charles w. hingle(1947) shane p. coleman (3417) holland...

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Charles W. Hingle (1947)Shane P. Coleman (3417)HOLLAND & HART LLP401 North 31st Street, Suite 1500P.O. Box 639Billings, Montana 59103-0639(406) 252-2166 (telephone)(406) 252-1669 (facsimile)[email protected]@hollandhart.com

ATTORNEYS FOR MARC S. KIRSCHNER, ASTRUSTEE OF THE YELLOWSTONE CLUBLIQUIDATING TRUST

IN THE UNITED STATES BANKRUPTCY COURTFOR THE DISTRICT OF MONTANA

)In re: )

) Chapter 11Yellowstone Mountain Club, LLC, ) Case No. 08-61570-11-RBKet al.,1 )

Debtors. )))

TIMOTHY BLIXSETH, )) Adversary No. 09-00014 and

Plaintiff/Counterclaim Defendant, ) consolidated with Adversary No.v. ) 09-00017-RBK

)MARC S. KIRSCHNER, AS )TRUSTEE OF THE YELLOWSTONE ) YCLT’S PRETRIALCLUB LIQUIDATING TRUST, ) MEMORANDUM

)Defendant/Counterclaimant. )

)

Marc S. Kirschner (“Trustee”), as Trustee of the Yellowstone Club Liquidating

Trust (“Trust”), pursuant to this Court’s August 12, 2009 Order, hereby files the

following Pretrial Memorandum:

1 The Debtors are the following entities: Yellowstone Mountain Club, LLC, Yellowstone Development Club, LLC and Big Sky Ridge, LLC, which entities are substantively consolidated and Yellowstone Club Construction Co., LLC, which is jointly administered with the other Debtors.

09-00014-RBK Doc#: 550 Filed: 02/22/10 Entered: 02/22/10 16:50:51 of 30

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I. INTRODUCTION

Timothy Blixseth (“Blixseth”) took hundreds of millions of dollars from the

Debtors in breach of his fiduciary duties and pursuant to several constructive fraudulent

conveyances. His conduct can only be described as looting, and he should be held

accountable for his actions. The evidence during the first phase of the Consolidated

Adversary Proceeding conclusively established that Blixseth breached his fiduciary duty

to the Debtors by entering into the loan transaction with Credit Suisse (“CS”) on

September 30, 2005, and then immediately thereafter transferring $209 million to an

intermediary he controlled and ultimately to himself for his own personal benefit. This

transaction in turn left the Debtors doomed to failure, having inadequate capital on a

consolidated balance sheet, cash flow and working capital basis. Blixseth further

depleted the assets of the Debtors by causing them to use in the first half of 2006 over

$80 million of the CS loan proceeds to purchase property for the benefit of third parties

that he controlled. All of these transfers were also fraudulent transfers that should be set

aside.

Blixseth urges this Court to accept his looting of these entities as lawful and

acceptable. He bases this untenable argument on various defenses, none of which have

any merit.2 These defenses include advice of counsel, statute of limitations, the releases

granted pursuant to the MSA and the alleged lack of authority of Edra Blixseth to

prosecute and confirm the Plan of Liquidation for the Debtors. Blixseth also contends

2 In fact, the Court has rejected many of Blixseth’s defenses as a matter of law in its Memorandum of Decision denying Blixseth’s motion for summary judgment, and in its Memorandum denying Blixseth’s motion for reconsideration of his motion to dismiss, and its Memorandum of February 22, 2010 denying Blixseth’s motion for sanctionsrelating to alleged spoliation of evidence.


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that he and the Debtors are victims of a grand conspiracy between Credit Suisse, Edra

Blixseth, Cross Harbor Capital (“Cross Harbor”) and Sam Byrne to destroy the value of

the Debtors. This conspiracy, according to Blixseth, constitutes an intervening or

superceding cause to the Debtors’ damages and excuses Blixseth from any responsibility.

Blixseth’s conspiracy theory is completely nonsensical, legally irrelevant, and wholly

unsupported by any reliable evidence. All of these defenses are meritless and most are

entirely irrelevant. Blixseth’s remaining defenses are likewise neither supported by fact

nor law.

The truth of the matter is that Blixseth walked away from the Debtors after

receiving the benefit of hundreds of millions of dollars, and the Debtors received nothing

in return, except enormous liens against their property and an obligation to repay a loan

that was never meant for their benefit in the first place. Blixseth cannot just walk away

this time; rather, he must be held accountable for his actions.

II. FACTS

The evidence elicited at the first phase of the trial conclusively established that

Blixseth breached his fiduciary duties to the Debtors in obtaining the CS loan and then

distributing over $270 million of the loan proceeds for his direct or indirect personal

benefit. The facts of that transaction are briefly summarized as follows:

1. In the years leading up to the Credit Agreement, the Yellowstone Club had

loans to BGI and other affiliates of approximately $55 million. The Yellowstone also

carried an additional debt load ranging from a low of approximately $4 to $5 million to a

high of approximately $60 million on a revolving line of credit. The day before the loan

transaction with Credit Suisse, the Yellowstone Club carried, in addition to any amounts


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owed to BGI and its affiliates, approximately $19 to $20 million in debt on its books,

consisting of a combination of a revolving line of credit and a term loan with American

Bank. (See, e.g., Docket 292, Memorandum of Decision of 6/11/2009, at 26.)

