Lawsuit against M&I gets a do-over [Milwaukee Journal Sentinel]By Cary Spivak, Milwaukee Journal SentinelMcClatchy-Tribune Information Services
July 08--A $1 billion lawsuit against M&I Marshall & Ilsley Bank has been dismissed by a bankruptcy court judge, although the ruling leaves the door open for investors burned in a massive Ponzi scheme to file a new claim against M&I, which until recently was the largest bank based in Wisconsin.
The lawsuit grew out of the scheme run by Thomas Petters, an M&I customer. The Minnesota man is serving a 50-year federal prison sentence after being convicted in 2009 of running a Ponzi scheme second in size only to the one orchestrated by Bernard Madoff.
Some investors who lost fortunes in the scheme sued M&I, contending the bank was blinded by the fees it received from Petters and ignored telltale signs that he was running billions of dollars through the bank to keep the Ponzi scheme afloat.
In dismissing the lawsuit last week, Paul G. Hyman, chief bankruptcy judge for the Southern District of Florida, left room for both sides to support their arguments.
"This is a major victory," said Florida attorney Michael Budwick, who represents the Palm Beach Funds investor groups that brought the action. "The bulk of the claims survived . . . including aiding and abetting fraud and conspiracy and fraudulent transfer claims."
The judge's 37-page order does not indicate whether the investors can prove their claims, only that the claims are solid enough for the suit to continue -- provided a new version of it is filed.
"The plaintiff adequately alleges that M&I had knowledge of the underlying fraud -- Petters' Ponzi scheme," the judge wrote.
Budwick said he would file a new complaint within the 20-day timetable set by the judge.
M&I, which was sold to BMO Harris last year after losing billions of dollars on real estate loans, has denied wrongdoing in Petters' scheme, arguing that investors are looking for a scapegoat with deep pockets.
In court filings, the bank said the billions in Petters' funds it handled were in depository accounts, similar to giant checking accounts, and so it had no special or fiduciary duty to Petters' investors.
"In its motion to dismiss, M&I argues that as a matter of law it owed no duty of any kind to the Palm Beach Funds," Hyman wrote. "The court agrees with M&I."
M&I's attorney, John Kirtley of Godfrey & Kahn, said, "We are pleased with the court's decision and continue to believe the plain tiffs' claims are without merit."
Petters' fraud involved taking money from investors and claiming those funds were used to buy appliances and other merchandise to be sold by national big-box retailers such as Sam's Club and Costco.
"Petters, however, was not operating a legitimate purchase financing operation," Hyman wrote. "Petters was running a Ponzi scheme -- there were no purchase orders, no merchandise, no retailers, no sales to any retailers, and no payments from any retailers."
Instead, the funds "were allegedly used to repay earlier investors and to fund Petters' lavish lifestyle," Hyman wrote.
In dismissing the suit, Hyman noted he did so "without prejudice," which means it can be refiled.
"The gist seems to be the complaint should have been more streamlined and more precise," Budwick said. "That is something that is remedied pretty readily."
The judge criticized the complaint, calling it "a textbook example of a 'shotgun pleading.' The complaint spans 68 pages, excluding 76 pages of exhibits, and contains 322 numbered paragraphs."
As a result, the judge wrote, "it is difficult, if not impossible, for the defendants and the court to discern which allegations are meant to support which claims."
(c)2012 the Milwaukee Journal Sentinel
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