115 F.4th 901
8th Cir.2024Background
- Thomas Petters orchestrated a multibillion-dollar Ponzi scheme using Petters Company, Inc. (PCI).
- After the scheme collapsed, PCI was placed into federal receivership and later filed for bankruptcy; Douglas Kelley served both as receiver and then bankruptcy trustee.
- Kelley, as trustee, sued BMO Harris (successor to M&I Bank), alleging the bank aided and abetted PCI’s fraudulent activities and breach of fiduciary duty.
- BMO asserted the equitable defense of in pari delicto, arguing PCI was equally or more culpable for its own losses from the scheme.
- Lower courts denied BMO’s in pari delicto defense, allowed the case to proceed, and a jury awarded over $500 million to Kelley.
- On appeal, the Eighth Circuit considered whether the in pari delicto defense barred Kelley’s claims as bankruptcy trustee.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Availability of in pari delicto | Receivership cleansed PCI of wrongdoing; defense unavailable to trustee. | PCI, as the wrongdoer, cannot recover; trustee stands in PCI’s shoes and is subject to same defenses. | In pari delicto applies; trustee is subject to all defenses against PCI. |
| Trustee standing after receivership | Trustee assumes claims of a “cleansed” entity free of pre-receivership liabilities. | Bankruptcy trustee inherits debtor’s liabilities and defenses, regardless of receivership. | Trustee is bound by pre-bankruptcy defenses, including in pari delicto. |
| Effect of Minnesota law on defenses | Minnesota law allows receiver to sue for creditors, not bound by prior fraud. | Minnesota law permits receiver, not bankruptcy trustee, to avoid prior fraud for creditor benefit. | Bankruptcy trustee is not exempted under Minnesota law; defense applies. |
| Necessity of further proceedings | The nature of PCI’s wrongdoing requires fact-finding on degree of fault. | PCI’s sole purpose was fraud; no party could be more culpable than PCI. | No remand necessary; judgment for BMO entered directly. |
Key Cases Cited
- Grassmueck v. Am. Shorthorn Ass’n, 402 F.3d 833 (8th Cir. 2005) (bankruptcy trustee subject to defenses that could be raised against the debtor)
- Stumpf v. Albracht, 982 F.2d 275 (8th Cir. 1992) (trustee stands in the shoes of the debtor)
- State ex rel. Head v. AAMCO Automatic Transmissions, Inc., 199 N.W.2d 444 (Minn. 1972) (in pari delicto bars recovery where plaintiff’s fraud equals defendant’s)
- German-Am. Fin. Corp. v. Merchs.’ & Mfrs.’ State Bank of Minneapolis, 225 N.W. 891 (Minn. 1929) (receiver may sue on behalf of creditors, not bound by officers’ fraud)
- Magnusson v. Am. Allied Ins., 189 N.W.2d 28 (Minn. 1971) (receiver not bound by fraudulent acts of former corporate officers)
- United States v. Petters, 663 F.3d 375 (8th Cir. 2011) (criminal liability for underlying Petters Ponzi scheme)