RITCHIE CAPITAL MANAGEMENT, L.L.C. v. JEFFRIES No. 10-2568.
653 F.3d 755 (2011)
RITCHIE CAPITAL MANAGEMENT, L.L.C.; Ritchie Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investments, I, LLC; and Ritchie Capital Structure Arbitrage Trading, Ltd., Appellants, v. Mary JEFFRIES and Camille Chee-Awai, Appellees.
United States Court of Appeals, Eighth Circuit.
Filed: September 6, 2011.
Thomas C. Cronin, argued, John T. Cusack and Steven Scott Shonder, on the brief, Chicago, IL, for appellant.
Andrew S. Birrell, argued, Minneapolis, MN, Stacy Ann Broman, Michael Gregory Simpson, Minneapolis, MN, Ian Pitz, Melissa S. Caulum, Madison, WI, Ernesto Rafael Palomo, Terrence Patrick Canade, Chicago, IL, on the brief, for appellee.
Before WOLLMAN, BYE, and SHEPHERD, Circuit Judges.
BYE, Circuit Judge.
This case represents a fallout from a $3.65 billion Ponzi scheme perpetrated by Minnesota businessman Thomas J. Petters. Ritchie Capital Management, LLC, and the other appellants (collectively, Ritchie) are investment funds who, like other creditors of Petters and his companies, incurred substantial losses as a result of participating in Petters's investment scheme. Neither Petters nor his companies are named as defendants in the present action, however. Instead, Ritchie is suing two officers of Petters's companies, Mary Jeffries and Camille Chee-Awai, alleging they assisted Petters in getting Ritchie to loan over $100 million to PGW by representing the loans would be adequately secured by the assets of the Polaroid Corporation. Ritchie's five-count complaint alleges violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), see 18 U.S.C. § 1962(a), (c)-(d), common law fraud, and tortious interference with the contract.
The omission of Petters and his companies from the case caption is not accidental. They were placed in the receivership proceedings, which are still ongoing in the District of Minnesota, and the receivership court prohibited commencement of any new actions "interfer[ing] with the exclusive jurisdiction of [the receivership court] over the assets or documents of Defendants," absent leave of the court. Ritchie thought it could bypass this anti-suit injunction if it sued other individuals who, it alleged, were actively involved in the fraud. The district court disagreed, and dismissed Ritchie's case on account of the receivership court's anti-suit injunction. The present appeal followed.
We find the district court erred in concluding Ritchie's action was barred by the Receivership Order. Considered on a textual level, this order did not bar all actions that merely called for interpretation of documents in the receiver's possession unless this exercise ultimately threatened the receivership assets. Nor did the receivership court have the power to cast its anti-suit injunction net that broadly because its equitable powers were circumscribed by its duty to protect the receivership assets. We also reject Jeffries's and Chee-Awai's alternative argument challenging the sufficiency of Ritchie's pleadings in the common
Background Information. Understanding this case requires a basic familiarity with the cast of characters involved therein. The two main companies owned by Petters were Petters Group Worldwide, LLC (PGW) and Petters Company, Inc. (PCI). "PCI was the venture capital arm of the Petters enterprises that utilized single purpose entities to obtain billions of dollars of funding, purportedly to acquire merchandise for sale to wholesalers and retailers nationwide. PGW held investments in numerous companies, and its principal asset was its stock in Polaroid." Ritchie Special Credit Invs., Ltd. v. U.S. Trustee,
According to Ritchie, Jeffries and Chee-Awai conspired with Petters, "the principal conspirator," Compl. ¶ 1, to induce Ritchie to loan PGW well over $100 million and then deprive it of its security interest in Polaroid. In making its decision to provide financing to PGW in February 2008 and then to extend maturity dates on the notes in May through September 2008, Ritchie allegedly relied on Jeffries's and Chee-Awai's representations as to the existence, value, and exclusivity of its security interest in Polaroid and the legitimate nature of Petters's businesses in general. Interpreting Illinois law to allow for creation of a valid security interest on the basis of oral agreements alone, Ritchie relies on these representations to assert a security interest in Polaroid assets dating back to Ritchie's first loan to PGW on February 1, 2008.
