In re- Douglas A. Kelley

Case Type:
Case Status:
Affirmed in part and Reversed in part
20-3330 (8th Circuit, Apr 21,2022) Published
In another appeal arising out of the Ponzi schemes of Thomas Peters (TP), the U.S. Court of Appeals for the Eighth Circuit partly diverged from the U.S. District Court for the District of Minnesota (DC), which construed § 546(e) to bar recovery by a trustee of property received by a subsequent transferee of a PT entity against whom he had won a default judgment: agreeing that the transfer may have been connected to a securities contract, the DC had failed to precisely identify the transferor and thus whether a contract counterparty, as § 546(e) too demands, had, remand required.
Procedural context:
Douglas A. Kelley, in his capacity as Trustee of the PCI Liquidating Trust (TR or Kelley), had been appointed the trustee for the estates of the sundry entities controlled by TP whom he had caused to file voluntary petitions for relief under chapter 11. Thereafter, Kelley launched hundreds of lawsuits seeking to recover payments that these entities made to early investors for the benefit of later investors who lost their entire investments to TP's unabashed Ponzi scheme. The appeal at issue here actually had its roots in an earlier adversary proceeding. In October 2010, Kelley had commenced an adversary proceeding against one entity--Arrowhead Capital Partners II, L.P. (Arrowhead), a limited partnership formed and managed by Arrowhead Capital Management Corp. for the purpose of serving as a the feeder fund of Petters Company, Inc. (PCI), the central conduit for TP's fraud, for Arrowhead’s investors--seeking to avoid the transfers made to Arrowhead by a second entity--MGC Finance, Inc. (MGC Finance), a wholly owned subsidiary of PCI that served as a special purpose entity (SPE) used by PCI to carry out its fraudulent activities--ultimately controlled by the wily TP, who used these entities (and one other) to orchestrate a multiyear Ponzi scheme. In March 2018, Arrowhead having failed to answer or otherwise defend the case, the United States Bankruptcy Court for the District of Minnesota (BC) granted Kelley in his capacity as Trustee of the PCI Liquidating Trust a $941,704,263.66 default judgment against Arrowhead, plus costs and prejudgment interest. Subsequent to this result, Kelley filed an adversary proceeding, the very one that was the subject of this appeal, against Safe Harbor Managed Account 101, Ltd. (Safe Harbor), the appellee, to recover nearly $6.9 million transferred to Safe Harbor as a subsequent transferee of Arrowhead, the same entity against whom he had won a default judgment. Kelley cited to § 550(a) and § 551, and Safe Harbor responded with a motion to dismiss Kelley's complaint on the basis that § 546(e) precluded Kelley from recovering from Safe Harbor "because the subject transfers were 'settlement payments' or transfers 'in connection with a securities contract' made 'by or to (or for the benefit of' a 'stockbroker . . . , financial participant . . . or a financial institution.'" The BC denied this dispositive motion, finding § 546(e) to be inapplicable. After the discovery launched in this order's wake concluded, the DC joined the party. Administratively, the case was transferred to the DC based upon Safe Harbor’s request for a jury trial. Shortly thereafter, Safe Harbor filed a motion for summary judgment, arguing that Kelley could not recover the $6.9 million transferred to it by Arrowhead under § 550(a) because § 546(e) applied to the transfers made from MGC Finance to Arrowhead. Agreeing with Safe Harbor, the DC found that, because Arrowhead was a "financial institution," the Note Purchase Agreement pursuant to which MGC Finance had purchased notes from Metro was a "securities contract," and the relevant transfers were made “in connection” with the Note Purchase Agreement, § 546(e) applied. Kelley timely appealed. In so doing, he argued that the DC had erred in finding that no genuine dispute of material fact existed as to whether (1) Arrowhead was a financial institution and (2) the relevant transfers were made "in connection with a securities contract."
Today, the players and their schemes are as clear as day. Long before he appeared in a bankruptcy court, though PCI and its subsidiaries, TP purported to run a diverting business that purchased electronics in bulk and resold them at high profits to major retailers. In truth, it was just a complicated Ponzi scheme. To quote the Circuit, "[i] actuality, no such diverting business existed, and Petters was running a scam held up by continuously enticing new investors." Of course, to make this work, TP created and roped in other corporate constructs. There were, as noted above, Arrowhead and MGC Finance. In addition to this tainted duo, there was Metro I, LLC (Metro), formerly known as Metro Gem Capital, LLC, which had been formed by Arrowhead Capital Management Corp.’s CEO as an SPE of Arrowhead. Its sole purpose was to facilitate the transfer of funds from Arrowhead to PCI through MGC Finance. On July 18, 2001, MGC Finance entered into a Credit Agreement with Metro. Per this agreement, Metro would make loans evidenced by promissory notes to MGC Finance (the MGC Finance Notes) for the purpose of financing PCI’s diverting business. That same day, Arrowhead and Metro entered into a Note Purchase Agreement (NPA), under which the promissory notes Metro received from MGC Finance were transferred directly to and held for the sole benefit of Arrowhead. In 2002, Safe Harbor got involved. In that midterm year, In that midterm year, Safe Harbor invested a total of $6 million in Arrowhead. Having become an equity holder of Arrowhead pursuant to one agreement, Safe Harbor wired funds into a “custodial” account held by Wells Fargo Bank (Wells Fargo) pursuant to the Private Placement Memorandum for Arrowhead and the Custodial Agreement referenced therein. Essentially, the funds held in the Wells Fargo account were used by Arrowhead to purchase the MGC Finance Notes from Metro; when Arrowhead received payment from MGC Finance on the notes it had purchased from Metro pursuant to the Note Purchase Agreement, those funds would flow back through the Wells Fargo account to repay investors such as Safe Harbor. This is what happened in September 2003 when Safe Harbor redeemed its investment in Arrowhead and received two wire transfers totaling nearly $6.9 million from the Wells Fargo account. 2008 proved to be a watershed. In September of that year, TP's fraud was uncovered. Within a month, PCI and other entities owned or controlled by TP were placed into civil receivership. Subsequently, Kelley caused these entities to file voluntary petitions for relief under chapter 11. The BC ultimately authorized joint administration of these cases, and Kelley was later appointed as Trustee for the PCI Liquidating Trust.
Bobby E. Shepherd; Steven M. Colloton; and Jane L. Kelly

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