Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 1 of 43 Desc Main UNITED STATES BANKRUPTCY COURT DISTRICT OF MINNESOTA Jointly Administered under Case No. 08-45257 In re: Petters Company, Inc., et al., Court File No. 08-45257 Debtors. (includes: Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc.; Edge One LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.) Court Files No.’s: 08-45258 (GFK) 08-45326 (GFK) 08-45327 (GFK) 08-45328 (GFK) 08-45329 (GFK) 08-45330 (GFK) 08-45331 (GFK) 08-45371 (GFK) 08-45392 (GFK) Chapter 11 Cases Judge Gregory F. Kishel NOTICE OF HEARING AND MOTION TO APPROVE THE SETTLEMENT AGREEMENT ENTERED INTO BY AND AMONG (I) DOUGLAS A. KELLEY, AS THE CHAPTER 11 TRUSTEE OF THE ABOVE-CAPTIONED DEBTORS, (II) EPSILON GLOBAL ACTIVE VALUE FUND II, LTD., (III) SEATTLE CITY EMPLOYEES RETIREMENT SYSTEM, AND (IV) IOTA INVESTMENTS, LLC ______________________________________________________________________________ TO: The Parties in Interest identified in Local Rule 9013-3(a)(2). 1. Douglas A. Kelley (the “Trustee”), as the Chapter 11 Trustee of the above- captioned debtors (each a “Debtor,” and collectively, the “Debtors”), by and through his undersigned counsel, moves this Court for the relief requested in this amended motion (the “Motion”) and gives notice of hearing. 2. The Court will hold a hearing on this Motion at 1:30 p.m. on December 16, 2014, or as soon thereafter as the parties may be heard, before the Honorable Gregory F. DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 2 of 43 Desc Main Kishel, Chief United States Bankruptcy Judge, in Courtroom 2A of the United States Courthouse, 316 North Robert Street, St. Paul, Minnesota. 3. Any response to the Motion must be filed with the Court and served by mail or delivery not later than December 11, 2014, which is five (5) days before the hearing (including Saturdays, Sundays and holidays). UNLESS A RESPONSE OPPOSING THIS MOTION IS TIMELY FILED, THE COURT MAY GRANT THE MOTION WITHOUT A HEARING. 4. The Court has jurisdiction over this Motion under 28 U.S.C. §§ 157 and 1334, Rule 5005 of the Federal Rules of Bankruptcy Procedure (the “Federal Rules”) and Local Rule 1070-1. This is a core proceeding under 28 U.S.C. § 157(b). Petitions commencing the Chapter 11 cases of Petters Company, Inc. (“PCI”) and Petters Group Worldwide, LLC (“PGW”) were filed on October 11, 2008. Petitions commencing the Chapter 11 cases of PC Funding, LLC (“PC Funding”), Thousand Lakes, LLC (“Thousand Lakes”), SPF Funding, LLC (“SPF”), PL Ltd., Inc. (“PL Ltd.”), Edge One, LLC (“Edge One”) and MGC Finance, Inc. (“MGC”) were filed on October 15, 2008. The petition commencing the Chapter 11 case of PAC Funding, LLC (“PAC Funding”) was filed on October 17, 2008. The petition commencing the Chapter 11 case of Palm Beach Finance Holdings, Inc. (“Palm Beach”) was filed on October 19, 2008 (individually, a “Petition,” a “Petition Date,” a “Bankruptcy Case,” and a “Bankruptcy Estate,” and collectively, the “Petitions,” the “Petition Dates,” the “Bankruptcy Cases,” and the “Bankruptcy Estates”). Venue is proper in this district under 28 U.S.C. §§ 1408 and 1409. 5. An Official Committee of Unsecured Creditors (the “Committee”) was 2 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 3 of 43 Desc Main appointed in the Bankruptcy Cases on November 21, 2008. On December 24, 2008 the United States Trustee’s office for this District appointed Douglas A. Kelley as Chapter 11 Trustee. On February 26, 2009, this Court entered an order approving the Trustee’s appointment [Dkt. No. 153], which Order was affirmed. See Ritchie Special Credit Investments, Ltd. v. U.S. Trustee, 620 F.3d 847 (8th Cir. 2010). 6. This Motion arises under 11 U.S.C. §§ 105, 502, 506, 548, 550, 551 and Federal Rule 9019. This Motion is filed under Federal Rules 2002, 9014, and 9019 and Local Rules 2002-1, 9013-1 through 3 and 9019-1. The Trustee seeks an order approving and authorizing his entry into a Settlement Agreement (the “Settlement Agreement”) by and among (i) himself, in his capacity as Trustee, (ii) Epsilon Global Active Value Fund II, Ltd. (“EGAVF II”), (iii) Seattle City Employees Retirement System (“SCERS”), and (iv) Iota Investments, LLC (“Iota,” and together with EGAVF II and SCERS, the “Settling Parties” and together with the Trustee, the “Parties”). The final Settlement Agreement will be substantially in the form as that attached as Exhibit A hereto. Capitalized terms not defined herein shall have the same meaning as in the Settlement Agreement, unless the context requires otherwise. 7. The Settlement Agreement, among other things, resolves the disputes between the Trustee and the Settling Parties with respect to the adversary proceeding commenced by the Trustee captioned Kelley, Trustee v. Westford Special Situations Master Fund, L.P., et al., Adv. No. 10-04396 (the “Westford/Epsilon Adversary Proceeding”). In the Westford/Epsilon Adversary Proceeding, the Trustee seeks to recover from the Settling Parties as well as from certain Non-Settling Defendants payments or other 3 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 4 of 43 Desc Main transfers made by PCI totaling at least $3.2 billion in the aggregate, of which the Trustee asserts at least $323,343,275 exceeds the principal invested. By this settlement, the Trustee will obtain a judgment against EGAVF II in the amount of $92,707,000, which amount represents the approximate amount of net income EGAVF II received on investments in Epsilon Global Master Fund II, L.P. that were returns from Petters’ Ponzi scheme, together with prejudgment interest. For the reasons stated below, the Trustee believes that the Settlement Agreement is in the best interests of the Bankruptcy Estates and should be approved. FACTUAL BACKGROUND I. Events Leading Up to Bankruptcy Filing 8. PCI is a Minnesota corporation, the shares of which are 100% owned and, prior to October 6, 2008, were 100% controlled by Thomas J. Petters (“Petters”). PCI, in turn, is the sole member or shareholder, as applicable, and owns 100% of the membership interests or shares, as applicable, of PC Funding, Thousand Lakes, SPF Funding, PL Ltd., Edge One, MGC Finance, and PAC Funding (the “PCI SPEs”). Palm Beach is also wholly-owned by Petters (collectively, PCI, Palm Beach and the PCI SPEs are the “PCI Estates”). The operational and managerial decisions of the PCI Estates and their affiliates were principally made by Petters and certain of his employees (“Coconspirators,” as that term is defined below). PCI obtained capital for the Petters enterprises, on its own account and also utilizing the PCI SPEs to obtain billions of dollars of funding, and purportedly to acquire merchandise for sale to wholesalers and retailers nationwide. The purchase and sale business, however, did not exist. 4 DOCS-#4408558-v3 Case 08-45257 9. Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 5 of 43 Desc Main PGW is a privately held Delaware limited liability company that was also 100% owned and, prior to October 6, 2008, was 100% controlled by Petters. The operational and managerial decisions of PGW and its subsidiary entities were also made by Petters and the Co-conspirators. PGW was a holding company that provided certain accounting, legal and human resource services to Petters’ business entities, but had no independent operations. PGW obtained funds mostly from PCI, funds that PCI obtained as part of a scheme to defraud investors, as well as from investors whose funds were used to further the fraudulent scheme. 10. On October 3, 2008, Petters was arrested on charges of mail and wire fraud, money laundering, and conspiracy. Other executives implicated in this scheme have also been arrested on various charges and have either plead guilty to, or have been convicted of, certain crimes as a result of their involvement in the scheme to defraud investors by means of materially false and fabricated pretenses and promises (the “Ponzi Scheme.”) 