Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Stoebner v. Opportunity Finance, LLC

United States District Court, D. Minnesota

December 23, 2016

John R. Stoebner, Trustee, Appellant,
v.
Opportunity Finance, LLC; Opportunity Finance Securitization, LLC; Opportunity Finance Securitization II, LLC; Sabes Minnesota Limited Partnership; Robert W. Sabes; Janet F. Sabes; Jon R. Sabes; Steven Sabes; DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt Am Main; and John and Jane Does 1-30, Appellees.

          Richard T. Thomson, John R. Stoebner, Amy L. Schwartz, and Rosanne H. Wirth, Lapp, Libra, Thomson, Stoebner & Pusch, Chartered, for Appellants

          Joseph G. Petrosinelli, Jonathan M. Landy, and Christopher Mandernack, Williams & Connolly, LLP, John R. McDonald, Kari S. Berman, and Scott M. Flaherty, Briggs & Morgan, PA, for Opportunity Finance Appellees

          Michael A. Rosow, Winthrop & Weinstine, PA, H. Peter Haveles, Jr., Kaye Scholer LLP, for Appellee DZ Bank AG Deutsche Zentral- Genossenschaftsbank

          MEMORANDUM OPINION & ORDER

          SUSAN RICHARD NELSON United States District Judge.

         Appellant/Plaintiff John R. Stoebner, [1] Trustee in bankruptcy for Polaroid Corporation and other related debtors (“the Polaroid Debtors”) appeals from a January 14, 2016 order (“the Order”) of the United States Bankruptcy Court for the District of Minnesota (“Bankruptcy Court”) and an oral order made by that same court on December 1, 2015. For the reasons set forth herein, the Trustee's appeal is denied.

         I. BACKGROUND

         This matter arises from an underlying adversary proceeding in Bankruptcy Court. The Trustee filed suit under the Minnesota Uniform Fraudulent Transfer Act, (“MUFTA”), to avoid certain prepetition payments to the following lenders: Defendants Opportunity Finance, LLC and related Opportunity Finance entities (collectively, “Opportunity Finance”), DZ Bank AG Deutsche Zentral-Genossenschaftsbank (“DZ Bank”), Sabes Minnesota Limited Partnership, Robert W. Sabes, Janet F. Sabes, Jon R. Sabes, Steven Sabes, (collectively, “the Sabes Family”), and John and Jane Does 1-30. Under the MUFTA, creditors may recover assets that debtors have otherwise fraudulently transferred to third parties. Finn v. Alliance Bank, 860 N.W.2d 638, 644 (Minn. 2015).

         Defendants Opportunity Finance and DZ Bank moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), as incorporated by Fed.R.Bankr.P. 7012(b). While Defendants' motion was pending, at a December 1, 2015 omnibus hearing, the Trustee requested leave to file a third amended complaint. (See 12/1/15 Bankr. Tr., Tab 2 to Opp. Fin. Appendix [Doc. No. 22 at 29-31].) From the bench, Chief Bankruptcy Court Judge Gregory F. Kishel declined to entertain the Trustee's request until after the issuance of his ruling on the pending dispositive motions. (Id. at 47-58.) Six weeks later, in the written Order on Defendants' motions, Chief Judge Kishel granted Defendants' motion and dismissed the case with prejudice, finding that any amended pleadings would contradict the facts already alleged so as to be futile. In re Polaroid, 543 B.R. 888, 903, 905, 915 (Bankr. D. Minn. 2016).[2] The Trustee filed the instant appeal [Doc. No. 1] of the Order and the bench ruling.

