United States District Court, N.D. Illinois, Eastern Division
FRANCES GECKER, solely as Chapter 7 Trustee of the bankruptcy estate of ark Discovery II, LP, Plaintiff,
GENERAL ELECTRIC CAPITAL CORPORATION, Defendant.
MEMORANDUM OPINION AND ORDER
SIDNEY I. SCHENKIER, Magistrate Judge.
On October 27, 2014, plaintiff Frances Gecker, as Chapter 7 trustee of the bankruptcy estate of Ark Discovery II, LP ("Ark"), filed a complaint against defendant General Electric Capital Corporation ("GECC"), alleging that GECC participated in a civil conspiracy to commit fraud and aided and abetted fraud by entering into an implicit agreement with Thomas Petters ("Petters") and two of his entities - Petters Capital, Inc. and Redtag - to perpetuate a Ponzi scheme. Plaintiff alleges that as a result of Petters's Ponzi scheme, Ark was misled into extending millions of dollars in loans to a phantom supply chain financing business, which were never repaid. Plaintiff seeks to recover Ark's losses of more than $100 million on account of GECC's alleged tortious contributions to the success of the Ponzi Scheme (Doc. #1: Compl. ¶ 6).
Defendant has moved to dismiss plaintiff's complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) on the grounds that: (1) plaintiff does not have standing to sue GECC for aiding and abetting or conspiracy; (2) plaintiff's claims are deficient as a matter of law; and (3) plaintiff's claims are untimely (doc. #41: Mem. in Supp. of Def.'s Mot to Dismiss at 1-2). The motion has now been fully briefed. For the reasons that follow, we grant defendant's motion to dismiss (doc. #40).
We set forth the material factual allegations in the complaint, which the Court accepts as true solely for the purpose of this motion. We supplement those allegations with information from documents in the public record, which we may judicially notice without converting the motion to dismiss in to a motion for summary judgment. Pugh v. Tribune Co., 521 F.3d 686, 691 (7th Cir. 2008).
Beginning in 1994, Petters, through Petters Company, Inc. ("PCI"), operated a multibillion dollar Ponzi Scheme over the course of nearly fifteen years. PCI formed special purpose entities ("SPEs") ostensibly to purchase certain consumer electronics at below wholesale prices, and then to resell them to big box retailers such as Costco. Petters lured investors to advance billions of dollars to fund this enterprise, but unbeknownst to them, there were no true retailers and virtually no merchandise, and the lenders were repaid from monies sourced from other defrauded lenders (Compl. ¶¶ 15-17, 21).
In 1998, defendant GECC, a sophisticated commercial lender, agreed to extend a $50 million line of credit to Petters Capital, an SPE, to finance Petters Capital's purchase of electronics merchandise for resale to Costco and other retailers (Compl. ¶ 27). In return, Petters Capital agreed to pay GECC interest and fees, including "success fees" (generally totaling 10 percent of the purported profit for each transaction) predicated on Petters Capital's gross profit margin on its sale of merchandise (Id. ¶ 28). GECC took a security interest in substantially all of Petters Capital's assets, including the purported accounts receivable generated from merchandise sales, whose proceeds were to be paid by the retailers directly into a lockbox account controlled by GECC (Id. ¶ 30). On or about December 17, 1999, Redtag, another SPE, entered into a $55 million line of credit with GECC ostensibly to finance the purchase of electronic merchandise over the internet (Id. ¶ 31).
In May 2000, GECC learned that accounts receivable in connection with Costco purchases from Petters Capital appeared to have aged past 120 days (Compl. ¶ 32). GECC initiated collection efforts, and prepared a document for Mr. Petters to give to the purchasing arm of Costco requesting verification of outstanding accounts receivable for more than $52 million in purported purchase orders issued by Costco to Petters Capital (Id. ¶ 33). Mr. Petters never forwarded the verification request, instead forging a signature purporting to verify the phony purchase orders (Id. ¶ 34). On June 23, 2000, GECC's Senior Vice President, Paul Feehan, demanded that Petters Capital forward endorsed Costco checks directly to GECC instead of issuing checks to GECC from its own bank account as it had been doing (Id. ¶ 36). Petters Capital never did so, and instead made payment to GECC through checks drawn on Petters Capital's bank account (Id. ¶ 38). Nonetheless, in early July 2000, GECC approved another loan of $1.67 million to Petters Capital to fund a Costco deal (Id. ¶ 39).
On October 9, 2000, GECC terminated the Petters Capital line of credit, and Petters Capital agreed to pay amounts GECC claimed due totaling $45, 891, 229.62, which included $400, 695.63 in success fees (Compl. ¶ 41). On or around October 23, 2000, Mr. Feehan asked Costco to verify whether any amounts remained unpaid in connection with 14 purchase orders, totaling approximately $59, 615, 246.00 (Id. ¶ 42). A Costco employee informed Mr. Feehan that Costco had not issued any of the purchase orders (Id. ¶ 43). When confronted, Mr. Petters told Mr. Feehan that he would pay GECC off with money from new investors, and Petters Capital paid GECC $46, 048, 347.00 as payment in full by December 7, 2000 (Id. ¶¶ 50, 54). GECC provided Mr. Petters with a UCC-3 termination statement, but that statement was not filed at the time (Id. ¶ 99).