2. The Debtors had also experienced negative cash flows in several of the

years leading up to the Credit Agreement with Credit Suisse. Several of the witnesses

made reference to EBITDA, which is earnings before interest, taxes, depreciation and

amortization. Kent Mordy (“Mordy”), a certified public accountant and a certified

insolvency and reorganization advisor, calculated that the Debtors' Cash EBITDA was a

negative $15,701,772 in 2002, a positive $20,369,766 in 2003, and a negative

$45,910,598 in 2004. According to Mordy, the Debtors projected Cash EBITDA of

$83,500,000 in 2005 but realized Cash EBITDA of only $19 million. (See, e.g., Docket

292, Memorandum of Decision of 6/11/2009, at 26.)

3. It is clear that even though the Debtors' had nine months of operations

under their belt before the September 30, 2005, Credit Agreement, they missed their

profitability projections by a substantial amount. Such numbers show that Debtors'

projections for the future were not based upon historical reality. Conditions in the real

estate market were also changing rapidly. (See, e.g., Docket 292, Memorandum of

Decision of 6/11/2009, at 27.)

4. Despite all the red flags, the Credit Agreement was consummated and

$342,110,262.53 was wired to the Yellowstone Club on September 30, 2005. This

amount reflected the total loan amount of $375 million less fees, administrative costs, and

a $24,241,910.98 takeout to payoff preexisting debt. On the same date that

$342,110,262.53 was transferred to the Debtors, approximately $209 million was


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transferred out of the Yellowstone Club by Blixseth to BGI. (See, e.g., Docket 292,

Memorandum of Decision of 6/11/2009, at 27-28.)

5. The immediate transfer of funds out of the Yellowstone Club to BGI and

then to Blixseth was not memorialized in any contemporaneous loan documents but was

simply reflected on the Debtors' books with a journal entry. Blixseth, right around the

time the B shareholders were threatening suit against Blixseth and the Yellowstone Club,

drafted a two-page promissory note in the amount of $209 million. The $209 million

unsecured demand note, payable by BGI to the Debtors, was created in May 2006, and

backdated to September 30, 2005. (See, e.g., Docket 292, Memorandum of Decision of

6/11/2009, at 28.)

6. Roughly all of the $209 million proceeds that were transferred to BGI

were then immediately disbursed to various personal accounts and payoffs benefiting

Tim and Edra Blixseth personally. Blixseth testified that the Debtors had no interest in

any of these accounts or payoffs. The Debtors, under Blixseth' direction, never made

demand of BGI on the demand notes, even when the Yellowstone Club needed cash.

(See, e.g., Docket 292, Memorandum of Decision of 6/11/2009, at 28.)

7. At the foregoing times, Blixseth was the controlling member of the

Debtors. (See, e.g., Docket 292, Memorandum of Decision of 6/11/2009, at 22.)

8. As the controlling shareholder of BGI,3 Blixseth effectively distributed

$209 million of that loan to himself.

3 Blixseth and BGI were alter egos of each other. During the time that he was the controlling shareholder of BGI, Timothy Blixseth dominated and controlled the affairs of BGI to such an extent that BGI had no separate corporate identity apart from Timothy Blixseth.


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10. In addition to the $209 million distribution, Blixseth caused Debtors to use

$80 million of the CS loan proceeds to purchase properties for the benefit of third parties,

including himself. These properties included Chateau de Farcheville, in France ($28

million); Tamarindo, a resort in Mexico ($40 million); and a golf property in St.

Andrews, Scotland ($12 million). (See Financial Statements, submitted to the Court as

Credit Suisse Exhibit 35 and YCLT Exhibit 81.)

11. Debtors did not receive reasonably equivalent value for the transfer of

these assets to Blixseth. Despite entering into the promissory notes,4 the Debtors

(controlled by Blixseth) never intended to call upon these demand notes, even when they

were in hopeless need of cash. As a result of these transactions, the Debtors were

rendered insolvent. Further, these transactions left the Debtors with unreasonably small

assets compared to its business operations. Indeed, the Court has already found that

Yellowstone Club was rendered insolvent on a cash flow/inadequate capital basis when

the CS loan was obtained on September 30, 2005. The Court found that Yellowstone

Club was “doomed” by the CS loan.5 There is ample evidence in the record to support

this finding, including, but certainly not limited to, the following.

12. From 2005 through the filing of the bankruptcy, the Yellowstone Club was

4 The promissory notes Blixseth relies upon were unsecured, only matured upon demand, had no term and gave no economic benefit to the Debtors. In order for these “notes” to be paid by BGI, Blixseth would have had to essentially make a demand upon himself. Moreover, upon receipt of the proceeds from the CS loan, Blixseth for the most part purchased illiquid assets, and could have never satisfied a demand for payment from himself personally.5 These findings are contained in the Court’s Interim and Partial Order dated May 12, 2009 (Dkt. No. 289). Although this order was vacated pursuant to the settlement reached with CS after the first phase of the trial, there is no reason for the Court to change its mind regarding these underlying facts. This Court, in fact, ruled on June 11, 2009, that Blixseth would only be permitted to raise at this trial new evidence, not cumulative evidence, from the first trial that began last April.


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constantly behind on its accounts payable. When the Yellowstone Club needed cash,

Moses Moore (“Moore”), who worked as a Senior Accountant and then later Comptroller

for the Yellowstone Club, would request money from George Mack (“Mack”), who

served at that time as the Yellowstone Club’s CFO. Mack was a go-between between

Blixseth and Moore when Moore needed money to pay the bills at the Yellowstone Club.

After Moore would make a request for funds, Moore testified that money may or may not

appear in the Yellowstone Club’s accounts. Moore testified that it was not uncommon to

have to shuffle the Yellowstone Club’s accounts payables due to a lack of money, and

creditor and vendor invoices would often go unpaid for 90 days or more. (See, e.g.,

Docket 292, Memorandum of Decision of 6/11/2009, at 28-29.)

