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Ritchie Special Credit Investments, Ltd. v. United States Trustee

September 2, 2010


Appeal from the United States District Court for the District of Minnesota.

The opinion of the court was delivered by: Wollman, Circuit Judge.

Submitted: June 17, 2010

Before WOLLMAN, EBEL,*fn1 and COLLOTON, Circuit Judges.

The United States Trustee appointed Douglas A. Kelley, Esq., as Chapter 11 trustee for the debtors in the jointly administered bankruptcy proceedings for certain companies established by Thomas J. Petters, including Petters Company, Inc. (PCI), and Petters Group Worldwide, LLC (PGW). Ritchie*fn2 objected to the appointment, arguing that Kelley did not qualify as a "disinterested person" as required by 11 U.S.C. § 1104(d) and as defined by 11 U.S.C. § 101(14)(C) and that Kelley's appointment as the common trustee for the jointly administered estates would prejudice Ritchie. Ritchie also moved for expedited discovery, seeking to require Kelley to respond to discovery requests and to appear for a deposition.

The bankruptcy court*fn3 denied the discovery motion, overruled the objection, and approved Kelley's appointment as trustee for all debtors. See In re Petters Co., 401 B.R. 391 (Bankr. Minn. 2009) (overruling the objection and approving the appointment). The district court*fn4 affirmed the bankruptcy court's orders. Ritchie appeals, arguing that disabling conflicts of interest prevent Kelley from serving as an unbiased common trustee for the jointly administered estates and that the bankruptcy court abused its discretion in denying the discovery motion. We affirm.

I. Background

Before his arrest and conviction, Petters owned PCI and PGW, both of which were privately held limited liability companies. PCI was the venture capital arm of the Petters enterprises that utilized single purpose entities to obtain billions of dollars of funding, purportedly to acquire merchandise for sale to wholesalers and retailers nationwide. PGW held investments in numerous companies, and its principal asset was its stock in Polaroid. As explained more fully below, PCI, PGW, and certain related companies have petitioned for Chapter 11 bankruptcy relief. Ritchie is an investment group that has filed more than $200 million in claims against PGW.

A. Civil Action

In October 2008, the government commenced a civil action against Petters, several of his business associates, and his companies, PCI and PGW. The complaint alleged a massive Ponzi scheme that generated more than $3 billion in fraudulent proceeds. The government sought to freeze the defendants' assets under the authority of the Anti-Fraud Injunction Statute, 18 U.S.C. § 1354, thereby preserving the assets for victim restitution and potential forfeiture. The district court issued a temporary restraining order, essentially freezing the assets of PCI, PGW, and other related entities.

Thereafter, the district court approved a stipulated preliminary injunction that maintained the asset freeze over PCI, PGW, and the companies' subsidiaries, affiliates, and wholly owned or controlled entities. The assets were placed in receivership and Kelley was appointed to serve as the receiver. As receiver, Kelley serves as an agent of the district court and has been vested with the powers necessary to take immediate custody, control, and possession of the assets of the estates in receivership. United States v. Petters, No. 08-cv-05348 (D. Minn. Dec. 8, 2008) (order appointing receiver at 13-14) (Receiver Order).

The scope of the receivership and Kelley's duties and authority are set forth in the district court's order. See id. at 13-18. The order authorizes Kelley to file bankruptcy petitions "for any of the entities to protect and preserve the assets of any of the entities" and requires that any bankruptcy cases be governed by the requirements of the U.S. Bankruptcy Code, 11 U.S.C. § 101 et seq., and the Federal Rules of Bankruptcy Procedure. Id. at 15. The order further requires Kelley to "[c]oordinate with representatives of the United States Attorney's office and Court personnel as needed to ensure that any assets subject to the terms of this Order are available for criminal restitution, forfeiture, or other legal remedies in proceedings commenced by or on behalf of the United States." Id. at 16-17.

Ritchie moved to intervene, stating that an Illinois state court previously had appointed a receiver for PCI and PGW. Ritchie had filed suit in Illinois alleging that Petters, PCI, and PGW had defaulted on promissory notes held by Ritchie. The complaint alleged that Petters, PCI, and PGW had fraudulently induced Ritchie to sign purchase agreements and to extend the agreement's due dates by falsely representing that PCI was a successful, viable business and by failing to disclose that "PCI was involved in a 'Ponzi scheme' that used funds obtained from new investors to pay off prior creditors." Ritchie speculated that its funds were likely used to pay prior creditors in the Ponzi scheme and claimed damages exceeding $220 million. In early October 2006, shortly after it had appointed a receiver, the Illinois court determined that its orders freezing assets and appointing a receiver had expired and deferred to the judgments of the federal district court. The district court denied Ritchie's motion to intervene.

In March 2009, Ritchie filed a second motion to intervene, which was also denied. See United States v. Petters, No. 08-cv-05348 (D. Minn. Apr. 29, 2009) (order denying second motion to intervene). We affirmed the denial of that motion, and to date, Kelley remains the receiver in the civil case. See United States v. Ritchie Special Credit Invs., Ltd., ___ F.3d. ___, 2010 WL ____ (8th Cir. Sept. 2, 2010).

B. Criminal Case

In December 2008, a federal grand jury indicted Petters, PCI, and PGW on charges of mail fraud, wire fraud, money laundering, and conspiracy. A superseding indictment was issued in June 2009. Both indictments sought forfeiture of property involved or traceable to the offenses alleged in the indictment or, if that property is unavailable, the defendants' substitute property. ...

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