Yet, Ritchie apparently did not believe in the power of a written word. Rather than demanding from Petters a full-fledged written commitment regarding the security interest in Polaroid from the beginning, Ritchie extended its first $31 million loan on the strength of Petters's personal guaranty alone. Then, on February 19, 2008, Ritchie entered into the Note Purchase Agreement with Petters and PGW, in which Petters also agreed to "endeavor, as soon as reasonably practicable, to secure this Note ... by a pledge of 100% of the capital stock of Polaroid." Compl. ¶ 58. Ritchie's interest in certain Polaroid assets was finally memorialized on September 19, 2008, when Ritchie and Petters executed agreements extending maturity dates on certain notes evidencing PGW's obligations to Ritchie. Because Polaroid was placed under the bankruptcy protection less than three months later, however, that formal grant of the security interest might prove to be too little too late. This is so because it is vulnerable to being attacked as a preferential transfer.
Receivership Action. On September 24, 2008, just five days after Ritchie got Petters to formally assign the security interest in Polaroid, the federal authorities executed search warrants at PCI's premises and at Petters's house. On October 2, 2008, the government commenced an action pursuant to the Fraud Injunction Statute, 18 U.S.C. § 1345, to preserve the assets held by PCI, PGW, and other related entities, including Polaroid, in the event they are ordered to pay restitution to the victims of the alleged fraud scheme. See
Appellant App'x at 95-96.
Twice after the Receivership Order was entered, Ritchie sought to intervene, urging the receivership court to exempt PGW and its wholly-owned subsidiary Polaroid from the asset freeze. Both times, the district court disallowed the intervention on account of untimeliness and failure to establish the denial of intervention would impair Ritchie's ability to protect its interests. The Eighth Circuit affirmed the rulings. See United States v. Ritchie Special Credit Invs., Ltd.,
Criminal Action. In December 2008, a federal grand jury returned an indictment against Petters, PCI, and PGW on charges of mail fraud, wire fraud, money laundering, and conspiracy to commit the same offenses. Petters was convicted of the twenty charges against him and sentenced to fifty years' imprisonment. The appeal from his convictions and sentence is currently pending before this court. See United States v. Thomas Petters, No. 10-1843 (8th Cir., argued Feb. 17, 2011).
Polaroid's Bankruptcy Action. On December 18, 2008, the Receiver filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code (later converted into Chapter 7) on behalf of Polaroid, among other Receivership entities. See In re Polaroid Corp., No. 08-46617 (Bankr.D. Minn., filed Dec. 18, 2008). Kelley was appointed as Chapter 11 trustee for PGW and PCI.
Ritchie vigorously disputed Kelley's account of events. It countered Polaroid was never in need of bankruptcy protection and "Jeffries's and Kelley's sole purpose in placing Polaroid into bankruptcy was a bad faith attempt to void [Ritchie's] (and others') security interests in Polaroid." Compl. ¶ 109. In the adversary-proceeding counterclaim, Ritchie sought a declaration that its security interest in certain Polaroid assets was valid, advancing many of the same allegations that are raised in the present complaint.
The bankruptcy court authorized the sale of Polaroid assets unencumbered by Ritchie's lien, but provided for attachment of Ritchie's lien, to the extent it is determined to be valid, to the proceeds of the sale. According to Ritchie's complaint in the present case, the bankruptcy court allowed the sale to proceed based, in part, on the sworn affidavit of Jeffries averring that "Ritchie invested at least $146 million into PCI as part of the fraudulent Ponzi scheme," and that "at no time did Ritchie invest in, or advance any funds to Polaroid or to PGW for that matter." Compl. ¶ 111. In exchange for her "cooperation with Kelley's plans to forfeit PGW's assets to the Government," Ritchie's theory proceeds, Jeffries was allowed to retain a million-dollar bonus she had received from PCI. Compl. ¶ 112.
