Ritchie Capital Management LLC v. BMO Harris Bank, N.A.

United States Court of Appeals
For the Eighth Circuit
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No. 16-1968
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Ritchie Capital Management, L.L.C.; Ritchie Capital Management, Ltd.; Ritchie
Special Credit Investments, Ltd.; Rhone Holdings II, Ltd.; Yorkville Investments
I, L.L.C.; Ritchie Capital Structure Arbitrage Trading, Ltd.,
lllllllllllllllllllll Plaintiffs - Appellants,
v.
BMO Harris Bank, N.A., as successor to M&I Marshall & Ilsley Bank,
lllllllllllllllllllll Defendant - Appellee.
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Appeal from United States District Court
for the District of Minnesota - Minneapolis
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Submitted: February 8, 2017
Filed: August 17, 2017
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Before LOKEN, COLLOTON, and KELLY, Circuit Judges.
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COLLOTON, Circuit Judge.
This suit arises out of the collapse of Thomas Petters’s massive Ponzi scheme.
Ritchie Capital Management, one of Petters’s creditors, appeals the district court’s
dismissal of its claims against BMO Harris, the successor-in-interest to M&I Bank.
Ritchie seeks damages from BMO based on M&I’s alleged collusion with Petters and
his companies. The district court abstained from exercising jurisdiction and then
dismissed Ritchie’s claims. We affirm the district court’s decision to abstain, but
vacate the judgment dismissing the case and remand for the court to enter a stay.
I.
Petters’s Ponzi scheme involved convincing investors to loan him money on
the pretense that Petters would purchase and resell wholesale consumer merchandise.
Petters fabricated purchase orders from big-box retailers to make it appear that his
company, Petters Company, Inc. (PCI), was generating profits from these resales.
Instead of purchasing merchandise, PCI rerouted the money through M&I bank
accounts back to other PCI entities and to Petters. From 2001 to 2008, PCI used at
least one M&I checking account exclusively for fraudulent transactions.
Ritchie was one of the investors that bought into Petters’s scheme. In 2008,
Ritchie made a series of loans to Petters and his companies totaling $150 million.
One of the loans, $31 million disbursed in March 2008, was allegedly made so that
PCI could purchase a bulk order of Sony PlayStations. For the PlayStation
transaction, PCI, Ritchie, and M&I entered into a deposit account control agreement,
under which M&I agreed to administer a separate account for PCI to collect payments
and direct the proceeds to Ritchie. PCI never repaid the loans. In September 2008,
Petters’s scheme collapsed; a few weeks later, PCI filed for bankruptcy.
Eager to recover some of its losses, Ritchie filed proofs of claim for more than
$200 million in PCI’s bankruptcy proceedings. The PCI Trustee filed an adversary
proceeding against Ritchie in the bankruptcy court to, among other things, have
Ritchie’s proofs of claim disallowed based on what the Trustee claimed was Ritchie’s
actual notice of the fraudulent scheme. The PCI Trustee also filed an adversary
proceeding against BMO based on M&I’s purported role in the fraud, claiming that
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M&I and Petters were part of a civil conspiracy and that M&I aided and abetted
Petters’s fraud and breach of fiduciary duty.
The case before us began in February 2014, when Ritchie sued BMO in New
York state court alleging fraud and misrepresentation, aiding and abetting fraud, and
civil conspiracy. As the appeal concerns an order granting a motion to dismiss, we
recite the facts as alleged by Ritchie. Ritchie claimed that M&I had actual knowledge
of Petters’s fraud, because the bank knew that retailers were not making payments to
PCI and that PCI’s stated business model could not have generated the amount of
money that was transferred into and out of PCI’s accounts. Ritchie also claimed that
M&I substantially assisted Petters by entering into deposit account control
agreements with investors like Ritchie, who allegedly extended loans to PCI in
reliance on M&I’s assurances.
BMO removed the suit to federal court, successfully moved to transfer it to the
District of Minnesota, and then moved to dismiss for failure to state a claim. In the
alternative, BMO requested that the district court abstain from hearing Ritchie’s
claims in light of the ongoing bankruptcy proceedings. The district court granted
BMO’s motion to dismiss on abstention grounds, concluding that there was
“substantial overlap” between this case and the Ritchie and BMO adversary
proceedings. The court reasoned that although the parties and claims in the two cases
were not identical, the issues common to both cases—including whether M&I knew
about Petters’s fraud, whether M&I’s conduct amounted to substantial assistance, and
whether Ritchie was on actual notice of Petters’s fraud—rendered them sufficiently
similar to warrant abstention. The district court noted that although Ritchie requested
a stay in lieu of dismissal, Ritchie did not explain why a stay would be preferable, so
the court dismissed the action.