         A. Petters Consumer Brands, LLC

         Before the collapse of Tom Petters' Ponzi scheme in September 2008, (see Second Am. Compl. (“SAC”) ¶ 20 [Doc. No. 18]), Petters utilized a variety of corporate entities, most notably Petters Company, Inc. (“PCI”) and Petters Group Worldwide, LLC (“PGW”), to operate a massive Ponzi scheme. In re Polaroid, 543 B.R. at 890. Petters was ultimately convicted on multiple counts of fraud, (SAC ¶ 21), and this Court appointed a receiver to marshal and secure his assets. See In re Polaroid, 543 B.R. at 890. The receiver placed PCI and many of Petters' affiliated entities into Chapter 11 bankruptcy. Id. Clawback proceedings were initiated by bankruptcy trustees involving the PCI entities in order to recover some of the losses sustained by Petters' later lender-investors. Id. The Polaroid Corporation, which Petters ultimately acquired in 2005, was also placed into Chapter 11 bankruptcy. (SAC ¶ 2.) The Polaroid Debtors converted the Polaroid cases to proceedings administered under Chapter 7 of the Bankruptcy Code. (SAC ¶ 3.) The Trustee here, John R. Stoebner, was appointed to represent the interests of creditors of the Polaroid debtors. (SAC ¶ 3.) While Petters later acquired the Polaroid Corporation, the facts at issue here occurred before then, when Polaroid was Petters' contractual counterparty, outside of the Petters enterprises. In re Polaroid, 543 B.R. at 891.

         The Petters entity directly at issue here is Petters Consumer Brands, LLC (“PettersCB”). During the relevant time period of 2003-2005, PettersCB, under a contractual license agreement with Polaroid, used the Polaroid brand name on certain goods, which PettersCB then sold to retailers like Best Buy. (SAC ¶¶ 24; 36; 40.) But as the Trustee acknowledges, “[U]nlike many of Tom Petters' companies, [PettersCB] actually purchased, warehoused, and sold to prominent retailers high volumes of consumer electronic equipment, branded with the Polaroid name.” (SAC ¶ 24.) As alleged in the SAC, Opportunity Finance provided funding to PettersCB which it then used to purchase consumer electronics for resale to retailers or to pay third parties regarding the electronics. (SAC ¶¶ 40-41.) DZ Bank was a senior secured lender to Opportunity Finance, providing Opportunity Finance with funding for its lending to PettersCB. (SAC ¶ 14.) The Trustee generally alleges that Tom Petters used PettersCB to further his Ponzi scheme, (SAC ¶¶ 19; 24), and that Opportunity Finance was a significant investor and “net winner” in Petters' scheme, receiving “false profits” from “Tom Petters' entities” and “far higher annual rates of return on its investments with Tom Petters' entities than were commercially reasonable.” (SAC ¶¶ 27-28.) In addition, the Trustee alleges that PettersCB was used to launder money from the overall Ponzi scheme and “prop up” its losses; Tom Petters is further alleged to have personally taken Ponzi proceeds out of PettersCB. (SAC ¶¶ 25-26.)

         The Trustee asserts that, eventually, Opportunity Finance insisted that PettersCB create an entity called Petters Consumer Brands Funding, LLC (“PettersCB Funding”) as a “bankruptcy remote vehicle.” (SAC ¶¶ 46-47.) Established on or about July 28, 2003, PettersCB Funding was allegedly intended to “shield[ ] Defendants from the consequences of [PettersCB's] inevitable bankruptcy.” (Id. at ¶ 46.) The Trustee alleges that the envisioned “plan” was for PettersCB Funding to be a “real” and independent entity to which Opportunity Finance would provide loans. (Id.) In exchange, PettersCB Funding would use the loan proceeds to purchase accounts receivable from PettersCB. (Id.) PettersCB would use the money obtained from PettersCB Funding to buy more consumer goods to resell. (Id.) However, the Trustee asserts that the sales of accounts received between PettersCB and PettersCB funding “were not true sales.” (SAC ¶ 48.) Moreover, he contends that when Opportunity Finance “swept the [PettersCB Funding] bank account to pay itself the principal and interest due on its loans, ” Opportunity Finance returned the excess profit to PettersCB, not PettersCB Funding. (Id.) Thus, the Trustee alleges that in actuality, PettersCB Funding lacked the true attributes of a bankruptcy-remote entity, (SAC ¶ 50), and was a “mere conduit” for transferring money. (SAC ¶ 51.)

         The Trustee also alleges that in April 2005, PettersCB paid Opportunity Finance $349, 000 as a prepayment penalty (the “Prepayment Penalty Transfer”). (SAC ¶ 52.) However, the Trustee asserts that no such penalty was owed, since the notes on which the Prepayment Penalty Transfer was made provided for prepayment without penalty. (SAC ¶¶ 53-54.)

