State v. Blixseth (In re Blixseth)

• Decision Date: 17 December 2012
• Docket Number: Bankruptcy No. 11–15010.,BAP No. NV–11–1305–PaJuH.
• Citation: 484 B.R. 360
• Parties: In re Timothy L. BLIXSETH, Alleged Debtor. State of Montana, Department of Revenue, Appellant, v. Timothy L. Blixseth, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

484 B.R. 360

In re Timothy L. BLIXSETH, Alleged Debtor.State of Montana, Department of Revenue, Appellant,

v.Timothy L. Blixseth, Appellee.

BAP No. NV–11–1305–PaJuH.

Bankruptcy No. 11–15010.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted July 20, 2012.

Decided Dec. 17, 2012.

Lynn Hamilton Butler, of Brown McCarroll, LLP, Austin, TX, argued for Appellant; Charles D. Axelrod, of Fox Rothschild LLP, Los Angeles, CA, argued for Appellee.

Before: PAPPAS, JURY, and HOLLOWELL, Bankruptcy Judges.

OPINION

PAPPAS, Bankruptcy Judge.

The Montana Department of Revenue (“MDOR”) appeals the order of the bankruptcy court dismissing the involuntary bankruptcy petition it and others filed against the alleged debtor, Timothy Blixseth (Blixseth), for improper venue. We REVERSE.

FACTS

On April 5, 2011, MDOR, along with the Idaho State Tax Commission and the California Franchise Tax Board, filed an involuntary chapter 7 ¹ bankruptcy petition (the “Petition”) against Blixseth in the bankruptcycourt for the District of Nevada. The Petition listed Blixseth's residence and mailing address as Medina, Washington, and Blixseth's “county of residence or principal place of business” as Las Vegas, Nevada. The box on the Petition titled “Location of Principal Assets of Business Debtor (if different from previously listed address)” was left blank. The “Venue” box on the Petition indicated that venue in the District of Nevada was appropriate because Blixseth had been domiciled, had a residence, principal place of business, or had principal assets, in the District of Nevada for the longer part of 180 days before the petition was filed.

In the Petition, MDOR asserted a claim against Blixseth in the amount of $219,258,² the Idaho State Tax Commission asserted a claim against Blixseth for $1,117,914, and the California Franchise Tax Board asserted a claim against Blixseth for $986,957.95, all for unpaid taxes. Just a few days later, on April 20, after settling their claims with Blixseth, the Idaho State Tax Commission and the California Franchise Tax Board withdrew as petitioning creditors in the Petition, leaving MDOR as the sole petitioning creditor.

Meanwhile, on April 8, 2011, the bankruptcy court, acting sua sponte, had entered an “Order to Show Cause Why Venue in This District is Proper And Why Transfer of Case is Not Appropriate” (the “OSC”). In the OSC, the bankruptcy court noted that Blixseth's Washington street and mailing address were listed in the Petition. The court expressed concern that venue in Nevada was not proper “because of the paucity of the connection between Blixseth and the petitioning creditors' selected venue.” The OSC required the petitioning creditors to present admissible evidence sufficient to support a finding that venue in Nevada complied with 28 U.S.C. § 1408. That statute provides in pertinent part that:

[A] case under title 11 may be commenced in the district court for the district—

(1) in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located for the one hundred and eighty days immediately preceding such commencement ...;

The petitioning creditors responded to the OSC on April 18, 2011. In their response they asserted that, based on a thorough review of public records, the only indicator they had to determine proper venue for the involuntary bankruptcy case under 28 U.S.C. § 1408 was their discovery that Blixseth recently “had transferred most of his assets out of his personal name and into two Nevada corporate entities.” The petitioning creditors asserted that Blixseth's principal assets consisted of his 98% partner's interest in Desert Ranch LLLP, a Nevada limited liability limited partnership (“Desert Ranch”), and his 40% member's interest in Desert Ranch Management LLC, a Nevada limited liability company (“Desert Management”). The creditors contended, because Blixseth's equity interests in the two Nevada entities were his principal assets, venue was proper in Nevada. Additionally, the petitioning creditors outlined several factors that they argued militated against transfer of the case to another district.

In response to the OSC, Blixseth filed a motion to dismiss (“MTD”) the Petition.³ Blixseth asserted that there was no basis for venue for the bankruptcy case in Nevada. Blixseth stated that he had resided in Washington since 2007, after previously residing in California. Moreover, Blixseth asserted that he conducted no business in Nevada, had no place of business in Nevada, and had no property in Nevada.