A few weeks after the district court granted BMO’s motion to dismiss, the PCI
Trustee and Ritchie settled the Ritchie adversary proceeding. Ritchie received a $163
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million unsecured claim against Petters’s estate, with a $6 million reduction from
whatever amount the estate would otherwise pay on Ritchie’s allowed claim. A few
days after the settlement, Ritchie wrote to the district court, requesting permission to
file a motion for reconsideration and restating its arguments against abstention. The
district court denied Ritchie’s request, and Ritchie appealed. We review a district
court’s decision to abstain for abuse of discretion.
II.
On appeal, Ritchie argues that the district court applied the wrong standard for
abstention. Ritchie contends that the court erred when it abstained based on the
“substantial overlap” between the claims and parties before the district court and
those in the ongoing bankruptcy proceedings. According to Ritchie, abstention is
appropriate only where one case will fully dispose of the other, so the district court
erred when it abstained in favor of bankruptcy proceedings that will not fully resolve
all of Ritchie’s claims against BMO.
We disagree with Ritchie’s proffered standard. The district court properly
considered whether the case before it was “duplicative” of the case before the other
federal court. Colo. River Water Conservation Dist. v. United States, 424 U.S. 800,
817 (1976). Proceedings are duplicative if the issues in one case “substantially
duplicate those raised by a case pending in another court.” Ritchie Capital Mgmt.,
L.L.C. v. Jeffries, 653 F.3d 755, 763 n.3 (8th Cir. 2011). To be sure, many federal
decisions involving abstention in favor of another federal proceeding have involved
identical parties and complaints. See, e.g., Blakley v. Schlumberger Tech. Corp., 648
F.3d 921, 926, 932 (8th Cir. 2011); Selph v. Nelson, Reabe & Snyder, Inc., 966 F.2d
411, 412-13 (8th Cir. 1992) (per curiam); Orthmann v. Apple River Campground,
Inc., 765 F.2d 119, 120-21 (8th Cir. 1985). But the standard does not require precise
identity between the parties and actions; abstention can be warranted when
proceedings are duplicative because of the overlapping issues and parties. The
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district court correctly rooted its “duplicative” determination in the relevant equitable
considerations: conservation of judicial resources and comprehensive disposition of
litigation. Colo. River, 424 U.S. at 817.
The heightened standard for which Ritchie advocates—abstention only if there
is a substantial likelihood that the first proceeding will fully dispose of the claims
presented in the second proceeding—applies when a federal court confronts a
concurrent state proceeding. See United States v. Rice, 605 F.3d 473, 476 (8th Cir.
2010). “This difference in general approach between state-federal concurrent
jurisdiction and wholly federal concurrent jurisdiction stems from the virtually
unflagging obligation of the federal courts to exercise the jurisdiction given them.”
Colo. River, 424 U.S. at 817. The stricter standard for abstention in favor of a state
court acknowledges that whether the federal action is stayed or dismissed, the state
court proceeding likely will preclude the plaintiff from receiving consideration of its
claims in federal court. Because federal-federal abstention cases do not involve this
risk of depriving a litigant of a federal forum, the standard for similarity is more
flexible.
In determining whether the parallel proceedings were duplicative, the district
court concluded that the “parties and the issues being litigated in this case
substantially overlap” with those in the BMO adversary proceeding. The court
reasoned that the Trustee and Ritchie both seek damages based on the same conduct
by M&I. And the court observed that most of the claims are common to both actions,
including civil conspiracy and aiding and abetting fraud and breach of fiduciary duty.
The district court also identified fact-intensive issues common to both
proceedings—whether M&I knew of Petters’s fraud, whether M&I’s conduct
constituted substantial assistance, whether M&I and Petters reached a common
understanding to defraud creditors—that both courts necessarily would address in the
absence of abstention. The court noted that the Ritchie adversary proceeding also
raised fact-bound issues common to both proceedings, such as whether Ritchie had
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actual notice of Petters’s fraud when it made the loans. The district court
acknowledged that the parties to the proceedings in the district court and the
bankruptcy court were not identical. But it concluded that because Ritchie and the
Trustee both sought to hold BMO accountable for the same conduct by M&I, and
because Ritchie is a creditor for the estate that the Trustee administers, the interests
of Ritchie and the Trustee were “sufficiently aligned” to render the two proceedings
duplicative. These were appropriate considerations in the court’s exercise of
discretion.*
Ritchie argues that abstention is inappropriate because the bankruptcy case will
not resolve all of its claims against BMO; these allegations include the fraud-and-
misrepresentation claim specific to Ritchie. Ritchie also disagrees with the district
court’s conclusion that the Trustee’s interests are aligned with its own: it argues that
the Trustee’s complaint against BMO in the bankruptcy court omits critical facts that
Ritchie included in its First Amended Complaint; and Ritchie contends that the
Trustee faces dispositive defenses, such as in pari delicto, which may prevent the
Trustee from prevailing in the BMO adversary proceeding.
