Ritchie Capital Management, LLC v. Stoebner et al

Filing 16

MEMORANDUM OPINION AND ORDER : Appellants' Motion for Certification to Appeal Directly to the United States Court of Appeals for the Eighth Circuit Pursuant to 28 U.S.C. § 158(d)(2)(A) [Doc. No. 6] is DENIED (Written Opinion). Signed by Judge Susan Richard Nelson on 6/6/13. (LPH)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil Case No. 12-3038 (SRN)
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.,
Appellants,

MEMORANDUM
OPINION & ORDER

v.
John Stoebner, Trustee,
Appellee.

James M. Jorissen, Leonard, O’Brien, Spencer, Gale & Sayre, Ltd., 100 South Fifth
Street, Suite 2500, Minneapolis, Minnesota 55402; Brian A. McAleenan and Michael J.
La Mare, Sidley Austin, LLP - IL, One South Dearborn Street, Chicago, Illinois, 60603,
for Appellants
George H. Singer, Mark S. Enslin, Sandra S. Smalley-Fleming, and Terrence J. Fleming,
Lindquist & Vennum, PLLP, 80 South Eighth Street, Suite 4200, Minneapolis, Minnesota
55402, for Appellee

SUSAN RICHARD NELSON, United States District Judge
Appellants Ritchie Capital Management, L.L.C., Ritchie Special Credit
Investments, Ltd., Rhone Holdings II Ltd., Yorkville Investments I, L.L.C., and Ritchie
Capital Structure Arbitrage Trading, Ltd. (collectively, “Ritchie”) appeal a final order of
the Bankruptcy Court for the District of Minnesota. Before the Court is Appellants’
Motion for Certification to Appeal Directly to the United States Court of Appeals for the
Eighth Circuit Pursuant to 28 U.S.C. § 158(d)(2)(A) [Doc. No. 6]. For the reasons set

forth herein, Appellants’ motion is denied.
I.

BACKGROUND
This case arises from underlying bankruptcy proceedings involving Polaroid

Corporation and other affiliated Polaroid entities (collectively, “Polaroid”). In December
2008, Polaroid filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for
the District of Minnesota (“Bankruptcy Court”). In February 2009, the Polaroid
Corporation, in the capacity of debtor-in-possession, commenced an adversary
proceeding against the Ritchie Entities in Bankruptcy Court. The proceeding was
subsequently converted to a case under Chapter 7, at which time Appellee-Trustee John
R. Stoebner was substituted as the plaintiff. The Trustee seeks to avoid certain liens that
Polaroid had granted to Ritchie pursuant to a September 19, 2008 Trademark Security
Agreement, and the disallowance of claims based on that agreement. Specifically, the
Trustee seeks to avoid the liens as fraudulent transfers pursuant to 11 U.S.C. §§ 548 and
544.
The Bankruptcy Court entered a bifurcated schedule in which it first considered a
motion for partial summary judgment on the Trustee’s claims of actual fraudulent transfer
prior to the resolution of the Trustee’s other remaining claims, including constructive
transfer. The Trustee argued that the transfers at issue were actually fraudulent under two
theories: (1) by application of the “Ponzi scheme presumption”; and (2) under a
traditional “badges of fraud” analysis. Stoebner v. Ritchie Capital Mgmt. (In re: Polaroid

2

Corp.), 472 B.R. 22, 30-32 (Bankr. D. Minn. 2012).1 The Ponzi scheme at issue was
operated by Tom Petters.2 Id. at 27. At the time of the scheme’s operation, the ownership
of Polaroid was traceable to one of Petters’ entities, Petters Group Worldwide, LLC. Id.
Ritchie lent funds to Tom Petters and, like many of Petters’ investors and creditors,
became concerned when, in 2008, it appeared that Tom Petters and his entities were
insolvent. Id. at 50. In exchange for an extension agreement on several outstanding
notes held by Ritchie, Tom Petters, on behalf of Polaroid, executed the Trademark
Security Agreement in favor of Ritchie. Id. at 51. The agreement granted Ritchie a
security interest in certain trademarks owned by Polaroid. Id. As noted, Polaroid
subsequently filed for bankruptcy in December 2008. Id. at 27. When Polaroid was
placed into bankruptcy, Ritchie claimed to hold enforceable security interests, or liens, in
the particular Polaroid trademarks.
In the adversary proceeding below, the Honorable Gregory F. Kishel, Chief United
States Bankruptcy Judge for the District of Minnesota, granted in part, and denied in part,
the Trustee’s motion for partial summary judgment.3 Id. at 77. Chief Judge Kishel

