United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 09-3271
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Ritchie Special Credit Investments, Ltd.; *
Rhone Holdings II. Ltd.; Yorkville *
Investments I, LLC; Ritchie Capital *
Structure Arbitrage Trading, Ltd., *
Ritchie Capital Management, L.L.C., * Appeal from the United States
* District Court for the
Appellants, * District of Minnesota.
*
v. *
*
United States Trustee; Official *
Committee of Unsecured Creditors, *
*
Appellees. *
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Submitted: June 17, 2010
Filed: September 2, 2010
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Before WOLLMAN, EBEL,1 and COLLOTON, Circuit Judges.
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WOLLMAN, Circuit Judge.
The United States Trustee appointed Douglas A. Kelley, Esq., as Chapter 11
trustee for the debtors in the jointly administered bankruptcy proceedings for certain
companies established by Thomas J. Petters, including Petters Company, Inc. (PCI),
1
The Honorable David M. Ebel, United States Circuit Judge for the Tenth
Circuit, sitting by designation.
and Petters Group Worldwide, LLC (PGW). Ritchie2 objected to the appointment,
arguing that Kelley did not qualify as a “disinterested person” as required by 11
U.S.C. § 1104(d) and as defined by 11 U.S.C. § 101(14)(C) and that Kelley’s
appointment as the common trustee for the jointly administered estates would
prejudice Ritchie. Ritchie also moved for expedited discovery, seeking to require
Kelley to respond to discovery requests and to appear for a deposition.
The bankruptcy court3 denied the discovery motion, overruled the objection,
and approved Kelley’s appointment as trustee for all debtors. See In re Petters Co.,
401 B.R. 391 (Bankr. Minn. 2009) (overruling the objection and approving the
appointment). The district court4 affirmed the bankruptcy court’s orders. Ritchie
appeals, arguing that disabling conflicts of interest prevent Kelley from serving as an
unbiased common trustee for the jointly administered estates and that the bankruptcy
court abused its discretion in denying the discovery motion. We affirm.
I. Background
Before his arrest and conviction, Petters owned PCI and PGW, both of which
were privately held limited liability companies. PCI was the venture capital arm of
the Petters enterprises that utilized single purpose entities to obtain billions of dollars
2
Ritchie Special Credit Investments, Ltd., Rhone Holdings II. Ltd., Yorkville
Investments I, LLC; Ritchie Capital Structure Arbitrage Trading, Ltd., Ritchie Capital
Management, L.L.C. (collectively, Ritchie). According to Ritchie’s brief, Ritchie
Capital Management is the agent for the other Ritchie parties.
3
The Honorable Gregory F. Kishel, United States Bankruptcy Judge for the
District of Minnesota.
4
The Honorable Ann D. Montgomery, United States District Judge for the
District of Minnesota.
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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. As explained more fully below, PCI, PGW, and certain
related companies have petitioned for Chapter 11 bankruptcy relief. Ritchie is an
investment group that has filed more than $200 million in claims against PGW.
A. Civil Action
In October 2008, the government commenced a civil action against Petters,
several of his business associates, and his companies, PCI and PGW. The complaint
alleged a massive Ponzi scheme that generated more than $3 billion in fraudulent
proceeds. The government sought to freeze the defendants’ assets under the authority
of the Anti-Fraud Injunction Statute, 18 U.S.C. § 1354, thereby preserving the assets
for victim restitution and potential forfeiture. The district court issued a temporary
restraining order, essentially freezing the assets of PCI, PGW, and other related
entities.
Thereafter, the district court approved a stipulated preliminary injunction that
maintained the asset freeze over PCI, PGW, and the companies’ subsidiaries,
affiliates, and wholly owned or controlled entities. The assets were placed in
receivership and Kelley was appointed to serve as the receiver. As receiver, Kelley
serves as an agent of the district court and has been vested with the powers necessary
to take immediate custody, control, and possession of the assets of the estates in
receivership. United States v. Petters, No. 08-cv-05348 (D. Minn. Dec. 8, 2008) (order
appointing receiver at 13-14) (Receiver Order).
The scope of the receivership and Kelley’s duties and authority are set forth in
the district court’s order. See id. at 13-18. The order authorizes Kelley to file
bankruptcy petitions “for any of the entities to protect and preserve the assets of any
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of the entities” and requires that any bankruptcy cases be governed by the
requirements of the U.S. Bankruptcy Code, 11 U.S.C. § 101 et seq., and the Federal
Rules of Bankruptcy Procedure. Id. at 15. The order further requires Kelley to
“[c]oordinate with representatives of the United States Attorney’s office and Court
personnel as needed to ensure that any assets subject to the terms of this Order are
available for criminal restitution, forfeiture, or other legal remedies in proceedings
commenced by or on behalf of the United States.” Id. at 16-17.
