RALPH B. KIRSCHER, Bankruptcy Judge.
Rule 9017, F.R.B.P., provides that the Federal Rules of Evidence apply in cases under the Bankruptcy Code. It is a commonly-accepted practice to take "judicial notice" of a court's records. See 3 J. Weinstein & M. Berger, WEINSTEIN'S EVIDENCE ¶¶ 201[03] at 201-35 to -40 (1992). The practice is particularly useful in bankruptcy litigation in which individual adversary proceedings and contested matters, each of which is procedurally distinct and has its own record, all occur within, and are affected by, the context of the parent bankruptcy case. See id. For the reasons discussed above, this Court takes judicial notice of the proceedings in the related bankruptcy cases and adversary proceedings discussed in this Memorandum of Decision for the purpose of providing additional background regarding the nature of the dispute and the relationship of the parties.
Timothy L. Blixseth ("Blixseth"), the plaintiff-in-intervention and the now captioned Plaintiff in this matter, and his former spouse, Edra Blixseth ("Edra"), were the founders of Yellowstone Mountain Club, LLC ("YMC"), Yellowstone Development, LLC ("YD"), Big Sky Ridge, LLC, and Yellowstone Club Construction Company, LLC. The four aforementioned limited liability companies comprise the Yellowstone Club and will be referred to generally as the Debtors or the Yellowstone Club entities. Through the Yellowstone Club entities, Blixseth and Edra began development in the late 1990's of the Yellowstone Club on land that Blixseth acquired through various transactions. The parties maintain that the Yellowstone Club is the world's only private ski and golf community. The Yellowstone Club is a members only master-planned unit development, situated on 13,500 acres of private land in Madison County near Big Sky, Montana. At its conclusion, the Blixseths contemplated that the Yellowstone Club would consist of roughly 864 dwelling units situated in seven planned residential areas or neighborhoods.
Members join the Yellowstone Club because of its amenities, including the Warren Miller Lodge, 17 ski runs, equestrian center, Tom Weiskopf 18-hole golf course, kids' facilities and other various amenities
YMC was formed on November 7, 1997, and is primarily engaged in operating the Yellowstone Club. YD was formed on June 10, 1999, and is engaged primarily in the business of retail and land sales and development of residential lots in the Yellowstone Club. Big Sky Ridge, LLC was formed in 2002 for the purpose of acquiring and developing land located outside but contiguous to the boundaries of the Yellowstone Club. YMC and YD had two classes of members; Class A members who had voting rights, and Class B members who had no voting rights. Yellowstone Club Construction Company, LLC is owned by YD and was formed in 2006 for the purpose of constructing various buildings within the boundaries of the Yellowstone Club. Each of the Debtors is a limited-liability company organized under Montana law.
From its inception to August 12, 2008, Blixseth was the sole managing member of Big Sky Ridge, LLC. From their inception to August 12, 2008, YMC and YD were controlled by Blixseth through his holding company, Blixseth Group, Inc. ("BGI"). Since August of 2001, BGI has owned 82.6532 percent of the Class A stock in YMC and YD, and Blixseth Family Investments, LLC has owned 5.1020 percent of Class A stock. The Class B Members, or Class B Shareholders—consisting of the following twelve entities or individuals: Bankers Financial Corporation, Gregory C. Branch Family Limited Partnership, Blixseth Family Investments, LLC, Jorge V. Jasson, Greg LeMond, A.C. Markkula and Linda K. Markkula Trustees of the Arlin Trust, Mountain Vista Properties AG, David L. Morris and Sacia B. Morris, Sacia Enterprises, Inc., Michael L. Snow, Spano Yellowstone Holdings Limited Partnership and Robert P. Watson and Katharine M. Watson—each owned 1.0204 percent of YMC and YD, or a total of 12.25 percent of YMC and YD.
BGI, an Oregon sub-S corporation, was owned solely by Blixseth as President and CEO from 1999 to August 12, 2008. Blixseth and Edra separated in December of 2006, and effective August 12, 2008, Edra and Blixseth agreed, pursuant to a June 26, 2008, confidential Marital Settlement Agreement ("MSA"), that Edra would receive BGI and the Yellowstone Club entities. On August 19, 2008, just days after obtaining control of BGI, Edra changed
Various creditors filed an involuntary Chapter 11 bankruptcy petition on behalf of BLX Group, Inc. on September 21, 2009. See Bankruptcy Case No. 09-61893. Edra filed a voluntary Chapter 11 bankruptcy petition on March 26, 2009. See Bankruptcy Case No. 09-60452. Edra's case was converted to Chapter 7 of the Bankruptcy Code on May 29, 2009.
Blixseth and Edra were also the founders of Big Springs Realty, LLC and Yellowstone Club World, LLC, both of which were awarded to Edra under the couples' MSA. On January 31, 2001, Charles Callander ("Callander") went to work for Blixseth and Edra as the Director of Marketing and Sales at the Yellowstone Club. Callander explained that in 2005, Blixseth decided to split the marketing and sales departments at the Yellowstone Club, placing the sales department under Big Springs Realty, LLC. However, the sales department at the Yellowstone Club did not change its office, letterhead or business cards. According to Callander, the only change he noticed was the addition of a signature line for Big Springs Realty, LLC on resale listings and resale purchase and sale agreements. Because sales at the Yellowstone Club had grown from $10 million in 2001 to somewhere in the neighborhood of $150 million in 2005, Callander believed that Blixseth formed Big Springs Realty, LLC for the purpose of spreading his risk of liability. In Callander's words, Big Springs Realty, LLC "became a private bank account for someone, for Mr. Blixseth, that was segregated from other accounts at the [Yellowstone] Club."
Edra caused Big Springs Realty, LLC to file a voluntary Chapter 7 bankruptcy petition on June 5, 2009. See Bankruptcy Case No. 09-61079. The Chapter 7 Trustee in the Big Springs Realty, LLC bankruptcy filed a complaint against Blixseth on September 3, 2009, alleging that Blixseth took in excess of $5 million from Big Springs Realty, LLC between August of 2007 and June of 2008, which precluded Big Springs Realty, LLC from paying its other obligations as they became due.
Blixseth had a conceptual idea of Yellowstone Club World in 2005 but he did not have a functioning business plan. Blixseth formed Yellowstone Club World, LLC with the vision of taking the Yellowstone Club concept worldwide. High-wealth individuals who purchased memberships in Yellowstone Club World were promised "access to life's most luxurious amenities, activities and services." In particular, Yellowstone Club World members had access to "premier properties," including the Yellowstone Club, a castle near Paris, France (Chateau de Farcheville), a 30,000 square foot mansion in the Turks and Caicos Islands, a golf course resort in Manzanillo, Mexico, Blixseth's private golf course estate in Rancho Mirage, California (Porcupine Creek), a luxury ranch near Cody, Wyoming, and a Tom Weiskopf golf course in St. Andrews, Scotland, among others. The use of various yachts and private jets, and access to "[s]mall scale world class properties in exquisite locations" were also held out as benefits to members of Yellowstone Club World. Blixseth testified that Yellowstone Club World ended up with eight members who each paid a membership deposit of $1.5 million each.
An involuntary Chapter 7 bankruptcy petition was filed against Yellowstone Club World, LLC on January 25, 2009. See Bankruptcy Case No. 09-60061. The Chapter 7 Trustee in the Yellowstone Club World, LLC bankruptcy filed an action against Blixseth on October 20, 2009, alleging that Blixseth owed Yellowstone Club World, LLC at least $2.8 million for inappropriate
Sometime prior to 2004, a team at Credit Suisse First Boston crafted a new syndicated loan product that allowed Credit Suisse to offer a loan product the size of which had previously been unavailable to borrowers in the corporate bank loan market. The loan product was designed to allow owners of high-end master-planned residential and recreational communities to realize their anticipated future profits from their developments through distributions made possible by Credit Suisse's syndicated equity recapitalization loan. Credit Suisse's new loan product had several unique aspects. For instance, the loan product relied on an appraisal methodology that was based on future gross revenues, without any discount to current dollar value. The new loan product was not tied to an as-is appraisal that set forth the fair market value of the real estate securing the loan. To syndicate such loans, Credit Suisse targeted investors who were described as highly sophisticated parties who were more than qualified to perform their own quantitative analysis to assess the risk of the loans that were being offered to entities such as the Yellowstone Club.
In December of 2004 and early 2005, Jeffrey Barcy ("Barcy"), a Director in Credit Suisse's Investment Banking Division, began actively pursuing Blixseth in an effort to sell Credit Suisse's equity recapitalization loan to the Yellowstone Club. Barcy first attempted to contact Blixseth via teaser emails, providing Blixseth with a brief overview of Credit Suisse and its equity recapitalization or syndicated term loan, which was described to Blixseth as something akin to a "home-equity loan." Blixseth initially rebuffed Barcy's emails but eventually developed an interest in the loan product and contacted Barcy to learn more.
Barcy and another person from Credit Suisse met Blixseth and Chris Campbell ("Campbell"), Yellowstone Club's Vice President of Finance, at Blixseth's home in Rancho Mirage, California ("Porcupine Creek")
After numerous discussions, Blixseth originally agreed to accept a loan of $150 million from Credit Suisse. To assist with the Credit Suisse loan process, Blixseth formed an in-house team that consisted of Blixseth, Edra (who was serving as Chief Operating Officer of the Yellowstone Club), Campbell (who Blixseth referred to as the point guard on the deal, and an ex-Wall Streeter from Smith Barney), Robert Sumpter (Vice President of Real Estate Development, who Blixseth said was "pretty savvy in the financial world"),
As negotiations between Credit Suisse First Boston and Blixseth progressed, the proposed amount of the loan grew from $150 million to $375 million and the language of the credit agreement evolved. For instance, similar to the syndicated loans to Tamarack Resort, Promontory, Ginn, Turtle Bay and Lake Las Vegas, and consistent with the purpose for which the Credit Suisse loan was developed, the Yellowstone Club credit agreement was initially drafted to provide that the proceeds of the Yellowstone Club's loan could be used, in part, for "distributions" to members for purposes unrelated to the Yellowstone Club. However, Credit Suisse's standard credit agreement language that allowed for the loan proceeds to be used for "distributions" was problematic for Blixseth. According to Blixseth, the problem was two-fold. First, Blixseth would incur a substantial tax liability if he took the loan proceeds as a distribution. Second, Blixseth testified that recording such a large distribution on the Debtors's books would leave Blixseth with a negative balance in his owner's equity account. According to Blixseth, Mack informed him approximately 30 to 45 days prior to September 30, 2005, that "if we took a distribution, that we would have a negative capital account to the point where he didn't think that an audit firm would or could audit the Debtor companies."
Although disputed by Blixseth, the "distribution" language was also problematic because characterizing a disbursement of the Credit Suisse loan proceeds as a distribution would require Blixseth to share the loan proceeds with the "B" shareholders. In an attempt to eliminate the issues attendant to the "B" shareholders, Blixseth, during the spring and summer of 2005, sought to buy the interests of the "B"
Blixseth's letter advised the "B" shareholders: "This proposal will be held open and valid until June 15, 2005. At such time if all `B' holders have agreed to this proposal, we will commence the paperwork." Also in the May 25th letter, Blixseth represented that he had "arranged financing that would allow [him] to re-purchase these outstanding shares and will take this financing on only if [he could] reacquire all of the outstanding `B' shares."
Blixseth's accountant Mack assisted Blixseth with his efforts to purchase the "B" shareholders' interests in the Yellowstone Club. Debtors' Exhibit 263D is a letter dated July 14, 2005, addressed to "Mike" from Mack. In the letter, Mack informs Mike, a "B" shareholder, "that between 2005 and 2011 sales will be approximately $1.4 billion with net income before taxes of $900 million. Hence, after taxes at a 40% rate, the net income is $540 million. So, with this analysis, each 1% member's equity would be $5,400,000." Mack goes on to explain that "[o]n a present value basis at an 8% return over seven years, each share would be worth approximately $4,500,000. However, as we both know, with marketability and monetary discounts between 30% and 55%, each share could be valued at between $2,025,000 and $3,150,000." Mack's letter concluded that Blixseth's "offer is a tremendous offer which yields an excellent return."
Attorney Doyle also weighed in on Blixseth's efforts concerning the "B" shareholders. Blixseth recalled telling Doyle during the negotiations with Credit Suisse, that "this would be a good opportunity to try and buy the `B' shares back." In fact, while Blixseth's May 25, 2005, letter was on BGI letterhead, Blixseth could not recall whether the letter was sent by Blixseth or whether it came from Doyle's office. Doyle also recalled discussing with Mack the fact that if the money was removed from the Debtors as a distribution that Blixseth would have to share such distribution with the "B" shareholders. Consistent with his discussion with Mack, Doyle sent Blixseth correspondence on August 31, 2005, stating:
Exhibit D-263F.
Unfortunately for Blixseth, not all "B" shareholders agreed to accept Blixseth's offer and Blixseth ultimately purchased none of the "B" shareholders' interests because, as Blixseth testified, the offer was an all or nothing deal. Blixseth subsequently made the decision, "the sole decision," that any transfer of money from the Debtors to BGI would be in the form of a loan rather than a distribution. Blixseth contends that he thought a loan was better for the Yellowstone Club because the "Yellowstone Club would receive interest" from BGI. However, the interest that Blixseth and BGI ultimately paid on the notes was minuscule. Moreover, despite Blixseth's assertion that "the [Debtors] had an unconditional intention to seek repayment of the loans," the Debtors, under Blixseth' direction, never made demand of BGI on the notes, even when the Yellowstone Club desperately needed cash.
Blixseth contends that the "B" shareholders did not factor into his decision to take the Credit Suisse loan proceeds as a loan rather than a distribution, but Blixseth's testimony on this matter is not credible and is controverted by the evidence. Contrary to his testimony, Blixseth sent Edra an email on or about September 5, 2005, stating that "[w]ith the 6 B's now starting to nose around we must make sure we have not made any `distributions' to BGI as the `B's' would be entitled to their equal share, loans are OK in the operating agreement." Exhibit D-266. Edra also testified that the Yellowstone Club loan team had several discussions about whether Blixseth would take the loan proceeds as a distribution or a loan. Edra could not recall any discussion about Blixseth having to take the money in the form of a loan in order to avoid creating a negative equity position. Consistent with the evidence, Edra testified that Blixseth wanted to take the money in the form of a loan because Blixseth could then avoid paying the "B" shareholders their fair share. Edra also testified that Blixseth was not overly concerned about having to
At or about the time that Blixseth realized that he would not be able to purchase the "B" shareholder's interests, Blixseth contacted Credit Suisse and requested that the proposed credit agreement be modified to provide that the majority of Credit Suisse loan proceeds could be used for either a distribution or a loan.
As previously noted, the transfer of loan proceeds out of the Yellowstone Club was a key feature used to sell the Credit Suisse loan product. Steve Yankauer ("Yankauer"), a Managing Director at Credit Suisse Securities, USA, testified that the cornerstone of Credit Suisse's loan product was that it allowed preferred resort owners, such as Blixseth, to capitalize on the value of their asset.
Even though Blixseth's efforts with the "B" shareholders were not going as hoped, Blixseth was nonetheless proceeding full speed ahead in his negotiations with Credit Suisse. As of August 22, 2005, the loan amount had grown to $330 million. Also, in addition to allowing Blixseth to use a substantial amount of the loan proceeds for a distribution or loan, Credit Suisse had also agreed that Blixseth could use another substantial amount of the loan proceeds for purposes unrelated to the Yellowstone Club.
Blixseth was also negotiating the transaction costs charged by Credit Suisse. Credit Suisse generally charged borrowers a transaction fee equal to 3 percent of the loan amount but Blixseth wanted the transaction costs reduced to 2 percent. Blixseth and Barcy thus met at the Yellowstone
Credit Suisse did its initial offering of the Yellowstone Club loan in early September 2005. The loan amount at that time was $300 million and the syndication was 400 percent oversubscribed. Because the Yellowstone Club was deemed creditworthy, the loan amount crept up to $375 million. Yankauer testified that the loan increased to $375 million because one, Blixseth wanted more money and two, lenders were clamoring to get a piece of the loan.
After months of negotiations, Credit Suisse and Blixseth reached an agreement on the final terms of a credit agreement. Credit Suisse, Cayman Islands Branch, and Blixseth, on behalf of YMC, YD and Big Sky Ridge, LLC entered into a First Lien Credit Agreement dated September 30, 2005 ("Credit Agreement").
Blixseth argued that he sought the Credit Suisse loan on behalf of the Debtors, in part, to fund development and construction of the Yellowstone Club properties and to acquire worldwide resorts. Contrary to Blixseth's arguments, the Credit Suisse loan was created so that resort owners, such as Blixseth, could extract large distributions from their development projects, without the need for any personal guarantee. Thus, the overall purpose of the loan was not for development of the Yellowstone Club, but instead, the purpose was to permit Blixseth to take money out of the Yellowstone Club and in fact, the record shows that very little, if any, of the Credit Suisse loan proceeds were used to fund development and construction at the Yellowstone Club.
Pursuant to the Disbursement Authorization dated September 30, 2005, UCC Exhibit 222, Blixseth approved use of the $375 million Credit Suisse loan proceeds as follows:
$7.5 million To Credit Suisse in payment of its 2
percent Arrangement Fee
$ 100,000.00 To Credit Suisse in payment of its
First Annual Administration Fee
$ 45,077.89 To Credit Suisse for payment of its out-of-pocket expenses $ 10,000.00 To Credit Suisse for payment of Syndtrak $ 380.00 To Credit Suisse for payment of Cusip $ 70,500.00 To Credit Suisse for payment of Clear Par Settlement 12 $ 15,500.00 To Credit Suisse for payment of Cushman Wakefield Appraisal $ 325,000.00 To Latham & Watkins LLP in payment of estimated legal fees incurred to date13 $ 581,368.60 To Security Title of Montana for payment of title fees, endorsements and recording costs $ 19,758,458.93 To American Bank in repayment in full of the Existing Indebtedness $ 4,483,452.05 To Silver Ridge, Inc. in repayment in full of the Existing Indebtedness14 $342,110,262.53 To Yellowstone Mountain Club, LLC, a Montana limited liability company
The $342.1 million disbursed to the Debtors was distributed in two significant ways. First, the Credit Agreement designated up to $209 million of the loan proceeds to be used as "distributions or loans" for "purposes unrelated" to the Yellowstone Club. Additionally, up to $142 million was authorized to be used for investments in "unrestricted subsidiaries" for "purposes unrelated" to Yellowstone Club development. As the numbers show, the bulk of the loan proceeds were designated to be used for purposes outside of, and unrelated to, the Yellowstone Club.
Specifically, of the $342,110,262.53 that went to YMC, UCC Exhibits 213 and 218 show that as contemplated, $209 million went to BGI and the remainder of $133,110,262.53 stayed with YMC. Of the latter amount, Blixseth put $100 million in a 6 month CD at U.S. Bank, $30 million in a 6 month CD at American Bank and $3,110,262.53 went into a checking account. In 2006, portions of the remaining funds held by YMC were used to purchase the Chateau de Farcheville in France for approximately $28 million, Tamarindo in Mexico for $40 million, the Turks and Caicos property for $28 million and a down payment of $12 million on the St. Andrews property in Scotland.