         Based on the financing agreement between PettersCB and Opportunity Finance and the agreement between Opportunity Finance and DZ Bank, the Trustee alleges that the transfers to Opportunity Finance, purportedly in repayment of the loans, were fraudulent transfers under the MUFTA. (SAC ¶¶ 27; 31.) The Trustee also alleges that DZ Bank provided funding to Opportunity Finance, which was presumably loaned to PettersCB. (SAC ¶ 14.) One of the Trustee's asserted bases of liability for actual fraud under the MUFTA involves the application of the “Ponzi scheme presumption, ” although the Trustee does not use this specific term in the SAC.[3] (See SAC ¶¶ 19-35.) In addition, the Trustee asserted state law claims for breach of contract, relating to the Prepayment Penalty Transfer made to Opportunity Finance, (SAC ¶¶ 110-13), and a count in the alternative for fraud and misrepresentation as to the Prepayment Penalty Transfer. (SAC ¶¶ 114-23.)

         B. Procedural History

         The Trustee commenced the underlying action against Defendants on December 17, 2010. (Bankr. D. Minn. No. ADV-10-4600, ECF No. 1.) Pursuant to the parties' stipulation, the Bankruptcy Court approved the filing of an amended complaint. (Id., ECF Nos. 19-20.) On May 3, 2011, the Trustee filed the First Amended Complaint. (Id., ECF No. 21.) He filed the SAC on November 8, 2013. (Id., ECF No. 46.)

         On December 20, 2013, Opportunity Finance and DZ Bank filed the underlying motions to dismiss the SAC. (Id., ECF Nos. 48; 49.) The Bankruptcy Court heard oral argument on March 3, 2014. (Id., ECF No. 57.) However, prior to the issuance of a ruling, the Minnesota Supreme Court, in an entirely separate legal action, ruled on February 18, 2015, that the Ponzi scheme presumption could not be applied to establish actual fraud under the MUFTA. Finn, 860 N.W.2d at 653.

         On December 1, 2015, the Bankruptcy Court held an omnibus hearing to discuss various issues in related bankruptcy cases. (See 12/1/15 Bankr. Tr., Tab 2 to Opp. Fin. Appendix [Doc. No. 22 at 47-58].) At the omnibus hearing, counsel for the Trustee expressed his intent to seek to amend the SAC for seven reasons: (1) to address any issues raised by defendants regarding Finn in the separate PCI litigation; (2) to allege with greater specificity the issue of initial versus subsequent transferee; (3) to allege standing with greater specificity; (4) to correct allegations identifying predicate creditors; (5) to set forth the Trustee's claims with greater clarity; (6) to allege a claim for unjust enrichment; and (7) to eliminate some legal theories. (Id. at 29-31.) Defendants objected, arguing that the Trustee should have raised any deficiencies and proposed amendments when he responded to their motions to dismiss in early 2014. (Id. at 33.) Moreover, Defendants noted that the Minnesota Court of Appeals' November 2013 decision in Finn, while slightly different than the Minnesota Supreme Court's ultimate decision, raised issues implicating these pleadings even before the deadline for the Trustee's response to Defendants' motion to dismiss. (Id. at 35.) Defendants also argued that to permit the Trustee to amend, two years after Defendants had filed their motions to dismiss, would be unfairly prejudicial. (Id. at 33.) Citing Rule 16, Chief Judge Kishel denied the Trustee permission to seek leave to amend the complaint until after he had issued his pending ruling on Defendants' motions to dismiss. (Id. at 40-41.)

         C. The Bankruptcy Court's Order

         Six weeks later, in the Order, Chief Judge Kishel granted Defendants' motions to dismiss on two bases. First, he found that the Trustee lacked statutorily-based standing to seek avoidance of transfers made by PettersCB. In re Polaroid, 543 B.R. at 897-903. Because PettersCB was not in bankruptcy, and the Plaintiff was appointed the Trustee of the Polaroid Corporation and Polaroid-entities, the bankruptcy judge held that the Trustee had no authority to sue. Id. at 898-903. Moreover, the Bankruptcy Court concluded that the creditors identified in the SAC lacked standing as well, because the Trustee's factual allegations failed to support a legally-enforceable right to payment from the debtor. Id. Accordingly, the Bankruptcy Court found that these failings warranted dismissal of the Trustee's fraudulent transfer claims under Rule 12(b)(6). Id. at 903.

