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Ritchie Capital Management, L.L.C. v. JP Morgan Chase & Co.

United States District Court, D. Minnesota

December 14, 2017

Ritchie Capital Management, L.L.C.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investment I, L.L.C.; Ritchie Capital Structure Arbitrage Trading, Ltd.; and Ritchie Capital Management, Ltd.; Plaintiffs,
v.
JPMorgan Chase & Co; JPMorgan Chase Bank, N.A.; J.P. Morgan Private Bank; Richter Consulting, Inc.; Wells Fargo & Co., as successor by merger to Wachovia Capital Finance Central; Wells Fargo Bank, N.A.; Wachovia Capital Finance Corporation Central; UBS Loan Finance, L.L.C.; UBS AG; UBS AG Stamford Branch; Merrill Lynch Business Financial Services, Inc.; LaSalle Business Credit, L.L.C.; Bank of America Business Capital; Bank of America Corp.; The CIT Group Inc.; The CIT Group/Business Credit, Inc.; PNC Bank N.A.; Fifth Third Bank; Webster Business Credit Corporation; Associated Commercial Finance, Inc.; Chase Lincoln First Commercial Corporation, Defendants.

          James W. Halter, Esq., Liddle & Robinson, L.L.P.; James M. Jorissen, Esq., Leonard, O'Brien, Spencer, Gale & Sayre, Ltd; Kelly A. Lelo, Esq., and Patrick H. O'Neil, Jr., Esq., Larson King, LLP; counsel for Plaintiffs.

          Benjamin E. Gurstelle, Esq., Kevin M. Decker, Esq., and John R. McDonald, Esq., Briggs & Morgan, PA; and David J. Woll, Esq., Isaac Martin Rethy, Esq., Michael Freedman, Esq., Thomas Charles Rice, Esq., William T. Pilon, Esq., Simpson Thacher & Bartlett LLP, counsel for Defendants JPMorgan Chase & Co; JPMorgan Chase Bank, N.A.; J.P. Morgan Private Bank; Chase Lincoln First Commercial Corporation; and J.P. Morgan Europe Ltd.

          Bradley R. Schneider, Esq., David H. Fry, Esq., Kevin H. Scott, Esq., and Marc T.G. Dworsky, Esq., Munger, Tolles & Olson, LLP; and Daniel J. Millea, Esq., and Elizabeth V. Kniffen, Esq., Zelle Hofmann Voelbel & Mason LLP, counsel for Defendants Wells Fargo & Co.; Wells Fargo Bank N.A.; Wachovia Capital Finance Corporation (Central); UBS Loan Finance, L.L.C.; UBS AG; UBS AG Stamford Branch; Merrill Lynch Business Financial Services, Inc.; LaSalle Business Credit, L.L.C.; Bank of America Business Capital; Bank of America Corp.; The CIT Group Inc.; The CIT Group/Business Credit, Inc.; PNC Bank, N.A.; Fifth Third Bank; Webster Business Credit Corporation; Associated Commercial Finance, Inc.; Allen P. Pegg, Esq., and John F. O'Sullivan, Esq., Hogan Lovells U.S. LLP; and Bryant D. Tchida, Esq., Robert T. Kugler, Esq., and Timothy P. Griffin, Esq., Stinson Leonard Street LLP, counsel for Defendant Richter Consulting, Inc.

          Adam A. Gillette, Esq., Baillon Thome Jozwiak & Wanta LLP; George H. Singer, Esq., and James A. Lodoen, Esq., Lindquist & Vennum LLP; Jennifer G. Lurken, Esq., Gislason & Hunter LLP; Lori A. Johnson, Esq., Nilan Johnson Lewis PA; Richard T. Thomson, Esq., and Rosanne H. Wirth, Esq., Lap Libra Thomson Stoebner & Pusch, Chartered; Terrence J. Fleming, Esq. Fredrikson & Byron; and Thomas E. Jamison, Esq., Fruth Jamison & Elsass PA, counsel for Intervenor Trustees.

          MEMORANDUM OPINION AND ORDER

          DONOVAN W. FRANK UNITED STATES DISTRICT JUDGE

         INTRODUCTION

         The plaintiffs in this case loaned millions of dollars to a business that turned out to be part of a Ponzi scheme. The plaintiffs allege that the defendants (lenders and consultants for the business in the Ponzi scheme) were aware of the Ponzi scheme but wrongfully allowed the plaintiffs to sink their money into the business. This case is before the Court on a report and recommendation from the bankruptcy court on the defendants' motions to dismiss. For the reasons discussed below, the Court grants the defendants' motions.