11. Petters operated the Ponzi Scheme with the assistance of Deanna Coleman (“Coleman”), Robert White (“White”), Larry Reynolds (“Reynolds”) and Michael Catain (“Catain”) (collectively, the “Co-conspirators”) as well as other individuals within the Petters organizations from approximately 1993 through the date of his arrest by federal agents on October 3, 2008. Petters, through PCI, PGW and various other entities that he controlled, laundered what is estimated to be an amount in excess of $40 billion. 12. Petters, through a multitude of entities, induced investors into financing the purchase of non-existent electronic equipment purportedly secured by fabricated 5 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 6 of 43 Desc Main purchase orders. Over many years, Petters and the Co-conspirators caused investors to believe that their investments were to be used to purchase consumer electronic goods from wholesalers to be resold to large, “big box” retailers such as Costco, Sam’s Club and B.J.’s Wholesale Club. Petters and the Co-conspirators, however, intentionally fabricated and forged documents to recruit investors into the Ponzi Scheme and cause existing investors to continue to invest in the Ponzi Scheme. They also prepared and utilized fabricated and forged documents that were represented to investors to be purchase orders and related documents. While the fabricated or forged purchase orders and the related documents identified certain inventory, no such inventory—electronic goods or other inventory—actually existed. The result was that investors were not repaid with the earnings from their investments, but with funds obtained from other investors. 13. Integral to perpetuating the Ponzi Scheme was Petters’ portrayal of himself to investors as a business person who owned and operated numerous legitimate businesses, which falsely led investors to believe they were investing with a successful business person and in a successful business empire. In order to perpetuate this image as a successful business person and captain of industry running a legitimate business empire, Petters needed investors to believe the businesses within his empire were profitable and/or valuable in order to continue to attract additional investments to perpetuate his Ponzi Scheme. If one of Petters’ publicly touted holdings failed, he would have had difficulty attracting new investments and the house of cards would fall. 6 DOCS-#4408558-v3 Case 08-45257 14. Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 7 of 43 Desc Main As a result of numerous defaults with investors, and to forestall discovery of the Ponzi Scheme, Petters was forced to enter numerous agreements with creditors, including a series of pledges, guaranties, security agreements, forbearance and other agreements with various investors and entered into numerous other transactions and transfers in order to prop up failing businesses, obtain new funding, delay discovery of the fraud, halt investigations, appease large investor groups who had the leverage to extract value, and perpetuate the Ponzi Scheme. 15. On October 2, 2008, the United States sought an asset freeze and receivership under the Anti-Fraud Injunction Act, 18 U.S.C. § 1345, for the benefit of victims of the Ponzi Scheme. United States v. Thomas Joseph Petters, et al., Case No. 08-cv05348 (ADM/JSM) (D. Minn.) (the “Civil Fraud Case”). The Honorable Ann D. Montgomery was assigned the Civil Fraud Case. On October 6, 2008, Judge Montgomery appointed Douglas A. Kelley (the “Receiver”) as Receiver for, among others, Petters, PCI, and PGW, as well as entities owned or controlled by them. See Order for Entry of Preliminary Injunction, Order Appointing Receiver and Other Equitable Relief, Id. at Dkt. No. 12, as subsequently amended on December 8, 2008, Dkt. No. 127 (collectively, the “Receivership Order” and the “Receivership Proceeding”). The Receiver then sought relief for the Debtors under Chapter 11 of the Bankruptcy Code in order to preserve assets and potential avoidance claims. II. Events Since the Bankruptcy Filing 16. On December 1, 2008, and through a Superseding Indictment returned June 3, 2009, Petters, PCI and PGW were indicted by a federal grand jury on charges of 7 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 8 of 43 Desc Main (i) mail fraud, (ii) wire fraud, (iii) conspiracy to commit mail fraud and wire fraud, and (iv) conspiracy to commit money laundering in violation of 18 U.S.C. §§ 371, 1343, 1956 and 1957. See Indictment, Dkt. No. 79, and Superseding Indictment, Dkt. No. 196, United States v. Petters et al., Case No. 08-cr-00364 (RHK-AJB) (D. Minn.) (the “Criminal Fraud Case”). 17. On December 2, 2009, a jury found Petters guilty of all 20 counts charged in the Superseding Indictment. On April 8, 2010, Petters was sentenced to 50 years in prison for his crimes, which conviction and sentence have been upheld on appeal. See United States v. Petters, et al., 663 F.3d 375 (8th Cir. 2011), cert. denied, 132 S. Ct. 2417 (2012). Petters has, in fact, admitted his guilt in connection with the fraud scheme. See Transcript of Hearing, Criminal Fraud Case, October 23, 2013, at 36 (“Q. Now, you admit today that you’re guilty of orchestrating really an enormous fraud scheme, correct? A. Yes.”); Id. at 76 (“Q. Did you intend to defraud your investors? A. Yes.”). III. The Trustee Commences Adversary Proceedings to Recover Transfers 18. Between September 10, 2010 and October 11, 2010 the Trustee timely commenced over 200 adversary proceedings against approximately 382 defendants seeking, among other things, the avoidance and recovery of false profits, bonuses, commissions, gifts, preferences and other sums transferred by the Debtors prior to the Petition Date. The Trustee anticipates commencing additional adversary proceedings in the future against additional immediate and mediate transferees of initial transferees and other parties, including those that have entered into tolling agreements with the Trustee regarding the Trustee’s claims (all such adversary proceedings are collectively 8 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 9 of 43 Desc Main referred to herein as the “Adversary Proceedings”). The Adversary Proceedings arise out of the Ponzi Scheme and, for the most part, allege a common nucleus of operative facts. 19. It is widely recognized that Ponzi Schemes necessarily give rise to extensive avoidance powers and presumptions in favor of a trustee. The premise underlying all avoidance litigation, namely advancing the Bankruptcy Code’s goal of equality of distribution, has a particularly pronounced meaning in the context of a Ponzi Scheme. While one can readily say that most creditors are victims in a Ponzi Scheme, not all creditors are damaged. The economic loss attributable to a fraudulent scheme falls disproportionately on those that have not been repaid some or all of their principal investment while those who received stolen funds in excess of their principal investment (“False Profits”) have received a substantial benefit, with such funds having been stolen from other investors. The Bankruptcy Code’s avoidance powers permit, among other things, a trustee to set aside and recover payments or other transfers made by the perpetrator of a Ponzi Scheme to redress the inherently unfair distribution of stolen funds. In that way, the Bankruptcy Code rectifies the illicit method by which funds are laundered in a Ponzi Scheme, and in its place, transplants a new method— one which represents the equitable determination by Congress that creditors must be treated equally in cases of insolvency or fraud. IV. EGAVF II’s Investments in Petters’ Ponzi Scheme 20. The majority of funds invested in Petters’ Ponzi Scheme came from hedge funds, including Epsilon Global Master Fund II, L.P. (the “Master Fund”). The Master 9 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 10 of 43 Desc Main Fund received money from several feeder funds, including EGAVF II. 21. Commencing in May, 2002 and continuing through March 30, 2005, the Master Fund loaned money to PCI through PL Ltd. in 91 note transactions in the principal amount of approximately $878,627,000. The Master Fund received repayment of the entire principal amount invested plus an additional amount of approximately $117,780,000 by April 30, 2007, denominated as interest (the “False Profits”). The Master Fund has entered into a Settlement Agreement with the Trustee stipulating to a judgment in the amount $136,334,800, which amount represents the False Profits received by the Master Fund from the invested funds together with interest on that amount. 