On the same date that Credit Suisse transferred $342,110,262.53 to the Debtors, Blixseth transferred approximately $209 million out of the Yellowstone Club to BGI. Almost all of the $209 million proceeds transferred to BGI were disbursed to various personal accounts and payoffs benefitting Blixseth and Edra personally; Blixseth put $25 million into a 6 month CD at First Bank, used $11,939,598.24 to payoff an existing obligation owed to First Bank on a line of credit that Blixseth had used to build his and Edra's residence at Porcupine Creek in California, purchased a $17 million 6 month CD at Palm Desert National Bank, put $14,018,227.87 in a money market account, used $4,133,623.50 to payoff an existing obligation owed to Palm Desert National Bank ($3,169,118.75 related to Blixseth's real estate development project in the Palm Springs area of California, $79,629.54 was used to pay off a condo owned by Edra and $884,875.21 was used to pay off two lines of credit), purchased a $15 million 6 month CD at Jackson State Bank, paid off five existing obligations owed to American Bank totaling $7,434,226.76, purchased a 3 month CD at U.S. Bank for $100 million, purchased a 6 month CD for $5 million at Pacific Western Bank, paid off an existing obligation owed to Pacific Western Bank in the amount of $2,971,443.02, and paid off existing obligations owed to Union Bank totaling
Blixseth testified that he "absolutely" would not have taken the $209 million from the Debtors if anyone on his legal or consulting team or anyone from Credit Suisse, would have told Blixseth that it was illegal or a breach of his fiduciary duty to take the money out of the Debtors. Relying on a letter dated September 30, 2005, Blixseth asserts the advice of legal counsel defense. The September 30, 2005, letter was written by Brown of the Garlington, Lohn & Robinson, PLLP law firm, and was addressed to Credit Suisse. In the letter, Brown states that "as of [September 30, 2005] ... [e]ach Loan Party has the requisite power and authority to execute, deliver and perform its obligations under the Loan Documents[;]... [and] [e]xecution and delivery by the Loan Parties, and performance of their respective obligations under, the Loan Documents does not: violate any of their organizational documents; violate any laws; to the best of our knowledge violate any orders, judgments, or decrees; to the best of our knowledge, breach any material contract or create liens or encumbrances; or require filing or registration with any governmental agency." Blixseth's Exhibit 4. Blixseth interpreted Brown's third-party opinion letter to Credit Suisse to also mean that Blixseth would not be breaching any laws in the State of Montana.
Prior to September 30, 2005, the "B" shareholders were not aware that Blixseth was pursuing a loan on behalf of the Yellowstone Club. However, the "B" shareholders were trying to obtain financial information from Blixseth regarding the Yellowstone Club. Doyle sent Blixseth an email on October 10, 2005, advising Blixseth that it "would serve nobody's best interests to have some kind of legal action taken to force the disclosure of financial information that is very clearly required to be provided under the Operating Agreement. It is your call, but I would think it would make a lot of sense to authorize George [Mack] to release all of the prior reviewed financial statements through 2004, and then put a concerted effort into getting the insurgents bought out." Exhibit 263Z.
The "B" shareholders eventually learned of the Credit Suisse loan and in early May 2006, "B" shareholders Greg LeMond, Jorge V. Jasson, David L. Morris, Sacia B. Morris, and Sacia Enterprises, Inc., threatened suit against Blixseth. After the "B" shareholders threatened suit, Blixseth's counsel conferred and on May 8, 2006, Doyle sent Blixseth an email stating that the attorneys were in agreement that the main thrust of the "B" shareholders' complaint involved the $209 million loan from the Yellowstone Club to BGI and that the Montana attorneys, while they agreed that a loan was permitted under the operating agreement, they "were a bit dismayed when I had to tell them that this loan was not evidenced by a Promissory Note." Debtors' Exhibit 263G.
The immediate transfer of funds out of the Yellowstone Club to BGI and then to Blixseth was not memorialized in any contemporaneous loan documents. The $209 million was originally recorded in a suspense account though a journal entry, and was later reclassified as a note receivable
On May 31, 2006, Greg LeMond, Jorge V. Jasson, David L. Morris, Sacia B. Morris, and Sacia Enterprises, Inc. (the "LeMond Plaintiffs"), filed a complaint in Madison County, Montana, captioned LeMond v. Blixseth Group, Inc., C.V. No. DV-29-06-26 (the "LeMond Litigation"). In general, the LeMond Plaintiffs complained that the $209 million loan Blixseth took from the Debtors was a distribution, not a loan. Therefore, the LeMond Plaintiffs argued that they were entitled to a proportionate distribution under the Debtors' applicable operating agreements. Blixseth, on behalf of himself and the Debtors, settled the above-referenced litigation for $38 million.
The remaining "B" shareholders consisting of Michael L Snow, Gregory C. Branch Family Limited Partnership, A.C. and Linda K. Markkula, Spano Yellowstone Holdings Limited Partnership, Robert P. And Katharine M. Watson, Bankers Financial Corporation, and Mountain Vista Properties AG commenced Adversary Proceeding No. 09-00018 against Blixseth on March 3, 2009. The claims in Adversary Proceeding No. 09-00018 are similar to the claims previously asserted by the LeMond Plaintiffs. Trial in Adversary Proceeding No. 09-00018 is scheduled to commence on August 23, 2010.
In the years leading up to 2005, the Yellowstone Club had receivables due from BGI and other affiliates of approximately $55 million. The Yellowstone also carried an additional debt load ranging from a low of approximately $4 to $5 million to a high of approximately $60 million on a revolving line of credit. Such debt load was in addition to the membership deposits that the Yellowstone Club listed as a liability on its balance sheet, along with equipment leases and a myriad of other small items. According to Blixseth, the day before the Loan Transaction with Credit Suisse, the Yellowstone Club carried, in addition to any amounts owed to BGI and its affiliates, approximately $19 to $20 million in debt on its books, consisting of a combination of a revolving line of credit and a term loan with American Bank.
Although the Yellowstone Club had a reputation of being slow to pay its debts, Edra testified that in her opinion, the Yellowstone Club did not need the Credit
In September of 2004, Cushman & Wakefield did a limited appraisal of the Debtors' property for American Bank. In that limited appraisal, as of September 21, 2004, Cushman & Wakefield determined that the "as-is market value" of those assets that later served as collateral for Credit Suisse's $375 million loan was $420 million. Just a year later, Credit Suisse commissioned Cushman & Wakefield to perform a total net value appraisal of the Yellowstone Club. Cushman & Wakefield's "total net value" appraisal of the Yellowstone Club as of September 30, 2005, was $1,165,000,000.00.
Cushman & Wakefield's 2005 "total net value" appraisal was based in large part on revenue and expense projections provided by Blixseth. In 2005, Callander was employed as vice president of sales and Campbell was vice president of finance. However, it was Sumpter—the vice president of real estate development
When questioned about the projections, Sumpter attempted to explain that the Debtors missed their projections in 2005 because the Debtors pushed some of the
Charles Bradley Foster ("Foster"), a Managing Director for FTI Consulting— the consulting company hired to serve as the Debtors' post-petition financial advisor—gave a simplistic, but enlightening, explanation of the impact the Credit Suisse loan had on the Debtors' cash flow. Under the Credit Suisse Credit Agreement, the Yellowstone Club was required to pay Credit Suisse $800,000 from the sale of each dwelling unit for principal curtailment. Foster testified that between September 30, 2005, and February of 2009, the Debtors sold a total of 85 dwelling units at an average sales price of $2.4 million per dwelling unit. From the $2.4 million realized from each unit, Foster did a rudimentary calculation to ascertain the "free cash flow" from each of the sales. In simple terms, Foster subtracted from $2.4 million the $800,000 that the Debtors were required to pay Credit Suisse for principal curtailment,
It is clear that the Debtors began a downward spiral on September 30, 2005, that took them to the inevitable bankruptcy filing on November 10, 2008. At the end of 2005, the Debtors's audited financial statements showed $130 million in cash or cash equivalents. The Debtors spent $70 to $80 million in 2006 acquiring assets outside the confines of the Yellowstone Club. Factoring in the Debtors' annual cash needs of $25 to $30 million a year, above and beyond land sales, the Debtors were left with just under $29 million of cash or cash equivalents at the end of 2006 and only $5 million at the end of 2007.
From 2005 through the filing of the bankruptcy case, the Yellowstone Club was persistently behind on its accounts payable. When the Yellowstone Club needed cash, Moore, who took over as Comptroller at the Yellowstone Club in October of 2006, would make a request for money to Mack, who acted as the intermediary between Blixseth and Moore when Moore needed money to pay bills at the Yellowstone Club. After making a plea for money, Moore testified that funds might or might not appear in the Yellowstone Club's accounts. Moore testified that it was not uncommon to have to shuffle the Yellowstone
Even though the Yellowstone Club was consistently struggling to pay its creditors, Blixseth continued to siphon money from the Debtors. In addition to the Credit Suisse loan proceeds, Blixseth took approximately $90 million in distributions from the Debtor entities and later reclassified such distributions as loans. For instance, Blixseth and BGI took $4 million plus of distributions from YD in 2003. Also, the Debtors' 2004 year end financial statements show a distribution of $19,000,617.51 to Blixseth. In 2005, Blixseth or BGI took total disbursements of $35,478,750.24 out of YMC. Of the foregoing amount, $23,853,000 was reclassified as a loan on March 13, 2006. The evidence suggests that the 2004 and 2005 distributions were eventually reclassified as a $55 million note payable from BGI.
Despite the Debtors' consistent and often desperate need for cash from the time of the Credit Suisse loan to the date of the Debtors' bankruptcy petition, neither Blixseth nor Edra made a demand of BGI for payment on any of the BGI notes. BGI also never made any type of consistent payment on the obligations. The evidence shows that after September of 2005, the Debtors were only able to meet their financial obligations by selling bulk pieces of property at deep discounts.
Samuel T. Byrne ("Byrne") is one person who purchased bulk property from the Yellowstone Club. Byrne, the founder and managing partner of CrossHarbor Capital Partners, LLC ("CrossHarbor"),
Consistent with the foregoing, Moore testified that the Yellowstone Club was only current on its payables during the first few months of 2006, in early 2007, in August of 2007 and again in April or May of 2008. Moore explained that Byrne's $60 million bulk purchase in 2006 allowed the Debtors to bring their payables current in 2006. Also, the Debtors sold a Gulfstream jet in January of 2007 for approximately $45 million and received roughly $20 million of the proceeds. Those monies were sufficient to bring the Yellowstone Club's accounts payable current for a brief period of time. The Debtors then sold 31 golf course lots to Byrne in August of 2007 for $54 million. That bulk sale allowed the Yellowstone Club to once again brings its obligations current. Moore also testified that the Debtors sold five lots to Overlook Partners in March or April of 2008 for $15 million, which allowed the Debtors to bring their accounts payable current and still leave $5.6 million in the bank accounts. The Debtors also drew down a line of credit at American Bank in 2008 to meet their financial obligations. That cash was used to bring the Yellowstone Club's accounts payable current at that time. The Debtors were not current on their accounts payable in August of 2008. To further frustrate the Yellowstone Club's financial plight, testimony at trial indicated that perhaps the Office of the Comptroller of the Currency had instructed American Bank not to loan any more money to the Debtors and U.S. National Bank had told its branches not to extend more credit to the Debtors.
Without denying the Debtors' dire financial condition, Blixseth testified that the Credit Suisse loan was current in August of 2008 when he relinquished control of the Yellowstone Club to Edra. While Blixseth may be technically correct, the evidence also shows that Blixseth was almost three years into a five year note but had repaid only $65 million of principal; all arguably attributable to the required release price of $800,000 per lot. Blixseth was able to make the interest payments on the Credit Suisse loan obligation by essentially cannibalizing the Yellowstone Club. Blixseth then left the Yellowstone Club to Edra in August of 2008, saddled with enormous debt that the Yellowstone Club had no prospect of repaying.
Also noteworthy is the fact that the Debtors' audited financial statements show that the outstanding balance owed by BGI and its affiliates to the Debtors was $272 million on December 31, 2005, $254.8 million on December 31, 2006, and $243.7 million on December 31, 2007. Approximately $18 million of the $28.3 million paid on the BGI notes was the result of a payment made by BGI toward the $38 million settlement with the LeMond Plaintiffs. Moore recalled that BGI only paid $5 million toward principal on the $209 million note.
Blixseth also seeks refuge in various audits performed by KPMG. With respect to the BGI notes, no evidence exists in the record that KPMG audited BGI to determine the true value of the BGI notes. Notably, KPMG did not assign a value of the BGI notes, but merely noted under
Various aspects of the Debtors' financial condition were also examined by several experts:
David Abshier ("Abshier") performs financial advisory services for LECG and specializes in credit and risk management. Abshier was retained in this case to evaluate the Debtors' loan transaction with Credit Suisse in accordance with regulatory and customary banking industry standards. Abshier began his testimony by noting that the Credit Suisse Loan Agreement did not comport with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA").
Abshier also observed that Credit Suisse's loan product was nonconforming in that 100 percent of the loan proceeds were disbursed on the closing date. Abshier testified that it is not customary for lending institutions to lend 100 percent of approved loan funds at the closing date for large real-estate development projects. Instead, projects, such as the Yellowstone Club, are generally done in phases and the associated loan is funded accordingly. Furthermore, Credit Suisse's loan product allowed the bulk of the loan proceeds to flow directly to the borrower's principal, in this case BGI and Blixseth, for purposes unrelated to the underlying development. Yankauer countered that 100 percent funding of the loan in this case was appropriate because the loan was not a construction loan and Blixseth had already invested a substantial amount of equity into the project.
Abshier went on to observe that Credit Suisse did not require any type of reserve account with which to fund future payments
Finally, Abshier noted that while Credit Suisse First Boston provided all the marketing materials, made all the contacts in the United States, and engaged a United States appraiser, the signatory on the Credit Agreement was Credit Suisse, Cayman Island branch.
Kent Mordy ("Mordy") is a certified public accountant and a certified insolvency and reorganization advisor. Mordy examined the Debtors' financial performance both pre- and post-September 30, 2005. Mordy testified that the Debtors experienced negative cash flows in several of the years leading up to the Debtors' September 30, 2005, agreement with Credit Suisse. Several witnesses used the term EBITDA, which is earnings before interest, taxes, depreciation and amortization.
In the offering memorandum, Credit Suisse projected cash EBITDA for the Debtors of $83,500,000 in 2005, $97.6 million in 2006, $135 million in 2007 and $269 million in 2008. Reducing the above numbers for interest expense, Mordy testified that Credit Suisse's true cash EBITDA projections were $60 million in 2005, $72 to $73 million in 2006 and $113 million in 2007, yet Debtors' actual cash EBITDA in such years was woefully short of Credit Suisse's projections. The Debtors missed the Credit Suisse projections by $42,660,000 in 2005 because Debtors in fact had only $17 million with which to repay debt in that year. In 2006, Debtors missed the mark by $46 million because cash EBITDA was only $25 million. Similarly, in 2007, Debtors missed the mark by $90 million because cash EBITDA was $23 million rather than $113 million. Mordy characterized Credit Suisse's projections as a "leap of faith."
Mordy noted several deficiencies in Credit Suisse's projections. First, Credit
Credit Suisse's projections also failed to account for the $140 million that was used to purchase Yellowstone Club World assets. Instead, Credit Suisse's projections showed $140 million as staying in the Debtors' bank accounts for reserves to pay interest and principal on the Credit Suisse loan.
Mordy also pointed out that the Debtors, and thus Credit Suisse, were including in their income projections the anticipated revenues from Big Sky Ridge. However, the record shows that Big Sky Ridge was wholly-owned by Blixseth in 2002. In April of 2002, Big Sky Ridge paid $3.5 million for some land. Blixseth then sold 50% of Big Sky Ridge to Voyager Group, LP for $2.5 million. In September of 2003 Blixseth sold the other 50% of Big Sky Ridge to Yellowstone Development for $17 million. That same month, Blixseth bought back Voyager Group, LP's 50% interest in Big Sky Ridge for $3 million. Thus, in September of 2005, Blixseth owned 50% of Big Sky Ridge and Yellowstone Development owned the other 50%, entitling Blixseth to 50% of Big Sky Ridge's profits, yet Blixseth was including his profits from Big Sky Ridge in the revenue projections that he was supplying to Credit Suisse.
Mordy concluded that in exchange for a possible $164 million benefit, the Debtors undertook an obligation to repay $375 million plus interest. Mordy arrived at his $164 million calculation by adding the $133 million cash that stayed in the Yellowstone Club on September 30, 2005, the $6 million of principal payments from BGI on the $209 million note and approximately $25 million paydown on the $375 obligation by the Debtors.
Yankauer countered Mordy's testimony, arguing that EBITDA was in the neighborhood of $55.5 million. Yankauer considered 2005 income of $39,299,732 and added interest of $6,442,264 and depreciation and amortization of $9,868,957. Yankauer then included deferred income from 2004 to reach the $83.5 million number used by Credit Suisse. Mordy apparently did not consider deferred income and subtracted real estate under development of roughly $13,660,000. Mordy also excluded $17.9 million for the purchase of property and equipment, and $9.6 million from construction in process. Mordy found Credit Suisse's assumptions unreasonable based
After performing his forensic review of the Debtors' books, Mordy concluded that the purported $209 million loan to BGI and its affiliates was not in fact a loan under generally accepted accounting principles, but rather, was a distribution and a return of capital to BGI and its then owner, Blixseth. Six factors led Mordy to his conclusion. First, Mordy referred to the Credit Agreement which referred to funds that were earmarked as a return of capital. Second, repayment of the BGI notes payable, which were due on demand, was controlled by Blixseth, who controlled BGI. Third, the $209 million note payable included no scheduled principal payments and in fact, only minimal principal reductions were made. Moreover, the principal reduction payments that were made also benefitted BGI and Blixseth. Fourth, the Debtors continued to finance acquisitions and fund operations through bulks sales of lots rather than make demand on the BGI note payable. Next, Blixseth used funds from the Debtors, rather than BGI as contemplated, to purchase St. Andrews in Scotland. Finally, KPMG indicated in the footnotes of Debtors' 2006/2007 audited financial statements that the fair value of BGI's notes payable was not determined because it was not practical to estimate the value of such notes.
Based on his determination that the $209 million was a distribution rather than a loan, Mordy determined that as of December 31, 2005, the Debtors's books should have reflected negative equity of approximately $141 million.
Dr. John S. Hekman ("Hekman") has a Ph.D in economics and is employed by LECG to provide expert witness testimony in the area of real estate and real estate finance. Hekman was hired to examine Cushman & Wakefield's September 30, 2005, appraisal and tailor the appraisal to more accurately reflect Debtors' historical reality. Hekman, like Mordy, also performed EBITDA calculations.
