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Ritchie Capital Management, L.L.C. v. U.S. Bank National Association

United States District Court, S.D. New York

April 10, 2015



PAUL A. ENGELMAYER, District Judge.

Plaintiffs Ritchie Capital Management, L.L.C. and five affiliated entities (together, "Ritchie"[1]) brought this suit against defendant U.S. Bank National Association ("U.S. Bank"), alleging that U.S. Bank helped Minnesota businessman Tom Petters perpetrate and conceal a massive Ponzi scheme over several years. As a result, Ritchie lost about $157 million. U.S. Bank now moves to transfer this action, pursuant to 28 U.S.C. § 1404(a), to the United States District Court for the District of Minnesota. For the reasons set forth below, the Court grants U.S. Bank's transfer motion.

I. Background

A. Factual Background[2]

On January 7, 2015, Ritchie filed a Complaint against U.S. Bank, bringing claims including conspiracy to commit fraud as well as aiding and abetting fraud. Dkt. 4 ("Compl."). At its heart, the Complaint alleges that U.S. Bank knew about and took various steps to facilitate Tom Petters' fraud. Ritchie's Complaint explains both Petters' fraud and the role that U.S. Bank allegedly played in it.

As to Petters' fraud, the Complaint alleges that Petters created, and was "the ring-leader" of, a "massive" "fraudulent purchase order financing scheme." Id. ¶¶ 26, 50. "Petters and his criminal associates" conducted this scheme for at least a decade "through Petters Company, Inc. (PCI'), resulting in unpaid debts to PCI's creditors of over $3 billion and damages to Plaintiffs of over $157 million." Id. ¶ 1. Petters' fraud was based on "intentional misrepresentations that PCI was in the business of acquiring brand-name consumer electronics merchandise at below wholesale prices and [re]selling those goods at substantial profits to discount warehouse club retailers like Costco... and Sam's Club." Id. ¶ 2. Petters and his companies financed their purchases by obtaining loans "in exchange for what they represented were secured, high-yield promissory notes." Id. ¶ 19. In fact, however, no such electronics purchases were made; rather, it was a huge Ponzi scheme. Petters' financing deals were supported by purported equipment purchase orders and other documentation, but the purchase orders and the equipment were fabrications. "In October 2008, after Petters was arrested and PCI filed a petition for bankruptcy relief, it was revealed that Petters, PCI and their affiliates had used invalid purchase orders... to fraudulently induce a number of lenders to loan over $30 billion to Petters' companies between January 2003 and September 24, 2008." Id. ¶ 3.

In fall 2008, federal agents searched Petters' home in Wayzata, Minnesota, and his businesses' headquarters in Minnetonka, Minnesota. Petters was then prosecuted criminally in the District of Minnesota. After a 20-day trial, he was convicted of 20 counts and is now serving a 50-year prison sentence. See United States v. Thomas J. Petters, No. 08 Cr. 364 (RHK) (AJB) (D. Minn.), aff'd, United States v. Petters, 663 F.3d 375 (8th Cir. 2011).

Between February and May 2008 - a few months before Petters' fraud was revealed - Ritchie and its affiliates made a series of loans to Petters and his companies, totaling $189 million. Compl. ¶¶ 3, 48. "Petters did not disclose the material facts regarding his fraudulent purchase-order financing scheme to Plaintiffs. Instead, Petters intentionally misrepresented the nature and financial condition of his business with the intent to induce Plaintiffs to extend loans to him and his companies in reliance on those false representations and material omissions that led Plaintiffs to believe that Petters was entirely a legitimate businessman...." Id. ¶ 3.

