Stoebner v. Ritchie Capital Mgmt., L. L.C. (In re Polaroid Corp.)

Decision Date30 April 2012
Docket Number08–46627(GFK).,08–46629(GFK).,08–46623(GFK).,08–46625(GFK).,08–46620(GFK).,Adversary No. 09–4032.,08–46624(GFK).,08–46621(GFK).,08–46628(GFK).,08–46626(GFK).,Bankruptcy Nos. 08–46617
Citation472 B.R. 22
PartiesIn re POLAROID CORPORATION, et al., Debtors. (includes: Polaroid Holding Company; Polaroid Consumer Electronics, LLC; Polaroid Capital, LLC; Polaroid Latin America I Corporation; Polaroid Asia Pacific LLC; Polaroid International Holding LLC; Polaroid New Bedford Real Estate, LLC; Polaroid Norwood Real Estate, LLC; Polaroid Waltham Real Estate, LLC). John R. Stoebner, Trustee, Plaintiff, v. Ritchie Capital Management, L.L.C., as Administrative and Collateral Agent, Ritchie Special Credit Investments, Ltd., Rhone Holdings II, Ltd., Yorkville Investments I, L.L.C., and Ritchie Capital Structure Arbitrage Trading, Ltd., Defendants.
CourtU.S. Bankruptcy Court — District of Minnesota


Nicole Siemens, Sandra S. Smalley–Fleming, Lindquist & Vennum P.L.L.P., Minneapolis, MN, for Plaintiff.

Brian F. Leonard, James M. Jorissen, Leonard O'Brien et al., Minneapolis, MN, Garrett M. Vail, Thomas C. Cronin, Cronin & Co. Ltd., Bloomington, MN, for Defendants.



This adversary proceeding came before the Court on the Plaintiff's motion for partial summary judgment. The Plaintiff (“the Trustee) appeared by his attorneys, Terrence J. Fleming, Sandra S. Smalley–Fleming, George H. Singer, and Mark S. Enslin (all of Lindquist & Vennum P.L.L.P., Minneapolis). The Defendants (collectively, “the Ritchie Defendants) appeared by their attorneys, Thomas K. Cauley and Brian A. McAleenan (of Sidley Austin LLP, Chicago), and James M. Jorissen (of Leonard, O'Brien, Spencer, Gayle & Sayre, Ltd., Minneapolis). The following memorandum of decision is based on the record made for the motion.


Debtor Polaroid Corporation and several related companies were put into bankruptcy by voluntary petitions filed on December 18, 2008.1 At that time, the ownership of the Polaroid Corporation was traceable through an intermediate holding entity to Petters Group Worldwide, LLC (“PGW”), itself a holding company. PGW and a number of business entities related to it had been put into bankruptcy about two months earlier. Before PGW's bankruptcy filing, one Thomas J. Petters was its sole shareholder, board chair, and chief executive officer.2

Earlier in the fall of 2008, Tom Petters and six of his business associates had been charged with various federal offenses in the United States District Court for the District of Minnesota: wire and mail fraud, money laundering, and conspiracy. The prosecution's overarching theory was that Tom Petters and his co-conspirators had conducted an elaborate and long-term Ponzi scheme, using as its instrumentalities a corporation known as Petters Company, Inc. (“PCI”) and numerous related entities including PGW. As charged, the essence of the scheme was that Tom Petters and his fellow defendants had induced lenders and investors to advance money to PCI. The ostensible purpose of the advances was to fund proposed, intermediate purchases and resales of consumer electronic goods in bulk. However, the prosecution accused Tom Petters and his fellow defendants of using forged documents in the inducement to lend—when there were no corresponding, contracted transactions in real life and no such transactions came to pass that could be identified to particular loans. PGW was implicated in the scheme as an alleged recipient and conduit of a significant portion of the funding that had been received by PCI or its subsidiary entities.

Ultimately, all of the individual co-conspirators pleaded guilty under arrangements with the United States Department of Justice. On December 2, 2009, a jury convicted Tom Petters of all 20 felony charges that had been brought against him under a superseding indictment.3

When the Polaroid Corporation was placed into bankruptcy, the Ritchie Defendants claimed to hold an enforceable security interest in certain aspects of its intellectual property, specifically trademarks and associated rights registered in China, India, and Brazil. Tom Petters, in the capacity of “Chairman” of the Polaroid Corporation, had executed documents to grant that security interest on September 19, 2008.4 (This was done five days before the Federal Bureau of Investigation executed a search warrant at PGW's corporate headquarters, in the legal process that led to the criminal charges.) When the security interest was granted, the Polaroid Corporation was not a debtor of the Ritchie Defendants. The pledge of the patent rights was expressly made to secure preexisting debt of third parties. That debt was evidenced by multiple notes executed by PCI, PGW, and/or Thomas Petters, Inc. (“the PCI/PGW note debtors”) and given in favor of the Ritchie Defendants or for their benefit.5

In February, 2009, the Polaroid Corporation commenced this adversary proceeding in the capacity of debtor-in-possession. After the conversion of the case, the trustee of that Debtor's estate under Chapter 7 was substituted as plaintiff.

