VENTERS, Bankruptcy Judge.
Interlachen Harriet Investments Ltd., appeals the bankruptcy court's approval of a multi-million dollar, global settlement ("Settlement") in one of the largest Ponzi scheme bankruptcies in American history.
We have jurisdiction over this appeal pursuant to 28 U.S.C. § 158(b).
I. STANDARD OF REVIEW
A bankruptcy court's approval of a settlement agreement may be set aside only for an abuse of discretion.
II. BACKGROUND
The following facts have been gleaned from the pleadings. Notably, Interlachen has not disputed any of the facts set forth in the Appellees' pleadings; its dispute lies in the sufficiency, weight, and interpretation of those facts.
A. Context
As noted, this appeal arises out of the multi-billion-dollar Ponzi scheme perpetrated by Thomas Petters. Over many years, Petters used various wholly owned, special purpose entities, including Petters Company, Inc. ("PCI"), Petters Group Worldwide, LLC ("PGW"), and PAC Funding, LLC ("PAC Funding"), to carry out a fraudulent investment scheme. PCI obtained capital for the Petters enterprises on its own account and by using the special purpose entities to obtain billions of dollars of funding. Petters and his entities led investor-lenders to believe that their loans were being used to purchase electronics and other merchandise from wholesalers to be resold to "big box" retailers. The loans were purportedly secured by purchase orders. But the merchandise and inventory supposedly being bought with the investors' funds were nonexistent, and the purchase orders and related documents that were supposed to serve as security were fabricated. As in the prototypical Ponzi scheme, investors were not repaid with earnings from their investments, but instead with funds Petters obtained from other investors. In addition, Petters used investor funds to purchase the well-known Polaroid camera brand in 2005.
On or about September 24, 2008, the FBI and other federal agencies executed search warrants at multiple locations and seized records of Petters, PCI, PGW and other Petters entities. On October 3, 2008, Petters was arrested. He was charged with and found guilty of numerous federal criminal offenses and was sentenced to 50 years in prison.
B. The Federal Receivership and the Bankruptcies
On October 2, 2008, the United States Government filed a complaint pursuant to 18 U.S.C. § 1345 and sought an asset freeze and receivership for the benefit of the victims of the Petters fraud. On October 6, 2008, Judge Ann D. Montgomery of the United States District Court for the District of Minnesota, in United States v. Thomas Joseph Petters, et al., Civil Case No. 08-05248, appointed Douglas A. Kelley as the receiver for Petters, PCI and PGW, as well as entities 100% owned or controlled by them.
PCI, PGW, and PAC Funding were all receivership entities at one time. The receivership court specifically granted Kelley authority to file bankruptcy petitions for any of the receivership entities in order to protect and preserve their assets. In October 2008 Kelley filed Chapter 11 bankruptcy petitions for PCI, PGW, PAC Funding, and several other Petters entities.
Judge Kishel also presides over the related bankruptcy cases of PBE Corporation and PBE Consumer Electronics, LLC, formerly known as Polaroid Corporation and Polaroid Consumer Electronics, LLC. The Polaroid Bankruptcy Cases were commenced in December 2008 and operated as Chapter 11 debtors-in-possession. They were jointly administered under In re Polaroid Corporation, et al., Case No. 08-46617, and in April 2009, substantially all of Polaroid's assets were sold pursuant to 11 U.S.C. § 363, generating approximately $87 million for the Polaroid Bankruptcy Estates.
Two other Petters entities relevant to this appeal are Petters Aviation, LLC and its wholly-owned subsidiary, Elite Landings, LLC. These entities were initially excluded from the Receivership, but they ultimately filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Judge Robert J. Kressel of the United States Bankruptcy Court for the District of Minnesota presides over these cases; they are captioned In re Petters Aviation, LLC, No. 08-45136 and In re Elite Landings, LLC, Case No. 08-45210 ("Aviation Bankruptcy Cases").
C. ABRG and Acorn
Appellee Asset Based Resource Group, LLC ("ABRG"), successor-servicer to Acorn Capital Group, LLC ("Acorn"), is one of the larger creditors in the Receivership and of the Petters Bankruptcy Estates. The settlement at issue in this appeal focuses in large part on resolving the many and complex disputes between ABRG and various Petters entities.
