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Kelley v. Kanios

United States District Court, D. Minnesota

May 20, 2019

Douglas A. Kelley, in his capacity as the PCI Liquidating Trustee for the PCI Liquidating Trust, Plaintiff,
v.
Chris M. Kanios; Chris M. Kanios 401(k) Savings Plan; National City Bank, as Custodian of the Chris M. Kanios 401(k) Savings Plan; and Steve Papadimos, Defendants.

          Elizabeth M. Forsythe, Michael E. Rowe, J. David Jackson, and Lucas J. Olson, Dorsey & Whitney LLP, for Plaintiff.

          Henry B. Roberts, Jr., H. Buswell Roberts, Jr. PLLC, and Michael L. Gust, Anderson, Bottrell, Sanden & Thompson for Defendants.

          MEMORANDUM ORDER AND OPINION

          SUSAN RICHARD NELSON, UNITED STATES DISTRICT JUDGE

         This case arises out of the wreckage of local businessman Tom Petters's infamous, years-long Ponzi scheme, which lasted from the mid-1990s through June 2008, and which left Petters's creditors with over three billion dollars in unpaid liabilities. In this particular case, Plaintiff, the Liquidating Trustee for one of Petters's now-defunct companies, Petters Company Inc. (“PCI”), seeks to “avoid, ” or “claw back, ” approximately four million dollars of interest payments, or “transfers, ” received by Defendants Steve Papadimos and Chris M. Kanios during the heyday of Petters's scheme, i.e., 1997 to 2006, on grounds that those interest payments (and the promissory notes underlying the payments) were made directly in furtherance of Petters's fraud, and are therefore subject to “claw back” under the Trustee's interpretation of the Minnesota Uniform Fraudulent Transfers Act (“MUFTA”). Because the Court agreed with the Trustee's interpretation of MUFTA during a November 2018 jury trial the Court conducted in a companion case to this one, see Kelley v. Boosalis, No. 18-cv-868 (SRN/TNL), 2018 WL 6322631 (D. Minn. Dec. 3, 2018), and because the Trustee believes there are no material facts in dispute that would warrant another jury trial here, the Trustee now moves for summary judgment.

         Defendants not only oppose the motion, but argue that they, not the Trustee, are the parties entitled to summary judgment. This is so, Defendants argue, because the Court erred in the Boosalis case. And, Defendants continue, were the Court to adopt the “proper” interpretation of MUFTA here, the Trustee's case would fail as a matter of law. In the alternative, Defendants also argue that the Court should certify the meaning of certain critical terms under MUFTA to the Minnesota Supreme Court, so that that Court could resolve what Defendants describe as “unsettled” questions of state law. Defendants further contend that, at the least, the Trustee's summary judgment motion should be denied on grounds that a jury trial is still needed to resolve genuine disputes of material fact.

         For the reasons explained below, the Court grants the Trustee's summary judgment motion in full. Judgment will accordingly be entered for the Trustee.

         I. BACKGROUND

         A. Factual History [1]

         1. Defendants Lend Millions of Dollars to Petters Company, Inc., Between 1997 and 2006, and Receive Millions of Dollars of Interest in Return

         Steve Papadimos and Chris Kanios (collectively, “Defendants”) are a married couple that live in the suburbs of Toledo, Ohio. Papadimos is a government attorney and Kanios is a physician. (See Pl.'s Ex. 30 [Doc. No. 110-3] (“Kanios Dep.”) at 6-7.) At some point in 1997, Papadimos heard about an investment opportunity with a Minneapolis businessman named Tom Petters, and, more specifically, with a “diverting” business that Petters was running with consumer goods. In short, Papadimos believed, Petters needed Papadimos's money so that Petters could buy large lots of older, unsold consumer goods from wholesalers, and then re-sell, or “divert, ” those goods to retailers at a substantial profit. (See, e.g., Pl.'s Ex. 23 [Doc. No. 110-2] (“Papadimos Dep. I”) at 46-47 (Q: What did you think were funding? A: Oh, that I was lending money. . . there would be promissory notes, and that Petters, PCI was buying distressed goods, bankruptcy goods, liquidated goods, and re-selling them.”). Papadimos also thought that, because Petters was working with “distressed goods and bankruptcy goods, ” Petters would be generating 40 to 60 percent in “annual rate[s] of return.” (See Defs.' Ex. B. [Doc. No. 105-1] (“Papadimos Dep. II”) at 17 (describing a conversation he had with one of Petters's associates).)

