Opinion
11-15010-MKN
06-03-2021
In re: TIMOTHY L. BLIXSETH, Alleged Debtor.
Date: November 13, 2020
HONORABLE MIKE K. NAKAGAWA UNITED STATES BANKRUPTCY JUDGE
ORDER ON MONTANA DEPARTMENT OF REVENUE'S MOTION FOR RELIEF FROM JUDGMENT
In this Order, all references to "ECF No." are to the numbers assigned to the documents filed in this bankruptcy case as they appear on the case docket maintained by the Clerk of the Court. All references to "Section" are to provisions of the Bankruptcy Code, 11 U.S.C. § 101, et seq. All textual references to "Bankruptcy Rule" are to the Federal Rules of Bankruptcy Procedure. All textual references to "Civil Rule" are to the Federal Rules of Civil Procedure. All references to "FRE" are to the Federal Rules of Evidence.
On November 13, 2020, the court heard the Montana Department of Revenue's Motion for Relief From Judgment ("Relief Motion"). The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.
Pursuant to FRE 201(b), the court takes judicial notice of all materials appearing on the docket in the above-captioned case as well as the publicly filed documents referenced in those materials. See U.S. v. Wilson, 631 F.2d 118, 119 (9th Cir. 1980). See also Bank of Am., N.A. v. CD-04, Inc. (In re Owner Mgmt. Serv., LLC Trustee Corps.), 530 B.R. 711, 717 (Bankr. C.D. Cal. 2015) ("The Court may consider the records in this case, the underlying bankruptcy case and public records.").
On April 5, 2011 ("Petition Date"), the Montana Department of Revenue ("Montana"), joined by the Idaho State Tax Commission ("Idaho") and the California Franchise Tax Board ("California"), filed an involuntary Chapter 7 petition ("Involuntary Petition") against Timothy L. Blixseth, Alleged Debtor, commencing the above-captioned case ("Involuntary Proceeding"). (ECF No. 1). All three petitioning creditors asserted unsecured claims for unpaid taxes owing to their respective States, with $219, 258.00 asserted by Montana, $1, 117, 914.00 asserted by Idaho, and $986, 957.95 asserted by California.
On April 8, 2011, an Order to Show Cause Why Venue in this District is Proper and Why Transfer of Case is Not Appropriate ("OSC") was entered, setting an initial hearing date of April 22, 2011. (ECF No. 7).
On April 20, 2011, Idaho filed a notice of withdrawal from participation as a petitioning creditor. (ECF No. 20).
On April 20, 2011, the Alleged Debtor filed a response to the OSC that included a request to dismiss or abstain ("Dismissal Request"). (ECF No. 23). The Alleged Debtor's Dismissal Request also sought monetary sanctions against the petitioning creditors under Bankruptcy Rule 9011 and Section 303(i).
On April 20, 2011, California also filed a notice of withdrawal from participation as a petitioning creditor. (ECF No. 26).
On April 22, 2011, the initial hearing was held on the OSC by the assigned bankruptcy judge, Bruce A. Markell ("Judge Markell"). The OSC hearing was continued to May 18, 2011.
On April 27, 2011, the Alleged Debtor filed a motion under Bankruptcy Rule 9011 for sanctions to be awarded against Montana and its agents and attorneys. (ECF No. 55). The motion was set to be heard at the same time as the continued OSC hearing.
On May 5, 2011, a motion for relief from stay was filed by the Yellowstone Club Liquidating Trustee ("YCLT") to allow it to proceed with various appellate matters related to separate bankruptcy proceedings arising out of the United States Bankruptcy Court for the District of Montana ("YCLT RAS Motion"). (ECF No. 82). That motion was noticed to be heard on June 7, 2011. (ECF No. 83).
On May 18, 2011, the continued OSC hearing was conducted. After consideration of the evidence and arguments presented, Judge Markell orally ruled that the Alleged Debtor's principal assets, consisting of intangible interests in two Nevada limited liability companies, are not located in Nevada, but at the place of the Alleged Debtor's undisputed residence in the State of Washington. As a result, the court concluded that the Involuntary Proceeding should be dismissed for lack of venue. The court also concluded that jurisdiction should be retained to consider the issuance of sanctions against the petitioning creditors and their representatives.
A transcript of the continued OSC hearing ("OSC Transcript") was filed on May 24, 2011. (ECF No. 120).
On May 27, 2011, Judge Markell entered an "Order Dismissing Involuntary Petition Against Alleged Debtor Timothy L. Blixseth" that incorporated by reference his oral rulings issued at the OSC hearing ("First Dismissal Order"). (ECF No. 122). In light of the dismissal, the court also concluded that Alleged Debtor's Dismissal Request was moot as well as the YCLT RAS Motion. That order reserved jurisdiction over the Alleged Debtor's sanction requests and directed the filing of renewed motions.
On June 10, 2011, Montana appealed the First Dismissal Order to the Bankruptcy Appellate Panel for the Ninth Circuit ("BAP"). (ECF No. 146).
In his oral ruling on the OSC, Judge Markell noted that both Idaho and California had filed withdrawals from participation in the case nunc pro tunc to the Petition Date, but that no order approving the withdrawals had been entered. See OSC Transcript at 55:7-13. The court also noted that Montana was the only petitioner actively participating in response to the OSC.
On June 30, 2011, Judge Markell entered an order denying Montana's request for a stay pending its appeal of the First Dismissal Order. (ECF No. 186).
On July 19, 2011, however, the BAP entered an order granting Montana's request for a stay pending appeal of the First Dismissal Order. (ECF No. 236). Later the same day, this bankruptcy court entered an "Order Regarding Stay Pending Appeal." (ECF No. 237). That order stated, inter alia, that "Given the stay pending appeal issued today by the Bankruptcy Appellate Panel, all hearings in this case are hereby taken off calendar, and the parties are ordered to hold in abeyance all discovery. No new motions of any type may be filed without the prior permission of the Bankruptcy Appellate Panel confirming that its stay does not prohibit the filing and prosecution of such motions. If, or when, the stay is dissolved or appropriately modified, the court will hold a status conference to assess what actions should then be taken."
