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In Kelly v. BMO Harris N.A. (In re Petters Co.), 603 B.R. 424 (Bankr. D. Minn. 2019), the bankruptcy court denied Defendant’s motion for summary judgment, holding that Plaintiff has standing to pursue his various claims against Defendant and that Plaintiff’s claims are not barred by the doctrine of in pari delicto.

This case arose out of the Petters Ponzi scheme. Petters routed Ponzi-scheme funds through PCI’s depository checking account at National City Bank. National City Bank was acquired by M&I Bank, which was succeeded by BMO Harris Bank, N.A. (“Defendant”). The liquidating trustee filed this proceeding against Defendant for its alleged participation in the scheme, claiming various breaches of fiduciary duties, violations of the Minnesota Uniform Fiduciaries Act (“MUFA”), and aiding and abetting of fraud. Defendant moved for summary judgment on all claims.

Defendant argued Plaintiff lacked standing to pursue these claims. Defendant first asserted Plaintiff did not allege any direct harm to PCI, but instead was seeking to recover damages for harm to specific creditors. The court disagreed. Under 11 U.S.C. § 704(1) and 1106(a), Plaintiff has standing to pursue claims that remedy harm done to the estate. The Minnesota Court of Appeals determined in Greenpond South, LLC v. General Electric Capital Corp., 886 N.W.2d 649 (2016), that PCI’s insolvency and inability to repay its creditors due to fraudulent withdrawals from the PCI account represents direct harm to the estate. The case law that Defendant cited was inapplicable and unpersuasive. Defendant next asserted that Plaintiff has no derivative right to recover for individual creditor losses and that Plaintiff lacks standing to bring derivative claims on behalf of PCI’s creditors. The court rejected the Defendant’s arguments, as Minnesota law provides that a corporation may bring a claim when it has been injured for either direct or derivative harm. When a corporation is insolvent, its derivative claims include claims to recover for harm to its creditors.

In the alternative, Defendant argued that Plaintiff’s claims were barred by the doctrine of in pari delicto. The court disagreed. The purpose of this doctrine is to avoid court entanglement in a dispute between wrongdoers. Here, Plaintiff is a fiduciary who replaced any such wrongdoers. Defendant argues that despite this, the doctrine should apply because (1) Plaintiff was appointed only five days before the Chapter 11 petition was filed and (2) Plaintiff brought this suit in his capacity as PCI’s Chapter 11 Trustee, not as PCI’s receiver. The court rejected these arguments. The short time frame is irrelevant.  Plaintiff filed the bankruptcy case pursuant to his authority as receiver, even though he is now acting as PCI’s Chapter 11 Trustee. In the alternative, the court found genuine issues of material fact regarding the parties’ respective levels of fault that would preclude summary judgment based on the in pari delicto defense.