22. On October 8, 2010, the Trustee commenced an action in the Bankruptcy Court, Adv. Proceeding No. 10-04396 (the “Adversary Proceeding”). In the Adversary Proceeding, the Trustee seeks to avoid and recover the transfers it made to the Settling Parties, along with prejudgment interest. The Trustee asserts EGAVF II is liable to the Trustee under 11 U.S.C. §§ 544(b), 548(a)(1)(A), 550(a), 551 and 1106 and under Minnesota Statutes §§ 513.44(a), 513.45 and 513.47. EGAVF II has not filed an Answer in the Adversary Proceeding but generally denies the allegations of the Trustee’s Complaint. 23. SCERS was an investor in EGAVF II, and both SCERS and Iota represent and warrant to the Trustee that they did not receive any distributions, either as principal or interest, from EGAVF II. SCERS has replaced the directors of EGAVFII with its own nominees and then caused EGAVF II to replace its management manager with 10 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 11 of 43 Desc Main Iota, which continues to be the investment manager for EGAVF II. 24. In an effort to resolve their disputes, the Trustee and the Settling Parties have agreed to settle the Trustee’s claim without the expense, delay and uncertainty of future litigation. 25. The Trustee believes he would prevail at trial and thus would be entitled to recover all or a portion of the Transfers received by the Settling Parties, including amounts the Trustee asserts are False Profits, along with prejudgment interest. The Settling Parties believe they have meritorious defenses to the Trustee’s claims. The Parties, however, have agreed to settle all disputes concerning the Transfers on the terms and conditions set forth in the Settlement Agreement without the expense, delay and uncertainty of further litigation. THE SETTLEMENT AGREEMENT 26. The Parties believe that the Settlement Agreement fairly and reasonably resolves the disputes between them and is summarized as follows:1 a. EGAVF II will stipulate to the entry of judgment in the total amount of Ninety Two Million Seven Hundred Seven Thousand Dollars ($92,707,000) (the “Settlement Amount”). The Settlement Amount represents the approximate amount of net income received from the Master Fund together with prejudgment interest since the date the Complaint was filed. The Settlement Amount specifically does not include any recovery by the Trustee of any principal amounts returned to EGAVF II by the Master Fund. b. The judgments to which EGAVF II is stipulating shall be reduced by the 1 The description of the Settlement Agreement in this Motion is a summary only and interested parties should refer to the Settlement Agreement itself for a complete recitation of its terms. If there is any inconsistency between the Settlement Agreement and the Motion, the Settlement Agreement shall control. 11 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 12 of 43 Desc Main amount of any recoveries the Trustee may realize from his pursuit of subsequent transferees. c. The Trustee shall enter into a covenant not to sue SCERS and Iota. d. EGAVF II shall assign to the Trustee any and all rights it may have against its investors for the recovery of profits realized by such investors from the Ponzi Scheme as alleged in the Adversary Proceeding. e. EGAVF II will waive all rights to receive distributions in the bankruptcy proceedings, which includes a waiver of its right to assert a claim, directly or indirectly, against any of the Bankruptcy Estates, including, but not limited to PCI and PL Ltd., under section 502(h) of the Bankruptcy Code. RELIEF REQUESTED 27. The Trustee believes this Settlement Agreement provides an immediate and concrete benefit to the Bankruptcy Estates and their creditors while minimizing the risks, costs, and delay of administering the Bankruptcy Estates through further litigation and is in the best interest of the Bankruptcy Estates. 28. The Trustee commenced approximately 200 adversary proceedings against numerous defendants seeking to avoid and recover fraudulent and preferential transfers made in furtherance of the Ponzi Scheme. While the Trustee has settled or otherwise resolved claims against defendants in many of the Adversary Proceedings, almost 100 remain pending. As this Court is aware, while a number of legal issues raised in these adversary proceedings have been decided, a number of legal issues raised by defendants in motions to dismiss, as well as the Trustee’s claims against subsequent transferees arising under § 550 of the Bankruptcy Code, remain unresolved, with the complexity increased by the size of the Ponzi Scheme and number of parties involved. Resolution of these legal issues as well as the fact-intensive inquiry that may 12 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 13 of 43 Desc Main be necessary to determine each defendant’s good faith will likely require extensive discovery, dispositive motions, or potential evidentiary hearings. This is also true for the claims asserted by the Trustee against the transferees in the Westford/Epsilon Adversary Proceeding, including EGAVF II. 29. In reaching this settlement, the Trustee analyzed the economic realities of the claims and disputes being settled, specifically his claims against, and the defenses of, EGAVF II, the risks of continued litigation and also considered the prospects of recovery associated with the enforcement of any judgment. 30. The Settlement provides that EGAVF II will stipulate to entry of judgment against it totaling $92,707,000. As previously stated, this amount represents EGAVF II’s share of the net income it received from the Master Fund together with prejudgment interest thereon calculated from the date the Trustee’s Complaint was filed. 31. The Trustee has been informed that EGAVF II is without assets and redemption request have been wholly unsatisfied. By this settlement, the Trustee will receive what he believes he would be entitled to if these matters were to proceed to trial – a judgment representing the total amount of net income received by EGAVF II from the Master Fund plus prejudgment interest (at a negotiated reduced rate) – without incurring the additional expense and delay attendant with further litigation. 32. In connection with the settlement, the Trustee will be entering into a covenant not to sue SCERS and Iota. SCERS was an investor in EGAVF II, but did not receive any distributions, either as principal or interest, from EGAVF II. SCERS replaced the directors of EGAVFII with its own nominees and has caused EGAVF II to replace its 13 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 14 of 43 Desc Main management manager with Iota, which continues to be the investment manager for EGAVF II. Iota also did not receive any distributions, either as principal or interest, from EGAVF II. 33. EGAVF II will also assign to the Trustee any claims it may have against investors, which will aiding him in his pursuit of those investors who were the ultimate beneficiaries of the False Profits received by EGAVF II. 34. The Settlement Agreement is based on the Trustee’s: (i) assessment of his claims under state and federal avoidance and fraudulent transfer laws and under unjust enrichment theories; (ii) review of the Settling Parties’ defenses to the Trustee’s claims; (iii) prospects of a materially superior recovery associated with the expenditure of additional estate funds; (iv) evaluation of the prospect of realizing a superior economic recovery through continued litigation and the enforcement of any judgment that might be obtained; and (v) belief that a settlement reached as part of a settlement process is fair and equitable. 