Reversal of $1+ Billion Judgment – Kelley v. BMO Harris Bank N.A.

The following is an ebulletin by Leonard Gumport about a recent case of interest.     

Summary

Does the receivership of a debtor extinguish an in pari delicto defense to the debtor’s claims if the debtor subsequently files bankruptcy? How can judgment-preservation insurance (JPI) help my client? Read on.

The receiver of Petters Company, Inc. (PCI) filed a chapter 11 petition on PCI’s behalf. The chapter 11 trustee in PCI’s bankruptcy case obtained a $1+ billion judgment against BMO Harris Bank N.A. (BMO). Applying the equitable defense of in pari delicto (“in equal fault”), the U.S. Court of Appeals for the Eighth Circuit reversed the trustee’s judgment and directed entry of judgment for BMO. On May 27, 2025, the U.S. Supreme Court denied the trustee’s petition for certiorari. Kelley v. BMO Harris Bank N.A., 115 F.4th 901 (8th Cir. 2024) (Kelley 5), cert. denied, 2025 U.S. LEXIS 2057 (2025). On August 22, 2025, the trustee’s former counsel sought an attorney’s lien on a JPI policy that allegedly covered $80 million to $90 million of the risk of reversal of the trustee’s $1+ billion judgment.

A copy of Kelley 5 is here.

Facts

[A] The Ponzi Scheme

Thomas J. Petters, a Minnesota businessman, owned PCI. From 1994 to 2008, Petters used PCI to run a $3.5 billion Ponzi scheme. Kelley 5, at 903; see In re Petters Co., Inc. 401 B.R. 391, 395-397 (Bankr. D. Minn. 2009) (Kelley 1), aff’d sub nom. Ritchie Special Credit Invs. Ltd., et al. v. U.S. Trustee et al., U.S.D.C. No. 0:09-cv-00680 (D. Minn., Sept. 8, 2009), aff’d 620 F.3d 847 (8th Cir. 2010); Kelley v. Boosalis, 974 F.3d 884, 887 (8th Cir. 2020).

As part of his Ponzi scheme, Petters told investors that PCI purchased and sold consumer electronics products. In fact, Petters re-routed much of the investors’ funds to himself and his co-conspirators through PCI’s accounts at Marshall and Ilsley Bank (M&I), the predecessor-in-interest of BMO. Kelley 5, at 903.

On September 24, 2008, federal agents executed a search warrant at Petters’ corporate headquarters in Minnetonka, Minnesota. In response, Petters vacated the headquarters and resigned from PCI and other companies. In December 2008, Petters and PCI were indicted on federal fraud and money laundering charges. Subsequently, PCI pleaded guilty and Petters was convicted and sentenced to 50 years’ imprisonment. Kelley 1, at 395-396; Kelley 5, at 903.

[B] The Receivership Action

On October 2, 2008, in USA v. Thomas Joseph Petters et al., U.S.D.C. No. 0:08-cv-05348, the federal government (USA) filed a civil action (the Receivership Action) against Petters, PCI, and others in the U.S. District Court for the District of Minnesota (the District Court). In the Receivership Action, invoking the Fraud Injunction Act, 18 U.S.C. § 1345, the USA sought a receivership and related injunctive relief for the benefit of Petters’ victims. Kelley 1, at 396-397.

On October 6, 2008, the District Court granted an order (the 10/6/08 Order) appointing Douglas A. Kelley as receiver of multiple entities (the Entities), including PCI. Section IV.A of the 10/6/08 Order provided: “Douglas A. Kelley is appointed Receiver for the Entities with the full power of an equity receiver. The Receiver shall solely be the agent of this Court in acting as Receiver under this Order and shall have judicial immunity.” Section IV.B of the 10/6/08 Order authorized Kelley, as receiver, to file “any bankruptcy petitions for any of the Entities [including PCI] and [to serve] as management or Debtor in Possession” of any of those Entities. The 10/6/08 Order also prohibited financial and banking institutions from disposing of the Entities’ records.  Order etc. at 8-12 [U.S.D.C. No. 0:08-cv-05438, ECF No.12]; see Kelley 1, at 398-399.