         In addition, Chief Judge Kishel found that the Trustee's claims further failed to satisfy the elements of actual or constructive fraudulent transfer under the MUFTA. Id. at 908-09. In light of the Minnesota Supreme Court's decision in Finn, the Bankruptcy Court held that the Trustee's fraudulent transfer claims based on the Ponzi scheme presumption failed as a matter of law. Id. at 906-09.

         And, even aside from the unavailing Ponzi scheme presumption, Chief Judge Kishel also found that in light of Finn, the Trustee's pleading of actual and constructive fraud was deficient. Id. As to whether the debtor received reasonably equivalent value in exchange for the transfers[4], Chief Judge Kishel observed that the SAC insinuated that “PettersCB could not have received reasonably equivalent value from repaying a lender on any loan to it, legitimately contracted and used or not.” Id. at 908. But this broad pleading, the Bankruptcy Court determined, ran afoul of Finn's requirement of pleading the elements of fraudulent transfer, asset-by-asset and transfer-by-transfer. Id. Instead, Chief Judge Kishel found that throughout the SAC, “the Trustee seeks to avoid payments of money generated from actual sales of concrete goods, consummated consistently with the original contractual expectations for [Opportunity Finance's] lending to PettersCB.” Id. at 909. While Chief Judge Kishel envisioned several ways in which a pleading could tie PettersCB to the main Ponzi scheme, he noted that the SAC did not plead such facts. Id. at 910.

         While the Trustee alleged that the Opportunity Finance loans' interest rate was excessively high at 12%, (SAC ¶¶ 63-64), and thus demonstrated the lack of reasonably equivalent value, and constituted “false profits, ” (id. ¶ 65), the Bankruptcy Court found such pleading conclusory and devoid of any context. In re Polaroid, 543 B.R. at 908. In addition, Chief Judge Kishel rejected the notion that such an interest rate would yield false profits under the facts alleging the return of an investment for the financing of actual deals. Id.

         As to the Trustee's allegations of constructive fraud, the Bankruptcy Court analogized them to Finn, in which the debtor-transferor's transfers that were real and legitimate were not found to be constructively fraudulent, despite the fact that the debtor-transferor was running a Ponzi scheme to defraud other investors through the same type of transactions.[5] Id. at 913. Here, the Bankruptcy Court found that the Trustee's allegations suggested that “funds traceable to and from [Opportunity Finance] and through the real-goods transactions were commingled with some funds funneled out of the PCI-centered scheme, toward some undisclosed use by PettersCB.” Id. at 914. But, citing Finn, he found that commingling alone does not constitute a lack of reasonably equivalent value. Id.

         Regarding the Trustee's claims against Defendant DZ Bank, the alleged subsequent transferee from Opportunity Finance, the Bankruptcy Court held that because the claims against the initial transferee failed, the claims against DZ Bank likewise failed. Id. at 915.

         In conclusion, Chief Judge Kishel found that the Trustee could not replead an alternate set of facts to counter the effect of Finn without contradicting the facts asserted in the SAC-all of which repeatedly stated that real goods, real sales, and real loans supported the transactions between PettersCB and Opportunity Finance. Id. Accordingly, the Bankruptcy Court found that it would be futile to amend the pleading, given that any additional facts that might support the Trustee's claims would contradict the facts previously alleged. Id. at 914. Therefore, Chief Judge Kishel dismissed the Trustee's MUFTA claims with prejudice.[6]

         D. Appeal

         On appeal, the Trustee argues that the Bankruptcy Court erred in citing Rule 16 in denying leave to amend. (Pl's. Mem. at 2; 24-25.) He argues that denying the right to bring a motion for leave to amend effectively denied the motion, improperly, as there was no evidence that Defendants would be unfairly prejudiced by granting leave to amend. (Id. at 2; 25-27.)

