When the business entities that were utilized in a Ponzi scheme filed for bankruptcy, a plaintiff lender-investor lacks authority to bring fraud-related claims arising out of the Ponzi scheme against an earlier lender-investor, absent an allegation of an injury separate and distinct from an injury suffered by the entities. Such fraud-related cause of action [sic] is derivative and belongs to the bankruptcy estate.
The quote is the summary of a published Minnesota Court of Appeals decision this week ruling against a lender called Greenpond South LLC (“Greenpond”) in Greenpond’s lawsuit against another lender, General Electric Capital Corporation (“GECC”).
The description of the legal holding is bland and technical but the decision reflects underlying allegations of serious wrongdoing by the GECC, the winning party to this lawsuit.
To summarize, GECC was a lender to Minnesota’s most famous swindler, Tom Petters. GECC caught on to Petters’ fraud. GECC allegedly kept Petters’ secret until it had recovered the money it lent. GECC also knowingly provided Petters with a “To Whom It May Concern” letter praising Petters’ character, knowing that the praise was undeserved and that Petters would use that letter to defraud other potential lenders. Although the decision does not say so, it does not appear that GECC did anything to stop Petters’ ongoing fraud once it had gotten its own money out.
The basic holding of the Greenpond v. GECC case, however, is not that GECC did nothing wrong. Roughly, it is that the Bankruptcy Trustee brought its own action against GECC, which it settled. In other words, at least in theory, GECC already paid the piper for its alleged role in the scheme. Greenpond cannot sue GECC a second time.