A federal bankruptcy judge has dismissed the complaint against First Interstate Bank and American Bank Center, which now goes by Bravera Bank, which acquired Prairie Mountain Bank in 2019.

The complaint is part of a yearslong bankruptcy case over Shoot the Moon, which was one of 19 separate entities created between 2006 to 2015 for the purpose of acquiring and operating restaurants in Montana, Washington, and Idaho. The restaurants included Chili’s Bar & Grills, On the Borders and Sonic Drive-Ins, as well as several independent restaurants, according to the complaint in federal bankruptcy court.

The complaint alleged that the two banks knowingly participated in a check kiting scheme, a form of check fraud, essentially floating checks to make sure of nonexistent funds.

[READ: Federal opinion on check kiting scheme complaint]

Ken Hatzenbeller was a principal of Shoot the Moon and was sentenced to 30 months in federal prison for bank fraud in 2017 and ordered to pay $1 million in restitution.

Two local banks accused of complicity in fraud case

According to the civil complaint filed in August in federal court, “Hatzenbeller drafted checks of significant value from one account with one financial institution and then promptly drafted a check from another account from another financial institution to be deposited in the first account to cover the initial withdrawal. Hatzenbeller repeated this practice over and over utilizing its accounts with [First Interstate Bank] and [Prairie Mountain Bank], without ever having actual funds to cover the checks being written. In effect, the scheme provided Shoot the Moon with substantial interest-free loans.”

According the complaint, Shoot the Moon’s bankruptcy trustee argues that executives at both First Interstate Bank and Prairie Mountain Bank knew and allowed the fraud to continue for several years around 2010-2014.

The bankruptcy trustee argues that because the banks participated in the fraud, they should not be able to seek claims against Shoot the Moon in the bankruptcy case. The banks motioned to dismiss the complaint as they had been previously released from the bankruptcy case. The trustee argues that the release was invalid because it was obtained through fraud, according to the court documents.

In his Jan. 18 opinion Judge Whitman Holt, a federal bankruptcy judge, wrote that the trustee for Shoot the Moon dismissed his complaint with the option to amend it by Feb. 28.

[READ: The amended check-kiting scheme complaint]

The trustee had argued that the banks knew about the check kiting scheme and withheld it from him in the negotiations.

In his opinion, Holt wrote that the complaint “does not allege affirmative acts by either FIB or ABC to mislead, hinder, or otherwise create any misimpressions. It contains no allegations that the trustee made inquiries or that defendants provided false responses. It also contains no allegations that defendants concealed information or hindered the trustee’s ability to learn of relevant facts elsewhere. Nor does it contain allegations that anyone acting on behalf of defendants made any oral representations or warranties relating to the possible effect of the broad release or to Shoot the Moon or Mr. Hatzenbeller generally. Instead, the alleged facts simply tell a story of passive nondisclosure – a failure to volunteer – which is legally insufficient to invalidate the release.”

Holt wrote that in a bankruptcy, the trustee “must investigate the acts, conduct, assets, liabilities, and financial condition of the debtor.”

Holt continued that “there can be significant consequences if a party stymies a trustee’s investigation, such as by lying to the trustee, hiding relevant information, or not responding to valid inquiries. Creditors do not have a duty, however, to simply volunteer unsolicited information to a bankruptcy trustee, including when those creditors are negotiating a release with the trustee. If a trustee needs additional information before agreeing to a complete release, then he or she can request the information or the release language can be crafted to accommodate uncertainty. As alleged in the current complaint, the trustee negotiated, agreed to, and convinced the bankruptcy court to approve an extremely broad, general release of all known and unknown claims without any misdirection by defendants. The complaint does not allege a facially plausible basis on which to invalidate this release. As such, dismissal is appropriate.”