         Regarding standing, the Trustee argues that the bankrupt companies include PHC, the company into which PettersCB was merged, as well as a subsequent spin off, now known at PCE. (Id. at 3; 27-29.) Further, the Trustee contends that the creditors of the successor entities have standing to avoid the fraudulent transfers made by their predecessor. (Id. at 28.) Specifically, the Trustee asserts that the creditors of PettersCB that continued to do business with PCE are among the ranks of PCE's creditors who have unsecured claims in PCE's bankruptcy.[7] (Id.) The Trustee further argues that PCE satisfies the various legal tests to be considered a successor entity. (Id. at 32-36.) In addition, or alternatively, the Trustee contends that creditors of PHC had standing to sue under the MUFTA because, by amendment, the Trustee can name predicate creditors for both PCE and PHC. (Id. at 36-37.)

         As to the other aspects of the Trustee's MUFTA claims, he contends that the SAC sufficiently alleges fraudulent transfers of the property of PettersCB. (Id. at 37-38.) As to actual fraud, the Trustee contends that “the SAC alleges both that (a) PettersCB knew that by making transfers to Defendants, PettersCB would induce future creditors to make investments in PettersCB; and (b) PettersCB knew that those creditors would be left unpaid when the inevitable exposure of Petters' Ponzi scheme caused PettersCB to fail.” (Id. at 39.) The Trustee argues that the SAC sufficiently alleges the inevitability that PettersCB would fail when the Ponzi scheme was exposed and that “without financing, an insolvent and unprofitable company cannot survive.” (Id. at 40.) Likewise, the Trustee asserts that Chief Judge Kishel apparently overlooked the allegation in paragraph 39 of the SAC that PettersCB actually knew it was inducing creditors to invest despite the certainty that PettersCB would fail. (Id. at 41.) In addition, the Trustee argues that a lack of reasonably equivalent value is alleged, citing the 12% interest rate and the $349, 000 Prepayment Penalty Transfer. (Id. at 45-47.)

         As to the constructive fraud claim, the Trustee again argues that the SAC sufficiently alleges a lack of reasonably equivalent value. (Id. at 43.) For all of the transfers except the Prepayment Penalty Transfer, the Trustee cites his 12% interest rate allegation. (Id. at 44.) With respect to that rate, the Trustee argues that he was not required to allege the comparative market rate in his pleading. (Id. at 45-47.) He also argues that the Bankruptcy Court failed to address the adequacy of his allegation that PettersCB received “no value at all” in exchange for the Prepayment Penalty Transfer. (Id.)

         Finally, the Trustee contends that the Bankruptcy Court erred in holding that Plaintiff could not state a claim against DZ Finance, in light of the failure to plead adequate claims against the initial transferee. (Id. at 48.) Again, the Trustee maintains that had he been permitted to amend his pleading, he could have adequately asserted his claims against Opportunity Finance, and by extension, DZ Bank. (Id.)

         II. DISCUSSION

         In an appeal from a bankruptcy court proceeding, the Court acts as an appellate court. See 28 U.S.C. § 158(a). The Bankruptcy Court's legal conclusions are reviewed de novo and its findings of fact are reviewed for clear error. Tri-State Fin., LLC v. First Dakota Nat'l Bank, 538 F.3d 920, 923-24 (8th Cir. 2008); accord Fed.R.Bankr.P. 8013.

         The Bankruptcy Court applied the correct legal standard to the underlying motions to dismiss. In re Polaroid, 543 B.R. at 895. Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, dismissal is warranted where a plaintiff “fail[s] to state a claim upon which relief can be granted.” In evaluating a motion to dismiss, the court “must take the well-pleaded allegations of the complaint as true, and construe the complaint, and all reasonable inferences arising therefrom, most favorably to the pleader.” Morton v. Becker, 793 F.2d 185, 187 (8th Cir. 1986). Although the complaint need not contain “detailed factual allegations, ” it must plead facts sufficient “to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Thus, to survive a motion to dismiss, the plaintiff's “obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions.” Benton v. Merrill Lynch & Co., Inc., 524 F.3d 866, 870 (8th Cir. 2008) (quotations and citation omitted). Rather, “the complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quotation and citation omitted).