On December 17, 2012, a divided three-judge panel of the BAP entered an Opinion reversing the First Dismissal Order. (ECF No. 250). The majority concluded that the Alleged Debtor's intangible interests in the two Nevada limited liability companies were located in Nevada and venue in Nevada therefore was proper. The dissent agreed with Judge Markell that the Alleged Debtor's interest in those assets are general intangibles that are located for venue purposes at the Alleged Debtor's place of residence in the State of Washington.
On December 18, 2012, the bankruptcy court entered an Order Setting Scheduling Conference. (ECF No. 251). The order directed Montana, Idaho, California, and the Alleged Debtor to appear for a scheduling conference.
On January 11, 2013, after the scheduling conference was conducted, a Scheduling Order was entered. (ECF No. 256).
On January 18, 2013, the Alleged Debtor filed a Renewed Motion to Dismiss Involuntary Case ("Second Dismissal Motion"). (ECF No. 261). The Alleged Debtor asserted that it had more than 12 creditors and that the Involuntary Petition no longer had at least 3 petitioning creditors as required by Section 303(b)(1).
On January 23, 2013, pursuant to the Scheduling Order, Montana and the Alleged Debtor filed a Joint Discovery Plan regarding the Second Dismissal Motion. (ECF No. 265). That plan provided deadlines for expedited discovery to be conducted, including production of documents, deposition of witnesses, issuance of subpoenas, and the like. It further provided deadlines for the submission of witness declarations, excerpts of deposition transcripts, witness lists, exhibit lists, and trial stipulations. The Joint Discovery Plan was approved by a court order entered on January 24, 2013. (ECF No. 266).
On January 25, 2013, an amendment to the Joint Discovery Plan was submitted by Montana and the Alleged Debtor. (ECF No. 270). The amended Joint Discovery Plan was approved by a court order that set the trial of the Second Dismissal Motion for February 27, 2013. (ECF No. 271). On February 1, 2013, an order was entered vacating the hearing on the Second Dismissal Motion as well as the discovery deadlines. (ECF No. 283).
On March 15, 2013, the bankruptcy court entered another Order Setting Scheduling Conference. (ECF No. 294). The order directed Montana and the Alleged Debtor to appear for a scheduling conference to be held on March 25, 2013.
On March 22, 2013, Montana filed a motion to abate further proceedings on the Second Dismissal Motion to allow "global mediation" to be pursued. (ECF No. 297).
On March 25, 2013, the court conducted the scheduling conference at which time a two-day trial on the Second Dismissal Motion was set for June 13 and 14, 2013. The court directed counsel for Montana and the Alleged Debtor to submit a related scheduling order.
On March 28, 2013, a further amended Joint Discovery Plan was submitted by Montana and the Alleged Debtor. (ECF No. 306). The further amended Joint Discovery Plan specifically provided that the Second Dismissal Motion would "be limited to contested issues under 11 U.S.C. §303(b)" and that "[d]iscovery and trial on the Motion shall be limited as such and, therefore, will not encompass contested issues under 11 U.S.C. §303(h), (i), (k) and F.R.B.P. 9011." Joint Discovery Plan at ¶3. It also scheduled a pretrial conference to be held on May 28, 2013.
On April 2, 2013, the Alleged Debtor filed an amendment to the Second Dismissal Motion as permitted by the further amended Joint Discovery Plan. (ECF No. 309).
On April 9, 2013, an order was entered approving the further amended Joint Discovery Plan, including the agreed terms and deadlines specified therein. (ECF No. 313).
On April 17, 2013, Montana filed a notice of deposition and subpoena duces tecum with respect to the California Franchise Tax Board. (ECF No. 330).
On May 6, 2013, Montana filed an amended notice of deposition and subpoena duces tecum with respect to Michael J. Flynn. (ECF No. 350).
On May 8, 2013, Brian A. Glasser, as Trustee of the YCLT, filed a "Notice of Joinder in Involuntary Petition" pursuant to which the YCLT joined the Involuntary Petition. (ECF No. 359). YCLT asserted an unsecured claim in the amount of $40, 992, 210.81, based on a judgment previously entered by the bankruptcy court in Montana.
On May 13, 2013, Montana filed notices of deposition and subpoena duces tecum with respect to the California Franchise Tax Board as well as with respect to the Idaho State Tax Commission. (ECF Nos. 367 and 370).
On May 14, 2013, the Alleged Debtor filed a notice of deposition and notice of subpoena with respect to the California Franchise Tax Board (ECF Nos. 376 and 377), as well as with respect to the Idaho State Tax Commission. (ECF Nos. 378 and 379). The following day, the Alleged Debtor filed amended notices of subpoena with respect to both entities. (ECF No. 383 and 384).
On May 16, 2013, a Second Amended Joint Discovery Plan was submitted by Montana and the Alleged Debtor. (ECF No. 390). The amended discovery plan specifically provided that the Second Dismissal Motion would "be limited to contested issues under 11 U.S.C. §303(b)" and that "[d]iscovery and trial on the Motion shall be limited as such and, therefore, will not encompass contested issues under 11 U.S.C. §303(h), (i), (k) and F.R.B.P. 9011." Second Amended Joint Discovery Plan at ¶3. Attached to the amendment were preliminary witness lists from both Montana and the Alleged Debtor, that included unnamed representatives from Idaho and California.
On May 20, 2013, the Alleged Debtor filed an amended notice of subpoena and amended notice of deposition of Todd Bailey of the California Franchise Tax Board. (ECF Nos. 400 and 401).
On May 22, 2013, an order was entered approving the Second Amended Joint Discovery Plan. (ECF No. 413).
