Mont. Dep't of Revenue v. Blixseth, 2:13–cv–01324–JAD

• Decision Date: 15 December 2017
• Docket Number: 2:13–cv–01324–JAD
• Citation: 581 B.R. 882
• Parties: State of MONTANA DEPARTMENT OF REVENUE, Appellant/cross-appellee v. Timothy L. BLIXSETH, Appellee/cross-appellant
• Court: U.S. District Court — District of Nevada

581 B.R. 882

State of MONTANA DEPARTMENT OF REVENUE, Appellant/cross-appellee

v.Timothy L. BLIXSETH, Appellee/cross-appellant

2:13–cv–01324–JAD

United States District Court, D. Nevada.

Signed December 15, 2017

Keith A. Jones, Montana Department of Revenue, Helena, MT, Lynn Hamilton Butler, Husch Blackwell LLP, Austin, TX, Rodney M. Jean, Lionel, Sawyer & Collins, Mark J. Gardberg, Howard & Howard Attorneys PLLC, Las Vegas, NV, for Appellant/Cross-Appellee.

Mitchell D. Stipp, Las Vegas, NV, Nathan A. Schultz, Law Office of Nathan A. Schultz, P.C., Traverse City, MI, for Appellee/Cross-Appellant.

Decision Affirming Bankruptcy Court's Order Dismissing Involuntary Bankruptcy Case and Granting Motion for Leave to File Supplemental Authorities

[ECF No. 85]

Jennifer A. Dorsey, U.S. District Judge

This appeal and cross-appeal challenge the bankruptcy court's decision to dismiss the involuntary bankruptcy case that taxing authorities for the States of Montana, California, and Idaho filed against Timothy Blixseth. When Blixseth settled with the California and Idaho authorities a few weeks after the petition was filed, those creditors withdrew their support for the petition nunc pro tunc as of its filing date, and they took no further part in the bankruptcy case. Another creditor then joined in the petition. Blixseth moved to dismiss the case, arguing that the involuntary-bankruptcy standard was not met because three qualified creditors were needed to maintain the case, but none of the four contenders fit the bill.

The bankruptcy court allowed the parties to engage in expedited discovery and set the motion for an evidentiary hearing. After a two-day evidentiary hearing, the bankruptcy court converted the dismissal motion into one for summary judgment and dismissed the case. It found that Blixseth had met his burden to show that he had at least 12 creditors on the petition date, but that the petitioning creditors had not met their burden to show that those creditors were not qualified, so three qualified creditors were required to maintain the case against Blixseth. It held that, as amended in 2005, the involuntary bankruptcy statute now disqualifies petitioning creditors whose claims are the subject of any bona fide dispute as to amount, and it found that the petitioning creditors were not qualified because their claims were the subject of bona fide disputes. And, finally, the bankruptcy court concluded that the statute does not require the joining creditor's claim to be an undisputed debt.

Montana appeals all of the bankruptcy court's rulings except its determination that the joining creditor's claim was not required to be an undisputed debt.¹ Blixseth cross-appeals only the determination about the joining creditor's claim.² I have jurisdiction to consider the appeal and cross-appeal under 28 U.S.C. § 158(a), and I affirm.

Background

The State of Montana Department of Revenue (Montana), California Franchise Tax Board (California), and Idaho State Tax Commission (Idaho) filed an involuntary bankruptcy petition against Timothy Blixseth on April 5, 2011.³ Fifteen days later, Idaho and California each filed notice that they were withdrawing their participation in the petition nunc pro tunc as of the date it was filed due to settlements that they reached with Blixseth.⁴ The trustee of the Yellowstone Club Liquidating Trust (Yellowstone) then joined the involuntary petition,⁵ and Blixseth moved to dismiss the involuntary case, arguing that the petition did not meet 11 U.S.C. § 303(b)'s requirements because it lacked the support of three creditors who held noncontingent, undisputed claims against him.⁶

The bankruptcy court allowed the parties to conduct discovery on the dismissal issues and held a two-day evidentiary hearing on the motion.⁷ It then issued a written decision that converted the dismissal motion into one for partial summary judgment, granted the motion, and dismissed the involuntary bankruptcy case.⁸ The appeal and cross-appeal timely followed.⁹

Discussion

The bankruptcy code permits qualified creditors to file an involuntary bankruptcy case against an individual under certain conditions.¹⁰ To qualify as a petitioning creditor under the code, an entity must hold a claim against an individual "that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount...."¹¹ The petitioning creditors' "noncontingent, undisputed claims" must aggregate at least $14,425 more than the value of any lien on property of the debtor securing the holders' claims.¹² If the involuntary debtor has fewer than 12 qualified creditors (excluding employees, insiders, and any transferee of any transfer that is voidable under 11 U.S.C. §§ 544, 545, 547, 548, 549, or 724(a) ), then an involuntary case can be commenced by as few as one qualifying creditor.¹³ Otherwise, at least three qualifying creditors are needed to maintain an involuntary case against the individual.¹⁴

