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UNITED STATES BANKRUPTCY COURT DISTRICT OF MINNESOTA

In re Jointly Administered under Case No. 08-45257

Petters Company, Inc., et al., Court File No. 08-45257

Debtors. Court File Nos.: (includes: , LLC; 08-45258 (GFK) PC Funding, LLC; 08-45326 (GFK) Thousand Lakes, LLC; 08-45327 (GFK) SPF Funding, LLC; 08-45328 (GFK) PL Ltd., Inc.; 08-45329 (GFK) Edge One LLC; 08-45330 (GFK) MGC Finance, Inc.; 08-45331 (GFK) PAC Funding, LLC; 08-45371 (GFK) Palm Beach Finance Holdings, Inc.) 08-45392 (GFK)

Chapter 11 Cases Judge Gregory F. Kishel

REPLY TO POLAROID ENTITIES’ OBJECTION TO MOTION TO APPROVE SETTLEMENT AGREEMENT AND MUTUAL RELEASE

The Trustee, by and through his counsel, respectfully submits this reply to the Polaroid

Entities’ Objection to Motion to Approve Settlement Agreement and Mutual Release. The

Trustee respectfully requests this Court overrule such objection and grant the Trustee’s Motion.

Capitalized terms not defined herein are the same as those used in the Trustee’s Motion, unless the context requires otherwise.

BACKGROUND

In June of 2008, as the fraudulent was collapsing around him, Tom Petters submitted applications for the D&O Policies. As part of the PGW Policy application, Tom

Petters, on behalf of Polaroid, obtained for coverage for Polaroid as an additional insured under Case 08-45257 Doc 472 Filed 09/20/10 Entered 09/20/10 13:04:41 Desc Main Document Page 2 of 11 the PGW Policy. The application submitted by Petters to induce the Insurers to issue the PGW

Policy included a consolidated financial statement for PGW and its subsidiaries, including

Polaroid and its subsidiaries.

Since the Civil Fraud Case and the Criminal Fraud Case began, officers, directors and employees of PGW have incurred actual and substantial costs in excess of $3 million for which such individuals will assert claims against these Debtors’ estates. To date, the Insurers have reimbursed a substantial portion of such costs and expenses, with the District Court reviewing the professionals’ fees, approving reasonable and necessary costs and expenses, and directing the

Receiver to seek reimbursement for such professional fees under the D&O Policies. Until

Petters’ conviction, claims were provisionally paid by the Insurers under the D&O Policies.

Now that Petters’ intentionally dishonest conduct has been determined by a final adjudication (a jury verdict), the Insurers demand the return of more than $2.3 million that they have already paid under the D&O Policies and will not pay for more than $1 million in additional fees and expenses approved by the District Court.

The Trustee and his professionals have evaluated the risks in litigating whether there is coverage under the D&O Policies and believes the Settlement Agreement provides substantial benefit to these estates. The Settlement Agreement provides that more than $3.2 million of

Petters’ defense costs incurred to date not reimbursed by the Debtors will be reimbursed by the

Insurers, and the individuals other than Tom Petters will retain the ability to seek coverage for additional costs and expenses not reimbursed by the Debtors. In return, the Debtors are releasing claims for reimbursement of costs that the company may be obligated reimburse individual directors and officers in the future, as well as costs directly incurred by the Debtors for future claims against the companies. The Settlement Agreement is a practical and reasonable

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The Receiver’s entry into the Settlement Agreement was recently approved by the

District Court on September 17, 2010. Order Granting Motion for Approval of Settlement

Agreement and Mutual Release, Civil Fraud Case, 08-cv-5348, Dkt. 1471, a true and correct copy of which is attached hereto as Exhibit 1. The District Court thanked the Parties for reaching a compromise that will provide coverage for, and the reimbursement of, certain professional fees incurred in these cases.

ARGUMENT

The Polaroid Trustee asks this Court to force the Trustee to ‘roll the dice’ and risk subjecting PGW creditors with more than $3.2 million dollars of costs if the Insurers prevail in coverage litigation in the event potential claims that may be asserted against the Polaroid Estates evolve at some point in the future into cognizable claims that could possibly be entitled to coverage under the D&O Policies. The Settlement Agreement is a reasonable resolution of complex, inter-twined claims that is in the best interest of creditors and victims of Petters Ponzi

Scheme. The consequence of not approving the Settlement Agreement will be disastrous to these same creditors and victims.

A. The Settlement Agreement must be approved as written.

The Polaroid Trustee asks this court to re-write the agreement reached between the parties affected by the settlement. In exercising its discretion to approve a proposed settlement, the Court must either approve or refuse to approve the proposed settlement as written. In re

Trism, Inc., 282 B.R. 662, 667 (B.A.P. 8th Cir. 2002). An abuse of discretion occurs when the

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court does not determine and weigh these factors and either approve or reject the proposed settlement. Id.