Polaroid's adversary complaint against Ritchie and one of Ritchie's two counterclaims against Polaroid remain pending in the bankruptcy court, awaiting the decision on a motion for summary judgment filed by the Trustee.
District Court Proceedings. Unable to intervene in the receivership action and not having much luck in the bankruptcy forum, Ritchie filed this case alleging RICO violations, common law fraud, and tortious interference with a contract against Jeffries and Chee-Awai. The defendants moved to dismiss the case claiming, among other things, that the anti-suit provision in the Receivership Order barred Ritchie's action. The district court agreed, noting:
Appellant App'x at 73-74.
We review the district court's dismissal of Ritchie's action de novo, taking all facts alleged in the complaint as true. Trooien v. Mansour,
In deciding whether the anti-suit injunction in the Receivership Order prevents this litigation, we start with its text. The provision in question applies to "all investors, creditors ... seeking to establish or enforce any claim, right, or interest against or on behalf of Defendants," among other classes of people. Appellant App'x at 95. Because "Defendants" in the receivership case include PGW and "any affiliates, subsidiaries, divisions, successors, or assigns owned 100% or controlled" by the receivership defendants, Appellant App'x at 80, creditors seeking to establish an interest in Polaroid, PGW's wholly-owned subsidiary, fall within the purview of this clause. Ritchie is one of such creditors.
This is not the end of our textual analysis, however. Even suits affecting the receivership defendants do not run afoul of the anti-suit injunction unless they "interfere with the Receiver's managing or taking custody, control or possession of the assets or documents subject to this Receivership." Appellant App'x at 96. The parties agree Ritchie's action against Jeffries and Chee-Awai does not interfere with the assets of the receivership as such, but disagree on what it means to "interfere with the Receiver's managing or taking custody, control or possession of ... documents subject to this Receivership." While Ritchie argues for a literal interpretation of the phrase focusing on the Receiver's physical possession of the documents, Jeffries and Chee-Awai urge a more functional approach encompassing not only physical possession of the receivership documents but also their interpretation.
We think Ritchie's view is more loyal to the text of the Receivership Order. Quite simply, the order does not mention the interpretation of the receivership documents as one of the evils it was intended to prevent. Jeffries's and Chee-Awai's suggested construction would require the court to read the new word into the sentence without any sign the court intended it to be there. Cf. Jung v. Gen. Cas. Co. of Wisconsin,
Nor does the suggested construction fit in the overall scheme of the sentence. See United States v. Stanko,
Rather, we read the sentence to prohibit physical interference with documents in the Receiver's management custody, possession or control, in whatever medium. Interpreting interference with documents in a physical sense is also consistent with the receivership court's directive to stay all civil discovery while the preliminary injunction
Even if we set aside the textual interpretation of the Receivership Order, we are skeptical of the receivership court's power to preempt all actions calling for the interpretation of "documents subject to this Receivership." Whatever the precise scope of this category of actions, it is significantly broader and more amorphous than the group of actions affecting the assets of the receivership. A federal court supervising an equity receivership has inherent equitable authority to issue a variety of ancillary relief to protect the receivership and, true enough, the scope of that relief is not limited to parties before the court. SEC v. Wencke,
In this respect, equitable powers of the receivership court are similar to powers of the bankruptcy court to impose an automatic stay pursuant to 11 U.S.C. § 362(a). "The goal in both securities-fraud receiverships and liquidation bankruptcy is identical — the fair distribution of the liquidated assets." SEC v. Wealth Mgmt. LLC,
The unusual circumstances in which the bankruptcy court can stay cases against non-debtors are rare. Reliant Energy Serv., Inc. v. Enron Canada Corp.,
The unusual-circumstance exception is not implicated where, as here, the new litigation has no potential impact on the bankrupt entity. Because no receivership defendant is named in Ritchie's action and none is in privity with Jeffries or Chee-Awai, the court's findings in the present case cannot have a binding effect on Petters or other receivership defendants. Tyus v. Schoemehl,
Reasoning in the alternative, Jeffries and Chee-Awai attack the common law fraud count in Ritchie's complaint on the grounds it fails to plead that Jeffries and Chee-Awai had no intention to grant Ritchie the security interest in Polaroid prior to Ritchie's decision to extend the first loan.
