In re Big Springs Realty LLC, Case No. 09-61079-7 (Bankr.Mont. 2/2/2010)

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In re: BIG SPRINGS REALTY LLC, Debtor DARCY M. CRUM, Plaintiff. v. TIMOTHY L BLIXSETH, Defendant.

Case No. 09-61079-7.

Adv No. 09-00065.

United States Bankruptcy Court, D. Montana.

February 2, 2010.

MEMORANDUM OF DECISION

RALPH B. KIRSCHER, Bankruptcy Judge

In this Adversary Proceeding, the Plaintiff filed a Motion for Determination of Core Proceeding on November 24, 2009, at docket entry no. 56, requesting that this Court enter, pursuant to 28 U.S.C. § 157(b)(3), an order that this Adversary Proceeding is a core proceeding. This Adversary Proceeding was commenced on September 3, 2009, when the Plaintiff/Trustee filed a Complaint against the Defendant, Timothy L. Blixseth ("Blixseth"), requesting that the Court set aside and void certain distributions by the Debtor to Blixseth, that the Court enter judgment against Blixseth for the amount of the distributions and for prejudgment interest, and that the Court award the Plaintiff/Trustee her attorney fees and costs to the extent allowed by applicable rule or law. Blixseth filed an Answer to the Plaintiff/Trustee's Complaint on October 28, 2009.

BACKGROUND

Prior orders of this Court establish that Blixseth and his former spouse, Edra Blixseth ("Edra"), were the founders of Yellowstone Mountain Club, LLC, Yellowstone Development, LLC, Big Sky Ridge, LLC, and Yellowstone Club Construction Company, LLC, which limited liability companies are referred to generally by this Court as the Yellowstone Club entities. Blixseth and Edra were also the founders of Yellowstone Club World, LLC, Big Springs Realty, LLC and BLX Group, Inc., f/k/a Blixseth Group, Inc. or BGI. The Debtor in this case, Big Springs Realty, LLC was allegedly the exclusive real estate broker for the Yellowstone Club entities.

Blixseth was in control of all the aforementioned entities until approximately August 13, 2008, when Blixseth turned ownership and control of said entities over to Edra pursuant to the couple's marital settlement agreement. Shortly thereafter, on November 10, 2008, Edra caused the Yellowstone Club entities to seek protection under Chapter 11 of the Bankruptcy Code. In addition, an involuntary bankruptcy petition was filed against Yellowstone Club World, LLC on January 25, 2009, Big Springs Realty, LLC filed a voluntary Chapter 7 bankruptcy petition on June 5, 2009, and an involuntary Chapter 11 bankruptcy petition was filed against BLX Group, Inc. on September 21, 2009.

Between June 6, 2007, and June 27, 2008, while Debtor was under the exclusive control of Blixseth, the Plaintiff/Trustee alleges that Blixseth transferred $5,868,159.39 from the Debtor to himself for the benefit of Blixseth or one of his various other entities. The Plaintiff/Trustee also argues that the Debtor did not receive any consideration for the transfers totaling $5,868,159.39, that during the period of time between June 6, 2007, and June 27, 2008, Debtor's remaining assets were unreasonably small, and that Blixseth should have reasonably believed that the Debtor would not be able to pay its debts as they came due because Debtor was insolvent or became insolvent as a result of the distributions. Based on the above alleged facts, the Plaintiff/Trustee maintains that under 11 U.S.C. § 544(b), Debtor's distributions to Blixseth were fraudulent transfers under MONT. CODE ANN. §§ 31-2-333, and -334 (Montana's Uniform Fraudulent Transfer Act) and 11 U.S.C. § 548, that such distributions constitute avoidable preferential transfers under 11 U.S.C. § 547, that such distributions may be recovered pursuant to 11 U.S.C. § 550, and seeks a return of such distributions to the Debtor pursuant to MONT. CODE ANN. § 35-8-604 (Montana's Limited Liability Company Act).

APPLICABLE LAW and DISCUSSION

This matter comes before the Court on the Plaintiff/Trustee's request for a determination as to whether this Adversary Proceeding is a core proceeding as defined in 28 U.S.C. § 157(b)(2). 28 U.S.C. § 1334(b) confers upon federal district courts original but not exclusive jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." Section 157(a) of Title 28 permits federal district courts to refer "any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11" to bankruptcy courts. The United States District Court for the District of Montana has made such a reference by Standing Order 12.

"Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under [28 U.S.C. § 158]." 28 U.S.C. § 157(b)(1). "Core proceedings include, but are not limited to (A) matters concerning the administration of the estate . . .; (F) proceedings to determine, avoid, or recover preferences . . .; (H) proceedings to determine, avoid, or recover fraudulent conveyances. . .; (O) and other proceedings affecting the liquidation of the assets of the estate[.]" 28 U.S.C. § 157(b)(2). This Court finds that the core proceedings referenced above as (F) and (H) are matters specifically alleged in Count I of the Plaintiff/Trustee's Complaint.