         Before investing with Petters, though, Papadimos did some due diligence. Among other things, he (a) had a short meeting with Petters in Minneapolis, and, while there, observed that Petters owned actual warehouses and retail stores that had “thousands of boxes” inside of them (see Papadimos Dep. II. at 13-14), (b) spoke with Thomas Hays (a well-regarded lawyer who worked with Petters) on multiple occasions, and learned that Hays was confident about Petters's business acumen (id. at 15-19), (c) talked to at least one business that Petters had purportedly conducted a merchandise transaction with, Montgomery Ward, and confirmed that a business relationship existed between the two companies (id. at 34, 76), and (d) read articles in the Minneapolis Star-Tribune newspaper about Petters's businesses (thus again confirming the fact that the businesses did exist) (id. at 31, 76, 132).

         Consequently, in July 1997, Papadimos decided to begin lending to Petters's wholly-owned company, Petters Company, Inc. (“PCI”).[2] (See Defs.' Ex. J [Doc. No. 105-2] (“July 8, 1997 Promissory Note”).) Papadimos first lent money to PCI in 30- or 60-day loans, with an annualized interest rate averaging about 38 percent. (See Pl.'s Ex. 22 [Doc. No. 110-2] (“Martens - Papadimos Tracing Report”) at ECF p. 494.) As time went on, however, Papadimos lent Petters larger sums of money, and often simply “rolled” his principal investment from one promissory note to another, so as to keep receiving interest payments without putting any “new” money into PCI. (See Pl.'s Ex. 20 [Doc. No. 110-2] (“Martens - Papadimso Transfers Report”) at ECF p. 445 (showing that Papadimos stopped investing new principal into PCI in 2001).)

         Moreover, in March 2000, Papadimos also convinced his wife, Chris Kanios, to invest some of her personal 401(k) retirement fund with PCI, too, on virtually identical terms to his own loans. (See Kanios Dep. at 7-8; accord Pl.'s Ex. 29 [Doc. No. 110-3] (“Martens - Kanios Tracing Report”) at ECF p. 54.) Kanios relied entirely on her husband's due diligence, and “had no understanding of what PCI's business was.” (Kanios Dep. at 11.)

         The couple continued to lend money to PCI until 2005, when PCI told them that it only wanted to work with larger-scale investors, like hedge funds, from then on out. (See Papadimos Dep. II at 13, 17.) Shortly thereafter, PCI re-paid Defendants their principal investment(s) in full. (See Papadimos Dep. I at 107.)

         In sum, between July 1997 and March 2006, Papadimos lent $3, 297, 300 to PCI, arising out of at least 87 promissory notes and 115 related “transactions.” (See Martens - Papadimos Tracing Report ¶¶ 9, 12; see also id. at n.2 (noting that “the difference between the 115 transactions and the 87 promissory notes” arose for “one of the following reasons”: “(1) rolling of principal and/or interest on certain notes; (2) multiple interest and/or principal payments on the same note; or (3) reversals due to insufficient funds, uncollected checks, or missing endorsements”).) In return, PCI paid Papadimos $3, 126, 524.37 in interest. (See id. ¶ 9.)[3]

         Similarly, between March 2000 and March 2006, Kanios lent $690, 000 to PCI, arising out of at least 13 promissory notes and 21 related transactions. (See Martens - Kanios Tracing Report ¶¶ 9, 12.) In return, PCI paid Kanios $572, 500.22 in interest. (See id. ¶ 9; accord Kanios Dep. at 14-15 (admitting that she received this amount in interest income).)

