Update (March 24, 2012): State legislators have no doubt heard from constituents about what many see as the excesses of Petters clawback litigation, as innocent people and charitable institutions have been sued for the return of years-old gifts and donations.
Bryan Lake, “our man in St. Paul,” notes a new statute, HF1384, passed by the Senate Judiciary Committee, that carves out a shorter statute of limitations to protect charities and religious institutions from clawback efforts.
The bill, as proposed, would affect causes of action existing on, or arising on or after the day following final enactment (and so, in that way, would have some retroactive effect, one might say).
Update (May 24, 2011): Reminder: The Petters Clawback cases are the subject of a Minnesota State Bar Association Civil Litigation CLE tomorrow (May 25, 2011).
Original post (May 19, 2011): Anyone who has followed current events in Minnesota over the past three years is well-aware of Tom Petter’s billion dollar fraud, which, broadly, was premised on a gigantic sham business supposedly selling merchandise to large electronics retailers, intermingled with numerous “legitimate businesses” (for example Sun Country, Polaroid) that Petters also owned.
What is less publicly known is how the aftermath of the Petters fraud is playing out, as hundreds (literally) of lawyers do battle to “unscramble the eggs;” that is, lawyers work to sort through who is entitled to what in the rubble of this fallen empire, composed in part of non-existent assets and, in part, of real cash and actual value.
A massive redistribution of money is being attempted — with very large sums of money going to the many lawyers charged with sorting through the complicated mess.
One has to wonder where fairness and justice fit in and wonder when the so-called transaction costs (that is, the lawyers’ fees) become self-defeating, that is, where the justice system verges on a net negative on the ultimate goals of economic efficiency, fairness, and justice.
One of the many areas in the Petters aftermath where the risk is playing out are in more than one hundred “clawback” actions. Many people and businesses who had financial involvement with Petters over many years are being sued to return their “ill-gotten gains” to be redistributed to other Petters’ creditors for cents on the dollars lost.
In these cases, the court-appointed Trustee, Doug Kelley, and the several law firms that he has retained argue that (1) the fraud was uncovered in late 2008, and (2) the “clawback defendants” supposedly knew or should have known about the fraud many years before it was uncovered.
This logically strained scenario is the Trustee’s basis for claiming that statutes of limitation should not apply at all the the Trustee’s clawback actions. He should, he argues, be able to go well past the applicable Minnesota statutes of limitation to “claw back” money into the crumbled Petters empire to redistribute to empire creditors…
The Trustee’s theoretical scenario is implausible and logically strained but it is not impossible, as a logical or practical matter. The scale tips from justice to injustice, however, when one recognizes that the “clawback defendants” face overwhelming transaction costs to fight this counter-factual scenario; they cannot easily afford the cost to prove what everyone already knows to be true – that the fraud was undetected nearly a decade ago by all but those who perpetrated the fraud.
So, if Minnesota statutes of limitation are not applied, these defendants will face the awful choice between fighting a legal army with every incentive of battling for years (dissipating the remaining assets of the collapsed empire) or, alternately, donating their earned and innocent money as part of the Trustee’s giant and fairly arbitrary cash redistribution project.
There is a bitter paradox when lawyers charged with cleaning up the Petters fraud spend years getting paid from the Petters empire assets to argue that the whole world knew or should have known of the Petters fraud going back a decade or more but, because the fraud “only came to light in 2008” the statute of limitations only started to run then.
Full disclosure: Minnesota Litigator editor-in-chief has a small role in this massive litigation, which he hopes will be short-lived. The Court, in my view, should apply statutes of limitation under Minnesota law to stanch the hemorrhaging and harm inflicted on so many Minnesotans (and others) already by the Petters’ fraud.