USA v. Petters, et al.
MEMORANDUM OPINION AND ORDER denying 2897 Intervenors Ritchie Capital Management, L.L.C.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investment I, L.L.C., and Ritchie Capital Management, Ltd.'s Motion to Terminate Receivership or, Alternatively, to Lift the Litigation Stay Against Thomas J. Petters (Written Opinion). Signed by Judge Ann D. Montgomery on 09/27/2017. (TLU)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
United States of America,
Civil No. 08-5348 ADM/TNL
Thomas Joseph Petters; Petters Company,
Inc., a/k/a PCI; Petters Group Worldwide, LLC;
Deanna Coleman, a/k/a Deanna Munson;
Robert White; James Wehmhoff; Larry
Reynolds and/or d/b/a Nationwide International
Resources, a/k/a NIR; Michael Catain and/or d/b/a
Enchanted Family Buying Company;
Frank E. Vennes, Jr., and/or d/b/a Metro Gem
Finance, Metro Gem, Inc., Grace Offerings
of Florida, LLC, Metro Property Financing,
LLC, 38 E. Robinson, LLC, 55 E. Pine, LLC,
Orlando Rental Pool, LLC, 100 Pine Street
Property, LLC, Orange Street Tower, LLC,
Cornerstone Rental Pool, LLC, 2 South
Orange Avenue, LLC, Hope Commons, LLC, and
Metro Gold, Inc.;
Douglas A. Kelley,
Patrick H. O’Neill, Jr., Esq., Larson King, LLP, St. Paul, MN, on behalf of Ritchie Capital
Management, L.L.C.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.;
Yorkville Investment I, L.L.C., and Ritchie Capital Management, Ltd.
James Lodoen, Esq., Lindquist & Vennum LLP, Minneapolis, MN, and Steven E. Wolter,
Kelley, Wolter & Scott, P.A., Minneapolis, MN, on behalf of Receiver Douglas A. Kelley.
Gregory G. Brooker, Acting United States Attorney, and James S. Alexander, Assistant United
States Attorney, Minneapolis, MN, on behalf of Plaintiff United States of America.
On September 7, 2017, the undersigned United States District Judge heard oral argument
on intervenors Ritchie Capital Management, L.L.C.; Ritchie Special Credit Investments, Ltd.;
Rhone Holdings II, Ltd.; Yorkville Investment I, L.L.C., and Ritchie Capital Management, Ltd.’s
(collectively, “Ritchie”) Motion to Terminate Receivership or, Alternatively, to Lift the
Litigation Stay Against Thomas J. Petters [Docket No. 2897]. Receiver Douglas A. Kelley (the
“Receiver”) and Plaintiff United States of America (the “Government”) oppose the Motion. For
the reasons set forth below, the Motion is denied.
A. Petters’ Ponzi Scheme
This civil receivership case arises from a $3.8 billion Ponzi scheme orchestrated by
Minnesota businessman Thomas J. Petters (“Petters”).1 Ritchie is an investment fund that loaned
over $100 million to Petters and his companies beginning in February 2008. Like many other
creditors of Petters and his entities, Ritchie suffered substantial losses when the Ponzi scheme
collapsed in September 2008.
B. Receivership, Bankruptcy Estates Created
On October 2, 2008, the Government commenced this action pursuant to the Fraud
As part of his scheme, Petters induced investors to provide funds to purportedly finance
purchases of electronic consumer goods from wholesalers for resale to large retailers. The
purchase of the electronic goods was fiction. Petters used the investments from later investors to
repay earlier investors their principal, plus an amount Petters represented as profit from the
Injunction Act, 18 U.S.C. § 1345, to freeze the named defendants’ assets and preserve them for
victim restitution and forfeiture in the related criminal proceedings. See Compl. [Docket No. 1].
The Government stipulated to the appointment of a receiver to manage the defendants’ assets,
and the Court appointed Douglas A. Kelley, Esq. as Receiver.2 See Second Am. Order Entry
Prelim. Inj., Appointment Receiver, Other Equitable Relief (“the Receivership Order”), Dec. 8,
2008 [Docket No. 127] at 13. The Receivership Order includes a stay of litigation against the
named defendants and the Receivership assets. Id. at 19-20.
