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 Contributing Editor: Nauni Manty, Manty & Associates, P.A.
Eighth_Circuit___Stoebner_v__Opportunity_Finance_LLC.pdf

            This case is a by-product of the various Thomas Petters cases.  Thomas Petters, Inc. was a company involved in a multi-billion Ponzi scheme.  Petters owned Polaroid Holding Corporation (“PHC”) and Polaroid Consumer Electronics, LLC (“PCE”), which are successors in interest to Petters Consumer Brands, LLC (“Petters CB”).  PettersCB paid Polaroid licensing fees from the sale of Polaroid branded consumer electronics to prominent retailers.  Following the collapse of the Petters-related entities, some of the entities filed bankruptcy.  The trustee in the Polaroid bankruptcy cases sued Opportunity Finance, LLC and DZ Bank AG Deutsche Zentral-Genossenschaftsbank seeking avoidance under the Minnesota Uniform Fraudulent Transfer Act (“MUFTA”) of over $250 million in loan payments.  PettersCB made the payments to the defendants in 2003-2005 prior to Petters’ acquisition of Polaroid.   The defendants moved to dismiss and the bankruptcy court granted the motions, the U.S. District Court affirmed the dismissal. The Eighth Circuit affirmed.  

             The timing is critical to the dismissal.  The trustee filed his complaint in December 2010 in reliance that the Ponzi-scheme presumption would satisfy the elements of MUFTA.  The trustee filed an amended complaint on November 8, 2013.  The defendants moved to dismiss the amended complaint.  After lengthy arguments on March 3, 2014, the bankruptcy court took the matter under advisement.  While the motions were under advisement, the Supreme Court of Minnesota issued its decision in Finn v. Alliance Bank, 860 N.W.2^nd 638, 645-53 (Minn. 2015), holding that the Ponzi-scheme presumption did not satisfy the elements under MUFTA.  After the Supreme Court decision, the trustee at a December 2015 omnibus hearing orally sought to, once again, amend the complaint on seven different grounds. The bankruptcy court at the omnibus hearing indicated that a decision was imminent and indicated that it would not entertain a motion to amend prior to issuing that decision.

             Notably, prior to the Finn decision, some courts allowed a Ponzi scheme presumption to meet the proof requirements of fraudulent transfer claims by showing that a debtor operated a Ponzi scheme and transferred assets in furtherance of the scheme. Finn, 860 N.W.2d at 646. The Supreme Court held that the Ponzi scheme presumption does not apply to actual or constructive claims under MUFTA.  Rather, a creditor must prove the elements of the fraudulent transfer with respect to each transfer.  Ponzi scheme payments satisfying legitimate antecedent debts could not be avoided absent specific proof of actual intent to defraud or the statutory elements of constructive fraud.

             A few weeks after the trustee sought to amend his complaint again, the bankruptcy court, in January 2016, issued its lengthy decision granting the motions to dismiss on two grounds. In re Polaroid Corp., 543 B.R. 888 (Bankr. D. Minn. 2016).  First, the bankruptcy court held that the trustee lacked statutory standing to assert claims under MUFTA because he failed to identify any creditor of PHC or PCE, to be successors-in-interest to PettersCB that would have an allowable claim against the debtors. Id. at 903; see generally In re Marlar, 267 F.3d 749, 753 (8th Cir. 2001).  Second, applying the Minnesota Supreme Court’s decision in Finn, the bankruptcy court held that the amended complaint failed to state a claim for actual or constructive fraudulent transfer under MUFTA. Polaroid, 543 B.R. at 911-14.  The bankruptcy court further held that allowing the trustee to file a third amended complaint would be futile, as the pleading of facts that might demonstrate standing or state a claim would conflict with facts already pleaded. Id. at 903, 914.  On appeal, the district court affirmed the bankruptcy court’s decision to dismiss on both grounds and further held that the bankruptcy court did not abuse its discretion in denying leave to amend because the trustee unreasonably delayed in requesting leave to amend, defendants would be prejudiced, and any amendment would be futile. Stoebner v. Opportunity. Finance, 562 B.R. 368 (D. Minn. 2016).  The trustee appealed to the Eighth Circuit.

             The Eighth Circuit affirmed the U.S. District Court and found it unnecessary to address standing arguments raised.  The Eighth Circuit reiterated that the Ponzi presumption does not apply to actual or constructive fraudulent transfers adopting Finn. And, that the creditor (or trustee) must prove the elements with respect to each transfer.  The trustee’s complaint contained conclusory allegations, tracking the statutory language; noting that “threadbare recitals of the elements, supported by mere conclusory statements” did not suffice and the court “is not bound to accept them as true.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).  The Eighth Circuit stated that the amended complaint was “bereft of facts demonstrating PettersCB’s intent to defraud its own creditors through loan repayments.”  PettersCB financed legitimate business transactions with capital from the Opportunity Finance, repaying the loans through the proceeds of real life transactions.  The Eighth Circuit also found that the trustee’s failure to file a motion for leave to amend was necessary.  The trustee’s oral request at the omnibus hearing failed to meet the requirements under the rules.