Department of Revenue v. Blixseth

942 F.3d 1179

State of Montana DEPARTMENT OF REVENUE, Appellant,

v.Timothy L. BLIXSETH, Appellee.

No. 18-15064

United States Court of Appeals, Ninth Circuit.

Argued and Submitted August 26, 2019 Seattle, Washington

Filed November 26, 2019

Lynn H. Butler (argued), Husch Blackwell LLP, Austin, Texas; Mark J. Gardberg, Howard and Howard Attorneys PLLC, Las Vegas, Nevada; for Appellant.

Nathan Andrew Schultz (argued), Goodwin Procter LLP, San Francisco, California; Kevin O’Connell, Kevin O’Connell P.C., Portland, Oregon; Jenny L. Doling and Summer M. Shaw, Doling Shaw & Hanover APC, Palm Desert, California; for Appellee.

Before: Michael Daly Hawkins, M. Margaret McKeown, and Jay S. Bybee, Circuit Judges.

HAWKINS, Circuit Judge:

We must determine whether a creditor holding a claim that is partially disputed as to amount has standing to act as a petitioning creditor in an involuntary bankruptcy proceeding under 11 U.S.C. § 303. We join our sister circuits and hold that a claim is subject to a bona fide dispute as to amount within the meaning of 11 U.S.C. § 303(b)(1) even if a portion of that claim is undisputed. We therefore affirm the decisions of the bankruptcy and district courts that the Montana Department of Revenue ("MDOR") lacked standing to file the involuntary Chapter 7 bankruptcy petition against Timothy L. Blixseth. Because all other petitioning creditors have withdrawn from the proceedings, we remand to the bankruptcy court to determine whether this case should be dismissed under 11 U.S.C. § 303(j)(3).

BACKGROUND

This appeal arises out of the involuntary bankruptcy proceedings commenced against Blixseth, a co-founder of the private ski resort Yellowstone Mountain Club, see Blixseth v. Yellowstone Mountain Club, LLC , 742 F.3d 1215, 1218 (9th Cir. 2014), by several state taxing authorities. MDOR leads the charge.

I. MDOR’s Audit.

MDOR commenced an audit of Blixseth and certain "Related Blixseth Business Entities" for the 2002 through 2006 tax years. In July 2009, MDOR sent Blixseth a notice of deficiency assessing $56.8 million in taxes, penalties, and interest arising from eight "audit issues." Relevant to this appeal is the fourth audit issue—a disallowed deduction Blixseth claimed for the environmental penalty payment made by a pass-through entity in the 2004 tax year ("Audit Issue 4"). Audit Issue 4 was not the only adjustment MDOR claimed in connection with the 2004 tax year. For the 2004 tax year, MDOR assessed additional taxes of $5,505,515; penalties of $990,993; and interest of $2,587,692 for a total assessment of $9,084,100. By MDOR’s calculation, Audit Issue 4 comprises roughly $200,000 of that amount.

In response to the audit, Blixseth worked with MDOR in an informal review process during which he conceded Audit Issue 4, disputed the remaining audit issues, and provided additional information and materials to MDOR. In light of the additional information Blixseth provided, MDOR adjusted its original audit assessment. MDOR ultimately assessed additional taxes, penalties, and interest in the amount of $57,017,038 for the 2002 through 2006 tax years. Blixseth then filed a complaint before the Montana State Tax Appeals Board disputing all audit issues with the exception of Audit Issue 4. MDOR issued a statement of account, claiming $216,657 owed in connection with Audit Issue 4.

II. The Involuntary Bankruptcy Proceedings.

In April 2011, while Blixseth’s complaint was pending before the Montana State Tax Appeals Board, MDOR, joined by the Idaho State Tax Commission ("Idaho") and the California Franchise Tax Board ("California"), initiated involuntary bankruptcy proceedings against Blixseth.

MDOR, Idaho, and California each asserted claims for unpaid taxes and associated penalties and interest in the amounts of $219,258.00; $1,117,914.00; and $986,957.95, respectively. MDOR’s claim consisted of the taxes, penalties, and interest purportedly flowing from Audit Issue 4. Just a few weeks after filing the petition, California and Idaho entered into settlement agreements with Blixseth and withdrew as petitioning creditors. Thereafter, another entity, the Yellowstone Club Liquidating Trust ("Yellowstone"), filed a notice of joinder as a petitioning creditor and asserted a $40,992,210.81 claim based on a judgment it obtained against Blixseth in a separate proceeding.