         A. Procedural Issues

         While an appellate court reviews a denial of leave to amend under an abuse of discretion standard, it applies a de novo standard of review to the underlying legal conclusion that an amendment to the complaint would have been futile. Marmo v. Tyson Fresh Meats, Inc., 457 F.3d 748, 755 (8th Cir. 2006).

         The Trustee argues that Chief Judge Kishel erred in failing to address its oral motion for leave to amend the complaint before ruling on Defendants' already-pending motions to dismiss. (Pl.'s Mem. at 24) (citing Pure Country, Inc. v. Sigma Chi Fraternity, 312 F.3d 952, 956 (8th Cir. 2002); Bishop v. Minn. Dep't of Human Servs., No. 14-CV-1898 (ADM/SER), 2015 WL 4920262, at *3 (D. Minn. Aug. 12, 2015); Constantine v. Krueger, No. 13-2867 (MJD/LIB), 2014 WL 4449696 (D. Minn. July 31, 2014)). While it is generally the case that a pending motion for leave to amend should be considered prior to ruling on a motion to dismiss, see Pure Country, 312 F.3d at 956, it is not required in this instance.

         Under Rule 15, “there is no automatic right to amend one's complaint.” Deutsche Fin. Servs. Corp. v. BCS Ins. Co., 299 F.3d 692, 700 (8th Cir. 2002). Leave to amend may be denied for reasons such as undue delay, bad faith, or dilatory motive, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the non-moving party, or futility of amendment. Hammer v. City of Osage Beach, Mo., 318 F.3d 832, 844 (8th Cir. 2003). In Deutsche, the court affirmed the denial of the plaintiff's request to amend a second time where (1) nearly a year had passed since the deadline for seeking leave to amend; (2) extensive discovery had been conducted and the discovery period was closed; and (3) dispositive motions were filed and pending before the court. 299 F.3d at 700. Similarly, in Ikeri v. Sallie Mae, Inc., No. 13-CV-1943 (DSD/JSM), 2014 WL 4071953, at *2 (D. Minn. Aug. 18, 2014), the plaintiffs moved to amend their complaint two months after the defendant had moved to dismiss, and only two days before the hearing on the defendant's motion to dismiss. This Court denied leave to amend, finding that the plaintiff had delayed in bringing the motion to amend and that the defendant had demonstrated prejudice, “as its counsel had fully briefed and prepared for the pending hearing concerning the motion to dismiss before plaintiffs brought their dilatory motion.” Id.

         Here, a review of the relevant dates is instructive:

Year

Date

Event

2010

December 17, 2010

Adversary proceeding initiated in Bankruptcy Court

2011

May 3, 2011

First Amended Complaint

2013

September 12, 2013

Finn decision (Minnesota Court of Appeals)

November 8, 2013

Second Amended Complaint

December 20, 2013

Defendants file Motions to Dismiss

2014

May 3, 2014

Oral Argument on Motions to Dismiss

2015

February 18, 2015

Finn decision (Minnesota Supreme Court)

December 1, 2015

Trustee seeks leave to file a motion to amend at Bankruptcy Court omnibus hearing

2016

January 14, 2016

Underlying decision

         As indicated, the Trustee did not seek leave to amend after the motions to dismiss were filed in December 2013, nor at the hearing on the motions to dismiss in March 2014. Nor did the Trustee seek leave to file a motion to amend after the Minnesota Court of Appeals issued its decision in Finn in September 2013.[8] Nor did the Trustee seek leave in the months immediately after the Minnesota Supreme Court's issuance of Finn in February 2015. Rather, the Trustee waited nearly two years after the filing of Defendants' motions and over nine months after the Minnesota Supreme Court's issuance of Finn before he sought leave, in December 2015, to file a motion to amend. The facts here are therefore quite distinguishable from the authority on which the Trustee relies. In those cases, the plaintiffs filed motions to amend or sought leave to amend in their responses to the defendants' motions to dismiss. See Pure Country, 312 F.3d at 955; Bishop, 2015 WL 4920262, at *2; Constantine, 2014 WL 4449696, at 3.