         Notably, during this entire time period, it is undisputed that Defendants believed they were investing in PCI's “diverting” business, and in the merchandise purchases and re-sales undergirding that business; they did not believe they were providing general business loans to PCI. (See supra at 3-4.) In fact, the vast majority of the promissory notes Defendants signed with PCI included a security interest in a specific order of merchandise that PCI had purportedly bought with Defendants' money, as well as in any proceeds from sales of that merchandise. (See Matens - Papadimos Tracing Report ¶ 33 (stating that 74 of Papadimos's promissory notes referenced a security agreement and accompanying “purchase order” underlying that agreement); Martens - Kanios Tracing Report ¶ 28 (same, with respect to nine of Kanio's promissory notes).) What's more, these security agreements contained language confirming that the express purpose of Defendants' loans was to allow PCI to purchase, and then re-sell, merchandise, i.e., “[t]his Security Interest is granted to secure payment of funds loaned to [PCI] which has enabled or is intended to enable [PCI] to acquire rights in or use of certain merchandise, which the parties understand and anticipate that [PCI] intends to resell as part of its business.” (See generally Defs.' Ex. M [Doc. Nos. 105-3 to 105-4] (“Defendants' Loan Documentation”) (approximately 100 pages of promissory notes, security agreements, and purchase orders exchanged between PCI and Defendants, all containing materially identical language).) These purchase orders and security agreements constituted an “important factor” in encouraging Defendants to invest with PCI. (Papadimos Dep. I at 84.)[4]

         2. In 2008, the Public Learns that PCI Was Actually a Massive, Years-Long Ponzi Scheme, In Which Funds from Investors Like Defendants Were Primarily Used to Re-Pay Other Investors, Rather Than to Finance Legitimate Commercial Transactions

          In reality, however, Defendants were not investing in a diverting business, much less in specific merchandise transactions. Rather, Defendants were investing in a Ponzi scheme that maintained only a superficial veneer of a diverting business. See, e.g., United States v. Petters, 663 F.3d 375 (8th Cir. 2011) (providing general background on the now-infamous “Petters Ponzi Scheme”). As one of the key participants in this scheme (Deanna Coleman) has repeatedly testified since she first turned state's witness in 2008, including in a lengthy deposition she sat for in this case, “all of” the purchase orders attached to Defendants' security agreements were either vastly overstated or fabricated in their entirety. (See Pl.'s Ex. 13 [Doc. No. 110-1] (“Coleman Dep. I”) at 88 (“[I]nvestors [in PCI] never invested in a real transaction with a real purchase order, because every purchase order that [an] investor received or invested in was fake.”); accord Pl.'s Ex. 1 [Doc. No. 110-1] (“Boosalis Civil Trial Tr.”) at 232 (Coleman); Petters Crim. Trial Tr. at 648 (Coleman).) Instead, Coleman testified, PCI's three principal officers (Coleman, Petters, and a man named Bob White) essentially operated the company as a four-part scam: first, PCI would conduct some unprofitable, low-volume diverting business for show (ala a Potemkin village); then, Coleman or White would forge purchase orders and bank statements to make investors believe that those low-volume “Potemkin deals” were actually high-volume purchases resulting in multi-million dollar sales; next, PCI would use its fake purchase orders (and high promised returns) to solicit “securitized loans” from investors like Defendants; and, finally, PCI would use these loans to re-pay other investors as their loans became due (or to pay expenses otherwise unconnected to PCI's purported diverting business). (See generally Coleman Dep. I; accord Boosalis Civil Trial Tr. at 227-33 (Coleman); Petters Crim. Trial Tr. at 632-48 (Coleman).)

         With respect to Papadimos in particular, Coleman testified as follows:

Q: Do you recall ever speaking to [Papadimos]?
. . .
A: Yeah, I talked to [him].
Q: Do you remember what you talked about?
A: If [PCI] needed money I might have called him up and asked for two, three million dollars to do a certain deal.
Q: And at the time you called him to ask him to do a certain deal, were you providing false or misleading invoices at that time?
A: Yes.
Q: And I think you testified that there was not one legitimate invoice ever used with the small investors, [5] is that correct?
A: There was no real purchase order ever given to an investor, correct.