[C] The PCI Case

On October 11, 2008, in his capacity as receiver, Kelley filed chapter 11 petitions for PCI and other Entities in the U.S. Bankruptcy Court for the District of Minnesota (the Bankruptcy Court). Kelley 1, at 394; Kelley 5, at 903-904; e.g., Voluntary Petition [U.S.B.C. No. 4:08-bk-45257, ECF No. 1].  

In PCI’s chapter 11 case (the PCI Case), the United States Trustee (UST) objected to the receiver’s serving as the debtor-in-possession. The Bankruptcy Court stated that, although there was conflicting precedent, there were “colorable arguments” that a pre-bankruptcy receiver of a company should not serve as debtor-in-possession for the company. Kelley 1, at 408 n.32.

On December 8, 2008, at Kelley’s request, the District Court modified the 10/8/08 Order to provide that: “Any bankruptcy cases [of PCI and the other Entities] so commenced by the Receiver shall during their pendency be governed by and administered pursuant to the requirements of the United States Bankruptcy Code, 11 U.S.C. section 101 et seq., and the applicable Federal Rules of Bankruptcy Procedure.” See id. at 399-400; Kelley 5, at 903-905.

On February 26, 2009, the Bankruptcy Court approved the UST’s appointment of Kelley as chapter 11 trustee for PCI. Kelley 1, at 415. In approving the UST’s appointment of Kelley, the Bankruptcy Court stated that “Kelley has committed to proceeding with the administration of the estates in these cases in accordance with the values and priorities of bankruptcy law.” Kelley 1 at 409; see id. at 415.

[D] The BMO Proceeding

In November 2012, as chapter 11 trustee, Kelley filed an adversary proceeding (the BMO Proceeding) against BMO as M&I’s successor. The complaint alleged multiple claims against BMO based on M&I’s alleged complicity in Petters’ Ponzi scheme. Complaint at 4-27 [U.S.B.C. No. 4:12-ap-04288, ECF No. 1].

On April 15, 2016, in the PCI Case, the Bankruptcy Court confirmed a chapter 11 plan that established a litigation trust (the BMO Litigation Trust). As part of the plan, Kelley was appointed trustee of the BMO Litigation Trust, and the claims of PCI’s estate against BMO were transferred to the BMO Litigation Trust. Second Am. Chap. 11 Plan at 5, 41-42, 45-46 [U.S.B.C. No. 4:08-bk-04527, ECF No. 3263]; Findings etc. [U.S.B.C. No. 4:08-bk-04527, ECF No. 3305].

On October 20, 2016, as trustee of the BMO Litigation Trust, Kelley filed an amended complaint in the BMO Proceeding. The amended complaint alleged claims against BMO for: (1) violation of the Minnesota Uniform Fiduciaries Act, (2) breach of fiduciary duty, (3) aiding and abetting fraud, (4) aiding and abetting breach of fiduciary duty, and (5) civil conspiracy. As in the prior complaint, the trustee’s claims against BMO were based on M&I’s alleged complicity in Petters’ Ponzi scheme. The complaint did not allege any avoidance claims. First Amended Compl. at 1-5, 47-53 [U.S.B.C. No. 4:12-ap-04288, ECF No. 55].

On February 5, 2019, BMO filed a motion for summary judgment on multiple grounds, including in pari delicto. BMO argued: “BMO’s in pari delicto defense defeats the Trustee’s claims because PCI bears at least substantially equal responsibility for the injuries the Trustee seeks to remedy.” Defendant [BMO’s] Notice of Hearing etc. at 4 [U.S.B.C. No. 4:12-ap-04288, ECF No. 339].

On June 27, 2019, the Bankruptcy Court denied BMO’s summary judgment motion. The Bankruptcy Court stated: “Minnesota state and federal courts have consistently declined to apply in pari delicto when an equity receiver has been appointed because the wrongdoer is removed from the picture; the underlying purpose of [the in pari delicto] defense, to avoid court entanglement in a dispute between wrongdoers, is gone.” Kelley v. BMO Harris Bank N.A. (In re Petters Co.), 603 B.R. 424, 435 (Bankr. D. Minn. 2019) (Kelley 2)(footnotes omitted).  