On October 11, 2008, the Receiver placed two of Petters’ corporations, Petters Company,
Inc. (“PCI”) and Petters Group Worldwide (“PGW”), and their related affiliates into Chapter 11
bankruptcy. See In re Petters Co., Inc., No. 08-45257 (Bankr. D. Minn.) (“PCI/PGW
Bankruptcy Case”). The Receiver was appointed as Trustee of those consolidated bankruptcy
estates. Thereafter, two other Petters-related businesses, Polaroid Corporation and Petters
Capital, LLC, also filed for bankruptcy protection. See In re Polaroid Corp., No. 08-46617
(Bankr. D. Minn.) (“Polaroid Bankruptcy Case”); In re Petters Capital, LLC, No. 09-43847
(Bankr. D. Minn.) (“Petters Capital Bankruptcy Case”). Separate Trustees were appointed for
those bankruptcy estates.
C. Petters Convicted, Forfeiture Ordered
Petters was found guilty by a jury in December 2009 and was sentenced to fifty years in
prison. See United States v. Petters, No. 08-364 (D. Minn.) (“Criminal Case”), Sentencing J.,
A separate receivership, with its own independent receiver, Gary Hansen, was created
for the assets of named defendant Frank E. Vennes, Jr. and any entities he controlled. Order
Entry of Prelim. Inj., Appointment of Receiver, Other Equitable Relief, Oct. 16, 2008 [Docket
No. 59]. The Vennes receivership has since been terminated and is not at issue here.
April 8, 2010 [Criminal Case Docket No. 400]. Petters’ sentence included a forfeiture money
judgment of $3,522,880,614.10. Sentencing J. at 6 (ordering forfeiture pursuant to Preliminary
Forfeiture Order of Docket No. 395). Judge Richard H. Kyle, who presided over the criminal
case, in declining to order restitution, held that Petters’ victims may seek recovery through the
remission of forfeited assets and the bankruptcy process. See United States v. Petters, No. 08364, 2010 WL 2291486, at *3-5 (D. Minn. June 3, 2010).
D. Receiver, Trustees and Government Coordinate Recovery Efforts
In August 2010, the Government, Receiver, and Bankruptcy Trustees entered into a
Coordination Agreement to resolve their competing claims to property that was subject to
forfeiture and that belonged to the Receivership and bankruptcy estates. See Uphoff Decl.
[Docket No. 1351] Ex. A (“Coordination Agreement”). The parties to the Coordination
Agreement recognized that a “significant overlap of identity” existed among the creditors and
victims of the Receivership and bankruptcy estates, and that pursuing their competing claims in
litigation would diminish the recovery for victims and creditors, and would unduly delay the
distribution of assets. Id. at 3. The Coordination Agreement is designed to maximize recovery
to victims and creditors of the fraudulent scheme, minimize Receivership and bankruptcy
expenses, and provide for the fair and orderly distribution of recoveries to victims and creditors
through the bankruptcy and remission processes. See id. at 3–10.
To further this objective, the Coordination Agreement establishes a collective process by
which the Government, Receiver, and Trustees will recover and distribute property of the
Receivership and bankruptcy estates. Id. at 4–10. This process includes allocating
responsibilities among the Receiver and Trustees for pursuing clawback actions to recover assets
transferred to third parties. In exchange for the coordinated recovery process, the Government
agreed to forego forfeiture claims against third parties for the return of certain assets. Id. at 10.
The Coordination Agreement was approved by this Court on September 14, 2010, after a
joint hearing with the Bankruptcy Court. Order, Sept. 14, 2010 [Docket No. 1466].
E. Receiver, Trustees and Ritchie Commence Lawsuits Against JP Morgan Chase & Co.
The Receiver and Bankruptcy Trustees have commenced clawback actions against JP
Morgan Chase & Co. (“JPMC”) to recover assets of the Receivership and bankruptcy estates that
were allegedly transferred to JPMC. As discussed more fully below, Ritchie is also suing JPMC
to recover assets that were transferred from Petters and his bankrupt entities to JPMC.
On December 29, 2010, the Receiver commenced litigation against JPMC which includes
a claim to recover funds that JPMC liquidated from Petters’ personal investment accounts
maintained at JPMC. See Kelley v. J.P. Morgan Chase & Co., No. 10-cv-4999 (D. Minn.)
