United States District Court, N.D. Illinois, Eastern Division
Ronald R. Peterson, not individually but as Chapter 7 Trustee for the bankrupt estates of Lancelot Investors Fund, L.P., Lancelot Investors Fund II, L.P., Lancelot Investors Fund Ltd., Colossus Capital Fund, L.P., and Colossus Capital Fund, Ltd., Plaintiff,
General Electric Company, et al. Defendants.
MEMORANDUM OPINION AND ORDER
ELAINE E. BUCKLO, District Judge.
In this case, Ronald J. Peterson, in his capacity as the Chapter 7 Trustee for the bankrupt estates of several investment funds I collectively refer to as the "Lancelot Funds" or the "Funds" has sued three related accounting firms (collectively, "McGladrey") and Simon Lesser, one of the firms' partners. The Trustee alleges that defendants' negligent and reckless audits in 2007 and, alternatively, in 2008, failed to detect that the Funds had been duped into investing, from 2003 to 2007, in collateralized notes issued by an entity that turned out to be at the heart of a Ponzi scheme orchestrated by Thomas Petters. Before me is defendants' motion for summary judgment, which asserts two bases for judgment in their favor. Defendants first claim that the equitable affirmative defense of in pari delicto bars the Trustee from obtaining any recovery on his claims against them. Second, they argue that an exculpation clause in their contract with the Funds also bars the relief the Trustee seeks. As explained below, I agree that the undisputed facts establish the first of these affirmative defenses. Accordingly I need not reach the second.
I previously dismissed an earlier iteration of the Trustee's complaint, concluding that allegations that the Funds' manager, Gregory Bell, discovered and began participating in Petters' scheme during the time period for which the Trustee sought to recover losses on behalf of the Funds, established that the Funds were, indeed, in pari delicto with (i.e., at least as culpable as) defendants for those losses. The Seventh Circuit agreed with my conclusion that Bell's knowledge was attributable to the Funds, and held that "if Bell was in on Petters's scam, then the Funds have no claim against McGladrey for failing to detect and warn the Funds about something that Bell, and thus the Funds, already understood." Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594 (7th Cir. 2012)(" McGladrey "). But because the appellate court disagreed that the Trustee's pleadings alone established Bell's participation in the Ponzi scheme, it remanded the case for further proceedings.
Since then, the Trustee has twice amended his complaint. The substantive portion of the operative, Third Amended Complaint begins by describing how Bell came to be acquainted with Petters, then goes on to explain why Bell "trusted" Petters and why Bell agreed to set up new hedge funds-including the Lancelot Funds-to invest almost exclusively in an investment program that Petters explained as follows:
a) Lancelot I would loan money to Thousand Lakes [a Special Purpose Vehicle ("SPV"), owned and controlled by Petters Company, Inc. ("PCI")];
b) Thousand Lakes would issue SPV Notes to Lancelot I, which would allocate/assign some of the Notes (or interests in the Notes) to Lancelot II and/or Lancelot-Cayman;
c) Thousand Lakes was to use the loan proceeds to purchase consumer electronics from either of two vendors, Enchanted Family Buying Company or Nationwide Resources International, Inc., to fulfill pre-existing purchase orders from Costco's subsidiary;
d) PCI was to have pre-sold those electronics to Costco's subsidiary ("National Distributors"), and PCI was to then assign the purchase orders to Thousand Lakes; and
e) the SPV Notes were to be collateralized by Thousand Lakes' (1) inventory of electronics stored in warehouses, and (2) accounts receivable from National Distributors, which were guaranteed by Costco for payment.
Third Amended Complaint, ¶ 15. The complaint goes on to explain that Petters cultivated Bell's continued confidence in the legitimacy of this investment program by documenting each loan the Funds made to Thousand Lakes with at least the following:
a) a National Distributors (Costco) purchase order to PCI, and a Thousand Lakes invoice to National Distributors-providing Bell with verification of the accounts receivable collateral;
b) a Thousand Lakes purchase order to Nationwide (or Enchanted), and a wire transfer confirmation from Thousand Lakes to Nationwide-providing Bell with ...