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Parties Involved:
Douglas A. Kelley
Appellee
Official Committee of Unsecured Creditors
Appellee
Rhone Holdings II, Ltd.
Appellant
Ritchie Capital Management, L.L.C.
Appellant
Ritchie Capital Structure Arbitrage Trading, Ltd.
Appellant
Ritchie Special Credit Investments, Ltd.
Appellant
VICIS Capital Master Fund, Ltd.
Appellee
Yorkville Investments I, LLC
Appellant

Document Text:

United States Court of Appeals

For the Eighth Circuit

___________________________

No. 14-2482

___________________________

Ritchie Capital Management, L.L.C.; Ritchie Special Credit Investments, Ltd.;

Rhone Holdings II, Ltd.; Yorkville Investments I, LLC; Ritchie Capital Structure

Arbitrage Trading, Ltd.

lllllllllllllllllllllAppellants

v.

Douglas A. Kelley, in his capacity as the Chapter 11 Trustee of Petters Company,

Inc.; VICIS Capital Master Fund, Ltd.; Official Committee of Unsecured Creditors

lllllllllllllllllllllAppellees

____________

Appeal from United States District Court 

for the District of Minnesota - Minneapolis

____________

 Submitted: February 12, 2015

 Filed: May 4, 2015 

____________

Before BYE, BEAM, and BENTON, Circuit Judges.

____________

BYE, Circuit Judge.

Ritchie Capital Management, L.L.C., and other appellants (collectively,

Ritchie) objected to an allocation of proceeds derived from a settlement between

Douglas A. Kelley, in his capacity as Chapter 11 bankruptcy trustee of Petters

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Company, Inc. (PCI), and VICIS Capital Master Fund, Ltd. (VICIS). The bankruptcy

court overruled the objection and approved the settlement and the allocation of 1

proceeds. Ritchie appealed, and the district court affirmed. Ritchie again appeals, 2

alleging the bankruptcy court abused its discretion by approving the allocation. We

affirm.

I

Prior to his downfall in September 2008, Thomas Petters orchestrated a $3.65

billion Ponzi scheme. This Court has described in several ofits opinionsthe specifics

of Petters’s scheme and the numerousresulting civil disputes. See, e.g., United States

v. Petters, 663 F.3d 375, 379-80 (8th Cir. 2011); Ritchie Capital Mgmt., L.L.C. v.

Jeffries, 653 F.3d 755, 758-60 (8th Cir. 2011); Ritchie Special Credit Invs., Ltd. v.

U.S. Trustee, 620 F.3d 847, 850-51 (8th Cir. 2010). We recite only those facts most

relevant to the instant appeal.

Petters, in facilitating his scheme, purportedly operated a “diverting” business

primarily through PCI which purchased electronics in bulk and then resold them at

high profits to major retailers. The business, however, was a sham, and the only

influx of money came from loans or investments. Between February 1, 2008, and

May 9, 2008, Ritchie invested in Petters’s scheme, advancing approximately $189

million to PCI. In exchange for the funds, Ritchie received promissory notes. Ritchie

assigned two of its promissory notes to VICIS on February 19, 2008, with face values

totaling $25 million.

The Honorable Gregory F. Kischel, Chief Judge, United States Bankruptcy 1

Court for the District of Minnesota.

The Honorable Ann D. Montgomery, United States District Judge for the

2

District of Minnesota.

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Beginning on June 13, 2008, through September 2008, PCI and Petters made

a series of nineteen payments of not lessthan $23,785,508 to Ritchie. Eighteen of the

payments originated from PCI, and Petters made the nineteenth payment by

withdrawing funds from his personal checking account. Ritchie used a portion of the

funds it received from PCI and Petters to pay VICIS $17,703,227.39 based upon the

assigned promissory notes. Of the amount received by VICIS, approximately 15%

($2,701,200) originated from Petters’s payment and approximately 85%

($15,002,027.39) originated from PCI.

After Petters’s scheme ended in September 2008, a receivership was created

for Petters; PCI; Petters Group Worldwide, LLC (PGW); and other related entities. 