Compl. [Docket No. 1] ¶ 17. The investment accounts had been pledged by Petters as collateral
for an increase in a credit line for PGW. Id. ¶ 16. On September 30, 2008, approximately one
week after federal agents executed a search warrant on Petters’ offices, JPMC began liquidating
more than $20 million from Petters’ investment accounts and applied the funds to the amount
owed on the PGW line of credit. Id. ¶ 17. The Receiver seeks to avoid JPMC’s security interest
in Petters’ investment accounts and to recover the funds JPMC received from those accounts. Id.
¶¶ 17, 23, 114, 119, 123, 127. Consistent with the Coordination Agreement, the Receiver
stipulated to a stay of his lawsuit action against JPMC in district court pending the resolution of
the Trustees’ actions against JPMC in bankruptcy court. See Kelley v. J.P. Morgan Chase & Co.,
No. 10-4999 (D. Minn.), Order Approving Stip. Stay [Docket No. 27].
2. Bankruptcy Trustees
In addition to the Receiver’s action against JPMC in federal district court, the
Bankruptcy Trustees for the PCI/PGW, Polaroid, and Petters Capital bankruptcy estates
commenced adversary proceedings against JPMC in bankruptcy court to avoid and recover
certain transfers made by these debtors to JPMC. See Kelley, Trustee v. JPMorgan Chase &
Co., Case Nos. 10-4443, 10-4445, 10-4446 (Bankr. D. Minn). The Trustees’ actions against
JPMC are among hundreds of adversary proceedings filed by the Bankruptcy Trustees in the
Petters-related bankruptcy cases. The Bankruptcy Trustees’ actions against JPMC are presently
in active discovery after a motion to dismiss was denied on January 13, 2017. Kelley Decl.
[Docket No. 2905] ¶ 4.
Ritchie has filed its own lawsuit against JPMC. See Ritchie Capital Mgmt., L.L.C. v.
JPMorgan Chase & Co., No. 14-4786 (D. Minn.) (“Ritchie v. JPMC”). The suit against JPMC is
one of at least nine lawsuits that Ritchie has filed against third parties whom Ritchie alleges
share responsibility for losses that Ritchie sustained as a result of its loans to Petters.3 In seven
Ritchie’s other actions, most which have been dismissed or stayed, include: Ritchie
Capital Mgmt., L.L.C. v. Costco Wholesale Corp., No. 14-4819 (S.D.N.Y. Sept. 21, 2015)
(dismissed for lack of personal jurisdiction), aff’d No. 15-3294 (2d Cir. Aug. 1, 2016); Ritchie
Capital Mgmt., L.L.C. v. U.S. Bank, N.A., No. 15-2092, 2015 WL 4744528 (D. Minn. Aug. 11,
2015) (dismissed as time-barred and for failure to state a claim); Ritchie Capital Mgmt., L.L.C.
v. Gen. Elec. Capital Corp., 121 F. Supp. 3d 321 (S.D.N.Y. 2015) (dismissed since claims are
property of Petters-related bankruptcy estates and also for failure to state claim), aff’d, 821 F.3d
349 (2d Cir. 2016); Ritchie Capital Mgmt., L.L.C. v. Fredrikson & Byron, P.A., No. 1-14-2067,
2015 WL 1445681 (Ill. Ct. App. March 27, 2015) (affirming dismissal of time-barrred claims),
appeal denied, 39 N.E.3d 1011 (Ill. 2015); Ritchie Capital Mgmt., L.L.C. v. Opportunity Fin.,
L.L.C., No. 27-13-17424, 2015 WL 787747 (Minn. Dist. Ct. Jan. 15, 2015) (holding complaint
of the actions, Ritchie asserts claims for aiding and abetting fraudulent inducement and civil
conspiracy to commit fraudulent inducement.
Ritchie’s lawsuit against JPMC, filed in January 2014, is based in part on JPMC’s
liquidation of Petters’ investment accounts on September 30, 2008. See Ritchie v. JPMC,
Second Am. Compl. [Docket No. 158] ¶¶ 429–453 (Counts 20 and 21). Ritchie contends that
“[b]y seizing and liquidating Petters’s investment accounts after news of the federal raid,
JPMorgan stepped ahead of the fraud scheme’s victims and creditors to recover the nearly $20
million that Petters Group Worldwide allegedly owed under the credit line.” Id. ¶¶ 440, 452.