Ritchie moved to intervene, stating that an Illinois state court previously had
appointed a receiver for PCI and PGW. Ritchie had filed suit in Illinois alleging that
Petters, PCI, and PGW had defaulted on promissory notes held by Ritchie. The
complaint alleged that Petters, PCI, and PGW had fraudulently induced Ritchie to sign
purchase agreements and to extend the agreement’s due dates by falsely representing
that PCI was a successful, viable business and by failing to disclose that “PCI was
involved in a ‘Ponzi scheme’ that used funds obtained from new investors to pay off
prior creditors.” Ritchie speculated that its funds were likely used to pay prior
creditors in the Ponzi scheme and claimed damages exceeding $220 million. In early
October 2006, shortly after it had appointed a receiver, the Illinois court determined
that its orders freezing assets and appointing a receiver had expired and deferred to the
judgments of the federal district court. The district court denied Ritchie’s motion to
intervene.
In March 2009, Ritchie filed a second motion to intervene, which was also
denied. See United States v. Petters, No. 08-cv-05348 (D. Minn. Apr. 29, 2009)
(order denying second motion to intervene). We affirmed the denial of that motion,
and to date, Kelley remains the receiver in the civil case. See United States v. Ritchie
Special Credit Invs., Ltd., ___ F.3d. ___, 2010 WL ____ (8th Cir. Sept. 2, 2010).
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B. Criminal Case
In December 2008, a federal grand jury indicted Petters, PCI, and PGW on
charges of mail fraud, wire fraud, money laundering, and conspiracy. A superseding
indictment was issued in June 2009. Both indictments sought forfeiture of property
involved or traceable to the offenses alleged in the indictment or, if that property is
unavailable, the defendants’ substitute property. Petters was convicted of the twenty
charges against him and sentenced to fifty years’ imprisonment.
C. Bankruptcy Case
As receiver, Kelley filed Chapter 11 bankruptcy petitions for the debtors, and
the bankruptcy court authorized joint administration of the bankruptcy cases.5 The
companies’ management had resigned prior to the bankruptcy filings and Kelley
served as the de facto debtor-in-possession. In December 2008, the U.S. Trustee and
Ritchie brought motions for the appointment of Chapter 11 trustee or trustees. Ritchie
sought appointment of a separate trustee for PGW. The bankruptcy court issued an
order authorizing the U.S. Trustee to appoint one or more trustees. The U.S. Trustee
selected Kelley to serve as the sole Chapter 11 trustee for the debtors in the jointly
administered cases. Ritchie objected to the appointment, arguing that Kelley was
disqualified from serving as trustee because of disabling conflicts of interest, and
moved to compel discovery.
5
Cases for the following debtors are being jointly administered: PCI; PGW; PC
Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc.; Edge One
LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.
Petters is the sole shareholder of PCI, PGW, and Palm Beach Finance Holdings; the
remaining debtors are subsidiaries of PCI.
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With its objection overruled, its discovery motion denied, and its appeal to the
district court rejected, Ritchie appeals from the approval of the appointment of Kelley
and the denial of the motion to compel.
II. Jurisdiction
Our jurisdiction to review matters from the district court in bankruptcy matters
extends to “final decisions, judgments, orders, and decrees” entered by the district
court under 28 U.S.C. § 158(a). § 158(d)(1); see also In re M&S Grading, Inc., 526
F.3d 363, 368 (8th Cir. 2008); Kubicik v. Apex Oil Co., 884 F.2d 343, 346 (8th Cir.
1989). We apply a broader, more flexible concept of finality in bankruptcy cases than
we do in nonbankruptcy cases. In re M&S Grading, 526 F.3d at 368. To determine
the finality of a bankruptcy court order, we consider (1) the extent to which “the order
leaves the bankruptcy court nothing to do but execute the order; (2) the extent to
which delay in obtaining review would prevent the aggrieved party from obtaining
effective relief; (3) the extent to which a later reversal on [the contested] issue would
require recommencement of the entire proceeding.” Id. (quoting In re Farmland
Indus., Inc., 397 F.3d 647, 650 (8th Cir. 2005) (internal marks and citations omitted)).