That the Trustee might not succeed on some of its separate claims, or that some
findings may not apply to Ritchie, does not preclude the district court’s exercise of
discretion. Abstention does not prevent Ritchie from raising any claims left
unresolved after the bankruptcy proceedings; questions of issue or claim preclusion
can be resolved later by the district court. But by abstaining, the district court will
*
The parties settled the Ritchie adversary proceeding after the district court
ruled on the motion to dismiss, but we review the district court’s decision based on
the state of the record at the time of the ruling. Also after the ruling, the Trustee filed
an amended complaint in the BMO adversary proceeding that includes many of the
facts to which Ritchie refers, and the bankruptcy court rejected BMO’s argument that
in pari delicto categorically prevents the Trustee from raising the PCI estate’s claims
against BMO.
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avoid the “unnecessary expenditure of scarce federal judicial resources” to address
other issues that another federal court may well resolve. Mo. ex rel. Nixon v.
Prudential Health Care Plan, Inc., 259 F.3d 949, 954 (8th Cir. 2001).
While the district court was within its discretion to abstain, we conclude that
the court should have stayed Ritchie’s claims rather than dismiss them. A district
court’s authority to dismiss is circumscribed in cases where the plaintiff seeks purely
legal relief, such as damages. The Supreme Court has “applied abstention principles
to actions ‘at law’ only to permit a federal court to enter a stay order that postpones
adjudication of the dispute, not to dismiss the federal suit altogether.” Quackenbush
v. Allstate Ins. Co., 517 U.S. 706, 719 (1996). Quackenbush addressed abstention
under Burford v. Sun Oil Co., 319 U.S. 315 (1943), based on concerns about
protecting state administrative processes, but the decision spoke to prudential limits
on federal jurisdiction more generally. 517 U.S. at 716-21. This court applied the
rule against dismissal in Yamaha Motor Corp., U.S.A. v. Stroud, 179 F.3d 598 (8th
Cir. 1999), after a district court abstained in light of ongoing state proceedings under
Younger v. Harris, 401 U.S. 37 (1971), because “[w]hen monetary damages are
sought in addition to injunctive relief and the federal court is not asked to declare a
state statute unconstitutional in order to award damages, the case should not be
dismissed.” 179 F.3d at 603-04.
Abstention in this case, involving an overlapping proceeding in a federal
bankruptcy court, is based on concerns of wise judicial administration, see Colo.
River, 424 U.S. at 817, but the two cases here were not identical actions involving
identical parties that could justify dismissal. Cf. Blakley, 648 F.3d at 932; Orthmann,
765 F.2d at 121. Where there is potential that Ritchie’s claims will not be resolved
in the bankruptcy proceeding, we see no reason why the court should have greater
authority to dismiss an action for damages here than in a case involving parallel state
court proceedings and Burford or Younger abstention.
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BMO complains that Ritchie failed to provide any reason in the district court
why a stay would be preferable to dismissal. But even assuming that the court had
discretion to dismiss an action for damages, the statute of limitations is always a
concern in abstention cases. See, e.g., Wilton v. Seven Falls Co., 515 U.S. 277, 288
n.2 (1995). For this reason, we have emphasized a preference for stays over
dismissals to preserve any claims that might not be resolved by the parallel
proceedings. See Royal Indem. Co. v. Apex Oil Co., 511 F.3d 788, 797-98 (8th Cir.
2008). We have implemented that preference even when plaintiffs did not clearly
explain why further proceedings in the abstaining court were likely. See Cedar
Rapids Cellular Tel., L.P. v. Miller, 280 F.3d 874, 882-83 (8th Cir. 2002). Similarly
here, we conclude that while the district court appropriately invoked its discretion to
abstain, the court should have stayed the action rather than dismiss it.
For these reasons, we affirm the district court’s order abstaining from
exercising jurisdiction at this time, but we vacate the judgment dismissing the action
and remand for further proceedings consistent with this opinion.
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