GREGORY F. KISHEL, Chief Judge.
These bankruptcy cases were commenced after the collapse of the enterprise structure of Thomas J. Petters, a Minnesota-based business promoter. In early October, 2008, Tom Petters was arrested and charged with multiple fraud-based federal criminal offenses. The United States District Court for this district (Montgomery, J.) appointed Douglas A. Kelley, Esq. as receiver, to take control of the assets of Tom Petters. Those assets included exclusive ownership interests in numerous artificial business entities that Tom Petters had controlled, most of which he had created himself. Between October 11, 2008 and October 19, 2008, the Receiver filed petitions to commence cases under Chapter 11 for the debtor-entities named above. Kelley was later appointed as Trustee pursuant to 11 U.S.C. § 1104(a) for all of these cases.
After the arrest of Tom Petters, the complicated activity that he had purveyed through his enterprise structure was termed a "Ponzi scheme" in local and national media. That nomenclature carried into the array of legal proceedings that were brought under federal jurisdiction (criminal, civil, and bankruptcy) to address the consequences of the downfall.
In the late summer and early fall of 2010, the Trustee commenced over 200 adversary proceedings in these cases. In almost all of them, he sought to avoid transfers of property that the Debtors had made to the defendants before the bankruptcy
The commencement of this litigation was part of the Trustee's general strategy in the bankruptcy process: to rectify the de facto outcomes that otherwise would have resulted from the status quo as it lay when the Petters enterprise structure collapsed. Over a period of more than two decades, the Petters-controlled entities had made tens of thousands of transfers, almost all in the form of money, to a large number and variety of lenders, "investors," charitable donees, and other parties.
By the time of the bankruptcy filings, the status quo had three salient features. First, the debt structures in the bankruptcy cases included a much smaller number of late investors into the Petters operation, that were left unsatisfied on very large and late-created debt obligations. In the pre-bankruptcy operation of the debtor-entities, a much greater number of lenders and other creditor-participants had been repaid earlier. They had the benefit of earlier satisfaction of the debts owing to them. Finally, there was a huge, and sad, insolvency; by the time of the bankruptcy filings, very little money was left in the coffers of the business entities involved, and there were relatively few hard assets to show for all of the pre-petition activity.
This sort of litigation-undertaking by a receiver, trustee, or other appointed fiduciary is made to address the large imbalance between the positions of those who got out, versus those who were still in at the collapse. It bears the unfortunate name of "clawback" in lawyers' jargon and in media reportage. In the law, however, there is no specific, dedicated set of legal remedies to address the failure of a Ponzi scheme, as such. The inequities in a post-failure status quo seem obvious; but how to gauge and prioritize those inequities, and how to redress them, in a fashion that is procedurally regular, transparent, and substantively principled?
The federal processes of receivership, bankruptcy, and other court-supervised liquidation measures have been the resort taken, as the phenomenon of failed investment schemes has burgeoned in recent years.
Ultimately, the shortfalls of existing statutory remedies highlight the deep underlying tensions in any legal response to failed, large-scale, and long-term fraudulent schemes.
It obviously cannot be a matter solely of "fairness," gauged subjectively and judicially imposed long after the fact. Our legal system is structured to protect seated property rights and to promote the reliance that underpins free commerce and the ready flow of capital. A deal is a deal, presumptively final as made; and transfers of property regular on their face are to be treated as final unless there is a specific basis, justified in established law, to disturb and reverse them.
Limited as they are to the structures of preexisting general law, serving as they do the interests of a defined group of unpaid and unsatisfied creditors, those charged with unraveling failed Ponzi schemes have resorted to the existing law of fraudulent transfer and related creditors' remedies for the authority to recapture value from those who got clear of the purveyor before the downfall.
The Trustee in these cases has done just that. The law of fraudulent transfer is the centerpiece theory of most of his "clawback" litigation. That structure comes with benefit for its invoker, but it is also subject to its original internal limitations. The exercise at bar is an effort to outline part of the extent and some of the limitations, against the incomplete state of the underlying law.
After the Trustee served complaints in the 200-odd adversary proceedings, he proposed a coordinated treatment of this large docket of litigation. He acknowledged that every proceeding had its own distinct facts. Tom Petters had transacted in a large variety of ways with a wide array of individuals, business entities, and organizations, through the vehicles of the debtor-entities. Nonetheless, as the Trustee correctly noted, there were several issues common to blocks of the adversary proceedings, that could be framed for broader rulings on the governing law. The issues would be purely ones of law — i.e., which interpretation of existing statute was the correct one, considering legislative history and intent to the extent it could be gleaned? Or, had the Trustee adequately pleaded the fundaments of his cases against the defendants?
Most of these issues could not be matched to definitive, on-point binding precedent from state or federal appellate courts. Much of the Trustee's theory of recovery had never been advanced in litigation
So, the Trustee proposed to "consolidate" the presentation of issues that were common to the defense in large numbers of adversary proceedings, and that went either to the content of his pleading or to the applicable rule of decision as a matter of law alone. The vehicle for presentation would be motions for dismissal by defendants, under Rule 12(b)(6). To get the issues before the court, there would be a coordinated effort by the defense and a single consolidated response by the Trustee.
The proposal was aired via a "procedures motion" brought in the main bankruptcy cases. Numerous defendants gave their input. The court adopted the Trustee's proposal with some modifications. A "procedures order" then was entered [Dkt. No. 961] to identify these issues and to govern the coordination of briefing and argument on them in a semi-collective way. Separate rulings on particular issues were contemplated, to be memorialized in a general frame of reference and later applied to individual adversary proceedings via rulings on their specific fact-pleading. The court concluded that these broader rulings would be best set forth in one or more memoranda, styled in the main bankruptcy cases to make the best use of electronic means for general notice to the defense.
Oral argument was presented on three separate days, on discrete groups of issues for each day. This is the first memorandum on the parties' submissions. It is set down for the group of issues that is most involved, difficult, and portentous, for the largest number of defendants.
Under a careful analysis of the presentations, the issues posed under the broad rubric of "Statute of Limitations/Timeliness of Suit" are relevant for two different tasks in the treatment of the defendants' motions for dismissal. Rulings on the issues will also enable litigant-parties to position themselves against each other, for the actual disposition of motions for dismissal or for negotiation or mediation.
The first task breaks into several inquiries: to peg a specific minimum period, fixed by limitations principles and reaching back from a specific date, for which transfers by the Debtors to defendants are vulnerable to avoidance if fraudulent; to set the beginning date of the period; and to determine the availability and operation of tolling, a "discovery allowance," or other extension in time of defendants' vulnerability to suit. These are all abstract matters of finding or choosing a rule of decision; they do not turn on the individual circumstances of any specific adversary proceeding. Thus, the rulings on these issues do not require the consideration of actual fact-pleading, whether specific to any one complaint or the common fact-pleading used by the Trustee across the docket. The recent jurisprudence under Rule 12(b)(6) — Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); and their progeny — does not apply to this task.
After that, a second task is posed by the motions for dismissal, as they go to the timeliness of suit: to gauge the adequacy of the Trustee's fact pleading as to the discovery allowance, or any other extension of the limitations period as to transfers
The sequence of analysis for the first task is best handled the way the parties organized their argument. They segregated the issues by their substantive nature and their sources in law. This breaks out into five defined issues. All of them center on the Trustee's ability to maintain suit against any particular defendant on transfers he impugns as fraudulent, via a complaint filed when he filed it and served when and as he did.
This issue goes back to the basic conundrum, articulated in the introduction: just how far back in time and how broadly might a clawback effort sweep, when it is substantively premised on the law of fraudulent transfer? The controversy here arises from the Trustee's invocation of Minnesota state law, under the empowerment of 11 U.S.C. § 544(b).
MUFTA's text does not contain its own statute of limitations, i.e., one specifically applicable to actions brought under MUFTA.