Hekman testified that the Debtors' had very small losses or profits in 2001 and 2002. Debtors' income in 2003 and 2004 was slightly higher with the Debtors' having $24 million in the best of the two years to service debt. Hekman's EBITDA calculation for 2005 was $39 million.
Hekman observed that Cushman & Wakefield's cash flow projections went through 2012, and required the sale of 89 lots in a single year. Credit Suisse, in turn, compressed Cushman & Wakefield's absorption period by two years, thereby effectively and unrealistically increasing the appraiser's cash flow projections for 2006 through 2010. Hekman testified that Credit Suisse's cash flow projections were completely out of proportion to the Yellowstone Club's historical performance. Hekman believed that Credit Suisse's aggressive projections warranted a 20 to 30% discount rate.
Interestingly, the total net value of the Club in 2005 was $1,165,000,000 but as of March 31, 2006, that value increased to $1,222,000,000. In the total net proceeds report as of June 30, 2006, such amount increased to $1,225,000,000 and in the report as of September 30, 2006, the value was $1,250,000,000 and as of March 31, 2007, and June 30, 2007, that value was $1,361,000,000. The total net value, according to Cushman & Wakefield, did not decline until late 2007. As of September 30, 2007, the total net value decreased to $1,268,000,000. Consistent with the updated appraisals, which suggest that the value of the Club was increasing, Certificates of Compliance required under the Credit Agreement indicated that the loan to value ratio was consistently dropping. The Credit Agreement specifically provided that the loan to value ratio could not exceed 45%. Per the compliance certificates, the loan to value ratio continued to decrease, going from 29.6%, Exhibit 18, to 28.4% on November 29, 2006, to 24.85% on May 29, 2007, and to 25.8% on May 29, 2008, and then to 27.6% on August 26, 2008.
Ignoring Cushman & Wakefield's "total net value" appraisals and the attendant loan-to-value ratio, Hekman found the more realistic loan-to-value ratio of 20% troubling because it left little room for fluctuations in the real estate market. Hekman explained that while it is difficult to predict a downturn in the real estate market, experts agree that downturns always come. Hekman testified that the real estate market was very strong in the late 1990's but real estate went down during the recession in 2001. In order to keep the economy moving during the recession, the Federal Reserve aggressively lowered interest rates which set off a wave of real estate investment and increases in real estate prices because the cost of financing was so low. Hekman characterized 2003 and 2004 as the peak years for real estate. However, due to concerns about a real estate bubble, the Federal Reserve began raising interest rates in 2005, which caused the beginning of a slowdown in the real estate markets. Indeed, the July 1, 2005, appraisal prepared by Cushman & Wakefield for Credit Suisse First Boston, LLC, UCC Exhibit 144, acknowledges on page 33 that "[t]he years 2003 and 2004 were record years for the national housing market. The housing market has continued to remain very strong in 2005. While price appreciation and sales activity have started to moderate in most markets across the country, continued low mortgage rates and strong housing demand have kept prices and sales at levels which are still near record highs in an historical perspective."
Other than using historical reality to reach a valuation determination, Hekman did not change any other assumptions used in the 2005 appraisal. For example, Hekman
To illustrate, Hekman looked at funds available to service debt. The Yellowstone Club's best year for income was 2005. In that year, the Club had $39 million available to service debt. Credit Suisse projected that the Yellowstone Club would have interest expense of $25 million in 2006. On top of the interest expense, the Yellowstone Club was also required to pay a release payment of $800,000 as each lot was sold. Using the 48 lots sold in 2005 as a gauge, Hekman calculated that the Yellowstone Club would be required to make release payments of approximately $38 million. Adding the interest expense of $25 million and the release payments of $38 million meant that the Yellowstone Club needed to generate revenues of $63 million in 2006 just to service the Credit Suisse obligation.
Hekman prepared a demonstrative exhibit showing actual lot sales at the Yellowstone Club from 2001 through 2005. See also, Addendum B to Cushman & Wakefield's September 30, 2005, appraisal. On his demonstrative exhibit, Hekman also plotted projected lot sales from 2006 through 2012, which Hekman referred to as the absorption period. Hekman pointed out the obvious; that projected lot sales were significantly higher than actual lot sales. Hekman found the absorption period simply unrealistic because the absorption period was not based on historical lot sales, was not justified by looking at comparable sales in other developments, and it was not justified given the somewhat weakening economy, which was recognized in Cushman & Wakefield's 2005 appraisal. According to Hekman, in 2005, the Debtors' projected future lot sales or absorption period should have mirrored historical sales. Credit Suisse then took Debtors' lofty projections and reduced the absorption period from 2012 to 2010 to comport with Credit Suisse's proposed five-year loan.
Mordy explained that his cash EBITDA numbers differed from Hekman's 2003, 2004 and 2005 EBITDA calculations because Hekman did not subtract capital expenditures
Donaldson is a real estate appraiser employed as the managing director of the Utah office of the global real estate firm of Cushman & Wakefield of Colorado.
Donaldson's retrospective appraisal continued to assume that the Debtors would sell their national memberships at a price of $650,000 each, even though Debtors had not previously sold a single national membership and even though the highest membership fee that Donaldson could find at any comparable membership club was $125,000. Donaldson similarly calculated that the Pioneer Mountain condos would sell for $3.5 million, or roughly $1,000 per square foot, even though no Pioneer Mountain condo had ever sold for $1,000 per square foot. Finally, Donaldson assumed that 325 single-family lots could be sold, but the 325 number was not based on engineered drawings. Donaldson also did not contemplate any bulk sales.
Regardless of whose numbers are utilized, in conjunction with the Credit Suisse loan, Moody's Investors Service reviewed the business fundamentals and financial condition of YMC and YD in 2005 and assigned a private rating of B1 to the Credit Suisse Loan as of September 30, 2005.
Although Blixseth called not a single expert witness at Part I of this trial held in 2009, Blixseth called two expert witnesses to testify in February of 2010; Robert Reilly and Joanne Sheridan. Robert Reilly ("Reilly") is an expert in the area of business valuations and solvency opinions and was retained to offer testimony solely as to the solvency of Blixseth and BGI as of September 30, 2005, December 31, 2006 and December 31, 2007.
As background, Reilly explained the Statement on Standards for Valuations Services No. 1 ("SSVS1")
Reilly explained that a certified public accountant ("CPA") can give solvency opinions without complying with SSVS1 but if CPAs have the appropriate credentials and experience, and if they comply with SSVS1, they can give independent valuation opinions as well. If an independent valuation opinion is contained within a solvency opinion, CPAs must comply with the AICPA standards, including SSVS1.
Reilly examined the solvency of Blixseth as of September 30, 2005, December 31, 2006, and December 31, 2007, using all three of the solvency tests and concluded that Blixseth was solvent on such dates. Reilly also examined the solvency of BGI as of September 30, 2005, the end of 2006 and the end of 2007 using all three solvency tests and concluded that BGI was solvent on all three of the aforementioned dates.
Based upon information that Reilly received from Mack and Blixseth's counsel, Reilly's balance sheet test for BGI originally included the assumption that BGI had cash of $242 million on September 30, 2005. Reilly later learned that BGI did not have cash on hand of $242 million on September 30, 2005, because such money had gone directly to Blixseth, and that the $242 million "really should be a note receivable." In addition, to complete his balance sheet tests for BGI and Blixseth, Reilly relied upon Sheridan's balance sheet test of the Yellowstone Club. As for Blixseth, Reilly was initially provided with a balance sheet as of 2004 and had to inform Blixseth's counsel that he would need starting balance sheets for 2005, 2006 and
Reilly testified that he also performed a cash flow test and the capital adequacy test of the Yellowstone Club as of September 30, 2005, the end of 2006 and the end of 2007, and concluded that the Yellowstone Club was solvent on the three dates examined. Reilly could not give an overall solvency opinion of the Yellowstone Club because he did not perform the third solvency test, the balance sheet test.
Reilly's due diligence with respect to the two solvency tests he performed on the Yellowstone Club consisted of interviewing Blixseth, Mack and Sumpter.
Reilly criticized Mordy's solvency opinion on grounds that Mordy was making critical assumptions that equated to an independent valuation. As explained by
Joanne D. Sheridan ("Sheridan") was retained by Blixseth to perform the balance sheet test portion of the solvency analysis by examining the Debtors' financial statements as of December 31, 2005, December 31, 2006, and December 31, 2007. For example, using Cushman & Wakefield's September 30, 2005, appraisal, Sheridan concluded that the fair market value of Debtors' total assets was $1,120,089,177.00 as of December 31, 2005. Sheridan's asset number included cash and cash equivalents in excess of $120 million, property and equipment in excess of $696 million
On June 28, 2007, Byrne, on behalf of CIP Yellowstone Acquisition LLC ("CIP") and Blixseth, on behalf of YMC, YD and Big Sky Ridge, LLC, entered into a letter of intent wherein Byrne and CrossHarbor, through CIP, agreed to purchase all of the assets of YMC, YD and Big Sky Ridge, LLC for the sum of $510 million. As part of the anticipated purchase, Byrne and his group proceeded with a due diligence analysis of the Yellowstone Club. Byrne explained that given the state of the Yellowstone Club's books, coupled with the lack of cooperation by employees at the Yellowstone Club, CIP was forced to build its own financial models from the ground up. CIP spent roughly $4 million on its due diligence.
Edra, upon learning of Blixseth's agreement with CIP, sought to enjoin the sale, believing that the Yellowstone Club was worth far more than $510 million. Upon request by Blixseth, Judge Waters of the Superior Court of California, Riverside, who was presiding over the Blixseths' divorce, enjoined Edra from interfering with the sale.
After signing the letter of intent, Blixseth approached Byrne in August of 2007, to see if Byrne would be interested in purchasing 31 golf course lots at the Yellowstone Club. Byrne explained that "there was a lot of pressure put on us in the summer [of 2007] to make a purchase that would pay off the past-due payables, allow them to do some capital spending, and pay down [Credit Suisse First Boston]." According to Byrne, "we were solicited for virtually everything that was available to be purchased at different points in time from probably the first quarter of 2006 right up until April of 2008.... [C]learly when it came time to purchase
Following purchase of the golf course lots, another Byrne entity, Club YC Acquisition LLC entered into an Asset Purchase Agreement dated January 15, 2008, with YMC, YD, Big Sky Ridge LLC and Big Springs Realty LLC, agreeing to purchase the Yellowstone Club for $455,690,000, subject to various adjustments as set forth in the Asset Purchase Agreement.
Byrne obviously wanted the sale to go through because as the sale began to unravel, Byrne proposed to Blixseth that the Yellowstone Club file bankruptcy. In an email dated April 1, 2008, Byrne told Edra that he "understood from a number of people ... that you are telling them that I intended to bankrupt the Yellowstone Club and that I don't have the interest of the Club at heart and this is conclusive proof." To address Edra's apparent concern over Byrne's "fleeting" solution to the Club's financial problems, Byrne explained, "the discussions on the prepackaged bankruptcy were so that an entity and not an asset deal could be done that would eliminate the trigger on all the tax liabilities and eliminate the need for the reps and warranties, and hold backs of $10 million." The discussion of a possible bankruptcy was also addressed with Credit Suisse as a way to get around a 100% approval requirement but according to Byrne, Blixseth was adamant that bankruptcy was not a path he wanted to pursue.
Like the letter of intent, Edra undertook to undermine the Asset Purchase Agreement. From 2005 through August 12, 2008, Edra believed that the Yellowstone Club was worth far in excess of $510 million, the price that CIP originally agreed to pay for the Club. Edra testified that her belief that the Yellowstone Club was worth far in excess of $510 compelled her to oppose Blixseth's sale of the Yellowstone Club to Byrne.
Although Blixseth was negotiating to sell the Yellowstone Club to Byrne, Cross-Harbor and CIP as late as March of 2008, Blixseth contends he remained current on the Credit Suisse loan agreement up until August 12, 2008. Blixseth testified that CIP's termination of the Asset Purchase Agreement negatively impacted the Yellowstone Club's ability to repay the Credit Suisse loan. This latter contention of Blixseth's is not supported by any credible evidence, other than the evidence showing that the Yellowstone Club simply did not have the ability to pay any of its bills in a timely fashion.
Blixseth and Edra separated sometime in 2006 and Blixseth retained sole control of the Debtors and the Yellowstone Club until August of 2008, when Edra was awarded BGI and the Debtors as part of the MSA. During Blixseth and Edra's "bitter" divorce, Edra made several attempts to gain control of the Yellowstone Club, arguing that the Yellowstone Club was going broke under Blixseth's control. Blixseth was successful in obtaining two orders against Edra restraining her from meddling in the Yellowstone Club's affairs. Edra also tried to intervene in the action filed by the LeMond Plaintiffs against Blixseth and the Yellowstone Club. Blixseth contends that Edra's actions devastated sales at the Yellowstone Club.
Even though Blixseth had "frozen" Edra out of the Yellowstone Club since December of 2006, Edra knew the Yellowstone Club was in a tough financial position in July and August of 2008. Edra testified that the revenues at the Club were "hurt extensively" by the LeMond litigation, the Blixseths' divorce and the failed sale to CrossHarbor. However, she did not know the exact nature of the financial condition. The information that Edra had during the summer of 2008 was coming from Byrne and what he was learning through his due diligence.
As mentioned above, after a long and acrimonious divorce, Blixseth and Edra divided their marital property pursuant to the June 2008 MSA that was approved and incorporated into a California Superior Court final Judgment, Riverside County Case No. RIDIND91152. As part of the MSA, both parties received full and comprehensive releases from the other party and those corporate entities to which the party obtained ownership. The Debtors are listed as signatories on the releases, releasing Blixseth "from any claim, right or demand that any such Edra Entity has, or may have against any of the Timothy Released Parties."
After receiving his portion of the marital assets free and clear of any claims by, among others, the Debtors, Blixseth transferred his marital assets to Desert Ranch LLLP, and in return, received 98% of the
The Debtors were not parties to the MSA or any of its amendments. The Debtors were similarly not parties to the divorce proceedings and were not present at a divorce hearing held July 3, 2008, wherein that Waivers and Releases were approved at a perfunctory, non-confrontational hearing. At that hearing, the divorce court did not make any type of determination that the values on each side of the transaction between the Debtors and Blixseth (i.e. the Release) were equal. Indeed, the divorce court did not even make a determination as to equality in the value of the transaction as between Blixseth and Edra.
To finalize the MSA, Edra was required to make a cash payment to Blixseth. Edra originally secured a commitment for funding but that commitment would not allow Edra to consummate the MSA in mid-August of 2008. Edra thus approached Byrne asking for a 15-day loan so she could finalize the MSA. Edra and Byrne reached an agreement whereby CIP would loan Edra $35 million ("CIP Loan"). The CIP Loan was part of a larger transaction that was meant to bring financial stability to the Yellowstone Club. The CIP Loan was intended to be a short-term bridge loan that would provide Edra time to secure longer-term financing. The CIP Loan was evidenced by two notes:
The CIP Loan was secured in part by a Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing granted by BGI for the benefit of CIP. The BGI Deed of Trust encumbers the Porcupine Creek Property as well as two single family houses (and associated personal property) located outside of the gates of the Porcupine Creek Property and commonly known and numbered as 71361 Gardess Road and 71621 Gardess Road, Rancho Mirage, California. The CIP Loan is also secured by real property commonly referred to as the 160-acre Blixseth Family compound located within the Yellowstone Club. The CIP Loan became due and payable in full on September 30, 2008.
Edra believed that she would be able to repay the CIP Loan within 15 to 30 days because she had been promised long-term financing from another financial institution. Edra also believed that she would receive a cash infusion from the sale of Chateau de Farcheville, which Edra thought she could sell for $50 to $60 million. The CIP Loan reached maturity and neither BLX nor Edra were able to repay the CIP Loan in full. Once it was clear that Edra would not be able to secure long-term financing, Byrne once again suggested that the Yellowstone Club file bankruptcy. Blixseth maintains that this bankruptcy is nothing but a sham concocted by Edra and Byrne so Byrne could purchase the Yellowstone Club at a deep discount.
Blixseth seeks to discredit Edra's testimony claiming Edra overstated the value of her assets in various pleadings before this Court. Based upon what she knew in 2008, Edra believed that Porcupine Creek was worth $207 million; Chateau de
Blixseth also seeks to discredit Edra by pointing out that Edra failed to list BLX in her personal bankruptcy schedules as one of her 20 largest unsecured creditors. As part of the MSA, Edra assumed the obligation that Blixseth owed BGI stemming from Blixseth's personal use of the Credit Suisse loan proceeds. Blixseth contends that Edra owed BLX $181 million on her petition date and that it was incumbent upon her to list BLX as a creditor. The Court is not going to discredit Edra's testimony simply because she essentially failed to list herself as a creditor on the list of 20 largest unsecured creditors.
On May 17, 2009, the Debtors and the Unsecured Creditors Committee settled and released their claims against Credit Suisse. Shortly thereafter, the Debtors filed their Third Amended Joint Plan of Reorganization on May 22, 2009. Following a hearing held June 1, 2009, the Court entered an Order on June 2, 2009, confirming the Debtors' Third Amended Joint Plan of Reorganization. Under the Yellowstone Club entities' confirmed Third Amended Joint Plan of Reorganization, the bankruptcies of Yellowstone Mountain Club, LLC, Yellowstone Development, LLC, and Yellowstone Club Construction Company, LLC were substantively consolidated, and are being jointly administered with the Chapter 11 bankruptcy of Big Sky Ridge, LLC. Bankruptcy Case Number, 08-61570 was designated by this Court as the lead case number for the consolidated and jointly administered cases.
Pursuant to Debtors' confirmed Third Amended Joint Plan of Reorganization, YCLT was created on July 17, 2009. As contemplated by the Debtors' confirmed Third Amended Joint Plan or Reorganization and pursuant to an Assignment and Assumption Agreements, the claims of the Debtors' were assigned to YCLT. On September 18, 2009, YCLT was substituted in place of the Debtors and the Unsecured Creditors Committee in this consolidated Adversary Proceeding.
During several debtor-in-possession financing hearings, the $375 million Credit Suisse loan and Blixseth's personal use of the loan proceeds was a popular topic of discussion. Those discussions eventually prompted the Court to schedule a show cause hearing on January 13, 2009, for parties in interest to appear and show cause why the Court should not lift the automatic stay to allow enforcement of the three Promissory Notes between the Debtors and BGI (now BLX) in the approximate stated amount of $275,000,000. Following the January 13, 2009, hearing, the Court entered an Order on January 16, 2009, lifting the automatic stay to allow "[the Official Committee of Unsecured Creditors], as fiduciary of the bankruptcy estate, [to] conduct a full review of the causes of action belonging to [the Yellowstone Club entities] that are related to the Promissory Notes to determine how [the Yellowstone Club entities'] bankruptcy estates should best proceed to recover the
Shortly thereafter, the Official Committee of Unsecured Creditors (the "Committee"), on February 11, 2009, filed a combined "Notice of Claim Against Credit Suisse, Objection to Claim of Credit Suisse, and Motion for Authorization to File Complaint Against Credit Suisse." Blixseth's counsel received notice of the Committee's February 11, 2009, combined pleading, including the proposed complaint attached thereto. In anticipation of the Committee's complaint and as a protective measure, Credit Suisse filed a complaint against the Yellowstone Club entities and the Committee on February 25, 2009, thereby commencing this Adversary Proceeding. Credit Suisse's complaint was accompanied by a Motion to Expedite Proceedings and Set an Immediate Scheduling Conference.
