Ritchie Capital Management, L.L.C. et al v. U.S. Bank National Association
Filing
39
Order Granting 15 Motion to Dismiss. Signed by Senior Judge David S. Doty on 8/11/2015. (DLO)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil No. 15-2092(DSD/TNL)
Ritchie Capital Management, L.L.C.,
Ritchie Capital Management, LTD.,
Ritchie Special Credit Investments, LTD
Rhone Holdings II, LTD, Yorkville
Investment I, L.L.C., and Ritchie
Capital Structure Arbitrage Trading, LTD.
Plaintiffs,
ORDER
v.
U.S. Bank National Association,
Defendant.
Gregg M. Fishbein, Esq. and Kate M. Baxter-Kauf, Esq. of
Lockridge Grindal Nauen P.L.L.P. 100 Washington Avenue
South, Suite 2200, Minneapolis. MN 55401, attorneys for
plaintiff.
Richard G. Wilson, Esq. of Maslon LLP, 3300 Wells Fargo
Center, 90 South 7th Street Suite 3300, Minneapolis, MN
55402, attorneys for defendant.
This matter is before the court upon the motion to dismiss by
defendant U.S. Bank National Association. Based on a review of the
file,
record,
and
proceedings
herein,
and
for
the
following
reasons, the court grants the motion.
BACKGROUND
This business dispute arises out of a multi-billion dollar
Ponzi scheme orchestrated by Tom Petters and committed in part
using US Bank accounts.
The scheme collapsed in 2008, and Petters
was convicted by a jury and sentenced to fifty years’ imprisonment.
See United States v. Petters, 663 F.3d 375, 378 (8th Cir. 2011).
Plaintiffs Ritchie Capital Management, LLC and related entities1
(collectively, Ritchie) allege that US Bank knowingly assisted
Petters in operating the scheme, causing damages in excess of $157
million.
I.
Am. Compl. ¶ 1.
The Purchase Order Financing Scheme
Petters, through his company Petters Company, Inc. (PCI),
purported to operate a “diverting” business through which PCI
purchased bulk quantities of electronic merchandise from vendors at
below wholesale prices, and then sold the merchandise to discount
retailers at a substantial profit.
Id. ¶¶ 2, 18.
To finance the
alleged purchases, Petters, PCI, and Petters Capital, Inc. sold
high-yield promissory notes to lenders, secured by the purchase
orders.
Id. ¶ 19.
PCI then used the sale proceeds to pay off the
promissory notes with interest.
In 2002, Petters and his affiliates formed Palm Beach Finance
Partners, LP (Palm Beach Finance) and PBFP Holding, LLC.
21.2
Id. ¶
In 2003, PBFP Holding began selling promissory notes on
behalf of Petters to Palm Beach Finance.
Id. ¶ 22.
Palm Beach
1
Plaintiffs include Ritchie Capital Management, LLC; Ritchie
Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.;
Yorkville Investments I, LLC; and Ritchie Capital Management, Ltd.
2
Petters later formed two other entities with similar names,
Palm Beach Finance Holdings II, LLC and Palm Beach Finance II, LP.
Am. Compl. ¶ 24. These entities served the same purpose as Palm
Beach Finance and PBFP Holding, and as a result, the court refers
only to the entities formed in 2002.
2
Finance purchased the notes with funds that were loaned by Palm
Beach Offshore, Ltd., a private investment company.
Wilson Decl. Ex. 10, at 6.
Id. ¶ 24;
Palm Beach Offshore was in turn
financed through private investors.
Am. Compl. ¶ 27.
As is well known by now, the diverting business operated by
Petters was
a
sham.
PCI
neither
purchased
vendors, nor sold any merchandise to retailers.
merchandise
from
Instead, Petters
used forged purchase orders to solicit financing for the scheme,
and used funds from new investors and lenders to pay off previously
issued promissory notes.
II.
Id. ¶ 3.