The first choice is Minn.Stat. § 541.05, Subd. 1(2), which provides for a six-year
In application, then, there is the same basic six-year window for the commencement of suit. However, for actions subject to Subd. 1(6), the limitations period does not start on the event of fraud, but rather upon its "discovery by the aggrieved party." Kopperud v. Agers, 312 N.W.2d 443, 446-447 (Minn.1981). (This interim period is sometimes called the "discovery allowance" in the case law.)
The defendants collectively
The choice between the two is important to both sides. If Subd. 1(2) applies, the Trustee's avoidance power reaches transfers that occurred within the six years that preceded the relevant date from which the limitations period reaches back.
Neither the Minnesota Supreme Court nor the Minnesota Court of Appeals has ruled on the basic, but specific, issue — the choice between the two subdivisions in the context of an action under MUFTA.
The thrust of the defense's argument on Issue # 1 is that Subd. 1(2) applies because the Trustee relies on MUFTA, a statute, as his substantive basis for seeking a judgment of avoidance and recovery against them. The defense does not deny that the Trustee's claims "sound in" fraud, in the sense that resort to fraudulent-transfer remedies generally calls to mind a notion of deception akin to that traditionally contemplated under the common law of fraud. But despite that connotative resonance, the defense insists that the application of Subd. 1(2) is compelled by the very origin of the governing law in a legislative enactment, and nothing more. The defense says it is this simple: the Trustee invokes a specific statute to provide the rules of decision on his requests for relief; he seeks the remedies provided in that statute; and therefore any resultant liability in any of the defendants is "created by statute."
In support, the defense cites Tuttle v. Lorillard Tobacco Co., 377 F.3d 917 (8th Cir.2004). In Tuttle, the court held that Subd. 1(2), with its strict-accrual approach, provided the statute of limitations for actions under the Minnesota Prevention of Consumer Fraud Act ("MPCFA"), the Minnesota Unlawful Trade Practices Act ("MUTPA"), and the Minnesota False Statement in Advertising Act ("MFSAA"). The defendants also cite a string of decisions from the United States District Court, in which Subd. 1(2) was held to apply to actions under the same statutes, plus other Minnesota legislation that provides remedies for conduct in commerce (the sale of goods) that involves deception. E.g., Moua v. Jani-King of Minnesota, Inc., 613 F.Supp.2d 1103, 1113-1114 (D.Minn.2009); Buetow v. A.L.S. Enters.,
The Trustee is correct, that the discussion in these earlier decisions does not expressly pit Subd. 1(2) against Subd. 1(6), as the source for a statute of limitations. However, at least some of these courts note that a "discovery allowance" was available under some statutes of limitation other than Subd. 1(2), and they considered these alternatives for their applicability where argued. Thus the judicial task in these cases had some semblance to the one at bar. All of these courts held that the plaintiffs' specific statutory causes of action accrued on the date of the purchase of the goods or products at issue, for the statutory limitation on the action. Thus, under these rulings, the limitations periods were to expire six years after the date of that purchase — regardless of when the plaintiffs actually discovered the alleged deception in the conduct of their opposing parties. Tuttle, 377 F.3d at 926; Moua, 613 F.Supp.2d at 1114; Klehr, 875 F.Supp. at 1352-1353; Veldhuizen, 839 F.Supp. at 676.
To counter such an outcome, the Trustee uses the analysis from a different line of authority, one from the Minnesota appellate courts. As he would have it, the mere source-point of his remedies in the legislative enactment of MUFTA in 1987 is not the telling aspect. Rather, he maintains, the deeper historical origin of fraudulent-conveyance remedies, in the received common law of Minnesota, mark them as "on the ground of fraud" in a pre-statutory sense. Hence, the Trustee argues, Subd. 1(6) must apply, with its extender for a discovery allowance.
The Trustee argues that this approach is well-founded in Minnesota precedent, specifically McDaniel v. United Hardware Distrib. Co., 469 N.W.2d 84 (Minn.1991). McDaniel was an action for damages, brought pursuant to Minn.Stat. § 176.82 on a claim of wrongful discharge from employment in retaliation for seeking workers' compensation benefits. In it, the Minnesota Supreme Court had to determine whether the action was subject to the six-year statute of limitations of Subd. 1(2), or to shorter limitations periods provided for claims for nonpayment of wages made under law other than Minn.Stat. § 176.82. The McDaniel court stated that "[Subd. 1(2) ] applies to liabilities imposed by statute, not to liabilities existing in common law which have been recognized by statute." 469 N.W.2d at 85 (emphasis added). This holding is the touchstone of the Trustee's analysis.
Citing historical antecedents of Minnesota fraudulent-conveyance law back to earlier statehood and before, the Trustee argues that MUFTA descends directly from traditional common-law authority that countenanced the avoidance remedy and the imposition of liability on transferees. In the Trustee's view, MUFTA only continued a statutory "recognition" of this far-earlier and equally-broad liability "existing at common law"; and because the original common-law claim and the statutory form are both premised on fraud committed by the transferor, any action for avoidance is a suit "on the ground of fraud." Thus, as the Trustee would have it, his claims are subject to Subd. 1(6) for their limitations, including that statute's discovery allowance.
The Trustee's theory is linear in its relative simplicity. His opponents raise a welter of arguments against it.
One strong defense theme is the insinuation that McDaniel's quoted distinction is only dicta. Beyond that, McDaniel is impugned
The insinuation is wrong. Even though McDaniel did not involve the issue at bar, the choice between Subd. 1(2) and Subd. 1(6), the case did require the components of a set of claims in suit to be categorized between Subd. 1(2) and other statutory limitations provisions that govern claims substantively arising under common law.
Thus, the cause of action in McDaniel was definitely "created by statute"; it had no antecedent expressly articulated in the common law and there had been no right to sue for the specific wrong before the enactment. Because the nature of the alleged wrong was factually distinctive and the statutory framework was enacted to address such facts, the suit could not be likened to a common law action for lost wages that would be subject to a different (and shorter) statute of limitations (under Minn.Stat. § 541.07). 469 N.W.2d at 86.
To be sure, the legal backdrop to McDaniel did not feature a discovery allowance or other durational override of an otherwise-fixed time to commence suit. Nonetheless, the case did require a distinction to be drawn between claims derived from different sources of law for which comparable measures of damages could be sought. It then required a determination whether the legal basis for those claims originated in legislative action or judicially-enunciated common law. As such, McDaniel's cleaving line is not extraneous to that case's outcome. It definitely
The Trustee relies on McDaniel to take his fraudulent transfer claims from the governance of Subd. 1(2). His theory is that these remedies "exist[ed] at common law" in Minnesota from early statehood; that the first enactments of fraudulent conveyance legislation only "recognized [the remedies] by statute"; and that the essence of the remedies remained the same through the enactment of MUFTA, the current law, in 1987. Thus, he insists, the line of descent makes his avoidance claims "on the ground of fraud," subjecting the limitations period to extension under the statutory discovery allowance.
Certain parts of this genealogy are established beyond dispute. A creditor's remedy against fraudulent conveyance was present in the law of early-modern England, recognized judicially and also embodied in the statute of 13 Elizabeth Ch. 5. E.g., Orr v. Kinderhill Corp., 991 F.2d 31, 34 (2d Cir.1993) (pointing to recognition of fraudulent conveyance principles in Twyne's Case, 76 Eng.Rep. 809 (Star Chamber 1601)). See also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 43, 109 S.Ct. 2782, 2790-2791, 106 L.Ed.2d 26 (1989) (recognizing that "actions to recover... fraudulent transfers were often brought at law in late 18th-century England"). The notion of fraudulent conveyance and the structure of a remedy against it were received into the judicially-enunciated law of Minnesota very early. Significantly, that receipt was articulated as an adoption of common law. E.g., Byrnes v. Volz, 53 Minn. 110, 54 N.W. 942, 943 (1893); Benton v. Snyder, 22 Minn. 247, 1875 WL 3901, *1 (1875); Blackman v. Wheaton, 13 Minn. 326, 331, 1868 WL 1903, at *3.