Beginning in the early 2000s, Acorn originated numerous loans to several Petters entities, including PCI, PAC Funding, Petters Aviation, and PAL. From 2001 to 2008, Acorn invested approximately $2.7 billion in various Petters entities. Measured by cash invested minus cash repaid to Acorn, Acorn lost approximately $138 million as a result of investments in PAC Funding and PCI.
Many of the loans Acorn made to the Petters entities were assigned directly or indirectly to various third parties, including Stewardship Credit Arbitrage Fund, LLC, Putnam Green LLC, ACG II, LLC ("Onshore Funds") and three Bermuda-based entities ("Offshore Funds"). After discovery of the Petters fraud, both the Onshore Funds and Offshore Funds began to wind up their respective affairs, and liquidation proceedings were commenced for the Offshore Funds in the Supreme Court of Bermuda, Commercial Court.
D. Acorn — Polaroid Litigation
Acorn has asserted claims of $290,500,725.10 against the Polaroid Bankruptcy Estates, allegedly secured by senior liens against substantially all of the Polaroid Bankruptcy Estates' assets, including accounts, inventory, and certain North American trademarks.
Acorn argued prior to the settlement that its secured claims arose out of certain loans made by Acorn to PAC Funding, an obligation of Polaroid to replenish a blocked account, and Polaroid's guaranty of all obligations owed by PAC Funding to Acorn. Notably, Acorn's claims against the Polaroid Bankruptcy Estates compete against those asserted by Kelley on behalf of PCI and PGW and PAC Funding. Some of PCI's most valuable assets are: (1) the approximately $28 million in secured claims it has asserted against the Polaroid Bankruptcy Estates, (2) non-priority, general unsecured claims of approximately $11.4 million it has asserted against the Polaroid Bankruptcy Estates for various inter-company notes, and (3) the over-$180 million claim Petters Capital, LLC has asserted against the Polaroid Bankruptcy Estates. Asset (3) is valuable because PCI anticipates being the only material creditor of Petters Capital, holding in excess of 95% of the claims against the Petters Capital estate.
In February 2009 Polaroid commenced an adversary proceeding against Acorn, alleging that approximately $3.9 million in transfers made by Polaroid to Acorn were preferential and fraudulent transfers avoidable pursuant to Bankruptcy Code sections 544, 547, and 548 and Minn. Stat. § 513.41, et seq. ("Polaroid Adversary Proceeding"). The Polaroid Adversary Proceeding has been vigorously litigated, with both parties engaging in extensive discovery. As of the date of the hearing on the Settlement, the Polaroid Bankruptcy Estates had incurred more than $1 million in fees and expenses. Cross-motions for summary judgment were pending at the time the parties pursued (and ultimately consummated) settlement discussions.
E. PCI /PAC Funding — Acorn Litigation
On October 10, 2010, Kelley also commenced an adversary proceeding against Acorn, alleging that over $2.7 billion of the transfers made by PCI, PGW, and PAC Funding to Acorn were preferential or fraudulent transfers avoidable under the Bankruptcy Code and Minnesota law ("Petters Adversary"). As of the date of the Settlement, the Petters Adversary had not progressed beyond the filing of the Complaint. The Complaint also seeks disallowance of Acorn's claims — exceeding $312 million — against PCI and PAC Funding.
F. Interlachen's Involvement with PCI.
Appellant Interlachen was one of the last entities to invest in the Petters enterprises before the fraud was exposed. In April 2008 — at a time when PCI and other Petters entities were in default on numerous notes, were entering into numerous forbearance agreements, and the Ponzi scheme was collapsing — Interlachen entered into a short-term, high-interest loan with PCI and Petters for $60 million. As of the petition date, $71,540,984 was due on the loan. Interlachen was not repaid any principal and has asserted a claim of more than $60 million against the PCI Estate.