On May 28, 2013, a pretrial conference was conducted confirming the June 13 and 14, 2013 trial dates.
On June 4, 2013, a Third Amended Joint Discovery Plan was filed. (ECF No. 465). The amended discovery plan set specific deadlines for certain depositions to be taken, as well as to exchange copies of all declarations, excerpts of deposition transcripts and exhibits to be used at trial. The further amended discovery plan specifically provided that the Second Dismissal Motion would "be limited to contested issues under 11 U.S.C. §303(b)" and that "[d]iscovery and trial on the Motion shall be limited as such and, therefore, will not encompass contested issues under 11 U.S.C. §303(h), (i), (k) and F.R.B.P. 9011." Third Amended Joint Discovery Plan at ¶3. Attached to the Third Amended Joint Discovery Plan were preliminary witness lists from both Montana and the Alleged Debtor, which included the Alleged Debtor and unnamed representatives from Idaho and California. Also included on the witness lists were individuals named Mike Flynn ("Flynn"), Spencer Marks ("Marks"), Kim Davis ("Davis"), and Pete Donnelly ("Donnelly").
On June 6, 2013, an order was entered approving the Third Amended Joint Discovery Plan. (ECF No. 472).
On June 11, 2013, counsel for the Alleged Debtor and counsel for Montana filed a Joint Statement of Evidentiary Objections and Responses Thereto ("Joint Evidentiary Objections"). (ECF No. 490). Among other items, the Alleged Debtor and Montana objected to their respective designations and counter-designations of the deposition testimony of Patrick Fox, (California Franchise Tax Board Representative) Laura Shuck, Joel Silverman, Dan Bucks, and a representative of the Idaho State Tax Commission. See Joint Evidentiary Objections at Tables 8, 9, 10, 11, 12, 13, 14, and 15.
On June 13 and June 14, 2013, Judge Markell conducted a trial on the Second Dismissal Motion at which testimony was presented by multiple witnesses and more than 200 exhibits were offered into evidence. After the conclusion of the trial, the court scheduled closing arguments for July 5, 2013, with final evidentiary rulings to be issued prior to submission of post-trial briefs.
Transcripts of the trial on the Second Dismissal Motion ("Trial Transcripts") were filed on June 20 and 21, 2013. (ECF Nos. 496, 497, 498, 499, and 504). The Trial Transcripts include the live trial testimony of the Alleged Debtor, Flynn, Marks, Donnelly, and Davis, as well as individuals named Jerry Keller ("Keller") and Thomas Morrison ("Morrison"). Flynn testified as an attorney that consulted with the Alleged Debtor's representatives who had negotiated settlements with Idaho and California. Marks, Donnelly, Davis, and Keller testified as current or former employees with the Montana Department of Revenue. Direct testimony declarations from Flynn, Marks, Donnelly, Davis, and Keller were admitted into evidence, subject to the court's subsequent rulings on the Joint Evidentiary Objections. The Alleged Debtor, Flynn, Marks, Donnelly, Davis, and Keller were subject to cross-examination at trial. Morrison was offered by Montana as a percipient witness and as an expert witness, but the court sustained the Alleged Debtor's objection to his testimony in both capacities.
On July 2, 2013, Judge Markell entered omnibus rulings on the parties' evidentiary objections raised before and during trial, including those set forth in the Joint Evidentiary Objections ("Omnibus Evidentiary Rulings"). (ECF No. 512).
On July 3, 2013, post-trial closing briefs were filed by the Alleged Debtor and by Montana. (ECF Nos. 515 and 516).
On July 5, 2013, closing arguments were presented by counsel and the Second Dismissal Motion was taken under submission.
A transcript of the closing arguments on the Second Dismissal Motion was filed on July 8, 2013. (ECF No. 525).
On July 10, 2013, Judge Markell entered an "Order Granting Motion to Dismiss Involuntary Case" ("Second Dismissal Order"). (ECF No. 528). The court found that the Alleged Debtor had at least 12 creditors as of the date of the Involuntary Petition and concluded that the petition therefore must be supported by at least 3 qualifying creditors under Section 303(b)(1). See Second Dismissal Order at 5:9 to 9:2. The court further held that if any amount of a petitioning creditor's claim is subject to a bona fide dispute, the creditor is disqualified from filing or joining in an involuntary petition under Section 303(b). Id. at 9:3 to 14:2. Based on the evidence presented, Judge Markell found that Idaho's claim was subject to bona fide dispute because its acceptance of a discounted settlement inferred the petitioning creditor's own concerns about the Alleged Debtor's liability. Id. at 14:4-15. The court also found that California's claim was subject to bona fide dispute because the settlement of its claim required the existence of a good faith dispute to serve as consideration for an enforceable settlement agreement. Id. at 14:16 to 15:3. Judge Markell concluded that because the claims of both Idaho and California were subject to bona fide dispute, both were disqualified as petitioning creditors. Id. at 15:4-6. The court further concluded that YCLT qualified as a creditor that joined in the petition under Section 303(c) notwithstanding a possible contingency or dispute as to its claim. Id. at 15:7 to 16:8. Finally, Judge Markell found that at least part of Montana's claim was subject to bona fide dispute as to liability and amount, thereby disqualifying Montana from being a petitioning creditor. Id. at 16:9 to 17:12. Because the Involuntary Petition was not filed or joined by at least 3 qualifying creditors as required by Section 303(b), Judge Markell concluded that the requirements for involuntary bankruptcy relief had not been met and therefore granted the Second Dismissal Motion.
Judge Markell having found that the Alleged Debtor had 12 or more creditors, Section 303(b)(2) would not have applied to permit YCLT alone to file an involuntary petition, even if its claim was not subject to bona fide dispute as to liability or amount.
On July 22, 2013, Montana filed a notice of appeal with respect to the Second Dismissal Order. (ECF No. 541).