As well, early Minnesota legislatures enacted statutory provisions to govern the remedy for fraudulent conveyance. Gere v. Murray, 6 Minn. 305, 1861 WL 1869, *3 (1861). Even later in the 19th century, the Minnesota Supreme Court recognized that the remedy under adopted common law had continuing vitality itself, even as the court cited the local fraudulent-conveyance legislation in its rulings in the same opinion. Byrnes v. Volz, 54 N.W. at 943; Blackman v. Wheaton, 13 Minn. at 330-331, 1868 WL 1903, at *3.
And directly to the point of the Trustee's McDaniel-structured analysis, the Minnesota Supreme Court expressly characterized these early local statutes as "but declaratory of the common law," just as the original statute of Elizabeth had been. Blackman v. Wheaton, 13 Minn. at 330-331, 1868 WL 1903, at *3; Byrnes v. Volz,
The defense does not deny this analysis, to the extent it speaks to the first and earliest Minnesota fraudulent-conveyance legislation. The attack on the Trustee's theory goes to the categorization of current law, MUFTA, the actual basis of the Trustee's suit. The defense's position is straightforward: even if Minnesota's original fraudulent conveyance statute had abstract coincidence to a claim for fraud under the common law, an ensuing 150 years of legislative amendment, repeal, and enactment have altered and expanded the law of fraudulent transfer in Minnesota — so greatly that the current variant, in its indivisible whole, gives rise to "liability created via statute" and nothing else.
But is this so, that the governing law is the product of such a sea-change?
The Trustee strenuously denies that, but he does so in a fairly conclusory way. He cites the holding of the Minnesota Supreme Court that the predecessor of Subd. 1(6) applied to the pre-UFCA statute, Brasie v. Minneapolis Brewing Co., 87 Minn. at 461-463, 92 N.W. at 342. He then quotes a later observation that the text of Minnesota's 1921 adoption of the UFCA was a "codification and an extension of our former law," Lind v. O.N. Johnson Co., 204 Minn. 30, 282 N.W. 661, 666 (1938). And then he quotes the statement of the drafters of the original model law,
As the defendants' various arguments show, it is neither as easily done nor as blithely said as that. Nonetheless, once the defendants' points are parsed through, the outcome urged by the Trustee is the better-supported one. Over the course of Minnesota's statehood, the facial and mid-level accretions to the substance of the statute of 13 Elizabeth did not enlarge the true scope of the remedy. Nor did they materially alter the proof required to get it. Current fraudulent transfer law in Minnesota remains in essence as a conduit of relief to creditors who otherwise would be mulcted out of their possible recovery, by their debtors' acts to hide or remove assets from the creditors' collection remedies. The remedy has been recast, reorganized, and limned in a modified vocabulary by two major replacements of statutory
The defendants compared various aspects of the several statutes, to challenge the Trustee's theory of continuity. Other points to address appear from a deeper reading of the law's genealogy.
The first can be recognized right away as unequivocal support for the Trustee's theory. The first post-statehood fraudulent conveyance statute in Minnesota mirrored the New York statute in covering "[e]very conveyance or assignment ... of any estate or interest in lands, or of goods, chattels, or things in action." However, an 1863 amendment removed outright transfers of personalty (i.e., those not made into a trust) from its coverage. Compare Minn.Stat. Ch. 41, § 18 (1858) with Minn. Stat. Ch. 41, § 18 (1863) (the latter lacking the phrase "goods, chattels, and things in action" as potential subjects of a fraudulent transfer). Between 1863 and the 1921 adoption of the UFCA, fraudulent transfers of personalty were still subject to challenge, under the preexisting common law rule. Byrnes v. Volz, 53 Minn. at 114-115, 54 N.W. at 943.
The UFCA, by a provision codified locally at enactment at former Minn.Stat. Ch. 68, § 8467 (1923), brought fraudulent transfers of personalty (identified there as "goods and chattels") back under statutory governance. They remain there under MUFTA. See Minn.Stat. § 513.41(2) (defining "asset"-subject of challenged transfer, as "property of a debtor," without distinction between realty and personalty). Thus, if anything, the respective enactments of the UFCA and MUFTA actually reconform the scope of fraudulent transfer remedies under modern statute to the originals under the common law. This makes out one (temporarily interrupted) continuity in the line of descent through statute, to support the genealogy posited by the Trustee.
For their part, the defendants emphasize four other, salient aspects of Minnesota's modern, post-1921 fraudulent transfer law. They characterize these provisions as large discontinuities. As they would have it, these provisions so expanded the nature and scope of preexisting law as to fully supplant the historical original. This would make "liability" under MUFTA "created by statute" and hence governed by Subd. 1(2).
The second of these alleged departures (the one most emphasized by the defendants) is the grant of remedies under the UFCA and MUFTA to "general" unsecured creditors, i.e., those that do not have judgments against transferor-debtors.
It is true that, before the UFCA's enactment, Minnesota fraudulent conveyance law required a creditor to reduce its claim to judgment before it could seek to have a transfer of property by its judgment debtor set aside as fraudulent. Brasie v. Minneapolis Brewing Co., 87 Minn. at 460, 92 N.W. at 341 (describing three procedures to have fraudulent conveyance set aside, all of them requiring creditor to have received judgment against transferor-debtor); Wadsworth v. Schisselbaur, 32 Minn. 84, 19 N.W. 390, 391 (1884) (requiring creditor to have obtained post-judgment lien, via levy on personalty or docketing of
It is also true that the UFCA eliminated this prerequisite. Via its definition of "creditor," it allowed "a person having any claim [against a transferor], whether matured or unmatured, liquidated or unliquidated, absolute, fixed, or contingent" to bring action to set aside a fraudulent conveyance. Minn.Stat. Ch. 68, § 8475 (1923). See also Minn.Stat. Ch. 68, §§ 8483-8484 (1923) (granting rights of action to creditors with matured and unmatured claims). Finally, on its enactment in 1987 MUFTA carried forward the UFCA's broader grant of statutory standing for the remedy. Minn.Stat. §§ 513.41(4) ("`Creditor' means a person who has a claim.") and (3) ("`Claim' means a right to payment, whether or not the right is reduced to judgment....").
As the defendants would have it, the 1921 statutory change "extend[ed] the right to bring a preexisting common law cause of action to a new set of plaintiffs," making it something created by statute that went far beyond any mere codification of the common law. GECC's Reply Memo, 9 (citing Aetna Life and Cas. Co. v. Nelson, 67 N.Y.2d 169, 501 N.Y.S.2d 313, 492 N.E.2d 386, 389 (1986) for a proposition that "where statute afforded new category of plaintiffs ... right to sue" on preexisting cause of action, it was "not a mere codification" of the common law that previously governed).
This argument is not viable. Yes, the 1921 legislation was recognized generally as "an extension of former law." Lind v. O.N. Johnson Co., 282 N.W. at 667. However, this facial change was not an extension in substance. The change was defined solely in terms of the affected party's procedural posture in a process of civil litigation. There was no change in the substantive qualification for membership in the simply-defined, general class of parties that had long been protected by the overall legal regime of fraudulent conveyance — which is to say, the creditors of a fraudulently-conveying debtor, those that claimed an extrinsic right to payment from the debtor. This provision did not change the substantive requirements to obtain the relief. It only "add[ed] an efficient, optional, and additional remedy" for a creditor that had not yet taken the procedural expedient of suing through to judgment — "a simple creditor," yes, but a creditor nonetheless. Id. See also Bridgman, UFCA in Minnesota, 7 Minn. L.Rev. at 541 (characterizing deletion of prior requirement of judgment as a "change of procedure which reduces the delay," "sav[ing] great delay and circuity of action," by allowing creditor to use single action to sue debtor for judgment on debt
If one considers the "relief" in question (to use the terminology of Subd. 1(6)), there is no difference — the remedy as a whole was created long ago to redress a wrong to creditors generally.
The direct ancestry of MUFTA in the common law of fraud, then, is not sundered by the UFCA's facial abrogation of a procedural prerequisite for suit.
