On September 12, 2024, the U.S. Court of Appeals for the Eighth Circuit nixed a $563 million jury verdict against BMO Harris Bank involving claims that the bank aided and abetted a multibillion-dollar Ponzi scheme, ruling that the bank’s equitable defense of in pari delicto barred the suit. The appeal was the latest of a long string of disputes arising from Thomas Petters’s Ponzi scheme. After the scheme collapsed, one of Petter’s companies, Petters Company, Inc. (“PCI”), filed for bankruptcy. PCI’s trustee then sued BMO alleging that BMO (through a predecessor bank) was aware of the scheme and gave PCI special treatment to conceal it. BMO moved for summary judgment, arguing that in pari delicto precluded PCI from recovering for any wrongdoing because PCI was itself a wrongdoer of equal or greater fault. The court ruled that the defense was unavailable because, before its bankruptcy filing, PCI had been placed into receivership and thus was no longer bound by its officers’ previous fraudulent acts. A jury ultimately awarded Kelly $563 million.
On appeal, BMO argued that PCI orchestrated the scheme and was thus at least as culpable as the bank and unable to recover under the doctrine of in pari delicto. BMO argued that Kelley brought claims as bankruptcy trustee in an adversary proceeding in bankruptcy court. Because a trustee in bankruptcy stands in the shoes of the debtor, BMO argued that the defense could be raised against the debtor. The trustee argued that he was acting as receiver in bringing the claims, relying on a line of Minnesota cases holding that a receiver is not bound by the fraudulent acts of former corporate officers because a receiver represents the interests of creditors, in addition to shareholders. Thus, he maintained that the defense was unavailable because he stepped into the shoes of a “cleansed” receivership that is not bound by its prior wrongdoing.
The Eighth Circuit rejected the trustee’s argument. It explained that, even if the trustee were correct that a receiver is not subject to in pari delicto under Minnesota law, the receiver no longer controlled PCI’s assets and thus had no claims to bring once PCI filed for bankruptcy. PCI’s claims became part of the bankruptcy estate and belonged exclusively to the trustee. Because in bankruptcy the trustee is subject to any equitable or legal defenses that could have been raised against the debtor, BMO was entitled to assert the in pari delicto defense. The Eighth Circuit ordered judgment to be entered in favor of BMO.
The case is Kelley v. BMO Harris Bank NA, No. 23-2551 (8th Cir. 2024). The trustee is represented by Clement & Murphy PLLC. BMO Harris Bank is represented by Munger Tolles & Olsen LLP and Mayer Brown LLP. The opinion is available here.
