As U.S. Bankruptcy Judge Gregory Kishel strode into court last week for yet another hearing on the Tom Petters case, he almost sighed. "It's been a long haul for everybody," he said.
Kishel's remarks were greeted with light laughter from the courtroom crowded with dark-suited lawyers. Few, if any, would disagree.
It's been more than three years since the bankruptcy filing for the corporate entities of Petters and one year since more than 200 controversial clawback cases were filed in an attempt to recoup so-called "phantom profits" from investors who made money doing business with the former Wayzata businessman.
Petters, meanwhile, is serving a 50-year prison term for conducting the now infamous $3.65 billion Ponzi scheme that operated out of his offices for more than a decade. Seven others also are serving, or have served, prison time for their roles in the fraud.
But fallout from the criminal case still lingers in the bankruptcy matter, most notably in the hotly contested clawback actions. The paper trail of documents in the bankruptcy case is staggering. Just the court docket of motions, replies, orders and assorted other filings runs more than 130 pages.
Legal and professional bills are mounting. Last month Kishel approved $9.28 million in fees for the bankruptcy side of the case for five months of work. Total legal fees now sit at $13 million.
Here's how bankruptcy trustee Doug Kelley puts those numbers into perspective.
"We are the Wal-Mart of legal fees," said Kelley, noting that published reports put fees for the trustee cleaning up the $65 billion Madoff Ponzi scheme at $225 million.
In the Petters case, no one knows what the private attorneys are charging their clients.
And when the case will conclude is anyone's guess.
"We're behind schedule from where I thought we would be a year ago at this time," Kelley said in an interview last week. "I think this is going to take at least another 18 months to two years."
Kelley and a team of attorneys, accountants and investigators have collected an estimated $260 million, largely through the sale of Petters' corporate holdings, notably Sun Country Airlines ($34 million) and Polaroid Corp. ($85.9 million).
The trustee also picked up $11.2 million from the Jamaican lottery, where Petters had an interest, and $34 million in a patent settlement with Hewlett-Packard.
Charitable recipients of Petters' philanthropy returned $8 million. Former Petters employees have returned at least $9 million.
But by far the largest source for potential recovery is the attempt to claw back profits made by investors who often received healthy interest payments for their loans to the charismatic and self-made businessman.
Kelley has claims outstanding of nearly $1.64 billion. But the picture is complicated, as would be expected with the stakes that high. In the claims, he alleges that investors "knew or should have known" that the investment was a fraud.
Of the 200 cases outstanding, half have filed dismissal motions on a variety of grounds, including lack of jurisdiction because of statute of limitations issues and value calculations. Hearings on those motions have been ongoing throughout the fall, and Kishel has yet to rule on them.
"This is a slippery slope," said John McDonald, the Briggs and Morgan attorney for Minneapolis-based Opportunity Finance, one of the largest Petters investors. "This improperly imposes a duty on a creditor to be his fellow creditor's keeper .... Lenders have no duty to 'know or should have known.' They lend at their own peril. That's not enough to state a claim."
Tobias Keller, a Jones Day attorney representing the hedge fund Epsilon, said the returns paid to his client were "within commercially reasonable standards."
"My clients made loans. The loans were repaid. We believe that is the end of the inquiry," Keller said in his argument for a dismissal.
Kelley says he expects the large hedge funds to fight him right up to a trial "and if we have to do that, that is going to take a couple of years, minimum, to get them done."
Richard Painter, a corporate law professor at the University of Minnesota School of Law, said clawbacks are complicated because there is little case law on the books.
"It's difficult because the law doesn't give you specific guidelines," Painter said. "I'm not saying the trustee shouldn't try it. We'd just be better off if Congress wrote a law on this. It would help discourage Ponzi schemes."
David Phelps • 612-673-7269