1

Appellants have provided a copy of the Bankruptcy Court’s decision as Exhibit
A to their Memorandum, however, the Court cites to the published version of the opinion,
Stoebner v. Ritchie Capital Mgmt. (In re: Polaroid Corp.), 472 B.R. 22, 30-32 (Bankr. D.
Minn. 2012).
2

Petters was convicted in 2009 for crimes related to the Ponzi scheme and is
serving a fifty-year prison sentence. United States v. Petters, 08-CR-364 RHK/AJB [Doc.
Nos. 361; 400].
3

The Court denied the Trustee’s motion for partial summary judgment as to a
contract claim, for which the Trustee asserted that the agreement between Polaroid and
Ritchie was invalid, unenforceable, or lacked consideration. Id. at 73.
3

granted the Trustee’s motion on the issue of actual fraudulent transfer, applying both a
Ponzi scheme presumption and a badges of fraud analysis. Id. at 40-60. Under either
analysis, Chief Judge Kishel held that Ritchie’s liens resulted from actual fraudulent
transfers and were therefore avoidable. Id. at 59-60.
II.

DISCUSSION
A court of appeals has jurisdiction of appeals from the bankruptcy court under 28

U.S.C. § 158(d)(2)(A) if the district court certifies that:
(i) the judgment, order, or decree involves a question of law as to which
there is no controlling decision of the court of appeals for the circuit or of
the Supreme Court of the United States, or involves a matter of public
importance;
(ii) the judgment, order, or decree involves a question of law requiring
resolution of conflicting decisions; or
(iii) an immediate appeal from the judgment, order, or decree may
materially advance the progress of the case or proceeding in which the
appeal is taken.
28 U.S.C. § 158(d)(2)(A). Appellants urge certification under parts (i) and (iii). Under
part (i), they argue that the Eighth Circuit has not previously recognized the Ponzi scheme
exception to the badges of fraud analysis: “[t]herefore, as a threshold matter, the very
viability and availability of the presumption within the Eighth Circuit is a matter of first
impression.” (Appellants’ Mem. in Supp. Mot. for Certification at 7 [Doc. No. 6].) In
addition, they argue that even assuming the adoption of the Ponzi scheme presumption in
the Eighth Circuit, “the bankruptcy court’s application of the Ponzi scheme presumption
to a debtor that was not a Ponzi scheme and operated as a legitimate business is, as the
bankruptcy court itself expressly acknowledged, entirely novel, and has never before been
4

applied in that manner by any court.” (Id.)
Under Part (iii), Appellants also contend that direct appeal to the Eighth Circuit
would materially advance the progress of the underlying proceedings. Because of the
bifurcated nature of the bankruptcy proceedings, Appellants argue that receiving a final,
definitive opinion from the Eighth Circuit would obviate the need to litigate the
remaining claims. (Id. at 9.) They contend that speedy resolution of the actual
fraudulent transfer claims would save the debtor’s estate from expending resources, “as
the Trustee would not be forced to litigate two levels of appeal.” (Id. at 10.)
A.

Question of Law Lacking a Controlling Court of Appeals Decision

As to Appellants’ argument under part (i) of § 158(d)(2)(A), Appellants are correct
that the Eighth Circuit has not applied the Ponzi scheme presumption to alleged
fraudulent transfers arising under the federal bankruptcy statutes or the Uniform
Fraudulent Transfer Act. In non-Ponzi scheme cases, courts look to whether
circumstantial evidence – in the form of badges of fraud – establishes fraudulent intent.
Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348, 1353-54 (8th Cir. 1995). The
Ponzi scheme presumption is an exception to an ordinary badges of fraud analysis,
recognizing the unique, entirely fraudulent nature of Ponzi schemes. In fact, Chief
Bankruptcy Judge Kishel observed that the presumption constitutes “one big badge of
fraud.” Stoebner, 472 B.R. at 35 (emphasis in original).

Where the Ponzi scheme

presumption applies to the transfers at issue, courts have held that consideration of the
badges of fraud is unnecessary. In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 10, n.13
(S.D.N.Y. 2007) (citing Securities Investor Protection Corp. v. Old Naples Securities, Inc.
5