We conclude that we have jurisdiction to review the district court’s order
affirming the bankruptcy court’s decision to overrule the objection and approve the
appointment of Kelley. In doing so, we join the majority of our sister circuits that
have considered the issue and concluded that an order appointing a bankruptcy trustee
is final and thus reviewable. See In re Marvel Entm’t Group, Inc., 140 F.3d 463, 470-
71 (3d Cir. 1998) (holding that district court’s appointment of bankruptcy trustee is
an immediately appealable final order); In re Cajun Elec. Power Coop., Inc., 69 F.3d
746, 748 (5th Cir. 1995) (same), rev’d on other grounds, 74 F.3d 599, 600 (5th Cir.
1996); In re Plaza de Diego Shopping Ctr., Inc., 911 F.2d 820, 826 (1st Cir. 1990)
(same); Comm. of Dalkon Shield Claimants v. A.H. Robins Co., 828 F.2d 239, 241
(4th Cir. 1987) (same). But see In re Cash Currency Exch., Inc., 762 F.2d 542, 547-48
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(7th Cir. 1985) (holding that the appeal from the bankruptcy court’s appointment of
trustee to the district court was interlocutory in nature and thus unreviewable by the
Court of Appeals).
We find persuasive the reasoning of the Third Circuit in In re Marvel
Entertainment Group:
Using the liberal finality rules which apply in bankruptcy matters of this
nature, we believe that jurisdiction is proper over the order appointing a
trustee here. . . . Were we to put off hearing an appeal of the district
court’s order appointing a trustee until after the entire bankruptcy
proceeding, allowing the possibility of an order returning this bankruptcy
to its very beginning for a second round, the concept of judicial
efficiency would be effectively turned on its head. . . . Were we not to
take jurisdiction at this juncture, no meaningful review of the order
appointing a trustee could ever take place, as a practical matter.
140 F.3d at 470. The Third Circuit remarked that it would “strain[] credulity to
suggest that a reviewing court would jettison years of bankruptcy infighting,
compromise and final determinations solely for the purpose of reversing” on the issue
of the identity of the trustee. Id.
The bankruptcy court’s order overruling Ritchie’s objection and approving the
appointment of Kelley as trustee left nothing more for the bankruptcy court to do but
execute the order. Once the order was executed, Kelley had secured the powers
granted to Chapter 11 trustees under the Bankruptcy Code. Although Ritchie can seek
Kelley’s removal for cause under 11 U.S.C. § 324, Ritchie would be unable to obtain
the relief it seeks—the appointment of PGW’s own trustee at the outset of the
bankruptcy proceedings—in the absence of our immediate review. Moreover, later
reversal of the bankruptcy court’s order would require recommencement of the entire
proceeding, beginning with the appointment of one or more trustees. Accordingly, we
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hold that the bankruptcy court’s approval of the appointment of a trustee is a final
order and that we have jurisdiction to review the order.
III. Analysis
“We sit as a second court of review in bankruptcy matters, generally applying
the same standards of review as the district court and reviewing the bankruptcy court’s
factual findings for clear error and its conclusions of law de novo.” In re M&S
Grading, 526 F.3d at 367. The decisions to appoint a trustee and to deny expedited
discovery are committed to the discretion of the bankruptcy court, and we will not
reverse those decisions unless that court has abused its discretion. See In re Jones
Truck Lines, Inc., 63 F.3d 685, 686 (8th Cir. 1995) (reviewing matters committed to
the discretion of the bankruptcy court for abuse of discretion); see also In re National
Warranty Ins. Risk Retention Group, 384 F.3d 959, 964 (8th Cir. 2004) (reviewing the
bankruptcy court’s denial of discovery motion for abuse of discretion); In re BH&P
Inc., 949 F.2d 1300, 1313 (3d Cir. 1991) (reviewing the bankruptcy court’s
disqualification of a trustee for abuse of discretion). The bankruptcy court abuses its
discretion when its decision relies upon a clearly erroneous finding of fact or fails to
apply the proper legal standard. In re Zahn, 526 F.3d 1140, 1142 (8th Cir. 2008); In
re Farmland Indus., Inc., 397 F.3d at 651.
A. Approval of Kelley’s Appointment as Chapter 11 Trustee
1. Kelley as Receiver and Trustee
Ritchie contends that Kelley cannot serve as both receiver and trustee. Ritchie
argues that Kelley, as receiver, is predisposed towards forfeiture and that forfeiture
would remove assets from PGW, thereby harming the company. According to
Ritchie, Kelley thus has an interest materially adverse to PGW creditors and does not
qualify as a disinterested person.