Third, the defense asserts that "the UFCA established a cause of action for constructive fraudulent transfer for the first time in Minnesota," as a decisive break from the common law into exclusive governance by statute. GECC's Reply Memorandum, 9.
A constructively-fraudulent transfer is proven without evidence of the transferor's actual intent, where a debtor, then-insolvent or to be rendered insolvent, did not receive value commensurate to the value of the asset transferred. Under current law, this is provided by Minn.Stat. § 513.44(a)(2). That statute provides in pertinent part:
The defense acknowledges that the UFCA included a predecessor-provision, Minn. Stat. Ch. 68, §§ 8478, 8780 (1923). But, it insists, law preexisting the UFCA did not contemplate the remedy being available on anything other than hard proof of the debtor-transferor's actual intent to hinder, delay, or defraud creditors.
This argument is correct, in a purely abstract sense that goes to statutory structure and syntax. However, it ignores a strong continuity in the legal substance that actually controlled the remedy, under the Minnesota Supreme Court's construction of prior statute and the original common law.
Following its New York antecedents, pre-UFCA statute in Minnesota did contain a facial requirement of actual intent to defraud. Minn.Stat. Ch. 51, § 4 (1858) (fraudulent intent is question of fact that cannot be adjudged solely on proof of lack of valuable consideration); Minn.Stat. Ch. 68, § 7015 (1913) (same). See also Bridgman, UFCA in Minnesota, 7 Minn. L.Rev. at 530 (before promulgation of UFCA, small number of states statutorily recognized fraudulent conveyance on articulated constructive-fraud theory that expressly did not require proof of intent; but that was never the rule under Minnesota's statutes).
However, in recognition of the invariable difficulties of proving actual intent by direct evidence, the Minnesota courts recognized a presumption of fraudulence as to existing creditors, where a debtor conveyed without receiving consideration and either was insolvent or did not retain property sufficient to pay his existing debts. E.g., Underleak v. Scott, 117 Minn. 136, 134 N.W. 731 (1912); Thysell v. McDonald, 134 Minn. 400, 159 N.W. 958, 960 (1916).
And, in at least two early opinions the Minnesota Supreme Court considered the presumption to be difficult to rebut, at least when triggered on certain combinations of proof. Henry v. Hinman, 25 Minn. 199, 1878 WL 3585, *2 (1878) (debtor's transfer of all assets to relative for nominal sum and promise of future support "is, in the absence of proof of other property left to satisfy creditors, a clear prima-facie case of an intent to defraud creditors — one which requires strong evidence to overcome"); Truitt Bros. & Co. v. Caldwell, 3 Minn. 364, 1859 WL 3104, *7 (1859) ("an assignment of an insolvent debtor, providing for a resulting interest to the assignor, without paying all the creditors, is of itself evidence of actual fraudulent intent, due to "[t]he legal effect of
The same principles, then, were placed into a facially-separate basis for liability under a successor statute. This probably stemmed from the same functional considerations of proof and judicature. The codification of constructive-fraud theory served in the main to impose a uniform, objectively-articulated standard, to remedy prior inconsistencies in the judicial framing of the presumption. Bridgman, UFCA in Minnesota, 7 Minn. L.Rev. at 530 ("the decisions [were] in some confusion because the rule of presumptive fraud [was] not stated in all cases the same...."). The legislation "introduced certainty in the matter," because it "stated the rule [under Underleak and other preexisting case law] without requiring a stretching of judicial construction." Id. See also Nat'l Surety Co. v. Wittich, 184 Minn. 44, 237 N.W. 690, 692 (1931) (comparing UFCA provision in application, to rule of Underleak and other decisions).
As to a constructively-fraudulent conveyance, then, the UFCA had a near-wholesale transplantation of the basic substance of liability from prior judicial construction of early statute and preexisting common law. This was not a fresh legislative grant of rights of action to a wholly new class of parties, who had not been protected under the common law. The change did not "create" something "truly new."
The replacement of the UFCA by MUFTA made a few alterations to the sense of a constructively-fraudulent transfer, but they are not material to the analysis between Subds. 1(2) and 1(6).
Contrary to the defense's argument, this provision reflects and codifies longstanding Minnesota precedent that imposed liability on a violation of fiduciary status. For over a century, the Minnesota Supreme Court has held that directors of an insolvent corporation who are also creditors of it "cannot secure to themselves any advantage or preference over other creditors"; and when they do, "equity will set aside the transactions at the suit of creditors of the corporation, ... without reference to... actual fraudulent intent on the part of the directors, for the right of the creditors does not depend upon fraud and fact, but on the violation of the fiduciary relation of the directors." Taylor v. Mitchell, 80 Minn. 492, 83 N.W. 418, 420 (1900). See also Snyder Electric Corp. v. Fleming, 305 N.W.2d 863, 869 (Minn.1981); St. James Capital Corp. v. Pallet Recycling Assocs. of N. Am., Inc., 589 N.W.2d 511, 514 (Minn.Ct.App.1999) (reaffirming continuing viability of remedy against officers and directors, under principles of fiduciary duty, but declining to extend it beyond liability for self-dealing).
At its core, insider liability under this provision of MUFTA is nothing new. As part of a comprehensive body of uniform legislation promulgated elsewhere, it was likely not intended to codify the preexisting Minnesota authority in specific. But there is no doubt that it embodies the same principles, though subject to some changes in the enunciated requirements.
Liability under MUFTA's insider provisions thus is not "created by statute." Its articulation in MUFTA gives no basis to apply Subd. 1(2) to a suit under the isolated provision of Minn.Stat. § 513.45(b), or under any other provision of MUFTA.
The fifth and last aspect proffered as a UFCA-created change is the standing to sue afforded "future creditors" — that is, creditors whose claims against a debtor-transferor come into existence after the challenged transfer.
Before the enactment of the UFCA, there was authority in Minnesota for the proposition that proof of a debtor's actual intent to defraud existing creditors — those that held claims at the time of an outright transfer — would not satisfy the intent element for a "future creditor" that sued to set aside the same transfer. Coulter v. Meining, 143 Minn. 104, 172 N.W. 910, 912 (1919) (citing Fullington v. Northwestern Breeders' Ass'n, 48 Minn. 490, 51 N.W. 475 (1892)). See also, e.g., Williams v. Kemper, 99 Minn. 301, 109 N.W. 242 (1906); Stone v. Myers, 9 Minn. 303, 1864 WL 1422, *6 (1864). Under this line of authority,
With the adoption of the UFCA, however, actual intent ("as distinguished from intent presumed in law") to defraud either present or future creditors could render a transfer fraudulent as to both classes. Minn.Stat. Ch. 68, § 8481 (1923). The wording of MUFTA's treatment of this point is somewhat different; but the effect is the same. See Minn.Stat. § 513.44(a) (2012) (transfers may be held fraudulent as to present or future creditors). Cf. Minn. Stat. § 513.45 (transfers may be held fraudulent as to present creditors, on stated elements that differ from those of Minn. Stat. § 513.44(a)).
Contrary to the defense's argument, the line of demarcation between the rules of decision here is not knife-sharp. In an earlier opinion, the Minnesota Supreme Court had observed, as "well settled," that where voluntary conveyances are actually fraudulent, and "the purpose or effect of the same is to prejudice subsequent creditors, such conveyances will also be void as to them" — even as the same court recognized the need to demonstrate "additional facts tending to prove fraud in fact, [to] apply to cases of subsequent indebtedness." Walsh v. Byrnes, 39 Minn. 527, 40 N.W. 831, 832 (1888). Whatever its derivation, this pronouncement seems to contemplate the use of proof of fraudulent intent to the benefit of either class of creditors. Its presence in pre-UFCA case law shows that the transition on the UFCA's enactment was not as abrupt on this point as the defense characterizes it.
As a result, MUFTA's greater cross-applicability of proof of intent for creditor-plaintiffs of both classes looks more like an incorporation of that earlier, variant line of decision under the common law of fraudulent conveyance and the judicial construction of earlier statute. This again undercuts the argument for characterizing liability under MUFTA as "created by statute," and bolsters the classification of relief under MUFTA as "on the ground of fraud."