(Coleman Dep. I at 193-94.)

At a subsequent deposition, Ms. Coleman further noted that the “Montgomery Ward” deal that Papadimos had relied on as part of his due diligence had, in fact, been one of PCI's signature “Potemkin deals, ” in which Petters (and Coleman) vastly overstated the amount of merchandise PCI had purchased from Montgomery Ward, and then lied about the millions of dollars in “accounts receivable” it was “owed” from purported “re-sales” of that inventory. (See Pl.'s Ex. 1 [Doc. No. 115-1] (“Coleman Dep. II”) at 370-76.)

         On a more general level, Coleman also testified that she, Petters, and White had been intentionally committing this fraud since 1994. (See Coleman Dep. I at 21, 24, 208-09; accord Boosalis Civil Trial Tr. at 228 (Coleman); Petters Crim. Trial Tr. at 567, 773-74 (Coleman).) Indeed, shortly after the FBI discovered this scheme, Coleman pled guilty to conspiracy to commit mail fraud. (See Pl.'s Ex. 10 [Doc. No. 110-1] (“Coleman Criminal Judgment”).) White similarly pled guilty to two criminal charges - aiding and abetting mail fraud, and illegal monetary transactions - and testified as such at Petters's criminal trial. (See Pl.'s Ex. 11 [Doc. No. 110-1] (“White Criminal Judgment”); Petters Crim. Trial Tr. at 1271 (White) (admitting that he forged “hundreds of millions of dollars” of merchandise sales to wholesalers that did not in fact occur).) And, perhaps most notably, after a month-long trial, a jury found Petters guilty of 20 criminal charges, including 13 counts of wire fraud and mail fraud, and four counts of money laundering. (See Pl.'s Ex. 9 [Doc. No. 110-1] (“Petters Criminal Judgment”).)[6]

         Coleman similarly testified that she, Petters, and White took substantial steps to keep this scheme secret from both investors and other PCI employees, such as by falsifying bank account, profit and loss, and insurance statements. (See Pl.'s Ex. 14 [Doc. No. 110-1] (“Coleman Dep. II”) at 389-90, 409-10; Petters Crim. Trial Tr. at 1140-41, 1163-66 (White).) PCI's tax accountant, James Wehmhoff, also testified that, in 2007, he discovered that PCI had been “maintain[ing] two different sets of books, ” which he understood to be evidence that PCI was “tell[ing] investors or lenders one thing, ” but then “us[ing] funds for something else.” (Pl.'s Ex. 15 [Doc. No. 110-1] (“Wehmhoff Dep.”) at 40, 55-56.)[7]

         Moreover, in an exhaustive forensic accounting investigation conducted after the Petters Ponzi Scheme became public knowledge, the Trustee's expert forensic accountant (the aforementioned Theodore Martens) discovered that PCI had effectively been insolvent from December 31, 1996 until its collapse in 2008. (See Pl.'s Ex. 19 [Doc. No. 110-2] (“Martens Solvency Report”) ¶ 9.) In other words, at the end of 1996, PCI's liabilities exceeded its assets by at least $6.5 million, and that gap only increased until it had reached $3.25 billion by June 2008, when PCI went out of business as a result of the criminal prosecutions. (Id. ¶ 20; cf. Wehmhoff Dep. at 69-72 (noting that the tax returns he prepared for PCI in 2000, 2001, and 2002 all showed losses in the tens of millions of dollars).) This insolvency occurred largely because “the assets reported on the PCI Balance Sheets included fictitious accounts receivable and inventory balances that resulted from falsified purchases of goods.” (Id. ¶ 15.) Indeed, Martens added, “PCI . . . did not engage in actual inventory and accounts receivable financing, with the exception of some limited transactions involving the purchase of small amount of goods.” (Id.) Petters also did not contribute much of his own capital to PCI, which, in Martens's opinion, further “evidence[d] . . . that [PCI] served no functional purpose from [its] inception other than to perpetuate the fraud.” (Id. ¶ 24.)[8]