13. When funds were tight, rather than make a demand on the BGI promissory

notes, Blixseth would instead seek to obtain operating funds from various members of the

Yellowstone Club. One such member that Blixseth approached was Sam Byrne

(“Byrne”). Byrne was the founder and managing partner of Cross Harbor. Blixseth asked

Byrne whether he would be interested in making a bulk purchase of Yellowstone Club

lots at a substantially reduced price. Byrne made his first bulk purchase in 2006 with the

58 unit Sunrise Ridge Condominium Development purchase for a price of $60 million.6

In August of 2007, Blixseth again approached Byrne to purchase 31 lots on the golf

course. That sale was consummated in August of 2007 at a price of $54 million. (See,

e.g., Docket 292, Memorandum of Decision of 6/11/2009, at 29.)

14. Blixseth and Edra separated sometime in 2006 and Blixseth retained sole

control of the Debtors and the Yellowstone Club until August of 2008, when Edra was

6 Sunrise Ridge was not part of the security package for the CS loan and the Trust will prove at trial that Tim Blixseth personally benefited enormously from this transaction.


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awarded BGI and the Debtors as part of a marital settlement agreement. (See, e.g.,

Docket 292, Memorandum of Decision of 6/11/2009, at 30-31.)

15. Blixseth’s pattern of deception and self-dealing continued in 2008 when

Blixseth and Wayne Prim (“Prim”) consummated the Overlook transaction. In the

Overlook transaction, Blixseth formed Overlook Partners, LLC (“OP”) with Prim. Prim

loaned OP $15,000,000. Blixseth then used the money to buy five lots from the Club for

$3,000,000. The lots were being marketed for $6,000,000 each and had recently been

appraised by Cushman & Wakefield for $5,000,000 each, making the value of this

transaction for OP between $10,000,000 and $15,000,000. Blixseth confirmed this value

by immediately contracting on behalf of OP to cause the same lots to be sold for no less

than $5,500,000 each. The net result was to line Blixseth’s pocket at the expense of the

Yellowstone Mountain Club by over $10 million. (See YCLT Exhibits 32, 33, 176, 180-

84.)

16. Following the transfer of these substantial assets, and other similar

transactions, Blixseth attempted to absolve himself from any liability to the Debtors by

obtaining purported releases from the Debtors through his divorce proceedings. Edra

Blixseth filed for divorce in December 2006. Blixseth retained sole control of the

Debtors and the Yellowstone Club from that time until August 13, 2008, when Edra was

awarded BGI and the Debtors as part of a Marital Settlement Agreement (“MSA”). The

MSA was itself a fraudulent transfer, as discussed below and as proven by the deposition

testimony of Edra Blixseth, which will be offered at trial. (See Ex. A, Excerpts from Edra

Blixseth Dep. of 12/17/2009.)


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17. During the course of his divorce proceedings, Blixseth sought legal advice

from the law firm of Thornton Byron for alleged estate planning purposes, but the

invoices from that firm indicate he actually sought a means to avoid any liability to the

Debtors for his many breaches of fiduciary duty, including but not limited to the CS loan

transaction and subsequent transfers.7 The Thornton Byron invoice is replete with

references to analyzing ways to shield Blixseth from potential liability of Debtors and

BGI. For example, one entry on the Thornton invoice provides:

Analysis of Closing Agreement received from Steve Kolodny’s office to refine initial analysis of tax and economic concerns presented by same; draft correspondence to Mr. Blixseth and representatives regarding concerns raised by Closing Agreement from tax liability perspective; discussion with George Mack regarding particular concern regarding Mr. Blixseth’s possible liability to creditors of Mrs. Blixseth, Blixseth Group, Inc. or the Yellowstone Club entities i[f] Mrs. Blixseth were to assume liabilities of business entities and the marital community on which Mr. Blixseth is currently obligated; revise correspondence to client and representatives regarding same; analysis of documentation and transactional steps to limit MR. Blixseth’s exposure on subsequent efforts with respect to liabilities assumed by Mrs. Blixseth; discussion to analyze same; draft correspondence regarding recommendation for limiting Mr. Blixseth’s liability after Mrs. Blixseth’s assumption of debt; draft multiple correspondence responding to questions and concerns raised by Mr. Blixseth and other representatives regarding same.

(Emphasis added.)

18. As will be shown at trial, the Thornton invoice also contains several

references to consideration of placing Blixseth’s assets into a holding company to protect

them from liabilities. Blixseth followed this advice by placing all of his assets into

7 These other breaches, as will be shown at trial, involve Blixseth’s dealing with a Porcupine Lease Agreement, Big Sky Ridge, Sunrise Ridge, the LeMond Settlement, the sale of lots 90 and 147, the Overlook lots, and WML Units 303 and 304.


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Desert Ranch, LLLP, a Nevada limited liability limited partnership initially began by his

son, Beau Blixseth, which was transferred to Blixseth shortly before he executed the

MSA, as set out in Tim Blixseth’s recent deposition on January 26, 2010 and in greater

detail below.

19. In an effort to cover up his intent to further defraud the Debtors, Blixseth

denied obtaining this advice. As currently as last month, Blixseth testified as follows:

Q. [I]n June and July 2008, you had no earthly reason to fear liabilities passing through Yellowstone entities and BGI to you?

A. None whatsoever, or we wouldn’t be here today because I would own the club.

Q. So there’s no relationship whatsoever between the creation of the Desert Ranch, LLLP, and a concern on your part that Edra would go bankrupt in the near, near future after she took over the club?

A. Absolutely not.

(Blixseth Dep. of 1/26/2010, at 226.)

