31 F.4th 1058
8th Cir.2022Background
- The PCI Ponzi scheme (Thomas Petters) led to bankruptcy proceedings; Douglas A. Kelley was appointed Trustee for the PCI Liquidating Trust and sought to claw back prepetition transfers.
- MGC Finance (a PCI subsidiary SPE) made transfers to Arrowhead; Arrowhead bought MGC Finance promissory notes via a Note Purchase Agreement; funds moved through a Wells Fargo custodial account.
- Safe Harbor invested $6 million in Arrowhead and later received roughly $6.9 million in redemptions from Arrowhead via the Wells Fargo account.
- Kelley obtained a default judgment avoiding the transfers from MGC Finance to Arrowhead and then sued Safe Harbor to recover the subsequent transfers under 11 U.S.C. § 550(a).
- The district court granted summary judgment for Safe Harbor, holding § 546(e) (the securities‑safe‑harbor) barred recovery because Arrowhead qualified as a “financial institution,” the Note Purchase Agreement was a “securities contract,” and the transfers were made “in connection with” that contract.
- The Eighth Circuit affirmed that Arrowhead is a financial institution and that the Note Purchase Agreement is a securities contract, but reversed and remanded for the district court to decide — on fact development — whether the MGC Finance→Arrowhead transfers were made “in connection with” the Note Purchase Agreement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Arrowhead is a “financial institution” under §101(22)(A) | Kelley: Arrowhead is not a financial institution | Safe Harbor: Arrowhead is a customer of Wells Fargo; Wells Fargo acted as custodian/agent so Arrowhead qualifies | Affirmed: Arrowhead qualifies as a financial institution because Wells Fargo acted as custodian/agent |
| Whether the Note Purchase Agreement is a “securities contract” under §741(7) | Kelley: it is not | Safe Harbor: it is an agreement to purchase promissory notes (notes are securities) | Affirmed: the agreement is a securities contract (notes fit ordinary definition of “note”/security) |
| Whether the transfers were made “in connection with” the securities contract (§546(e) prerequisite) | Kelley: transfers from MGC Finance to Arrowhead were not connected to the Note Purchase Agreement | Safe Harbor: the transactions were integrated/related and thus satisfy the low "in connection with" standard | Reversed summary judgment and remanded: factual determination required whether transfers were sufficiently related to the Note Purchase Agreement |
| Whether remand is required given district-court errors (e.g., conflating MGC Finance and Metro; custodian definition) | Kelley: district court erred and factual issues remain; remand needed | Safe Harbor: summary judgment was proper | Court: remand appropriate for fact-intensive analysis; declined to consider Kelley’s new custodian-definition argument raised first on appeal |
Key Cases Cited
- Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018) (holds the §546(e) inquiry focuses on the overarching transfer the trustee seeks to avoid)
- Deutsche Bank Tr. Co. Ams. v. Large Priv. Beneficial Owners (In re Tribune Co. Fraudulent Conveyance Litig.), 946 F.3d 66 (2d Cir. 2019) (construed customer-of-bank/agent relationship to treat the customer as a "financial institution" under §101(22)(A))
- Picard v. Ida Fishman Revocable Tr. (In re Bernard L. Madoff Inv. Sec. LLC), 773 F.3d 411 (2d Cir. 2014) (interprets §546(e) broadly; defines “in connection with” as a low bar—related or associated)
- Ritchie Cap. Mgmt., LLC v. Stoebner, 779 F.3d 857 (8th Cir. 2015) (background on Petters/PCI entities and SPE usage)