The core of relief under MUFTA is traceable back to the common law; and the aspects of the statutory regime that are more extensively restructured or rearticulated still have their antecedents, in common law and its intermediate descendants in statute. Under an analysis informed by McDaniel, the basis for applying Subd. 1(6) as the limitations period for the Trustee's avoidance litigation is far stronger than the case for Subd. 1(2).
All of this presupposes that McDaniel furnishes the rule of decision. This conclusion seems self-evident, despite the defense's strenuous cavil. At this point, it is appropriate to address the defense's pitch for a different source of authority for the rule of decision of federal origin, which the defense would parlay to compel a different outcome. That, as noted earlier (pp. 11-12), is Tuttle v. Lorillard Tobacco Co., 377 F.3d 917.
Tuttle came out of the waive of litigation against manufacturers of tobacco products in which ailing tobacco users, or their survivors, sought recoveries on the theory that the manufacturers had fraudulently concealed from the consuming public the health-related risks of tobacco usage. The widow-plaintiff in Tuttle had sued in the federal courts under theories of common law fraud, negligence, and conspiracy, plus various Minnesota statutes that are sometimes colloquially termed "consumer fraud laws."
Because of the lapse of time between the decedent's purchase and usage of tobacco and the commencement of suit, the applicable statute of limitations was a key issue for the litigation. The District Court for the District of Minnesota granted summary judgment to the defendants, on alternate bases including the expiration of applicable limitations periods before the commencement of suit. On appeal, the Eighth Circuit affirmed the district court's dismissal of the plaintiff's claims under the Minnesota Prevention of Consumer Fraud Act, Minn.Stat. § 325(f).68, et seq.; the Minnesota Unlawful Trade Practices Act, Minn.Stat. § 325(d).09, et seq.; and the Minnesota False Statement in Advertising Act, Minn.Stat. § 325(f) 67. It did so on its "agree[ment] with the district court that the consumer protection claims [under those statutes] depend on the purchase of a product within the applicable six-year limitations period," which it deemed to be that under Subd. 1(2). 377 F.3d at 926.
The defense uses the term "statutory fraud claims" to identify the Tuttle plaintiff's claims under these statutes. It insists that Tuttle creates a sharp cleaving line between any action brought on any Minnesota statute (even if the statute incorporates any of the structure of the legal concept of fraud), and an action pleaded specifically on the common law of fraud.
The problem is, that articulation does not appear in the text of Tuttle and it does not feature at all in the reasoning for the outcome on appeal. Nor does the phrase "statutory fraud claim." The Tuttle court stated that the plaintiff's "statutory claims are governed by [a] six-year statute of limitations," emphasis added, and then cited Subd. 1(2). It went on to note that, "[h]owever, `[t]his provision does not include a discovery allowance as does the statute of limitations applicable to fraud claims.'" 377 F.3d at 926. For that holding, it cited Klehr v. A.O. Smith Corp., 875 F.Supp. 1342, 1352-1353 (D.Minn. 1995), aff'd, 87 F.3d 231 (8th Cir.1996), aff'd, 521 U.S. 179, 117 S.Ct. 1984, 138 L.Ed.2d 373 (1997). Klehr was a trial court decision that similarly presupposed that its claims were classified under Subd. 1(2), without discussion of why any alternative was not suitable. And, perhaps tellingly, Tuttle did not even use the terms "consumer fraud claims" to denote the statutory claims it treated; rather, the references are to "consumer statutes" and "consumer protection claims."
Those references were no accident, because Tuttle did not present the issue so sharply outlined here, i.e., the choice between Subds. 1(2) and 1(6) for an action brought under a statute that is argued to be directly in the nature of a common law claim for fraud, or decisively not in that nature. Tuttle does not contain any analysis of the essence of its statutory causes of action. It does not cite McDaniel as an aid to analysis under Subd. 1(2). And it does not use a McDaniel-styled analysis at all.
As much as Tuttle speaks to the issue squarely before that court, its authority
On those considerations, it is clear that the Trustee seeks relief "on the ground of fraud" through his claims under MUFTA, and that the limitations period of Minn. Stat. § 541.05, Subd. 1(6) governs.
So,
The second issue posed by the defense is the effect to be given to the running of time post-bankruptcy up to the statutory deadline for commencement of suit by the Trustee, 11 U.S.C. § 546(a)(1)(A),
The defense argues that the two periods "run at the same time" and cannot cumulate.
Put another way, if the defense is correct, in a bankruptcy case the six-year base limitations period under state law runs back from the date on which a proceeding for avoidance under § 544 is actually commenced in the bankruptcy case, as long as that was before the deadline fixed by § 546(a)(1).
The defense does not cite any binding precedential authority from the Eighth Circuit or any from the lower local federal courts. There is none. The defense argument is largely built on the strength of "policy," said to be articulated in McCuskey v. Central Trailer Servs., Ltd., 37 F.3d 1329, 1331 (8th Cir.1994).
For his part, the Trustee cites on-point rulings from other federal jurisdictions. These decisions are not precedential but the Trustee insists they are strongly persuasive. E.g., In re Antex, Inc., 397 B.R. 168 (1st Cir. BAP 2008); In re Bernard L. Madoff Inv. Secs. LLC, 445 B.R. 206 (Bankr.S.D.N.Y.2011); In re American Energy Trading, Inc., 291 B.R. 159 (Bankr.W.D.Mo.2003).
The Trustee urges that § 546(a)(1) be construed as it was in these decisions, specifically in the context of avoidance pursuant to § 544, with its incorporation of the substance of state law including limitations periods under state law.
For the defense's argument, two points dictate caution in using McCuskey as readily or as heavily as urged. One is context-based, one is structural.
First, McCuskey did not treat the issue at bar, or anything close to it. The plaintiff in McCuskey was a trustee under
Second, the McCuskey court applied a statutory text made significantly different by intervening Congressional action. Section 546 was amended by the Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, 108 Stat. 4106, 4126-4127 (1994). The previous language was markedly less complex in its provisions to fix the deadline for suit.
There is a further difficulty with using McCuskey to glean a "policy" behind § 546 that would generally apply to all avoidance proceedings under Chapter 5. McCuskey dealt with a federally-created and structured avoidance power — under 11 U.S.C. § 547(b) — rather than a federally-enabled one — as under 11 U.S.C. § 544(b). For preferential transfers under § 547(b), there is no separate applicable statute of limitations that fixes a "reachback" from the commencement of suit toward a subject transfer, for timeliness considerations. The window of vulnerability to avoidance is in the substantive elements under the statute — 11 U.S.C. § 547(b)(4) — and it dates back from the commencement of the bankruptcy cases. Section 546(a) then applies to set a deadline looking forward, for the exercise of the avoidance power in the administration of the estate. It divests the estate of the power (and the potential recovery) if suit is not timely commenced within the specified confines of the bankruptcy case.
On the other hand, § 544(b)(1), the empowerment under which the Trustee has invoked MUFTA, does not contain any textual provision for reachback; and of course neither does MUFTA itself. Any broader policy toward the repose of aging claims is effectuated in this context by the general state statute of limitations.
Outside of bankruptcy the analysis of limitations periods is made against two readily-fixed points: the date of the alleged injury and the date of commencement
In bankruptcy, a trustee inherits the results of the acts and experiences of a third party, the debtor. By tacit definition, the trustee was not to have been involved in them.
Such deference has been forthcoming from the courts. Most often though, it has been on vague grounds of a "strong policy goal[ ] involved," toward "foster[ing] a trustee's ability to recover property for the benefit of the estate." In re Bernard L. Madoff Inv. Secs. LLC, 445 B.R. at 230-231. This sort of pronouncement recognizes the reality of the problem. But, it does not give the comfort of an objective basis in external law, as statute-based adjudication would dictate.
With that thought, the defense points out that § 546(a) has no provision on its face for the tolling of any external limitations period, as contrasted with 11 U.S.C. § 108(a).
