That time the ‘My Pillow Guy’ declared a ‘false bankruptcy’ to avoid a lawsuit

By: - February 23, 2021 12:03 pm

Michael J. Lindell CEO of My Pillow, cheers as U.S. president Donald Trump speaks to supporters during a campaign rally at Scheels Arena on June 27, 2018 in Fargo, North Dakota. (Photo by Justin Sullivan/Getty Images)

The $1.3 billion lawsuit filed by the voting machine company Dominion against Minnesota pillow mogul Mike Lindell Monday is not the first time he’s faced a potentially ruinous lawsuit. 

By late 2003, after more than a decade owning his beloved Victoria bar called Schmitty’s Tavern, Lindell had $147,000 in debts, according to court records, and couldn’t keep up with the bar mortgage payments. Lindell sold the bar that year for $500,000, with part of the purchase financed through two promissory notes requiring the buyer to make monthly payments.

But then Lindell learned his corporation was being named as a co-defendant in a dram shop lawsuit — that’s when a bar owner is sued if a customer is over-served and then causes injury, in this case a snowmobile crash. 

Lindell writes in his book “What are the Odds?” that he decided to avoid the potential damages by declaring bankruptcy — a “fake bankruptcy,” he calls it in the book. By doing so, he could protect his assets from the people suing him and embark on his next plan: Becoming a professional gambler. 

Christopher Soper, a University of Minnesota law professor who teaches bankruptcy, reviewed Lindell’s bankruptcy court documents and excerpts from Lindell’s 2019 book, and said Lindell’s actions could have led him to being charged with a federal bankruptcy crime with a maximum sentence of five years in prison and a $250,000 fine. The statute of limitations has passed, however. 

Bankruptcy crimes are not uncommon but rarely prosecuted, Soper said.

And, Soper added, Lindell epitomizes, in a bizarre fashion, the reason we have bankruptcy laws.  

“Although his honesty is perhaps questionable, he certainly took advantage of the fresh start by wiping out his debts; it would have been much harder for him to found MyPillow saddled with debt.” 

Lindell went on to found a wildly successful pillow company and visited former President Donald Trump in the Oval Office in the final days of his presidency, but he’s facing familiar adversity, albeit on a much larger scale than when he ran a watering hole. This time, after months of claiming Dominion’s voting machines rigged the election against Trump, the company is suing Lindell for an eye-popping sum. 

Colorful, convoluted bankruptcy tale

By his own telling, Lindell was in the throes of his drug and alcohol addiction when he sold his bar in the hopes of beating the casinos at blackjack by counting cards. With the bar lawsuit hanging over his head, however, he sought the freedom of bankruptcy protection. 

The only problem: He needed cash to start his card counting play.

The colorful, convoluted and revealing story about the bankruptcy that Lindell tells in his book is at times consistent with and at other moments contradicts the bankruptcy filing. 

He wanted $50,000 to start counting cards but didn’t have good credit, so he went to his bookie’s stepson, “a man whose last name was Neff” — a reference to a man named Nathan Neff — to try to borrow the money quickly, he writes in his book.

He met Neff — a “dumpy guy with oversized glasses” who ordered scotch and milk — at a hotel bar, where he says Neff came up with the idea of having Lindell sell him the bar promissory notes for $60,000 and declare bankruptcy. Then Neff would sell the bar notes back to Lindell a year later, presumably after the bankruptcy was final, he wrote. In other words: Neff would help Lindell hide assets from potential creditors. 

Lindell knew the notes were worth much more money and says in the book that he wasn’t bankrupt.

“Not a problem. You make up some creditors that you supposedly owe money to,” Lindell quotes Neff as saying. “You’ll get out of the lawsuit and have a little steady income, and I’ll make 20 grand plus a year of payments.”

It amounted to a loan with an interest rate of about 50%, Lindell wrote.

“Of course, it wouldn’t be the first time I’d colored outside the lines of the law,” Lindell wrote. One problem: Neff wouldn’t put the deal in writing, so nothing stopped him from refusing to sell the notes back to Lindell.

Desperate for cash, Lindell agreed with a handshake. Bankruptcy court documents show he sold the promissory notes from his bar sale to Neff’s corporation in December 2003 for about $50,000 — even though they were worth about $130,000 more than that, by one court estimate — and filed for Chapter 7 bankruptcy in March 2004. Then he headed to Las Vegas and promptly lost it all.

When he tried to borrow more money, Neff refused and said legally he didn’t have to sell the notes back.

“It felt like I had made a deal with the devil,” Lindell wrote.

“What are you going to do about it?” Neff snapped. “If you try to tell the cops, you’re gonna have to tell them you declared bankruptcy when you weren’t really bankrupt, and that’s a crime. You’ll go to jail.”

Lindell warned Neff that the court was challenging the legitimacy of his bankruptcy, and he wasn’t the only one at risk.

