Blixseth v. Blixseth (In re Blixseth)

• Decision Date: 28 September 2011
• Docket Number: Adversary No. 10–00018.,Bankruptcy No. 09–60452–7.
• Parties: In re Edra D. BLIXSETH, Debtor.Beau Blixseth and Morgan Blixseth, Plaintiffs v. Edra D. Blixseth, Defendant.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Montana

459 B.R. 444

In re Edra D. BLIXSETH, Debtor.Beau Blixseth and Morgan Blixseth, Plaintiffs
v.
Edra D. Blixseth, Defendant.

Bankruptcy No. 09–60452–7.

Adversary No. 10–00018.

United States Bankruptcy Court, D. Montana.

Sept. 28, 2011.

[459 B.R. 446]

Jon R. Binney, Missoula, MT, Kevin P. O'Connell, Mark R. Sandri, Hagen O'Connell LLP, Portland, OR, for Plaintiffs.

[459 B.R. 447]

Gary S. Deschenes, Great Falls, MT, for Defendant.

MEMORANDUM of DECISION and ORDER RALPH B. KIRSCHER, Bankruptcy Judge.

In this Adversary Proceeding, after due notice, the Court conducted a trial on June 20, 2011, in Missoula on the Plaintiffs Beau and Morgan Blixseth's (collectively “the Blixseths”) complaint to deny Debtor/Defendant Edra D. Blixseth's (“Edra”) discharge under 11 U.S.C. § 523(a)(4).¹ The Blixseths were represented at trial by Kevin O'Connell and Mark R. Sandri of Portland, Oregon and Jon Binney of Missoula, Montana; Edra was represented at trial by Gary S. Deschenes of Great Falls, Montana. Edra, Morgan Blixseth (“Morgan”), Beau Blixseth (“Beau”) and Richard Samson (“Samson”), the Chapter 7 Trustee in Debtor's main bankruptcy case, testified. The Blixseths' Exhibits 101 through 205 and Edra's Exhibits A through E were admitted into evidence. The Court also agreed at trial to take judicial notice of Blixseth Family Investment's proof of claim no. 53 filed August 6, 2009, which Proof of Claim was also admitted into evidence as the Blixseths' Exhibit 198. The Court entered an Order on June 30, 2011, granting the Blixseths' Motion for Leave to File Deposition of Alan Rye For Use As Perpetuated Testimony, subject to the errata sheet filed separately on June 29, 2011, at docket entry no. 112. At the conclusion of the Blixseths' case-in-chief, Edra's counsel made an oral request for directed verdict. The Court took Edra's request under advisement and proceeded with trial. At the conclusion of trial, the Court gave the parties additional time to file post-trial briefs. The Blixseths and Edra have filed their post-trial briefs and the matter is ready for decision. This Memorandum of Decision and Order sets forth the Court's findings of fact and conclusions of law.

BACKGROUND

The parties agree in the Final Pretrial Order that the following facts are undisputed:

a. Debtor, Edra Blixseth's bankruptcy case was filed on March 26, 2009, under Chapter 11 of the Bankruptcy Code.

b. Edra's case was converted from a Chapter 11 to a Chapter 7 by Order of this Court entered May 29, 2009.

c. At all relevant times, Blixseth Family Investments, LLC (“BFI”) was a Montana limited liability company formed on August 22, 2000 and governed by an Operating Agreement of the same date.

d. At all relevant times, Plaintiffs, Beau and Morgan Blixseth, each owned a 10% interest in BFI. Edra owned a 60% interest in BFI and served as its Managing Member.

e. As a Managing Member of BFI, Edra had fiduciary duties to all members, including Plaintiffs.

f. At all relevant times, BFI's primary asset was a promissory note in the face amount of $35,650,000 (“the BFI Promissory Note”).

g. In November 2007, Edra obtained an unsecured loan from First Bank in the amount of $5,000,0000.

h. In March 2008, Edra, as Managing Member of BFI, executed loan documents for an $8,000,000 loan from First Bank.

[459 B.R. 448]

None of the proceeds of the loan went to BFI.

i. Following the $8,000,000 loan from First Bank to BFI, BFI approved an $8,000,000 unsecured loan to Edra. Edra used $5,000,000 of the proceeds of this loan to pay off her unsecured $5,000,000 loan to First Bank.

j. Edra did not provide notice to or seek approval of Plaintiffs for the above-referenced transactions.

k. In January 2009, Edra, as Managing Member of BFI, executed loan documents for an extension of the $8,000,000 loan and an additional $2,000,000 advance from First Bank. None of the loan proceeds went to BFI.

l. Neither BFI nor Plaintiffs received any benefit from the loan transactions described herein. The only member of BFI that received any benefit from the $8,000,000 loan and/or $2,000,000 additional advance was Edra.

m. On August 6, 2009, BFI filed a claim in Edra's bankruptcy in the amount of $10,749,095.89.

n. On February 24, 2011, First Bank filed a Complaint against BFI for Breach of Contract and Money Had and Received in the Superior Court of California. The Complaint relates to the loan transactions described herein and alleges damages in the amount of $11,515,762.64.