The Committee then filed a separate complaint against Credit Suisse and John Does 1-15 on March 3, 2009, thereby commencing Adversary Proceeding 09-00017. This Adversary Proceeding and Adversary Proceeding 09-00017 were consolidated by the Court on March 3, 2009. Blixseth's counsel, along with the other attorneys involved in the Yellowstone Club entities' bankruptcies, including counsel for the Yellowstone Club entities, the Committee and Credit Suisse, appeared at a hearing held March 4, 2009. At the March 4, 2009, hearing, counsel for the Yellowstone Club entities, the Committee and Credit Suisse discussed the need for an expedited trial in this consolidated Adversary Proceeding because of the Debtors' need to secure confirmation of a Chapter 11 plan before their already extended debtor-in-possession financing expired. At the conclusion of the March 4, 2009, hearing, the Court directed the parties to submit a proposed scheduling order. On March 11, 2009, the Yellowstone Club entities, the Committee and Credit Suisse filed a Stipulated Scheduling Order, which the Court adopted as the Scheduling Order governing this consolidated Adversary Proceeding. The Scheduling Order set April 22, 2009, as the date for commencement of trial.
On March 16, 2009, Blixseth filed a Motion to File Complaint in Intervention. Following an expedited hearing held March 24, 2009, the Court granted Blixseth's motion to intervene. While the Court advised Mr. Guthals, one of Blixseth's attorneys, that it would entertain requests to extend discovery and other such deadlines, the Court made it very clear to Mr. Guthals that trial would commence on April 22, 2009, as scheduled, and that Blixseth would not be permitted to delay the proceedings.
Blixseth's counsel promptly filed Blixseth's complaint in intervention on March 24, 2009, and on March 25, 2009, Blixseth filed a request for shortened time for the other parties-in-interest to respond to his complaint in intervention, which the Court granted. Despite the Court's prior directive to Blixseth and his counsel that they be ready for trial on April 22, 2009, Blixseth filed a Motion to Amend Scheduling Order and Continue Trial Date on March 26, 2009. arguing:
Following a hearing held March 27, 2009, the Court entered an Order denying Blixseth's motion for continuance.
Prior to commencement of trial, Blixseth filed on April 14, 2009, an emergency motion to dismiss the Committee's claims against Blixseth. In said emergency motion, Blixseth claimed that the Committee had violated Blixseth's attorney-client relationship and gained confidential attorney-client information from attorney Brown on matters that were the subject of the litigation in this consolidated Adversary Proceedings. Blixseth argued that he had been damaged by Brown's alleged divulgence of information that was protected by Blixseth's attorney-client privilege.
Brown admittedly represented the Debtors in various matters between the late 1990's through 2008.
Brown and his law firm, Garlington, Lohn & Robinson, PLLP ("GLR"), have a substantial unsecured claim against the Debtors for work that Brown and GLR did for the Debtors prepetition. Because of the substantial claim, Brown agreed to serve as Chairman of the Committee. Brown was one member on an eleven member committee and testified that he served as a layperson on the Committee, performing no legal work for the Committee.
Blixseth claims Brown's alleged violations of Blixseth's attorney-client privilege has tainted every aspect of the trial in this matter. Given the seriousness of the allegations, the Court instructed the Committee to initially produce copies of those email communications on Blixseth's Exhibit 8 that originated from Brown. The Committee complied with the Court's request by producing, on May 1, 2009, copies of various email communications between December 22, 2008, and March 19, 2009.
Blixseth's counsel also took every opportunity to complain that Blixseth was denied due process because of his inability to properly prepare for trial given the speed with which the matter went to trial. For example, on the eve of trial, Blixseth's counsel filed an expedited motion to bifurcate trial of claims regarding Blixseth arguing that Blixseth had not had an opportunity to conduct and complete adequate discovery and trial preparation. In response to that argument, the Court wrote:
Blixseth next complained on April 22, 2009, the date trial was scheduled to commence, that the other parties in this matter had not formally produced all their exhibits to Blixseth. After considering Blixseth's numerous grievances, the Court, for Blixseth's benefit, delayed the trial for a period of one week, explaining:
Blixseth's counsel also argued on a regular basis that Blixseth was being denied due process because the Committee, the Debtors and Credit Suisse had a full month more to prepare for trial. The evidence showed otherwise. The parties all agreed that Blixseth was originally named as a defendant in the Committee's complaint and in fact, on or about February 7, 2009, the Committee's counsel contacted Blixseth's counsel, Michael Flynn, as a courtesy, prior to the date the Committee filed its Complaint, to apprise Blixseth that he was going to be named as a defendant. About this same time, Blixseth was making noise that he was going to possibly put an end to the increasing litigation associated with the Debtors' bankruptcy cases by proposing to pay many of the unsecured creditors in full. Blixseth's statements obviously prompted Brown to send an email to the Committee's counsel asking the Committee to hold off on filing the Complaint against Blixseth stating "we need to hear what Tim Blixseth has to say first[.]" Sometime between February 7, 2009, and March 3, 2009, Blixseth was removed from the Committee's Complaint as a named defendant.
Still, as Blixseth's counsel explained, the complaint filed in Adversary Proceeding No. 09-17 contained numerous references to Blixseth. Thus, Blixseth felt compelled to intervene. While Blixseth was not granted leave to officially intervene until March 24, 2009, Blixseth knew the Committee had its sights on him as early as February 7, 2009. Accordingly, Blixseth had just as much time as the other parties to prepare for trial, yet Blixseth continued to complain that he was being denied due process under the deadlines and trial date set forth in the stipulated scheduling order.
Part I of the trial in this consolidated Adversary Proceeding finally commenced on Wednesday, April 29, 2009. Part I of the trial was held in Missoula on April 29, April 30, May 1, May 4, 5 and 6, 2009. At Part I of the trial, the Debtors were represented by Tom Hutchinson, Troy Greenfield, Connie Sue Martin and David A. Ernst of Seattle, Washington, and James A. Patten of Billings, Montana; Credit Suisse was represented by Mark S. Chehi, Robert S. Saunders and Joseph O. Larkin of Wilmington, Delaware, George A. Zimmerman, Evan R. Levy and Jeremy M. Falcone of New York, New York, Edward J. Meehan of Washington, D.C. and Shane Coleman of Billings, Montana; the Committee was represented by J. Thomas Beckett, Chris P. Wangsgard, Derek Langton, Sean D. Reyes and Mark W. Dykes of Salt Lake City, Utah, and James H. Cossitt of Kalispell, Montana; and Blixseth was represented by Michael J. Flynn of Boston, Massachusetts, Joseph M. Grant of Houston, Texas, and Joel E. Guthals of Billings, Montana. The Court heard expert testimony from David Abshier, John Hekman, Kent Mordy and Christopher Donaldson. The Court heard fact testimony from Blixseth, Michael W. Doyle (currently in-house counsel for Blixseth Group of Washington, LLC), Stephen R. Brown, Moses Moore, Brad Foster, Samuel T. Byrne, Edra Blixseth, Steve Yankauer, and Robert Sumpter. The testimony of the following witnesses was submitted through deposition transcript:
Following conclusion of Part I of the trial on May 6, 2009, the Court entered a Partial and Interim Order on May 12, 2009. The Partial and Interim Order dealt solely with the Debtors' and the Committee's claims against Credit Suisse. The Court specifically noted in the Partial and Interim Order that the Court was issuing "an interim ruling for purposes of facilitating the upcoming auction of the Debtors' assets" and that a detailed memorandum of decision and order would be entered at a later date to decide all matters heard at trial. On June 11, 2009, the Court entered its subsequent Memorandum of Decision in which it denied Blixseth's then pending motions to dismiss. The Court also "found absolutely no evidence that Brown violated Blixseth's attorney-client privilege" concluding that "Blixseth's arguments on this point are nothing but baseless allegations intended to derail these proceedings."
The Court also wrote in the June 11, 2009, Memorandum of Decision:
After the Court entered the above Memorandum of Decision on June 11, 2009, the Court entered an Order on June 29, 2009, dismissing all claims brought by or against Credit Suisse in this consolidated Adversary Proceeding. The Court also vacated its Partial and Interim Order entered May 12, 2009.
Following a scheduling conference held August 12, 2009, the Court entered a further scheduling order which directed that Part II of the trial in this Proceeding would commence on February 24, 2010. After entry of the further scheduling order on August 12, 2009, the now-named Defendant/counter claimant, Yellowstone Club Liquidating Trust ("YCLT"), filed a Motion for Party Substitution on September 3, 2009, seeking to substitute YCLT in place of the Committee and the Debtors on grounds that YCLT is the successor-in-interest to the claims brought by the Committee and the Debtors in this action, which were transferred to YCLT on July 17, 2009, pursuant to the Debtors' confirmed Third Amended Joint Plan of Reorganization and an Assignment and Assumption Agreement. YCLT's motion for substitution was granted on September 18, 2009.
Part II of the trial was held February 24, 25 and 26, 2010, in Missoula. Blixseth was represented at Part II of the trial by Michael J. Flynn of Boston, Massachusetts, Benjamin A. Schwartzman, Thomas A. Banducci and Wade L. Woodard of Boise, Idaho, and Joel E. Guthals of Billings, Montana. YCLT was represented at Part II of the trial by Steven L. Hoard and John G. Turner, III of Amarillo, Texas, Brian A. Glasser and Athanasios A. Basdekis of Charleston, West Virginia, and Shane P. Coleman of Billings, Montana. The Court heard additional testimony from Marc S. Kirschner, Ani Garikian of Kolodny & Anteau, Richard Samson, Robert Reilly, Joanne B. Sheridan, David Thornton, Blixseth, Moses Moore, Michael Snow, Kent Mordy and Harry Potter.
Following Part II of the trial, the parties participated in a post-trial mediation in May of 2010. The Court has been advised that the mediation was not successful in resolving the pending matters in this Adversary Proceeding.
This consolidated Adversary Proceedings arises under title 11 of the Bankruptcy Code, and arises in and is related to the Debtors' substantively consolidated and jointly administered bankruptcy cases, which are pending in this Court. This Court has jurisdiction over these proceedings under 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2). Venue is proper under 28 U.S.C. § 1409. Blixseth withdrew his request for a jury trial after YCLT withdrew its claim for punitive damages.
The parties contend that there are two central unresolved issues in this case: "(i) whether Mr. Blixseth breached his fiduciary duties to the Debtors by causing the Borrowers to enter into the Credit Suisse Loan and by subsequently using the proceeds for his personal benefit and for the benefit of third parties, and the damage, if any, caused by the alleged breaches; and (ii) whether the Credit Suisse Loan and the subsequent transfers of those loan proceeds
Notwithstanding his actions, Blixseth claims that Edra, in the period of time between mid-August of 2008 and November 10, 2008, concocted a scheme with Byrne to drive the Debtors into bankruptcy so that Byrne could purchase the Debtors at a deep discount, with no apparent benefit to Edra. The Court is not persuaded by Blixseth's attempts to lay blame at Edra's doorstep, particularly when Blixseth was the driving force behind the Credit Suisse transaction.
Blixseth attempts to justify his use of the money arguing that Blixseth knew he needed to reach a bigger market if the Yellowstone Club was going to succeed financially. Thus, he sought to take the Yellowstone Club international and that is why Yellowstone Club World was created. But those properties, with perhaps the exception of Chateau de Farcheville and the Scotland property, ended up in the hands of Edra and Blixseth personally. Blixseth's counsel summarized in oral argument that Blixseth "built it, he owned it, he was absolutely entitled to take this money out, and it was part of his business vision to go international."
Blixseth contends, and Mordy agrees, that BGI paid back approximately $6 million of the $209 million note. Interest was also paid over a period of time, but eventually stopped. There was no real distinction between Blixseth and BGI, other than BGI's corporate structure and Blixseth agrees that he had sole control of BGI's affairs in 2005.
In his complaint-in-intervention, Blixseth seeks declaratory judgments: (1) that the Committee's and the Debtors' claims are barred by the statute of limitations; (2) that the Credit Suisse Loan was not a fraudulent transfer; (3) that Blixseth has been released from liability for any claim asserted by the Debtors; (4) that Blixseth did not have a fiduciary duty to the Debtors' creditors; (5) that the loan or a portion of the Credit Suisse Loan proceeds to BGI was not a fraudulent transfer; and (6) that YCLT's claims assigned from the Debtors' and its amended claims are based on defective assignments under Montana law, that said claims are based on the bad faith of the Debtors, Cross Harbor Capital and Edra, that said claims are barred as a matter of law, and that the real party in interest of YCLT is Credit Suisse, which is contractually prohibited from pursuing claims against Blixseth on a nonrecourse loan.
YCLT counterclaims that in directing the Debtors to enter into the Credit Suisse Loan and immediately transferring a substantial portion of those proceeds to BGI (for Blixseth's personal use), Blixseth breached his fiduciary duties to the Debtors, entitling YCLT to damages and/or disgorgement of all funds received by Blixseth from the Credit Suisse loan proceeds. Also, YCLT claims that in directing Debtors to purchase certain assets for the benefit of third parties using proceeds from the Credit Suisse Loan, Blixseth breached his fiduciary duties to Debtors, entitling YCLT to damages and/or disgorgement of all funds received by Blixseth from the Credit Suisse loan proceeds. Next, counsel for YCLT asserts that YCLT is entitled to recover damages in the amount of at least $286.4 million for Blixseth's breaches of fiduciary duties. YCLT maintains that pursuant to 11 U.S.C. § 544(b), the transfer of proceeds from the Credit Suisse Loan to BGI and Blixseth for the benefit of Blixseth was a constructively fraudulent transfer under MONT. CODE ANN. ("MCA") § 31-2-333(1)(b), and can be avoided pursuant to 11 U.S.C. § 550 and MCA § 31-2-339(1)(a). YCLT argues that the transfers/distributions described
The parties also assert additional defenses. With respect to the alleged release of claims purportedly given to Blixseth on behalf of the Debtors and/or BGI, YCLT asserts that such release is a fraudulent transfer that should be set aside and declared to be unenforceable as a matter of law. YCLT argues that the claims against Blixseth constitute a valuable asset of the Debtors' consolidated estate. The release of such claims would constitute a fraudulent transfer under MCA §§ 31-2-333 and 31-2-334 and 11 U.S.C. § 548(a)(1), and can be avoided pursuant to 11 U.S.C. § 550 and MCA § 31-2-339(1)(a). YCLT asserts that the releases were obtained by Blixseth with the actual intent to hinder, delay, or defraud the creditors of the Debtors. Likewise, the Debtors did not receive a reasonably equivalent value in exchange for the release. No consideration was given to the Debtors in return for the release. The Debtors were engaged or were about to be engaged in a business or transaction for which their remaining assets were unreasonably small in relation to the business or transaction, and Blixseth knew that Debtors had incurred debts beyond the Debtors' ability to pay as they became due. The Debtors were insolvent within the meaning of MCA § 31-2-329 and 11 U.S.C. § 548(a)(1)(B) at the time the release was given. Blixseth was an insider of the Debtors, and he either knew the Debtors were insolvent or had reasonable cause to believe that the Debtors were insolvent. The release is unenforceable under California law, Montana law and federal bankruptcy law.
YCLT asserts that it has stated claims upon which relief can be granted. YCLT also asserts that its claims are not barred by any statute of limitations either because the limitations period had not run by the time this adversary proceeding was filed or because accrual of its claims was tolled under the adverse domination doctrine, the discovery rule and/or fraudulent concealment. Also, YCLT asserts that Blixseth's defenses of waiver, estoppel, laches, and unclean hands are not supported by the facts in this case and, in any event, these defenses may not be asserted against YCLT as a matter of law.
YCLT also counters that it has standing to assert the claims herein by virtue of the Debtors' Third Amended Joint Plan of Reorganization and certain assignments executed by the Debtors. According to YCLT, because the breach of fiduciary duty claims asserted by YCLT are intentional torts, Blixseth's arguments regarding
In his reply to YCLT's amended counterclaim, Blixseth denies the Committee's counterclaims and further asserts that the Committee's counterclaims are barred in whole or in part by failure to state a claim upon which relief can be granted; statute of limitations; MCA §§ 1-3-208, 1-3-215, 27-1-703; waiver; release; estoppel; laches; unclean hands; in pari delicto; accord and satisfaction; payment; settlement with Credit Suisse and accompanying offset; the doctrine of issue preclusion; the Rooker-Feldman doctrine and federalism principles; YCLT's lack of standing because Debtors are not creditors entitled to relief; YCLT's lack of standing because the creditors were not creditors at the time of the Credit Suisse loan transactions; YCLT's lack of standing because the Debtors unlawfully transferred their claims; YCLT's lack of standing because the Debtors' transfer of claims was void ab initio; YCLT's lack of standing because it is controlled by a party who participated in the allegedly bad behavior; assumption of risk by creditors who advanced credit after the Credit Suisse loan transactions; Blixseth's lack of proximate cause for the Committee's claims and damages; proximate causation by the conduct of other persons, including but not limited to, the collusion of Edra, Sam Byrne and CrossHarbor Capital to thwart a purchase of the Debtors by the filing of a Chapter 11 petition in bad faith; causation by unforeseen and unforeseeable events over which Blixseth had no control; Blixseth's conduct and transactions are protected by the business judgment rule; Blixseth's conduct and transactions were based upon Blixseth's reasonable reliance on advice of qualified professionals, including legal and accountant opinions; Blixseth is only subject to liability equal to that which could have been distributed without violating the Montana Limited Liability Act; and the claim for unjust enrichment is barred by
This Memorandum of Decision sets forth the Court's findings of fact and conclusions of law. For the reasons discussed below, judgment is entered in favor of YCLT, in part and in favor of Blixseth, in part.
At the commencement of Part I of the trial in this matter, Blixseth's counsel argued that when this trial was over, the Court would understand that the primary reason the Yellowstone Club went into bankruptcy was because of Edra's "obsession to control the Yellowstone Club[.]" Blixseth failed to make any such showing. Instead, the evidence shows that, as a threshold matter, Blixseth removed funds from the Debtor entities and attempted to disguise the removal of such funds as a loan, when in fact, the money was a distribution to BGI and then Blixseth. Blixseth's removal of funds from the Debtors was the primary, and perhaps the sole reason the Debtors are in bankruptcy today.