Neither side recognizes the real source of the answer. For the Trustee's litigation under § 544(b), the operation of a reachback is fixed by statute just as it is by § 547(b)(4) — more subtly, but just as firmly. The interaction among several governing statutes is the key.
In exercise of the Code's "strongarm" powers, a trustee is allowed to:
11 U.S.C. § 544(b)(1). A "creditor" is "an entity that has a claim against the debtor that arose at the time of or before the order for relief against the debtor." 11 U.S.C. § 101(10)(A). The referent creditor here must have a claim "allowable" in the bankruptcy case. This means, first, that the creditor must have had a "right to payment" from the debtor. 11 U.S.C. § 101(5)(A) (definition of "claim"). In turn, that "claim" may be "allowed" for the purposes of the bankruptcy case and the administration of the estate, as it stood in validity and amount under nonbankruptcy law "as of the date of filing of the bankruptcy petition." 11 U.S.C. § 502(b) (preamble).
If a creditor qualifies as such within the understandings of bankruptcy law, its attendant rights under state law follow that status. In the sense of the validity and amount of its claim, this applies to the place of the creditor's claim in the administration of the estate, i.e., for distribution. But it also has to apply to other provisions of the Bankruptcy Code that implicate different aspects of the position or status of such a creditor. Thus, if such a referent-creditor would have had the right to bring suit to set aside a fraudulent transfer as of the date of the bankruptcy filing, the trustee can use that referent-creditor's standing to sue on behalf of the bankruptcy estate. The right would be established by the possession of a legally-enforceable right to payment from the debtor, and a subject transfer that fell within the applicable limitations period as of that date. The trustee then would have to prove the same case for avoidance that the creditor would have had to meet outside of bankruptcy.
By vesting the trustee with such derivative standing, the interaction of all of these provisions clearly contemplates a reachback
The defense asperses those courts that articulated the recognition of a cumulating on more functional considerations, like "breathing room" for the trustee and the realities of the burden of estate administration. As apt as these connotative considerations may be, they are not the reason why the Trustee has the options he has.
Thus,
With the specific statute of limitations established and the base six-year period of vulnerability to suit fixed in time in relation to the Debtors' bankruptcy filings, the focus shifts to the major thrust of the Trustee's avoidance effort. The issue now is: how much further back than the six-year period can the Trustee reach to avoid transfers by a subject Debtor to any of the defendants?
Subd. 1(6) requires a discovery allowance to be considered, on a plaintiff's assertion that a right of suit in the nature of fraud did not accrue because it was not capable of discovery until after the relevant events. The Trustee has invoked the discovery allowance. Numerous defendants took issue with that. In the context of a bankruptcy case, the threshold point is the identity of the party as to which the discovery allowance is to be gauged on its terms.
The discovery allowance was not the only basis on which the Trustee urged that the limitations period be extended or eased. He asserts that he would have the benefit of non-statutory tolling doctrines as well. At various points, the Trustee has asserted them as if they applied regardless of whether Subd. 1(2) or Subd. 1(6) governed. At others he appeared to concede that one or all of them would not, if Subd. 1(6) governed with its discovery allowance.
As a judicial hedge if nothing else, it is prudent to treat these theories as if the Trustee were maintaining them all. The threshold point actually spans these theories.
Under Subd. 1(6), a cause of action "on the ground of fraud ... shall not be
To establish his right to this discovery allowance, the Trustee points to the obvious, in a general way and in a specific. First, a Ponzi scheme is sustained only so long as unwitting lender-investors continue to infuse large sums of cash.
The Trustee insists that a plaintiff seeking to set aside earlier transfers out of a long-running Ponzi scheme should not have its rights to suit cut off by a strict application of the base six-year period. As he points out, all such lenders were gulled, but the last-in creditors were misled to far greater prejudice. The Trustee urges a liberal application of the discovery allowance in the context of these cases, in recognition of the pervasive fraud. He argues that no creditor could have learned of the fraud until the whole artifice collapsed in the late summer of 2008. With some gumption, the Trustee argues that this could expose all transferees back to the inception of the whole scheme, if a means of discovering the fraud was not available until the very end.
In litigation by a trustee in bankruptcy, the discovery allowance poses a threshold issue: who or what is the "aggrieved party," as to which the relevant notice or knowledge is to be determined to fix the allowance and its effect? This point is material in its own right, and the same question cascades through the defense's other theories for dismissal.
In his initial written briefing, the Trustee argued on the assumption that he was the aggrieved party. He cited decisions from other jurisdictions (most arising out of clawback litigation in Ponzi scheme cases) in which that status was deemed as an unspoken postulate. Trustee's Omnibus Memorandum, 60-61. In the next breath, the predictable pitch came: it was not possible for the Trustee himself to have had any knowledge, personal or imputed, before the Petters scheme was subjected to federal jurisdiction.
This way of conceiving the problem feels like a tautology. The circularity comes from the nature of bankruptcy, as an ameliorative legal process that is started long after any act becomes the subject of avoidance litigation. Because of that, the late-arrived steward of an estate that is created only in that process could not possibly be subject to any legal onus that otherwise would be imposed by a deemed notice that predated the date of appointment. Before appointment, a trustee (or receiver) is not even there, i.e., in the status of a potential party-litigant.
This argument is just too pat. The deferral of the onus of investigation of suit, and their effect on the limitations period, loop around to create themselves; and they are entirely self-serving.
Later in the submission of this issue, the Trustee's premise shifted.
This is the correct approach, because it is consistent with the statutory structure. It pushes the Trustee's derivative standing to the boundaries of the statutory limitations analysis, consistently with its application in the other parts.
The existence of notice or knowledge for discovery-allowance purposes will be specific to each bankruptcy case from which a given avoidance proceeding arises. The possible cutoff of an unlimited discovery allowance under Subd. 1(6) will turn on the actual, historical facts involving the predicate creditor in whose status the trustee sues in any particular adversary proceeding. If as of the date of the bankruptcy filing the predicate creditor truly knew nothing of the "facts constituting the fraud" of the Ponzi scheme, then the reachback extends as the Trustee argues. If before the bankruptcy filing the predicate creditor knew or discovered enough to equate to a discovery of the facts,
So,
The Trustee structured his original argument in alternate tracks, to cover his request for an extension of the base period whether Subd. 1(2) were adopted or Subd. 1(6). Against an adoption of Subd. 1(2), he argued for several judicially-created tolling doctrines to substitute for the statutory discovery allowance. At various points, the Trustee seemed to argue that one or more of these alternatives applied even if Subd. 1(6) were the statute of limitations.
In the end it is not entirely clear that this is his position. From the standpoint of raw advocacy it is not inconceivable, though. By its internal articulation, at least one of the alternate doctrines would involve an easier burden in proof, via simpler and less proceeding-specific elements.
Whether the Trustee really advocates the cumulation of the judicially-created tolling doctrines with Subd. 1(6) or not, all of them will be treated. Conceptually, some of them overlap with the underpinnings of the discovery allowance. In any event, with applicability and/or substance unsettled throughout this palette of law, a comprehensive treatment of all alternatives is appropriate. This is made more challenging by a dearth of precedent from the Minnesota Supreme Court, about two of the doctrines at all and about the scope of the third. In such a situation, a federal court is still to "ascertain and apply" the "state law that supplies the rule of decision... even though it has not been expounded by the highest court of the State." Fidelity Union Trust Co. v. Field, 311 U.S. 169, 177, 61 S.Ct. 176, 178, 85 L.Ed. 109 (1940). The "job is to predict what the Supreme Court of [the State] would do if faced with the case before" the federal court. In re
The Minnesota courts have long recognized that the running of the statute of limitations may be tolled where the factual bases of a cause of action were fraudulently concealed. E.g., Schmucking v. Mayo, 183 Minn. 37, 39-41, 235 N.W. 633, 633-634 (1931). Tolling operates on a statute of limitations that has already begun to run, on a cause of action that has already accrued. Kopperud v. Agers, 312 N.W.2d at 446.
