Bank of Montreal BMO-T persuaded a U.S. appeals court on Thursday to throw out a US$564-million jury verdict against a subsidiary over its role in an approximately US$3.65-billion Ponzi scheme run by convicted Minnesota businessman Tom Petters.
Citing a similar case involving Bernard Madoff, the 8th U.S. Circuit Court of Appeals said a court-appointed trustee for the now-bankrupt Petters Co. could not recover on behalf of its creditors because that firm had helped orchestrate the fraud.
The 3-0 decision by the St. Paul, Minn.-based court overturned a November, 2022, jury verdict, and directed that trustee Douglas Kelley’s case against BMO be dismissed.
Lawyers for Mr. Kelley did not immediately respond to requests for comment.
In a statement, an unnamed BMO spokesperson said the bank is “very pleased with the decision.”
BMO said it will reverse a $1.19-billion provision it made for the court case. That will add $875-million to after-tax profits in the fourth quarter, the bank said.
Mr. Petters is serving a 50-year prison term after being convicted in 2009 on 20 criminal counts including fraud and money laundering.
Mr. Kelley claimed that Mr. Petters’ former bank, Milwaukee-based Marshall & Ilsley, knew about the Ponzi scheme and ignored red flags of money laundering, enabling Mr. Petters to withdraw large sums he wasn’t entitled to.
BMO bought M&I in 2011, and Mr. Kelley sought to hold it liable.
But the appeals court said the trustee effectively stood in the shoes of Petters Co. because that company was equally or more at fault than M&I.
It said that meant BMO was not liable under a legal doctrine known as “in pari delicto.”
“Bankruptcy law does not provide a vehicle for PCI or its trustee to proceed unbound by PCI’s own wrongdoing,” Chief Judge Steven Colloton wrote, referring to Petters Co.
Colloton cited a similar 2013 decision by the federal appeals court in New York that rejected claims that the trustee liquidating Bernard L. Madoff Investment Securities made against JPMorgan Chase and other banks that Mr. Madoff used.
The case is Kelley v BMO Harris Bank NA, 8th U.S. Circuit Court of Appeals, No. 23-2551.
With a report from David Milstead.