On July 1, 2019, the Bankruptcy Court ordered sanctions, including evidentiary sanctions, against BMO for failing to preserve electronically stored information (ESI). The next day, the Bankruptcy Court transferred the BMO Proceeding to the District Court for a jury trial. On July 22, 2022, the District Court affirmed the Bankruptcy Court’s sanctions against BMO. Orders etc. [U.S.B.C. No. 4:12-ap-04288, ECF Nos.353, 355]; Kelley v. BMO Harris Bank N.A., 657 B.R. 475, 492-493 (D. Minn. 2022) (Kelley 3).  

During October-November 2022, in the transferred BMO Proceeding, the District Court conducted a 17-day jury trial. On November 8, 2022, the jury returned its verdict, finding against trustee Kelley on three of his four remaining claims, but finding for him on his claim against BMO for M&I’s aiding and abetting breaches of fiduciary duty by Petters and his co-conspirators.

On trustee Kelley’s claim against BMO for aiding and abetting breaches of fiduciary duty, the jury awarded $484,209,716 in compensatory damages and $79,533,392 in punitive damages. Redacted Jury Verdict [U.S.D.C. No. 0:19-cv-01756, ECF No. 340].

Post-trial, the District Court increased the $560+ million award by adding $483,679,075 in prejudgment interest, $109,600 in costs, and post-judgment interest compounded annually. Amended Judgment etc. [U.S.D.C. No. 0:19-cv-01756, ECF Nos. 476, 479, 483]; see Kelley v. BMO Harris Bank N.A., 2023 U.S. Dist. LEXIS 108516 (D. Minn. 2023) (Kelley 4).

On June 23, 2023, the District Court denied BMO’s post-trial motion for a judgment notwithstanding the verdict. The District Court stated that, among other things, BMO had “destroyed email backup tapes containing tens of thousands of documents, despite knowing that those tapes were subject to a litigation hold.” BMO’s conduct permitted the jury to draw an inference “that the spoliated evidence would have been detrimental to” BMO. Kelley 4, at *4.

On July 31, 2023, BMO posted a $1.158 billion appeal bond. Appeal Bond [U.S.D.C. No. 0:19-cv-01756, ECF No. 472]. On August 24, 2023, BMO filed an amended appeal. Am. Notice of Appeal [U.S.D.C. No. 0:19-cv-01756, ECF No. 485]. On May 9, 2024, the U.S. Court of Appeals for the Eighth Circuit heard oral argument. The advocates included two former U.S. Solicitors General. On September 12, 2024, in Kelley 5, the Eighth Circuit reversed the judgment and directed entry of judgment for BMO.

Reasoning

Kelley 5 decided: (1) PCI’s pre-petition claims against BMO were barred by in pari delicto; and (2) PCI’s pre-bankruptcy receivership did not extinguish that defense to PCI’s claims when asserted by PCI’s chapter 11 trustee.

“The equitable defense of in pari delicto embodies the principle that a plaintiff who has participated in wrongdoing [is barred] from recovering damages resulting from the wrongdoing.” Kelley 5, at 904 (citing Grassmueck v. Am. Shorthorn Ass’n, 402 F.3d 833, 837 (8th Cir. 2005) (Grassmueck)). “In Minnesota, the defense of in pari delicto is appropriately applied to bar recovery when the plaintiff’s fraud was no less than that of the defendant.” Kelley 5, at 904 (internal quotations and citation omitted).

“PCI was created solely to operate the Ponzi scheme. Even assuming that [BMO] aided the scheme to the degree that Kelley alleges, BMO cannot be more culpable than the entity that orchestrated the scheme. The defense of in pari delicto thus bars Kelley’s claims on behalf of PCI.” Id. at 907 (citations omitted).