Importantly, though, in a declaration filed to support the MTD, Blixseth acknowledged that his primary asset was indeed his 98% limited partnership interest in Desert Ranch. Blixseth Supplemental Omnibus Declaration at ¶ 21, May 4, 2011 (“All of my income derives from entities held by Desert Ranch LLLP.”). However, he explained that Desert Ranch is a holding company for a number of non-Nevada entities whose principal assets are real estate holdings located in Idaho, Washington, California, Mexico and the Turks & Caicos. He stated that the business records and original partnership agreement for Desert Ranch are maintained in Idaho; its bookkeeping is done in California; and the company conducts no business in Nevada.

Blixseth also admitted that his 40% member's interest in Desert Management comprised the rest of his principal assets. Blixseth explained that Desert Management is the general partner of Desert Ranch, and its only asset is a 2% interest in Desert Ranch. Blixseth noted that he and his son co-manage Desert Management, and that the LLC has no offices or place of business, and does not conduct business, in Nevada. Other than the interests in Desert Ranch and Desert Management, Blixseth stated, he owns only his personal effects.

A hearing on the OSC was conducted by the bankruptcy court on April 22, 2011. MDOR, by then the only petitioning creditor, argued that, based on Nevada's charging order statutes for LLCs and LLLPs, and a decision by a Washington appellate court interpreting a statute similar to the Nevada laws, for venue purposes, the location of a debtor's uncertificated interest in a limited liability company or a limited liability partnership is the entity's state of registration. The bankruptcy court continued the hearing so that the parties could submit briefs to more fully: (1) address the location of Blixseth's equity interests in Desert Ranch and Desert Management; (2) analyze the Nevada statutes regarding the right to obtain a charging order against a limited partner's partnership interest; and (3) discuss how Article 9 of the Uniform Commercial Code (“UCC”) would treat Blixseth's interests in Desert Ranch and Desert Management.

At the initial hearing, the bankruptcy court also asked MDOR to address why the interests of justice and convenience to the parties required that the case remain in Nevada, rather than transferring the case to a different venue. MDOR conceded that, as to the convenience of the parties, venue in Nevada made little difference since the petitioning creditors were not located in Nevada. However, MDOR argued that “the heart of a creditor's concern is the transfer of the assets ... into Nevada vehicles that are created for asset protection measures.” Hr'g Tr. (Apr. 22, 2011) at 28:21–23. MDOR argued that because Nevada law could apply to unwind the transfer, Nevada had a greater interestin the case than another state. Thus, MDOR argued that transfer to another venue was not in the interests of justice.

On April 27, 2011, Blixseth filed a renewed motion to dismiss and a motion for sanctions.⁴ Blixseth and MDOR submitted their supplemental briefs on May 4, 2011, and the continued hearing on the OSC was held May 18, 2011.

At the hearing on May 18, the bankruptcy court identified the issue before it as when “all someone has is an equity interest in a Nevada limited-liability, limited-partnership and a membership interest in an LLC, can you say for purposes of [28 U.S.C. § ] 1408 that his principal assets are in Nevada?” Hr'g Tr. (May 18, 2011) at 20:23–21:1. In its arguments to the court, MDOR asserted that Blixseth had a statutory connection with Nevada with respect to the governance and operation of Desert Ranch and Desert Management. Furthermore, MDOR reiterated its position that, based on the Nevada charging order statutes that require a creditor to enforce a judgment against a debtor's interest in an LLLP or LLC solely in a Nevada court, the location of the debtor's interest is the state of registration. Blixseth, however, argued that the common law principle that intangible assets are located at the person's domicile applied in this case and was supported by case law and the UCC.

At the close of the second hearing, the bankruptcy court announced its findings of fact and conclusions of law and ruled that venue of the bankruptcy case in Nevada was improper. While Blixseth had not argued so, the bankruptcy court concluded that intangible ownership interests have no physical location. Therefore, the bankruptcy court determined that, in this case, venue based on the location of Blixseth's principal assets was unavailable. And because it was undisputed that Blixseth did not reside, was not domiciled, and did not have a principal place of business in Nevada, there was no other basis for venue in Nevada.

In the alternative, the bankruptcy court noted that because courts have, for various non-venue purposes, ascribed a location for intangible assets, the bankruptcy court could also in this case determine the location of Blixseth's ownership interests in Desert Ranch and Desert Management. The court decided, applying the common law, that “you look to the residence of the owner of the intangible.” Hr'g Tr. (May 18, 2011) at 62:16–17. In the court's opinion, this view was ...