The College of St. Benedict has won a $2 million reprieve in the clawback odyssey involving charitable contributions made by former Wayzata businessman Tom Petters at the same time he was bilking investors out of billions of dollars.

U.S. District Judge Richard Kyle ruled late last week that the court-appointed receiver handling the Petters estate does not have the authority to sue the college on behalf of the federal government to recover the money.

Kyle said only the U.S. government can sue for return of the $2 million, part of a $3 million pledge made to St. Benedict in 2003 and paid out over the next 2 1/2 years. The remaining $1 million was never paid.

Kyle ruled that receiver Doug Kelley has the authority to "maximize the receivership estates for the benefit of creditors" but lacked the ability to sue on the government's behalf under a federal debt collection law.

"At its core, this case asks the court to decide between two 'losers,''' Kyle wrote in reference to investors in the $3.65 billion Ponzi scheme and a college that accepted the donations without knowing their true source.

St. Benedict, in St. Joseph, Minn., north of Petters' hometown of St. Cloud, used the money for renovation and expansion of its Benedicta Arts Center.

"The college is grateful for the ruling from the judge as the donations were accepted and spent in good faith from 2003 to 2006 to further its mission," the school said in a statement.

Kelley said he would confer with the Minnesota U.S. Attorney's Office to see how it wants to proceed.

The U.S. Attorney's Office said it had no comment on the ruling. "This action is between the court and the receiver," the office said in a statement Wednesday to the Star Tribune.

Petters is serving a 50-year prison sentence after being found guilty on 20 counts of fraud, money laundering and conspiracy for his role as leader of a decade-long operation that fooled investors into thinking they were receiving interest from the sale of electronic goods when new investors were actually paying off old investors.

The attempt to recover charitable donations has been a bit of a juggling act for Kelley based on each organization's financial wherewithal. Kelley said some of the larger charities are able to repay all of the money received from Petters, while others that spent the money could only afford to pay a portion of the donation.

"Some were so small I just let them go," Kelley said.

The ruling, while a defeat for Kelley, is more of a speed bump than a roadblock in his clawback activities with regard to contributions by Petters to charities and other nonprofit organizations.

$13.3 million retrieved so far

To date, Kelley and his team of attorneys, accountants and investigators in the receivership and as trustee for the Petters corporate estate in U.S. Bankruptcy Court, have collected more than $13.3 million in 55 cases through out-of-court settlements with contribution recipients.

Kelley said St. John's University in nearby Collegeville returned the full $2 million it received from Petters, while Miami University in Ohio returned $5 million and Rollins College of Florida gave back $900,000.

"Every one of these charities took the money in good faith and used it for the stated purpose. They said it would be wrong to keep stolen money," Kelley said. "I'm surprised and disappointed that St. Benedict took a different tack. What kind of example does that set for its students?"

Kelley said most of the charitable cases have been resolved.

The lawsuit to recover from St. Benedict was filed in April under the Minnesota Fraudulent Transfer Act and the Federal Debt Collection Procedures Act.

The Minnesota law was changed two days after the suit was filed to shorten the statute of limitations from six years to two years for collecting tainted money, making Kelley's recovery attempt moot. Kyle ruled that only the government could sue under the federal law.

David Phelps • 612-673-7269