The Trustee seeks to avoid the grant of the security interests to the Ritchie Defendants under the authority of bankruptcy law. Invoking 11 U.S.C. §§ 548 and 544, he characterizes the grant as a transfer fraudulent to the Polaroid Corporation's creditors under the federal and state iterations of fraudulent transfer remedies. He classifies the grant as both “actually” fraudulent (i.e., made with actual intent to hinder, delay, or defraud those creditors) and “constructively” fraudulent (i.e., made for less than reasonably equivalent value given to the Polaroid Corporation, coupled with the contemporaneous or subsequent insolvency of the Polaroid Corporation).

The Trustee seeks other relief, in the alternative or additional: avoidance of the grant of the liens as a preferential transfer under 11 U.S.C. § 547(b), [t]o the extent that any of the transfers [of liens] were made ... on account of a preexisting obligation ...”; disallowance of the Ritchie Defendants' claims in the underlying cases pursuant to 11 U.S.C. §§ 502(b) and 502(d) (i.e., until any avoided transfers are rectified by payment or other form of restoration to the estate); avoidance of the Ritchie Defendants' liens under 11 U.S.C. § 506(d); equitable subordination of the Ritchie Defendants' claims in the underlying cases, pursuant to 11 U.S.C. § 510(c); “recharacterization” of the Ritchie Defendants' claims as “equity” received from what was “in substance and economic reality capital investment” by them; and declaratory relief that the liens are unenforceable under state-law principles of equity and for failure of consideration.

For their part, the Ritchie Defendants responded via a 38–page answer, heavy with fact allegations. They admit that the four named defendants other than Ritchie Capital Management, LLC made loan advances “to Thomas J. Petters ... and companies owned and controlled by him,” in February, March, and May, 2008. As to the grants of lien, they admit that they and [the] Polaroid [Corporation] entered into an agreement titled Trademark Security Agreement dated September 19, 2008.” They specify that the Trademark Security Agreement was contemplated by a prior but nearly-contemporary agreement between them and the PCI/PGW note debtors. Under that other agreement, maturity dates on the underlying payment obligations were extended.

As to the estate's theories for avoidance, the Ritchie Defendants flatly deny the complaint's allegation that the grants of security interests “were made with actual intent to hinder, delay, or defraud a creditor....” 6 They characterize the complaint's fact pleading as a “malicious attempt to create the false impression that [they] engaged in a fraudulent scheme,” and that the Trustee's actual-fraud theory is “irresponsible and unconscionable because there is absolutely no basis for such an allegation.”

Responding to the complaint's preferential-transfer count, the Ritchie Defendants insist that the grants of lien “were in no way made on account of ‘antecedent debt’ of Polaroid because: (a) the relevant debt was owed by PGW, PCI and [Tom] Petters and thus was not even ‘debt’ of Polaroid....”

Finally, as an “Eighth Affirmative Defense” the Ritchie Defendants plead that they “gave value for” their receipt of the security interests, “and received such interests in good faith....”


This adversary proceeding is before the undersigned pursuant to 28 U.S.C. § 157(a), via the general reference of Loc. R. Bankr.P. (D.Minn.) 1071–1.

Of the counts entailed by the motion at bar, one is governed by substantive law contained in the Bankruptcy Code, Title 11 of the United States Code: 11 U.S.C. §§ 548(a)(1)(A) and 548(c). The second, governed by substantive state law, was brought by the Trustee under the empowerment of 11 U.S.C. § 544. The former arises under Title 11, and the latter arises in a bankruptcy case under Title 11; thus, the district court has jurisdiction over both counts. 28 U.S.C. § 1334(b). These counts are statutorily classified as core proceedings. 28 U.S.C. § 157(b)(2)(H). So are the counts for relief that would follow under the Bankruptcy Code's governance after the avoidance as a fraudulent transfer. 28 U.S.C. §§ 157(b)(2)(B) and (O). The last substantively-oriented count, toward the invalidation of liens as unenforceable under state law, is also a core proceeding—this time under 28 U.S.C. § 157(b)(2)(K). As such, a bankruptcy judge may order final judgment on all of these counts when that is substantively and procedurally appropriate. 28 U.S.C. § 157(b)(1).


Earlier in this litigation, the parties and the Court addressed the sequence and means by which the various, complex issues could be presented for adjudication. The Trustee proposed that his requests for avoidance...

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