“What’s going to happen when the court finds out I sold that contract to you for pennies on the dollar?” Lindell recounts telling Neff in his book. “I’ve been looking into it. It’s called a clawback. They will pull that contract in as part of my actual assets. They’ll also know it’s a fraud. Then we’re both gonna be in trouble.”

Lindell was right: Attorneys were looking into his finances, and would zero in on the sale to Neff, as well as the Lindells’ 2003 transfer of their house to Lindell’s father.

Lindell’s solution: Neff would sell the bar notes to Lindell’s friend for $70,000 so the court would conclude the valuation was legit after two sales in the same ballpark. Neff agreed to sell the notes to Lindell’s friend “Bob.” 

“I had arranged to pay Bob a good rate of interest, so it would be a win-win,” Lindell wrote. “Bob would make good money, and I’d get some of my equity back.”

In May 2004, Neff sold the notes for $73,000 to Robert Weierke, a longtime Schmitty’s patron who had loaned Lindell money over the course of 15 years, according to bankruptcy court documents. Although Lindell’s book goes into great detail about his “fake bankruptcy” and frustration with Neff, it doesn’t mention something the bankruptcy judge noted in a September 2005 order voiding the Lindell-to-Neff transaction. 

“Neff testified that Michael Lindell coerced him into selling the notes to Weierke and that he believed the notes to be worth more than the sale price,” U.S. Bankruptcy Judge Robert Kressel wrote, saying in a footnote Neff asserted Lindell threatened him “with a gun to his head” if he did not sell the notes. 

Neff died in 2017, and Lindell did not respond to a request for comment, but in court documents denied coercing Neff. Kressel declined to comment on the footnote, saying through his clerk that it was a reference to Neff’s testimony.

Weierke, who lives in Prior Lake, told the Reformer Lindell was a friend who always repaid him what he owed, and he doesn’t remember the bankruptcy case much.

For complicated bankruptcies like Lindell’s, the bankruptcy trustee will sometimes hire outside attorneys to help. In Lindell’s case, attorney Patrick B. Hennessy, who retired three years ago, was hired to work on the case. 

“I remember Neff asserting that Lindell threatened him to get him to sell the notes,” Hennessy said in an interview. 

Trustee tried to get back assets 

The trustee initiated “adversary proceedings” against Neff’s corporation, Weierke’s corporation and Lindell’s corporation. It was essentially a lawsuit within the bankruptcy case that sought to claw back assets gained through a fraudulent conveyance, meaning giving or selling something for less than it’s worth to hinder creditors.

Neff claimed in court documents he paid so little for the bar because it was a risky venture because the new bar owner was inexperienced; Schmitty’s was close to losing its right to run pull tabs because Neff alleged Lindell had been taking money from the gaming revenue; Lindell had given false reports of liquor sales volume to the state and the Lindells feared there was an investigation into whether dope was being sold from the bar. 

The bankruptcy trustee settled with Weierke for an undisclosed amount and went to trial against Neff, winning an $80,000 judgment. But Hennessy told the Reformer he never recovered more than a few hundred dollars from Neff, who worked out of his car.

Lindell admitted he sold the notes to Neff to avoid losing assets in the dram shop lawsuit, according to court documents. 

Soper said Lindell’s scheme likely constituted a fraudulent transfer under federal bankruptcy law; the bankruptcy court decided as much when it unwound the transfer. 

But criminal prosecution of bankruptcy fraud is difficult, Soper said, and unlikely in this case because the prosecutors would have had to prove Lindell had a specific, knowing, fraudulent intent to commit a bankruptcy crime — usually the most difficult element to prove.

Although his criminal intent seems present in his own telling, Lindell wasn’t under oath when he wrote the book, so it’s unclear how much weight the memoir would carry as evidence, Soper said.

“And the story told in the bankruptcy case was much different and much more favorable to Lindell,” he said. “Lindell and his associates crafted a colorable argument why the fraud was normal bankruptcy fraud and not criminal.”

By one estimate, 10 to 25% of bankruptcies include some kind of fraud, Soper said. When bankruptcy fraud is prosecuted, it usually involves other charges, like money laundering, conspiracy or bank fraud. Often it takes a jilted creditor to push the crime to the federal prosecutors, he said.

Hennessy said if a bankruptcy crime were committed, the trustee would gather information and refer it to the U.S. Trustee’s office, and if they find merit they refer the case to the U.S. Justice Department. But bankruptcy crimes haven’t been a priority with the department for decades, he said. 

“I can count on one hand the number of cases that have gone to the Justice Department and been prosecuted,” he said.

And the stakes — in the neighborhood of $100,000 — are fairly low on the scale of money loss, Soper said.

“Lindell is no Bernie Madoff,” he said.

As the bankruptcy case was winding its way through court, Lindell was also working on a pillow he literally dreamed up the year he filed, 2004. By 2007, his “fake bankruptcy” was finalized, and he was on his way to creating a successful company that brought him wealth, fame and a platform he used to broadcast claims of voter fraud, which now threaten to undo everything he’s built. 

Minnesota Reformer is part of States Newsroom and a sister organization to the Daily Montanan.

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