(In re Old Naples Securities, Inc., 343 B.R. 310, 319 (Bankr. M.D. Fla. 2006)).
Here, the Bankruptcy Court applied the Ponzi scheme presumption and applied a
badges of fraud analysis, arriving at the same result under either test. Discussing the
badges of fraud, the Bankruptcy Court concluded:
The last factor clinches it, when tied back to the others: even without the
overlaid backdrop of a collapsing Ponzi scheme, these badges cumulate to
independently support the inference that Tom Petters was willing to
materially impair the interests of the Polaroid Corporation's creditors by
encumbering assets otherwise subject to their claims, and was ready to go
ahead and do that in mid-September, 2008. This meets the actual-intent
requirement under either bankruptcy law or the [Minnesota Uniform
Fraudulent Transfer Act, Minn. Stat. § 513.44(b)]. The avoidance of the
grant of liens is thus merited, independently of the Ponzi scheme
presumption.
Stoebner, 472 B.R. at 59-60.
While the Eighth Circuit has not adopted the Ponzi scheme presumption when
considering claims of actual fraudulent transfer, the Eighth Circuit has certainly
considered application of the traditional badges of fraud in analyzing actual fraudulent
intent. See, e.g., Kelly v. Armstrong, 141 F.3d 799, 802 (8th Cir. 1998); In re Sherman,
67 F.3d 1348, 1353 (8th Cir. 1995). As Appellee notes, the badges of fraud test and the
Ponzi scheme presumption function in the same way – they permit a court to apply a
rebuttable presumption that the transferor acted with actual intent to defraud. (Appellee’s
Opp’n Mem. at 4 [Doc. No. 13].) Because the Bankruptcy Court applied the Ponzi
scheme presumption as an alternative basis for finding actual fraudulent intent, the
requirement under part (i) for certification – that the ruling involves a question of law as
to which there is no controlling decision of the court of appeals for the circuit – is not
6

met.4
Further, Appellee correctly observes that “Ritchie’s principal criticism of the
Bankruptcy Court – and its principal basis for requesting certification for direct appeal –
is that the Bankruptcy Court misapplied the Ponzi scheme presumption in this case.” (Id.
at 5) (emphasis in original). In other words, Appellants contend that the Bankruptcy
Court’s application of the presumption to transfers made by a related entity outside the
main operation of the Ponzi scheme merits certification under part (i) of § 158(d)(2)(A).
(Appellants’ Mem. at 7 [Doc. No. 6].) It is true that the Bankruptcy Court acknowledged
that “thus far the courts have recognized and applied the presumption only as to transfers
made by entities that directly purveyed Ponzi schemes.” Stoebner, 472 B.R. at 32-33.
However, certification to the Court of Appeals under part (i) requires a lack of controlling
precedent on a purely legal question. 28 U.S.C. § 158(d)(2)(A)(i). The application of
the Ponzi scheme presumption to the facts of this case is not a purely legal question –
instead, it involves a mixed question of law and fact. Accordingly, for these reasons, the
Court finds that certification under part (i) does not apply.
B.

Materially Advancing the Progress of the Case

The other basis on which Appellants move for certification is part (iii) of 28
U.S.C. § 158(d)(2)(A): “an immediate appeal from the judgment, order, or decree may

4

While this Court does not presume whether the Eighth Circuit would adopt the
presumption, at least four other federal circuits have adopted or applied it. See, e.g.,
Wing v. Dockstader, 482 Fed. App’x 361, 363 (10th Cir. 2012); Perkins v. Haines, 661
F.3d 623, 626-27 (11th Cir. 2011); Donell v. Kowell, 533 F.3d 762, 770-71 (9th Cir.
2008); Warfield v. Bryon, 436 F.3d 551, 558-59 (5th Cir. 2006). Ritchie does not argue
that other courts that have adopted the Ponzi scheme presumption are incorrect.
7

materially advance the progress of the case or proceeding in which the appeal is taken.”
28 U.S.C. § 158(d)(2)(A)(iii).
Ritchie argues that because of the bifurcated nature of the adversary proceeding,
the direct appeal of the claims involving actual fraudulent intent will allow the adversary
proceeding to proceed more quickly. (Appellants’ Mem. at 9 [Doc. No. 6].) In addition,
Ritchie contends that a ruling on this issue will also advance other Petters-related
proceedings.
The Court disagrees. The language of part (iii) speaks to the “progress of the case
or proceeding in which the appeal is taken. ” 28 U.S.C. § 158(d)(2)(A)(iii). In other
words, it refers to the specific case or proceeding at issue – not to other cases or
proceedings. In addition, the argument that immediate appeal now, as opposed to appeal
later, is more expeditious could be made in nearly all cases. The Court thus finds that a
certification to the Court of Appeals would not materially advance the progress of the
case. The Court therefore denies certification under part (iii) as well.
THEREFORE, IT IS HEREBY ORDERED that:
Appellants’ Motion for Certification to Appeal Directly to the United States Court
of Appeals for the Eighth Circuit Pursuant to 28 U.S.C. § 158(d)(2)(A) [Doc. No. 6] is
DENIED.
Dated: June 6, 2013
s/Susan Richard Nelson
SUSAN RICHARD NELSON
United States District Judge

8