On July 23, 2013, the Alleged Debtor filed an election to have the appeal heard by the United States District Court for the District of Nevada ("USDC") rather than the BAP. (ECF No. 549). As a result of that election, Montana's appeal of the Second Dismissal Order was transferred to the USDC, assigned to Judge Jennifer Dorsey ("USDC Judge Dorsey"), and denominated Case No. 2:13-cv-01324-JAD ("USDC Appeal"). (USDC ECF No. 4).
Where necessary, "USDC ECF No." will be used in this Order to identify documents filed in the USDC Appeal.
Excerpts of the record on appeal were filed with the USDC on August 21, 2014 ("USDC Record"). (USDC ECF No. 58). Copies of the declarations of certain witnesses who testified at trial, see note 5, supra, were included in the USDC Record. (USDC ECF No. 58-11, MER01439 to MER01476). Copies of the exhibits admitted at trial also were included in the USDC Record.
On July 24, 2013, the Alleged Debtor filed "Timothy L. Blixseth's Motion for Judgment and for Costs and Fees Pursuant to 11 U.S.C. §§105 and 303(i)(1)" pursuant to which the Alleged Debtor requested sanctions against Montana and the YCLT ("303(i)(1) Motion"). (ECF No. 554).
On August 5, 2013, the Alleged Debtor filed a cross appeal of the Second Dismissal Order "with respect to the Bankruptcy Court's ruling regarding the claim of" the YCLT. (ECF Nos. 566 and 568). On that same day, an election was filed to have the cross appeal heard by the USDC. (ECF No. 569).
On August 7, 2013, the cross appeal was referred to the USDC. (ECF No. 575).
On August 9, 2013, Montana filed in the bankruptcy court a "Petitioning Creditor Montana Department of Revenue's Motion for Stay Pending Appeal" ("Stay Motion"). (ECF No. 583).
On August 15, 2013, the Alleged Debtor filed an objection to the Stay Motion (ECF No. 592) and a supplemental objection on August 30, 2013 (ECF No. 612).
On September 6, 2013, Montana filed a reply in support of the Stay Motion. (ECF No. 621).
On September 13, 2013, the Bankruptcy Judge William T. Thurman ("Judge Thurman") presided over a hearing on the Stay Motion. At the conclusion of the parties' arguments, Judge Thurman issued his oral findings of fact and conclusions of law granting the Stay Motion in light of, among other reasons, the "irreparable harm" that Montana could suffer if the Alleged Debtor was allowed to continue seeking discovery of privileged material in furtherance of the 303(i)(1) Motion.
A transcript of the hearing before Judge Thurman was filed on September 18, 2013. (ECF No. 631).
On September 20, 2013, Judge Thurman entered an "Order Granting a Stay of Proceedings Pending Appeal" ("Stay Order") pursuant to which he stayed "all 11 U.S.C. § 303(i) and other post-dismissal proceedings against Montana, pending final resolution of the appeals by Montana and Mr. Blixseth" of the Second Dismissal Order. (ECF No. 635). The Stay Order does not expressly reference the Alleged Debtor's cross-appeal or otherwise mention the YCLT.
On October 2, 2013, the Alleged Debtor filed "Timothy L. Blixseth's Motion Pursuant to Fed.R.Bankr.P. 9023 and Fed.R.Civ.P. 59(e) to Amend Order Granting a Stay of Proceedings Pending Appeal" ("Reconsideration Motion"). (ECF No. 638). By the Reconsideration Motion, the Alleged Debtor asked the bankruptcy court to lift the stay and authorize him to continue prosecuting the 303(i)(1) Motion, including authorizing him to continue conducting discovery.
On October 23, 2013, Montana filed an objection to the Reconsideration Motion. (ECF No. 648).
On October 30, 2013, the Alleged Debtor filed a reply in support of the Reconsideration Motion. (ECF No. 651).
On November 6, 2013, Judge Thurman presided over a hearing on the Reconsideration Motion. At the conclusion of the parties' arguments, Judge Thurman issued his oral findings of fact and conclusions of law denying the Reconsideration Motion.
On November 12, 2013, Judge Thurman incorporated his oral findings of fact and conclusions of law made at the November 6 hearing into an order denying the Reconsideration Motion ("Reconsideration Order"). (ECF No. 653).
On April 19, 2017, approximately three and a half years after Judge Thurman's entry of the Reconsideration Order, the Alleged Debtor filed a motion in the bankruptcy court seeking a variety of relief, including to lift the Stay Order previously entered in the case, to enter sanctions against Montana for various alleged misconduct, and for a protective order ("Sanctions Motion"). (ECF No. 673). On the same date, the Alleged Debtor filed a separate motion in the bankruptcy court requesting the YCLT successor trustee to show cause whether he has preserved or destroyed evidence ("OSC Motion"). (ECF No. 674).
On September 12, 2017, the court heard the Alleged Debtor's Sanctions Motion as well as his OSC Motion, and took them under submission.
On December 15, 2017, USDC Judge Dorsey, entered her decision affirming the Second Dismissal Order ("USDC Decision"). (USDC ECF No. 87). The USDC agreed that the Alleged Debtor had more than 11 creditors and that there were not at least three qualifying creditors. USDC Judge Dorsey therefore affirmed the Second Dismissal Order.
On December 20, 2017, the bankruptcy court entered an order denying the Sanctions Motion. (ECF No. 728). On the same date, the bankruptcy court entered an order denying the OSC Motion. (ECF No. 730). On January 11, 2018, Montana appealed the USDC Decision to the United States Court of Appeals for the Ninth Circuit ("Ninth Circuit"). (USDC ECF No. 88).
Where necessary, "9th ECF No." will be used in this Order to identify documents filed in the proceedings before the Ninth Circuit.
On March 6, 2018, YCLT filed a notice of withdrawal from participation as a petitioning creditor in the Involuntary Proceeding. (ECF No. 737).