The evidence in this case shows beyond any doubt that Blixseth took a substantial amount of money from the Debtor entities with no intention whatsoever of repaying those monies back to BGI or the Debtors. In that vein, Blixseth did whatever was necessary to disguise his taking of over $200 million as a loan. A substance over form analysis puts matters in perspective by highlighting Blixseth's efforts to dress up his dividend/distributions as loans. Bergersen v. Commissioner, 109 F.3d 56, 60 (1st Cir.1997). As explained by the First Circuit Court of Appeals, the ultimate issue is "whether the owner is trying to smuggle earnings out of the company without paying personal income tax[,]" for "if a `loan' by the company to an owner is not intended to be repaid, then allowing that label to control would effectively deprive the government of its tax bite on dividends and salaries." Id. at 59.
The heart of the inquiry — intent to repay — is measured by objective factors:
Id. (citations omitted). Thus, even allegedly heartfelt claims of an intent to repay cannot survive the weight of adverse evidence:
Williams v. Commissioner, 627 F.2d 1032, 1034 (10th Cir.1980).
The objective facts reveal a distribution, not a loan. First, the BGI Notes were not created until mid-2006, months after Blixseth, through BGI took $209 million from the Debtors. Until months later, the purported "loan" was evidenced by nothing more than a journal entry, and Blixseth admitted that a portion of the monies taken from the Debtors was previously classified as dividends. Second, the notes from BGI to the Debtors were not created until after the LeMond parties threatened litigation.
Third, the promissory notes from BGI contained no terms of repayment. See Bergersen, 109 F.3d at 59 ("no fixed repayment schedule"). Fourth, for the BGI Notes to be paid, Blixseth — who repeatedly testified to his sole control of BGI — would have had to make demand on himself for payment. See Bergersen, 109 F.3d at 60 ("at the very outset of the loans, the Bergersens knew that there was no effective corporate constraint to induce repayment.").
Also, the BGI Notes were unsecured. Even though Porcupine Creek had been paid off with Credit Suisse proceeds and thus easily could have been pledged as collateral for the BGI Notes, it was not. See Bergersen, 109 F.3d at 59 ("the loans had no collateral"). In response to his counsel's questions, Blixseth testified that he owned 100% of BGI so it "never crossed his mind" to mortgage Porcupine Creek to secure the notes. He further testified he did not believe that he needed "security for himself," and that the security was "his promise to pay," although "in hindsight" he thought perhaps Porcupine Creek should have been pledged. Sixth, Blixseth used the money for personal purposes. Williams, 627 F.2d at 1035 ("Use of the withdrawals for personal interests and repayment after the start of an audit are incompatible with an intent to repay when the withdrawals were made."); Bergersen, 109 F.3d at 59 ("the proceeds were used by the Bergersens for personal purposes.")
Furthermore, Blixseth's alleged repayments are not controlling. See Williams, 627 F.2d at 1035 ("[r]epayment is a factor to be taken into consideration along with all pertinent circumstances attending the transactions."); Bergersen, 109 F.3d at 60 ("Here, the payments had some of the traditional indicia of loans (notes existed, interest was paid). In other respects, formalities were absent (no fixed repayment date, no collateral, no credit limit)"). The payments in this case were nothing more than capital contributions. The payments were not made in regular amounts, but varied in relation to the intensity of Moses Moore's pleas for cash. Sam Byrne confirmed — in unrebutted testimony — that Blixseth repeatedly asked Byrne to make bulk purchases of lots to keep the Debtors afloat. The Debtors sold an aircraft to pay bills. The Debtors were cannibalizing their assets in order to meet their financial obligations. Yet Blixseth did not pay the BGI Notes. See Williams, 627 F.2d at 1034 (shareholder had ability to pay, yet did not).
Moreover, Credit Suisse's new loan product was created as a mechanism for resort owners to realize their profits up front, which is the equivalent of a transfer of retained earnings (before they were earned). See Bergersen, 109 F.3d at 60 ("regardless of formalities, the nominal loans, paid by a controlled company that was accumulating large earnings but paying its main owners no dividends, effectively gave the Bergersens permanent tax-free control over the moneys.") Also, the Debtors' financial projections for the Credit Suisse loan failed to account for an interest payment on any loans to related entities.
The Court is similarly not persuaded that KPMG's audit somehow creates validity in the BGI Notes. KPMG did not audit BGI/Blixseth and refused to certify the BGI Notes' value in 2006 and 2007. See Murphy v. Meritor Savings Bank (In re O'Day Corp.), 126 B.R. 370, 409 (Bankr. D.Mass.1991) ("clean audit report" not dispositive on debtor's finances).
In his testimony, Blixseth claimed that he had relied heavily on Mack's opinion
Blixseth's efforts to avoid paying anything to the "B" shareholders further bolsters the Court's finding that Blixseth took a distribution from the Debtors, not a loan. Doyle told Blixseth in an August 30, 2005, memo that if the money came out as a distribution, it would have to be shared with the minority holders. Blixseth later warned Edra in a September 5, 2005, e-mail — right in the thick of the Credit Suisse negotiations — that the "B" shareholders were "nosing around" and a distribution must be avoided lest those holders claim a share. The Debtors' credit agreement with Credit Suisse was the only one of the similar resort loans that added the language of "or loans"; even though, the purported "loan" was not documented until the LeMond case was filed. Blixseth's goal in calling his distribution a "loan" was to evade minority interests, not to provide reassurance to the Debtors of repayment. The BGI Notes were nothing more than phantom obligations created by Blixseth in an effort to avoid sharing the Credit Suisse loan proceeds with the "B" shareholders.
In a final attempt to convince this Court that the distributions were in fact true loans, Blixseth introduced correspondence to and from the Internal Revenue Service. The Court finds that any determination the Internal Revenue Service may have made with respect to the BGI notes is not binding on this Court. 26 U.S.C. § 6110(j)(3); see also Disabled American Veterans v. C.I.R., 942 F.2d 309, 314-15 (6th Cir.1991); Mercantile Bank & Trust Co. v. U.S., 441 F.2d 364, 368 (8th Cir. 1971); B.F. Goodrich Co. v. U.S., 94 F.3d 1545, 1550 (Fed.Cir.1996); In re Comp., 134 B.R. 544, 556 (Bankr.M.D.Pa.1991); In re Pulley, 111 B.R. 715, 742 (Bankr. N.D.Ind.1989). The evidence clearly shows that the BGI notes were nothing but a sham to disguise Blixseth's distributions.
Correctly characterizing the three notes at issue as distributions, as opposed to loans, basically renders the expert opinions of Reilly and Sheridan moot because the expert opinions of Reilly and Sheridan were premised on the belief that the Debtors had a legitimate $272 million receivable on their books from BGI. However, even if the BGI notes were legitimate, which they clearly were not, the Court would still not rely on Reilly and Sheridan's opinions in this case because Blixseth's counsel masterfully divided the work between Reilly and Sheridan so as to cast Blixseth in a light that simply does not shine in this Court.
Reilly did not give a solvency opinion as to the Debtors nor did he testify to such. Moreover, on cross-examination, Reilly confirmed that he had not been retained to render a solvency opinion on the Debtors. Reilly's opinion as to the Debtors was confined to whether the Debtors passed the cash flow and the capital adequacy tests. Moreover, Reilly's solvency opinions as to Blixseth and BGI were to some extent dependent upon Sheridan's opinion as to whether the Yellowstone Club passed the balance sheet test.
Blixseth retained Sheridan to perform one prong of a three-prong test, the balance sheet test. In order to perform that test, Blixseth provided Sheridan with Cushman & Wakefield's September 30,
The Court, however, made no finding whatsoever at Part I of the trial with respect to whether the Debtors were insolvent from a balance sheet perspective as of September 30, 2005. Accordingly, the opinions of Ms. Sheridan (even if accepted by the Court) do not cause this Court to disturb its findings of insolvency as to the Debtors on a cash flow basis and capital adequacy basis as of September 30, 2005.
Rejecting Sheridan's opinion on the balance sheet test leaves Blixseth with the expert opinion of Reilly. Reilly was an extremely qualified and compelling expert. But Reilly, for reasons unexplained, did not perform a solvency analysis of the Yellowstone Club and Reilly's solvency opinions regarding Blixseth and BGI were, to some extent, dependent upon Sheridan's flawed balance sheet conclusions regarding the Yellowstone Club.
Moreover, Reilly acknowledged that in giving his opinions, the information that he was relying upon was provided to him by Blixseth's legal counsel and accounting firm. Reilly also acknowledged the he had not "independently verified the accuracy and completeness of the information supplied by Legal Counsel or by the Accountants." Reilly conceded that he had heard and did not disagree with the concept of "garbage in/garbage out." After considering the information relied upon by Reilly, the Court finds that the information relied upon is not reliable and in fact that the garbage in/garbage out maxim is applicable. Indeed, by e-mail dated November 5, 2009, a mere eight days before Reilly issued his opinion, counsel for Blixseth provided Reilly "WAG" balance sheets for Blixseth and BGI. The unrealistic nature of the information provided to and relied upon by Reilly and the limited scope of his engagement leads this Court to conclude that his opinion, while generally credible, was so restricted by Blixseth and his counsel as to render his opinion in this case simply inapplicable.
Reilly testified that he did his own analysis of Yellowstone Club's management's cash flow projections in conjunction with his cash flow and adequate capital solvency opinions on Tim Blixseth and BGI. Like Sheridan, Reilly relied on the cash flow projections provided by the Yellowstone Club's management. However, Reilly's, like Sheridan's, reliance on such faulty projections is flawed and unpersuasive. To test the reliability of the projections, Reilly chose to compare projected gross revenues to actual gross revenues, as opposed to projected cash flows to actual cash flows as was done by Mordy and
Reilly testified that he compared gross revenues, instead of cash flows, because there was too much "noise" in the cash flow numbers, by which he meant too many non-recurring, non-operating expense and income items. Reilly conceded, however, that the only two such items he specifically mentioned, the LeMond settlement and the gain on sale of an airplane, were itemized on the actual financials and could have easily been accounted for by a "normalization adjustment."
In any event, Reilly's comparative analysis of projected gross revenues to actual gross revenues is fraught with the same type of mistakes as Sheridan's comparative analysis of cash flows. It is also noteworthy that Reilly chose to ignore, or was instructed to ignore or not consider, the actual historical financial performance of the Debtors in the period prior to September 30, 2005. The reason is obvious. Debtors' actual historical financial performance did not support Debtors' future projections and, in fact, Debtors' historical financial performance demonstrates conclusively that the Debtors would not be able to sustain the burden of the Credit Suisse debt, especially after Blixseth extracted his large distributions.
Reilly testified that Yellowstone Club's management's projections represented "the best then available estimates of future results of operations." He also testified that the Cushman & Wakefield cash flow projections were "well supported and not materially different from management's projections prior to 2008. In fact, as shown on the following chart, the Cushman & Wakefield projections for 2007 and 2008 were substantially lower than management's projections for those same time periods:
2007
Cushman & 2007 Yellowstone
Wakefield Management Variance
Lot Sales 35 53 (18)
Gross Proceeds from
Sale of Home sites $99 Million $148.5 Million ($ 49.5 million)
Cash Flow $34.6 Million $137.9 Million ($103.3 million)
2008
Cushman & 2007 Yellowstone
Wakefield Management Variance
Lot Sales 35 53 (18)
Gross Proceeds from
Sale of Home sites $99 Million $148.5 Million ($ 49.5 million)
Cash Flow $34.6 Million $137.9 Million ($103.3 million)
Given Reilly's acknowledgment that Cushman & Wakefield had substantial experience in doing these types of cash flows and that Blixseth had no experience, Reilly's decision to rely on management's projections for his opinions is highly questionable. Confronted with this issue, Reilly
The Court also rejects Blixseth's argument that YCLT's case must fail because KPMG gave the Debtors clean, unqualified audit opinions in 2005, 2006 and 2007. Those unqualified audit opinions were based upon the assumption that the BGI notes were fully collectible. As determined above, the notes were in fact distributions that should not have appeared as an asset on BGI's balance sheet. Moreover, nothing in the evidence suggests that KPMG audited BGI to determine whether the BGI notes were collectible. Blixseth seeks to convince the Court that BGI paid down roughly $70 million on the BGI notes, thereby proving that the BGI notes were collectible. That alleged pay down was nothing more than an infusion of cash by Blixseth in an attempt to keep the Debtors afloat.
Having concluded that the purported loans from the Debtors to BGI were in fact distributions, the Court now turns to various contentions set forth in the Amended Pretrial Order filed February 17, 2010, at docket entry no. 538:
The burden of proof on an affirmative defense such as the statute of limitations rests with the party asserting the defense. F.R.B.P. Rule 7008; Fed. R.Civ.P. 8(c); E.F. Matelich Construction Co. v. Goodfellow Brothers, Inc., 217 Mont. 29, 32, 702 P.2d 967, 969 (1985). MCA § 27-2-204 provides a three-year statute of limitations on claims "not founded upon an instrument in writing[,]" such as a claim for breach of fiduciary duty. The statute of limitations for conversion and violation of the MCA § 35-8-604 is two years. MCA §§ 27-2-207 and 35-8-605(4). The parties disagree as to accrual. YCLT argues that Montana common law applies the discovery rule towards this statute of limitations. See Shupak v. N.Y. Life Ins. Co., 780 F.Supp. 1328, 1339 (D.Mont.1991) (applying MCA § 27-2-102 to breach of fiduciary duty claim); Burgett v. Flaherty, 204 Mont. 169, 663 P.2d 332, 334 (1983); Stanley L. and Carolyn M. Watkins Trust v. Lacosta, 321 Mont. 432, 92 P.3d 620, 629-30 (2004) (legal malpractice claim in which attorney owed fiduciary duties to client); Estate of Watkins v. Hedman, Hileman & Lacosta, 321 Mont. 419, 91 P.3d 1264, 1270 (2004) (same). See also Orr v. State, 324 Mont. 391, 106 P.3d 100, 117 (2004).
Blixseth argues that "[l]ack of knowledge of the claim or cause of action, or of its accrual, by the party to whom it has accrued does not postpone the beginning of the period of limitation." MCA § 27-2-102(2); see also Bennett v. Dow Chemical Co., 220 Mont. 117, 713 P.2d 992 (1986) ("The fact that a party with a cause of action has no knowledge of his rights, or even the facts out of which the cause arises, does not delay the running of the statute of limitations until [the party] discovers the facts or learns of his rights under those facts." (citing Carlson v. Ray Geophysical Division, 156 Mont. 450, 481 P.2d 327, 329 (1971))). Blixseth further argues no concealment of YCLT's alleged claims occurred as everything about the loan transaction was done in the open and cites to the fact that other members—such as the LeMond Plaintiffs—were able to file suit within months of the September 30,
MCA § 27-2-102(3) provides that "[t]he period of limitation does not begin on any claim or cause of action for an injury to person or property until the facts constituting the claim have been discovered or, in the exercise of due diligence, should have been discovered by the injured party if: (a) the facts constituting the claim are by their nature concealed or self-concealing; or (b) before, during or after the act causing the injury, the defendant has taken action which prevents the injured party from discovering the injury or its cause." YCLT also argues that the doctrine of adverse domination tolls the statute of limitations period on a cause of action against a corporation while wrongdoers control the corporation. United States v. First National Bank & Trust, 1994 WL 775440, *5 (D.Mont.1994). "Under the doctrine of adverse domination, a statute of limitations is tolled on an action against director/officer misconduct so long as a majority of the board is controlled by the alleged wrongdoers. The doctrine rests on the theory that if the wrongdoers control the corporation through a majority of stock ownership and control the directorate[,] there [would] consequently [be] no one to sue them." Id. Finally, YCLT contends that the discovery rule prevented the running of limitations in this case.
Blixseth asserts that the doctrine of adverse domination does not apply. In order to prove adverse domination, "the wrongdoer's control [must] result[] in the concealment of causes of action from those who otherwise might be able to protect the corporation." Frazer v. U.S. 49 Fed.Cl. 734, 737 (Fed.Cl., 2001). Because of this standard, if a derivative action is possible and the facts giving rise to the claim are available, the adverse domination doctrine cannot be asserted, since an ability to "protect the corporation" existed. Id.; Rx.com v. Medco Health Solutions, Inc. 322 Fed.Appx. 394, 398-99 (5th Cir.2009). Under Montana law, a derivative action is available to the members of a limited liability corporation. See MCA § 35-8-1104; Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286, 293-94 (Del.Supr.1999). Because a derivative suit was open to members of the Debtors, Blixseth concludes that adverse domination is not a viable theory in this matter. Frazer, 49 Fed.Cl. at 737; Rx.com, 322 Fed.Appx. at 398-99.
The evidence does not support Blixseth's position on this issue. The Debtors in this case filed bankruptcy on November 10, 2008. Thus, if the applicable statute of limitations had not expired by November 10, 2008, the claims were timely asserted because two years had not passed since the filing of the bankruptcy before the claims asserted herein were filed.
Pursuant to Montana's codified discovery rule, a "cause of action for an injury to person or property [does not commence] until the facts constituting the claim have been discovered or, in the exercise of due diligence, should have been discovered by the injured party if: (a) the facts constituting the claim are by their nature concealed or self-concealing; or (b) before, during or after the act causing the injury, the defendant has taken action which prevents the injured party from discovering the injury or its cause." MCA § 27-2-102(3).
Blixseth's actions that form the basis of the claim are by their nature concealed. On September 30, 2005, Credit Suisse transferred $342,110,262.52 to the Yellowstone Club and on that same date, Blixseth transferred approximately $209 million out of the Yellowstone Club to BGI. The funds were then transferred from BGI to Blixseth, individually. The transfer of funds out of the Yellowstone Club to BGI and then to Blixseth was not memorialized in any contemporaneous loan documents, but was simply recorded in the Yellowstone Club's books with a journal entry. It was not until the "B" shareholders threatened litigation in May 2006 that Blixseth drafted his two-page unsecured promissory notes which were executed by BGI and payable to Yellowstone Club on demand. Even though the promissory notes were dated September 30, 2005, they were admittedly not drafted and executed until May of 2006.
The overwhelming evidence shows a pattern of deception as it relates to the use of the Credit Suisse loan proceeds. One of the minority shareholders, Michael Snow, testified that he was led to believe that the proceeds from the Credit Suisse loan were going to be used for operating expenses and capital expenditures at the Club. Notably, when Blixseth later took the stand on rebuttal he did not deny Mr. Snow's testimony in this regard. Moore, who at the time was second in command of finances at the club, testified that he did not learn of the actual disposition of the Credit Suisse proceeds until February 2006. William G. Griffon, who was Vice President of Operations at the time, testified that he did not learn of the disposition of the loan proceeds until after the LeMond litigation was filed, around June of 2006. Brown, former counsel for the Debtors, testified that he was unaware of the use of the loan proceeds until May 2006. And finally, Byrne testified that Blixseth originally represented that the Yellowstone Club was essentially debt free and when Byrne later learned of the Credit Suisse loan, Blixseth explained that the loan was related to Yellowstone Club World and not the Yellowstone Club.
Because the transfers from the Debtors to BGI were not documented until May of 2006, the facts forming the basis of the claim against Blixseth were concealed. As such, the statute of limitations is tolled "until the facts constituting the claim have been discovered or, in the exercise of due diligence, should have been discovered by the injured party. ..." Discovery could not have occurred until May of 2006, at the earliest.