The Trustee argues that the base limitations period for his MUFTA claims was tolled almost indefinitely by the long-term deliberate acts of Tom Petters and his confederates to conceal the existence and operation of the Ponzi scheme. The defense strenuously denies that proposition, based on prominent aspects of the Minnesota courts' articulation of the doctrine.
The notion of intentional concealment certainly has relevance for the statutory discovery allowance under Subd. 1(6). The circumstances, strength, and duration of an effort to hide a fraud bear logically on any plaintiff's claim that it could not have learned of the basic facts constituting the fraud and should not be held to a deemed notice of them. E.g., Duxbury v. Boice, 70 Minn. 113, 72 N.W. 838, 839-840 (1897) (Wm. Mitchell, J.) (equitable roots of statutory discovery rule dictate that "the means of discovery are equivalent to actual discovery, and that a party must be deemed to have discovered the fraud when, in the exercise of proper diligence, he could and ought to have discovered it").
However, by its own terms the equitable doctrine of fraudulent concealment applies to cases of concealment by the party against which the cause of action lies, i.e., by the named defendant(s). Williamson v. Prasciunas, 661 N.W.2d 645, 650 (Minn.Ct.App.2003) (focusing on "the defendant's conduct" in concealment); Haberle v. Buchwald, 480 N.W.2d 351, 357 (Minn.Ct.App.1992); Goellner v. Butler, 836 F.2d 426, 431 (8th Cir.1988) (applying Minnesota law); Helleloid v. Ind. School Dist. No. 361, 149 F.Supp.2d 863, 868 (D.Minn.2001) (fraudulent concealment tolls statute of limitation where "the defendant has engaged in some behavior that has had the purpose and effect of concealing....").
The defense insists that the doctrine cannot be extended consistent with the underlying equitable considerations, to cases where the fraudulent concealment was by a third party not named as a defendant. This argument is entirely justified on the foundational principles. The doctrine's override of a statutory limitations period is equitably justified when strict enforcement of the law would give the unfair benefit of repose to a defendant that had connived. Where the conniver was a third party and the defendant was equally gulled by the fraudulent concealment, there is a lack of the fundamental unfairness that the doctrine is designed to ameliorate.
On its own terms, then, the doctrine of fraudulent concealment does not apply independently to toll the limitations period for the Trustee's MUFTA claims against any of the defendants.
Anticipating the failure of that theory, the Trustee asserted the doctrine of equitable tolling as a different measure to extend the reachback under MUFTA.
This judicially-created theory also had roots in the discovery rule. Under it, a limitations period is tolled "when the plaintiff, despite all due diligence, is unable to obtain vital information bearing on the existence of his claim." Comcast of Ill., X, LLC v. Multi-Vision Elecs., Inc., 2005 WL 2177070, *5 (D.Neb.2005). The considerations for this variant of tolling go to the plaintiff's de facto ability to recognize and assemble a basis for suit, a case on the merits. Hence, the focus is on the plaintiff's knowledge, awareness, and intent. The application of equitable tolling does not require a showing of misconduct on the part of the defendant. Dring v. McDonnell Douglas Corp., 58 F.3d 1323, 1328-1329 (8th Cir.1995).
The Trustee pitches equitable tolling as particularly appropriate for litigation on wrongdoing done through a Ponzi scheme, as opined in In re Int'l Mgmt. Assocs., 2010 WL 2026442, *5 (Bankr.N.D.Ga.2010). Given the unique alignment of parties in avoidance litigation in Ponzi-scheme cases, this argument has some cogency.
However, the equitable tolling doctrine that the Trustee relies on was articulated by the federal courts. It is not a feature of Minnesota state jurisprudence. As held earlier, the Trustee's reliance on Minnesota substantive law means that the attendant Minnesota law of limitations applies — and Minnesota law only. E.g., Great Plains Trust Co. v. Union Pacific R.R. Co., 492 F.3d 986, 995 (8th Cir.2007). All of the cases that the Trustee cites involved statutes of limitation imposed by federal law. Any application of equitable tolling by other jurisdictions that is expressly premised on the limitations law of their own forum states is not relevant, if the principle has not been adopted in the Minnesota state courts.
The Trustee does not expressly request a ruling that the Minnesota Supreme Court would extend its tolling jurisprudence to adopt the additional, and broader, doctrine of equitable tolling. Even if he had, there again do not seem to be any bases for making that inference, in dicta, rulings on points under other law that address subsidiary aspects common to both, and the like. This may be only a result of the right sort of case not yet making it to the appellate level in Minnesota. But it is also a caution that the adoption of equitable tolling would be a slippery slope, given the tilting of its fairness-based considerations markedly toward one side. In application it could become quite slanted and increasingly deviant
The doctrine of equitable tolling is simply not available to the Trustee for his MUFTA-based claims against the defendants.
The Trustee argued that the doctrine of adverse domination would toll his statute of limitations, no matter which subdivision applied.
This doctrine is again an offshoot of the discovery rule, applied in the corporate context. In re Reading Broad., Inc., 390 B.R. 532, 552-553 (Bankr.E.D.Pa. 2008). As the Eighth Circuit has observed, the adverse domination doctrine can apply to toll "the statute of limitations as to claims against the officers or directors of a corporation as long as those officers or directors control the corporation." Resolution Trust Corp. v. Armbruster, 52 F.3d 748, 751 (8th Cir.1995).
However, the doctrine lies as to claims that the corporation would have against its own directors and officers. It can remedy actions on their part in abuse of their positions of control, i.e., the shunting-away of assertions that they are liable to the corporation, and the stalling of litigation that otherwise could be brought against them. E.g., Resolution Trust Corp. v. Farmer, 865 F.Supp. 1143, 1151 (E.D.Pa.1994). This reflects the doctrine's descent out of the discovery rule; only after a shift in corporate control could the claims be brought out and advanced. Hence, fairness again would dictate that conniving parties be denied the repose that they would otherwise get from having the law (the statute of limitations) applied on its face.
Clearly, this equitable override is as ancillary to the main law (the statute of limitations) as any of the others are. It is available for this litigation only if it is a feature of Minnesota law, or there is a strong case that it would be adopted as such were the Minnesota Supreme Court to consider it. Resolution Trust Corp. v. Armbruster, 52 F.3d at 751.
The Minnesota state courts have not spoken to the doctrine of adverse domination, and they certainly have not adopted it in extant case law. The Trustee argues that the Minnesota Supreme Court would, however, and thus it should be recognized for application here and now. He notes that other federal courts have made the inference for their own forum states' courts. However, it appears that those courts did so on the lone basis that the supreme court of their forum state had already recognized the basic discovery rule for a liberal application in cases of fraud. E.g., Clark v. Milam, 847 F.Supp. 409, 422 (S.D.W.Va.1994); In re Reading Broad., Inc., 390 B.R. at 552-553; Wilson v. Paine, 288 S.W.3d 284, 288-289 (Ky.2009) (collecting federal case law citations, noting that courts "confronted with [this] question have almost uniformly embraced adverse domination").
Here, the Trustee undercuts his own argument by citing Resolution Trust Corp. v. Armbruster — where the Eighth Circuit declined to infer that the Arkansas Supreme Court would recognize the adverse domination doctrine.
Dalton v. Dow Chem. Co., 280 Minn. 147, 158 N.W.2d 580, 584 (1968).
It appears that the Minnesota courts have repeatedly rejected the use of a generalized discovery rule where the discovery allowance of Subd. 1(6) does not apply. Thus, the platform for an extension to the adverse-domination variant is not present. The doctrine cannot be applied on an inference that the Minnesota Supreme Court would recognize it in this litigation.
The defense characterizes the Trustee's assertion of multiple tolling doctrines as part of an effort to lever the judicial creation of a wide-ranging remedy of "Ponzi scheme disgorgement," one that would have little substantive limit. The accusation is overstated, but there is much to be said for the caution from which it springs. Such expansiveness should be engaged in by the legislative branch — or if by the courts, then on the appellate level after a thorough and more distanced vetting of all dimensions of policy.
