The latest turn in the ongoing Petters bankruptcy saga came on June 11, when U.S. Bankruptcy Judge Gregory Kishel issued a 46-page order examining 2012 amendments to the Minnesota Uniform Fraudulent Transfer Act (MUFTA). Specifically, Judge Kishel reviewed whether the MUFTA amendments created a complete defense and barred the Petters trustee’s avoidance claims against several charitable organizations. In the end, Judge Kishel denied motions to dismiss filed by the charities and permitted the trustee’s suits to move forward.

These cases arose from an unraveling of one of the largest Ponzi schemes in U.S. history, which was primarily perpetrated by Minnesota businessman Tom Petters. In the course of the Petters Chapter 11 bankruptcy cases, a trustee was appointed to remediate damages caused by the scheme. With that charge, the trustee has proceeded to engage in numerous lawsuits; among those, the trustee filed suit against several charitable organizations seeking to avoid specific transfers made to them by Petters or his affiliated entities under MUFTA (invoked through 11 U.S.C. 544).

While those suits were pending, the Minnesota Legislature amended MUFTA in 2012 to add a retroactively-effective provision limiting the scope and nature of transfers to qualifying charitable organizations that may be subjected to avoidance claims. Following that, those charities sued by the Petters trustee moved to dismiss the complaints on grounds that the amendments sheltered the transfers at issue and barred the trustee’s claims.

Recognizing the “snarl of conflicting public policy considerations” on both sides, Judge Kishel proceeded with a close review of the pleadings and a careful interpretation of the amended legislation in the context of a Rule 12 standard of review. Under his reading, a key common thread emerged among the trustee’s allegations against the charities; each received assignments and held rights to payments collected by Petters affiliates under promissory notes the affiliates had first issued in favor of independent third parties.

The charities argued that the receipt of funds through the Petters affiliates by virtue of these assigned interests are “contributions” under the 2012 MUFTA amendments, and, as a result, the trustee had no right of avoidance. In addition to the statutory language, the charities relied more broadly the Minnesota Legislature’s intent to shield donations made to charitable organizations from these types of actions.

Judge Kishel, however, found that the MUFTA amendments cannot be construed so broadly, particularly in the context of the larger statute. In particular, Judge Kishel pointed out that “the exception under the 2012 amendment is limited to direct “contributions” from a debtor, of that debtor’s property, to the qualifying charitable organization that is then to be statutorily-protected.” Accordingly, under Judge Kishel’s interpretation “the exception only applies to contributions actually made by the referent debtor, of its own assets and to a qualifying charity-recipient.” With that reading, the trustee would not have the legal power to avoid the original assignments of the promissory notes. The trustee does have power to avoid transfers made under the promissory notes, as the Petters affiliates were not making “contributions” of their property when they acted as makers of the notes, but rather contributions of others’ property.

Because the trustee’s fact-pleading in the complaints alleged this distinction, among other reasons, Judge Kishel denied the charities’ motions to dismiss and permitted the suits to move forward.

The practical effect of this ruling, of course, is limited. Judge Kishel’s analysis is applied to very specific facts involving very specific kinds of charitable “transfers.” But when combined with the Minnesota Supreme Court’s recent elimination of the so-called Ponzi scheme presumption in Finn v. Alliance Bank (which we reported on earlier), there seems to an increased willingness to carve up MUFTA in ways that remain friendly to bankruptcy trustees.