The receivership of PCI did not extinguish the in pari delicto defense that applied to PCI’s claims when they were transferred from the receivership to PCI’s bankruptcy estate. “While the receiver controlled PCI, Minnesota law allowed him to pursue the claims on behalf of creditors, unbound by the corporation’s fraudulent acts. But PCI itself was never ‘cleansed,’ so the [in pari delicto]defense was never ‘extinguished.’” Id. at 906. “The claims [of PCI] entered the bankruptcy estate subject to a defense based on PCI’s previous fraudulent acts. Bankruptcy law does not provide a vehicle for PCI or its trustee to proceed unbound by PCI’s own wrongdoing.” Ibid.  

The trustee and BMO disputed whether, under Minnesota law, “a receiver, acting on behalf of creditors, may avoid the defense of in pari delicto even when he brings a claim that belongs to the corporate entity. Even assuming that Kelley has the better reading of Minnesota law on this point, Kelley is acting in this case as a bankruptcy trustee, not as a receiver. A bankruptcy trustee steps into the shoes of the debtor and is subject to any defenses that could be raised against the debtor, including the defense of in pari delicto, Grassmueck, 402 F.3d at 836.” Kelley 5, at 905.

Postscript

In October 2024, shortly after the Eighth Circuit decided Kelley 5, an insurance industry newsletter reported: “The judgment preservation insurance (JPI) class is braced for a potential loss of at least $80mn-$90mn following a favorable appeal that the Bank of Montreal (BMO) secured over a lawsuit related to a Ponzi scheme in Minnesota, Insurance Insider US has learned.” Jairo Ibarra & Ayesha Venkataraman, “JPI class faces potential loss after BMO appeal in Minnesota case,” Insurance Insider US, Oct. 3, 2024; Decl. of Randall Tietjen at ¶ 6 and Ex. 5 [U.S.D.C. No. 0:19-cv-01756, ECF No. 526].

On February 12, 2025, the trustee petitioned for certiorari. The petition stated that it presented this issue: “Whether the Eighth Circuit should have certified the controlling question of Minnesota law to the Minnesota Supreme Court, rather than fashion a novel rule that is foreign to Minnesota law and antithetical to important federal bankruptcy policy.” The petition argued that the Eighth Circuit “fashioned its own novel version of Minnesota law, holding that, while the receiver is free from the [in pari delicto]defense, the company that he represents is not, and the company is the debtor in bankruptcy.” Petition for Writ of Certiorari at i-ii [No. 24-874] (italics in original). On May 27, 2025, the Court denied the petition. Kelley v. BMO Harris Bank N.A., 2025 U.S. LEXIS 20257 (2025).

On remand, additional events occurred in the BMO Proceeding:

On July 22, 2025, the District Court awarded $3.1 million in costs to BMO, including $3,092,267 in appeal bond premiums. Kelley v. BMO Harris Bank N.A., 2025 U.S. Dist. LEXIS 139348, at *2-9 (D. Minn.) (Kelley 6).

On August 22, 2025, the trustee’s former contingent fee counsel filed a motion for discovery, a protective order, and an attorney’s lien for their fees and costs on a JPI policy that allegedly provided $80 million to $90 million of coverage against the risk of reversal of the trustee’s $1+billion judgment against BMO. Robins Kaplan LLP’s Motion to Establish a Lien for Attorneys’ Fees etc. at 1 [U.S.D.C. No. 0:19-cv-01756, ECF No. 522]. In particular, the trustee’s former counsel alleged: “Before the reversal, judgment preservation insurance (JPI) was obtained, using BMO Litigation Trust Assets, in the name of least one trust beneficiary [of the BMO Litigation Trust] – in an amount of possibly $80 to $90 million or more.” Robins Kaplan LLP’s Mem. of Law Supporting Its Motion etc. at 1 [U.S.D.C. No. 0:19-cv-01756, ECF No. 524].