On November 26, 2019, the Ninth Circuit entered its Opinion affirming in part and remanding in part to the bankruptcy court ("Circuit Opinion"). See State of Montana Department of Revenue v. Blixseth, 942 F.3d 1179 (9th Cir. 2019). Agreeing with Judge Markell and USDC Judge Dorsey, the circuit panel held that "a creditor whose claim is the subject of a bona fide dispute as to amount lacks standing to serve as a petitioning creditor under §303(b)(1) even if a portion of the claim amount is undisputed." Id. at 1186. The circuit panel also agreed that "on the petition date, the vast majority of [Montana's] claim remained disputed. As a result, [Montana's] claim was the subject of a bona fide dispute as to amount." Id. at 1187. The panel's decision then concluded as follows: "[Montana] also disputes whether Idaho, California, and [YCLT"]'s claims may sustain the petition individually or in combination. We do not reach these issues because all other petitioning creditors have withdrawn their participation in the underlying bankruptcy proceeding. Instead, we remand for the bankruptcy court to determine whether this matter should be dismissed for want of prosecution consistent with 11 U.S.C. § 303(j)(3)." Id. (Emphasis added.)
On January 6, 2020, the Ninth Circuit entered its order denying the Alleged Debtor's petition for rehearing. (9th ECF No. 52).
On January 14, 2020, the Ninth Circuit entered its mandate. (9th ECF No. 53).
On February 19, 2020, the USDC entered the "Order on Mandate," wherein the matter was remanded back to the bankruptcy court for "further proceedings consistent with the Ninth Circuit's instructions." (USDC ECF No. 94). On August 10, 2020, the Alleged Debtor filed and served a request for a status conference and noticed the matter to be heard by the bankruptcy court on September 16, 2020. (ECF Nos. 757 and 758).
On September 11, 2020, Montana filed and served a "Position Paper." (ECF No. 764).
On September 16, 2020, counsel for the Alleged Debtor and counsel for Montana appeared at the status conference at which time the bankruptcy court set deadlines for both parties to file motions in accordance with the instructions from the Ninth Circuit. The motions were ordered to be heard concurrently on November 13, 2020.
An order incorporating the briefing and hearing schedule was entered on October 15, 2020. (ECF No. 776). Notice of entry of the order was served on all creditors and parties in interest. (ECF No. 778).
On October 9, 2020, Montana filed and served the instant Relief Motion along with a memorandum in support thereof ("Montana Brief"). (ECF Nos. 770 and 771). As directed at the prior status conference, the Relief Motion was scheduled to be heard on November 13, 2020.
On October 9, 2020, the Alleged Debtor filed and served a 303(j) Motion. (ECF No. 772). The 303(j) Motion was scheduled to be heard concurrently with the Relief Motion.
On October 14, 2020, the Alleged Debtor also filed and served a Motion to Strike Montana Department of Revenue's Motion for Relief from Judgment ("Strike Motion"). (ECF Nos. 774 and 775). The Strike Motion also was scheduled to be heard concurrently with the Relief Motion and the 303(j) Motion.
On October 30, 2020, an opposition to the 303(j) Motion was filed by Montana. (ECF No. 783).
On October 30, 2020, an opposition to the Relief Motion was filed by the Alleged Debtor ("Relief Opposition"). (ECF No. 785).
On October 30, 2020, an opposition to the Strike Motion was filed by Montana. (ECF No. 784).
On November 6, 2020, a reply in support of the Relief Motion was filed by Montana ("Relief Reply"). (ECF No. 786). On November 6, 2020, an omnibus reply in support of the Strike Motion as well as the 303(j) Motion was filed by the Alleged Debtor. (ECF No. 787).
On November 13, 2020, the concurrent hearing was conducted on the Relief Motion, Strike Motion, and 303(j) Motion.
The Strike Motion and the 303(j) Motion are the subject of separate orders entered contemporaneously herewith.
DISCUSSION
Montana brings the instant Relief Motion under Civil Rule 60(b)(6), seeking to vacate the Second Dismissal Order. See Montana Brief at ¶ 5. Civil Rule 60 applies in bankruptcy proceedings pursuant to Bankruptcy Rule 9024. Civil Rule 60(b)(6) is preceded by five other specific reasons to relieve a party from a prior judgment. See Fed.R.Civ. P. 60(b)(1, 2, 3, 4, and 5). Civil Rule 60(c) provides that relief sought for the first three reasons must be sought no more than one year after entry of the subject judgment, and for the last three reasons, relief must be sought "within a reasonable time." See Fed.R.Civ.P. 60(c)(1). Civil Rule 60(b)(6) then provides that relief from a prior judgment may be granted for "any other reason that justifies relief." Fed.R.Civ.P. 60(b)(6). In light of this express language, it is well established that relief under Civil Rule 60(b)(6) must be based on some ground that would not be encompassed by Civil Rules 60(b)(1, 2, 3, 4, or 5). See Lyon v. August S.P.A., 252 F.3d 1078, 1088 (9th Cir. 2001); Molloy v. Wilson, 878 F.2d 313, 316 (9th Cir. 1989); Pineda v. Gipson, 2020 WL 1892459, at *1 n.2 (E.D. Cal. Apr. 16, 2020). See also Liljeberg v. Health Services Acquisition Corp., 486 U.S. 847, 863 n.11 (1988)("Rather, 'extraordinary circumstances' are required to bring the motion within the 'other reason' language and to prevent clause (6) from being used to circumvent the 1-year limitation period that applies to clause (1). This logic, of course, extends beyond clause (1) and suggests that clause (6) and clauses (1) through (5) are mutually exclusive."); Sattler v. Russell (In re Sattler), 2020 WL 2897257, at *5 (B.A.P. 9th Cir. June 1, 2020). The burden of establishing "other reasons that justify relief' lies with the moving party. See Community Dental Services v. Tani, 282 F.3d 1164, 1168 (9th Cir. 2002). Ordinarily, this requires proof of extraordinary circumstances that prevented a litigant from seeking earlier, more timely relief. See United States v. Alpine Land & Reservoir Co., 984 F.2d 1047, 1049 (9th Cir. 1993). Where there is delay in seeking relief, fault or lack of fault by the moving party should be considered. See Pioneer Inv. Services v. Brunswick Assoc., 507 U.S. 380, 393-94 (1993). Extraordinary circumstances do not exist where the moving party made a deliberate litigation choice and subsequently sought relief from that choice. See Ackermann v. United States, 340 U.S. 193, 198 (1950); Afoa v. China Airlines, Ltd., 817 Fed.Appx. 369, 371 (9th Cir. 2020). In that situation, the party should not be provided relief under Civil Rule 60(b)(6). See United States v. Wyle (In re Pacific Far East Lines, Inc.), 889 F.2d 242, 250 (9th Cir. 1989).