         Importantly, Martens and his forensic accounting team also built upon Coleman and White's generalized “Ponzi scheme testimony” by conducting an ex-post, individualized “tracing” investigation with respect to each PCI investor (including both Defendants here). As part of this investigation, Martens scoured PCI's bank account records (and any other available evidence) to glean whether any individual loan was used to fund a real merchandise order, as well as whether that loan was re-paid from revenue earned from the re-sale of a real merchandise order. With respect to both Papadimos and Kanios, Martens found “no evidence” “to indicate that any of the transactions to/from [Defendants] were related to potentially real PCI purchases and/or sales transactions, ” but that, “rather, ” “the funds received from/sent to [Defendants] were part of the rolling churn of the Petters Ponzi Scheme.” (Martens - Papadimos Tracing Report ¶ 35; Martens - Kanios Tracing Report ¶ 30.)

         Martens concluded that Defendants' funds were “part of the rolling churn of the Petters Ponzi Scheme, ” based largely upon the (highly suspect) timing between incoming loans and outgoing loan payments. (See Martens - Papadimos Tracing Report ¶ 15.c (“[W]e observed that the typical churn of the Ponzi scheme was such that cash received on one day was disbursed to other investors the same or the day after.”); accord Coleman Dep. II at 443 (Q: What did [PCI] then use to pay investors' notes? Where did the money come from? A: Other investors.”).) Although Martens acknowledged that several of Defendants' transactions occurred around the same time as “real” PCI “purchases/sales, ” Martens ultimately concluded that no evidence linked that (extremely limited) “real” activity to Defendants' money. (See, e.g., Martens - Papadimso Tracing Report ¶¶ 22, 27-29; Martens - Kanios Tracing Report ¶¶ 20-21, 24-25.) In fact, Martens specifically analyzed the relative amount of “real sales activity” in PCI's bank accounts during each of these “ambiguous” time periods, and found that the amount of money flowing through the Ponzi scheme substantially dwarfed the amount of money flowing from “real business.” (See, e.g., Martens - Papadimos Tracing Report ¶ 27 (finding that, although Papadimos received an interest payment of $3, 300 on May 3, 1999, which was three days after PCI received a $68, 798.64 “sales” payment, there was “no evidence to suggest that the payment to [Papadimos] was funded by potentially real sales transactions, ” and further noting that, “excluding the $68, 798.64 incoming transfer marked “SALES, ” over $8.4 million was deposited into [PCI's] bank account between April 29, 1999 and May 3, 1999 from the serial churn of the Petters Ponzi scheme”) (emphasis added).)

         Martens also conducted a “cash tracing analysis” to determine if any of Defendants' money flowed to one of Petters's more “legitimate” companies (see supra n.8), and was then used for real diverting activity. (See, e.g., Martens - Papadimos Tracing Report ¶ 30; see also Defs.' Ex. J [Doc. No. 113-2] (“Martens Intercompany Analysis”) (showing that, between December 1999 and September 2008, approximately three percent of PCI's $50 billion cash flow either went to, or came from, other Petters entities).) However, after a thorough investigation of available records, Martens likewise concluded that no evidence showed that “transfers to/from [these] other entities . . . relate[d] directly to any of Defendants' PCI Note Transactions and/or indicate[d] that Defendants either (1) [were] potentially involved in the funding of any potentially real purchases, or (2) received the proceeds of potentially real sales made by those entities.” (Martens - Papadimos Tracing Report ¶ 30; Martens - Kanios Tracing Report ¶ 26.) Martens specifically re-affirmed this conclusion at his deposition. (See Defs.' Ex. G [Doc. No. 113-2] (“Martens Dep.”) (stating that Defendants' funds were not even used “indirectly, ” “through another Petters entity, ” to “acquire” “real goods, real inventory, for subsequent resale”).)