20. However, Blixseth did have concerns about potential liability as evidenced

by the Thornton bills and the fact that he obtained releases from Edra Blixseth and the

Debtors. As part of the MSA, Blixseth sought releases from Edra Blixseth and the

Debtors for all claims against him, including, but not limited to (a) breach of fiduciary

duty, (b) breach of corporate business opportunities, (c) any similar type of potential

liability based on failure to act properly on behalf of said entity or (d) any document

signed by Blixseth. These releases were not supported by any consideration. Similar to

the “loans” to Blixseth from the CS transaction, Debtors did not receive reasonably

equivalent value for entering into these releases. The Debtors were not parties to the

Blixseth divorce litigation. Neither the Debtors nor the Trust were represented by


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independent counsel in connection with the divorce proceedings and, in fact, the Trust

had not yet even been formed. Yet, Blixseth asks this Court to uphold the release of

claims worth hundreds of millions of dollars, without any real consideration, much less

reasonably equivalent value.

21. The Debtors were in financial disarray at the time Blixseth transferred

them to Edra on August 13, 2008. Simply put, the Debtors were insolvent. They were

unable to pay their debts when they came due in the ordinary course of business. As the

Trust’s expert witness Kent W. Mordy is expected to testify, at the time of the release the

Debtors were insolvent on a consolidated balance sheet, cash flow and working capital

basis. The Debtors filed for bankruptcy a mere 88 days following the execution of the

releases and consummation of the MSA. At that time, the Debtors had less than $35,000

cash in their collective bank accounts. The Credit Suisse loan by itself had saddled the

Debtors with $375,000,000 in debt. (See, e.g., Docket 292, Memorandum of Decision of

6/11/2009, at 25, 33-34.)

22. In summary, Blixseth took $209 million from the Debtors and used such

funds for purposes wholly unrelated to the Yellowstone Club. Blixseth knew that the

Debtors were having difficulty paying their debts as they became due when the Debtors'

obligations were something less than $60 million, so Blixseth had to know that the

Debtors had little or no chance of ever servicing a $375 million debt to Credit Suisse.

(See, e.g., Docket 292, Memorandum of Decision of 6/11/2009, at 33-34.)

23. The Debtors filed for bankruptcy on November, 10, 2008. The Proposed

Second Amended Plan of Reorganization was filed by the Debtors on April 3, 2009 (Dkt.

No. 691), along with a 93-page Disclosure Statement (Dkt. No. 692). On April 6, 2009,


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this Court held a hearing regarding the Disclosure Statement at which Blixseth’s counsel

appeared. The following day the Court approved the Disclosure Statement (Dkt. No.

715). On May 18, 2009, after Blixseth (Dkt. No. 860) and a number of other parties

objected to confirmation of the plan, the Court held a full-blown confirmation hearing.

Thereafter, the Debtors modified their plan and filed the Third Amended Plan of

Reorganization (Dkt. No. 995). The Court confirmed the Third Amended Plan (Dkt.

1026) on June 2, 2009. Blixseth subsequently appealed the Plan (Dkt. No. 1038) and

unsuccessfully sought to stay all proceedings pending his appeal (Dkt. Nos. 1111 and

1112).

24. Pursuant to the terms of the Third Amended Plan, the parties executed

transfer and trust documents assigning the Debtors’ claims to the Trust. These were

finalized on July 17, 2009. Marc S. Kirschner, as Trustee, executed the documents for

the Trust. Edra Blixseth executed each of the transfer and trust documents on behalf of

the Debtors. She signed in her capacity as manager/president of the BLX Group, Inc., the

Manager of each of the Debtor limited liability companies. The evidence will

conclusively prove that Edra Blixseth had the full authority to execute the assignments on

behalf of the Debtors.

25. According to the Liquidating Trust Agreement, created under the terms of

the Third Amended Plan, the Trust was “organized for the purpose of holding and

liquidating the Trust Claims and Trust Assets and distributing the proceeds thereof to the

Beneficiaries.” Credit Suisse, as agent for the pre-petition lenders, had the right to

appoint four members of a seven-member Trust advisory board. Although nominally

titled an “advisory board,” the Board itself has little control over the affairs of the Trust.


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The Board may approve the settlement of certain claims by a simple majority but

settlement of “Designated Claims” requires an affirmative vote of five members of the

Board. The termination and replacement of the Trustee, and engagement of counsel each

require the unanimous consent of the Board. In all other matters, the Trustee consults the

Board but operates the affairs of the Trust, including prosecution of claims, in his

discretion, subject to the duties inherent to any fiduciary.

26. The Trustee, Marc S. Kirschner, currently serves as trustee in other cases

of national importance, including In re Refco, Inc., Case No. 05-60006, in the Southern

District of New York and In re LeNature’s, Inc., Case No. 06-25454, in the Western

District of Pennsylvania. The Trust is not beholden to the Prepetition Agent or the

Prepetition Lenders. The Trustee operates independently of all creditors in all matters

except those for which Board approval is required.

III. ARGUMENT

A. Blixseth’s Breaches of Fiduciary Duties

Under Montana law, Blixseth owed fiduciary duties to the Debtors. Blixseth

breached these fiduciary duties by obtaining the CS loan and then distributing over $270

million of the loan proceeds for his direct or indirect personal benefit. By placing his

own interests above those of the Debtors, Blixseth placed the Debtors in a hopeless

financial condition while reaping all of the benefits from the CS loan.

Under Montana law, a member of a member-managed company owes the duty of

loyalty and duty of care to the company and its members. Mont. Code Ann. § 35-8-310.

Officers and directors must exercise those duties in good faith, with the care an ordinarily

prudent person in a similar position would exercise under similar circumstances, and in a


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manner the director or officer reasonably believes is in the companies’ best interests.

Trifad Entertainment, Inc. v. Anderson, 306 Mont. 499, 508, 36 P.3d 363 (2001).