Like the Receiver, Ritchie seeks to avoid JPMC’s security interest in Petters’ investment
accounts and to recover amounts JPMC received from those accounts. Id. ¶¶ 441, 453.
Ritchie’s suit, originally filed in New York state court, removed to federal court, and then
transferred sua sponte to this district, was assigned to the Honorable Donovan W. Frank. JPMC
moved to refer the action to bankruptcy court based on the ongoing Petters-related bankruptcy
proceedings, and the Bankruptcy Trustees moved to intervene for the purpose of joining JPMC’s
motion. On July 2, 2015, Judge Frank granted the Bankruptcy Trustees’ request to intervene,
holding that “[t]he Trustees have a direct, substantial, and legally protectable interest in the
claims being asserted and litigated by [Ritchie] because the parties are at least partially seeking
recovery of the same funds. . . . It may be that the funds JPMorgan received will be recovered
subject to automatic stay under Bankruptcy Code because claims alleged by Ritchie are
derivative of claims alleged by PCI Bankruptcy Trustee); Ritchie Capital Mgmt., L.L.C. v.
Jeffries, 849 F. Supp. 2d 881 (D. Minn. 2012) (dismissed on abstention grounds because claims
were duplicative of Petters-related bankruptcy proceedings); Ritchie Capital Mgmt., L.L.C. v.
Coleman, No. 12-270, 2012 WL 1901300, at *1 (D. Minn. May 25, 2012) (same); Ritchie
Capital Mgmt. v. BMO Harris Bank, N.A., 868 F.3d 661 (8th Cir. 2017) (affirming abstention
because case is duplicative of a Petters-related bankruptcy adversary proceeding).
by one party at the expense of another.” See Ritchie v. JPMC, Order, July 2, 2015 [Docket No.
157] at 16. Judge Frank also referred the case to bankruptcy court based on the “interest in
uniform administration of all matters that implicate the Petters related bankruptcies.” Id. at 14.
F. Ritchie Seeks Relief from Litigation Stay Over Receivership in 2015
In 2015, Ritchie moved for relief from the litigation stay over the Receivership for the
purpose of obtaining a default judgment against Petters in Minnesota state court. Mot. Intervene
[Docket No. 2757]. Ritchie argued that it would not execute the judgment against assets of the
Receivership, but would instead use the judgment in Ritchie’s actions against third parties to
establish essential elements of its claims for aiding and abetting fraud. The Court denied
Ritchie’s request for relief from the stay because the Receiver’s interests in maintaining the stay
outweighed Ritchie’s interest in lifting the stay.
G. Bankruptcy Court Recommends Denial of Ritchie’s Lawsuit Against JPMC
On May 31, 2017, United States Bankruptcy Court Judge Kathleen H. Sandberg issued a
Report and Recommendation (“R&R”) in Ritchie’s lawsuit against JPMC, which recommends
dismissing all of Ritchie’s claims. Ritchie v. JPMC, R&R [Docket No. 159], 2017 WL 2799878
(Bankr. D. Minn. May 31, 2017). Ritchie filed objections to the R&R, and Judge Frank heard
oral argument on Richie’s objections on September 12, 2017. See Ritchie v. JPMC, Min. Entry
[Docket No. 172]. The matter remains under advisement.
H. Present Motion
Ritchie now moves to terminate the Receivership, arguing that (1) there is no valid
reason to continue the Receivership, and (2) the existence of the Receivership is unnecessarily
delaying Ritchie’s right to recovery. Alternatively, Ritchie argues that if the Receivership is not
terminated, the litigation stay be lifted so Ritchie can pursue a default judgment against Petters in
state court. Ritchie contends that the circumstances that previously prevented the Court from
lifting the receivership stay in 2015 have now changed to a degree that the Court must lift the
stay so that Ritchie is no longer denied its day in court.
The Receiver and the Government oppose Ritchie’s motion. The Receiver argues that
the reasons for the Receivership remain in force, and that maintaining the stay is necessary to
maintain the status quo and to protect the Receivership from the harm of Ritchie’s continued
litigation. The Government argues that termination of the Receivership would threaten the
equitable distribution of Receivership assets, and that lifting the stay would provide Ritchie with
an unfair advantage over other creditors and victims of Petters’ fraud.
