BANKRUPTCY BULLETIN
Editors-in-Chief
Karl Johnson, Briggs and Morgan, P.A.
Alexander J. Beeby, Larkin, Hoffman, Daly, & Lindgren Ltd.
Contributing Editors: Kesha Tanabe, Tanabe Law & Brittany Kennedy, University of St. Thomas Law
Kelley_v__Home_Federal_Savings_Bank__In_re_Petters_Co___Inc__.pdf
In Kelley v. Home Federal Savings Bank (In re Petters Co.), 603 B.R. 601 (Bankr. D. Minn. 2019), the bankruptcy court granted the Trustee’s motion for partial summary judgment, holding that interest payments to the Home Federal Savings Bank (the “Bank”) were constructively fraudulent and avoidable under both the Minnesota Uniform Fraudulent Transfer Act (“MUFTA”) and Section 548 of the Bankruptcy Code.
This adversary proceeding arose out of the Petters Ponzi scheme and involves Petters Company, Inc. (“PCI”), Petters Group Worldwide (“PGW”), and Thomas Petters in his individual capacity (“Petters”). Prior to the petition date, a third-party investor (the “Investor”) borrowed money from the Bank, which it subsequently loaned to PGW. The Investor entered into a loan agreement with PGW, backed by a personal guarantee from Petters. There was never a direct obligation from PCI to the Bank. However, PCI made three pre-petition payments directly to the Bank, which were applied to interest payments due on the Investor’s loan. The Trustee sought to avoid all three such transfers.
MUFTA allows a transfer to be avoided if it is made without an exchange of reasonably equivalent value and the debtor is insolvent when the transfer occurs. Section 544(b) empowers the Trustee to avoid transfers that are avoidable by a creditor under applicable law. Upon reviewing the structure of the loans and related documentation, the court determined that PCI received no direct or indirect benefit by paying interest on the loan between the Bank and the Investor. The Bank argued that PCI indirectly benefited through the reduction of PCI’s obligations to the Investor. The Bank also argued that PCI indirectly benefited through a chain reaction of reduced obligations stemming from (1) the Investor’s obligation to the Bank, (2) PGW’s obligation to the Investor, and (3) an accounts-receivable obligation from PCI to PGW.
The court, finding no evidence supporting these arguments, disagreed with the Bank and emphasized that PCI not only made transfers without receiving equivalent value, but also made transfers while it was insolvent. Because of PCI’s insolvency and the Bank’s inability to prove that PCI received reasonably equivalent value for the payments, the court granted the Trustee summary judgment on his fraudulent transfer claims. Notably, the Court also granted the Trustee’s request for prejudgment interest at Minnesota’s statutory rate of 10%. The court reasoned that an award of prejudgment interest was within its discretion and that MUFTA, as state substantive law, and the Code, applied as federal procedural law, support the application of Minnesota law to determine the interest rate.