35. Notice is given pursuant to Local Rule 9013-2(c) that, if necessary, Douglas A. Kelley, the Trustee in these Bankruptcy Cases, whose business address is 431 South Seventh Street, Suite 2530, Minneapolis, Minnesota 55415, may testify at the hearing on this Motion in support of the Settlement Agreement. WHEREFORE, the Trustee respectfully requests that the Court enter an order (i) approving the Settlement Agreement, (ii) authorizing him, as Trustee, to enter into, and perform according to the terms of, the Settlement Agreement, and (iii) granting such further and other relief as the Court deems just and equitable. 14 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 15 of 43 Desc Main LINDQUIST & VENNUM LLP DATED: November 25, 2014 By: /s/ James A. Lodoen Daryle L. Uphoff (0111831) James A. Lodoen (0173605) Mark D. Larsen (0318498) Kirstin D. Kanski (0346676) Adam C. Ballinger (0389058) 4200 IDS Center 80 South Eighth Street Minneapolis, MN 55402-2274 (612) 371-3211 (612) 371-3207 (facsimile) www.lindquist.com ATTORNEYS FOR DOUGLAS A. KELLEY, CHAPTER 11 TRUSTEE 15 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 16 of 43 Exhibit A Desc Main Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 17 of 43 Desc Main SETTLEMENT AGREEMENT This Settlement Agreement (the “Agreement”) is made and entered as of November ___, 2014 by and among (i) Douglas A. Kelley (“Kelley”, “Plaintiff” or “Trustee”) in his capacity as the Chapter 11 Trustee for Petters Company, Inc. (“PCI”) and PL Ltd., Inc. (“PL”); (ii) Epsilon Global Active Value Fund II, Ltd. (“EGAVF II”); (iii) Seattle City Employees Retirement System (“SCERS”), and; (iv) Iota Investments, LLC (“Iota”), (EGAVF II, SCERS and Iota collectively the “Settling Parties”). BACKGROUND A. Pursuant to an Order entered on October 6, 2008 and amended on December 8, 2008, the Honorable Ann Montgomery, United States District Court Judge for the District of Minnesota, appointed Kelley as Receiver for, among others, PCI and PL. United States v. Petters, et al., United States District Court, District of Minnesota, Case No. O:08-CV-05348, (ADM/JSM) (D. Minn.) Docket Nos. 12 and 127 (the “Receivership Order”). B. Pursuant to the authority granted to him under the Receivership Order, Kelley filed petitions in the United States Bankruptcy Court for the District of Minnesota (the “Bankruptcy Court”) commencing the Chapter 11 case of PCI on October 11, 2008 and the Chapter 11 case of PL on October 17, 2008. C. On December 24, 2008, the United States Trustee’s office for this District appointed Kelley as the Chapter 11 Trustee in those cases jointly administered under Bky. No. 08-4557 in the Bankruptcy Court. D. On October 3, 2008, Thomas J. Petters (“Petters”), the sole owner of PCI and indirectly of PL, was arrested on charges of mail and wire fraud, money laundering and conspiracy in connection with a scheme to defraud investors (the “Ponzi scheme”). On Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 18 of 43 Desc Main December 2, 2009, a jury in the United States District Court for the District of Minnesota found Petters guilty of all 20 counts charged in the superseding indictment, and Petters was sentenced to 50 years in prison for his crimes. E. The Ponzi scheme orchestrated by Petters induced investors into investing billions of dollars into the financing of non-existent electronic equipment purportedly secured by purchase orders which in fact were fabricated. PCI was at the epicenter of the Ponzi scheme. The majority of funds invested in the Ponzi Scheme came from hedge funds, including Epsilon Global Master Fund II, L.P. (the “Master Fund”). The Master Fund received money from several feeder funds, including EGAVF II. These funds were invested in PCI through PL, a special purpose entity created by PCI for receiving funds from the Master Fund. F. Commencing in May, 2002 and continuing through March 30, 2005, the Master Fund loaned money to PCI through PL in 91 note transactions in the principal amount of Eight Hundred Seventy-eight Million Six Hundred Twenty-seven Thousand Dollars ($878,627,000). The Master Fund received repayment of the entire principal amount invested plus an additional amount of approximately One Hundred Seventeen Million Seven Hundred Eighty Thousand ($117,780,000) by April 30, 2007, denominated as interest. The Master Fund has entered into a Settlement Agreement with the Trustee stipulating to a judgment in the amount of One Hundred Thirty-six Million Three Hundred Thirty-four Thousand Eight Hundred Dollars ($136,334,800), which amount represents the profits received by the Master Fund from the invested funds together with interest on that amount. G. On October 8, 2010, the Trustee commenced an action in the Bankruptcy Court, Adv. Proceeding No. 10-04396 (the “Adversary Proceeding”). In the Adversary Proceeding, the Trustee asserts that EGAVF II is liable to the Trustee under 11 U.S.C. §§ 544(b), 2 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 19 of 43 Desc Main 548(a)(1)(A), 550(a), 551 and 1106 and under Minnesota Statutes §§ 513.44(a), 513.45 and 513.47. H. EGAVF II has not filed an Answer in the Adversary Proceeding but generally denies the allegations of the Trustee’s Complaint. I. SCERS was an investor in EGAVF II, and both SCERS and Iota represent and warrant to the Trustee that they did not receive any distributions, either as principal or interest, from EGAVF II. J. In 2010, SCERS replaced the directors of EGAVF II with its own nominees (Pacot LTD. and Gareth Thomas as “Directors”) and then caused EGAVF II to replace its management manager with Iota, which continues to be the investment manager for EGAVF II. Do to cost considerations, the Directors resigned and Iota elected not to appoint new directors, so at this point in time, EGAVF II does not have any acting directors. K. The Trustee and the Settling Parties wish to compromise and settle the Trustee’s claim without the expense, delay and uncertainty of future litigation; NOW, THEREFORE, in consideration of the foregoing and the promises and undertakings set forth herein, the sufficiency of which is hereby acknowledged, and subject to approval of the Bankruptcy Court, the Trustee and Settling Parties agree as follows: AGREEMENT 1. Judgment Against EGAVF II. EGAVF II shall stipulate to a judgment in the amount of Ninety Two Million Seven Hundred Seven Thousand Dollars ($92,707,000) (the “Settlement Amount”), which amount represents EGAVF II’s share of the net income received from the Master Fund together with prejudgment interest thereon calculated from the date the Trustee’s Complaint was filed. The Settlement Amount specifically does not include any 3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 20 of 43 Desc Main recovery by the Trustee of any principal amounts returned to EGAVF II by the Master Fund. The Stipulation to be entered by EGAVF II shall be in the form attached hereto as Exhibit A. 2. Reduction of Judgment. The judgment to which EGAVF II is stipulating shall be reduced by the amount of any recoveries the Trustee may realize from his pursuit of subsequent transferees. 3. Consent Not to Sue. The Trustee shall enter into a covenant not to sue SCERS and Iota. The Covenant Not to Sue shall be in the form of Exhibit B attached hereto. 4. Assignment of Claims. EGAVF II shall assign to the Trustee any and all rights it may have against its investors for the recovery of profits realized by such investors from the Ponzi Scheme as alleged in the Adversary Proceeding. 