrosinelli, Jonathan M. Landy, and Christopher Mandernack, Williams & Connolly, LLP, 725 Twelfth Street, Northwest, Washington, D.C. 20005; John R. McDonald, Kari S. Berman, and Scott M. Flaherty, Briggs & Morgan, PA, 80 South Eighth Street, Suite 2200, Minneapolis, MN 55402, for Opportunity Finance Appellees

Michael A. Rosow, Winthrop & Weinstine, PA, 225 South Sixth Street, Suite 3500, Minneapolis, MN 55402; H. Peter Haveles, Jr., Kaye Scholer LLP, 250 West 55^thStreet, New York, NY 10019, for Appellee DZ Bank AG Deutsche Zentral–Genossenschaftsbank

MEMORANDUM OPINION & ORDER

SUSAN RICHARD NELSON, United States District Judge

Appellant/Plaintiff John R. Stoebner,¹ Trustee in bankruptcy for Polaroid Corporation and other related debtors ("the Polaroid Debtors") appeals from a January 14, 2016 order ("the Order") of the United States Bankruptcy Court for the District of Minnesota ("Bankruptcy Court") and an oral order made by that same court on December 1, 2015. For the reasons set forth herein, the Trustee's appeal is denied.

I. BACKGROUND

This matter arises from an underlying adversary proceeding in Bankruptcy Court. The Trustee filed suit under the Minnesota Uniform Fraudulent Transfer Act, ("MUFTA"), to avoid certain prepetition payments to the following lenders: Defendants Opportunity Finance, LLC and related Opportunity Finance entities (collectively, "Opportunity Finance"), DZ Bank AG Deutsche Zentral–Genossenschaftsbank ("DZ Bank"), Sabes Minnesota Limited Partnership, Robert W. Sabes, Janet F. Sabes, Jon R. Sabes, Steven Sabes, (collectively, "the Sabes Family"), and John and Jane Does 1–30. Under the MUFTA, creditors may recover assets that debtors have otherwise fraudulently transferred to third parties. Finn v. Alliance Bank, 860 N.W.2d 638, 644 (Minn. 2015).

Defendants Opportunity Finance and DZ Bank moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), as incorporated by Fed. R. Bankr. P. 7012(b). While Defendants' motion was pending, at a December 1, 2015 omnibus hearing, the Trustee requested leave to file a third amended complaint. (See 12/1/15 Bankr. Tr., Tab 2 to Opp. Fin. Appendix [Doc. No. 22 at 29–31].) From the bench, Chief Bankruptcy Court Judge Gregory F. Kishel declined to entertain the Trustee's request until after the issuance of his ruling on the pending dispositive motions. (Id. at 47–58.) Six weeks later, in the written Order on Defendants' motions, Chief Judge Kishel granted Defendants' motion and dismissed the case with prejudice, finding that any amended pleadings would contradict the facts already alleged so as to be futile. In re Polaroid, 543 B.R. 888, 903, 905, 915 (Bankr. D. Minn. 2016).² The Trustee filed the instant appeal [Doc. No. 1] of the Order and the bench ruling.

A. Petters Consumer Brands, LLC

Before the collapse of Tom Petters' Ponzi scheme in September 2008, (see Second Am. Compl. ("SAC") ¶ 20 [Doc. No. 18] ), Petters utilized a variety of corporate entities, most notably Petters Company, Inc. ("PCI") and Petters Group Worldwide, LLC ("PGW"), to operate a massive Ponzi scheme. In re Polaroid, 543 B.R. at 890. Petters was ultimately convicted on multiple counts of fraud, (SAC ¶ 21), and this Court appointed a receiver to marshal and secure his assets. See In re Polaroid, 543 B.R. at 890. The receiver placed PCI and many of Petters' affiliated entities into Chapter 11 bankruptcy. Id. Clawback proceedings were initiated by bankruptcy trustees involving the PCI entities in order to recover some of the losses sustained by Petters' later lender-investors. Id. The Polaroid Corporation, which Petters ultimately acquired in 2005, was also placed into Chapter 11 bankruptcy. (SAC ¶ 2.) The Polaroid Debtors converted the Polaroid cases to proceedings administered under Chapter 7 of the Bankruptcy Code. (SAC ¶ 3.) The Trustee here, John R. Stoebner, was appointed to represent the interests of creditors of the Polaroid debtors. (SAC ¶ 3.) While Petters later acquired the Polaroid Corporation, the facts at issue here occurred before then, when Polaroid was Petters' contractual counterparty, outside of the Petters enterprises. In re Polaroid, 543 B.R. at 891.

