Kelley v. Westford Special Situations Master Fund, L.P.

Background

Douglas A. Kelley, acting as trustee of the PCI Liquidating Trust, brought this adversary case to avoid and recover money transfers made by PL Ltd., Inc. and Petters Company, Inc. The opinion states that those entities were controlled by Thomas J. Petters and were involved in a multibillion-dollar Ponzi scheme.

The defendants included four master funds, their management companies, eleven feeder funds, and Steve Goran Stevanovich. From 2001 through 2007, the master funds invested nearly $2.5 billion through approximately 346 loans and ultimately received nearly $2.8 billion, including $318,187,782 in profits. Kelley sought to recover principal and profits under provisions of the Bankruptcy Code and the Minnesota Uniform Fraudulent Transfer Act, now called the Minnesota Uniform Voidable Transactions Act.

Kelley’s operative second amended complaint asserted eleven claims. The Bankruptcy Court previously denied the management companies’ and Stevanovich’s summary-judgment motion as to counts I through VIII because the parties’ evidence created a genuine dispute about the tracing methods and conclusions of Kelley’s expert. The Bankruptcy Court granted the motion as to count XI and directed the parties to file a stipulation concerning the voluntary dismissal of counts IX and X, but the opinion states that no such stipulation had been filed. The case was later transferred to the District Court.

Motions and analysis

Kelley moved for partial summary judgment on actual- and constructive-fraud claims against the master funds. The court decided to delay ruling on that motion because the Eighth Circuit’s decision in a prior related proceeding would likely be significant to the issues presented.

The management companies and Stevanovich moved for summary judgment on all remaining claims against them. They argued that Kelley could not show, as a matter of law, that they received property transferred from PCI or PL Ltd. They emphasized that the master funds had combined money from Petters-related payments, other investments, asset sales, and new investors in single accounts. The management companies also combined fees from Petters-related and unrelated sources in single accounts and used those funds for business expenses and payments.

The court explained that the Bankruptcy Code and Minnesota law may permit recovery from a subsequent transferee—someone who received property after the initial recipient—not only from the initial transferee. Because the management companies and Stevanovich apparently did not directly invest in or receive payments from PCI or PL Ltd., Kelley had to show that they were subsequent transferees of money received by the master funds.

The court rejected the argument that commingling automatically defeated tracing. It explained that tracing does not require a dollar-for-dollar accounting of the exact money transferred. Evidence showing the relevant pathways through which the money moved can be sufficient. The court also concluded that the authority cited by the defendants did not require Kelley to prove that the challenged payments originated solely with PCI or PL Ltd.

Kelley offered an expert report by Marti P. Murray and related documents. Murray concluded that the management companies received at least $60,667,405 in management and performance fees attributable to the $318,187,782 in profits the master funds received from Petters investments. Murray also concluded that Stevanovich received cash payments from the management companies exceeding that amount. The court held that these materials could permit a juror to reasonably infer that the management companies and Stevanovich were subsequent transferees of property that originated with the debtor.

The defendants also challenged Murray’s methodology. The court said that whether her methodology was accepted was more appropriately addressed under Federal Rule of Evidence 702 and the standards associated with expert testimony, but the defendants had not challenged her opinions on that basis. Stevanovich separately argued that his distributions were compensation for management services and therefore were not recoverable. The court found a factual dispute on that issue because his testimony stated that he was not an employee of his entities and that his distributions consisted of funds remaining after the management companies paid their expenses.

Ruling

Judge Eric C. Tostrud denied the motion for summary judgment filed by Westford Global Asset Management, Ltd.; Westford Asset Management, LLC; Epsilon Global Asset Management, Ltd.; Epsilon Investment Management, LLC; and Steve Goran Stevanovich. The order did not decide Kelley’s separate motion against the master funds, which the court postponed pending the Eighth Circuit’s decision in the prior related proceeding.