The vast majority of the proceeds from the Loan Transaction were transferred to

entities other than the Debtors for the benefit of Timothy Blixseth, yet the Debtors were

left with the obligation to repay the loans resulting from the Loan Transaction and with

liens on their property intended to secure that obligation. The Debtors did not receive

reasonably equivalent value in exchange for these transfers and liens. As a result of the

Loan Transaction and these transfers and liens, the Debtors were left with an

unreasonably small amount of assets with which to continue their business. As a result of

the Loan Transaction and these transfers and liens, Blixseth knew or should have known

that the Debtors were incurring a debt they would not be able to repay.

B. Constructive Fraudulent Transfer

Pursuant to section 544(b) of the Bankruptcy Code, Blixseth’s misappropriation

of the CS loan proceeds for his own use and directing the Debtors to purchase assets with

the CS loan proceeds for the benefit of himself and related third parties were

constructively fraudulent transfers under Mont. Code. Ann. 31-2-333(1)(b), and can be

avoided pursuant to section 550 of the Bankruptcy Code and Mont. Code. Ann. 31-2-

339(a).

A transfer is deemed fraudulent under Montana law when:

(1) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(a) with actual intent to hinder, delay, or defraud any creditor of the debtor; or


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(b) without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor:

(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

ii) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.

Mont. Code Ann. § 31-2-333(1).

Transactions where the Debtor takes all of the risk but gets little of the benefit,

such as occurred with the CS loan and subsequent conveyances to Blixseth are deemed

fraudulent. See Gough v. Titus (In re Christian & Porter Aluminum Co.), 584 F.2d 326,

337 (9th Cir. 1978) (transaction that benefits a third party does not constitute reasonably

equivalent value for the debtor); see also, Frontier Bank v. Brown (In re Northern

Merchandise, Inc.), 371 F.3d 1056, 1058-59 (9th Cir. 2004)(‘reasonably equivalent value’

inquiry is focused on whether there was an indirect benefit to the estate so as to ensure

that the net effect of the transaction did not harm unsecured creditors); First Nat’l Bank

in Anoka v. Minnesota Util. Contracting, Inc. (In re Minnesota Util. Contracting, Inc.),

110 B.R. 414, 420 (D. Minn. 1990) (court should look at the disparity of the value

received versus the obligations assumed under the transaction; any benefit purported to

extend to the debtor must be fairly concrete).

Here, Blixseth caused the Debtors to enter into an unreasonably large loan

transaction and then caused a substantial amount of the proceeds ($209 million) to be

transferred to BGI and then to himself leaving the Debtors saddled with enormous debt

and unable to meet their liabilities. To create the appearance of propriety, many months

later Blixseth caused demand notes to be prepared which purported to show that the


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transfers to BGI and then to himself would be repaid to Debtors. These notes, however,

were not worth the paper they were written on because Blixseth never intended to have

them repaid. As shown, Blixseth, for the most part, purchased highly illiquid assets,

thereby leaving him with insufficient cash to repay or service the loan. Further, there is

no evidence that he ever tried to call on the loan. (See, e.g., Docket 292, Memorandum of

Decision of 6/11/2009, at 28.) Accordingly, the Debtors failed to receive reasonably

equivalent value for the transfer and never had the cash to meet a real demand. Instead,

the Debtors were saddled with all of the responsibility and none of the benefit because of

Blixseth’s actions. The net result was that the Debtors’ remaining assets were

unreasonably small in relation to this transaction and the Debtors had incurred debts that

were beyond their ability to pay.8

C. Conversion and Unjust Enrichment

Blixseth’s illegal use of the CS loan proceeds constitutes conversion. Conversion

requires ownership of property, a right of possession, and unauthorized dominion over

the property by another resulting in damages. Love v. United States, 844 F. Supp. 616,

623 (D. Mont. 1994) (citing Lane v. Dunkle, 231 Mont. 365, 368 (1988)). Blixseth

converted the rightful property of the Debtors for his own use through fraudulent

transfers and unjust means. Blixseth’s conduct has deprived Debtors from utilizing the

CS loan proceeds for their benefit.

Additionally, he has been unjustly enriched by these transactions to the detriment

of the Debtors. Unjust enrichment is an obligation created by law in the absence of an

8 Although already dealt with at the first phase of the trial, whether the transfers are deemed a dividend or a loan does not matter. Either way, the Debtors did not receive any value.


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agreement between the parties. Maxted v. Barrett, 198 Mont. 81, 87 (1982). Courts have

applied the theory of unjust enrichment when no contract exists between the parties, but a

contract in law is implied. Id. Unjust enrichment occurs when one has and retains money

which in justice or equity belongs to another. Edwards v. Cascade County, 351 Mont.

360, 366 (2009). The doctrine of unjust enrichment is an equitable means of preventing

one party from benefiting from his or her wrongful acts. Albinger v. Harris, 310 Mont.

27, 33 (2002). In order to succeed on a claim of unjust enrichment, a plaintiff must show

some misconduct or fault on the part of the defendant or that defendant somehow took

advantage of plaintiff. Ragland v. Sheehan, 256 Mont. 322, 327 (1993).

It is clear that Blixseth has been unjustly enriched by his conduct. He took money

from the Debtors to pay off personal obligations, to purchase other assets in his name,

and other ways for his own benefit. The means in which Blixseth obtained the loan

proceeds from Debtors were unlawful, were in contravention to his fiduciary duties and

were detrimental to the Debtors.

D. BGI and Blixseth Were Alter Egos

There is no question that BGI and Blixseth were alter egos; thus, subjecting

Blixseth to the liability for BGI’s conduct. During the time that he was the controlling

shareholder of BGI, Blixseth dominated and controlled the affairs of BGI to such an

extent that BGI has no separate corporate identity apart from Blixseth. A fact that

Blixseth himself has admitted.