As to U.S. Bank's role in Petters' fraud, Ritchie's Complaint alleges that U.S. Bank knowingly facilitated Petters' "money laundering and fraudulent transfers." Id. ¶ 5. "Petters-controlled companies and entities maintained a number of bank accounts at U.S. Bank (collectively, the Petters Accounts'), which Petters and his cohorts utilized to perpetrate and operate their fraudulent purchase order financing scheme." Id. ¶ 4. Specifically, Petters and PCI maintained a trust account, a funding account, and a capital account "into which Costco, Sam's Club, and other wholesale club retailers were supposed to deposit the purchase money which would become subject to a security interest in favor of the lenders." Id. U.S. Bank "managed and oversaw the flow of all funds to and from the Petters Accounts at U.S. Bank." Id. ¶ 5. Moreover, U.S. Bank entered into "collateral agreements, escrow agreements and/or deposit account control agreements pursuant to which U.S. Bank served as custodian and/or agent for the parties that held interests in the funds credited to accounts at U.S. Bank that were subject to those agreements (collectively, the Collateral Accounts')." Id. By 2006, "U.S. Bank had actual knowledge that PCI" - rather than big-box retailers like Costco - "was the true source of the incoming payments and wire transfers of funds into the Petters Accounts" and the Collateral Accounts. Id. ¶¶ 8, 42, 87. Despite its knowledge, U.S. Bank, as alleged, "deliberately re-coded its bank statements for the Collateral Accounts to conceal" the fact that PCI, rather than retailers, was making the payments. Id. ¶ 43. "[A]t the direction of Petters and his cohorts, " U.S. Bank "indicated that the source of the incoming payments was a third-party wholesale retailer, " thus giving apparent support for, and legitimacy to, Petters' fraudulent "business" model. Id. ¶¶ 43, 51. This appearance of legitimacy "enabled Petters to fraudulently induce Ritchie to make the loans to Petters." Id. ¶ 51. If Ritchie had known the truth, it would not have loaned any money to Petters and his companies. Id. ¶ 52.

Ritchie's Complaint alleges that, to further the fraud, U.S. Bank took the following specific actions: (1) the Bank "processed each payment sent by PCI and received into the Petters Accounts and Collateral Accounts, including receiving incoming wires indicating that funds were coming directly from PCI"; (2) the Bank "recorded and described each incoming payment from PCI in bank statements and records prepared for the Collateral Accounts"; (3) the Bank "deliberately re-coded its bank statements for the Collateral Accounts to" change the identity of the payer (from PCI to retailers); (4) the Bank "continued to process all of the payments sent by PCI"; and (5) the Bank "entered into a corrupt agreement with Petters and PCI to, among other things, permit PCI to establish and structure the direct payment system and Collateral Accounts at U.S. Bank to provide comfort to lenders and investors like Ritchie that Petters and PCI were operating a legitimate business." Id. ¶¶ 87, 89, 92, 107. Ritchie's Complaint further alleges that U.S. Bank's relationship with Petters "was very lucrative for U.S. Bank and it desired to continue receiving substantial fees from Petters-related accounts and the tremendous number of transfers into and out of the Petters Accounts and Collateral Accounts at U.S. Bank." Id. ¶ 119.

B. Procedural Background

On September 23, 2014, Ritchie commenced this action against U.S. Bank by filing a Summons with Notice in Supreme Court of the State of New York, New York County. Dkt. 1, Ex. A. On October 24, 2014, U.S. Bank timely removed the action to this Court.[3] Dkt. 1. On January 7, 2015, Ritchie filed its Complaint. Dkt. 4.

On February 5, 2015, U.S. Bank moved to transfer the case to the District of Minnesota, Dkt. 5, and filed a memorandum of law, Dkt. 6 ("U.S. Bank Br."), and two declarations in support of its transfer motion, Dkt. 7 ("Wilson Decl."), Dkt. 8 ("Kleinbaum Decl."). On March 6, 2015, Ritchie filed a brief in opposition to the transfer motion, Dkt. 12 ("Ritchie Br."), as well as a declaration in support of its opposition, Dkt. 13 ("Leyva Decl."). On March 13, 2015, U.S. Bank filed a reply brief. Dkt. 14 ("U.S. Reply Br."). Thereafter, U.S. Bank also filed a motion to dismiss Ritchie's Complaint, as well as a memorandum of law and ...

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