Thus,
The fourth common issue under the rubric of timeliness of suit affects a smaller number of defendants. The movants for dismissal on this narrower ground are those defendants who were put into suit at the Trustee's instance late in the large-scale initiation of the avoidance litigation, and who received service of a summons and complaint after the deadline of § 546(a)(1)(A) had passed.
The underlying theory stems from the difference between federal and Minnesota state law, as to the act that commences a lawsuit. Under Fed.R.Civ.P. 3, "[a] civil action is commenced by filing a complaint with the court."
The defendants who received the Trustee's summons and complaint in-hand after the deadline seek dismissal on this theory. They insist that the Minnesota state law governs the means of commencing suit for this litigation. This, they argue, is a consequence of the Trustee's substantive reliance on MUFTA through the empowerment of § 544(b), and the applicability of Minnesota law's statute of limitations. The underlying rationale is that the longstanding Erie doctrine, i.e., Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) and its progeny, requires the application of the Minnesota rule for commencement of an action for the purposes of limitations periods and deadlines for suit. More specifically, they cite Walker v. Armco Steel Corp., 446 U.S. 740, 752-753, 100 S.Ct. 1978, 64 L.Ed.2d 659 (1980), in which the Supreme Court held that Erie compels federal courts to apply rules for tolling under state law where claims under state law are sued in federal court.
Walker, however, was decided in a case under the federal district court's diversity-of-citizenship jurisdiction, 28 U.S.C. § 1332(a). Under that provision, the district court may entertain original jurisdiction over actions that are governed by state substantive law alone, as long as the action is "between ... citizens of different States," or when citizenship (or in the case of "a foreign state," identity) is otherwise diverse between opposing parties in its national character.
The Trustee's avoidance claims, however, were expressly pleaded into suit under the bankruptcy jurisdiction of the federal courts, 28 U.S.C. § 1334(b).
Obviously, the Trustee relied on the governance of Fed.R.Civ.P. 3 in timing the commencement of suit against his deadline under § 546(a)(1). That reliance did not render untimely any adversary proceeding in which he served a summons and complaint after that deadline.
The fact that Minnesota law governs the issues relating to the limitations period does not alter that conclusion. See West v. Conrail, 481 U.S. 35, 39, 107 S.Ct. 1538, 95 L.Ed.2d 32 (1987) ("... when the underlying cause of action is based on federal law and the absence of an express federal statute of limitations makes it necessary to borrow a limitations period from another statute, the action is not barred if it has been `commenced' in compliance with Rule 3 within the borrowed period."). Here, specific federal law governs the commencement of suit. As a result, a federal court need not look to nonfederal law for a rule of decision. West v. Conrail, 481 U.S. at 39, 107 S.Ct. 1538 ("we borrow only what is necessary" when a limitations period is taken from non-federal law for a federally-based cause of action). The result must be the same: the Trustee timely-commenced as long as he filed his complaints by the deadline under § 546(a)(1).
So,
A fifth matter requires treatment because it was classified with this round of issues and placed onto the agenda for the first day of oral argument.
When the first hearing on oral argument was convened, the issue was an orphan.
Through their motions, one or more defendants asserted that they had not been properly served with the Trustee's summons and complaint. For the purposes of treating the issue, it will be assumed that the Trustee served all relevant defendants under the means permitted by Fed. R. Bankr.P. 7004(b)(1) and (c) — that is to say, by a simple "mailing of the summons and complaint" via the United States Postal Service, first-class mail, postage prepaid, to the address designated for the class of defendant for which those rules apply.
The defense argument is that this means of service was improper, because the Trustee exclusively or predominantly relies on state law for his theories of recovery against them. As the defense would have it, this required the Trustee to use the means of service prescribed by the forum that provided the substantive legal governance. Here, that would be the state of Minnesota, and Minn. R. Civ. P. 4.03 (2010).
The Minnesota rule requires service by "delivering a copy" of the summons.
In the federal courts, this issue is confined to the bankruptcy court.
In the end, this is a non-issue. Under basic choice-of-law principles, the forum court prescribes the means of service of process, whether the governing substantive law is its own or that of another jurisdiction. Pritchard v. Norton, 106 U.S. 124, 129-130, 1 S.Ct. 102, 27 L.Ed. 104 (1882) ("The principle is that whatever relates merely to the remedy and constitutes part of the procedure is determined by the law of the forum, for matters of process must be uniform in courts of the same country."). Fed. R. Bankr.P. 7004(a)(1) permits a plaintiff to use the means of service provided by Fed.R.Civ.P. 4(e)-(j). In turn, Fed.R.Civ.P. 4(e)(1) and 4(h)(1)(A) allow service "following state law for serving a summons in an action brought in courts of general jurisdiction in the state where the [federal] district court is located or where service is made." However, these means of service only cumulate with the options permitted in those rules themselves.
To the point at bar, however: the plaintiff in an adversary proceeding has the option to use any of the alternatives. In re Lencoke Trucking, Inc., 99 B.R. 200, 201 (W.D.N.Y.1989). The Eighth Circuit has recognized that service by mail in compliance with Rule 7004(b) is given full effect in the federal courts. Stephenson v. El-Batrawi, 524 F.3d 907, 911 and n. 5 (8th Cir.2008). See also In re Otto, 409 B.R. 912, 916 (Bankr.D.Minn.2009).
So,
To reprise the rulings on this group of issues presented in the abstract as matters of law:
The law thus laid out will apply to each remaining motion for dismissal according to the individual posture of each defendant. How, when, and whether that is to be effected will be determined once the remaining "consolidated issues" and other prerequisites receive ruling. After that, the future of this litigation will be addressed with counsel at a status conference.
Kathy Bazoian Phelps and Steven Rhodes, The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, § 1.02 at 1-5 (2012). See also United States v. Dreier, 682 F.Supp.2d 417, 418 (S.D.N.Y.2010) ("An under-appreciated evil of substantial frauds ... is how they pit their victims against one another.").
Group Health Plan, Inc. v. Philip Morris Inc., 621 N.W.2d 2, 12 (Minn.2001) (quoting State by Humphrey v. Alpine Air Prods., Inc., 500 N.W.2d 788, 790 (Minn. 1993)); emphasis in original. Such major alterations from the corollary common law arguably make the resultant liability created by statute, even under the broad pronouncements of Orr v. Kinderhill Corp.
Applying this statute takes some thinking. The Trustee in these cases was appointed on February 26, 2009, which fell within two years of the entry of the order for relief in these cases. (An order for relief is deemed to have been entered on the commencement of these voluntary cases. 11 U.S.C. § 301(b).) So, the two-year period of § 546(a)(1) is the "later" of the two alternatives within that sub-subsection. Because all of the cases are still open, the Trustee's right to sue has not been extinguished by § 546(a)(2). For these cases, then, the expiration of two years from the filing of the relevant petition fixes the deadline for commencement of suit by operation of § 546(a) generally.
(a) An action or proceeding under [11 U.S.C. §§ ] 544, ... may not be commenced after the earlier of —
The defense is correct in pointing out the fundamental error committed by those courts that rely on § 108(a) as authority for a tolling of limitations periods in actions under § 544. E.g., Lippe v. Bairnco Corp., 225 B.R. 846, 853 (S.D.N.Y.1998); In re Southern Health Care of Ark., Inc., 299 B.R. 918, 922 (Bankr.E.D.Ark. 2003). The flaw stems from the differing effects of the two statutes. Section 108(a) only applies to causes of action originally held by the debtor pre-petition, to which the trustee succeeds by operation of 11 U.S.C. § 541(a). Hence, § 108 does not apply to avoidance powers conferred on the bankruptcy estate by separate statute. E.g., In re Sears Petroleum & Transp. Corp., 417 F.Supp.2d 212, 223-225 (D.Mass.2006); In re Downtown Inv. Club III, 89 B.R. 59, 65 (9th Cir. BAP 1988); In re Am. Energy Trading, Inc., 291 B.R. 159, 165 n. 10 (Bankr.W.D.Mo.2003).