The parties challenge every aspect of the bankruptcy court's decision to dismiss the involuntary bankruptcy case. I begin with the question of how many qualified creditors were needed to maintain the case against Blixseth. I find that the bankruptcy court applied the correct standard to decide this question and not clearly err in its conclusion, so I affirm its decision that three qualified creditors were needed to maintain the case against Blixseth. I then consider whether there was a sufficient number of qualified creditors to maintain the involuntary case. I find that Montana and California are not qualified because their claims were the subject of bona fide disputes. Because that leaves only one petitioning creditor and a joining creditor, and they could not possibly fill the three-qualified-creditors requirement, I disregard the parties' remaining arguments as moot and affirm the bankruptcy court's decision to dismiss the involuntary bankruptcy case.

A. How many qualified creditors are needed to maintain the case against Blixseth?

If an individual has 12 or more creditors whose claims are not contingent as to liability or the subject of a bona fide dispute as to liability or amount—referred to as "qualified" creditors in the jurisprudence—then the support of three such creditors is needed to maintain an involuntary bankruptcy case against that individual.¹⁵ But if an individual has 11 or fewer qualified creditors, then an involuntary case can be maintained against him by a single qualified creditor.¹⁶

The bankruptcy court determined that three qualified creditors were needed to maintain the case against Blixseth because he had met his burden to show that he had at least 12 creditors on the petition date, but that the petitioning creditors had failed to meet their burden to show that any of those creditors should be disqualified.¹⁷ Montana argues that the bankruptcy court got the burden of proof wrong and erred in finding that Blixseth had met his burden but that the petitioning creditors had not.¹⁸

Reviewing courts "apply de novo review to questions of law, such as the question of whether the ... [bankruptcy] court applied the correct burden of proof."¹⁹ "Whether that burden of proof has been met, however, is reviewed for clear error."²⁰ Clear error is a "deferential" standard that "does not entitle [me] to overturn a finding ‘simply because [I am] convinced that [I] would have decided the case differently.’ "²¹ This standard requires me to have "a definite and firm conviction that a mistake has been made."²²

1. Burden of proof

Montana argues that the burden of proof on the number of qualified creditors needed to maintain an involuntary bankruptcy case is a shifting one: the debtor has the initial burden to "prove up the existence of 12 or more creditors" and, once met, the burden shifts "to the petitioning creditors to show ‘that the [d]ebtor has fewer than ... 12 ... bona fide creditors.’ "²³ According to Montana, the bankruptcy court erroneously placed the entire burden on the petitioning creditors. I disagree.

The bankruptcy court began by noting that petitioning creditors have the "burden to show that they have met all the requirements of Section 303(b). This includes showing that they collectively have a sufficient number of petitioning creditors."²⁴ It next analyzed whether Blixseth, the moving party, had proffered evidence showing that he had 12 or more creditors on the petition date.²⁵ It stated that Federal Rule of Bankruptcy Procedure 1003(b) requires that, if a debtor's "answer to an involuntary petition filed by fewer than three creditors avers the existence of 12 or more creditors," then "the debtor shall file with the answer a list of all creditors with their addresses...."²⁶ But, the court reasoned, FRBP 1003(b) did not apply because Blixseth filed a motion to dismiss the involuntary petition, not an answer.²⁷ The court then explained that Blixseth had responded "in discovery with a non-exhaustive list of 18 creditors he claimed he had on the Petition Date."²⁸ Montana, it continued, had engaged "in extensive cross examination on the issue"²⁹ during the hearing, and "Blixseth reiterated his discovery responses and authenticated documents related to each of these creditors."³⁰

The bankruptcy court then considered the parties' arguments and the evidence pertaining to the 18 creditors that Blixseth had identified. It determined that the evidence showed that Blixseth owed debts to at least 16 of those creditors on the petition date.³¹ The court found that those 16 creditors had continued to provide services to Blixseth and, thus, possessed at least "accrued but unbilled balances on the [p]etition [d]ate."³² The bankruptcy court recounted Blixseth's testimony that, for 11 of these creditors, "periodic, recurring" debts were "owed, undisputed and generally paid in the ordinary course."³³ As for the five professionals that Blixseth listed among his creditors, the bankruptcy court determined that Blixseth had "authenticated these debts to ...