Kelleywas appointed asthe receiver and thereafter petitioned for relief under Chapter

11 of the United States Bankruptcy Code on behalf of PCI and PGW in accordance

with the authority granted to him pursuant to the receivership order. The bankruptcy

court appointed Kelley asthe Chapter 11 trustee for PCI and PGWin February 2009.

3

Due to the extent and impact of the fallout from Petters’s scheme, the United

States, Kelley in his positions as the trustee and the receiver, and the bankruptcy

trustee for Polaroid Corporation, one of Petters’s wholly-owned companies, entered

into a coordination agreement “to maximize recovery to victims and creditors and

minimize receivership and bankruptcy expenses . . . .” The coordination agreement

recognized there is a “significant overlap ofidentity” between the victims of the fraud

and the creditors of the bankruptcy estates and “competing litigation would result in

Ritchie previously filed an objection to Kelley’s dual appointments as the

3

trustee and the receiver based on a conflict of interest. The bankruptcy court

overruled Ritchie’s objection, finding no disabling conflict of interest which

precluded Kelley from operating as both. We affirmed the bankruptcy court in

Ritchie Special Credit Investments, Ltd. v. U.S. Trustee, 620 F.3d 847, 856 (8th Cir.

2010).

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the overall diminishment of the recovery for victims and creditors alike and undue

delay in the distribution of assets[.]”

On October 10, 2010, Kelley, as the trustee, commenced an adversary

proceeding against Ritchie, VICIS, and other defendants, seeking to recover alleged

fraudulent and preferential transfers under bankruptcy and state law. VICIS and

Ritchie opposed the complaint. Kelley, as the receiver, also alleged the transfer by

Petters was fraudulent and therefore recoverable, but he had yet to commence an

action on this particular claim. Conversely, VICIS held a claim against PCI’s

bankruptcy estate to recover the amount which remained outstanding on the

promissory notes.

After the filing of the adversary proceeding, Kelley met with VICIS to discuss

a resolution of the claims. Kelley and VICIS, along with representation for the

unsecured creditors’s committee appointed in PCI’s bankruptcy case, mediated the

dispute and reached a settlement. Pursuant to the settlement agreement, VICIS paid

$7.5 million to Kelley in return for a global release of all claims held by and against

it by either the receivership or the bankruptcy estate. The settlement agreement was

contingent on approval by both the district court overseeing the receivership and the

bankruptcy court.

Kelley filed a verified motion to approve the settlement agreement with the

bankruptcy court on February 6, 2014. The motion indicated the settlement

agreement, among other things, resolved the disputes between Kelley, as the trustee

and the receiver, and VICIS. The motion further included an allocation of the $7.5

million received from VICIS. According to Kelley, because Petters’s payment to

VICIS constituted 15% of the overall amount received by VICIS and the bankruptcy

estate did not have a claim to these funds, Kelley intended to allocate 15% of the

funds received from VICIS to the receivership. Kelley indicated this allocation was

part of the global resolution with VICIS. The unsecured creditors’s committee

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supported the settlement agreement and the allocation, but Ritchie, although

supporting the settlement agreement, did not support the allocation and filed an

objection.

The bankruptcy court held a hearing on the motion and heard argument from

Kelley, VICIS, the unsecured creditors’s committee, and Ritchie. At the conclusion

of the hearing, the bankruptcy court overruled Ritchie’s objection and approved the

settlement agreement and the allocation of the funds, finding the allocation was

reasonable because Kelley applied an objective mathematical calculation to divide the

funds, the unsecured creditors’s committee participated in the settlement process and

approved of the allocation, and the circumstances in the case dealt with complex

issues, unsettled law, and massively complicated factual disputes. The district court

overseeing the receivership also approved the settlement agreement and the

allocation.

Ritchie elected to appeal the bankruptcy court’s order regarding the allocation

to the district court pursuant to 28 U.S.C. § 158. The district court affirmed the

allocation as reasonable, concluding the bankruptcy court properly followed the

factors found in Lambert v. Flight Transportation Corp. (In re Flight Transportation

Corp. Securities Litigation), 730 F.2d 1128, 1135 (8th Cir. 1984), Kelley as the

trustee did not have a claim to the 15% paid by Petters, multiple assurances of

trustworthiness supported the agreement although Kelley acted as the trustee and the

receiver, and the allocation did not violate the coordination agreement. Ritchie

appeals, arguing the bankruptcy court abused its discretion by approving the

allocation.

