BMO Harris Bank N.A., as Successor to M&I Marshall and Ilsley Bank v. Kelley

Background

These related bankruptcy matters arose from a Ponzi scheme operated by Thomas J. Petters and associates between 1994 and 2008. Petters owned, directed, and served as chief executive officer of Petters Company, Inc. (PCI). Billions of dollars moved through PCI’s account at National City Bank, which M&I Marshall and Ilsley Bank acquired in July 2001. BMO Harris is M&I’s successor.

Douglas A. Kelley served as PCI’s equity receiver and later as its Chapter 11 trustee. PCI’s liquidation plan transferred certain assets, including the claims at issue, to the BMO Litigation Trust. Kelley, as trustee, sued BMO Harris, alleging that the bank failed to respond to irregularities as required by banking regulations and that its actions and omissions helped legitimize and facilitate the Ponzi scheme.

Four claims remained after the bankruptcy court partly granted and partly denied BMO Harris’s motion to dismiss: violation of the Minnesota Uniform Fiduciaries Act, breach of fiduciary duties owed to PCI, aiding and abetting fraud against PCI, and aiding and abetting the breach of fiduciary duties owed to PCI.

BMO Harris moved for summary judgment, arguing that the trustee lacked authority to pursue the claims and that the equitable defense of in pari delicto barred recovery. In pari delicto is a defense asserting that a plaintiff who bears substantially equal responsibility for the injury cannot recover for it. The bankruptcy court denied summary judgment on both grounds in an order dated June 27, 2019.

Motion for Leave to Appeal

Because the bankruptcy court’s order was not final, BMO Harris needed the district court’s permission to pursue an interlocutory appeal, meaning an appeal before the bankruptcy case was fully resolved. The court explained that permission is discretionary, should be granted sparingly, and requires exceptional circumstances. Relevant considerations include whether refusing an immediate appeal would cause wasted litigation and expense, whether there is a controlling legal question with substantial grounds for disagreement, and whether an immediate appeal would materially advance the litigation.

Trustee’s Authority to Pursue the Claims

The bankruptcy court concluded that the trustee could pursue the claims because they belonged to PCI’s bankruptcy estate. Under Minnesota law, the bankruptcy court determined that the alleged fraudulent depletion of PCI’s assets directly harmed PCI, while the resulting harm to creditors was indirect. Claims involving direct harm to a corporation belong to the corporation or its bankruptcy estate; claims belonging solely to a creditor cannot be pursued by the trustee for the estate.

The district court held that BMO Harris had not shown a substantial legal disagreement about this issue. The court relied on binding Eighth Circuit precedent holding that fraudulent depletion of a corporation’s assets, even when it leaves the corporation unable to repay creditors, directly harms the corporation. The fact that creditors may benefit from a recovery does not turn the estate’s claim into a claim belonging to the creditors.

The court also rejected BMO Harris’s reliance on decisions from other courts. It concluded that BMO Harris had identified no conflicting Eighth Circuit authority and that the other decisions did not establish the required disagreement with the applicable Eighth Circuit law. The court therefore denied BMO Harris’s motion for permission to appeal this part of the bankruptcy court’s summary judgment order.

In Pari Delicto Defense

The bankruptcy court ruled that the in pari delicto defense did not apply because PCI was in receivership when it filed for bankruptcy. It also ruled, alternatively, that factual disputes prevented summary judgment on the defense.

The district court explained that a bankruptcy trustee generally remains subject to defenses that could have been asserted against the debtor, including in pari delicto. But under the authorities discussed in the opinion, when a receiver has been appointed for a corporation, the corporation’s wrongdoer is removed from control, and the defense does not apply in the same way against the receiver. The court stated that BMO Harris had identified no Minnesota or Eighth Circuit authority contrary to the bankruptcy court’s legal conclusion. It also noted that disagreements involving factual disputes do not warrant discretionary interlocutory review of a controlling legal question.

The court concluded that BMO Harris had not shown substantial grounds for disagreement concerning the in pari delicto defense. It therefore denied BMO Harris’s motion for permission to appeal this part of the bankruptcy court’s summary judgment order.

Other Motions and Disposition

BMO Harris asked the district court to stay the bankruptcy proceedings while it sought the interlocutory appeal and to accept a confidential bankruptcy exhibit under seal. Because the court denied permission for the interlocutory appeal, it denied both the motion to stay and the motion to accept the sealed document as moot.

Judge Wilhelmina M. Wright ordered that BMO Harris’s motion for leave to file an interlocutory appeal be DENIED. The court ordered that BMO Harris’s motions to stay be DENIED as moot, and that its motion to accept sealed bankruptcy documents be DENIED as moot.