As an initial matter, it is unclear whether Jeffries and Chee-Awai attack the complaint under Rule 9(b) or Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Arazie v. Mullane,
Jeffries's and Chee-Awai's challenge fares no better if it is interpreted as an attack on Ritchie's complaint in a traditional Rule 12(b)(6) sense. It is indeed black-letter law that a "representation of the maker's own intention to do or not to do a particular thing is fraudulent if he does not have that intention" at the time he makes the misrepresentation. See Restatement (Second) of Torts § 530(1); see also Vandeputte v. Soderholm, 298 Minn. 505,
Ritchie's complaint satisfies these requirements. It opens with the allegation that Petters, Jeffries and Chee-Awai entered into a "fraudulent scheme ... to deprive the Plaintiffs ... of the benefits of valuable security interests in one of the world's most-recognized companies, Polaroid Corporation (`Polaroid')." Compl. ¶ 1. "After Plaintiffs made the loans," the complaint continues, "Defendants and their co-conspirators schemed to defraud Plaintiffs out of the benefit of those security interests." Id. After enumerating various communications between Ritchie, Petters, Jeffries, and Chee-Awai, the complaint recaps:
Compl. ¶¶ 50, 58-59.
Paragraph 59 of its complaint alleges Petters, Jeffries, and Chee-Awai had no intent to "endeavor" to pledge the capital stock of Polaroid to Ritchie. Jeffries and Chee-Awai acknowledge this paragraph "comes close" to satisfying the intent-at-the-time-of-promise element of fraud, but contend it relates only to the intent of coconspirators as of February 19, 2008, when Ritchie entered into the Note Purchase Agreement with Petters referenced in the preceding Paragraph 58. While the text of Paragraph 59 uses the same word "endeavor" that was used in the February 19, 2008, agreement referenced in Paragraph 58, it does not on its face contain any temporal limitations. There is likewise no temporal limitation in count four of the complaint, which charges Jeffries and Chee-Awai "schemed to deprive Plaintiffs of the benefits of those security interests in Polaroid by fraudulently concealing ... Defendants' and their co-conspirators' plans to pledge and the pledge of Polaroid as collateral to obtain from third parties funds and other benefits for Polaroid, PGW and/or PCI." Compl. ¶ 140. Combined, these allegations support an inference that Jeffries and Chee-Awai never intended to pledge Polaroid as collateral for Ritchie's loans.
Attempting to dispel this inference, Jeffries and Chee-Awai point to the complaint allegation stating, "[a]fter one of Plaintiffs' funds wired the initial $31 million to pay JPMorgan, Defendants and their co-conspirators initiated a scheme to deprive Plaintiffs of the benefits of their security interest in Polaroid." Compl. ¶ 4. We do not read this statement as antithetical to the inference that Jeffries and Chee-Awai had no intent to act on their promises from the beginning of their dealings with Ritchie. Rather, the statement focuses on a different time frame — it relates to the parties' actions after obtaining the first loan — and is intended to underscore the validity of Ritchie's security interest in Polaroid once it extended the first loan to PGW. As a final point, we also observe the common-law fraud count rests not only upon Jeffries's and Chee-Awai's misrepresentations prior to February 1, 2008, but also upon their misrepresentations in the months that followed. It is in reliance on these misrepresentations, argues Ritchie, that it extended additional loans to PGW and granted additional extensions
For these reasons, we reverse the judgment of the district court and remand for further proceedings.
- No Cases Found