In sequence, those five other reasons are: "(1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b); (3) fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party; (4) the judgment is void; (5) the judgment has been satisfied, released, or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable..."
In this instance, the Second Dismissal Order was entered on July 10, 2013, and Montana filed its current Relief Motion on October 9, 2020. More than seven years have passed.
Montana maintains that relief from the Second Dismissal Order is appropriate under Civil Rule 60(b)(6) because Judge Markell erred in finding that the California and Idaho claims are subject to bona fide dispute. See Montana Brief at 6:5 to 9:4. Attached to its brief are copies of five exhibits. Exhibit "A" is a copy of portions of the Alleged Debtor's California Nonresident or Part-Year Resident Income Tax Return 2007. Exhibit "C" is a copy of a settlement agreement dated April 18, 2011, between the Alleged Debtor and the California Franchise Tax Board, that includes California's withdrawal of its participation in this involuntary bankruptcy proceeding and the Alleged Debtor's release of any claims under Section 303(i). Exhibit "E" is a copy of a "Settlement Agreement Summary" dated April 18, 2011, apparently prepared by the Idaho State Tax Commission. Exhibit "B" is a copy of excerpts from the second day transcript of the trial conducted by Judge Markell. Exhibit "D" is a copy of excerpts from the first day transcript of the trial before Judge Markell.
None of the copies are authenticated under FRE 901, but all appear to have been submitted as part of the record of the USDC Appeal.
In response, the Alleged Debtor argues that Montana's request for relief under Civil Rule 60(b)(6) is barred by the law of the case doctrine. See Relief Opposition at 4:4 to 7:17, citing, e.g., Milgard Tempering v. Salas Corp. of Am., 902 F.2d 703, 715 (9th Cir. 1990). Additionally, the Alleged Debtor maintains that Montana has failed to demonstrate exceptional circumstances under Civil Rule 60(b)(6) sufficient to vacate the Second Dismissal Order. Id. at 9:12 to 13:2. Finally, the Alleged Debtor argues that Montana lacks constitutional standing to bring the Relief Motion. Id. at 13:4 to 14:22.
In reply, Montana maintains that application of the law of the case doctrine is discretionary, see Relief Reply at 2:18 to 4:19, citing, e.g., Arizona v. California, 460 U.S. 605, 618 (1983), that extraordinary circumstances exist under Civil Rule 60(b)(6), see Relief Reply at 4:21 to 7:12, and that it has standing to bring the instant Relief Motion. Id. at 7:14-22. No additional exhibits or materials accompanies Montana's reply.
The court has considered the written and oral arguments of counsel, along with the exhibits offered in support of the request, and the record of these lengthy proceedings. The court concludes that Montana has failed to meet its burden of demonstrating extraordinary circumstances entitling it to relief under Civil Rule 60(b)(6). Several reasons lead to this conclusion.
First, there are no grounds for relief from the Second Dismissal Order based on the evidence. Civil Rule 60(b)(6) does not provide a "do over." A party's mere dissatisfaction with a trial court ruling does not constitute extraordinary circumstances under Civil Rule 60(b)(6). See Twentieth Century-Fox Film Corp. v. Dunnahoo, 637 F.2d 1338, 1341 (9th Cir. 1981). The Second Dismissal Motion was filed on January 18, 2013. Trial commenced on June 13, 2013. Montana and the Alleged Debtor engaged in extensive discovery prior to the trial. Depositions were scheduled and/or taken of multiple individuals, including representatives of tax authorities for Montana, Idaho, and California, as well as the Alleged Debtor's tax consultant and other professionals. Document subpoenas were issued to multiple entities, including tax authorities for Idaho and California, as well as the Alleged Debtor's professionals. The discovery was taken pursuant to multiple discovery plans agreed to by the litigants and approved by the bankruptcy court. Multiple witnesses testified at trial and hundreds of exhibits were admitted into evidence. Portions of the designated excerpts of the deposition transcripts of witnesses who did not testify at trial, including from the Idaho and California tax authorities, were offered and admitted into evidence.
The evidentiary exhibits on which Montana now seeks relief are the same as those presented to Judge Markell. Exhibits "A," "C," and "E" are merely copies of some of the same items presented and considered previously. More important, the transcripts of the two-day trial before Judge Markell reflect that the same exhibits were the subject of or could have been the subject of live witness testimony presented in open court. All of the trial witnesses provided direct testimony and all of them were subject to cross-examination. Deposition excerpts of the witnesses who did not testify at the trial were admitted into evidence. Whatever persuasive value may have been provided by the exhibits could have been explored through the live witness and deposition testimony offered at trial. Montana has provided no evidence by declaration, affidavit, or otherwise, suggesting a defect in any of the testimony or exhibits presented at trial, or in the opportunity to present evidence at trial. In short, Judge Markell's factual determinations were based on an evidentiary record fully presented by Montana and the Alleged Debtor.