In addition to the plain language of the statute, the Plaintiff/Trustee relies on the case of Duck v. Munn (In re Mankin), 823 F.2d 1296 (9th Cir. 1987), cert. denied, 485 U.S. 1006, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988), which held that § 157(b)(2)(H) confers core status on both federal fraudulent conveyance actions brought under 11 U.S.C. § 548 and fraudulent conveyance actions of state origin. Blixseth, in his response filed December 4, 2009, agrees:

Defendant acknowledges that under 28 U.S.C. §157(b), a proceeding need not be deemed a non-core proceeding solely on the basis that its resolution may be affected by state law. That concept, in the context of a fraudulent conveyance claim is addressed in the Mankin case cited by Plaintiff. In re Mankin, 823 F.2d 1296 (9th Cir. 1987). Mankin provides the following guidance:

[W]e have found no evidence that Congress intended to restrict §157(b)(2)(H) to federal fraudulent conveyance proceedings. Not only does §157(b)(2)(H) not distinguish between state and federal fraudulent conveyance proceedings, the federal law of fraudulent conveyance is essentially identical to the law of fraudulent conveyance adopted by the states.

Id. at 1300 (emphasis added).

The Court goes on to state that Thus, for purposes of §157(b)(2)(H), state fraudulent conveyance proceedings are distinguishable from federal fraudulent conveyance proceedings only by the fact that they are of state origin. Congress has explicitly found that this is a distinction which, standing alone, cannot serve as a basis for distinguishing core from non-core proceedings. Thus, it appears that the weight of authority regarding state law fraudulent conveyance claims is to deem those claims core proceedings.

Id. at 1300-01 (emphasis added).

Rather than dispute the plain language of § 157(b)(2) and the ruling in Mankin, Blixseth argues that the Plaintiff/Trustee's application for a prejudgment writ of attachment "is purely a creature of state law and is not `essentially identical' to any provision in the Bankruptcy Code for fraudulent conveyance claims."¹ Blixseth's argument is misplaced. "A prejudgment remedy is nothing more than a device a court uses to preserve its ability to ultimately fashion some sort of meaningful relief; it is not the reason for the lawsuit's existence or the court's initial jurisdiction." In re Teknek, LLC, 343 B.R. 850, 866 (Bankr. N.D.Ill. 2006). Count I of the Plaintiff/Trustee's Complaint, by Blixseth's own admission, is a core proceeding under 28 U.S.C. § 157(b)(2) and In re Mankin, 823 F.2d 1296.

Whether Count II of the Plaintiff/Trustee's Complaint is a core proceeding is less clear. Congress specifically enacted § 157 in response to the Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982). In Marathon, the Supreme Court held, in a plurality opinion, that a bankruptcy court did not have jurisdiction to hear a pre-petition breach of contract claim that the debtor-in-possession had brought. The Marathon holding was based primarily on the premise that granting the bankruptcy court such jurisdiction allowed a non-article III court to adjudicate claims based on state-created private rights arising independent from and antecedent to the bankruptcy proceedings, and involving individuals that would not otherwise be party to the bankruptcy proceeding. See Marathon, 458 U.S. at 84, 102 S.Ct. 2858. Congress subsequently established 28 U.S.C. § 157 to try to remedy the defects in the bankruptcy system noted in Marathon.

Subsequent to Marathon and enactment of § 157, the Ninth Circuit in Security Farms v. International Brotherhood of Teamsters, 124 F.3d 999, 1008 (9^th Cir. 1997) (citing In re Castlerock Properties ("Castlerock"), 781 F.2d 159, 162 (9^th Cir. 1986), explained that "[a]ctions that do not depend on bankruptcy laws for their existence and that could proceed in another court are considered `non-core'." Other Ninth Circuit authority notes that core proceedings are matters concerning administration of the estate and rights created by Title 11. In re International Nutronics, Inc., 28 F.3d 965, 969 (9<sup>th</sup> Cir. 1994), cert. denied Robertson v. Isomedix, Inc., 513 U.S. 1016, 115 S.Ct 577, 130 L.Ed.2d 493 (1994). Similarly, this Court has held: "`If the proceeding does not invoke a substantive right created by the federal bankruptcy law and is one that could exist outside of bankruptcy it is not a core proceeding . . . .' [In re Eastport Assoc., 935 F.2d 1071, 1076 (9th Cir.1987)] (quoting [In re Wood, 825 F.2d 90, 97 (5th Cir.1987)])." In re Reinertson, 224 B.R. 137, 147-48 (...