         BACKGROUND

         Plaintiffs Ritchie Capital Management, L.L.C.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investment I, L.L.C.; Ritchie Capital Structure Arbitrage Trading, Ltd.; and Ritchie Capital Management, L.L.C., [1](collectively, the “Ritchie Entities” or “Ritchie”) filed suit against Defendants seeking to recover millions in loans that the Ritchie Entities made to convicted fraudster Tom Petters and entities that he controlled. Defendants are made up of four relevant groups: (1) “JPMorgan”;[2] (2) JPMorgan Europe LTD. or JPME;[3] (3) the “Syndicated Lenders”;[4] and (4) Richter Consulting.[5] In addition, the Trustees[6] from the Petters bankruptcies have intervened.

         A. Petters Buys Polaroid Corporation

         The Petters fraud is well known[7] and is recounted in short: Tom Petters operated a Ponzi scheme whereby he would fabricate purchase orders from wholesalers (like Costco) and get financiers to lend money to fund the purchase orders. The Ponzi scheme was operated through the Petters Company, Inc. (“PCI”). In addition, Petters owned a number of legitimate businesses under a parent company, Petters Group Worldwide, LLC (“PGW”).

         In 2004, JPMorgan approached Petters about purchasing Polaroid Corporation. At the time, Petters had a license agreement that allowed PCI to use Polaroid's brand name on electronic equipment. (Doc. No. 164, Second Amended Complaint, (“SAC”) ¶ 73.) But by 2004, PCI had fallen behind significantly on its license payments to Polaroid. JPMorgan allegedly used PCI's delinquent payments as leverage to force Petters to purchase Polaroid. (Id. ¶ 81.) JPMorgan and Petters agreed to a deal worth $426 million for Polaroid. Plaintiffs make much of the fact that JPMorgan expected Petters to buy Polaroid when PCI could not afford to even use Polaroid's name. (Id. ¶ 87.)

         The deal had a complex structure: Petters needed to fund the full purchase price in an escrow account at Wells Fargo. JPMorgan would then refinance the completed transaction. According to Plaintiffs, the Wells Fargo account was used to circumvent anti-money laundering laws that obligate JPMorgan to investigate its customers. (Id. ¶ 96.) The merger resulted in PGW owning Polaroid Holding Company, which in turn owned Polaroid Corporation. The merger closed on April 27, 2005. Then, on April 28, 2005, JPMorgan loaned $125 million to Polaroid Corporation as a term loan, and Defendant Syndicate Lenders loaned another $250 million as a revolving-credit agreement. (See Id. ¶¶ 107-108.)[8] JPMorgan was the administrative agent for the U.S.-based Syndicate Lenders and JPME was the administrative agent for the Europe-based lenders.

         Fast forward to 2007, and Polaroid was in default on its loans for failure to provide audited financial statements. Polaroid had been required to provide them in 2005 and 2006, but JPMorgan had not strictly enforced the requirement. But by 2007, JPMorgan declared default. Rather than call the debt, JPMorgan granted an extension and installed Defendant Richter Consulting at Polaroid to report to JPMorgan on Polaroid's financial condition. Richter Consulting began examining Polaroid's business and determined that its business model was not viable. Then in October 2007, JPMorgan, Richter, and Polaroid discussed financing options for additional forbearance and extensions of credit. PGW agreed to make repayments each week in amounts ranging from $4 to $6 million. According to the Plaintiffs, JPMorgan or Richter instructed Petters not to transfer the money directly from PCI (the Ponzi scheme) but to instead route the money through another entity, Petters Capital. (SAC ¶ 149.)

         At the end of 2007, Polaroid was still behind on its debt to JPMorgan and the Syndicate Lenders. Under the forbearance agreement, the lenders had the option to hire an investment bank to monetize some of Polaroid's assets, but they did not do that. Instead, Richter expanded its role at Polaroid to helping to find a lender to replace JPMorgan and the Syndicate Lenders. Pursuant to this expanded role, Richter allegedly helped Polaroid with the due-diligence process and to consult with advisors and counsel in connection with financing-related activities. (Id. ¶ 156.)