II

“We sit as a second court of review in bankruptcy matters, applying the same

standards of review as the district court . . . .” Velde v. Kirsch, 543 F.3d 469, 472

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(8th Cir. 2008). “A bankruptcy court’s approval of a settlement will not be set aside

unless there is plain error or abuse of discretion.” Tri-State Fin., LLC v. Lovald, 525

F.3d 649, 654 (8th Cir. 2008) (internal quotation marks omitted). “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.” Ritchie Special Credit Invs., Ltd,

620 F.3d at 853. A settlement, however, is not required to constitute “the best result

obtainable”; instead, the standard for evaluation “is whether the settlement isfair and

equitable and in the best interests of the estate.” Tri-State Fin., LLC, 525 F.3d at 654

(internal quotation marks omitted). The court need only ensure “the settlement does

not fall below the lowest point in the range of reasonableness.” Id. In assessing the

reasonableness of a settlement, the court considers: “‘(A) the probability of success

in the litigation; (B) the difficulties, if any to be encountered in the matter of

collection; (C) the complexity of the litigation involved, and the expense,

inconvenience and delay necessarily attending it; and (D) the paramount interest of

the creditors and a proper deference to their reasonable views in the premises.’” Id.

(alteration omitted) (quoting Protective Comm. for Indep. Stockholders of TMT

Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968)).

Ritchie first challenges the bankruptcy court’s approval of the allocation by

contending the allocationwaswholly gratuitous, providing nothing to PCI’s creditors,

and was without consideration. The settlement agreement, which contains an

integration clause, makes no mention of the allocation and provides VICIS will pay

$7.5 million to Kelley as the trustee without mentioning his position as the receiver. 

When considering that the settlement agreement was fully integrated, Ritchie

maintains it was unreasonable for the bankruptcy court to approve the allocation.

Ritchie’s argument, however, overlooks the posture of the settlement

agreement before the bankruptcy court. Prior to the settlement agreement becoming

enforceable, the bankruptcy court needed to approve the agreement. See Fed. R.

Bankr. P. 9019(a). Consequently, the integration clause found in the settlement

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agreement was not yet enforceable while Kelley’s motion for approval was pending

before the bankruptcy court. The settlement was also contingent on approval by the

district court overseeing the receivership. During the hearing on Kelley’s motion

before the bankruptcy court, the bankruptcy court considered the arguments presented

by the parties involved in the mediation, including Kelley, VICIS, and the unsecured

creditors’s committee. Each of these parties indicated it considered the allocation as

a part of the global resolution, which released claims held by and against VICIS for

both the bankruptcy estate and the receivership. Without the allocation, according

to the parties, settlement would not have occurred, resulting in PCI’s creditors

missing the opportunity to receive $6,375,000. Consequently, it was not an abuse of

discretion for the bankruptcy court to consider the allocation and the settlement

agreement as a single settlement. See Lurie v. Blackwell (In re Popkin & Stern), 196

F.3d 933, 938 (8th Cir. 1999) (“Several instruments constitute a single contract when

they pertain to the same transaction and when the parties intend for them to be

construed as such.”).

Ritchie continues to maintain the district court’s reasoning wasflawed because

even though Petters transferred some funds, the amount received by VICIS from PCI

totaled over $15 million, which is more than double the payment being made by

VICIS, meaning PCI could properly receive the entire $7.5 million from VICIS. 

Ritchie asserts the district court erred by assuming a portion of the funds paid by

VICIS needed to be transferred to the receivership based on Petters’s transfer of

funds. Ritchie contends the receivership released any claims it had to the VICIS

funds by executing the settlement agreement.

Ritchie’s argument again overlooks that the settlement agreement was subject

to approval by the bankruptcy court and the district court prior to it being enforceable. 