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The Bankruptcy Code requires that the Chapter 11 trustee be a “disinterested
person.” 11 U.S.C. § 1104(d). As relevant to this case, “disinterested person” is
defined as one who “does not have an interest materially adverse to the interest of the
estate or of any class of creditors or equity security holders, by reason of any direct
or indirect relationship to, connection with, or interest in, the debtor, or for any other
reason.” § 101(14)(C). Generally, the definition is construed to apply only to
personal interests of the trustee, not those attributed to him in his representative or
fiduciary capacity. See In re BH&P Inc., 949 F.2d at 1310 (Definition of disinterested
“may be read to implicate only the personal interests of the trustee.” (emphasis
omitted)); In re O.P.M. Leasing Servs., Inc., 16 B.R. 932, 938 (Bankr. S.D.N.Y 1982)
(“[I]t is ‘personal interests’ that are forbidden.”) see also In re AFI Holding, Inc., 530
F.3d 832, 848 (9th Cir. 2008) (concluding that the definition of disinterested “was
intended to disqualify only creditors with personal claims and those ‘holding’
prepetition adverse interests, not trustees having claims in a representative capacity”).
Adverse interest has been defined to include the “possession of a predisposition under
circumstances that create a bias against the estate.” In re AFI Holding, 530 F.3d at
845.
The bankruptcy court refused to construe the receivership order as aligning
Kelley with the U.S. Attorney’s office or predisposing him towards forfeiture. As
stated above, the district court’s receivership order requires Kelley to “[c]oordinate
with representatives of the United States Attorney’s office and Court personnel as
needed to ensure that any assets subject to the terms of this Order are available for
criminal restitution, forfeiture, or other legal remedies.” Receiver Order at 16-17.
The bankruptcy court determined that the order required Kelley to fully disclose the
assets and their locations, to keep the assets secure, and to maintain the assets’
liquidity. In re Petters Co., 401 B.R. at 407. “This reflects the transparency that our
legal system makes incumbent on any entrusted officer of a court, in the performance
of obligations to the appointing court.” Id. (emphasis omitted). The district court
concluded that the bankruptcy court’s interpretation of the order was correct and
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determined that Kelley’s dual roles as receiver and trustee did not give rise to a
material adverse interest.
Likewise, we do not perceive Kelley’s role as receiver as creating a material
adverse interest. As an initial matter, Kelley does not have personal interests adverse
to PGW. Even if the definition of disinterested were read to include representative as
well as personal interests, we nonetheless conclude that Kelley qualifies as
disinterested. Kelley’s duties as a receiver did not “vest him with any interest aligned
with the United States,” nor does the order mandate any action on Kelley’s part that
would make him the “servant, agent, or ally” of the U.S. Attorney’s office. Id. The
bankruptcy court thus did not abuse its discretion in concluding that Kelley’s role and
interests as a receiver do not predispose him towards forfeiture or amount to a
disqualifying material adverse interest.
2. Kelley as Trustee for PCI and PGW
Ritchie argues that PCI and PGW have opposing interests and competing claims
to the same assets such that Kelley cannot serve as a fiduciary to both companies.
Ritchie contends that PGW owns legitimate companies, like Polaroid, whereas PCI
and its subsidiaries engaged in the fraudulent diversion of funds and thus have little
or no assets. According to Ritchie, PCI’s most valuable asset is its claim against
PGW. Ritchie maintains that these potential interdebtor claims and the threat of
substantial conflict require the appointment of separate trustees.
The Federal Rules of Bankruptcy Procedure contemplate that a common trustee
may be appointed for estates being jointly administered. Fed. R. Bankr. P. 2009(c)(2).
Ordinarily the potentiality of a conflict of interest among the creditors of the jointly
administered estates “is not sufficiently serious or frequent in most cases to warrant
the selection of separate trustees.” Id. advisory committee’s note. Although we
recognize that cases involving several debtors “served by a single trustee present
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special concerns requiring the trustee to balance competing interests with vigilance
and guard against conflicts, we also recognize the reality that a single trustee is often
able to maximize the return to jointly administered estates through increased economy
and efficiency.” In re BH&P, 949 F.2d at 1310.
The bankruptcy rules do require that the court order the selection of separate
trustees for estates being jointly administered on a showing that creditors or equity
security holders of the different estates will be prejudiced by conflicts of interest of
a common trustee. Rule 2009(d) “requires the court to make a preliminary evaluation
of the risks of conflict of interest.” Fed. R. Bankr. P. 2009 advisory committee’s note.