However, the Court finds that Blixseth was in sole control of the Debtors until they were transferred to Edra in August 2008. Given Blixseth's total control and domination of the Debtors until August 2008, the statute of limitations did not begin to run, and in fact was tolled, on YCLT's claims until August of 2008, a mere three (3) months prior to the bankruptcy
Blixseth asserts that the assignment of the Debtors' claims to YCLT is invalid and that, as a result, YCLT does not own the claims it asserts herein. The Court disagrees and concludes that YCLT does in fact own the claims.
A hearing under 11 U.S.C. § 1128(a) and Bankruptcy Rule 3020(b)(2) was held May 18, 2009, in Butte on approval of the Debtors' Second Amended Joint Plan of Reorganization filed April 3, 2009, at docket entry no. 691. Prior to the May 18, 2009, confirmation hearing, the Debtors filed a ballot report compiled by Kurtzman Carson Consultants LLC which showed that Classes 4, 6, 9, 10, 12 and 14 voted to accept Debtors' Second Amended Joint Plan of Reorganization, while classes 3, 7, 8 and 13 voted to reject Debtors' Second Amended Joint Plan of Reorganization. However, in the hours leading up to the May 18, 2009, confirmation hearing, the Debtors; Credit Suisse, Cayman Islands Branch; the Committee; New CH YMC Acquisition LLC; CIP Yellowstone Lending LLC; CrossHarbor Capital Partners LLC; and CrossHarbor Institutional Partners, L.P. agreed in principal to a global settlement termed "Yellowstone Club Settlement Term Sheet" ("STS"). A signed copy of the STS was presented to the Court on May 18, 2009, but was not filed until May 22, 2009, when the Debtors filed their Third Amended Joint Plan of Reorganization, at docket entry no. 995.
The STS, because it was a settlement that included Credit Suisse, arguably impacted whether Class 3 and Class 8 creditors would accept or reject the Debtors' Plan. Counsel for the Debtors, the Committee, CrossHarbor and Credit Suisse thus agreed that the Debtors should have an opportunity to re-solicit the votes of Class 3 and Class 8 creditors. Moreover, while amendment of the Debtors' proposed joint plan was not required by the STS, the Court, in an effort to provide clarity to all parties going forward, directed the Debtors to amend their plan to specifically incorporate the STS.
Also at the May 18, 2009, confirmation hearing, counsel for YCW, the Montana Department of Revenue and the Internal Revenue Service noted that their objections to confirmation were not insurmountable and in fact, counsel for YCW made the statement that YCW may withdraw its objection to confirmation. The Debtors also sought to cure the objections of various other parties and concluded that the
The STS was filed separately with a new Credit Agreement on May 28, 2009, at docket entry number 985. Highland Capital Management, L.P., although not objecting to Debtors' Second Amended Joint Plan of Reorganization or appearing at the confirmation hearing, filed an Objection to Confirmation of the Debtors' Third Amended Joint Plan of Reorganization and approval of the STS on May 22, 2009, at docket entry number 943. Blixseth objected to Debtors' Third Amended Joint Plan on May 26, 2009, at docket entry no. 969, by referencing his prior objection filed May 11, 2009, at docket entry no. 860. In his May 11, 2009, objection, Blixseth incorporated Credit Suisse's objections to confirmation and also objected to the Debtors' Third Amended Joint Plan "on the grounds that the Chapter 11 Plan is not filed in good faith, but is a continuation of prepetition and post-petition acts of bad faith by the CEO of the Debtors-in-Possession, Edra Blixseth, in concert with others, all is more fully described in evidence previously presented or proffered to this Court in proceedings in the above captioned main bankruptcy case and in Adv. Pro. 09-00014/09-00017."
While the Court considered the record on confirmation closed at the conclusion of the May 18, 2009, confirmation hearing, the Court held an additional hearing on June 1, 2009. Following the June 1, 2009, hearing, the Court entered an Order Confirming Debtors' Proposed Plan of Reorganization on June 2, 2009. The Court also entered Findings of Fact and Conclusions of Law in connection with its approval of the Plan, wherein the Court specifically held that the Plan was proposed in good faith. Blixseth has appealed confirmation of the Debtors' Plan, again maintaining that the Debtors' bankruptcy cases and the Third Amended Joint Plan were not filed in good faith. Blixseth also filed a motion to stay the order confirming the Debtors' Plan pending the appeal. The Court denied Blixseth's motion to stay the confirmation order, specifically concluding that the Plan was filed in good faith.
Debtors' Third Amended Joint Plan provides for the disposition of the assets of the Debtors in two major components. First, the "Project" was transferred to the "Reorganized Debtors" on the "Effective Date." Second, the non-Project Assets, including "Transferred Actions," were transferred by the Debtors on the Effective Date to the "Liquidation Trust" created under the terms of the Plan and organized pursuant to a Trust Agreement in substantially the form set forth in Schedule 1.85 to the Plan.
Section 8.2.2 of the Plans provides that "pursuant to section 1123(b)(3)(B) of the Bankruptcy Code, on the Effective Date, all Transferred Actions of any kind or nature whatsoever against third parties arising before the Confirmation Date shall be transferred by the Debtors to the Liquidating Trust." The "Transferred Actions" include the claims asserted by YCLT against Blixseth in this Adversary Proceeding. The Court finds that the claims asserted by YCLT against Blixseth were assigned by virtue of the specific terms of the Plan, which was approved by the Court.
In addition to the foregoing, on July 17, 2009, Edra in her capacity as manager/president of BLX, the Manager of each of the Debtor limited liability companies, executed a certain Assignment and Assumption
After Debtors' Third Amended Joint Plan was confirmed, Marc S. Kirschner was appointed Trustee by the vote of the Trust Advisory Board (the "Board"). Subsequently, the Yellowstone Club Liquidating Trust Agreement was entered into and executed. Section 1.1 of the Trust Agreement states that YCLT is organized for "the purposes of holding and liquidating Trust Claims and Trust Assets." The Trustee has all the "rights, powers, and duties ... that are necessary and proper to fulfill the purposes of the Trust" pursuant to Section 5.3.1 of the Trust Agreement. The Trustee's duties include prosecution of "all suits as may be necessary, appropriate or incident to the purposes of the Trust" as set forth in Section 5.3.2.4.
Pursuant to Debtors' confirmed Third Amended Joint Plan and the Assignment and Assumption Agreement, Kirschner, as Trustee of YCLT, succeeds to "all Causes of Action that the Debtors or their Estates could assert immediately prior to the Effective Date," except certain claims released by the Confirmed Plan of Reorganization. YCLT owns the claims asserted in this case and is the proper party to be asserting the claims being asserted against Blixseth. Kirschner testified that he believed that the assignment was confirmatory only to give notice to third parties instead of asking bankers and vendors to review a complex plan.
As contemplated by the Debtors' confirmed Plan, on September 3, 2009, YCLT filed its Rule 25 Motion for Party Substitution seeking to substitute YCLT in place of the Committee and Debtors. Blixseth did not object to this Motion, and on September 18, 2009, the Court entered an ordered substituting YCLT for the Committee and the Debtors in this action.
After reviewing applicable law, the Court finds that YCLT owns the claims asserted against Blixseth in this case. In a prior Order, this Court addressed Blixseth's standing arguments in the context of a motion for summary judgment wherein the Court noted:
Memorandum of Decision entered February 17, 2010, at docket entry no. 535. As previously discussed, under the Debtors' confirmed Third Amended Joint Plan of Reorganization including the Liquidation Trust Agreement, YCLT is the owner of the claims asserted against Blixseth and asserted in this suit. Moreover, 11 U.S.C. § 1123(b)(3)(B) specifically allows a plan of reorganization to provide for "the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose" any claim belonging to the Debtors. See also Collins & Aikman v. Stockman, 2010 WL 184074, 2010 Lexis 3818 (D.C.Del.2010). Furthermore, the assignment later executed by Edra as Manager for the Debtors is valid. Finally, the Debtors are "creditors" of Blixseth by virtue of their claims for breach of fiduciary duty and thus can seek to set aside fraudulent transfers under the UFTA as well as the applicable bankruptcy provisions.
YCLT's avoidance action was brought under 11 U.S.C. § 544(b), which gives trustees the right to avoid transfers voidable by unsecured creditors under state law. YCLT asserts, and Blixseth denies, that Blixseth's use of funds from the Yellowstone Club, and in particular the Credit Suisse loan proceeds, was a fraudulent transfer under MCA § 31-2-333(1)(b). YCLT also argues that execution of the Releases in the MSA was a fraudulent transfer under MCA § 31-2-333(1)(a) and (1)(b).
YCLT's first fraudulent transfer claim pertains to Blixseth's use of the Yellowstone Club's funds and implicates Montana's Uniform Fraudulent Transfer Act ("UFTA") 31-2-333(1)(b). UFTA provides, in relevant part, that transfer of an asset by a debtor is fraudulent as to existing and future creditors if the debtor transferred the asset without receiving a reasonably equivalent value in exchange for the transfer and the debtor (i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (ii) intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due. MCA § 31-2-333(1)(b). The language of MCA § 31-2-333(1)(b) implies that constructive fraud does not require proof of intent.
Prior to being diverted to BGI and Blixseth, the Credit Suisse loan proceeds rested for a moment in the Debtors' accounts. The Court deems it appropriate to collapse the constituent parts and treat the various transfers that occurred on September 30, 2005, as phases of a single transaction for analysis under fraudulent transfer law, HBE Leasing Corp. v. Frank, 48 F.3d 623, 635 (2d Cir.1995), especially in a case such as this where Credit Suisse's own Credit Agreement was designed to remove the funds from the Debtors.
Towe Antique, 999 F.2d at 1391.
During the time that Blixseth was the controlling shareholder of BGI, Blixseth dominated and controlled the affairs of BGI to such an extent that BGI had no separate corporate identity apart from Blixseth. Blixseth and BGI were one in the same. Blixseth's accountant Mack testified that no real distinction existed between Blixseth and BGI, other than corporate structure. Blixseth was BGI's sole owner and had sole control of BGI's affairs. Corporate formalities were not followed as is illustrated by the fact that promissory notes in connection with the alleged "loans" were not executed until well after the transactions took place. Finally, Blixseth held himself out as the owner of the Yellowstone Club, when in fact the Yellowstone Club entities were owned by BGI. BGI was clearly Blixseth's alter ego.
Because of the alter ego relationship between BGI and Blixseth, Blixseth was able to fix liability to the Debtors and to his alter ego, BGI, and not himself as primary beneficiary of the Credit Suisse loan. Because of the control he exercised over BGI, and the Debtors (through BGI), Blixseth was able to ensure that BGI would never have demand made on it by the Debtors and in turn that BGI would not make demand on Blixseth even though there were numerous times after the disbursement of the Credit Suisse loan proceeds where a demand would have been in the best interest of the Debtors.
Turning to the merits of YCLT's claim under MCA § 31-2-333(1)(b), MCA § 31-2-328 defines the term "transfer" as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset and includes payment
In a lengthy discussion, supported by an abundance of evidence, the Court previously concluded that the transfer of money from the Debtors to BGI was a distribution and not a loan. It is thus obvious that Debtors did not receive reasonably equivalent value for the transfer of their assets, namely in the form of money, to BGI and ultimately Blixseth.
The third element of constructive fraudulent transfer requires that the Debtors were either insolvent when the transfer occurred, or that the transfer made Debtors insolvent. In analyzing whether a debtor was left with unreasonably small assets following the transaction at issue, "[t]he test is aimed at transfers that leave the transferor technically solvent but doomed to fail." MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Servs. Co., 910 F.Supp. 913, 944 (S.D.N.Y. 1995).
At trial, Credit Suisse repeatedly asked witnesses rote questions taken from the text of the fraudulent transfer statute, such as whether Mr. Foster, who came onto the scene later, had any evidence of a contemporaneous Debtor intent or belief that bills would not be paid as they came due, or whether witnesses "believed" that the transaction left the Debtors with unreasonably small assets. The proof in this case lies in objective results, not subjective beliefs. That proof is uncontestable.
First, the use of a "Total Net Value" (later changed to "Total Net Proceeds," undoubtedly to avoid the impression that actual "value" was being addressed) appraisal was devastating to the Yellowstone Club. Paauw explained that he had never heard of a total net value appraisal until he was asked to perform one by Credit Suisse. Donaldson testified that he had no idea why a loan participant would want such an appraisal. Neither Hekman (a real estate economist and professor) nor Abshier (a former financial institution regulator) knew of such a vehicle. A FIRREA-compliant market value appraisal (unlike the Credit Suisse appraisals) would contain all the information contained in the Credit Suisse appraisal, including undiscounted cash flows. The reasonable inference is that Credit Suisse, with Blixseth's tacit approval, wanted to bulk up the alleged value of the Yellowstone Club in order to inflate the size of the loan. It is highly probable that the loan amount to the Yellowstone Club would have been substantially less than $375 million had Credit Suisse asked Cushman & Wakefield to perform a FIRREA-compliant appraisal.
Even if Credit Suisse's "sophisticated foreign hedge-fund investors" did not want a FIRREA-compliant appraisal (with a discount rate), Abshier explained that fair market value appraisals also benefit the borrower by assuring that loan sizes remain reasonable in connection with the collateral's value. Yet the Debtors, represented by Blixseth (whose duty of loyalty was hopelessly conflicted), never asked for that kind of appraisal. The result, as Abshier again explained, was a loan that
Blixseth's exuberant financial projections exacerbated the problem. As explained by the Third Circuit Court of Appeals:
Moody v. Sec. Pac. Bus. Credit, Inc., 971 F.2d 1056, 1073 (3d Cir.1992).
Sumpter, who prepared the projections, offered nothing at trial to substantiate them. Blixseth confirmed that projections of lot sales were based on the assumption that the economy would continue at then current levels. Hekman confirmed that such an assumption was foolhardy at the time given that real estate investment was fueled in 2002 and 2003 by Federal Reserve interest rate cuts, and that by 2004 the Federal Reserve was raising interest rates to avoid a bubble, thus causing a market slowdown, just as the Credit Suisse loan was being pursued. Indeed, Credit Suisse's own appraisal confirmed that the market was already slowing, and Credit Suisse knew, given Yankauer's testimony, that real estate is the first victim of any downturn.
Hekman also testified that Sumpter's projections contained extremely optimistic assumptions concerning the prices to be obtained from future lot sales, including projections that were 36% higher than Debtors' historical performance, and with no buffer in case those unprecedented and unsupported projections were not met, thus leaving the Debtors with an enormous balloon payment in 2010. See In re O'Day Corp., 126 B.R. at 412 ("The projections prepared by the Bank had no cushion, no room for error.").
Mordy deemed the projections seriously erroneous with critical omissions, such as the Warren Miller Lodge overruns and information available at the time about the Debtors' prior performance, as well as being replete with factual errors, such as claims that the $142 million was still somehow part of the Debtors' cash reserves. Mordy confirmed that proper projections would have shown that there was insufficient cash flow from operations to pay the debt being undertaken. See In re O'Day Corp., 126 B.R. at 381 ("Notwithstanding the availability of current information about the company's financial performance, neither Funston nor Meritor took steps to revise the reduced sales scenario projections, which implicitly assumed a gross profit margin of 21.84 percent.")
Despite all this, Credit Suisse accepted the Debtors' unfounded optimism, and agreed to provide a five-year loan to the Debtors, even though Cushman & Wakefield knew the Debtors' claimed absorption rate was far too optimistic, and provided its appraisal based on a seven-year absorption rate. See In re O'Day Corp., 126 B.R. at 407 ("In the face of such unequivocal financial information, Jones and Funston projected that, in a worst case scenario, O'Day would somehow match or exceed its best financial performance of the 1980's.") (emphasis original). Moreover, subsequent appraisals were forced to continually extend the absorption rate into the future
All these facts notwithstanding, Credit Suisse blames the Debtors' downfall on the allegedly unanticipated financial calamities of 2007. Lenders have tried this argument before:
In re O'Day Corp., 126 B.R. at 412. This case presents the same result. Blixseth blames the Debtors' downfall on the lawsuit filed by the LeMond Plaintiffs, the alleged conspiracy between Edra and Byrne, and Byrne's failure to follow through with purchase of the Yellowstone Club in 2008. Given the evidence, Blixseth's arguments are without support.
Also, the KPMG audits provide no support for Blixseth's arguments. Nonetheless, at trial, Credit Suisse and Blixseth repeatedly invoked the KPMG audits as the touchstone of the Debtors' alleged financial condition, forgetting that neither "book value" nor "generally accepted accounting principles" control a court's decision on projections or value. In re O'Day Corp., 126 B.R. at 398. Particular emphasis at trial was placed on KPMG's failure to include a "going concern" qualification. However, "the absence of reference to substantial doubt in an auditor's report should not be viewed as providing assurance as to an entity's ability to continue as a going concern." Codification of Accounting Standards and Procedures, U.S. Auditing Standards § 341 (Am. Inst. of Certified Pub. Accountants 2005). See also O'Day Corp., 126 B.R. at 409 (rebuffing lender's efforts to rely on "Arthur Andersen's failure to include a going concern qualification in its fiscal year end 1988 audit."). The KPMG audit does not absolve Blixseth of liability in this case.
Finally, both Credit Suisse, in Part I of the trial, and Blixseth, in Part II of the trial, were careful not to produce a solvency opinion with respect to the Yellowstone Club. However, history confirms what a proper solvency opinion would have revealed. As a result of the Credit Suisse transaction, the Debtors were unable to pay their bills as they became due. Blixseth testified that the Credit Suisse loan was current until mid-August of 2008. While the Yellowstone Club may have avoided any default until August of 2008, the term "current" simply means that the Debtors were paying interest, the applicable lot release price and the required annual paydown. As Hekman confirmed, in 2010 an enormous principal balance — far beyond the Debtors' ability to repay — would have remained because of the Debtors' failure to meet their unfounded projections.
Hekman opined that the Debtors never had sufficient cash flows following the Credit Suisse loan. Cash flows in 2005 were $39 million, yet in 2006 the Debtors needed $63 million simply to pay anticipated lot release payments and interest to Credit Suisse, a number that does not include the money needed to operate the Yellowstone Club. Foster testified that because the Club was burning between $25
Moore corroborated this with testimony that Debtors were rarely current with bills, and had to sell assets (such as an airplane) to provide cash. See In Re O'Day Corp., 126 B.R. at 407 ("Clearly, the 45 day payable stretch anticipated by Funston and Jones in their projections was a fiction after September of 1987. In short, O'Day was not paying its trade debt as it came due, particularly given the testimony establishing that most payment terms were net 30 days."). Byrne also testified that Blixseth repeatedly asked Byrne to make bulk purchases of lots to fund the Yellowstone Club. Again without rebuttal from Blixseth, Byrne testified that Blixseth told Byrne that the Yellowstone Club had no debt and that the Credit Suisse loan was related to Yellowstone Club World assets. Byrne also recounted the disarray of the Debtors' books, and the millions he spent recreating solid and reliable financial data.