5. Subsequent Transferee Claims. The Trustee intends to initiate claims against subsequent transferees of EGAVF II. Nothing in this Agreement should or shall be construed to be interpreted as a waiver of the Trustee’s claims against subsequent transferees. EGAVF II, SCERS and Iota agree to cooperate with the Trustee in his pursuit of subsequent transferees, including the giving of testimony on reasonable notice if so requested by the Trustee. 6. Waiver of Claims. EGAVF II waives the right to assert any claim, including claims arising under §502(h) of the Bankruptcy Code, against the estates jointly administered under Case No. 08-4557 in the Bankruptcy Court, including the estates of PCI and PL. 7. Approvals and Effective Date. This Agreement is subject to, and shall become effective and binding on the Trustee and the Settling Parties upon, and only upon, the entry of a final order approving this Agreement. The Trustee and the Settling Parties shall use their best efforts to obtain such approvals as promptly as practicable after the date of this Agreement. 4 Case 08-45257 8. Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 21 of 43 Desc Main Authority. EGAVF II, SCERS and Iota represent that as of the date hereof each has the full power, authority and legal right to execute and deliver this Agreement and to perform their obligations under it. 9. Entire Agreement. This Agreement, together with all documents incorporated therein, constitutes the entire agreement and understanding between and among the Trustee and the Settling Parties and supersedes all prior agreements, representations and understandings concerning the subject matter thereof. 10. Amendments, Waiver. This Agreement may not be terminated, amended or modified in any way except in a writing signed by the Trustee and the Settling Parties. No waiver of any provision of this Agreement shall be deemed to waive any other provision hereof, whether or not similar, nor shall such waiver constitute a continuing waiver. 11. Successors Bound. This Agreement shall be binding upon and inure to the benefit of each of the Trustee, the Settling Parties and their successors and permitted assigns. 12. No Third Party Beneficiary. The Trustee and the Settling Parties do not intend to confer any benefit by or under this Agreement upon any person or entity other than themselves and their respective successors and permitted assigns. 13. Governing Law; Venue. This Agreement shall be construed under and governed by the laws of Minnesota without regard to the conflicts of law principles of any jurisdiction. Any action brought to enforce any provision of this Agreement shall be brought in the Bankruptcy Court and the Settling Parties consent to the jurisdiction of the Bankruptcy Court. 5 Case 08-45257 14. Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 22 of 43 Desc Main Captions and Rules of Construction. The captions in this Agreement are inserted only as a matter of convenience and for reference and do not define, limit or describe the scope of this Agreement or the scope or content of any of its provisions. 15. Counterparts; Electronic Copy of Signatures. This Agreement and any attachments may be executed and delivered in any number of counterparts, each of which so executed and delivered shall be deemed to be an original and all of which shall constitute one and the same document. The Parties may evidence their execution of this Agreement by delivery to the other Parties of scanned or faxed copies of their signatures, with the same effect as the delivery of an original signature. 16. Notices. Any notices under this Agreement shall be in writing, shall be effective when received and may be delivered only by hand, by overnight delivery service, by fax or by electronic transmission to: If to the Trustee, c/o: Daryle L. Uphoff Lindquist & Vennum 4200 IDS Center 80 South Eighth Street Minneapolis, MN 55402-2274 T: (612) 371-3230 F: (612) 371-3207 E: duphoff@lindquist.com If to Settling Parties, c/o: Bradley P. Thoreson Foster Pepper PLLC 1111 Third Avenue Suite 3400 Seattle, WA 98101-3299 T: (206) 447-3867 F: (206) 447-9700 E: thorb@foster.com and Douglas A. Kelley Kelley, Wolter & Scott P.A. 421 South 7th Street Suite 2530 Minneapolis, MN 55415 T: (612) 371-9090 F: (612) 371-0574 E: dkelley@kelleywolter.com 6 Case 08-45257 17. Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 23 of 43 Desc Main Severability. By execution of this Agreement, the Parties acknowledge that if any of the provisions of this Agreement shall be found to be invalid or unenforceable for any reason, that provision may be severed from the remainder of this Agreement and the remaining provisions enforced as written to effectuate the purposes of this Agreement. [SIGNATURE PAGE TO FOLLOW] 7 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 24 of 43 Desc Main Douglas A. Kelley, Chapter 11 Trustee for Petters Company, Inc. and PL Ltd. Douglas A. Kelley Epsilon Global Active Value Fund II, Ltd. By Its Seattle City Employees Retirement System By Its Iota Investments, LLC By Its Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 25 of 43 Desc Main UNITED STATES BANKRUPTCY COURT DISTRICT OF MINNESOTA In re Petters Company, Inc., et al., Jointly Administered under Case No. 08-45257 Court File Nos.: 08-45258 (GFK) 08-45326 (GFK) 08-45327 (GFK) 08-45328 (GFK) 08-45329 (GFK) 08-45330 (GFK) 08-45331 (GFK) 08-45371 (GFK) 08-45392 (GFK) Chapter 11 Cases Debtors. (includes: Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc.; Edge One LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.) Douglas A. Kelley, in his capacity as the court-appointed Chapter 11 Trustee of Debtors Petters Company, Inc. and PL Ltd., Inc., Plaintiff, vs. Westford Special Situations Master Fund, L.P.; Westford Global Asset Management, Ltd.; Westford Special Situations Fund, Ltd.; Westford Special Situations Fund, L.P.; Westford Asset Management, LLC; Epsilon Global Master Fund, L.P.; Epsilon Global Active Value Fund, Ltd.; Epsilon Global Active Value Fund I-B Ltd.; Epsilon Global Active Value Fund, L.P.; Epsilon Global Master Fund II, L.P. a/k/a Epsilon Global Master Fund II, L.P., Sub 1; Epsilon Global Active Value Fund II, Ltd., a/k/a Westford Investment Fund Ltd.; Epsilon Global Active Value Fund IIB Ltd.; Epsilon Global Active Value Fund II-G Ltd.; Epsilon Global Active Value Fund II, L.P.; Epsilon Global Active Value Fund II-B, L.P.; Epsilon Global Active Value Fund II-G, L.P.; Epsilon Global Asset Management, Ltd.; Epsilon Investment Management, LLC; Epsilon Global Master Fund III — Structured Strategies, L.P.; Epsilon Global Active Value Fund HI Ltd.; Capital Strategies Fund Ltd.; Stafford Towne, Ltd.; and Steve Goran Stevanovich, Defendants. Exhibit A Doc #4378547 ADV. NO. 10-04396 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 26 of 43 Desc Main STIPULATION FOR ENTRY OF JUDGMENT AGAINST DEFENDANT EPSILON GLOBAL ACTIVE VALUE FUND II, LTD. IT IS HEREBY STIPULATED AND AGREED, by and between the parties hereto, through their respective counsel, pursuant to Rule 54 of the Federal Rules of Civil Procedure and Rule 7054 of the Bankruptcy Rules, that Plaintiff Douglas A. Kelley, in his capacity as the court-appointed Chapter 11 Trustee of Petters Company, Inc. and PL Ltd., Inc. have judgment entered against Defendant Epsilon Global Active Value Fund II, Ltd. (the “Defendant”) in the amount of $92,707,000.00. The Defendant further stipulates that the amount of the judgment represents transfers from Petters Company, Inc. and PL Ltd., Inc. for which no value was given. DATED: _________, 2014 LINDQUIST & VENNUM LLP By ______________________________________ Daryle L. Uphoff (#111831) James A. Lodoen (#173605) 4200 IDS Center 80 South Eighth Street Minneapolis, MN 55402-2274 (612) 371-3230 duphoff@lindquist.com ATTORNEYS FOR PLAINTIFF FOSTER PEPPER PLLC By ______________________________________ Bradley P. Thoreson 