“[T]he predicate for application of Rule 2009(d) is not that a common trustee is
‘disinterested’ but that prejudice will occur as a result of the trustee’s dual
representation.” In re BH&P, 949 F.2d at 1311 n.13.
To determine whether the appointment of a common trustee will prejudice the
creditors of the different estates, the bankruptcy court must consider the facts and
circumstances presented.
This inquiry is of necessity case-specific. There must be at a minimum
full and timely disclosure of the details of any given arrangement.
Armed with knowledge of all of the relevant facts, the bankruptcy court
must determine, case by case, whether a situation such as the presence
of a single trustee in jointly administered cases where there are
interdebtor claims can be tolerated under the particular circumstances.
In doing so, the court should consider the full panoply of events and
elements. The nature and extent of the conflict must be assayed, along
with the likelihood that a potential conflict might turn into an actual one.
An effort should be made to measure the influence the putative conflict
may have in subsequent decisionmaking. Perceptions are important;
how the matter likely appears to creditors and to other parties in
legitimate interest should be taken into account.
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Id. at 1312-13 (quoting In re Martin, 817 F.2d 175, 182 (1st Cir. 1987)) (internal
alterations omitted).
We find no abuse of discretion in the bankruptcy court’s determination that
Ritchie failed to show that it would be prejudiced by Kelley’s appointment as trustee
in the jointly administered estates. The bankruptcy court correctly focused on the
facts presented:
[T]he characteristics of these cases and their backdrop cannot be ignored:
multiple pending, major criminal prosecutions against key management
personnel of the Debtors; the sheer magnitude of the sums of money in
question; the present indeterminacy of what happened to build and then
fell the edifice of Tom Petters’s enterprise; the large complexities that
must be coordinated to responsibly propel the bankruptcy procedures
forward. These circumstances powerfully support the concentration of
attention and effort into one fiduciary steward, at this time and for a
while to come.
In re Petters Co., 401 B.R. at 412-13.
Particularly important in the bankruptcy court’s analysis was the fact that the
trustee had only begun to recover assets, assess liquidity, and determine encumbrances
against those assets. Given the administrative nature of the trustee’s work—which
Kelley expected to last a year or more—and Ritchie’s failure to identify to the
bankruptcy court any prejudice in the trustee’s completion of these tasks, the
bankruptcy court did not abuse its discretion when it concluded that no disqualifying
prejudice existed.
B. Denial of Motion for Expedited Discovery
We find no abuse of discretion in the bankruptcy court’s decision to deny
Ritchie’s motion for expedited discovery. The bankruptcy court reasonably
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determined that the receivership order served as the basis for Kelley’s duties as a
receiver and the order allowed the bankruptcy court to assess whether those duties
conflicted with his duties as trustee. Similarly, we see no reason to disturb the
conclusion that any prejudice in appointing a common trustee can be measured by the
publicly available documents.
III. Conclusion
We note that this case is before us on appeal from the appointment, objection
to the appointment, and subsequent approval of Kelley as a trustee under 11 U.S.C.
§ 1104(d) and the Federal Rules of Bankruptcy Procedure. Ritchie has not sought to
remove Kelley for cause under 11 U.S.C. § 324. The bankruptcy court invited Ritchie
to renew its conflict-of-interest claim after “a cash bearing estate has been assembled
and at a time the investigation” proved that unripened conflicts have materialized.
Id. at 413-14. Accordingly, the bankruptcy court left the matter neither to hindsight
nor to “the unfettered desire of the parties involved.” See In re BH&P, 949 F.2d at
1313 (quoting In re Martin, 817 F.2d at 182). Instead, it took the immediate
opportunity to assess the alleged conflicts and recognized that it would revisit its
preliminary determination that no disqualifying conflict of interest prevented Kelley
from serving as the common trustee.
The judgment is affirmed.
COLLOTON, Circuit Judge, concurring in the judgment.
An administrative panel of this court previously denied the appellees’ motion
to dismiss the appeal for lack of jurisdiction, see Order (Nov. 9, 2009), and that
decision “is the law of the case, ordinarily to be adhered to in the absence of clear
error or manifest injustice.” McCuen v. Am. Cas. Co., 946 F.2d 1410, 1403 (8th Cir.
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1991). Seeing no “clear error or manifest injustice” in the assertion of jurisdiction,
and agreeing with the court’s analysis of the merits, I concur in the judgment.
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