In making the determination of whether a shareholder is an alter-ego with an

entity, several factors are considered along with the other evidence and circumstances of

each individual case: whether the shareholder owns all or most of the corporation's stock,


{4653\00\00152806.DOC / 1} 18

is a director and/or president of the corporation, makes all the corporate decisions without

consulting the other directors or officers, and admits to third parties that the shareholder

and the corporation are one in the same; whether the shareholder's personal funds are

commingled with the corporation's funds, whether the shareholder's personal credit and

corporation's credit are used interchangeably to obtain personal and corporate loans,

whether the shareholder and corporation engage in the same type of business, and

whether the shareholder and corporation have the same address which is the address of

shareholder's personal residence. Peschel Family Trust v. Co-lonna, 75 P.3d 793 (Mont.

2003).

Blixseth and BGI were one in the same. He had sole control of BGI’s affairs.

Blixseth was BGI’s sole owner. Corporate formalities were not followed. The funds of

Blixseth and BGI were commingled and used interchangeably. Blixseth and BGI were

involved in the same business. Simply stated, Blixseth disregarded the corporate fiction.

As a result, this Court should do the same and hold that BGI is Blixseth’s alter ego.

E. Damages

The Trust is entitled to a judgment against Blixseth for the damages he caused the

Debtors as the result of his breaches of fiduciary duties and for the value of the transfers

to BGI and it’s alter ago, Timothy Blixseth, and to any mediate transferees. A party

damaged by a defendant’s breach of his fiduciary duties is entitled to compensation for

all losses caused by this breach. See Cartwright v. Equitable Life Assurance Society, 914

P.2d 976, 991 (Mont. 1996); Lund v. Albrecht, 936 F.2d 459, 464 (9th Cir. 1991). The

law further provides that the fraudulent transfers may be avoided and, to the extent


{4653\00\00152806.DOC / 1} 19

necessary, the injured party may seek the attachment of the assets that were fraudulently

transferred. 11 U.S.C. § 550; Mont. Ann. Code 31-2-339.

The damages the Trust has incurred are approximately $286.4 million. This

figure is derived by the calculations prepared by Kent Mordy. Mordy Expert Report at

11, Exhibits 8 and 8A. Mordy made this calculation by taking the proceeds from the CS

loan ($375 million) and then applying the appropriate credits and offsets. This

calculation does not include interest and represents the benefits personally received by

Blixseth, both directly and indirectly, from the proceeds of the CS loan as opposed to the

benefits the Debtors received from the loan.

The remedy of disgorgement is also available. See, e.g., County of San Bernadino

v. Walsh, 158 Cal. App. 4th 533, 543 (2008) (“Disgorgement of profits is particularly

applicable in cases dealing with breach of a fiduciary duty . . . . Where a person profits

from transactions conducted by him as a fiduciary, the proper measure of damages is

full disgorgement of any secret profit made by the fiduciary regardless of whether the

principal suffers any damage.” (Emphasis added)). Hence, the Trust is entitled to

disgorgement of all the CS loan proceeds from which Blixseth personally benefited.

F. Summary of Blixseth’s Defenses

In order to avoid responsibility for his breaches of fiduciary duty, Blixseth asserts

various defenses many of which this Court recently rejected in its February 17, 2010

Memorandum of Decision denying Blixseth’s Motion for Summary Judgment. The

remaining defenses are not supported by fact or law because of Blixseth’s breaches of

fiduciary duty and conduct in fraudulently transferring the CS loan proceeds to himself

without consideration to Debtors.


{4653\00\00152806.DOC / 1} 20

1. MSA Release Was a Fraudulent Transfer

Blixseth relies heavily on the purported release given as part of the MSA deal.

There is little doubt that the MSA releases were intentional and/or constructive fraudulent

transfers. Debtors were insolvent or rendered insolvent in the cash flow and balance sheet

sense when these transfers were made for no equivalent consideration.9 Evidence to

support this position will come from, among other sources, the deposition testimony of

Edra Blixseth which will be submitted at trial and which is attached hereto as Exhibit A.10

This testimony will prove that the Debtors were hopelessly insolvent at the time of the

MSA, as the following reflects:

Q. So the day of the MSA, the day it was signed, you were on a cash-flow basis not solvent; right?

A. Correct. . . .

(Ex. A, Edra Blixseth Dep., at 332.)

Likewise, Edra Blixseth also testified as follows:

Q. So on the day of the MSA, Yellowstone Club - - by that I mean Yellowstone Club, Yellowstone Development, BSR, the entities I represent - -

A. Correct.

Q. - - were all insolvent on a cash-flow basis to meet their debts as they came through over the next couple of months without some infusion; right?

A. Correct. . . .

9 Section 31-2-328 of the Montana Code provides: “‘Transfer’ means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset and includes payment of money, release, and creation of a lien or other encumbrance.” (Emphasis added).10 The Trust does not believe that Edra Blixseth will be available to testify per the Federal Rules of Evidence, and thus it is appropriate for the Trust to offer her prior sworn deposition testimony as evidence at the time of trial.


{4653\00\00152806.DOC / 1} 21


Debtors received nothing in exchange for releasing Blixseth from his breaches of

fiduciary duties owed to them in connection with the CS loan and subsequent

distributions. Again, supporting evidence will come from the testimony of Edra Blixseth,

which will include the following passage:

A. Yellowstone Club did not get benefit from the things that were taken.

Q. - - Yellowstone Development - -

A. Correct.

Q. - - BSR - -

A. Correct.

Q. - - none of those entities got a single thing from releasing him [Tim Blixseth] of all this and giving him all these assets; is that right?