G. The Settlement.
After extensive discovery and thorough briefing in the Polaroid Adversary Proceeding, Kelley, the Polaroid Trustee, Acorn, the Receiver, Petters Aviation and Elite negotiated a settlement over the course of several months. The Settlement has several key components, including:
The Settlement effectively resolves all disputes between Acorn and the other parties, thereby resolving numerous adversary proceedings pending in four different bankruptcy cases. In addition to the bankruptcy court's approval of the Settlement in the PCI Bankruptcy Case, the Settlement was contingent on: (1) the approval of the bankruptcy court (Kressel, J.) in the Polaroid Bankruptcy Cases; (2) the approval of the District Court in the Receivership Proceedings; (3) the bankruptcy court's confirmation of the Third Modified Joint Plan of Liquidation ("Aviation/Elite Plan") in the Aviation Bankruptcy Cases; and (4) approval by the Bermuda court presiding over the wind-up and liquidation of the Offshore Funds. Judge Kressel, the District Court, and the Bermuda court have all approved of the settlement. The Aviation/Elite Plan was confirmed on March 10, 2011, and became effective on March 25, 2011.
On January 18, 2011, Kelley filed a motion under Fed. R. Bankr. P. 9019 for approval of the Settlement. Interlachen was the only party to object. The Polaroid Trustee also filed a motion for approval of the Settlement in the Polaroid Bankruptcy Cases. On February 8, 2011, the bankruptcy court held a joint hearing on both Motions. After a lengthy hearing, the bankruptcy court orally approved the Settlement and explained its reasoning from the bench.
On February 9, 2011, the bankruptcy court entered an order approving the Settlement, citing its oral findings and conclusions. Interlachen timely appealed, and on March 14, 2011, Interlachen filed an Emergency Motion for a Stay with this Panel. We denied the Motion as procedurally and substantively deficient.
H. ABRG's Motion to Dimiss
On July 1, 2011, Appellee ABRG (Acorn's successor-servicer in interest) filed a motion to dismiss on the grounds that this appeal has been rendered moot (constitutionally and equitably) by the performance of many aspects of the Settlement since it was approved by the bankruptcy court, including:
After receiving Interlachen's response, we entered an order on July 21, 2011, stating that we would take ABRG's motion with the merits of the appeal.
III. DISCUSSION
A. ABRG's Motion to Dismiss is moot.
We first dispose of ABRG's motion to dismiss. While it has considerable merit,
B. The bankruptcy court did not abuse its discretion in approving the Settlement.
Interlachen's numerous objections to the Settlement can be distilled into two categories: those that assign error to the sufficiency of the record underlying the bankruptcy court's conclusion that the Settlement is reasonable, and those directed at the substance of the bankruptcy court's determination that the Agreement is reasonable. Although these are, in essence, two sides of the same analytical coin, for clarity we discuss each separately.
1. The record upon which the bankruptcy court based its approval of the Settlement was sufficient.
Interlachen argues that the bankruptcy court erred in approving the settlement without sufficient evidence that it was in the best interests of the estate. We disagree.
The sufficiency of a record underlying a decision to approve a settlement depends on the circumstances of each case. While an evidentiary hearing might be necessary in some cases, it isn't in others.
In addition to Judge Kishel's extensive familiarity with the issues and dynamics of this highly complex case — a difficult-to-quantify yet significant factor
It is also notable that Interlachen did not offer any evidence to demonstrate that the settlement was unreasonable.
The fact that the bankruptcy court's oral ruling did not segregate or specifically enumerate the evidence before it does not undermine its ultimate conclusion that the Settlement is in the best interest of the estate. Therefore we find that the record, taken as a whole, supports approval of the Settlement.
2. The Settlement satisfies the Flight Transportation/Drexel Factors.
As noted above, to be approved, a settlement need not be perfect, it must merely "not fall below the lowest point in the range of reasonableness." The reasonableness of a settlement is determined by reference to what are known as the Flight Transportation or Drexel (or Drexel Loomis) factors. Although these refer to different cases,
a. Likelihood of Success
Interlachen maintains that the bankruptcy court erred in finding that the Trustee's likelihood of success in the Petters Adversary was low enough to justify the Settlement, but it offers little more than emphatic language to support its argument. In contrast, the bankruptcy court evaluated the relative strength of the parties' positions based on its familiarity with ABRG's defenses in the Polaroid-Acorn litigation, on an understanding of the unsettled nature of the law implicated by the adversary (see section c. below), and extensive input from the Trustee and PCI Creditors Committee. The bankruptcy court also properly considered the skill and tenacity ABRG had demonstrated in advancing its interests in the bankruptcy case and in other litigation with the Trustee. Based on all of theses factors, the bankruptcy court's determination that the Trustee's likelihood of success (or lack thereof) in the Petters Adversary warranted approval of the settlement.