US Bank’s Involvement in the Scheme
To facilitate the purchase order scheme, Petters and his
affiliates maintained a number of accounts with US Bank. Id. ¶¶ 4,
22-24.
In pertinent part, US Bank managed a “Direct Payment
System” that transferred funds through a “Collateral Account.” Id.
¶ 27, 36.
Under the Direct Payment System, PCI would request a
loan from either PBFP Holding or individual lenders, and issue a
corresponding promissory note.
Id. ¶ 36.
US Bank would then wire
funds from the Collateral Account to a vendor, who would provide
the merchandise to a retailer.
Id.
The retailer would pay for the
goods by making a wire transfer to the Collateral Account or by
issuing a check to a “Lockbox Account” that was connected to the
Collateral Account.
Id.
The funds would then be distributed from
the Collateral Account to the lender, with the remainder going to
3
PCI.
Id.
Because the purchase order financing scheme was a sham,
however, no retailers actually sent payments to the Collateral
Account.
Instead, proceeds from the fabricated sales came from
PCI, with funds that PCI received through the issuance of new
promissory notes.
Id. ¶ 40.
Ritchie alleges that US Bank knew the
payments to the Collateral Account were coming from PCI rather than
the retailers.
Id. ¶ 8.
Despite this alleged knowledge, US Bank
complied with instructions to alter wire transfer documents, bank
statements,
and
“receipt
of
funds”
entries
to
show
that the
retailers were providing the payments. Id. ¶¶ 8, 42-45, 65-66, 9697.
that
US Bank also allegedly “assured PCI’s lenders and investors
the
direct
payment
maintained and operated.”
system
was
being
properly
followed,
Id. ¶ 38.
To solicit financing for the scheme, Palm Beach Offshore
issued
offering
circulars
to
prospective
subscribers,
which
explained the diverting business and the Direct Payment System.
Id. ¶ 27; Wilson Decl. Ex. 10.
Ritchie alleges US Bank knew that
certain representations made in the offering circulars were false,
and that investors relied on those representations to ensure that
the
Direct
Payment
System
would
interference by third parties.
protect
their
funds
from
Am. Compl. ¶¶ 30-33.
III. The Polaroid and PGW Loans
According to the complaint, in January 2008, “an agent for
4
Petters approached Ritchie” to make a short-term loan secured by
the assets of the Polaroid Holding Company, an entity owned by
Petters Group Worldwide, LLC (PGW).
Id. ¶ 46.
“Petters and
representatives of [PGW]” allegedly told Ritchie that the loan
would be used to pay $31 million owed under a credit facility that
Polaroid had with JP Morgan.
Id.
They also sought $150 million
for a bridge loan until Polaroid could obtain permanent financing.
Id. ¶ 47.
From February to May 2008, Ritchie loaned PGW and
Petters approximately $189 million, which was allegedly used to pay
down Polaroid’s debt to JP Morgan, repay debts owed on promissory
notes issued under the purchase order financing scheme, subsidize
the operations of Petters-controlled companies, and fund Petters’
extravagant lifestyle.
Id. ¶¶ 3, 48.
For example, on February 1, 2008, Ritchie wired $31 million
under a promissory note issued by PGW and Petters to an account at
M&I Bank that was held in PCI’s name.
Id. ¶ 53.
That same day,
three transfers were made from the M&I Bank account to an account
at US Bank.
Id. ¶ 54.
The next business day, US Bank made three
transfers in the same amounts to the Collateral Account, and
falsely described the funds as being received from merchandise
retailers for application to promissory notes issued by PBFP
Holding.
Id. ¶ 56.
Similar transfers were made from Ritchie to
Petters-controlled accounts in March and May 2008.
Id. ¶ 71.
Ritchie alleges that, “[b]ut for US Bank’s knowing and substantial
5
assistance to Petters and Petters-controlled entities” in operating
the purchase order scheme and the Direct Payment System, Ritchie
would not have made its loans.