         B. Procedural History

         1. Petters Company Inc., Declares Bankruptcy and the Liquidating Trustee Commences Dozens of Adversary Proceedings to Claw Back Interest Payments Made to “Early” Investors Like Defendants

         In October 2008, after Petters was arrested and indicted, the District Court appointed Douglas A. Kelley, Esq., as a “receiver, ” “to take control of the assets of Tom Petters.” In re Petters Co. Inc., 494 B.R. 413, 417 (Bankr. D. Minn. 2013). The case was then converted into a consolidated Chapter 11 bankruptcy, under the supervision of then-Chief Bankruptcy Judge Gregory F. Kishel. Id. Kelley was subsequently appointed Trustee for the entire Petters estate. Id.[9] Perhaps unsurprisingly, at the time of PCI's collapse, “very little money was left in the coffers of the business entities involved, and there were relatively few hard assets to show for all of the pre-[bankruptcy] activity.” Id. at 418. Indeed, “[a]fter the collapse of the scheme in 2008, the last lenders to [the Petters companies] were left unpaid and unsatisfied to the extent of over 3.5 billion dollars.” In re Petters Co., Inc., 495 B.R. 887, 892 (Bankr. D. Minn. 2013) (emphasis added). Thus, to recover assets for the creditors that had lost billions of dollars of principal as a result of Petters's scheme, all of whom had filed proofs of claim in the Bankruptcy Court, the Trustee (Kelley) commenced approximately 200 “adversary proceedings” against “net winner” PCI investors, like Defendants, in hopes of “clawing back” those investors' interest earnings (or “profits”) for the benefit of the estate. In re Petters Co., Inc., 494 B.R. at 417-18. These proceedings were (and still are) immensely complicated, and the Court will not attempt to summarize them here. See Id. at 418 (noting that, “[o]ver a period of more than two decades, the Petters-controlled entities had made tens of thousands of transfers, almost all in the form of money, to a large number and variety of lenders, ‘investors,' charitable donees, and other parties”).

         What is important, though, is the Trustee's “theory of the case, ” particularly as it relates to smaller, private investors like Defendants. Put simply, the Bankruptcy Code allows a Trustee to “avoid, ” or, “claw back, ” payments made to creditors prior to the bankruptcy filing, for the benefit of the estate, if the transfers were “fraudulent” within the meaning of applicable state “fraudulent transfers” law, here, the Minnesota Uniform Fraudulent Transfers Act (“MUFTA”). See In re Petters Co., Inc., 495 B.R. at 892 (citing 11 U.S.C. §§ 544(b) and 550(a)). MUFTA deems a transfer “fraudulent, ” if either (A) the debtor “made the transfer . . . with actual intent to hinder, delay, or defraud any creditor of the debtor, ” and the transferee cannot show that they accepted the transfer “in good faith and for a reasonably equivalent value, ” see Minn. Stat. §§ 513.44(a)(1) and 513.48(a) (the “actual fraud” theory); or (B) the debtor “made the transfer . . . without receiving a reasonably equivalent value in exchange for the transfer . . ., and the debtor (i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (ii) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due, ” see id. § 513.44(a)(2) (the “constructive fraud” theory).

         Although fraudulent transfer law usually applies to “suspicious midnight hour transfers, ” such as the Debtor who “sells” his friend his beach house on the eve of his bankruptcy filing, for virtually nothing in return, courts across the country have broadly applied fraudulent transfer law for the benefit of Ponzi Scheme victims, too. See, e.g., In re Petters Co., Inc., 499 B.R. 342, 355-59 (Bankr. D. Minn. 2013) (collecting cases). Consequently, in this case, the Trustee sought to recover interest payments made to investors/lenders like Defendants, on grounds that PCI made those “interest” payments to Defendants with an intent to defraud other creditors (i.e., PCI knowingly paid the interest with other investors' money, rather than with revenue from the merchandise sales the loans were purportedly funding), and without receiving a “reasonably equivalent value” in return for the interest payments (i.e., the “loan” did not benefit PCI's business, but, rather, “merely depleted [its] resources faster”). Id. at 357 (quoting Scholes v. Lehmann, 56 F.3d 750, 757 (7th Cir. 1995)); see also supra at 11-12 (noting PCI's gradually increasing insolvency from 1996 through 2008).