Byrne's bulk purchases, coupled with the drastic measures undertaken by the Debtors to pay bills, created the illusion that Debtors had the ability to pay their debts. In a similar case, the United States District Court for the Southern District of Texas convincingly explained:
ASARCO LLC, v. Americas Mining Corp., 396 B.R. 278, 398-99 (S.D.Tex.2008). For the reasons discussed above, the Court finds that Blixseth's transfer of funds from the Debtors to BGI, and ultimately himself, was a fraudulent transfer under MCA § 31-2-333(1)(b). Pursuant to 11 U.S.C. § 544(b), Blixseth's misappropriation of the Credit Suisse loan proceeds for his own use and directing the Debtors to purchase assets with the Credit Suisse loan proceeds for the benefit of himself and related third parties were constructively fraudulent transfers under 11 U.S.C. § 548(a)(1) and MCA §§ 31-2-333(1)(b) and 31-2-334(1), and can be avoided pursuant to 11 U.S.C. § 550 and MCA § 31-2-339(a). Additionally, the Court heard substantial evidence with respect to transfers concerning Unit 304 at the Warren Miller Lodge, Overlook, Sunrise Ridge and Big Sky Ridge transactions. Blixseth attempted to explain these transactions, but his testimony in this regard was simply not credible.
However, the foregoing were not Blixseth's only fraudulent transfers. The Release set forth in Blixseth and Edra' MSA was also fraudulent.
YCLT next asserts that the MSA Release was both constructively fraudulent under MCA § 31-2-333(1)(b) and actually fraudulent under MCA § 31-2-333(1)(a). The applicable law under § 333(1)(b) is set forth above and need not be restated here. Pursuant to § 333(1)(a):
Actual intent may be established either by direct or circumstantial evidence. Circumstantial evidence can be used to establish the existence of "badges of fraud," with consideration given, among other factors, to whether:
MCA § 31-2-333(2).
Blixseth contends that California law permits release of fraudulent transfer claims, particularly in a case such as this where Blixseth secured a § 1542 release under California Civil Code § 1542.
The MSA is to be construed under California law which permits the release to be set aside if it is determined to be a fraudulent transfer. Mejia v. Reed, 31 Cal.4th 657, 3 Cal.Rptr.3d 390, 74 P.3d 166
At the outset, the Court notes that the fairness and appropriateness of the Release as it relates to the Debtors were not actually, fully and fairly litigated. The Release was not an arms length transaction between the Debtors and Blixseth because Blixseth was negotiating the Release while he was in control of the Debtors. Furthermore, neither the Debtors nor any of Blixseth's creditors had an opportunity to contest or litigate the MSA or the Release. As such, this Court concludes that nothing that occurred in the Blixseth divorce proceeding is binding upon the Debtors.
Considering the factors set forth in MCA § 31-2-333(2), the Release at issue in this case was obtained with the actual intent to hinder, delay and defraud the Debtors and their creditors. The Release was clearly a "transfer" as contemplated under § 333(1). At the time the Release was negotiated, Blixseth was an insider of the Debtors as that term is defined in the Montana Fraudulent Transfer Statute as well as the United States Bankruptcy Code. The Release was in a confidential court proceeding (hence concealed), Blixseth gave no value to the Debtors in exchange for the Release, the Debtors were insolvent at the time of the release, Blixseth transferred all his investment assets into a Nevada entity as an additional measure to avoid liability, Blixseth was aware of numerous claims against him, and the Debtors received no tangible or concrete value in exchange for the Release.
In addition to the above badges of fraud, at the time Blixseth obtained the Release, he was fully aware of the serious financial problems faced by the Debtors. Blixseth was also cognizant of the material and negative changes in the real estate market, testifying that "prices ha[d] stopped escalating and buyers ha[d] dried up." In pleadings filed in connection with the divorce, Blixseth recognized that dramatic changes had occurred and were occurring in the economy and stock markets in the United States and the world, creating "change and uncertainty in the financial and lending markets." Further, according to Blixseth, "[b]ecause of the overall slow-down in the real estate market, sales at Yellowstone Club, which ha[d] been the primary source of cash funding ... ha[d] diminished dramatically." While acknowledging the changing economy and the decline in the real estate market, according to Blixseth, the LeMond Plaintiffs' litigation, coupled with Edra's efforts to thwart any sale of the Yellowstone Club and then the eventual termination of the purchase agreement by Byrne is what really hurt the Yellowstone Club.
The Debtors's cash flow issues were directly attributable to slow lot sales and the payments that the Debtors were making to Credit Suisse. As a result of Debtors' cash crunch, Blixseth testified the Yellowstone Club was unable to pay BGI's "management fee." No funds were available to fund Porcupine Creek or to pay taxes without borrowing money in 2007. The Debtors were forced to do bulk sale transactions
Edra testified that she was insolvent at the time she and Blixseth executed the MSA. As discussed below, evidence also shows that Blixseth knew that the Debtors and Edra, were on the brink of bankruptcy.
As discussed below, at the time the Release was executed, Blixseth was also aware the Debtors possessed potential claims against him. Blixseth was also aware at the time of the Release was executed that CIP had terminated its agreement to purchase the Yellowstone Club. Blixseth maintained throughout this litigation that Byrne pulled out of the sale because he was conspiring with Edra and others to bankrupt the Debtors so that Byrne could purchase the Debtors at a deep discount. The Court has not yet seen any credible evidence to support this particular conspiracy theory asserted by Blixseth.
Instead, the evidence shows that Blixseth did not want to consummate the proposed sale to CIP because the proceeds from the sale would not have been sufficient to pay off all the Yellowstone Club's outstanding obligations. According to Blixseth's divorce attorney, Ari Garikian ("Garikian"), Blixseth testified at a March 21, 2008, hearing in the divorce proceeding that he estimated that he and Edra would owe between $50 to $100 million in taxes as a result of the CIP sale and that "the proceeds may not have been sufficient to pay everything and all of the taxes." Blixseth thus understood that if the CIP transaction was consummated, he would not have received any money from the sale and would have, in fact, had to find additional funds to close the sale.
Blixseth's own emails contradict his testimony. On March 26, 2008 at 10:10 p.m., Blixseth e-mailed Doyle indicating that he was "in 100% opinion NOT to extend" the closing date for the transaction. Blixseth Exhibit 23, page 46. Less than an hour later, Doyle sent an e-mail indicating that "we will be sending a termination notice shortly." Id. p. 47. Subsequently, Club YC Acquisition LLC sent its termination letter in order to preserve its right to a refund of its deposit. Blixseth Exhibit 33. The evidence establishes that Blixseth had no intention of proceeding with the sale to CIP.
After the sale to CIP fell through, Blixseth agreed to transfer the Debtors to Edra as part of the MSA. By doing so, Blixseth avoided a $50 to $100 million tax liability by foisting the potential tax liability on Edra. Blixseth and his professional team examined the impact on Blixseth if Edra and/or the Debtors filed bankruptcy. In a June 17, 2008, e-mail between Blixseth and eight of his legal and financial advisors the "potential for a tax liability arising if Yellowstone Club, BGI and/or Mrs. Blixseth declared bankruptcy and defaulted on the [Credit Suisse] loan after the property settlement and divorce were final" was discussed. YCLT Exhibit 232.
Also, during the course of his divorce, Blixseth sought legal advice from the law firm of Thornton Byron LLP (Blixseth's so-called "wealth preservation" lawyers) for alleged estate planning purposes, but the invoices from that firm indicate Blixseth was also seeking a means to avoid any liability to the Debtors for his many breaches of fiduciary duty, including but not limited to, the Credit Suisse loan
YCLT Exhibit 149A.
As illustrated above, Blixseth and his advisors were contemplating the financial demise of the Yellowstone Club and Edra and they were developing a plan to shield Blixseth from the fallout. Blixseth's plan involved not only obtaining releases from the Debtors, it involved the creation of Desert Ranch LLLP, a structure referred to by his attorney as a "personal Berkshire Hathaway" that provided "general creditor protection." Desert Ranch LLLP ("Desert Ranch") is a Nevada limited liability limited partnership. Blixseth owns a 98% limited partnership interest in Desert Ranch. The remaining 2% is held by the general partner of Desert Ranch, Desert Ranch Management, which is a Nevada limited liability company. Blixseth owns 40% of Desert Ranch Management and his son, Beau Blixseth, owns 30% of this entity. The remaining 30% of Desert Ranch Management is owned by two trusts. Blixseth's long-time accountant and trusted advisor, Mack, serves as Trustee of the trusts. As admitted by his own lawyer, one of the purposes of this structure is to remove assets from the reach of creditors. Virtually all of Blixseth's assets were transferred into this vehicle. Interestingly, Desert Ranch LP was converted to Desert Ranch LLLP on November 12, 2009; a mere two days after the Debtors filed bankruptcy.
The Desert Ranch structure was an integral part of Blixseth's plan to shield himself from the consequences of his breaches of fiduciary duty and fraudulent transfers in connection with the Debtors. Securing a Release was another integral part of Blixseth's plan. Indeed, in the first phase of the trial, Blixseth testified unequivocally that getting a release from any claims for breach of fiduciary duty or fraudulent transfer was the "cornerstone" of the MSA.
Blixseth's fraudulent intent could not be more clear. Blixseth obtained the Release with the actual intent to hinder, delay and defraud his creditors, including the Debtors. As such, the Release is, for purposes of this Adversary Proceeding, voidable pursuant to MCA § 31-2-333(1)(a).
YCLT also asserts a meritorious claim under § 31-2-333(1)(b). First, the Debtors did not receive reasonably equivalent value in exchange for the Release. YCLT, through expert testimony, established that the Release was worth approximately $420 million. Of that amount, $133.6 million was attributable to Blixseth's transactions involving Big Sky Ridge, Sunrise Ridge, Overlook, Unit 304
Edra Blixseth testified as follows:
Similarly, Blixseth testified that at the time of the MSA release he knew of no claims he was releasing against YMC or Big Sky Ridge, LLC. With respect to YD, Blixseth testified that he knew of two potential claims he was releasing: one dealing with a note owed American Bank on the Warren Miller Lodge; and the other dealing with some bonds with Madison County. He believed that the value of those bonds were around $750,000. Blixseth testified that no lawsuits existed against YD at the time of the Release.
However, with respect to the American Bank note, YD's accountant Moore testified that on the eve of the MSA deal, Blixseth caused BGI to take the one unsold unit from the Warren Miller Lodge at a loss to YD of over $700,000, leaving only two units under that American Bank note, both secured by the real estate and subject to sales agreements that subsequently closed. Accordingly, as it turns out, the value of those claims was, in fact, zero and did not approximate $420 million. Even using Blixseth's value of the potential claim against YD ($750,000) relating to the Madison County bonds, the Court concludes that this does not constitute reasonably equivalent value for the Release, which is valued at $420 million.
YCLT proved that none of the Debtors received reasonably equivalent value in exchange for the Release. In fact, no direct value was received in exchange for the Release of over $400 million of claims against Blixseth. "The test used to determine reasonably equivalent value in the context of a fraudulent conveyance requires the court to determine the value of what was transferred and to compare it to what was received." Barber v. Golden Seed Co., Inc., 129 F.3d 382, 387 (7th Cir. 1997). "By its terms and application, the concept of `reasonably equivalent value' does not demand a precise dollar-for-dollar exchange." Advanced Telecommunication Network, Inc. v. Allen, 490 F.3d 1325, 1336 (11th Cir.2007). Furthermore, in reaching its conclusion herein, the Court has also considered that the transaction between the Debtors and Blixseth involving the Release was not an arm's length transaction. Samson v. U.S. West Communications, Inc., 208 B.R. 950, 956 (Bank.D.Mont.1997) (a factor of considerable importance in assessing reasonably equivalent value is whether the transaction was arm's length).
Two types of benefits need to be considered in analyzing reasonably equivalent value: benefits that the debtor receives directly ("direct benefits") and those it receives indirectly ("indirect benefits"). To make out the elements of a fraudulent conveyance claim, a plaintiff must prove that a debtor did not receive direct benefits reasonably equivalent to the value which it gave up. If the plaintiff meets that burden, the burden is then on
Blixseth contends that the Release bestowed an indirect benefit on the Debtors by bringing "peace in the valley." Blixseth testified that all the litigation, including his divorce proceedings, had a very negative impact on the Debtors and that settling matters between he and Edra bestowed a great benefit upon the Debtors. Thus, according to Blixseth, the Debtors received "peace in the valley" in exchange for the Release. It is a dubious proposition that one can create a negative situation and then claim that he has bestowed a benefit by eliminating the negative situation that he created. Nevertheless, the Court finds that an intangible and ephemeral "benefit" such as "peace in the valley" as a result of Blixseth's divorce settlement does not constitute reasonably equivalent value to the Debtors under the circumstances of this case.
Blixseth has failed to carry his burden of producing evidence of indirect benefits that were tangible and concrete, and of quantifying the value of those benefits with reasonable precision. In re Richards & Conover Steel, Co. 267 B.R. 602, 614 (8th Cir. BAP 2001) (party claiming to have delivered value must have quantified it); In re Minnesota Utility Contracting, Inc., 110 B.R. 414, 418 (D.Minn.1990) (it is transferee's burden to produce evidence of indirect benefit); Official Committee of Unsecured Creditors of TOUSA, Inc. v. Citicorp N. Am. Inc., 422 B.R. 783 (Bankr. S.D.Fla.2009). Not a single expert or fact witness for Blixseth attempted to quantify the value of the indirect benefits he claims were received by the Debtors. For that reason alone, it is appropriate to rule in favor of YCLT on the issue of reasonably equivalent value.
YCLT has convincingly demonstrated by a preponderance of the evidence that the Debtors did not receive any type of consideration that would constitute reasonably equivalent value. Claims of approximately $420 million were given up and nothing was received by the Debtors in exchange. Blixseth has wholly failed to produce any credible evidence that constitutes a tangible and concrete value flowing to the Debtors. In fact, the evidence in this case is just the opposite. Less than three (3) months after entering into the MSA transaction, the Debtors filed bankruptcy. This hardly constitutes "peace in the valley" or concrete and tangible value to the Debtors. Indeed, the Debtors' bankruptcy has disrupted the lives of hundreds of employees, creditors, and members. The Court thus concludes that the Debtors did not receive reasonably equivalent value in exchange for the Release.
The Court also finds that the Debtors were insolvent upon consummation of the Release. Mordy testified the Debtors were insolvent upon consummation of the MSA on August 13, 2008. While certain aspects of Mordy's opinions were challenged
In analyzing the Debtors' solvency, Mordy utilized the Balance Sheet test, the Cash Flow test and the Adequate Capital test. All experts in this case agreed that if a debtor fails any one of the three solvency tests, the debtor is considered insolvent for all purposes relevant to this case. Mordy concluded that as of August 13, 2008, the Debtors were insolvent under all three of the solvency tests.
Blixseth failed to offer any evidence to refute Mordy's opinion regarding the Debtors' solvency as of August 13, 2008. Instead, Blixseth's expert Reilly criticized certain adjustments that Mordy made to asset values in connection with his balance sheet solvency analysis. Reilly contends that Mordy did not comply with the requirements of SSVS1. Reilly testified that, in his opinion, Mordy inappropriately adjusted asset values. Conversely, Mordy testified that he did not believe that SSVS1 applied to his balance sheet analysis because of the exception to SSVS1 that applies to typical solvency opinions. Mordy also testified that he did not intend to perform any independent valuation of assets or offer a valuation opinion. The Court, however, need not dwell on this issue because Mordy also performed the balance sheet test without making any adjustment to values. Mordy's revised analysis demonstrates that the Debtors were insolvent under the Balance Sheet test on August 13, 2008.
The criticisms offered by Reilly in connection with Mordy's original balance sheet insolvency have no bearing on Mordy's cash flow analysis or his adequate capital analysis. Mordy found the Debtors to be insolvent under both of these tests and as all the experts agreed, the Debtors were insolvent if they failed any one of the solvency tests.
In summary, Blixseth produced no credible evidence that the Debtors were solvent as of August 13, 2008. Mordy's opinions on cash flow insolvency and adequate capital insolvency were not rebutted, and even if the Court were to find Mordy's conclusions deficient or faulty as to the Balance Sheet test, which it does not, the Court would still conclude that the Debtors were insolvent upon consummation of the Release under the Cash Flow test and the Adequate Capital test. In sum, the Release set forth in the MSA was clearly a fraudulent transfer by Blixseth.
Contrary to Blixseth's assertions, the Rooker-Feldman doctrine does not insulate the Release from an attack as a fraudulent transfer. The Rooker-Feldman doctrine states that a federal district court does not have subject matter jurisdiction to hear a direct appeal from the final judgment of a state court. The Rooker-Feldman doctrine is not applicable, however, because YCLT is seeking to set aside fraudulent transfers under §§ 544 and 548. In re Gruntz, 202 F.3d 1074, 1079 (9th Cir.2000) (en banc). Furthermore, the Rooker-Feldman doctrine has no application because YCLT was not a party to the divorce proceedings. In re Erlewine, 349 F.3d 205, 210 (5th Cir.2003). Judicial estoppel and issue preclusion do not bar YCLT's claims regarding the Release because neither YCLT nor the Debtors were parties to the Blixseths' divorce proceeding or in privity with any one who was a party. Kubacki v. Molchan, 340 Mont. 100, 172 P.3d 594, 597 (2007). Furthermore, YCLT's fraudulent transfer claims under the Bankruptcy Code were not and could not have been actually litigated or decided in the divorce court.
Just like the Bankruptcy Code, MCA § 31-2-330 provides that "value" is given when "property" is transferred or an antecedent debt is secured or satisfied. Section 31-2-328 of the Montana code defines "Property" as "anything that may be the subject of ownership."
The Debtors' claims against Blixseth constituted a valuable asset of the Debtors' estate. Uncontested testimony demonstrated that the Debtors had $286.4 million in claims against Blixseth. Furthermore, the Court heard testimony regarding an additional $133.6 million in claims the Debtors had against Blixseth. The Debtors received absolutely nothing in exchange for releasing their $420 million claims against Blixseth. The Release was, therefore, a constructively fraudulent transfer under § 333(1)(b).
YCLT's remaining substantive claim is that Blixseth breached his fiduciary duties. MCA § 35-8-310 sets forth the fiduciary duties of limited-liability-company members as follows:
Blixseth owed fiduciary duties of loyalty and care to the Debtors under the Montana Limited Liability Company Act ("MLLC Act"). Officers and directors must discharge their duties in good faith, with the care an ordinarily prudent person in a similar position would exercise under similar circumstances, and in a manner the director or officer reasonably believes is in the companies' best interests. Trifad Entertainment Inc. v. Anderson, 306 Mont. 499, 508, 36 P.3d 363 (2001). While Trifad discusses the duty of care and loyalty under Montana's Business Corporation Act, the Court finds its analysis applicable to limited liability companies. Blixseth breached these duties when he caused the Debtors to pledge nearly all of their assets for loan proceeds that he applied for his own use, and by using the proceeds of the Credit Suisse loan for his own benefit rather than for the benefit of Debtors. Blixseth did not act in the Debtors' best interests.