The Settlement Agreement is a reasonable compromise of substantial claims in these cases that is in the best interest of creditors and should be approved by this Court. Without this

Settlement Agreement, the Insurers will proceed with litigation to determine whether there is coverage at all under the D&O Policies, at substantial cost to these estates and carrying a significant risk there may be no coverage at all for any insured, and $2.3 million of costs and expenses paid to date will be returned to the Insurers and an additional $1 million of costs that would be paid by the Insurers pursuant to the Settlement Agreement will become obligations of these estates. The Polaroid Entities provide no alternative to this Settlement Agreement that would provide any protection to these Estates. This Settlement Agreement is a reasonable compromise and should be approved.

B. The Settlement Agreement Resolves a Current Dispute, Not Claims That May ‘Evolve.’

The Settlement Agreement resolves substantial claims against PCI and PGW that are real, are pending now, and are in excess of $3 million. The PCI and PGW estates have not incurred substantial liabilities for defense costs incurred by Covered Individuals under the Policies because such costs and expenses have been provisionally paid by the Insurers, with such costs being potential administrative claims in these cases. Absent the Settlement Agreement, there is substantial risk that the PCI and PGW estates may become obligated for more than $3 million in additional costs and claims. The Settlement Agreement resolves these real claims and disputes, involving known and present claims, for which real dollars have been paid under the D&O

Policies.

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The Polaroid Trustee does not assert a current claim for payment under the Policies; he is simply concerned about yet to be determined claims that may ‘evolve’ at some point in the future into a claim, which will be subject to the same policy defenses and exclusions asserted by the

Insurers today. The Insurers have denied coverage for the claims the Polaroid Entities have asserted to date. The Settlement Agreement, however, does not eliminate coverage altogether, as the Individual Insureds retain the ability to seek coverage for unreimbursed defense costs under the D&O Policies, subject to all available defenses of the Insurers under the D&O Policies.

C. Polaroid is not an Innocent Insured.

Petters purchased Polaroid to “bury the debt” created by the Ponzi Scheme and give himself increased credibility to investors. Petters appointed himself chairman and sole board member of Polaroid and repeatedly used Polaroid assets to lure prospective investors to invest in the Ponzi Scheme. Petters used Polaroid as a personal piggy bank, taking cash from Polaroid to further the Ponzi Scheme and treated Polaroid as an extension of himself. As a result, Polaroid was integral to the ‘success’ of the Ponzi Scheme. Petters was Polaroid, and any statements made by Petters on behalf of Polaroid, including those made in providing financial information in applications to obtain coverage under the D&O Policies, are statements of Polaroid that may void the Policy with respect to Polaroid.

D. Consequence to Non-Approval is Disastrous.

The Settlement Agreement resolves current claims for which actual costs and expenses have been incurred. If not approved, the Insurers will proceed with their pending coverage action to declare the D&O Policies void and to recover the $2.3 million paid to date, as well as not reimbursing an additional $1 million in additional costs and expenses incurred that will be reimbursed if the Settlement Agreement is approved. If this more than $3 million in costs and

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CONCLUSION

For the foregoing reasons, the Trustee respectfully requests that all objections be overruled and an order approving the Trustee’s entry into the Coordination Agreement be entered.

DATED: September 20, 2010 LINDQUIST & VENNUM P.L.L.P. By /s/ James A. Lodoen James A. Lodoen (#173605) [email protected] Paul A. Banker (#256596) [email protected]

4200 IDS Center 80 South Eighth Street Minneapolis, MN 55402-2274 (612) 371-3211 (612) 371-3207 (facsimile)

ATTORNEYS FOR DOUGLAS A. KELLEY, CHAPTER 11 TRUSTEE

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EXHIBIT 1 CaseCase 08-45257 0:08-cv-05348-ADM-JSM Doc 472 Filed 09/20/10 Document Entered 1471 09/20/10Filed 09/17/10 13:04:41 Page Desc 1 of Main4 Document Page 8 of 11

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

United States of America,

Plaintiff, Civil No. 08-05348 ADM/JSM v.

Thomas Joseph Petters; Petters Company, Inc., a/k/a PCI; Petters Group Worldwide, LLC; Deanna Coleman, a/k/a Deanna Munson; Robert White; James Wehmhoff; Larry Reynolds, and/or dba Nationwide International Resources, aka NIR; Michael Catain and/or dba Enchanted Family Buying Company; Frank E. Vennes, Jr., and/or dba Metro Gem Finance, Metro Gem, Inc., Grace Offerings Of Florida, LLC, Metro Property Financing, LLC, 38 E. Robinson, LLC, 55 E. Pine, LLC, Orlando Rental Pool, LLC, 100 Pine Street Property, LLC, Orange Street Tower, LLC, Cornerstone Rental Pool, LLC, 2 South Orange Avenue, LLC, Hope Commons, LLC, Metro Gold, Inc.,

Defendants.