         2. The Bankruptcy Court Denies the Trustee's Summary Judgment Motions En Masse, and Many “Petters Claw Back” Cases, Including This One, Are Transferred to the District Court for Trial

         Following a lengthy and complicated discovery process, which resulted in numerous published decisions from the Bankruptcy Court, this Court, and the Eighth Circuit Court of Appeals, the Trustee brought summary judgment motions against many private investors, including Defendants, based on the fraudulent transfer theory outlined above. The Bankruptcy Court[10] entertained the first of these motions on March 5, 2018, in a case called Kelley v. Charap. (See Defs.' Ex. A [Doc. No. 113-1] (“Mar. 5, 2018 Bankr. Hr'g Tr.”).) The Bankruptcy Court denied the Trustee's summary judgment motion from the bench, and then applied its oral ruling to the other at-issue “Petters claw black” adversary proceedings, including to the Trustee's action against Defendants. (See Defs.' Ex. C [Doc. No. 113-2] (“Mar. 20, 2018 Papadimos Summ. J. Ruling”).)

         As best this Court can tell, the Bankruptcy Court reached this decision for two reasons. First, the Bankruptcy Court found that material disputes of fact existed as to whether PCI acted with fraudulent intent with respect to each individual transfer the Trustee sought to claw back (which, again, collectively totaled in the thousands). (See, e.g., Mar. 5, 2018 Bankr. Hr'g Tr. at 75-76.) Although the Bankruptcy Court acknowledged the testimony of Ms. Coleman that “all of” the security agreements and purchase orders at issue were fabricated or exaggerated, the Court found that, at least in the case of Charap, the defendant-investor had rebutted that presumption of fraud by testifying that “he [was] not told that the loans were tied to specific deals, [and] did not rely on specific statements that tied the loans to specific deals.” (Id. at 76; see also id. at 67 (noting that Charap had “testified that he would give [PCI] the money and it could be used for any purpose”).) “There [were] no security agreements [with Charap], ” the Bankruptcy Court added. (Id.)

         Second, the Bankruptcy Court found that Martens's expert testimony did not sufficiently detail whether Defendants' money was used to finance legitimate merchandise transactions (as opposed to whether it was simply part of the “Ponzi churn”). (See id. at 77-78.) On this point, the Bankruptcy Court emphasized that, per Martens's own analysis, other Petters' companies “had legitimate business, ” and that PCI transferred “over a billion dollars” to those companies during the relevant time period. (Id.; but cf. supra at 13-14 (noting that this activity amounted to only three percent of PCI's total cash flow, and that Martens conducted an analysis with respect to these “intercompany” transfers).) Accordingly, the Bankruptcy Court reasoned, a reasonable juror could find that at least some of any individual investor's funds may have flowed to legitimate, non-PCI transactions, and thus provided “reasonably equivalent value” to PCI.[11]

         After reaching this decision, the Bankruptcy Court transferred many of the Petters claw back adversary proceedings before it to the District Court for trial (and/or further settlement negotiations). These cases were then distributed among the judges of the District.[12]

         3. The Court Holds the First “Petters Claw Back” Jury Trial in Late 2018, in the Case of Kelley v. Boosalis; the Jury Rules for the Trustee

         Between November 26 and December 4, 2018, the undersigned presided over the first (and, to date, only) Petters claw back trial, in the case of Kelley v. Boosalis. See No. 18-cv-868 (SRN/TNL). Although the facts in that case differed in some ways from the facts here, the Trustee put on an affirmative case that largely mirrored what the Court set forth supra (albeit in a vastly more detailed fashion). For instance, Coleman provided factual testimony about PCI's fraudulent intent, and Martens provided expert testimony about how each one of the at-issue transfers directly played into the “Ponzi churn.” The Trustee also put on four ...


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