Id. ¶ 73.
On September 23, 2014, Ritchie filed a complaint against US
Bank in New York state court, alleging (1) fraudulent conveyance,3
(2) aiding and abetting fraud, (3) conspiracy to commit fraud, and
(4) unjust enrichment. US Bank removed, and on April 10, 2015, the
action was transferred to this district.
ECF No. 19.
US Bank now
moves to dismiss.
DISCUSSION
I.
Standard of Review
To survive a motion to dismiss for failure to state a claim,
“a complaint must contain sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face.’”
Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009)
(quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
“A claim
has facial plausibility when the plaintiff [has pleaded] factual
content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.”
Iqbal, 556
U.S. at 678 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556
(2007)).
Although a complaint need not contain detailed factual
3
Ritchie also brought a claim for aiding and abetting
fraudulent conveyance, but voluntarily dismissed the claim in
response to this motion. See Pl.’s Opp. Mem. at 3 n.1.
6
allegations, it must raise a right to relief above the speculative
level.
Twombly, 550 U.S. at 555.
“[L]abels and conclusions or a
formulaic recitation of the elements of a cause of action” are not
sufficient to state a claim.
Iqbal, 556 U.S. at 678 (citation and
internal quotation marks omitted).
The court does not consider matters outside of the pleadings
under Rule 12(b)(6).
Fed. R. Civ. P. 12(d).
The court, however,
may consider matters of public record and materials that do not
contradict
the
complaint,
as
well
as
“necessarily embraced by the pleadings.”
materials
that
are
Porous Media Corp. v.
Pall Corp., 186 F.3d 1077, 1079 (8th Cir. 1999) (citation and
internal quotation marks omitted).
In addition to the complaint,
the court refers to pleadings in other Petters-related actions
involving Ritchie Capital, which are matters of public record.
II.
Statute of Limitations
US Bank first argues that Ritchie’s claims are time-barred,
because this action was filed more than six years after Ritchie
issued its loans to Petters.
Under New York law,4 actions sounding
4
“The statute of limitations from the transferor court
governs diversity cases transferred to another federal venue.”
Thorn v. Int’l Bus. Machs., Inc., 101 F.3d 70, 72 (8th Cir. 1996).
Under New York’s borrowing statute, a claim must be timely under
both New York law and the law of the state where the claim accrued.
N.Y. C.P.L.R. § 202. US Bank argues that Ritchie’s claims accrued
in Illinois, because it is the principal place of business for all
plaintiffs. See Soward v. Deutsche Bank AG, 814 F. Supp. 2d 272,
278 (S.D.N.Y. 2011) (stating that claims alleging economic harm
accrue at a company’s place of residence).
Illinois applies a
five-year statute of limitations for fraud-based and unjust
7
in fraud must be commenced within six years “from the date the
cause of action accrued” or two years “from the time the plaintiff
... discovered the fraud, or could with reasonable diligence have
discovered it[,]” whichever is greater.
N.Y. C.P.L.R. § 213(8).
This limitations period applies to all of Ritchie’s claims.
See
Koch v. Christie’s Int’l, PLC, 699 F.3d 141, 154 (2d Cir. 2012)
(aiding and abetting fraud and conspiracy to defraud); State Farm
Mut. Auto. Ins. Co. v. Rabiner, 749 F. Supp. 2d 94, 103-04
(E.D.N.Y. 2010) (unjust enrichment); Miller v. Polow, 787 N.Y.S.2d
319, 320 (N.Y. App. Div. 2005) (fraudulent conveyance).5
Ritchie alleges that it made loans to Petters and PGW in
February, March, April, and May 2008.
71.
See Am. Compl. ¶¶ 50, 53,
This action was not commenced until September 23, 2014, more
than six years later.
ECF No. 1, Ex. A.
