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Ritchie Capital Management, LLC v. Costco Wholesale Corp.

United States District Court, N.D. Illinois, Eastern Division

March 30, 2018




         Ritchie Capital Management is an investment firm that is trying to recoup losses that it attributes, at least in part, to a fraud scheme in which the Defendants allegedly participated. The scheme was carried out by Thomas Petters, who agreed to purchase various goods that ultimately would be supplied to Costco. R. 10, Am. Compl. at 1-2 ¶¶ 3-5; 12 ¶¶ 26, 29; 15 ¶ 37.[1] Petters funded the scheme with loans from Lancelot hedge funds, in which Ritchie had invested. Id. at 3-4 ¶¶ 7-8; 17 ¶ 51. In reality, Petters purchased very few goods, and Petters used new investor money to pay off older loans. See Am. Compl. at 4 ¶ 11.[2] After the Ponzi scheme was revealed in 2008, Lancelot filed for bankruptcy. In re Lancelot Investors Fund, L.P., 408 B.R. 167, 169-70 (Bankr. N.D.Ill. 2009).[3] Ritchie allegedly lost over $100 million in its investments, and now sues Costco (and one of its subsidiaries, National Distributors) for fraud, aiding and abetting that fraud, and civil conspiracy. Am. Compl. at 23-25 ¶¶ 78, 82, 86, 90. Costco and National Distributors move to dismiss the Amended Complaint in its entirety. R. 38, Def. Mot. to Dismiss at 1. For the following reasons, the motion is granted because the Court lacks personal jurisdiction over the Defendants.

         I. Background

         For purposes of evaluating the dismissal motion, the Court accepts as true the allegations in the Amended Complaint. Costco Wholesale Corporation is a general retailer that operates warehouse stores throughout the United States, selling wholesale goods at below-market prices. Am. Compl. at 7 ¶ 3. Costco and its wholly-owned subsidiary, National Clothing Company (which does business under the name National Distributors), are both incorporated and have principal places of business in Washington. Am. Compl. at 5 ¶ 1b-c.[4] Because of its discount retailer status, Costco was unable to purchase (in order to resell) certain brand-name consumer electronics-for example, plasma televisions-due to manufacturer restrictions on selling to warehouse clubs. Id. at 7 ¶¶ 4-5. To get around those constraints, Costco used a series of other businesses and people, called diverters, to purchase the products it wanted to sell and funneled the products through its own subsidiary, National Distributors. Id. at 1 ¶ 2; see Id. at 8 ¶ 11.

         In around 1992 (long before Ritchie entered the picture), Costco began a business relationship with Thomas Petters, a diverter with ties to authorized electronic distributors. Am. Compl. at 7 ¶ 5. To keep up with the volume of bulk purchases that Costco required, Petters needed additional financing. See Id. at 1 ¶¶ 2-3. In around 2000, General Electric Capital Corporation (for convenience's sake, GE) issued a $50 million line of credit to Petters to finance the product purchases for Costco, based on purchase orders that supposedly had been issued by Costco and National Distributors; the purchase orders provided a guarantee of payment. Id. at 8 ¶¶ 11-12.

         According to Ritchie, GE's issuance of the line of credit is when Costco became aware of Petters's fraud. Am. Compl. at 9 ¶ 14. In October 2000, GE requested that Costco verify fourteen purchase orders, which totaled over $50 million. Id. at 8-9 ¶ 13. Costco discovered that the purchase order numbers touted by Petters as proof of his creditworthiness were actually issued to other vendors. Id. at 9 ¶ 14. Petters allegedly confirmed to Costco that he had used the purchase order numbers to intentionally misrepresent to GE that Costco owed him around $50 million. Id. At this point, instead of informing GE of Petters's fraud, Costco agreed to help Petters refinance the GE debt to avoid disclosing the product diversion scheme. Id. at 9 ¶ 17. Costco allegedly provided Petters with what appeared to be checks totaling $48 million, so that Petters could verify to GE that Costco in fact had owed Petters money. Id. at 10-11 ¶¶ 18-23. In truth, however, the checks had already been issued to other payees in much smaller amounts, and had been altered to name Petters as the payee in the inflated amounts. Id. at 11 ¶ 21.

         Even after the GE debacle, Costco asked Petters to finance other diverters, and to do so without revealing Costco as the ultimate purchaser. Am. Compl. at 12-13 ¶¶ 29-30. Costco allegedly provided Petters with fake purchase orders in order to induce lenders to finance loans to him, and Petters in turn would provide the fake purchase orders to diverters, so in the end it looked like Petters was the actual purchaser rather than an intermediate financer. Id. at 12-13 ¶ 33. To get financing for the ongoing scheme, Petters created a number of special purpose entities based out of Minnesota to appear as the purchaser of diverted goods. Id. at 15 ¶ 38. Petters urged an associate, Greg Bell, to found Lancelot Investment Management, another company created to provide financing for the Costco diversions. Id. ¶ 39-40.