b. Difficulty of Collection
The Trustee, the PCI Creditors Committee and ABRG all represented to the bankruptcy court that ABRG's financial condition would make it difficult to collect any judgment that the Trustee might obtain against it. Interlachen has not disputed this assertion — in its brief or at oral argument. Rather, it sidesteps the issue by arguing that if the Trustee obtained a judgment against ABRG, the disallowance of Acorn/ABRG's claim against the PCI estate under 11 U.S.C. § 502(d) is tantamount to a recovery and therefore reduces the collection risk associated with the litigation.
Although the operation of § 502(d) under these circumstances might provide the PCI estate with a benefit in the form of a reduction of the claims pool, that benefit is difficult to quantify without knowing the size of the estate and the size of the claims pool, whereas the value of a worthless judgment is quantifiable: It's zero minus the costs of litigation. Considered in conjunction with the complexity of the litigation and the immediate, concrete benefits that will inure to the PCI bankruptcy estate as a result of the settlement, we cannot say that the bankruptcy court committed clear error in not finding that § 502(d) offset the collection risk associate with the litigation.
c. Complexity of the Litigation
Interlachen largely glosses over this factor, arguing that the cost and complexity of the litigation "alone" does not support approval of the Settlement, and that § 502(d) offers a straightforward approach to the Petters Adversary. But, as discussed above, § 502(d) does not significantly strengthen the Trustee's hand against ABRG. And the complexity of the litigation is not the only factor supporting the bankruptcy court's approval of the settlement; all of the Flight Transportation factors weigh in favor of its approval. Nonetheless, the bankruptcy court did not err in finding that pursuing the Petters Adversary would be exceedingly complex and costly and that this complexity supports approval of the adversary.
Aside from the noted and obvious complexity of pursuing the recovery of $2.7 billion from an entity that had already demonstrated its tenacity in defending a roughly $3.9 million preference action against it, the uncertainty surrounding at least two issues in the Petters Adversary — the proper measure of fraudulent transfer avoidance and recovery in a Ponzi scheme and the fact-intensive inquiry necessary to determine a defendant's good faith — pose particular challenges to the litigation.
d. Paramount Interest of Creditors and Proper Deference to their Reasonable View in the Premises
Interlachen argues vehemently that the Settlement favors ABRG to the detriment of other creditors, but Interlachen wholly fails to address the significant and telling fact that, despite notice to over 100 creditors, Interlachen was the only creditor to object, and the PCI Creditors Committee endorsed the Settlement, noting at length at the hearing that it did so only after a thorough consideration and extensive analysis:
The bankruptcy court's approval of the Settlement gave proper deference to these views.
In sum, the bankruptcy court's finding that the Settlement satisfied the Flight Transportation factors is not clearly erroneous.
On a final note, we cannot ignore the fact that two other federal judges — Judge Montgomery of the United States District Court for the District of Minnesota and Judge Kressel of the Bankruptcy Court for the District of Minnesota — have placed their imprimatur on this settlement. Admittedly, the Flight Transportation factors do not take into account other courts' opinions of a settlement (which would be a non sequitur under normal circumstances), and these courts weren't evaluating the settlement from the perspective of the PCI bankruptcy estate. But they also weren't evaluating the Settlement from Acorn's or ABRG's perspective, which undermines Interlachen's contention that the Settlement is grossly biased in favor of Acorn and ABRG. These approvals of the Settlement make it extremely difficult, if not impossible, to conclude the Settlement fell below the lowest point in the range of reasonableness.
CONCLUSION
For the reasons stated above, the order of the bankruptcy court approving the Global Settlement is hereby affirmed.
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