1111 Third Avenue Suite 3400 Seattle, WA 98101-3299 (206) 447-3867 thorb@foster.com ATTORNEYS FOR THE DEFENDANT Exhibit A Doc #4378547 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 27 of 43 Desc Main COVENANT NOT TO SUE Douglas A. Kelley, Chapter 11 Trustee for Petters Company, Inc. and PL Ltd., Inc. (the “Trustee”) for good and valuable consideration, the receipt and sufficiency of which hereby is acknowledged, pursuant to that certain Settlement Agreement dated as of November __, 2014 (herein called the “Agreement”) between and among the Trustee and Epsilon Global Active Value Fund II, Ltd. (“EGAVF II”), Seattle City Employees Retirement System (“SCERS”) and Iota Investments, LLC (“Iota”), does hereby covenant and agree not to sue SCERS or Iota and their respective personal representatives, successors and assigns, and past, present, and further affiliates, officers, members, employees, and agents, on account of any and all liabilities, duties, responsibilities, obligations, claims, demands, actions, damages, costs, losses, and expenses now existing or hereafter arising out of or in any way relating to or connected with, directly or indirectly, to SCERS’ investment in EGAVF II. Notwithstanding the foregoing, Trustee reserves, on its own behalf, the right to sue (including, without limitation, the right to counterclaim against) and obtain and satisfy a judgment against SCERS and Iota by reason of claims or causes or action arising out of (a) any breach of the covenants, representations, warranties, and agreements by SCERS and Iota set forth in the Agreement, including, but not limited to, the representation by SCERS and Iota in paragraph I of the Settlement Agreement that they did not receive any distributions from EGAVE II, or (b) fraud. The foregoing covenant not to sue will be null, void, and of no force and effect, if EGAVF II, SCERS or Iota commences any action, suit, or proceeding against Trustee in connection with the Agreement seeking to rescind the transaction contemplated thereby (in whole or in part). In the event that any condition or covenant in this Agreement is found to be invalid or void by any court of competent jurisdiction, the same shall be deemed severable from the remainder of the agreement and shall in no way affect any other covenant or condition contained in this agreement. If any condition or covenant is found invalid or void due to its scope or breadth, such provision shall be deemed valid to the extent of the scope or breadth permitted by law. This agreement shall be governed by the laws of the State of Minnesota, and any action regarding the interpretation or enforcement of this Agreement shall be brought in the United States Bankruptcy Court for the District of Minnesota. By: __________________________ Douglas A. Kelley, Trustee EXHIBIT B DOCS-#4390997-v4 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 28 of 43 Desc Main Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 29 of 43 Desc Main UNITED STATES BANKRUPTCY COURT DISTRICT OF MINNESOTA Jointly Administered under Case No. 08-45257 In re: Petters Company, Inc., et al., Court File No. 08-45257 Debtors. Court Files No.’s: 08-45258 (GFK) 08-45326 (GFK) 08-45327 (GFK) 08-45328 (GFK) 08-45329 (GFK) 08-45330 (GFK) 08-45331 (GFK) 08-45371 (GFK) 08-45392 (GFK) (includes: Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc.; Edge One LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.) Chapter 11 Cases Judge Gregory F. Kishel MEMORANDUM OF LAW IN SUPPORT OF THE MOTION TO APPROVE THE SETTLEMENT AGREEMENT ENTERED INTO BY AND AMONG (I) DOUGLAS A. KELLEY, AS THE CHAPTER 11 TRUSTEE OF THE ABOVE-CAPTIONED DEBTORS, (II) EPSILON GLOBAL ACTIVE VALUE FUND II, LTD., (III) SEATTLE CITY EMPLOYEES RETIREMENT SYSTEM, AND (IV) IOTA INVESTMENTS, LLC ______________________________________________________________________________ Douglas A. Kelley, the Chapter 11 Trustee of the above-captioned debtors, by and through his legal counsel, respectfully submits this Memorandum in support of his verified Motion to Approve the Settlement Agreement Entered Into by and between (i) Douglas A. Kelley, as the Chapter 11 Trustee of the above-captioned debtors, (ii) Epsilon Global Active Value Fund II, Ltd., (iii) Seattle City Employees Retirement System, and (iv) Iota Investments, LLC. Capitalized terms not otherwise defined herein 1 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 30 of 43 Desc Main shall have the meanings given to such terms in the amended motion filed in connection herewith (the “Motion”), unless the context requires otherwise. FACTS The factual basis for this Memorandum is set forth in the verified Motion and is incorporated as though fully set forth herein. LEGAL ARGUMENT Settlements and compromises are “a normal part of the process of reorganization.” Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (quoting Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 130 (1939)); ReGen Capital III, Inc. v. Official Committee of Unsecured Creditors (In re Trism, Inc.), 282 B.R. 662, 668 (B.A.P. 8th Cir. 2002). The purpose of a compromise is to “allow the trustee and the creditor[s] to avoid the expenses and burdens associated with litigating sharply contested and dubious claims.” In re Martin, 212 B.R. 316, 319 (B.A.P. 8th Cir. 1997) (quoting United States v. Alaska Nat'l Bank (In re Walsh Constr., Inc.) 669 F.2d 1325, 1328 (9th Cir. 1982)). In so doing, however, it 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. In re New Concept Hous., Inc., 951 F.2d 932, 939 (8th Cir. 1991). Bankruptcy Rules provide that “[o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement.” Fed. R. Bankr. P. 9019. Settlement agreements are generally encouraged and favored by the courts and “[i]n the 2 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 31 of 43 Desc Main absence of mistake or fraud, a settlement agreement will not be lightly set aside.” Justine Realty Co. v. American Nat’l Can Co., 976 F.2d 385, 391 (8th Cir. 1992) The standard by which courts evaluate a proposed compromise and settlement is well-established. In granting a motion pursuant to Rule 9019(a), a court must find that the proposed settlement is fair and equitable and is in the best interests of the estate. See Anderson, 390 U.S. at 424. The decision to approve a particular settlement lies within the sound discretion of the Bankruptcy Court. In re Trism, Inc., 282 B.R. at 665 (citing Lambert v. Flight Transp. Corp. (In re Flight Transp. Corp.), 730 F.2d 1128, 1135-36 (8th Cir. 1984)). Under the well-established standard for consideration of the merits of a settlement, “it is not necessary that a settlement be the best result possible; a bankruptcy court need only determine that the settlement does not fall below the lowest point in the range of reasonableness.” In re Petters, 455 B.R. 166, 168 (B.A.P. 8th Cir. 2011) (quoting Tri-State Fin., LLC v. Lovald, 525 F.3d 649, 654 (8th Cir. 2008)). In assessing reasonableness, however, the court does not substitute its judgment for that of the trustee. In re Martin, 212 B.R. at 319. For the reasons below, the Settlement Agreement is reasonable and in the best interests of the PCI Bankruptcy Estate. Accordingly, it should be approved. A. The Settlement Agreement Is Reasonable In determining whether a settlement is within the “range of reasonableness,” the Court should consider what are known as the Flight Transportation or Drexel factors: (a) the probability of success in the litigation; (b) the likely difficulties, if any, to be encountered in collection; (c) the complexity of the litigation involved, and the expense, 3 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 32 of 43 Desc Main inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors; and, when applicable, (e) whether the agreement promotes the integrity of the judicial system. In re Hancock-Nelson Mercantile Co., Inc., 95 B.R. 982, 990 (Bankr. D. Minn. 1989) (citing Drexel v. Loomis, 35 F.2d 800, 806 (8th Cir. 1929) and In re Flight Transp. Corp., 730 F.2d at 1135). These factors seek to balance the probable benefit and potential cost of pursuing a claim or defense against the costs of the proposed settlement. In making the determination of whether the proposed settlement is fair and equitable, deference must be given to the reasoned opinions of the Trustee, creditor’s committees and the debtor-in-possession. In re Petters Company, Inc., 455 B.R. at 176-77; In re Trism, Inc., 282 B.R. at 667-668; Nellis v. Shugrue, 165 B.R. 115, 122 (S.D.N.Y. 1994) (citations omitted). An application of these factors favors approval of the Settlement Agreement. After consideration and analysis of the terms of the settlement and, in light of the circumstances described in the Motion, entering into the settlement is in the best interest and will maximize the value of the Bankruptcy Estates for the benefit of all constituents and satisfies the Flight Transportation and Drexel standards set forth above. 