         This is where Ritchie Capital Management enters the picture. Ritchie is an investment administrative manager and has its principal place of business in the Cayman Islands. Am. Compl. at 5 ¶ 1a; id. at 6 ¶ 1. Ritchie relied on a memorandum, prepared by Bell on behalf of Lancelot, detailing a low-risk investment in Lancelot, because the goods to be purchased with investor money already had a bound buyer-supposedly Petters. Id. at 16-17 ¶¶ 49-52. Ritchie Capital invested in Lancelot based on these representations, as well as on Bell's claims that Lancelot had credit insurance (which was obtained using the fraudulent purchase orders). Id. at 17-18 ¶¶ 53-56. Each year, Ritchie received audited financial statements for Lancelot and relied on them to invest more money in Lancelot. Id. at 18 ¶¶ 57-58. Eventually, in around 2007, Ritchie explored the sale of its shares in a $1.1 billion restructuring, and the valuation opinion took the Lancelot Fund values into account. Am. Compl. at 20 ¶¶ 64-66. The valuation opinion set the interests in Lancelot at $50 million. Id. at 21 ¶ 69.

         The fraud scheme began to unravel when the FBI discovered that Petters was not actually selling merchandise to Costco, and had not been since around 2003. Am. Compl. at 19 ¶ 60. Once it became clear that the Lancelot funds were worthless, Ritchie incurred a $50 million liability for the overvaluation. Id. at 21 ¶ 72. Ritchie also lost its chance to collect around $44 million in deferred payments. Id. at 21-22 ¶ 73.

         Not surprisingly, Petters was charged in a federal criminal case. In 2009, during Petters's criminal trial, a senior-management Costco executive testified that Costco did “very little” business with Petters in 2000; Costco had stopped working with Petters by 2008; and Costco had never issued fake purchase orders or guarantees. Am. Compl. at 22 ¶ 74. More recently, in 2014, Ritchie learned that Costco allegedly did conduct “substantial” business with Petters, even after discovering the false purchase orders, and issued additional guarantee letters to Petters after 2006. Id. at 22 ¶ 75.

         Ritchie's direct losses from its Lancelot investments exceed $94 million. Am. Compl. at 19 ¶ 60. Now, Ritchie claims Costco contributed to the wrongful acts of Petters, Bell, and Lancelot. The Amended Complaint asserts claims for aiding and abetting, fraud, and conspiracy. See Id. at 23 ¶ 78; 24 ¶ 86; 25 ¶¶ 90-94. Ritchie alleges that Costco's involvement with Petters gave an “air of legitimacy” to Lancelot's actions. Id. at 19 ¶ 59. Finally, Ritchie argues that Costco fraudulently concealed its relationship with Petters during the criminal trial. Id. at 22 ¶ 76. Costco and National Distributors move to dismiss, arguing that this Court lacks personal jurisdiction over them; that Ritchie lacks standing to bring the suit; and that the Amended Complaint fails to state a claim. See Def. Mot. to Dismiss. As explained below, the defense is right that there is no personal jurisdiction over them in this District, so the case is dismissed on that ground.

         II. Standard of Review

         “[A] complaint need not include facts alleging personal jurisdiction.” Steel Warehouse of Wis., Inc. v. Leach, 154 F.3d 712, 715 (7th Cir. 1998). However, the plaintiff bears the burden of establishing that personal jurisdiction is proper once challenged by the defendant. Purdue Research Found v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003). When evaluating personal jurisdiction on a motion to dismiss, the plaintiff “need only make out a prima facie case of personal jurisdiction.” Id. at 782 (quoting Hyatt Int'l Corp. v. Coco, 302 F.3d 707, 713 (7th Cir. 2002)). In considering the prima facie case, the plaintiff is “entitled to the resolution in its favor of all disputes concerning relevant facts presented in the record.” Id. at 782 (quoting Nelson by Carson v. Park Indus., Inc., 717 F.2d 1120, 1123 (7th Cir. 1983)). This is in contrast to what is “[n]ormally [done] on review of a motion to dismiss, ” where the Court “accepts all well-pleaded allegations in the complaint as true.” Hyatt, 302 F.3d at 713. A defendant can submit affidavits or other materials challenging personal jurisdiction, which a plaintiff must affirmatively refute with supporting evidence. But a defendant's uncontested assertions will be accepted as true. See Purdue Research Found., 338 F.3d at 782-83.

         III. ...

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