Further, as previously explained, the bankruptcy court did not err by considering the

allocation as a part of the overall settlement between Kelley and VICIS, and a

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bankruptcy court may approve a settlement even though it may not be “the best result

obtainable.” Tri-State Fin., LLC, 525 F.3d at 654 (internal quotation marks omitted).

Next, Ritchie argues the allocation is not in the best interests of PCI’s creditors

because Kelley was irredeemably conflicted by serving as both the trustee and the

receiver. Ritchie alleges Kelley negotiated against himself by serving in dual

capacities, representing adverse interests, and therefore called the fairness of the

arrangement into question. In support of its argument, Ritchie cites York

International Building, Inc. v. Chaney (In re York International Building, Inc.), 527

F.2d 1061, 1076 (9th Cir. 1975), In re Las Colinas, Inc., 426 F.2d 1005, 1014 (1st Cir.

1970), and Access Cardiosystems, Inc. v. Fincke (In re Access Cardiosystems, Inc.),

340 B.R. 127, 148 (Bankr. D. Mass. 2006). We disagree.

In Ritchie Special Credit Investments, Ltd., 620 F.3d at 853-54, we considered

whether Kelley held an interest materially adverse to the bankruptcy estate because

of his appointment as receiver. We determined the bankruptcy court did not abuse

its discretion in concluding “Kelley’s role and interests as a receiver do not

predispose him towards forfeiture or amount to a disqualifying material adverse

interest.” Id. at 854. We also stated that holding an interest materially adverse to the

interest of the bankruptcy estate generally applies “only to personal interests of the

trustee, not those attributed to him in his representative or fiduciary capacity.” Id. at

853. Ritchie has failed to present any evidence Kelley had or has since developed a

personal interest adverse to the bankruptcy estate or that he is predisposed to favor

the receivership. To the contrary, Kelley applied an objective mathematical formula

to allocate the proceeds between the claims held by the receivership and the claims

held by the bankruptcy estate.

Although Ritchie contends the receivership’s claims against VICIS were

speculative and not equal in strength to the bankruptcy estate’s claims, the bankruptcy

court considered the claims of both the receivership and the bankruptcy estate during

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the hearing, finding the bankruptcy estate did not have a claim to the funds provided

by Petters, and found it did not appear asthough the statute of limitations had expired

on the receivership’s claims. The bankruptcy court was not required to conduct an

extensive investigation of the claims in order to approve the settlement. See Martin

v. Cox (In re Martin), 212 B.R. 316, 319 (B.A.P. 8th Cir. 1997) (“[I]t is not necessary

for a bankruptcy court to conclusively determine claims subject to a compromise, nor

must the court have all of the information necessary to resolve the factual dispute, for

by so doing, there would be no need of settlement.”).

Ritchie next maintains there was no trustworthiness in the process utilized to

arrive at the allocation to protect creditors, and even if there was, it would not cure

Kelley’s conflict ofinterest. In support ofits contention, Ritchie argues the allocation

was not discussed during the mediation, which resulted in only the settlement

agreement, and the unsecured creditors’s committee’s support of the agreement is

unfounded.

First, as we previously considered, Ritchie has failed to present evidence

demonstrating Kelley’s dual appointments as the trustee and the receiver result in an

interest materially adverse to the bankruptcy estate. Second, we find Ritchie’s

arguments regarding a lack of trustworthiness not persuasive. Ritchie did not

participate in the mediation, and consequently, can only speculate as to what was

discussed.

Additionally, the support ofthe unsecured creditors’s committee is noteworthy. 

“Creditor Committees have the responsibility to protect the interest of the creditors;

in essence, the function of a creditors’ committee is to act as a watchdog on behalf of

the larger body of creditors which it represents.” Loop Corp. v. U.S. Trustee, 379

F.3d 511, 519 (8th Cir. 2004) (internal quotation marks omitted). The committee

participated in the mediation and indicated it supported the allocation because it is in

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the best interests of the unsecured creditors for the bankruptcy estate to receive a

substantial settlement in a very complex case which they may not otherwise receive.