A. That’s correct.


Blixseth knew he had potential exposure to claims of this nature by virtue of him

seeking advice from attorneys on how to adequately protect himself in the divorce

proceedings. Immediately after the MSA became effective, Blixseth took the further step

of transferring virtually all, if not all, of the assets he received in the divorce proceedings

to Desert Ranch, LLLP. The foregoing will be demonstrated at trial by, among other

things, Blixseth’s own testimony, the testimony of expert witness Harry Potter, and

various documentary exhibits. These facts show evidence of a conscious effort to

defraud the Debtors.


{4653\00\00152806.DOC / 1} 22

As this Court recently noted, the MSA is to be construed under California law

which permits the release to be set aside if it is determined to be a fraudulent transfer.

Mejia v. Reed, 74 P.3d 166 (Cal. 2003) and In re Beverly, 374 B.R. 221 (9th Cir. BAP

2007), aff’d, 551 F.3d 1092 (9th Cir. 2008); see also, In re Beverly, 374 B.R. 221, 223

(9th Cir. BAP 2007)(“[i]t is settled California law that a transfer accomplished through

an MSA can be avoided as a fraudulent transfer pursuant to UFTA.”). Thus, based on the

evidence that the MSA releases were fraudulent transfers, Blixseth’s reliance on this

defense is misplaced.

Further, there is ample evidence that Blixseth intended to defraud the Debtors by

entering into these transactions, as will be demonstrated at trial. Intent is determined by

considering, among other things, whether:

(a) the transfer or obligation was to an insider;11

(b) the debtor retained possession or control of the property transferred after the transfer;

(c) the transfer or obligation was disclosed or concealed;

(e) the transfer was of substantially all the debtor’s assets;

(h) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(i) the debtor was insolvent or became insolvent12 shortly after the transfer was made or the obligation was incurred;

11 An insider of a corporation is defined as a director, officer or person in control of the debtor. Mont. Code Ann. 31-2-328. As the majority owner of the Yellowstone Club, Blixseth clearly qualifies as an insider for purposes of the statute. In fact, this Court has already found that Blixseth controlled the Debtors from September 30, 2005 until mid-August 2008 when the MSA was executed. June 11, 2009 Memorandum of Decision (Dkt. No. 292) at 22 and 30.


{4653\00\00152806.DOC / 1} 23

(j) the transfer occurred shortly before or shortly after a substantial debt was incurred; or

(k) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

Mont. Code Ann. § 31-2-333(2); Montana National Bank v. Michels, 631 P.2d 1260,

1263 (Mont. 1981). Moreover, the Trust’s expert witness, Harry Potter, is expected to

testify that the transfers discussed herein evidence many of the badges of fraud listed

above.

Blixseth, as the controlling member for each of the entities involved, qualifies as

an insider. The Debtors were saddled with all of the responsibility and none of the

benefit because of Blixseth’s actions. After placing the Debtors in a precarious financial

situation, and knowing full well that there was a risk of bankruptcy and unpaid unsecured

claims, Blixseth further defrauded the Debtors by seizing upon the opportunity to obtain

purported releases from the Debtors in the divorce proceedings without consideration to

the Debtors and his ex-wife. The releases were secretly obtained without any notice to

creditors of the Debtors. The entries contained in the Thornton law firm’s bills clearly

illustrate that Blixseth had a plan to walk away from the obligations he created without

returning one penny. His own deposition testimony is also illustrative of his intent to

conceal this plan when he denied seeking advice to protect himself from these liabilities.

After implementing his plan, he took the extra step of placing all of his ill begotten assets

into an LLLP, which he purports not to control, in order to further isolate what rightfully

belongs to the Debtors. This will be demonstrated at trial by, inter alia, Blixseth’s own

12 “A debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s property at a fair valuation and the debtor is generally not paying the debtor’s debts as they become due.” Mont. Code Ann. 31-2-329.


{4653\00\00152806.DOC / 1} 24

testimony, the testimony of expert witness Harry Potter, and various documentary

exhibits. These facts clearly establish that the transfers were fraudulent.

2. Statute Of Limitations

Blixseth maintains that the Trust’s claims for breach of fiduciary duty, conversion

and violation of § 35-8-604 are barred by the applicable statute of limitations. Blixseth is

wrong. The Trust has alleged several tolling doctrines that conclusively postpone the

commencement of the statute of limitations.

11 USC § 108 provides in relevant part:

(a) If applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor may commence an action, and such period has not expired before the date of filing the petition, the trustee may commence such action only before the later of --

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or

(2) two years after the order for relief.

The Debtors in this case filed bankruptcy on November 10, 2008. Thus, if

limitations had not expired on claims by November 10, 2008, then the claims have been

timely asserted because two years had not passed since the filing of bankruptcy before

these claims were asserted. Blixseth, however, attempts to date Debtors’ claims to the

closing date of the CS loan. Blixseth’s argument is not supported by the facts of this

case. The facts will establish that Blixseth’s breaches of fiduciary duty were concealed

until May 2006. Between September 30, 2005 and May 2006, the transfer of funds from

Yellowstone to BGI was recorded as a journal entry on Yellowstone’s books. It was not

until the B Shareholders threatened litigation in May 2006 that Blixseth had the two page


{4653\00\00152806.DOC / 1} 25

unsecured promissory demand note prepared. Despite the fact that it was prepared in

May 2006, the document was backdated to September 30, 2005.