On September 12, 2025, the trustee responded that: (1) the BMO Litigation Trust did not pay for or obtain a JPI policy; (2) the trustee did not know whether any beneficiaries of the BMO Litigation Trust had obtained a JPI policy; (3) the trustee supported discovery into whether there was any JPI policy that might be an asset of the BMO Litigation Trust; and (4) the BMO Litigation Trust had a judgment against it for $3.1 million in costs and “has total available funds in its bank account of approximately $16,000 with no other tangible assets.” Plaintiff Douglas A. Kelley’s Response to Robins Kaplan LLP’s Motion etc. at 6-8 [U.S.D.C. No. 0:19-cv-01756, ECF No. 529].

On the same day, BMO alleged that any attorney’s lien “must be subordinate to BMO’s cost [judgment] in this action.” Mem. in Opp. to Robins Kaplan LLP’s Motion to Establish a Lien etc. at 2 [U.S.D.C. No. 0:19-cv-01756, ECF No. 531].

As of September 17, 2025, the motion of trustee’s former counsel for an attorney’s lien on the alleged JPI is pending and undecided.

Author’s Comments

Here are several takeaways from the saga of the trustee’s $1+ billion judgment:

[1] Consider purchasing a JPI policy if your client has a large judgment that the other side is appealing. Expect to undergo a thorough underwriting process that examines the merit of the appeal and the risk of reversal. JPI is reported to be expensive. See Andy Lundberg, “How Legal Finance Adds Value to Judgment Preservation Insurance,” Carrier Management, Jan. 18, 2024 (“JPI is expensive. Premiums can run between 10 and 20 percent of the amount insured, whether that be the whole judgment or just a portion of it.”).

[2] Distinguish between a bankruptcy trustee’s avoidance claims and a debtor’s pre-petition claims. Kelley 5 did not decide that in pari delicto is a valid defense to a trustee’s avoidance claims. In the BMO Proceeding, the trustee did not assert any avoidance claims against BMO. The defense of in pari delicto generally does not bar avoidance claims asserted by a trustee. See, e.g., Shults & Tamm v. Tobey (In re Hawaiian Telcom Communs., Inc.), 483 B.R. 217, 221(Bankr. D. Haw. 2012) (“While the in pari delicto defense can be raised against a trustee bringing a debtor’s pre-bankruptcy claims under 11 U.S.C. § 541, it cannot be raised against avoidance claims.”). The reason is that “avoidance claims are brought under a trustee’s avoiding powers and not under his status as a successor in interest to the debtor.” Ibid. In California, a debtor’s pre-petition (non-avoidance) claim that is barred by in pari delicto remains barred by that defense when asserted by the debtor’s bankruptcy trustee. Uecker v. Zentil, 244 Cal. App.4th 789, 794 (2016) (Uecker) (“The Trustee first argues that, assuming [in pari delicto] would bar the claims if asserted by the Company, the doctrine does not bar them when asserted by the bankruptcy trustee suing on behalf of the Company’s bankruptcy estate. We disagree.”).

[3] Don’t assume that identical rules apply to claims asserted by receivers and bankruptcy trustees. See Uecker, 244 Cal. App. 4th at 796 (“The Trustee contends that there is no material difference between receivers and bankruptcy trustees. However, several federal courts of appeals – as well as [Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP, 133 Cal. App. 4th 658 (2005)] – have held otherwise, explaining that unlike bankruptcy trustees, receivers are not subject to the limits of section 541.”) (internal quotations and citations omitted); Stapleton v. JPMorgan Chase Bank, N.A., 2025 U.S. Dist. LEXIS 75745, at *10 (D. N. Cal., April 21, 2025) (“standing for a trustee differs from that of a receiver”).         

[4] Appreciate the exceptional briefs filed by all the parties and their amici in the Eighth Circuit in Kelley 5 on the issue of in pari delicto as applied to receivers and bankruptcy trustees.    

These materials were written by Leonard L. Gumport of Gumport Law Firm, PC in Pasadena (lgumport@gumportlaw.net). Editorial contributions were provided by Jessica L. Bagdanov of BG Law LLP (jbagdanov@bg.law ) and the Hon. Meredith Jury (ret.) (majury470@gmail.com).