A. Motion to Terminate Receivership
Ritchie argues that there is no longer a purpose for the Receivership because the
Government has obtained a forfeiture money judgment against Petters, and Petters has no
remaining cognizable interests in property that could justify continuing the Receivership.
Ritchie’s argument that the Receivership is no longer necessary overlooks the
Receivership’s core purpose of protecting estate property and facilitating an equitable
distribution of funds to victims. “The fundamental purpose” of an equitable receivership is “to
protect the estate property and ultimately return that property to the proper parties.” SEC v.
Pittsford Capital Income Partners, LLC, No. 06-6353, 2007 WL 61096, at *2 (W.D.N.Y. Jan. 5,
2007). The receiver’s role is to safeguard disputed assets, administer receivership property, and
assist with a final, equitable distribution of receivership assets. Liberte Capital Grp., LLC v.
Capwill, 462 F.3d 543, 551 (6th Cir. 2007).
Ritchie’s efforts to recover the same funds for itself that the Receiver is attempting to
recover for all victims and creditors exemplifies why the Receivership remains necessary.
Terminating the Receivership at this time, before the Receiver has obtained recoveries on
pending clawback actions, threatens the equitable and orderly clawback process established in
the Coordination Agreement and provides an unfair advantage to Ritchie and other creditors who
can afford to hire separate counsel to prosecute claims.4
Additionally, substantial assets within the Receivership remain to be liquidated or
administered, including a yet-to-be finalized settlement of $500,000 from an LLC interest held
by the Receivership, and $21 million in various cash accounts. Kelley Decl. ¶¶ 2–3, 5. Potential
tax claims against the Receivership must also be resolved before the Receivership is terminated.
Thus, the reasons for the Receivership continue to exist.
Ritchie also argues that any benefit of continuing the Receivership is outweighed by the
harm caused to Ritchie by being deprived of its right to pursue a state court judgment against
Petters for fraud. Ritchie insists that although it could prevail in its third-party lawsuits without
the state court judgment against Petters, Ritchie’s burden, expense, and risk in litigating the issue
of Petters’ fraud in each suit would increase substantially without a default judgment. However,
the benefit of preserving Receivership assets for equitable distribution to all creditors and
Ritchie argues that the Receiver lacks standing under the Minnesota Uniform
Fraudulent Transfer Act, Minn. Stat. § 513.41 et seq. (“MUFTA”), to bring clawback actions
that Petters could not bring himself. Ritchie has filed a motion to intervene in the Receiver’s
case against JPMC for the purpose of challenging the Receiver’s standing. The motion is
scheduled for oral argument before Magistrate Judge Hildy Bowbeer in October 2017. See
Kelley v. J.P. Morgan, No. 10-4999 (D. Minn.), Text Only Order [Docket No. 35]. Meanwhile,
the Receiver continues to have an active clawback action against JPMC on behalf of the
victims is more significant than any increase in litigation costs that Ritchie might expend in its
litigation against third parties.
B. Motion for Relief From Stay
Alternatively, Ritchie seeks relief from the litigation stay so that it can obtain a default
judgment for fraud against Petters in state court. Ritchie requested the same relief in 2015. At
that time, the Court denied Ritchie’s request for relief from the stay because the Receiver’s
interests in maintaining the stay outweighed Ritchie’s interest in lifting the stay. Ritchie argues
that the stay should now be lifted because Ritchie should not be indefinitely deprived from suing
Petters, who is not in bankruptcy. Ritchie further argues that the factors for determining whether
to grant relief from the stay have now tipped in Ritchie’s favor.
A court’s power to stay the litigation of actions that compete with a receivership estate
“falls within the court’s inherent power to prevent interference with the administration of th[e]
estate.” SEC v. Credit Bancorp., Ltd., 93 F. Supp. 2d 475, 477 (S.D.N.Y. 2000). “[T]he
preservation of the receivership estate is paramount.” Pittsford, 2007 WL 61096, at *2. A
litigation stay is “entirely appropriate” to enable the district court and receiver to “maintain
maximum control over the assets” and prevent small groups of creditors from “removing assets
from the receivership estate to the potential detriment of all.” SEC v. Byers, 609 F.3d 87, 92–93
(2d Cir. 2010).
