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Ritchie Capital Management, LLC v. Kelley

United States District Court, D. Minnesota

June 12, 2014

Ritchie Capital Management, LLC, Ritchie Special Credit Investments, Ltd., Rhone Holdings II, Ltd., Yorkville Investments I, LLC, and Ritchie Capital Structure Arbitrage Trading Ltd., Appellants,
v.
Douglas A. Kelley, in his capacity as the Chapter 11 Trustee of Petters Company, Inc., VICIS Capital Master Fund, Ltd., and the Official Committee of Unsecured Creditors, Appellees.

James Jorissen, Esq., Leonard, O'Brien, Spencer, Gale & Sayre, Ltd., Minneapolis, MN, and Thomas K. Cauley, Jr., Esq., Brian A. McAleenan, Esq., and Michael J. La Mare, Esq., Sidley Austin LLP, Chicago, IL, on behalf of Appellants Ritchie Capital Management, LLC, Ritchie Special Credit Investments, Ltd., Rhone Holdings II, Ltd., Yorkville Investments I, LLC, and Ritchie Capital Structure Arbitrage Trading Ltd.

Terrence J. Fleming, Esq., George H. Singer, Esq., Sandra S. Smalley-Fleming, Esq., and Adam C. Ballinger, Esq., Lindquist & Vennum LLP, Minneapolis, MN, on behalf of Appellee Douglas A. Kelley, in his capacity as the Chapter 11 Trustee of Petters Company, Inc.

David A. James, Esq., and Mark Girouard, Esq., Nilan Johnson Lewis PA, Minneapolis, MN, on behalf of Appellee VICIS Capital Master Fund, Ltd.

Connie A. Lahn, Esq., and David E. Runck, Esq., Fafinski Mark & Johnson, P.A., Eden Prairie, MN, on behalf of Appellees The Official Committee of Unsecured Creditors of Petters Company, Inc. and Petters Group Worldwide, Inc.

MEMORANDUM OPINION AND ORDER

ANN D. MONTGOMERY, District Judge.

I. INTRODUCTION

This matter is before the undersigned United States District Judge on Appellants Ritchie Capital Management, LLC, Ritchie Special Credit Investments, Ltd., Rhone Holdings II, Ltd., Yorkville Investments I, LLC, and Ritchie Capital Structure Arbitrage Trading Ltd.'s (collectively, "Ritchie") appeal [Docket No. 1] of United States Bankruptcy Court Judge Gregory F. Kishel's Order dated February 27, 2014 ("Order") [Docket No. 3, Attach. 1]. In the Order, Judge Kishel approved a global settlement among VICIS Capital Master Fund ("VICIS") and Douglas A. Kelley in his dual capacities as Receiver for Thomas J. Petters ("Receiver") and as Chapter 11 Trustee for certain Petters-owned entities, including Petters Comany, Inc. ("PCI") and Petters Group Worldwide, LLC ("PGW") (the "Trustee"). The settlement includes a provision that VICIS will pay $7.5 million to resolve all claims that have been or could be brought against it by the Trustee and the Receiver. The Order approving the settlement authorizes Kelley to allocate 85% of the settlement proceeds to the PCI bankruptcy estate (the "PCI Bankruptcy Estate") and the remaining 15% to the Petters receivership estate (the "Receivership").

Ritchie appeals the Order, arguing the Bankruptcy Court erred in approving a portion of the settlement proceeds to be allocated to the Receivership. Ritchie contends the allocation: (1) results in a gratuitous transfer from the PCI Bankruptcy Estate to the Receivership; (2) manifests a material conflict of interest between Kelley's concurrent roles as Trustee and Receiver; and (3) violates the Coordination Agreement among the Trustee, Receiver, and United States as to the allocation of recoveries on Petters-related claims among the PCI Bankruptcy Estate and the Receivership. For the reasons set forth below, the decision of the Bankruptcy Court is affirmed.

II. BACKGROUND

A. Ritchie and VICIS's Investment in Petters Notes

The Ritchie entities are investment funds that made a series of loans to Petters and his wholly-owned companies PCI and PGW from February through May 2008. Appellee Trustee App. (hereinafter "APP____") [Docket No. 22] at APP009-10. The loans totaled nearly $190 million and were memorialized by promissory notes (the "Petters Notes"). APP009-10, APP203. On February 19, 2008, Ritchie assigned its interest in two of the Petters Notes with a combined face value of $25 million to VICIS. APP010. Ritchie acted as administrative agent for VICIS with respect to the assigned Petters Notes. Id.

B. Petters and PCI's Payments on Petters Notes

On June 13, 2008, Petters transferred $2, 701, 200 from his personal checking account to Ritchie in partial payment on the Petters Notes. APP062, APP068. From June 16, 2008 to August 20, 2008, PCI made several payments to Ritchie totaling $21, 084, 308.81 toward the Petters Notes. APP068. Ritchie used funds received from Petters and PCI to pay $17, 703, 227.39 to VICIS, based on VICIS's assigned interest in two of the Petters Notes. APP010-11, APP068. Of the amounts received by VICIS, approximately 15% ($2, 701, 200) originated from Petters, and approximately 85% ($15, 002, 027.39) originated from PCI. APP068.

C. Petters's Ponzi Scheme and Resulting Receivership and Bankruptcy Proceedings

In late September of 2008, law enforcement officials conducted search warrants on Petters's home and corporate headquarters, securing evidence a multi-billion dollar Ponzi scheme. APP004-5. Petters had led investors to believe their loans were being used to purchase electronic goods from wholesalers which he would resell at a markup to "big box" retailers. The electronic merchandise did not exist, and investors were repaid with funds from other investors, rather than from earnings on the investments.

On October 2, 2008, the Government filed a civil action under the Fraud Injunction Statute, 18 U.S.C. § 1345, to freeze and preserve assets owned by Petters and others in the event that contemporaneously-filed criminal actions resulted in convictions. APP006-7. A receivership was established for Petters, PCI, PGW, and others. Kelley was appointed as the Receiver. APP007.

On October 11, 2008, Kelley, pursuant to his authority under the Receivership Order, filed Chapter 11 bankruptcy petitions for PCI and PGW. APP002, APP007. A committee of unsecured creditors (the "Creditors' Committee") was appointed on November 21, 2008 to protect the interests of the bankrupt entities' unsecured creditors. APP002; 11 U.S.C. §§ 1102; 1103(c). On December 24, 2008, the United States Trustee's Office appointed Kelley as Chapter 11 Trustee of the PCI Bankruptcy Estate and of certain other bankrupt entities owned by Petters, including PGW.[1] The appointment was approved by the Bankruptcy Court on February 26, 2009. Kelley thus serves as the Trustee for the PCI Bankruptcy Estate and certain other bankrupt Petters entities, and as the Receiver for Thomas Petters and Petters's entities that are ...


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