Douglas Kelley v. BMO Harris Bank N.A.
- Summarized by Jaden Banks , Nyemaster Goode P.C.
- 3 months 4 weeks ago
- Case Type:
- Business
- Case Status:
- Reversed and Rendered
- Citation:
- 23-2632 (8th Circuit, Sep 12,2024) Published
- Tag(s):
-
- Ruling:
- Because a bankruptcy trustee steps into the shoes of the debtor rather than shoes of a prepetition receiver, the defense of in pari delicto remains available to a defendant in an adversary proceeding and under the doctrine of in pari delicto a defendant may avoid state law claims of fraud even though the defense would have been unavailable against the prepetition receivership.
- Procedural context:
- Following the collapse of the Petters Ponzi scheme, a federal district court placed Petters Company, Inc (PCI), the entity facilitating the Petters Ponzi scheme, into a receivership and appointed Douglas Kelley as its receiver. Five days after his appointment, Kelley filed for bankruptcy on PCI’s behalf. Thereafter, Kelley initiated an adversary proceeding against BMO, as successor-in-interest to M&I Bank, for various state law causes of action, including claims that BMO aided and abetted PCI’s breach of its fiduciary duty. BMO moved for summary judgment arguing that Kelley could not recover based on the doctrine of in pari delicto. The bankruptcy court reasoned that the defense did not apply and further concluded that genuine issues of fact existed respecting the parties’ respective fault. The district court denied BMO’s request for an interlocutory review and the adversary proceedings continued to trial where BMO moved for judgment as a matter of law based on the in pari delicto defense. The district court denied the motion after which the jury found BMO liable for aiding and abetting and it awarded Kelley approximately $500 million in damages. After trial, BMO renewed its motion for judgment as a matter of law, which the district court denied. BMO appealed.
The Eighth Circuit Court of Appeals reversed the district court after it determined that the district court abused its discretion and committed a plain legal error in rejecting the defense.
- Facts:
- In 2008 Thomas Petters’s multi-billion dollar Ponzi scheme collapsed, he was prosecuted, and PCI was placed into a receivership. Kelley, as receiver, filed a bankruptcy petition for PCI and was subsequently named PCI's Chapter 11 trustee. Kelley filed an adversary proceeding against BMO Harris, alleging that its predecessor in interest, M&I Bank, aided and abetted the Ponzi scheme. Kelley argued M&I employees ignored money laundering alerts, ignored internal policies, and allowed PCI to overdraft millions of dollars, which helped the scheme avoid detection. BMO moved for summary judgment arguing that under the doctrine of in pari delicto, PCI could not recover for M&I’s alleged wrongdoing because PCI was itself a wrongdoer of equal or greater fault. The bankruptcy court ruled that the defense of in pari delicto was unavailable because under Minnesota law PCI had become a receivership entity and was no longer bound by its officers’ previous bad acts. The district court rejected BMO’s request for interlocutory review, after it conducted its own review of Minnesota law and determined that the defense remained inapplicable due to PCI’s status as a receivership. During trial, the district court again rejected the defense after concluding that BMO lacked any “valid factual or legal basis” to assert the in pari delicto defense. The jury found BMO liable for aiding and abetting M&I’s breach of its fiduciary duty and awarded Kelley $484,209,716 in compensatory damages and $79,533,392 in punitive damages. BMO renewed its motion for judgment as a matter of law, arguing that the in pari delicto defense barred Kelley’s suit but the district court again rejected the argument. BMO appealed, challenging the sufficiency of the evidence, jury instruction, available defenses, and damages.
The Eighth Circuit Court of Appeals reversed after concluding that the doctrine of in pari delicto barred Kelley’s action against BMO. The Eighth Circuit rejected Kelley’s argument that as a bankruptcy trustee he stepped into the shoes of a “cleansed” entity. The Eighth Circuit observed that under Minnesota law, a receiver represents the rights of creditors and the receiver is not bound by the fraudulent acts of the entity’s former officers. Therefore, a receiver may sue for the benefit of creditors even though certain defenses, including in pari delicto, could be raised against the corporation itself. However, the protections extended to a receiver only apply to that role, not to the entity in the receivership. Upon filing a bankruptcy petition for PCI, Kelley stepped into the shoes of PCI, not the receiver and in so doing became subject to any defenses applicable to the debtor, including the doctrine of in pari delicto. Under Minnesota law, a receivership changes only an entity’s management and grants the receiver custody and control over all of the entity’s assets, including causes of action, but though the receiver receives protection from the wrongdoing of the entity’s former officers, the entity itself remains a wrongdoer. Thus, once Kelley filed bankruptcy for PCI which created a bankruptcy estate, all of PCI’s assets again changed hands so that Kelley-as-receiver lacked any claims and instead those claims belonged to the duly appointed Chapter 11 Trustee, Kelley-as-Trustee. Because Kelley-as-Trustee initiated the adversary proceeding against BMO in his role as bankruptcy trustee. Kelley remained subject to any legal or equitable defense that could have been raised against PCI and the protections of a receiver did not apply, meaning the defense of in pari delicto remained available to BMO. The Eighth Circuit found remand unnecessary because based on the record, BMO could not be more culpable that PCI, which orchestrated the Ponzi scheme, and so the failure to apply the defense of in pari delicto would comprise a further abuse of discretion.
- Judge(s):
- COLLOTON, BENTON, and SHEPHERD
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