Douglas A. Kelley,

Receiver,

Gary Hansen,

Receiver. ______

Jeffrey D. Smith, Esq., Lindquist & Vennum P.L.L.P., Minneapolis, MN, on behalf of Receiver Douglas A. Kelley. CaseCase 08-45257 0:08-cv-05348-ADM-JSM Doc 472 Filed 09/20/10 Document Entered 1471 09/20/10Filed 09/17/10 13:04:41 Page Desc 2 of Main4 Document Page 9 of 11

Gregory G. Brooker, Assistant United States Attorney, Minneapolis, MN on behalf of Plaintiff United States of America. ______

This matter came before the Court on September 17, 2010 on the Motion [Docket No.

1440] of Receiver Douglas A. Kelley (the “Receiver”), to approve the Settlement Agreement and

Mutual Release (the “Agreement”) entered into by and among the Receiver, Greenwich

Insurance Company (“Greenwich”), XL Specialty Insurance Company (“XL Specialty”),

Felhaber, Larson, Fenlon & Vogt, P.A. (“Felhaber”), Paul Engh (“Engh”), Thomas J. Petters

(“Petters”) and the Chapter 11 Trustee (the “Trustee”) for Petters Company, Inc. (“PCI”) and

Petters Group Worldwide, LLC (“PGW”) (collectively, the “Parties”) resolving insurance

coverage claims and disputes between and among the Parties. No objections to the Motion were

filed or raised at the hearing. Plaintiff United States of America (the “Government”) did not file a written response but stated at the hearing that the Government views the settlement as fair, reasonable, and beneficial to the Receivership. Based upon the files and records herein and the oral arguments of counsel, the Court finds:

1. On October 6, 2008 and as subsequently amended (the “Receivership Order”), this Court appointed Douglas A. Kelley as Receiver for, among others, Thomas J. Petters, PCI,

PGW and any affiliates, subsidiaries, divisions, successors, or assigns owned 100% or controlled by the foregoing. On October 14, 2008 this Court appointed Douglas A. Kelley as receiver for

Deanna Coleman, Robert White, James Wehmhoff, Larry Reynolds and Michael Catain

(collectively, “Individual Defendants”).

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2. Pursuant to the Receivership Order, “the Receiver is authorized to … sue for, collect, receive, take in possession, hold, liquidate or sell and manage all assets of Defendants.”

See 2d Am. Order for Prelim. Inj., Appointment of Receiver, and Other Equitable Relief [Docket

No. 127]. Furthermore, “[t]he Receiver shall have the power and authority to perform any other act necessary or desirable to accomplish any of the foregoing.” Receivership Order, Section IV,

¶ B9.

3. On December 1, 2008, and through the Superseding Indictment entered June 3,

2009, Petters was indicted by a Grand Jury in the District of Minnesota which charged him with

20 separate counts of , and to commit mail and wire fraud and money laundering in connection with the perpetration of a Ponzi scheme. Petters’ companies, PCI and PGW, were also charged by indictment on similar counts.

4. Prior to the Receivership Order, PCI and PGW purchased several insurance policies from Greenwich and XL Specialty (the “D&O Policies”).

5. Petters is the former Chairman and Chief Executive Officer (“CEO”) of PGW, the former President of PCI, and the former CEO, Chief Financial Officer and President of TPI and falls within the definition of “Insured Person” as defined in the D&O Policies.

6. Petters and the Receiver provided notice of and requested coverage under the

D&O Policies for multiple lawsuits filed against Petters, PCI, and PGW, among other parties

(collectively referred to as the “Litigation”).

7. The Receiver also provided notice under the D&O Policies of various current and former employees of PGW and PCI who had been served with subpoenas in connection with the

United States’ investigation of Petters and for whom the Receiver paid attorneys’ fees and

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(collectively, the “Subpoena Matters”).

8. Petters retained Felhaber and Engh to represent him in the Litigation (collectively,

Felhaber and Engh are referred to as “Petters’ Defense Counsel”).

9. Various disputes (collectively, the “Disputes”) have arisen between and among the Parties as to coverage rights under the D&O Policies.

10. The Receiver and the Parties have negotiated a settlement agreement and release

(the “Agreement”), mutually acceptable to all parties, resolving the Disputes between and among the Parties.

11. The Agreement is the most efficient method for resolving certain insurance coverage disputes, and its approval is in the best interest of the Receivership Estate.

12. The Agreement requires Bankruptcy Court approval. A Bankruptcy Court

hearing

for approval of the Agreement is scheduled for Tuesday, September 21, 2010.

Therefore, IT IS ORDERED:

1. The Agreement is hereby approved and the Receiver is authorized to abide by and to perform in conformance with the terms of the Agreement.

2. The Receiver is authorized to execute any agreements or documents necessary to carry out the foregoing action.

BY THE COURT:

s/Ann D. Montgomery ANN D. MONTGOMERY U.S. DISTRICT JUDGE

Dated: September 17, 2010.

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