The Alleged Debtor characterizes Montana's request as being a time-barred "newly discovered evidence" argument under Civil Rule 60(b)(2) that is not supported by any newly discovered evidence. See Relief Opposition at 7:19-21 and 8:18-25. While the characterization is somewhat comical, it apparently is intended to suggest that Montana has not met its burden of proof or persuasion.
Second, there are no grounds for relief from the Second Dismissal Order based on the facts. There is no dispute that Idaho filed its notice of withdrawal from participation on April 20, 2011, i.e., less than three weeks after the Involuntary Petition was filed. There is no dispute that California also filed its notice of withdrawal from participation on April 20, 2011, i.e., less than three weeks after the Involuntary Petition was filed. There is no dispute that Idaho entered into a settlement with the Alleged Debtor on April 18, 2011. There is no dispute that a Settlement Agreement Summary dated April 18, 2011, was prepared by the Idaho tax authority after the Involuntary Petition was filed. See Exhibit "E" to Montana Brief. There also is no dispute that a "Settlement and Closing Agreement" dated April 18, 2011, between the Idaho State Tax Commission and the Alleged Debtor ("Idaho Agreement") also was included in the evidentiary record before Judge Markell. See USDC Record, Attachment 6, Appendix MER, Tabs 31-47, at MER 01030-01031. There is no dispute that the California Franchise Tax Board and the Alleged Debtor also entered into an Agreement dated April 18, 2011, to settle their disputes ("California Agreement"). See Exhibit "C" to Relief Motion. See also USDC Record, Attachment 4, Appendix MER, Tabs 17-24, at MER 00821-00824. There is no dispute that the agreement between California and the Alleged Debtor was included in the evidentiary record before Judge Markell. There is no dispute the settlement with Idaho included a discount of the tax liability originally asserted by Idaho in the Involuntary Petition. There is no dispute that the settlement with California included the following recital: "FTB contends that, as of April 18, 2011, Blixseth owes FTB $992, 300.99 related to the 2007 tax year and that the current per diem amount on this obligation is $108.75. Blixseth disputes this amount contending that he is owed a substantial refund from FTB, which he is prepared to litigate in the appropriate forum. Blixseth also contends that he has other claims against FTB."
There is no dispute that both of the settlement agreements contained language to limit the Alleged Debtor's pursuit of claims resulting from the commencement of the Involuntary Proceeding. See Idaho Agreement at ¶ 4 (stating that "nor shall any suit, action, or proceeding for determination, assessment, collection, refund or credit or any other claim be brought by either party."); California Agreement at ¶ 7 (specifically waiving rights including under Section 303(i)). No witnesses at trial disputed the contents of any of these documents, nor did their testimony persuade Judge Markell that there was no dispute as to the Alleged Debtor's tax obligations. Moreover, Montana has offered no evidence in support of the Relief Motion to undermine the factual findings on which Judge Markell reached his conclusions.
Third, there are no grounds for relief from the Second Dismissal Order based on the law. On the facts established by the evidence presented, Judge Markell concluded that the claims of both Idaho and California were subject to bona fide dispute. While Montana offered and continues to offer alternative interpretations of the evidence, it is well established that a factfinder's choice between alternatives cannot be clearly erroneous. See Branch Banking and Trust Co. v. Shapiro (In re R&S St. Rose Lenders, LLC), 756 Fed.Appx. 731, 733 (9th Cir. 2019). Montana references nothing in the trial record - live witness testimony or deposition excerpts from representatives of Idaho or California, or documentary exhibits - that prohibited Judge Markell from concluding that both Idaho and California settled because their claims were subject to dispute as a matter of law. Additionally, Montana offers nothing in the way of new evidence that would not be untimely under Civil Rule 60(c), to suggest that Idaho and California actually settled undisputed tax claims. Montana has provided no basis to conclude that Judge Markell misinterpreted or misapplied the applicable law to the evidence admitted and the facts established by the record.
Fourth, there can be no dispute that the Alleged Debtor did not voluntarily seek relief from this bankruptcy court. Rather, the Involuntary Petition was voluntarily filed by Montana, Idaho and California. Petitioners who attempt to place individuals or entities into involuntary bankruptcy do so at their own peril. Section 303(b) imposes eligibility requirements on creditors who seek to involuntarily subject a debtor to the bankruptcy process. The purpose of the eligibility requirements is "to prevent creditors from using the threat of an involuntary petition to bully an alleged debtor into settling a speculative or validly disputed debt." See Circuit Opinion, 942 F.3d at 1183, quoting Chi. Title Ins. Co. v. Seko Inv., Inc. (In re Seko Inv., Inc.), 156 F.3d 1005, 1007-08 (9th Cir. 1998). Section 303(h)(1) reinforces those eligibility requirements in contested involuntary proceedings. See, e.g., In re EB Holdings II, Inc., 589 B.R. 704, 722-26 (Bankr. D. Nev. 2017). Section 303(i) exposes creditors to significant consequences if they improvidently subject a debtor to an involuntary bankruptcy proceeding. See generally 2 Collier on Bankruptcy ¶ 303.33 (Richard Levin & Henry J. Sommer eds., 16th ed. 2020).
Under the joint discovery plans approved by Judge Markell, resolution of the Second Dismissal Motion was limited to contested issues under Section 303(b) and did not address any issues under Sections 303(h) or 303(i).