         B. The Ritchie Entities' Loans and the Ponzi Scheme Collapses

         In January 2008, JPMorgan allegedly learned of PCI's Ponzi scheme and refused to grant any more extensions. The situation became dire for Petters: JPMorgan and the Syndicate Lenders were still owed roughly $50 million. If Petters failed to repay the lenders, then they could take 100% of the Polaroid stock. So on January 31, 2008, Petters reached out to the Ritchie Entities for a short-term emergency loan. Petters and Polaroid sent some due diligence materials to Ritchie. Plaintiffs allege that JPMorgan and Richter Consulting were aware that the diligence materials were inaccurate. (See Id. ¶ 190.) Between February 1, 2008, and February 19, 2008, the Ritchie Entities loaned almost $150 million. The money went to a PCI bank account. (Id. ¶ 193.) The Ritchie Entities did not document the loans until February 19, 2008, when they signed a promissory note with PGW and Petters as co-obligors. The promissory notes gave Petters and PGW the sole discretion in using the money. In the Polaroid bankruptcy, Judge Nelson concluded based on the analysis of PWC accountants that none of the money from the Ritchie Entities actually went to Polaroid. Ritchie Capital Mgmt., L.L.C. v. Stoebner, Civ. No. 12-3038, 2014 WL 1386724, at *28 (D. Minn. Jan. 6, 2014) (citing affidavit of Theodore Martens). Instead, the loans from the Ritchie Entities went to PCI primarily to pay off investors in the Ponzi scheme. Id. In addition to the February loans, in March and May, Petters convinced the Ritchie Entities to loan money for purchase orders as part of the Ponzi scheme. In total, the Ritchie Entities loaned $189 million to Petters and companies that he controlled. Meanwhile, JPMorgan and the Syndicate Lenders were repaid in full by Polaroid.

         On September 24, 2008, the FBI raided Petters's home and his companies' offices. On December 1, 2008, Petters, PCI, and PGW (Polaroid's parent) were indicted. (USA v. Petters, et al., Crim. No. 08-364 (D. Minn), Doc. No. 79.) Days after the raid, the Ritchie Entities sought and received from Petters a security interest in Polaroid's trademarks. In December 2009, a jury convicted Petters of various federal crimes, and he was sentenced to 50 years in prison.

         C. Aftermath

         After the Ponzi scheme collapsed, a number of Petters's companies declared bankruptcy, including Polaroid and PCI. The Trustees have sought to void a number of transactions as fraudulent. As relevant here, the Trustees have sued JPMorgan to recover the loan repayments, and the Trustees sued the Ritchie Entities to void the Polaroid trademark transfer. In 2012, the bankruptcy court voided the trademark transfer, concluding that the Ritchie Entities provided no value to Polaroid. See In re Polaroid Corp., 472 B.R. 22, 46 (Bankr. D. Minn. 2012) (Polaroid I). The decision was affirmed by the district court and the Eighth Circuit. Ritchie Capital Mgmt., L.L.C. v. Stoebner, Civ. No. 12-3038, 2014 WL 1386724, at *28 (D. Minn. Jan. 6, 2014) (Polaroid II), aff'd sub nom. Ritchie Capital Mgmt., LLC v. Stoebner, 779 F.3d 857 (8th Cir. 2015) (Polaroid III).

         Ritchie has sued a number of entities that it claims learned of the Ponzi scheme, but kept quiet to recoup their investments.[9] Here, Ritchie brought 22 claims for: (1) aiding and abetting tortious conduct by JPMorgan; (2) aiding and abetting tortious conduct by Richter Consulting; (2) fraudulent transfers against the banks; (3) commercial bad faith by JPMorgan; (4) breach of fiduciary duty by JPMorgan; and (5) negligence against JPMorgan and Richter Consulting; and (6) unjust enrichment against all Defendants.

         The Court referred the case to the bankruptcy court, and Defendants moved to dismiss. The bankruptcy court recommended that the Court grant the motion to dismiss on jurisdictional grounds: Judge Sanberg concluded that the bankruptcy court did not have subject matter jurisdiction for some claims; Plaintiffs did not have standing to pursue the fraudulent transfer claims; and the abstention doctrine compelled dismissal for other claims because they would affect the Trustees' adversary proceedings against JPMorgan. (Doc. No. 159 (“Report and Recommendation”).) Because the bankruptcy court dismissed on jurisdictional grounds, it declined to address the merits. Defendants, Trustees, and Plaintiffs all objected to various parts of the Report and Recommendation. Additionally, Plaintiffs have filed a motion to withdraw the reference to the bankruptcy court, which Defendants and the Trustees oppose.

         DISCUSSION

         When, as here, the bankruptcy court has issued proposed findings and conclusions for non-core claims, the Court reviews de novo “those matters to which any party has timely and specifically objected.” 28 U.S.C. § 157(c)(1). The parties have effectively objected to the entire Report and Recommendation, including Judge Sanberg's decision not to address the merits. Additionally, the parties have incorporated by reference their prior motions to dismiss. Thus, the Court is essentially presented with Defendants' original motions to dismiss. The Court therefore will approach the parties' objections as a typical motion to dismiss, noting, where relevant, the Report and Recommendation.

         I. Motion to Dismiss for Lack of Personal ...


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