For 15 years, Tom Petters was a client of Fredrikson & Byron, a prominent and fast-growing Minneapolis law firm.

The routine legal work involved such legitimate Petters businesses as Sun Country Airlines, Polaroid and St. Cloud-based Fingerhut. But the firm's work came under a cloud when Petters' business empire crashed under the weight of a $3.65 billion Ponzi scheme in late 2008.

On Thursday, the 260-attorney firm announced that it will repay $13.5 million to the Petters bankruptcy estate for legal fees it received for its work for the former Wayzata businessman, who is now serving a 50-year prison sentence for his role in the crime.

"The settlement affirms our position that our representation of Mr. Petters and his companies was, in every respect, honest, ethical and consistent with our professional duties and responsibility," the firm said in a statement.

The agreement with bankruptcy trustee Doug Kelley was filed in U.S. Bankruptcy Court in St. Paul late Wednesday night. It was the second large clawback settlement announced by Kelley this week. Earlier on Wednesday, he revealed a $19 million deal with General Electric Capital Corp.

In the settlement with Fredrikson & Byron, Kelley acknowledges that his investigation found no evidence that the firm had any knowledge of Petters's scheme, although "there were a number of red flags that should have alerted F&B to the possibility that the business allegedly conducted by Petters was fraudulent.''

The law firm denied any wrongdoing in its dealings with Petters and his various business entities, a relationship that was terminated by Fredrikson the day after the government raided the Minnetonka campus of Petters Group Worldwide in 2008.

In its statement, the law firm said: "Like anyone, we don't like to settle a case in which we've done nothing wrong; as attorneys, though, we know that even the strongest case faces uncertainty at trial and that it is often the prudent, cost-efficient option to settle such matters.''

The firm said its payment is fully covered by its professional insurance policy. However, a law professor who studies the business of law firms noted that most policies carry the equivalent of deductibles and that work done on the case prior to the settlement might have been part of that deductible.

"No large law firm is going to have zero deductible," said the University of Minnesota's Herbert Kritzer. "This usually means the firm is covering the cost of its defense out of its own pockets."

Petters was convicted on charges of fraud, money laundering and conspiracy for orchestrating a bogus operation that promised high yields to investors in order to finance the purported purchase of consumer electronic goods to sell to big-box retailers. Except there were no electronic goods: Early investors were paid with funds from new investors.

Exhibits filed elsewhere in the Petters bankruptcy proceeding indicate that some Fredrikson attorneys were bewildered by Petters's transactions. In one e-mail, one Fredrikson attorney writes to another, "How can our client make money on a deal with a 10 percent mark-up if they're paying those kinds of interest rates?"

The settlement with the law firm was negotiated with a mediator. Both parties said they felt that protracted litigation would be prohibitively costly. Kritzer said the Petters entanglements should not hurt Fredrikson's standing in the Minnesota legal community.

"I don't think its clientele will be upset by this kind of thing," he said. "As big firm settlements go, this is not off the wall."

In a separate development Thursday, the trustee also announced a $1.25 million settlement with the John T. Petters Foundation for contributions it received from Petters and several of his associates in the Ponzi operation, including whistleblower Deanna Coleman and co-conspirator Larry Reynolds.

The settlements with GE Capital, Fredrikson and the foundation bring to nearly $299 million the total of recovered assets in the Petters bankruptcy that eventually will be distributed to creditors and others.

All settlements are subject to the approval of federal bankruptcy Judge Gregory Kishel.

David Phelps • 612-673-7269