The claims are therefore
enrichment claims, and a four-year limitations period for
fraudulent conveyance claims. See McMahan v. Deutsche Bank AG, 938
F. Supp. 2d 795, 802 (N.D. Ill. 2013); Richards v. Burgett, Inc.,
No. 10-7580, 2011 WL 6156838, at *4 (N.D. Ill. Dec. 12, 2011);
Salisbury v. Majesky, 817 N.E.2d 1219, 1221-22 (Ill. Ct. App.
2004).
Because Ritchie’s claims are untimely under New York’s
longer limitations periods, the court will not address the
timeliness of the claims under Illinois law.
5
Ritchie asserts claims for actual and constructive
fraudulent conveyance. Am. Compl. ¶ 85. Fraudulent conveyance
claims based on actual fraud are subject to the same limitations
period as other fraud-based claims, while fraudulent conveyance
claims based on constructive fraud are subject to a six year
statute of limitations with no two-year discovery rule.
See
Miller, 787 N.Y.S.2d at 320 (actual fraud); Analogic Corp. v.
Manuelian, No. 12-1428, 2014 WL 1330774, at *3 (E.D.N.Y. Mar. 31,
2014) (constructive fraud).
8
time-barred under their respective six-year limitations periods.
Ritchie argues, however, that the claims could be timely under New
York’s two-year discovery rule, because it is unclear at this stage
when US Bank’s involvement in the fraud could have reasonably been
discovered.
Specifically, Ritchie argues that stay orders issued
in
receivership
Petters’
and
bankruptcy
proceedings
prevented
Ritchie from accessing documents that would have revealed US Bank’s
participation at an earlier time.
See Fishbein Decl. Ex. C, at 19
(prohibiting any “action that would interfere with the exclusive
jurisdiction
of
this
Court
over
the
assets
or
documents
of
Defendants”).
The point at which Ritchie could have reasonably discovered US
Bank’s involvement in the scheme is irrelevant to whether its
claims are time-barred.
The two-year discovery period under New
York law begins to run when a plaintiff could have discovered “the
fraud,” not an alleged accomplice’s participation in the fraud.
See N.Y. C.P.L.R. § 213(8).
The complaint alleges that the Ponzi
scheme was “revealed” in October 2008.
Am. Compl. ¶ 3.
Thus,
Ritchie had knowledge of the fraud at that time, and the two-year
discovery window expired in 2010.
Indeed, beginning in September
2008, Ritchie commenced multiple actions arising out of Petters’
scheme.
See Wilson Decl. Ex. 8.
Because Ritchie issued its loans
to Petters more than six years before filing suit, dismissal of
this action is warranted.
See Kottler v. Deutsche Bank AG, 607 F.
9
Supp. 2d 447, 460-61 (S.D.N.Y. 2009) (dismissing claims for aiding
and abetting fraud and conspiracy to commit fraud as untimely,
because the underlying fraud claim was also time-barred).
II.
Failure to State a Claim
Even if this action was timely, the court finds that Ritchie
has failed to state a claim for relief.6
A.
Aiding and Abetting Fraud
To state a claim for aiding and abetting fraud under New York
law, Ritchie must plead “(1) the existence of an underlying fraud;
(2) knowledge of this fraud on the part of the aider and abettor;
and
(3)
substantial
assistance
achievement of the fraud.”
F.
Supp.
2d
372, 442
the
aider
and
abettor
in
Anwar v. Fairfield Greenwich Ltd., 728
(S.D.N.Y.
quotation marks omitted).
by
2010)
(citation
and
internal
Aiding and abetting fraud claims must
meet the heightened pleading requirements of Rule 9(b).
Musalli
Factory for Gold & Jewellry v. JPMorgan Chase Bank, N.A., 261
F.R.D. 13, 23 (S.D.N.Y. 2009).
Therefore, the complaint must “(1)
specify the statements that the plaintiff contends were fraudulent,
(2) identify the speaker, (3) state where and when the statements
were made, and (4) explain why the statements were fraudulent.”
Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir. 2006)
(citation and internal quotation marks omitted).