Pursuant to MCA § 35-8-310, Blixseth, as an owner of the Debtors, owed fiduciary duties to the Debtors, the minority owners of those entities, and the Yellowstone Club
Blixseth's actions also violate MCA § 35-8-604(1)(a) and (b), which prohibit distributions to the members of a limited liability company ("LLC") if such distributions render the LLC unable to pay its debts as they become due in the usual course of business and/or if such distributions cause the LLC's total assets to be less than the sum of its total liabilities. Mordy testified that the damages incurred by the Debtors as a result of Blixseth's breaches of fiduciary duty exceed $286.4 million. YCLT also presented convincing testimony from the Debtors' comptroller, Moore, regarding additional breaches of fiduciary duties and self-dealing by Blixseth in connection with the transactions known as Big Sky Ridge, Sunrise Ridge, Overlook Partners and Unit 304 at the Warren Miller Lodge.
For example, on April 1, 2002, Big Sky Ridge, LLC purchased property contiguous to the Yellowstone Club. The property was purchased from Silver Ridge, Inc. in the amount of $3,500,000. At that time the owner of Big Sky Ridge was Blixseth. The consideration was in the form of a Note. Blixseth's capital contribution to Big Sky Ridge was only $50,000. On May 7, 2002, Blixseth sold a 50% interest in Big Sky Ridge to Voyager Group, LP for $2,500,000. Blixseth then sold his remaining 50% interest in Big Sky Ridge to Yellowstone Development on September 17, 2003, for $17,000,000. Two years later, in September 2005, Blixseth purchased Voyager's 50% interest for $3,000,000. Subsequent to September 2005, Big Sky Ridge was owned 50% by Blixseth and 50% by YD. When Big Sky Ridge sold certain lots, Big Sky Ridge would pay the sales proceeds as dividends to Blixseth and YD. Blixseth received at least $26,541,818.60 in distributions from Big Sky Ridge by virtue of his ownership.
Next, on February 1, 2005, YD transferred its interest in the Sunrise Ridge Condominium Development at Yellowstone Club to Blixseth in exchange for a $5 million promissory note. Subsequently, on June 28, 2006, the Sunrise Ridge Condominium Development was sold to CIP Sunrise Ridge Owner, LLC for $60 million.
Blixseth's pattern of self-dealing continued in 2008 when Blixseth and Wayne Prim formed Overlook Partners, LLC ("OP"). The Yellowstone Club was in desperate need of cash. Wayne Prim loaned OP $15,000,000 and OP turned around and purchased five lots from YD for $3,000,000 each. This sale closed on or around May 7, 2008. The lots were appraised by Cushman & Wakefield for $5 million and were being marketed by the Yellowstone Club for $6,000,000 each, making the value of this transaction for OP between $10,000,000 and $15,000,000. Blixseth confirmed this value by immediately contracting on behalf of OP to cause the same lots to be sold for no less than $5,500,000 each. The net result was a benefit to Blixseth of between $5 and $7.5 million at the expense of YD.
Blixseth also committed acts of self dealing in connection with the sale of Warren Miller Lodge Unit 304. Prior to August 2008, this Unit was owned by YD and had a value of approximately $3.2 million. YD owed American Bank a debt of $2,511,000
Blixseth again breached his fiduciary duty in connection with the LeMond Plaintiffs' litigation and the settlement thereof. After the LeMond Plaintiffs filed suit against Blixseth, Blixseth engineered a settlement in the amount of $38 million. But Blixseth did not pay that amount personally. Instead, as reflected in Debtors' financial statements, Blixseth had the Debtors pay at least $18 million of that settlement amount on his behalf.
The record is riddled with instances where Blixseth breached his fiduciary duties. Such breaches caused substantial harm to the Debtors.
Blixseth asserts the advice of counsel defense with respect to his use of the Credit Suisse loan proceeds and as to the MSA Release. With respect to his use of the Credit Suisse loan proceeds, Blixseth testified that he discussed the need to take the money out as a loan with his accountant Mack because that "was in the lane of the accounting department[.]" Blixseth did not discuss the matter specifically with counsel because it "wasn't in their lane, it wasn't their bailiwick." Nevertheless, Blixseth asserts the advice of counsel defense based upon Brown's September 30, 2005 opinion letter and Doyle's email of May 8, 2006.
Brown's opinion letter was drafted pursuant to Paragraph J of the executed September 20, 2005, Credit Agreement, which reads: "The Administrative Agent and its counsel shall have received the written opinions of (i) Stephen R. Brown, of Garlington, Lohn & Robinson, PLLP and (ii) McDermott, Will & Emery, counsel for the Loan Parties (a) in form and substance reasonably satisfactory to the Administrative Agent and its counsel, (b) dated as of the Effective Date, (c) addressed to each of the Agents and the Lenders, and (d) setting forth the matters reasonably requested by the Administrative Agent." Doyle, who was Blixseth's lead attorney on the Credit Suisse transaction, explained that Brown's responsibility was to deal with environmental matters, entitlements and title issues that dealt specifically with Montana law.
Credit Suisse's Due Diligence Request List, Exhibit 263Q, shows that as of July 7, 2005, Brown, because he was already representing the Debtors on various matters, was in charge of "[d]ocumentation relating to any past and present litigation, arbitration or other dispute proceedings relating to the project or involving a member of company management (also include any threatened proceedings)," "[l]ist of existing entitlements/approvals and any future entitlements/approvals required to be obtained in the future," "[d]ocumentation evidencing existing entitlements, including documentation relating to any of the following: Permits, Specific plan, Subdivision maps, Water rights," "[c]opy of any public financing or assessment district in place or contemplated to finance infrastructure or other public improvements," "Environmental a. Schedule or material environmental licenses, permits and authorizations held by any of the Entities," and "Third Party Approvals/Consents (including governmental approvals)[.]" When questioned about Credit Suisse' checklist and whether anyone was assigned the responsibility of determining whether a distribution or loan of money by the Debtors to BGI would be a breach of fiduciary duty, Doyle testified that the purpose of the due diligence requested by Credit Suisse "was just to
Doyle believed that the final form of Brown's opinion letter may have even been provided by Credit Suisse, but Brown testified that he used his law firm's standard form opinion letter used for loan transactions. Brown's opinion letter states that it "is governed by and shall be interpreted in accordance with the Legal Opinion Accord (`Accord') of the ABA Section of Business Law (1991), as modified by the ABA/ ACREL Real Estate Report (`Report')." Section 19 of the Accord specifically states that "an Opinion does not address any of the following legal issues unless the Opinion Giver has explicitly addressed the specific legal issue in the Opinion Letter: ... (f) compliance with fiduciary duty requirements;... (i) fraudulent transfer and fraudulent conveyance laws[.]" Consistent with the foregoing, Brown testified that he did not give any opinion with respect to compliance with fiduciary duty requirements or fraudulent transfer and fraudulent conveyance laws because he is not qualified to do such. The only item under § 19 of the ABA Accord that Brown opined on was 19(h) dealing with the creation of a security interest in property.
Interestingly, while Blixseth claims he relied on Brown's September 30, 2005, opinion letter, Blixseth could not recall whether he read Brown's opinion letter prior to entering into the credit agreement. Blixseth's only specific memory was that Doyle and the people on Blixseth's team advised Blixseth "that the opinion letter that was required to do the deal from Montana counsel was prepared and was ready to sign." Such letter was signed by Brown, and recites at paragraph 7 that Brown's "opinion is being delivered solely to the addressees (i.e., the Administrative Agent and the Lenders) named in [the] letter, their successors and assigns, and may not be relied upon by any other person or entity and may not be disclosed, quoted, filed with a governmental agency or otherwise referred to without [Brown's] written consent."
Based upon the evidence, the advice, if any, that was given by Brown to Blixseth pertained to whether it was permissible for the Debtors to enter into a loan agreement with Credit Suisse. Brown did not take, and was not asked to take, the next step to determine whether Blixseth's withdrawal of funds from the Debtors violated any law.
Blixseth cannot rely upon an opinion letter he received from Brown that speaks to the validity of the Credit Suisse loan to absolve him from any liability for his conduct in connection with that loan. The case against Blixseth is not about the validity of the Credit Suisse loan, in the abstract, but about Blixseth's breach of his fiduciary duty in procuring the loan and
Blixseth also claims that he relied on advice of counsel in connection with the MSA and the Release although it is not entirely clear to the Court exactly what advice Blixseth received in this regard. Blixseth's divorce attorney, Ari Garikian, testified her firm did not warrant that the Release would protect Blixseth from claims by the Debtors. The Court fails to see how any advice Blixseth may have received from any counsel relating to the Release would change the Court's opinion that the Release should be set aside as a fraudulent transfer. Blixseth has wholly failed to carry his burden in this regard.
Originally, when Blixseth's interests were aligned with Credit Suisse, Blixseth's counsel argued that "Blixseth is an honest man" who wanted more than anyone to see the unsecured creditors in this case get paid, but Blixseth could not get that done because the Committee was controlled by the LeMond Plaintiffs, who trumped up and fabricated this proceeding in order to get money from Blixseth. Blixseth also argued that the Yellowstone Club bankruptcy was cleverly orchestrated by Byrne and CrossHarbor in order to obtain the Yellowstone Club and other properties at substantial discounts. Now that the Committee is out of this proceeding, Blixseth complains that he is not getting a fair shake because YCLT is controlled by Credit Suisse. Blixseth's latest complaint stems from events that transpired subsequent to Part I of the trial in this matter.
Following Part I of the trial in this matter, Credit Suisse on behalf of itself and the Prepetition Lenders
Under Debtors' confirmed Third Amended Joint Plan, the claims of the Prepetition Lenders (who actually advanced the loan funds to the Debtors under the Credit Agreement) were allowed in the amount of $309,376,110.42, less $80 million paid at Plan closing as a participation in an Equity Note distributed under the Plan. The Prepetition Lenders' allowed claim was divided into a secured portion under Class 3 and a deficiency claim under Class 8, per this Court's Memorandum of Decision Setting Forth Findings of Fact and Conclusions of Law Regarding Debtors' Proposed Plan of Reorganization of June 2, 2009. As partial distribution on the Class 3 claims, the Prepetition Lenders were to receive "100% of the net proceeds from the sale or other disposition of the Debtors' interest in its Farcheville property" Plan § 3.3.
Under Section 6.14 of the Plan, YCLT was created and funded. All of the property and assets of the Debtors, including all of their claims and causes of actions, including this then-pending Adversary Proceeding, were transferred to YCLT.
The Yellowstone Club Settlement Term Sheet approved as Schedule 1.123 of the Plan set out the governance and distribution provisions of YCLT. Paragraph 5(c) of the Settlement Term Sheet provides that YCLT would be governed by a seven-member Trust Advisory Board appointed as follows:
(Docket No. 985-1, Settlement Term Sheet § 5(c).)
The parties built into the Trust majority, super-majority and unanimity voting provisions. Also, YCLT was required to hire the Holland & Hart law firm that represented Credit Suisse as local counsel in Part I of the trial, and was not permitted to hire another law firm without unanimous approval. The Settlement Term Sheet provided a waterfall for the distribution of any funds to be collected by the YCLT. The specifics were as follows:
Settlement Term Sheet § 5(d).
Since its inception, the largest creditor in this case has been Credit Suisse and the
However, under the unique facts of this case, the Court finds merit in Blixseth's In Pari Delicto defense. In Pari Delicto is an "at equal default" defense that relieves a defendant from liability where a court determines that the plaintiff bore equal responsibility for the alleged harm. In the context of federal securities law, the United State Supreme Court discussed the in pari delicto defense:
Pinter v. Dahl, 486 U.S. 622, 632, 108 S.Ct. 2063, 2070-71, 100 L.Ed.2d 658 (1988).
In the Partial & Interim Order entered May 13, 2009, which Order was later vacated
While the Court agreed to vacate its Partial & Interim Order, the Court cannot and will not ignore the findings therein. Barcy testified that Credit Suisse cared not one iota what Blixseth did with the loan proceeds once Credit Suisse got its fat fees. That same sentiment applies to the Prepetition Lenders who snatched up the syndicated notes hoping to reap huge profits. The Prepetition Lenders had information available to them, had they bothered to look, indicating that the Yellowstone Club loan was very risky. For example, the Prepetition Lenders surely had access to the underlying Credit Agreement, which plainly disclosed that Blixseth could take $209 million as a distribution and could use another $142 million in unrestricted subsidiaries for purposes wholly unrelated to the Yellowstone Club. Moreover, the Prepetition Lenders surely had access to the fact that Moody's assigned a rating of B1 to the Yellowstone Club loan. And perhaps most important, Credit Suisse and the Prepetition Lenders knew the Yellowstone Club Credit Agreement was nonrecourse. Despite all the red flags, the Prepetition Lenders nevertheless clamored to get a piece of Credit Suisse's syndicated loan product.
In this case, Credit Suisse and the Prepetition Lenders are just as a culpable as Blixseth and as aptly noted by the U.S. Supreme Court, "[r]egardless of the degree of scienter, there may be circumstances in which the statutory goal of deterring illegal conduct is served more effectively by preclusion of suit than by recovery. In those circumstances, the in pari delicto defense should be afforded. Cf. A.C. Frost & Co. v. Coeur D'Alene Mines Corp., 312 U.S. 38, 43-44, 61 S.Ct. 414, 417, 85 L.Ed. 500, and n. 2 (1941)." Pinter, 486 U.S. at 634, 108 S.Ct. at 2072.
In a clever legal maneuver, counsel for Credit Suisse negotiated to insulate Credit Suisse from claims by the Prepetition Lenders and also negotiated a position that allowed YCLT to step in and seek
Blixseth and Credit Suisse have done a lot of finger pointing in this case, but in the end, their conduct prompted Debtors' bankruptcies. Following Part I of the trial in this matter, the Court was not inclined to enter an order that would benefit the people who took the funds out of the Debtor entities and the Court will not at this time enter an order that would in any way benefit Credit Suisse, the Prepetition Lenders or other parties who have speculated on a monumental award against Blixseth. The parties who suffered compensable damages in this case are the parties who have legitimate claims against the Debtors and who did not participate in the Credit Suisse loan debacle.
In an attempt to deflect Blixseth's unclean hands and in pari delicto defense, YCLT argues the Montana Supreme Court recently recognized that "there is no statutory basis in Montana for an offset of damages arising from the commission of intentional torts." Ammondson v. Northwestern Corporation, 353 Mont. 28, 220 P.3d 1, 22 (2009). Montana law provides for several liability that allocates damages in proportion to the amount of fault, but not in the case of intentional torts. Id.; Cartwright v. Equitable Life Assur. Soc. of U.S., 276 Mont. 1, 36, 914 P.2d 976, 998 (1996). Generally, each person who commits a tort that requires intent is jointly and severally liable for any indivisible injury legally caused by the tortious conduct. RESTATEMENT (3d) of Torts § 12.
Contrary to YCLT's above argument, the Court is not apportioning liability between Blixseth and Credit Suisse. Rather, the Court is precluding Credit Suisse and the Prepetition Lenders from benefitting from their participation in the Yellowstone Club loan. More importantly, the Court is prohibiting Credit Suisse and the Prepetition Lenders from converting a nonrecourse loan into a recourse loan through crafty legal negotiations with the Debtors and the Committee.
While Blixseth caused substantial harm to the Debtors through his self dealings, the only compensable damages in this case are repayment of remaining legitimate allowed claims as of the date of the bankruptcy and as allowed under Debtors' confirmed Third Amended Joint Plan of Reorganization, together with any amounts already paid, including amounts paid through the Trade Creditor Fund established under ¶ 6.17 of Debtors' confirmed Third Amended Joint Plan of Reorganization. Payment of Class 1 (priority non tax claims), Class 2 (other secured claims), Class 4 (general unsecured claims, except those of the First Lien Lender), Class 5 (convenience claims), Class 6 (intercompany claims), Class 9 (pioneer/frontier member rejection claims), Class 10 (American bank claims), Class 11 (allowed Prim secured claims), Class 12 (honorary member rejection claims), Class 13 (founder's circle member rejection claims), Class 14 (company member rejection claims) and those claims that Blixseth claims are "not classified" on Exhibit A attached to his Post-Trial Brief filed March 19, 2010, at docket entry no. 571. The damage award against Blixseth only includes the amounts that creditors in the above classes would be entitled under the terms of Debtors' confirmed Third Amended Joint Plan of Reorganization. For instance, Blixseth is not required to pay membership rejection damages if the memberships were assumed by the purchaser of the Yellowstone Club.
Commensurate with prior "scorched earth" trial tactics, the parties have included various other claims and defenses. Those claims and defenses require no discussion by this Court, other than to express that they are denied.
Blixseth testified at trial that he wanted to see the creditors of the Yellowstone Club paid and that the buck stopped with him. The Court agrees. Thus, in accordance with the forgoing, the Court will enter a separate judgment providing as follows:
IT IS HEREBY ORDERED and ADJUDGED that Judgement is entered in favor of Blixseth, in part, and YCLT, in part, with each party to pay their own fees and costs of suit; and YCLT is awarded that amount of money required to pay: (1) all allowed claims of Class 1 (priority non tax claims), Class 2 (other secured claims), Class 4 (general unsecured claims, except claims attributable to the First Lien Lender, if any), Class 5 (convenience claims), Class 6 (intercompany claims), Class 9 (pioneer/frontier member rejection claims), Class 10 (American bank claims), Class 11 (allowed Prim secured claims), Class 12 (honorary member rejection claims), Class 13 (founder's circle member rejection claims), Class 14 (company member rejection claims) and those claims that Blixseth identifies as "not classified" on Exhibit A attached to his Post-Trial Brief filed March 19, 2010, at docket entry no. 571, and (2) YCLT for the fees and costs it has incurred, and will incur, objecting to and liquidating such claims.
The discovery rule mandates that "the limitations period does not commence until the injured party actually discovers or should have discovered through reasonable diligence the fact essential to the cause of action." R.A.C. v. P.J.S., 192 N.J. 81, 98, 927 A.2d 97 (2007). Equitable tolling applies in certain limited circumstances where the wrongful conduct of one party warrants tolling the running of the statute of limitations period. Id. at 100, 927 A.2d 97. An example of such conduct would be "where `the complainant has been induced or tricked by his adversary's misconduct into allowing the filing deadline to pass.'" Freeman v. State, 347 N.J.Super. 11, 31, 788 A.2d 867 (App.Div.2002) (quoting Dunn v. Borough of Mountainside, 301 N.J.Super. 262, 280, 693 A.2d 1248 (App.Div. 1997)). "State common law tolling doctrines are incorporated by 11 U.S.C. § 108 and are, therefore, applicable in bankruptcy proceedings." Levitt v. Riddell Sports, Inc. (In re MacGregor Sporting Goods, Inc.), 199 B.R. 502, 513 (Bankr.D.N.J.1995).
Young, 384 B.R. at 104.