1. Likelihood of Success and Complexity of Litigation. The first factor requires the Court to determine whether the bankruptcy estate would be likely to succeed on the merits of the subject controversy, were the matter fully litigated. The third factor basically requires the Court to determine whether pursuing the controversy on its merits would produce a sufficient net benefit to the estate when compared against the resulting cost and further delay. Both factors favor 4 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 33 of 43 Desc Main approval of this settlement. Petters’ Ponzi Scheme has given rise to numerous claims and causes of action on behalf of creditors and the Debtors, including the commencement of more than 200 adversary proceedings against numerous defendants seeking to avoid and recover fraudulent and preferential transfers made as part of Petters’ Ponzi Scheme. As this Court is aware, while a number of legal issues raised in these adversary proceedings have been decided, a number of legal issues raised by numerous defendants remain unsettled, with the complexity increased by the size of Petters’ Ponzi Scheme and number of parties involved. The Master Fund loaned money to PCI through PL Ltd. in 91 note transactions and received repayment of the entire principal amount invested plus an additional amount of approximately $117,780,000 by April 30, 2007, denominated as interest, which the Trustee asserts are False Profits. The Master Fund has entered into a Settlement Agreement with the Trustee stipulating to a judgment in the amount $136,334,800, which amount represents the False Profits received by the Master Fund from the invested funds together with interest on that amount. The Trustee filed a Complaint seeking to avoid and recover fraudulent transfers, along with prejudgment interest. The Trustee asserts that EGAVF II is liable to the Trustee under 11 U.S.C. §§ 544(b), 548(a)(1)(A), 550(a), 551 and 1106 and under Minnesota Statutes §§ 513.44(a), 513.45 and 513.47. EGAVF II has not filed an Answer in the Adversary Proceeding but generally denies the allegations of the Trustee’s Complaint. 5 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 34 of 43 Desc Main While the Trustee remains confident in his legal position with respect to his claims, he is cognizant of the issues in dispute and that resolution of the legal issues as well as the fact-intensive inquiry that will be necessary to resolve all of the claims and defenses asserted by EGAVF II. This is particularly true here as there are multiple levels of investment funds that are transferees. There is no guarantee that continued litigation would either be 100% successful in favor of the Bankruptcy Estates on all claims or that the opposite result would occur, were the litigation to proceed to judgment. However, based on the Court’s prior rulings, the Trustee believes he is receiving from this settlements what he would be entitled to as against the Settling Parties were he to seek summary judgment as to avoidance of False Profits as fraudulent transfers (except for concessions on the prejudgment interest rate), but without the need to incur the cost and expense as well as the attendant delay of that litigation. The Settlement Agreement provides that EGAVF II will stipulate to judgment in the amount of $92,707,000, which represents the approximate amount of EGAVF II’s share of the net income received from the Master Fund together with prejudgment interest thereon calculated from the date the Trustee’s Complaint was filed. The settlement should be approved because it will provide a substantial benefit to the Bankruptcy Estates by resolving the Trustee’s claims against the Settling Parties, eliminating the burdens of further litigation, including the likely amount of administrative-expense claims which would accrue in the form of attorney, expert witness, and other professional fees, deposition and subpoena costs, and other litigation 6 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 35 of 43 Desc Main expenses and the delay that would result from deferring resolution of the controversy in favor of full litigation. For these reasons, these factors favors approval of this settlement. 2. Difficulties in Collection. This second factor requires an assessment of the estate’s collection risk. Settlement of the Trustee’s claims by the Settlement Agreement will provide an economic benefit to the Bankruptcy Estates in light of the difficulties that may be faced in enforcing any judgment obtained. The Trustee has been informed that EGAVF II is without assets and redemption request have been wholly unsatisfied. The Settlement Agreement resolves the Trustee’s claims without further litigation costs. In summary, the Trustee has concluded that he is receiving from this settlements what he believes he would be entitled to if this matter were to proceed to trial, a judgment representing EGAVF II’s share of the net income it received from the Master Fund together with prejudgment at an agreed rate. For these reasons, this factor also weighs in favor of approval of this settlement. Because of the potential for delay and additional costs that would be necessary to enforce any judgment obtained, this factor also favors approval of this settlement. 3. This Settlement Is in the Best Interests of Creditors. This factor is the major—though not ultimately the controlling—consideration. In re Flight Transportation Corp. Securities Litigation, 730 F.2d at 1135. This Settlement Agreement will resolve and settle claims and litigation against the Settling Parties and provide an immediate and concrete benefit to the Bankruptcy Estates and their creditors 7 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 36 of 43 Desc Main by minimizing the risks, costs, and delay of administering the Bankruptcy Estates through further litigation. The settlement provides for entry of a judgment against EGAVF II in the approximate amounts of the EGAVF II’s share of the net income it received from the Master Fund together with prejudgment. In addition, EGAVF II will be assigning any claims it may have against investors to the Trustee in aiding him in his pursuit of those investors who were the ultimate beneficiaries of such transfers. The settlement is based on the Trustee’s assessment of his claims and the defenses of the Settling Parties, the prospects of a materially superior recovery associated with the expenditure of additional funds to obtain judgment and the costs and risks of collecting on that judgment, and the belief that the settlement reached as part of a negotiated settlement is fair and equitable. This Settlement Agreement obviates the need for additional litigation and minimizes, to the extent practicable, the costs and burdens on the Bankruptcy Estates, the Settling Parties and this Court posed by further litigation, and appropriately focuses the Trustee to the recipients of the net income from EGAVF II. For the foregoing reasons, the Trustee respectfully requests the Court (i) enter an order approving the Settlement Agreement and authorizing the Trustee’s entry into and performing according to the terms of the Settlement Agreement, and (ii) grant such further and other relief as the Court deems just and equitable. 