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

Background

These related bankruptcy matters arose from a Ponzi scheme orchestrated by Thomas J. Petters and his associates between 1994 and 2008. Petters Company, Inc. obtained billions of dollars from investors through fraud and misrepresentations. Billions of dollars moved through the company’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, acting as the trustee of the BMO Litigation Trust, sued BMO Harris over M&I’s handling of the account. The complaint alleged that BMO Harris failed to respond to irregularities as required by banking regulations and that its acts 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 breaches of fiduciary duties owed to PCI.

BMO Harris later sought summary judgment on all four claims, arguing that the Trustee lacked authority to bring them and that the equitable defense of in pari delicto—which can bar recovery when a plaintiff bears substantially equal responsibility for the harm—applied. The bankruptcy court denied summary judgment on both grounds in an order dated June 27, 2019.

Motion for Permission to Appeal

Because the bankruptcy court’s summary-judgment order was not final, BMO Harris needed the district court’s permission to pursue an immediate, or interlocutory, appeal. The court explained that permission is discretionary and should be granted sparingly, only in exceptional cases. Relevant considerations include whether immediate review would avoid wasted litigation and expense, whether the appeal presents a controlling legal question with substantial grounds for disagreement, and whether review would materially advance the end of the litigation.

Trustee’s Authority to Bring the Claims

The bankruptcy court concluded that the Trustee could pursue the claims because they belonged to the bankruptcy estate under Minnesota law. The alleged fraudulent depletion of PCI’s assets directly harmed PCI by leaving it unable to repay creditors; the resulting harm to creditors was indirect. The district court held that this conclusion was consistent with controlling Eighth Circuit precedent, particularly the decision recognizing that a bankruptcy trustee may pursue claims involving direct harm to the debtor even when creditors are the primary beneficiaries of any recovery.

The court rejected BMO Harris’s reliance on decisions from other courts and on lower-court decisions that had been reversed or displaced by controlling precedent. It concluded that BMO Harris had not identified conflicting or contradictory opinions within the Eighth Circuit and therefore had not shown substantial grounds for disagreement. The court denied BMO Harris’s motion for permission to appeal this issue.

Wrongdoing-Based Defense

The bankruptcy court also ruled that the in pari delicto defense did not apply because PCI was in receivership when it filed for bankruptcy. Alternatively, it found that genuine disputes of material fact prevented summary judgment on that defense. The district court explained that Minnesota law generally recognizes the defense when a plaintiff bears at least substantially equal responsibility for the injury, but Minnesota authority also provides that a receiver may pursue claims for creditors even when the defense could have been asserted against the corporation itself before insolvency.

The district court found no Minnesota or Eighth Circuit authority supporting BMO Harris’s position that the defense applied to this receivership entity. It also concluded that BMO Harris’s disagreement with the factual issues did not support immediate review because interlocutory review is directed to controlling legal questions, not fact-intensive disputes. The court denied BMO Harris’s motion for permission to appeal this issue as well.

Other Motions and Disposition

Because the court denied permission for the interlocutory appeal, it denied as moot BMO Harris’s motions to stay the proceedings and to accept a confidential bankruptcy exhibit under seal.

The order therefore states that (1) BMO Harris’s motion for leave to file an interlocutory appeal is denied; (2) its motions to stay are denied as moot; and (3) its motion to accept sealed bankruptcy documents is denied as moot. The order did not decide the ultimate merits of the Trustee’s four claims against BMO Harris.