Ritchie’s next argument is the bankruptcy court erred because it did not have

an adequate record before it to determine whether the allocation was fair and in the

best interests of the creditors. “The sufficiency of a record underlying a decision to

approve a settlement depends on the circumstances of each case.” In re Petters Co.

v. Kelley, 455 B.R. 166, 173-74 (B.A.P. 8th Cir. 2011). “The critical inquiry on

appeal is not the quantum of evidence adduced at a hearing on a settlement, but rather

whether a bankruptcy court apprisesitself ‘of all facts necessary for an intelligent and

objective opinion of the probabilities of ultimate success should the claim be

litigated[.]’” Id. (quoting Anderson, 390 U.S. at 424).

Contrary to Ritchie’s assertion, there is no indication the bankruptcy court did

not have the facts necessary to approve the settlement. Based upon the bankruptcy

court’s extensive involvement in Petters’s cases, Kelley’s verified motion, the

settlement agreement, and the statements of Kelley, VICIS, and the unsecured

creditors’s committee, the bankruptcy court had the facts necessary to consider the

four In re Flight Transportation Corp. Securities Litigation factors and approve the

settlement. Specifically, the bankruptcy court explained the case involves “complex

issues, unsettled law, and massively complicated factual disputes,” and Ritchie’s

approach to the resolution of the claims “would entail a much larger infrastructure,

much more procedure and much more costs for the resolution of disputes” and would

“grind [the] process down to a much lower speed, make it much more expensive and

potentially drag this on for longer than it will drag on.” The bankruptcy court further

recognized the claims held by VICIS against the receivership, finding they “were

separate transfers on separate occasions from separately derived funds . . . and

involve separate legal merits,” and Kelley applied an objective mathematical formula

according to these figures. The bankruptcy court also considered the $8 million offset

claim VICIS held against the bankruptcy estate for the amountstill outstanding on its

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promissory notes, and as a part of settlement, VICIS released its rights to the claim. 

Accordingly, we find the bankruptcy court made an informed and independent

judgment of the settlement agreement and the allocation and cannot say its decision

“f[e]ll below the lowest point in the range of reasonableness.” Tri-State Fin., LLC,

525 F.3d at 654 (internal quotation marks omitted).

Ritchie’s final challenge to the allocation is that it runs counter to the

coordination agreement which governs the relationship between the receivership and

the bankruptcy estate. Specifically, Ritchie contends the allocation violates

paragraph III.B.2 which provides any recovery based on parallel claims pursued by

Kelley as the trustee and the receiver will inure to the benefit of the bankruptcy

estate. Ritchie maintains the claims held by PCI and the receivership against VICIS 4

are parallel claims and the bankruptcy court’s position with regard to parallel claims

is untenable because the trustee and the receiver will never have overlapping claims

to the same source bank account. Ritchie further argues it does not attempt to assert

personal rights under the coordination agreement but seeks the protection of the

coordination agreement for all of PCI’s creditors.

Assuming for the purposes of our analysis that Ritchie has standing under the

coordination agreement, when reviewing the coordination agreement de novo, see

Anderson v. Hess Corp., 649 F.3d 891, 896 (8th Cir. 2011), we do not find Ritchie’s

argument persuasive. After considering the language contained in paragraph III.B.2,

we interpret the term parallel claims to mean claims arising from the same operative

facts or the same wrongful conduct. See Wirig v. Kinney Shoe Corp., 461 N.W.2d

374, 377-79 (Minn. 1990). Although the claims pursued by Kelley as the trustee and

the receiver against VICIS are similar, they stem from separate wrongful conduct. 

The trustee’s claims are derived from PCI’s conduct, while the receiver’s claims are

The bankruptcy court determined the claims were not parallel claims because 4

the sources of the funds which were used to make payments to VICIS were separate.

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based upon Petters’s conduct. Consequently, the claims are not parallel. 

Additionally, Ritchie’s argument regarding the lack of a recovery from the same

source bank account overlooks the broad language included in the coordination

agreement which does not limit the variety of claims which the trustee and the

receiver can bring. In other words, merely because the circumstances of this specific

case did not result in parallel claims does not preclude parallel claims from existing

under other circumstances.

III

For the reasons provided, we affirm.

______________________________

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