Article courtesy of Michael D. Robson (Greenberg Traurig)
Stoebner v. Opportunity Finance, LLC, et al., 2018 WL 6055636, 66 BCD 127 (8th Cir. 2018).
In a proceeding under Chapter 7 of the United States Bankruptcy Code (the “Code”), the United States Court of Appeals, Eighth Circuit, affirmed the grant of the Defendants’ motion to dismiss the Trustee’s complaint under §544(b) of the Code and the Minnesota Uniform Fraudulent Transfer Act (“MUFTA”), holding per recent Supreme Court of Minnesota precedent that the Trustee could not rely on a “Ponzi scheme presumption”.
Prior to 2008, Thomas Petters ran a multi‑billion‑dollar Ponzi scheme through Petters Company, Inc., which purported to purchase electronics in bulk but fabricated purchase orders to obtain financing from investors. Petters also acquired legitimate businesses, including Polaroid Corporation in April 2005. Prior to such acquisition, a separate Petters entity, Petters Consumer Brands, LLC (“PettersCB”), paid licensing fees to Polaroid Corporation for the sale of Polaroid‑brand products to retailers. A substantial portion of PettersCB’s purchases were financed by loans from Opportunity Finance, LLC, and other (the “Defendants”). Following the collapse of the Ponzi scheme in September 2008, Polaroid Corporation and related entities (collectively, the “Debtors”) filed for protection under Chapter 11 of the Code. These cases were later converted to Chapter 7 liquidation proceedings in 2009.
In the bankruptcy proceedings, the Trustee’s second amended complaint (“SAC”) alleged that two Debtors (Polaroid Holding Company and Polaroid Consumer Electronics, LLC) were successors in interest to PettersCB. The Trustee sought to avoid over $250 million in loan payments made by PettersCB to the Defendants from 2003‑2005, claiming that such loans constituted fraudulent transfers under MUFTA.
Following arguments at the bankruptcy court on the Defendants’ motion to dismiss in March 2014, the Supreme Court of Minnesota held in February 2015 in Finn v. Alliance Bank, 860 N.W.2d 638 (Minn. 2015) that a “Ponzi scheme presumption” cannot be used to establish three elements of a claim under MUFTA—fraudulent intent, the debtor’s insolvency at the time of the transfer, and the lack of reasonably equivalent value. The Court held that a creditor must instead “prove the elements of a fraudulent transfer with respect to each transfer, rather than relying on a presumption related to the form or structure of the entity making the transfer.” Following the ruling, the Trustee sought leave in a December 2015 omnibus hearing in the Chapter 7 proceedings to file an amended complaint, but the bankruptcy court advised that a written decision on the motions to dismiss was imminent. In January 2016, the bankruptcy court granted the motions to dismiss both on standing grounds and for failure to state a claim for actual or constrictive fraudulent transfer under MUFTA. On appeal, the district court upheld the bankruptcy court’s decision to dismiss on both grounds and ruled that the bankruptcy court did not abuse its discretion in denying leave to amend the complaint.
The Eighth Circuit ruled that the lower courts had correctly dismissed the Trustee’s claims on the merits and declined to address the standing issue. The Trustee had argued that the SAC stated a claim of actual fraud by alleging that any transfer by PettersCB was done with the intent to defraud because Petters knew the company “was insolvent and embarked on a business plan that certain to fail” and that the challenged transfers “postponed discovery of the facts that [Petters CB] was insolvent, propped up with Ponzi funds and assumption of debt by related parties.” The Court held that the Trustee’s theory was a repackaging of the approach rejected by the Supreme Court of Minnesota. Finn permitted a court to rationally infer from the existence of a Ponzi scheme that a particular transfer was made with fraudulent intent, but the SAC did not demonstrate any intent by PettersCB to defraud its own creditors. Instead, the SAC affirmatively alleged that PettersCB financed legitimate business transactions with capital from the Defendants and did not allege that the proceeds of the loans were diverted to the Ponzi scheme.
The Court also ruled that the SAC failed to state a claim for constructive fraud since its allegations concerning the insolvency of PettersCB and the absence of “reasonably equivalent value” did not meet the necessary pleading requirements. The Trustee contended that the SAC stated a claim for constructive fraudulent transfer because it alleged that PettersCB was insolvent at the time of each transfer and that the 12% interest rate was “substantially in excess of the market rate”, such that PettersCB did not receive “reasonably equivalent value” for the transfers. As to the argument relating to the interest rate, the Court held that the SAC did not “plausibly assert with sufficient particularity the absence of reasonably equivalent value for the repayment of on‑going loans to finance legitimate transactions in a specific market.” Further, it held that the “SAC simply relies on the assumption that PettersCB was financially distressed because it received infusions of money from Petters’ Ponzi scheme”, whereas Finn contemplated that every fraudulent investment arrangement need not be insolvent from its inception. In addition, the Court upheld the denial of the leave to amend the SAC on the basis that the amendments would be futile as they only related to standing.