1. Wencke Factors
In determining whether to grant relief from the stay in a receivership case, a court
considers the following factors: “(1) whether refusing to lift the stay genuinely preserves the
status quo or whether the [movant] will suffer substantial injury if not permitted to proceed; (2)
the time in the course of the receivership at which the motion for relief from the stay is made;
and (3) the merit of the [movant’s] underlying claim.” S.E.C. v. Wencke, 742 F.2d 1230, 1231
(9th Cir. 1984) (“Wencke II”) (citing S.E.C. v. Wencke, 622 F.2d 1363, 1373 (9th Cir. 1980)
(“Wencke I”)). “The test simply requires the district court to balance the interests of the
Receiver and the moving party . . . . [T]he interests of the Receiver are very broad and include
not only protection of the receivership res, but also protection of defrauded investors and
considerations of judicial economy.” United States v. Acorn Tech. Fund, L.P., 429 F.3d 438,
443 (3d Cir. 2005) (internal quotation marks omitted, alterations in original).
a. Status Quo or Substantial Injury
Ritchie argues that the stay is causing substantial injury by preventing Ritchie from
obtaining a default judgment against Petters for use in Ritchie’s litigation against third parties.
As discussed above, any injury to Ritchie is not substantial and is outweighed by the benefit of
preserving Receivership assets for equitable distribution to all creditors and victims. Moreover,
as this Court found in 2015, Ritchie will suffer little, if any, prejudice if the stay is preserved.
Ritchie’s loans are predicated on promissory notes and should not be difficult to document.
Similarly, Petters’ criminal conviction of a multi-billion dollar fraud scheme is easily subject to
proof. See Ritchie Capital Mgmt., L.L.C. v. Stoebner, 779 F.3d 857, 859 (8th Cir. 2015) (“The
specifics of Petters’s Ponzi scheme . . . have been described in detail in several of this court’s
other opinions.”). Thus, any injury to Ritchie caused by the stay is not substantial.
Additionally, the litigation stay preserves the status quo by preventing Ritchie from
gaining traction in its effort to recover for itself what the Receiver is attempting to recover for all
creditors and victims. Ritchie’s lawsuit against JPMC interferes with the Receiver’s action
because both seek to recover the same funds that JPMC seized from Petters’ investment accounts
on September 30, 2008. Compare Kelley v. J.P. Morgan Chase & Co., No. 10-cv-4999 (D.
Minn.) Compl. [Docket No. 1] ¶¶ 114, 119, 123 127 (seeking to recover “for the benefit of the
Receivership . . . approximately $25 million in cash and securities that was held in Petters’
investment accounts at JPMC” and liquidated by JPMC beginning September 30, 2008); with
Ritchie Capital Mgmt., L.L.C. v. J.P. Morgan Chase & Co., Case No. 14-4786 (D. Minn.)
Second Am. Compl. ¶¶ 438, 440, 441 (alleging that on “or about September 30, 2008, JPMorgan
seized and began to liquidate the approximately $25 million in securities then held in Petters’s
personal investment accounts . . . JPMorgan stepped ahead of the fraud scheme’s victims and
creditors to recover the nearly $20 million . . . [and] Ritchie is entitled to a judgment . . . against
JPMorgan in an amount equal to the sum of the value of the March security interest and $6.5
million . . . .”).
Ritchie’s litigation against JPMC depletes Receivership assets because the Receiver is
forced to incur costs to monitor the litigation and ensure that Ritchie’s recovery is not at the
expense of the Receivership. Lifting the stay at this time thus threatens the status quo and the
“fundamental purpose of establishing a Receivership,” which is “to protect the estate property
and ultimately return that property to the proper parties.” Pittsford, 2007 WL 61096, at *2.
The first Wencke factor weighs in favor of the Receiver because the litigation stay
maintains the status quo, preserves Receivership assets, and does not substantially harm Ritchie.
b. Stage of the Receivership
Ritchie argues that this factor weighs in favor of lifting the litigation stay because the
stay has been in place for nearly nine years and the Receiver has had sufficient time to organize
and marshal the Receivership assets. Ritchie contends that even if the Receiver still has certain
duties to perform, a continued stay lasting nearly nine years cannot be justified.