8 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 37 of 43 Desc Main LINDQUIST & VENNUM LLP DATED: November 25, 2014 By: /s/ James A. Lodoen Daryle L. Uphoff (0111831) James A. Lodoen (0173605) Mark D. Larsen (0318498) Kirstin D. Kanski (0346676) Adam C. Ballinger (0389058) 4200 IDS Center 80 South Eighth Street Minneapolis, MN 55402-2274 (612) 371-3211 (612) 371-3207 (facsimile) www.lindquist.com ATTORNEYS FOR DOUGLAS A. KELLEY, CHAPTER 11 TRUSTEE 9 DOCS-#4408558-v3 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 38 of 43 Desc Main UNITED STATES BANKRUPTCY COURT DISTRICT OF MINNESOTA In re: Jointly Administered under Case No. 08-45257 Petters Company, Inc., et al., Court File No. 08-45257 Debtors. Court Files No.’s: (includes: Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc.; Edge One LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.) 08-45258 (GFK) 08-45326 (GFK) 08-45327 (GFK) 08-45328 (GFK) 08-45329 (GFK) 08-45330 (GFK) 08-45331 (GFK) 08-45371 (GFK) 08-45392 (GFK) Chapter 11 Cases Judge Gregory F. Kishel CERTIFICATE OF SERVICE Gayle J. Hildahl, of the City of Minneapolis, County of Hennepin, State of Minnesota, states that on November 25, 2014 she served the following documents: 1. Notice of Hearing and Motion to Approve the Settlement Agreement Entered into by and Among (I) Douglas A. Kelley, as The Chapter 11 Trustee of the Above-Captioned Debtors, (II) Epsilon Global Active Value Fund II, Ltd., (III) Seattle City Employees Retirement System, and (IV) IOTA Investments, LLC; upon: Deanne Anderson 562 Summerfield Drive Chanhassen, MN 55317 DOCS-#4410836-V1 Timothy F Brown Arent Fox LLP 1717 K Street NW Ste B1 Washington, DC 20006-5344 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 39 of 43 Desc Main Michael S. Budwick / Jonathan Feldman Solmon B. Genet / Eric W. Ostroff Meland Russin & Budwick PA 3200 Southeast Financial Center 200 South Biscayne Blvd Miami, FL 33131 Thomas K. Cauley Bryan Krakauer Sidley Austin LLP 1 South Dearborn Chicago, IL 60603 Chubb Group c/o Kevin Walsh 82 Hopmeadow Street Simsburg, CT 06070 Zachary Crain, Esq. Batten & Beasley, PLLC 2233 North Hamline Avenue Suite 650 Roseville, MN 55113 Theodore Deikel 1660 Highway 100 S., Ste. 500 Minneapolis, MN 55416 DZ Bank AG Deutsche ZentralGenossenschaftsbank, Frankfurt am Main DG Bank Building 609 Fifth Avenue New York, NY 10017-1021 Edward J. Estrada Reed Smith LLP 599 Lexington Ave., 22nd Floor New York, NY 10022 Matthew A. Feldman Jessica S. Etra Willkie Farr & Gallagher, LLP 787 7th Avenue New York, NY 10019 Matthew J. Flynn Jonathan Hackbarth Quarles & Brady 411 E Wisconsin Ave Milwaukee, WI 53202 Michael G Freedman Simpson Thacher & Bartlett LLP 1999 Ave of the States 29th Fl Los Angeles, CA 90067 Elise Scherr Frejka Joel Taylor Kramer Levin Naftalis & Frankel LLP 1177 Ave of the Americas New York, NY 10036 H. Peter Haveles Kaye, Scholer LLP 250 West 55th Street New York, NY 10019-9710 Interlachen Harriet Investments Limited c/o Interlachen Capital Group LP PO Box 24217 Edina, MN 55424-0217 Harris L Kay, Jeffry M. Henderson Henderson & Lyman 175 West Jackson Blvd Suite 240 Chicago, IL 60604 2 DOCS-#4410836-V1 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 40 of 43 Desc Main Robin E. Keller Hogan Lovellus US LLP 875 3rd Avenue New York, NY 10022 Douglas A. Kelley Kelley, Wolter & Scott PA Centre Village Offices 431 South 7th Street, Suite 2530 Minneapolis, MN 55415 Robert J. Lemons Weil Gotshal & Manges LLP 767 5th Ave New York, NY 10153 Michael S Mc Elwee Varnum LLP Bridgewater Place Po Box 352 Grand Rapids, MI 49501 MN Airlines, LCC 1300 Mendota Heights Rd Mendota Heights, MN 55120 Barry Mukamal KapilaMukamal, LLP The Kapila Building 1000 South Federal Highway, Suite 200 Fort Lauderdale, FL 33316 Martin J Mullen on behalf of Creditor Michael Smith Rowe Allen Mullen LLP 3636 Nobel Drive, Suite 214 San Diego, CA 92122-1042 Deborah M Perry on behalf of Creditor Ark Royal Capital LLC 3800 Lincoln Plaza 500 North Akard Dallas, TX 75201 Grover C Sayre Leonard O'Brien et al 100 S Fifth St Suite 2500 Minneapolis, MN 55402 Jonathan Shepard Pryor Cashman LLP 7 Times Square New York, NY 10036-6569 R Brian Shields / James Krause Michael Gaubert / Lawrence Friedman Friedman & Feiger LLP 5301 Spring Valley Rd Suite 200 Dallas, TX 75254-2488 Craig Singer Williams & Connolly LLP 725 12th St NW Washington, DC 20005 Martin A Stewart Martin Stewart Law Firm PC 2828 Routh St Ste 500 Dallas, TX 75201 Taunton Ventures LP c/o Paul Taunton 9980 Deerbrook Drive Chanhassen, MN 55317 Steven W. Thomas Thomas Alexander & Forrester LLP 14 27th Avenue Venice, CA 90291 Trent Tucker Non-Profit Organization 433 Riverstreet Minneapolis, MN 55401 3 DOCS-#4410836-V1 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 41 of 43 W. Benjamin Winger Michael J Ford Quinlivan & Hughes PA 400 S 1st St Ste 600 PO Box 1008 St Cloud, MN 56302 Desc Main XL Insurance c/o David M. Gische Marcus B. Holladay Troutman Sanders LLP 401 9th Street NW, Suite 1000 Washington, DC 20004-1234 via U.S. Mail to the addresses listed above and electronically by Notice of Electronic Filing upon all parties who have requested service in these cases by filing the same via ECF with the Bankruptcy Court in the District of Minnesota. /e/ Gayle J. Hildahl Gayle J. Hildahl 4 DOCS-#4410836-V1 Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 42 of 43 Desc Main UNITED STATES BANKRUPTCY COURT DISTRICT OF MINNESOTA Jointly Administered under Case No. 08-45257 In re: Petters Company, Inc., et al., Court File No. 08-45257 Debtors. (includes: Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc.; Edge One LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.) Court Files No.’s: 08-45258 (GFK) 08-45326 (GFK) 08-45327 (GFK) 08-45328 (GFK) 08-45329 (GFK) 08-45330 (GFK) 08-45331 (GFK) 08-45371 (GFK) 08-45392 (GFK) Chapter 11 Cases Judge Gregory F. Kishel ORDER ______________________________________________________________________________ This case came before the Court on December 16, 2014, on the motion (the “Motion”) of Douglas A. Kelley, Chapter 11 Trustee of the above-captioned bankruptcy estates, to approve a Settlement Agreement entered by and among (i) Douglas A. Kelley, as the Chapter 11 Trustee of the above-captioned debtors, (ii) Epsilon Global Active Value Fund II, Ltd., (iii) Seattle City Employees Retirement System, and (iv) Iota Investments, LLC resolving certain disputes that have arisen in these cases. Based on the arguments of counsel, moving documents, the record made at the hearing, the Court’s findings of fact and conclusions of law, if any, having been recorded in open court following the Case 08-45257 Doc 2558 Filed 11/25/14 Entered 11/25/14 15:03:42 Document Page 43 of 43 Desc Main close of evidence and the Court having reviewed the Settlement Agreement and being fully advised in the premises, IT IS ORDERED THAT: 1. The Motion to approve the Settlement Agreement is GRANTED. 2. The Settlement Agreement described in the Motion is hereby approved and Douglas A. Kelley, as the Chapter 11 Trustee of the above-captioned debtors, is authorized to enter into and perform the terms thereof. 3. Douglas A. Kelley, the Chapter 11 Trustee of the above-captioned debtors, is authorized to take any and all actions necessary to effectuate the terms of the Settlement Agreement approved by this Order. 4. The Court shall retain jurisdiction to interpret and enforce the terms of the Settlement Agreement. Dated: _________________________________________ Gregory F. Kishel Chief United States Bankruptcy Judge 2 DOCS-#4408558-v3