On or around December 20, 2000, Mr. Petters contacted Mr. Feehan about making a draw under the Redtag line of credit, ostensibly to fund the purchase of merchandise (Compl. ¶ 56). At Mr. Petters's criminal trial in October 2009, Mr. Feehan testified that back in December 2000, he questioned Mr. Petters about whether that money would simply refinance the investors who refinanced GECC in the Petters Capital facility (Id. ¶ 57). In response, Mr. Petters faxed Mr. Feehan copies of eleven checks from Costco, purporting to show that the previous purchase orders had been paid off, and that the Redtag merchandise was free and clear (Id. ¶¶ 58-59). Nevertheless, Mr. Feehan directed Jack Morrone, the GECC account representative for the Petters accounts, to contact the bank from which the checks were drawn (Id. ¶ 60).
As a result of that inquiry, GECC learned that the amounts that had actually cleared were millions of dollars less than the amounts set forth on the checks Mr. Petters had provided (Compl. ¶ 61). When confronted, Mr. Petters told Mr. Feehan that the bank had erred, but Mr. Feehan did not believe him (Id. ¶ 63). Mr. Feehan asked Mr. Petters for copies of the bank statements showing that the amounts had actually been deposited and cleared, but Mr. Petters never produced them (Id. ¶¶ 63-66). Plaintiff does not allege that GECC provided the requested funding to Redtag.
On December 27, 2000, GECC received a letter from Redtag requesting information, including the nature of any defaults, in connection with Ernst & Young's audit of Redtag's 2000 year-end financial statements (Compl. ¶ 68). In its response to E & Y, dated January 30, 2001, the only default identified by GECC was a "net worth covenant" (Id. ¶ 70). GECC did not notify E & Y, law enforcement, or New York State banking regulators of the Costco checks and purchase orders that GECC had discovered were false (Id. ¶¶ 71, 79, 83). By the end of March 2001, the Redtag line of credit was closed and its amounts due paid in full to GECC, ending GECC's lending relationship with Mr. Petters and his related companies (Id. ¶ 78).
In or around October 2002, PBFP Holdings, LLC, agreed to become a secured lender to Petters Capital, but it refused to extend financing when it discovered that GECC's UCC-1 financing statement was still in effect (Compl. ¶¶ 100-02). Although GECC had provided Mr. Petters with a UCC-3 termination statement in December 2000 when the Petters Capital debt was fully paid, that statement had not been filed (Id. ¶ 99). On February 20, 2003, a Petters employee asked GECC to terminate two outstanding UCC-1 financing statements, which GECC did (Id. ¶¶ 103, 106).
More than four years later, on July 5, 2007, AtoZ Investors Fund (the predecessor in interest to Ark) agreed to lend funds to Edge One, LLC (an SPE created and owned by PCI), on a transaction-by-transaction basis to purchase certain overstock and discontinued electronic merchandise for sale to various big box retailers, including Costco, in return for which Ark would be paid interest and fees from the profits from the sales (Compl. ¶¶ 108-09, 125). Ark operated for the sole purpose of extending receivables-based financing to Edge One (Id. ¶ 15). From approximately October 1, 2007 through September 3, 2008, Ark made thirty loans to Edge One, totaling $159, 010, 000.00, and additional loans totaling $6 million to Petters Group Worldwide, LLC, another company owned and controlled by Mr. Petters (Id. ¶ 122). Ark's insurers sought access to Mr. Petters's warehouses to inspect the merchandise that was purportedly purchased with Ark's loans, but the inspections were postponed and ultimately never took place (Id. ¶ 119). In August 2008, payments due to Ark under the agreement ceased; Ark was informed on a number of occasions that payments were delayed due to late shipments (Id. ¶ 120).
Thereafter, on or around September 24, 2008, Ark learned that search warrants had been executed at Mr. Petters's companies (Compl. ¶ 121). On October 3, 2008, Mr. Petters was arrested (Id. ¶ 22) and charged with creating and executing "a scheme and artifice to defraud and to obtain money and property by means of material false statements and false representations" from approximately January 1, 2000 through October 2, 2008. Criminal Complaint, United States v. Petters, et al., No. 08-MJ-364(FLN) (D. Minn. Oct. 2, 2008), ECF No. 26. Among other things, the criminal complaint issued against Mr. Petters disclosed that the scheme involved the use of "entirely fabricated" purchase orders and other documents "to induce investors to invest money" ( Id., Aff. in Supp. of Crim. Compl., ¶ 7(d)). On that same date, the United States District Court for the District of Minnesota placed PCI into receivership in civil litigation commenced by the United States against Mr. Petters, PCI and others pursuant to 18 U.S.C. § 1345, which is entitled "Injunctions against fraud" (Compl. ¶ 127). The ...