In addition to the foregoing, the evidence shows that in August of 2000, Edra, Timothy L. Blixseth (“Tim”), Julie Barve, Matthew Crocker, the Beau Blixseth Trust and the Morgan Blixseth Trust entered into a Restated and Revised Operating Agreement with the “purpose of forming a limited liability company” known as Blixseth Family Investments, LLC which was “to be managed by one manager[.]” ² Tim and Edra were Trustees of the Beau Blixseth Trust and the Morgan Blixseth Trust. In 2000, Edra had a 30% ownership interest in BFI, Tim had a 30% ownership interest in BFI, and the Beau Blixseth Trust, the Morgan Blixseth Trust, Matthew Crocker and Julie Barve each had a 10% ownership interest in BFI.

Edra testified that prior to January 1, 2005, BFI and an entity owned by James J. Dolan (“Dolan”) owned what was referred to as Spanish Peaks. Dolan also owned both A and B shares in the Yellowstone Club, an exclusive private ski and golf community located in Big Sky, Montana.³ Dolan and Tim decided Dolan should relinquish his A and B shares in the Yellowstone Club and BFI would, in return, relinquish its ownership interest in Spanish Peaks. To effectuate the agreement, Dolan transferred his A and B shares in the Yellowstone Club to BFI. In addition, S.P. Realty, LP ⁴ executed a Promissory Note in favor of BFI dated

[459 B.R. 449]

January 1, 2005, in the amount of $35,650,000. The Promissory Note provides that S.P. Realty, LP would make an initial payment of $3 million to BFI on January 5, 2006, which amount would be applied to principal reduction. The Promissory Note also provides that on January 5, 2007, the remaining principal balance plus any accrued interest would “be amortized over the next eight (8) years with interest calculated at three and one-half percent (3.5%) per annum commencing January 2, 2005.” The Promissory Note is secured by a Membership Pledge Agreement which “pledg[es] a security interest in 100 membership units in Spanish Peaks Development, LLC.” The S.P. Realty note is not accompanied by any real estate documents and is not secured by a mortgage, trust indenture or Uniform Commercial Code security agreement. S.P. Realty, LP made the required payment under the Promissory Note in January 2006. S.P. Realty, LP also made the payments due in 2007 and 2008. It is not clear from the evidence whether the membership units, which supposedly serve as collateral for the Promissory Note, still exist.

Edra and Tim separated in late 2006 and Edra filed for divorce in December of 2006. In April of 2007, after her separation from Tim, Edra secured a $2.5 million loan from Palm Desert National Bank. The Negative Covenants of an Addendum to Business Loan Agreement between Edra and Palm Desert National Bank dated April 9, 2007, recite that Edra “holds an interest in Blixseth Family Investments, LLC, a Montana Limited Liability Company (‘BFI’). Borrower represents that she is currently prohibited by the BFI Operating Agreement from pledging such interest in BFI to secure the Loan.” Edra's representation to Palm Desert National Bank on or about April 9, 2007, is consistent with paragraph 11.1 of BFI's operating agreement, which reads: “No Member may transfer all or any part of such Member's interest as a member of the Company except as permitted in this agreement. Any purported transfer of an interest or a portion of an interest in violation of the terms of this agreement will be null and void and of no effect. For purposes of this section a ‘transfer’ includes a sale, exchange, pledge, or other disposition, voluntarily or by operation of law.” The $2.5 million loan from Palm Desert National Bank matured April 9, 2008.

Edra contends S.P. Realty made a payment of $6.8 million to BFI in April of 2007, but that Tim took all the proceeds for himself. In late July 2007, Edra and her children, Julie Barve and Matthew Crocker, prepared a document that sought to expel Tim from BFI. As reflected in Exhibit 104, Edra alleged that Tim claimed sole control over BFI's books, records and operations, that Edra was entitled to an equal allocation of the first $8,799,576.49 of BFI's net profits,⁵ that

[459 B.R. 450]

Edra had received nothing and that as of July 17, 2007, BFI had no cash available, despite the $6.8 million payment BFI received April 2, 2007.

In lieu of having to provide an accounting of S.P. Realty's 2007 payment to BFI, Tim agreed on November 1, 2007, to assign his 30% ownership interest in BFI to Edra, giving Edra a 60% ownership interest in BFI. On December 13, 2007, Tim and Edra, as trustees of the Beau Blixseth and Morgan Blixseth Trusts, conveyed each of the Trusts' 10% ownership interests in BFI to Beau and Morgan individually.⁶ Also on December 13, 2007, Edra executed two documents permitting Beau and Morgan to become Members of BFI, with each receiving their current 10% ownership interests.

In 2007, Alan Rye (“Rye”), an executive vice president of First Bank who was also in charge of First Bank's Southern California real estate group, learned that Edra and Tim were divorcing and that Edra may have a need for short-term funding.⁷ Rye thus contacted Edra. Following that contact, First Bank agreed to loan Edra $5 million on or about November 15, 2007. The $5 million loan transaction was set up as an unsecured line of credit and was intended to be a stopgap until First Bank could finalize a $30 million line of credit secured by Porcupine Creek, Tim and Edra's 230–acre personal residence in California.⁸ At that time, Rye...