         Plaintiff also argues that the Bankruptcy Court erred in relying on Rule 16 in denying permission to seek leave to amend. (Pl.'s Mem. at 24-25.) The Trustee asserts that because no scheduling order had yet been issued, the Bankruptcy Court should have applied Rule 15's more lenient standard to “freely give leave when justice so requires.” (Id. at 25.)

         While Chief Judge Kishel specifically invoked Rule 16 instead of Rule 15 when he denied the Trustee's request, his decision was guided by concerns regarding a significant Rule 15 factor-the Trustee's delay. (12/1/15 Bankr. Tr., Tab 2 to Opp. Fin. Appendix [Doc. No. 22 at 31-32; 40-41].) Similarly, defense counsel cited the Rule 15 factors of delay and prejudice. (Id. at 33-34; 38-40.) Underscoring the impact of the Trustee's delay on Defendants and on the Bankruptcy Court, defense counsel stated, “If there were deficiencies the [T]rustee thought he had in his complaint, he was duty bound to raise them back at the time that the motion was argued before the court, ” as opposed to waiting until the eve of the issuance of the Bankruptcy Court's ruling. (Id. at 33.) Directly invoking Rule 15, DZ Bank's counsel further stated that his client devoted numerous resources to its motion to dismiss and would be prejudiced if Plaintiff were granted leave to file a motion to amend. (Id. at 36.) Similarly, counsel for Opportunity Finance cited the lengthy time lag between the Trustee's request for leave and the hearing on the motions to amend as well as the issuance of the Finn decision, stating, “[T]his kind of seriatim or serial amendment that's been taking place . . . really prevents the Court from actually performing its job in terms of adjudicating the motions that are before it.” (Id. 38.) The Bankruptcy Court's Order likewise identified the repeated failure to cure deficiencies in the three iterations of pleadings. In re Polaroid, 543 B.R. at 896; 903-04; 914.

         While it appears that Rule 15 is the applicable rule here, the Court finds that the Bankruptcy Court's reference to Rule 16 is not grounds for reversal.[9] Rule 15 factors were, in fact, raised by the parties and considered by the Bankruptcy Court. The lengthy delay in seeking leave to file a motion to amend was significant. Defendants were undoubtedly prejudiced in light of the passage of nearly two years from when they had filed their motions to dismiss and over 20 months from the hearing on those motions. These facts therefore support the Bankruptcy Court's decision to deny leave for the Trustee to file a motion to amend his pleadings a fourth time until after the issuance of the Bankruptcy Court's decision on the pending motions to dismiss.

         B. Futility

         Denying leave to amend on grounds of futility is appropriate when a pleading is so deficient that “the court is convinced that its defects cannot be cured through re-pleading.” Tatone v. SunTrust Mortg., Inc., 857 F.Supp.2d 821, 832 (D. Minn. 2012).[4]Here, Chief Judge Kishel found that repleading could not cure the defects with the Trustee's pleading on standing, (stating “It is not possible to conceive of any alternate set of facts to set up standing for the Trustee, absent irreconcilable conflict with the historical facts already pleaded”), and fraudulent transfer, (finding that “[t]here is no way that the Trustee could replead an alternate set of facts to counter this effect of Finn without indefensibly contradicting the factual premises for his present theory of recovery.”).[5] In re Polaroid, 543 B.R. at 903, 914. While the Trustee contends that the Bankruptcy Court's conclusions on futility are based on speculation since no amendments were actually before the court, (Pl.'s Mem. at 17), the Bankruptcy Court found that no factual amendments could cure the legal deficiencies in the SAC, stating:

[I]t does not appear that the Trustee can remedy the deficiencies by alternate fact-pleading. The Trustee had the onus to plead a plausible case in the first instance, and indisputable aspects of his pleading deprive him of that. These fundamental points of historical occurrence and sequence are conclusive, and they cut against any right to relief in favor of the bankruptcy estates. The Trustee cannot deny them now, for a repleading. Thus, granting leave to essay an amendment would be futile; ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.