The Petters entity directly at issue here is Petters Consumer Brands, LLC ("PettersCB"). During the relevant time period of 2003–2005, PettersCB, under a contractual license agreement with Polaroid, used the Polaroid brand name on certain goods, which PettersCB then sold to retailers like Best Buy. (SAC ¶¶ 24; 36; 40.) But as the Trustee acknowledges, "[U]nlike many of Tom Petters' companies, [PettersCB] actually purchased, warehoused, and sold to prominent retailers high volumes of consumer electronic equipment, branded with the Polaroid name." (SAC ¶ 24.) As alleged in the SAC, Opportunity Finance provided funding to PettersCB which it then used to purchase consumer electronics for resale to retailers or to pay third parties regarding the electronics. (SAC ¶¶ 40–41.) DZ Bank was a senior secured lender to Opportunity Finance, providing Opportunity Finance with funding for its lending to PettersCB. (SAC ¶ 14.) The Trustee generally alleges that Tom Petters used PettersCB to further his Ponzi scheme, (SAC ¶¶ 19; 24), and that Opportunity Finance was a significant investor and "net winner" in Petters' scheme, receiving "false profits" from "Tom Petters' entities" and "far higher annual rates of return on its investments with Tom Petters' entities than were commercially reasonable." (SAC ¶¶ 27–28.) In addition, the Trustee alleges that PettersCB was used to launder money from the overall Ponzi scheme and "prop up" its losses; Tom Petters is further alleged to have personally taken Ponzi proceeds out of PettersCB. (SAC ¶¶ 25–26.)

The Trustee asserts that, eventually, Opportunity Finance insisted that PettersCB create an entity called Petters Consumer Brands Funding, LLC ("PettersCB Funding") as a "bankruptcy remote vehicle." (SAC ¶¶ 46–47.) Established on or about July 28, 2003, PettersCB Funding was allegedly intended to "shield[ ] Defendants from the consequences of [PettersCB's] inevitable bankruptcy." (Id. at ¶ 46.) The Trustee alleges that the envisioned "plan" was for PettersCB Funding to be a "real" and independent entity to which Opportunity Finance would provide loans. (Id.) In exchange, PettersCB Funding would use the loan proceeds to purchase accounts receivable from PettersCB. (Id.) PettersCB would use the money obtained from PettersCB Funding to buy more consumer goods to resell. (Id.) However, the Trustee asserts that the sales of accounts received between PettersCB and PettersCB funding "were not true sales." (SAC ¶ 48.) Moreover, he contends that when Opportunity Finance "swept the [PettersCB Funding] bank account to pay itself the principal and interest due on its loans," Opportunity Finance returned the excess profit to PettersCB, not PettersCB Funding. (Id.) Thus, the Trustee alleges that in actuality, PettersCB Funding lacked the true attributes of a bankruptcy-remote entity, (SAC ¶ 50), and was a "mere conduit" for transferring money. (SAC ¶ 51.)

The Trustee also alleges that in April 2005, PettersCB paid Opportunity Finance $349,000 as a prepayment penalty (the "Prepayment Penalty Transfer"). (SAC ¶ 52.) However, the Trustee asserts that no such penalty was owed, since the notes on which the Prepayment Penalty Transfer was made provided for prepayment without penalty. (SAC ¶¶ 53–54.)

Based on the financing agreement between PettersCB and Opportunity Finance and the agreement between Opportunity Finance and DZ Bank, the Trustee alleges that the transfers to Opportunity Finance, purportedly in repayment of the loans, were fraudulent transfers under the MUFTA. (SAC ¶¶ 27; 31.) The Trustee also alleges that DZ Bank provided funding to Opportunity Finance, which was presumably loaned to PettersCB. (SAC ¶ 14.) One of the Trustee's asserted bases of liability for actual fraud under the MUFTA involves the application of the "Ponzi scheme presumption," although the Trustee does not use this specific term in the SAC.³ (See SAC ¶¶ 19–35.) In addition, the Trustee asserted state law claims for breach of contract, relating to the Prepayment Penalty Transfer made to Opportunity Finance, (SAC ¶¶ 110–13), and a count in the alternative for fraud and misrepresentation as to the Prepayment Penalty Transfer. (SAC ¶¶ 114–23.)

B. Procedural History

The Trustee commenced the underlying action against Defendants on December 17, 2010. (Bankr. D. Minn. No. ADV–10–4600, ECF No. 1.) Pursuant to the parties' stipulation, the Bankruptcy Court approved the filing of an amended complaint. (Id., ECF Nos. 19–20.) On May 3, 2011, the Trustee filed the First Amended Complaint. (Id., ECF No. 21.) He filed the SAC on November 8, 2013. (Id., ECF No. 46.)

On December 20, 2013, Opportunity Finance and DZ Bank filed the underlying motions to dismiss the SAC. (Id., ECF Nos. 48; 49.) The Bankruptcy Court heard oral argument on March 3, 2014. (Id., ECF No. 57.) However, prior to the issuance of a ruling, the Minnesota Supreme Court, in an entirely separate legal action, ruled on February 18, 2015, that the Ponzi scheme presumption could not be applied to establish actual fraud under the MUFTA. Finn, 860 N.W.2d at 653.

On December 1, 2015, the Bankruptcy Court held an omnibus hearing to discuss...