In a move that could limit financial recoveries in the Tom Petters Ponzi scheme, the Minnesota Senate on Thursday approved legislation to protect nonprofit organizations from legal attempts to recover or "claw back" donations that stem from illegal activities.

Sen. Benjamin Kruse, R-Brooklyn Park, said the bill attempts to "strike a balance" between the victims on both sides of a crime like the $3.65 billion fraud operated under the watch of Petters, who now is in prison for his crimes. The bill could relieve strapped nonprofits from having to repay an estimated $200 million in clawback payments.

But the legislation could have notable impact on collection efforts in the Petters bankruptcy case, where trustee Doug Kelley is attempting to recover so-called false profits and other proceeds from investors and those who received donations from Petters.

Kelley, who has filed clawback lawsuits against several nonprofits, said he may lose the ability to collect more than $200 million because the new legislation establishes a two-year statute of limitations on fraudulent financial transfers.

"It is sad because this legislation has so many unintended consequences," Kelley said. "What about the school teachers and the janitors who lost what they invested with Petters? They're being victimized twice."

Kruse said he was approached by a host of nonprofit and religious organizations about the need for such legislation after they handed back donations from contributors "who were not upstanding" about the source of their funds.

"My focus was not on the Tom Petters case. My focus was on a statute that will stand the test of time," Kruse said.

However, Susie Brown, public policy director for the Minnesota Council of Nonprofits, said the legislation was solely driven by the Petters scheme, which collapsed in 2008 after a decade-long run.

"This is a real practical financial difficulty for an organization," Brown said of requests to return donations. "In the nonprofit world those contributions are turned into mission work as soon as possible. And years later when they're asked for the funds, the money's already been spent."

Robert McCollum, a Minneapolis attorney on the board of Big Brothers Big Sisters of the Twin Cities, said his organization faces a $200,000 clawback lawsuit in the Petters bankruptcy.

"This is an effort to find a fair balance so there aren't more victims," McCollum said of the programs funded by nonprofits.

Kelley's lawsuits against nonprofits, using a six-year statute of limitations, currently total $445 million, or about 25 percent of the $1.7 billion he is seeking from investors who profited during the Ponzi scheme. With a two-year statute of limitations, Kelley estimates he will be limited to about half of that $445 million.

Funds collected by Kelley are being pooled for later distribution to investors who were victims of the scheme and creditors in the bankruptcy case.

In the Ponzi scheme, early investors were promised handsome rates of return -- 19 percent to 40 percent in some instances -- but were paid off with the funds of later investors. Kelley contends the high interest rates should have been a signal that something was amiss.

Petters and his associates told investors the money was for the purchase and resale of electronic goods, but those transactions never occurred.

The Senate-approved legislation now goes to the House where a similar bill has already been approved. If the House concurs with the Senate version it will then be sent to Gov. Mark Dayton for his signature.

"The governor will consider it when it comes to his desk," said Dayton spokeswoman Katharine Tinucci.

Kelley said he only learned of the existence of the legislation last weekend when one of his attorneys saw a summary of the bill in a bar association newsletter.

"I was flabbergasted that no one had called me," he said.

But Kruse noted the bill had been introduced nearly a year ago.

David Phelps • 612-673-7269