“The second Wencke prong is inherently case-specific, and of course, merely one of three
linked considerations.” Acorn, 429 F.3d at 450. There is no presumptive cut-off date after
which a stay should be presumptively lifted, and courts focus on the stage, rather than the age, of
the receivership when determining whether to lift the stay. Id. For example, the court’s decision
in Wencke II to lift the stay over a seven-year-old receivership was based on the fact that the
receiver was prepared to distribute the estate assets, which indicated that no additional time was
needed to disentangle the estate. Wencke II at 1232.
Although it has been two years since Ritchie last requested relief from the litigation stay,
the Receiver continues to actively liquidate and administer Receivership assets and pursue
litigation to recover funds from Ponzi scheme recipients. The age of the Receivership would be
of much greater concern to the Court had there been stagnation or periods of dormancy in the
Receivership. The pace of activity, as shown by even a cursory review of the docket, shows
sustained effort by the Receiver to reach a conclusion to the litigation.
Though the Receiver’s work is nearing completion, continuing the stay is necessary to
protect and preserve Receivership assets until the issues and claims stemming from this farreaching fraud are resolved. See S.E.C. v. Universal Fin., 760 F.2d 1034, 1039 (9th Cir. 1985)
(holding unresolved factual and legal issues in four-year-old receivership justified continuation
of stay); see also, Acorn, 429 F.3d 450 (continuing stay in three-year-old receivership because
“the alleged fraud encompassed many individuals and companies.”); Pittsford, 2007 WL 61096,
at *2 (“The preservation of the receivership estate is paramount.”). Moreover, the stay does not
permanently deprive Ritchie of its ability to pursue their claims against Petters. This Wencke
factor supports continuing the litigation stay.
c. Merits of Underlying Claim
In considering this prong, the Court assumes that Ritchie has a colorable claim against
Petters. However, the overall balance of the Wencke factors favors maintaining the litigation
stay at this time.
2. Comparison to Liquidating Trustee
At the hearing on this Motion, Ritchie argued that its request to lift the litigation stay is
indistinguishable from the relief requested and granted to Barry E. Mukamal (“Trustee
Mukamal”), Liquidating Trustee of the Palm Beach Finance Partners Liquidating Trust and the
Palm Beach Finance II Liquidating Trust. See Order, Feb. 25, 2014 [Docket No. 2598]. In
2014, this Court granted Trustee Mukamal’s unopposed motion seeking relief from the litigation
stay for the purposes of obtaining a default judgment against Receivership Defendants Michael
Catain and Enchanted Family Buying Company. Id.
This argument was raised by Ritchie in its first motion for relief from the stay and was
rejected by the Court at that time. The argument has not improved with age. As the Court
explained in 2015, material distinctions exist between the Ritchie Parties and Trustee Mukamal.
Trustee Mukamal was appointed under a Chapter 11 bankruptcy joint plan of liquidation that
was confirmed by the bankruptcy court for the Southern District of Florida. See Ex. 1 Mem.
Law Supp. [Docket No. 2592] ¶ 6. Funds recovered by Mukamal in his role as liquidating
trustee will be distributed to creditors in accordance with that court-approved liquidation plan,
and the bankruptcy court retains jurisdiction over the liquidation plan until the distribution
process has been completed. See In re Palm Beach Fin. Partners, L.P., No. 09-36379 (Bankr.
S.D. Fla.) (“Palm Beach Bankruptcy”) [Palm Beach Bankruptcy Docket No. 444] ¶ 30.
Furthermore, unlike Ritchie, Trustee Mukamal affirmatively committed not to interfere with the
claims of the Receiver or the Trustee. Therefore, sufficient bases exist for treating Ritchie
differently than Trustee Mukamal.
Based on the foregoing, and all the files, records and proceedings herein, IT IS
HEREBY ORDERED that intervenors Ritchie Capital Management, L.L.C.; Ritchie Special
Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investment I, L.L.C., and Ritchie
Capital Management, Ltd.’s Motion to Terminate Receivership or, Alternatively, to Lift the
Litigation Stay Against Thomas J. Petters [Docket No. 2897] is DENIED.
BY THE COURT:
s/Ann D. Montgomery
ANN D. MONTGOMERY
U.S. DISTRICT JUDGE
Dated: September 27, 2017.
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