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Later this month, BMO Harris Bank will ask a bankruptcy judge to dismiss a $1 billion lawsuit for its purported role in the Ponzi scheme engineered by former Wayzata businessman Tom Petters.
The dismissal hearing will be in Miami, 1,512 miles from the Petters bankruptcy proceedings in St. Paul, where the Chicago-based institution also may face a legal action for handling billions of dollars in deposits and withdrawals for Petters in the final months of the fraud.
So it goes as dueling bankruptcy trustees target some of the same deep pockets as they attempt to recover any proceeds they can from the decade-long, $3.65 billion fraud that collapsed in 2008. Individuals, charities and businesses find themselves on twin radar screens as bankruptcies proceed with Petters' corporate estate in St. Paul and the estate of one of his largest investors, the Palm Beach Funds, in Florida.
BMO Harris inherited its exposure to the Petters scheme last year when it acquired Milwaukee-based Marshall & Ilsley Bank, which counted Petters as a customer.
The trustees of both bankruptcies know each other. Palm Beach trustee Barry Mukamal even sits on the creditor's committee of the Petters bankruptcy, overseen by Doug Kelley.
"In our view, we should be working in a cooperative way," said Michael Budwick, the attorney for Mukamal. "We are obligated to pursue all claims that we believe have merit and Mr. Kelley is obligated to do the same. Hopefully, each will be successful in maximizing returns to the victims."
But that is not always easy.
"We sent out letters to 90 to 100 investors that [said] if you settle with Palm Beach, that does not mean you are settling with us," said Kelley of the dual claims. "I'd hope the trustees could arrive at an agreement to make it easier for people we are targeting and limit the cost of legal fees."
In the Ponzi scheme, early investors got their money back, plus interest, as new investors poured money into the funds with Petters or purchased interest-bearing promissory notes from him. The notes were sold to investors who were told that Petters was buying consumer electronic goods for sale to big-box retailers. But the transactions were fictitious, and the scheme fell apart in 2008.
The dueling bankruptcies are both complicated and simple:
• The Petters case involves his main investment vehicle, Petters Companies Inc. (PCI) and the liquidation of his corporate estate, which included Polaroid, Sun Country Airlines and Fingerhut, as well as recovery of so-called "false profits" from investors who made money before the scheme imploded.
• The Palm Beach case involves Frank Vennes Jr., a convicted felon who used his Metro Gem businesses to raise funds for Petters and served as a link between PCI and the Palm Beach funds, which took a net loss to PCI of $642 million.
But the legal landscape gets complicated when the list of investment winners -- who are now the targets of clawback lawsuits -- overlaps in the two bankruptcies and both trustees go after the same targets.
Some of them are charities and have been asked by each trustee to return donations made by both Petters and Vennes on grounds that the money was a byproduct of a fraud.
Minneapolis attorney Timothy Kelly, represents one of those charities -- Minnesota Teen Challenge -- which is the target of clawback litigation in both bankruptcies.
"The law does not deal with dueling trustees very well. It's factually and legally complicated," Kelly said. "At the end of the day do we flip a coin? Or do we pay twice?"
Coincidentally, legislation signed into law by Gov. Mark Dayton last week could sharply limit collection attempts from charities by both trustees. The new law protects nonprofits from paying back contributions from fraudulently obtained sources after two years instead of the current six-year statute of limitations. Both trustees are considering a legal challenge of the new law. But there are more than charitable donations at stake.
Earlier this year, Palm Beach sought permission to make clawback attempts on the Vennes estate, which is under the supervision of a federal judge in Minnesota. Kelley, who could get up to $4 million from the estate, objected. So did the liquidating trustee for Vennes. So did the U.S. attorney's office, which has oversight of forfeiture proceedings.
U.S. District Judge Ann Montgomery denied the Palm Beach request, noting that Kelley also is frozen from taking action against Vennes and Metro Gem by a previous court-ordered stay on litigation until an asset distribution plan is completed.
The BMO Harris Bank claim is another potential dueling claim in the two bankruptcies. Palm Beach wants more than $1 billion from the bank for allegedly failing to detect the fraud as tainted PCI dollars flowed through its M&I account. The bank calls the lawsuit's allegations "baseless."
Kelley, on the other hand, has M&I and BMO on his radar as well.
"We continue to explore their potential liability," he said.
As the bankruptcies unfold, the trustees can expect more disputes.
"In a complex bankruptcy situation, like the Petters case, trustees are trying to marshal assets and often there will be competing claims to the same assets," said Ann Graham, a business law professor at the Hamline University School of Law.
David Phelps • 612-673-7269