6
The parties primarily apply New York law in analyzing the
substance of Ritchie’s claims.
Neither party argues that a
different result would follow under Minnesota or Illinois law.
10
The court finds that Ritchie has failed to adequately plead
the underlying fraud with particularity.
January
2008,
an
unnamed
“agent
for
Ritchie alleges that, in
Petters”
requested
that
“Ritchie” provide a loan so that Polaroid could pay down debt that
it owed to JP Morgan and obtain working capital.
47.
Am. Compl. ¶¶ 46-
The complaint does not identify the agent that solicited the
financing, where any fraudulent statements were made, or to whom
those statements were made.
Ritchie argues that the complaint satisfies the requirements
of Rule 9(b) because it explains, in great detail, the fraudulent
purchase order financing scheme and specific misrepresentations
made in furtherance of that scheme.
As noted by US Bank, this
argument conflates the purchase order scheme with the specific
fraud against Ritchie.
Ritchie was asked to help Polaroid pay its
debts to JP Morgan and to obtain working capital.
It was not asked
to purchase promissory notes in furtherance of the fraudulent
diverting business.
Therefore, the misrepresentations made to
other investors in furtherance of the diverting business have no
relevance to the specific fraud perpetrated on Ritchie.
Moreover, the court finds that Ritchie has not adequately
pleaded knowledge on the part of US Bank.
“To survive a motion to
dismiss ... the [plaintiff] must allege facts giving rise to a
strong inference of defendant’s actual knowledge of the underlying
harm[.]”
Kirschner v. Bennett, 648 F. Supp. 2d 525, 544 (S.D.N.Y.
11
2009) (internal quotation marks omitted).
Ritchie alleges US Bank
knew that (1) there was no Lockbox Account as represented to
investors, (2) incoming payments to the Collateral Account came
from PCI rather than discount retailers, and (3) the Direct Payment
System was illusory.
Am. Compl. ¶¶ 29, 34, 39, 42, 44-45, 96, 98.
Again, however, there is no indication that US Bank knew of the
separate fraud that was committed against Ritchie.
See Kirschner,
648 F. Supp. 2d at 545 (declining to equate defendant’s knowledge
of one fraud to its knowledge of an allegedly related scheme).7
Dismissal of the aiding and abetting fraud claim is therefore
warranted.8
B.
Fraudulent Conveyance
Ritchie alleges that fraudulent conveyances occurred when
Petters directed the transfer of Ritchie’s funds from Petters or
from PCI’s account at M&I Bank to the accounts held by Petterscontrolled entities at US Bank.
Am. Compl. ¶¶ 76-85.
To be liable
for a fraudulent transfer under New York law, the defendant must be
a transferee of the funds.
See FDIC v. Porco, 552 N.E.2d 158, 159
(N.Y. 1990) (prohibiting recovery “against parties who ... were
7
Ritchie’s allegations regarding US Bank’s substantial
assistance are also unrelated to the Polaroid fraud and are
therefore without merit. See Pl.’s Opp. Mem. at 19-20.
8
Because Ritchie has not adequately pleaded the existence of
the underlying fraud, dismissal of the conspiracy claim is also
warranted. See Scala v. Sequor Grp., Inc., No. 94-0449, 1995 WL
225625, at *9 (S.D.N.Y. Apr. 14, 1995).
12
neither
transferees
of
the
assets
nor
beneficiaries
of
the
conveyance”); Farm Stores, Inc. v. Sch. Feeding Corp., 477 N.Y.S.2d
374, 379 (N.Y. App. Div. 1984) (stating that, in the event of a
fraudulent conveyance, a transferee “who was not a bona fide
purchaser for fair consideration is liable to the creditor to the
extent of the value of the money or property he or she wrongfully
received” (citation omitted)).
To be considered a transferee, the
defendant must exercise “dominion and control” over the transferred
assets.