In this instance, Montana and its co-petitioners voluntarily initiated involuntary bankruptcy proceedings against the Alleged Debtor. Montana cites no authority prohibiting any petitioning creditor, including even Montana, from acknowledging its claims to be disputed and settling with an alleged debtor, including the Alleged Debtor in this case. Montana cites no authority prohibiting a creditor from settling its disputed claims by including a release of an alleged debtor's rights to pursue relief under Section 303(i). Montana cites no agreement amongst the petitioning creditors - enforceable or not - that prevented any of them, including Montana, from settling their claims against the Alleged Debtor and withdrawing from participation in the involuntary proceeding. Similarly, Montana cites no authority prohibiting a later joining creditor under Section 303(c), such as YCLT, from later withdrawing from further participation. Montana cites no authority - persuasive or otherwise - suggesting that extraordinary circumstances under Civil Rule 60(b)(6) have been found in an involuntary case where the last petitioner standing is left "holding the bag" by its former co-petitioners.
Fifth, the law of the case doctrine is applicable in this matter. The doctrine applies in bankruptcy proceedings. See Kipperman v. Federal Deposit Insurance Corporation (In re Commercial Money Center, Inc.), 392 B.R. 814, 832-33 (B.A.P. 9th Cir. 2008). In Stacy v. Colvin, 825 F.3d 563 (9th Cir. 2016), the circuit panel observed:
The law of the case doctrine generally prohibits a court from considering an issue that has already been decided by that same court or a higher court in the same case...The doctrine is concerned primarily with efficiency, and should not be applied when the evidence on remand is substantially different, when the controlling law has changed, or when applying the doctrine would be unjust...A district court=s discretionary decision to apply the law of the case doctrine is reviewed for an abuse of discretion...Id. at 567 (citations omitted). In this involuntary bankruptcy case, Judge Markell specifically determined that Montana, Idaho, and California were disqualified as petitioning creditors because their claims were subject to bona fide dispute. USDC Judge Dorsey affirmed that determination with respect to Montana and California, but did not reach the determination with respect to Idaho because there were an insufficient number of creditors regardless of Idaho's or YCLT's eligibility. See USDC Decision at 29:15 to 30:6. The Ninth Circuit affirmed the determination that Montana's claim is subject to bona fide dispute and did not address the eligibility of Idaho, California or YCLT, because they had withdrawn from participation in the involuntary proceeding and were not parties to the appeal. See Circuit Opinion, 942 F.3d at 1187. On remand, there is no different evidence presented, nor has the record been reopened. The interpretations of Section 303(b) by the Ninth Circuit, the USDC, and the bankruptcy court have not changed, nor have they been overturned. No extraordinary circumstances have been demonstrated. Thus, as it currently stands, Judge Markell's ruling that the claims of Idaho and California were subject to bona fide dispute remains the law of this involuntary bankruptcy case.
Sixth, whatever standing Montana has to seek relief from the Second Dismissal Order that specifically determined its ineligibility under Section 303(b), and which may expose it to the Alleged Debtor's claim under Section 303(i), it appears that Montana has no standing to assert factual and legal challenges that might have been raised by Idaho and California. Even though Idaho and California unilaterally withdrew from further participation in the Involuntary Proceeding, and did not appear at the trial of the Second Dismissal Motion, testimony and documentary evidence from both Idaho and California were presented and considered at trial. The eligibility of Idaho and California under Section 303(b) was fully litigated. Even though the determinations made in the Second Dismissal Order are binding on Idaho and California, neither Idaho nor California appealed those determinations to the Ninth Circuit. Those determinations were not disturbed on appeal and Montana should not have standing to assert the rights of Idaho and California, as aggrieved parties if at all, to challenge the findings made in the Second Dismissal Order.
Finally, the "rule of mandate" also applies in bankruptcy proceedings. See, e.g., Barton Properties v. Blaskey (In re Blaskey), 2016 WL 4191775, at *5 (B.A.P. 9th Cir. Aug. 8, 2016) (bankruptcy court on remand correctly applied the mandate of the Bankruptcy Appellate Panel on prior appeal). The rule of mandate applies to an appellate decision rendered in the same proceeding. The Ninth Circuit has explained that
A district court that has received the mandate of an appellate court cannot vary or examine that mandate for any purpose other than executing it...At the same time, the rule of mandate allows a lower court to decide anything not foreclosed by the mandate...A district court is limited by our remand when the scope of the remand is clear...Violation of the rule of mandate is a jurisdictional error...Hall v. City of Los Angeles, 697 F.3d 1059, 1067 (9th Cir. 2012) (citations omitted, emphasis added). See also Stacy v. Colvin, 825 F.3d at 567-568. As previously mentioned, the Ninth Circuit affirmed the Second Dismissal Order and expressly stated: "We remand for the bankruptcy court to determine whether th is matter should be dismissed for want of prosecution consistent with 11 U.S.C. § 303(j)." In response to the remand, Montana initially suggests that the Ninth Circuit's mandate does not foreclose it from seeking relief from the Second Dismissal Order. See Montana Brief at 9:7-13. Thereafter, Montana describes its basis for seeking relief as follows:
As MDOR has explained, a clearly erroneous finding of fact is, by definition, an abuse of discretion…All of the evidence in this case proves that there was no bona fide dispute about Blixseth's liability to California and Idaho.Id. at 9:20-23. In its appeals to the USDC and the Ninth Circuit, Montana had every opportunity to demonstrate that Judge Markell's findings were clearly erroneous, but it did not prevail. Instead of addressing whether dismissal is appropriate under Section 303(j), Montana seeks to overturn Judge Markell's factual findings. In essence, Montana is asking this bankruptcy court to apply an appellate standard of review to its factual determinations that were the basis for Montana's prior unsuccessful appeals. While Montana's unusual request might not be foreclosed by the mandate, its Relief Motion is not the subject of the Ninth Circuit's remand. In essence, only Montana's approach is extraordinary, but the circumstances regarding the entry and enforcement of the Second Dismissal Order are not.
Based on the foregoing, the court concludes that Montana has failed to meet its burden of establishing that relief from the Second Dismissal Order is warranted under Civil Rule 60(b)(6).
IT IS THEREFORE ORDERED that the Montana Department of Revenue's Motion for Relief From Judgment, Docket No. 770, be, and the same hereby is, DENIED.