After some initial motion practice and an appeal regarding venue, Blixseth moved to dismiss the bankruptcy proceedings on the ground that the petitioning creditors’ claims were the subject of bona fide disputes. The bankruptcy court allowed the parties to conduct discovery and submit extensive briefing on the motion. In response to a discovery request, Blixseth provided a non-exhaustive list of eighteen current creditors and the amounts of their claims as of the petition date. Separately, a group of eight individuals, the members of an entity that had entered into a settlement agreement involving Blixseth, filed notices of appearance in the bankruptcy and identified themselves as additional creditors of Blixseth.

Following a two-day hearing, the bankruptcy court entered an order converting Blixseth’s motion to dismiss into a motion for summary judgment and granting the motion. The bankruptcy court acknowledged that no party contested that the petitioning creditors collectively held unsecured claims exceeding the statutory minimum amount to initiate an involuntary bankruptcy or that their claims were noncontingent. Thus, the only issues before the court were whether (1) Blixseth had more than eleven creditors on the petition date, necessitating three qualified petitioning creditors; and (2) the petitioning creditors’ claims were subject to bona fide disputes as to liability or amount.

The bankruptcy court first determined that Blixseth submitted sufficient evidence to demonstrate he had more than twelve creditors as of the petition date. Consequently, at least three petitioning creditors needed qualifying claims for the involuntary bankruptcy to proceed.

The bankruptcy court then evaluated the petitioning creditors’ standing. The court first evaluated "whether any part of a disputed claim could serve as a claim justifying an involuntary bankruptcy." After reviewing the history of § 303(b)(1) and accompanying case law, the bankruptcy court determined that § 303(b)(1) "should be construed to disqualify petitioning claims based on any bona fide dispute as to amount, even if some ‘portion’ of the claim is undisputed."

With this understanding, the court looked to MDOR, Idaho, California, and Yellowstone’s claims. The bankruptcy court determined that Idaho and California’s claims were subject to bona fide disputes as to liability or amount. Thus, at least two of the four petitioning creditors lacked standing. To avoid confusion, the court also addressed MDOR and Yellowstone’s claims. Looking at MDOR’s claim, the bankruptcy court noted that MDOR contended that it had over $50 million in claims against Blixseth, and at the time most of those claims were "disputed[ ] and disputed intensely." The court acknowledged that "a taxing entity generally has but one claim for each calendar year of a taxpayer’s life." MDOR had not shown that it was authorized to create a separate liability for Audit Issue 4 or if authorized that it took the proper steps to create that separate liability. Blixseth’s remaining liability for the 2004 tax year was disputed, and thus, MDOR’s claim was the subject of a bona fide dispute. The bankruptcy court determined that Yellowstone did have standing as a joining, petitioning creditor, but one petitioning creditor was not enough to sustain the petition. The bankruptcy court therefore granted summary judgment in favor of Blixseth.

III. The District Court Appeal.

MDOR appealed to the district court, and the district court affirmed the bankruptcy court’s grant of summary judgment. The district court agreed with the bankruptcy court that a holder of a partially disputed claim cannot serve as a petitioning creditor even if the undisputed portion of the claim exceeds the statutory threshold amount. The district court determined that MDOR and California’s claims were subject to bona fide disputes as to amount. Because two of the four petitioning creditors were ineligible and Blixseth had at least twelve creditors, the district court did not reach the arguments regarding Idaho and Yellowstone’s claims.¹ This timely appeal followed.

STANDARD OF REVIEW

We review de novo a district court’s decision on a bankruptcy court appeal. Rains v. Flinn (In re Rains) , 428 F.3d 893, 900 (9th Cir. 2005). Summary judgment is appropriate where the evidence demonstrates that there are no genuine issues of material fact for trial and the moving party is entitled to judgment as a matter of law. Barboza v. New Form, Inc. (In re Barboza) , 545 F.3d 702, 707 (9th Cir. 2008).

DISCUSSION

To commence involuntary bankruptcy proceedings against a debtor, a creditor must be:

a holder of a claim against [the debtor] that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount ... [and] such noncontingent, undisputed claims [must] aggregate at least $10,000^{[2 ]} more than the value of any lien on property of the debtor securing such claims held by the holders of such claims.

11 U.S.C. § 303(b)(1).³ Consequently, a petitioning creditor’s claim must not be (1) contingent or (2) "the subject of a bona fide dispute as to liability or amount." Id. Both requirements "aim to prevent creditors from using the threat of an involuntary petition to bully an alleged debtor into settling a speculative or validly disputed debt." Chi. Title Ins. Co. v. Seko Inv., Inc. (In re Seko Inv., Inc.) , 156 F.3d 1005, 1007–08 (9th Cir. 1998). Here, we must determine whether MDOR’s claim for the 2004 tax year is subject to a bona fide dispute as to amount notwithstanding Blixseth’s concession that the deduction challenged in Audit Issue 4 was improper.⁴

I. The History of...