See In re Bruno Mach. Corp., 435 B.R. 819, 848 (Bankr.
N.D.N.Y. 2010); In re Feaster, No. 12-12491, 2014 WL 7366031, at *3
(Bankr. S.D.N.Y. Dec. 23, 2014) (dismissing avoidance claim where
alleged transferee held no authority to direct the transfer of a
stock certificate).
The
complaint
alleges
that
Ritchie’s
loan
proceeds
were
transferred either from Petters or from PCI’s account at M&I Bank
to accounts maintained at US Bank.
77-80.
Am. Compl. ¶¶ 4, 53, 60-61, 71,
Ritchie does not allege that these transfers were directed
by US Bank, or that US Bank exercised dominion and control over the
funds at any time.
Indeed, Ritchie acknowledges that it was
Petters who exercised dominion and control over the transferred
funds.
See Pl.’s Opp. Mem. at 24; Am. Compl. ¶¶ 1, 81, 84-85.
As
a result, dismissal of Ritchie’s fraudulent conveyance claim is
13
also warranted.9
C.
Unjust Enrichment
To state a claim for unjust enrichment, Ritchie must show that
“(1) [US Bank] was enriched, (2) at [Ritchie’s] expense, and (3)
that it is against equity and good conscience to permit [US Bank]
to retain what is sought to be recovered.”
Old Republic Nat’l
Title Ins. Co. v. Luft, 859 N.Y.S.2d 261, 262 (N.Y. App. Div.
2008). The complaint alleges that US Bank was unjustly enriched as
a result of (1) the transfer of Ritchie’s loan proceeds to the
accounts maintained at US Bank, and (2) the substantial fees that
US Bank received from the transfer of funds in and out of Petters’
accounts.
Am. Compl. ¶ 119-20.
According to the complaint, the
loan proceeds were transferred from accounts maintained at US Bank
in order to fund the purchase order financing scheme, pay off debts
to
JP
Morgan,
subsidize
the
operations
entities, and fund Petters’ lifestyle.
of
Petters-controlled
See id. ¶¶ 3, 48.
Thus, US
Bank did not benefit simply by facilitating the transfer of these
funds to Petters and his affiliates.
9
See Schroeder v. Capital One
Ritchie argues that it is improper at the pleading stage to
dismiss a fraudulent conveyance claim on the ground that the
alleged transferee was a “mere conduit” of the transfer.
See
Steinberg v. Alpha Fifth Grp., No. 04-60899, 2010 WL 1332844, at *2
(S.D. Fla. Mar. 30, 2010) (“This issue presents a question of fact
that cannot be considered on a motion to dismiss.”).
The
complaint, however, does not include any allegations whatsoever
that US Bank exercised dominion and control over the funds. See In
re Feaster, 2014 WL 7366031, at *3 (dismissing avoidance claims
where there was “no basis on the allegations of [the complaint] to
deem the [defendant] a transferee”).
14
Fin. Corp., 665 F. Supp. 2d 219, 226 (E.D.N.Y. 2009) (“[T]he only
party that benefitted from the alleged wrongful transfer of funds
was
the
unauthorized
transferred.”).
third
party
to
whom
the
funds
were
Moreover, although US Bank generated fees through
transferring the funds at the direction of Petters, the complaint
fails to show how those fees were generated at Ritchie’s expense.
See Mazzaro de Abreu v. Bank of Am. Corp., 525 F. Supp. 2d 381, 397
(S.D.N.Y. 2007) (“As the transfers were done at the behest of [a
third party],
Plaintiffs
must
look
recovery, not to Defendants[.]”).
to
[the
third
party]
for
As a result, dismissal of
Ritchie’s unjust enrichment claim is warranted.
CONCLUSION
Accordingly, based on the above, IT IS HEREBY ORDERED that the
motion to dismiss [ECF No. 15] is granted.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated:
August 11, 2015
s/David S. Doty
David S. Doty, Judge
United States District Court
15
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