Because the transfers from Yellowstone to BGI and Blixseth were not

documented until May 2006, the facts forming the basis of the claim against Blixseth

were concealed. As such, the statute of limitations is tolled “until the facts constituting

the claim have been discovered or, in the exercise of due diligence, should have been

discovered by the injured party . . . .” Mont. Code Ann. § 27-2-102(3). Montana Code

section 27-2-204 provides a three-year statute of limitations on claims for breach of

fiduciary duty. Since the fiduciary duty claims did not accrue before May 2006,

limitations had not expired when the Debtors filed bankruptcy on November 10, 2008.13

Moreover, the doctrine of adverse domination tolls the statute of limitations

period on a cause of action against a corporation while wrongdoers control the

corporation. United States v. First National Bank & Trust, 1994 WL 775440, *5 (D.

Montana 1994). “Under the doctrine of adverse domination, a statute of limitations is

tolled on an action against director/officer misconduct so long as a majority of the board

is controlled by the alleged wrongdoers. The doctrine rests on the theory that if the

wrongdoers control the corporation through a majority of stock ownership and control the

directorate[,] there [would] consequently [be] no one to sue them.” Id. (internal citations

omitted). Here, there is no question that Blixseth remained in control of Debtors until

August 13, 2008, a fact this Court found in its June 11, 2009 Memorandum of Decision.

Based upon Blixseth’s total control and domination of the Debtors, the statute of

13 Additionally, Blixseth transferred more than $70 of the CS loan proceeds in April/May 2006 in order to purchase various foreign assets. These transfers also constitute a breach of his fiduciary duties and are within three years of the Debtors’ bankruptcy filing.


{4653\00\00152806.DOC / 1} 26

limitations did not begin to run on any of the Trust’s claims until August of 2008, a mere

three (3) months prior to the bankruptcy filing.

3. Advice Of Counsel

Blixseth continues to maintain that an opinion letter he received from attorney,

Stephen Brown as to the validity of the Credit Suisse loan absolves him from any liability

for his conduct in connection with that loan. The facts are uncontroverted with regard to

Brown’s letter. It was written prior to the CS Loan transaction with the purpose of

determining whether obtaining the CS loan was appropriate. However, the case against

Tim Blixseth is not about the appropriateness of the Credit Suisse loan, in the abstract,

but about Blixseth’s breach of his fiduciary duty in procuring the loan and fraudulently

transferring the bulk of the loan proceeds to himself and for his personal benefit. Both

Blixseth and Brown concede that Brown did not offer an opinion on the use of the CS

loan proceeds.

Advice of counsel has been held to be no defense in a situation in which the

accused is generally advised by counsel, but counsel is not shown to have advised the

specific course of action with which the accused is charged. See United States v.

McCormick, 67 F.2d 867 (2nd Cir. 1933); McNiel v. United States, 150 F. 82 (5th Cir.

1907). As Brown testified at the first stage of this trial, his opinion letter did not contain

an explicit opinion regarding whether the Credit Suisse loan document complied with

Blixseth’s fiduciary duty requirements or fraudulent transfer law. He also testified that

the letter was subject to the ABA Accord, which prohibits opinions by implication on

fiduciary duties and fraudulent transfers. Furthermore, Brown has testified that any

opinion given by him in connection with the Credit Suisse loan was given to Credit


{4653\00\00152806.DOC / 1} 27

Suisse, not to Blixseth. With neither full disclosure of all material facts, nor a specific

course of conduct advised by an attorney, Blixseth’s advice of counsel defense fails.

4. Conspiracy Theory and Spoliation

Blixseth relies upon a baseless conspiracy theory that Credit Suisse, Edra

Blixseth, Cross Harbor and Sam Byrne conspired to destroy the value of the Debtors and

engaged in a scheme to destroy evidence of this conspiracy. As this Court has already

concluded, Blixseth has failed to show how any alleged destruction of emails, particularly

“a gap of sent emails from October 2008 through December 2008,” has any relevance to

the Credit Suisse loan in 2005 or the use of proceeds therefrom. (Docket No. 546, Order

of 2/22/2010, at 5.)

As this Court also ruled, “Blixseth has wholly failed to show any misconduct by

YCLT or the Debtors in this case. This Court agrees with YCLT that a first party

defendant is not, and should not be, responsible for the actions of a third party spoliator

who is not a party to the litigation before the Court.” (Docket No. 546, Order of

2/22/2010, at 5-6.)

Blixseth further argues that this conspiracy is a superseding and intervening

cause. Blixseth’s argument, however, has no basis in fact or in law. The facts have

clearly established that Byrne provided financial assistance to Debtors when needed to

keep those entities from failing. His intent was to both protect his own interest as a

property owner within the Yellowstone Club and to assist the Debtors in time of dire


{4653\00\00152806.DOC / 1} 28

financial need. Blixseth has presented zero evidence of this massive four party

conspiracy.14

More fundamentally, Blixseth cannot rely upon superseding and intervening

causes in defense of the intentional tort claims against him. Montana law clearly

provides that the superseding and intervening cause defense is only applicable to

negligence claims. Jimison v. United States, 267 F. Supp. 674, 676 (D. Mont. 1967)

(noting that Montana follows the Restatement (Second) of Torts in analyzing the

defense). Section 440 of the Restatement (Second) of Torts defines superseding cause as

“an act of a third person or other force which by its intervention prevents the actor from

being liable for harm to another which his antecedent negligence is a substantial factor

in bringing about.” (Emphasis added.) Likewise, section 441 states that “an intervening

force is one which actively operates in producing harm to another after the actor's

negligent act or omission has been committed.” (Emphasis added.) The subsequent

sections, §§ 442-453, determine whether an intervening force prevents the actor’s

antecedent negligence from constituting a legal cause. Restatement (Second) of Torts, §

441(2). Based on the plain reading of these rules that have been adopted in Montana,

superseding and intervening cause is not a defense to an intentional tort. Similarly, this

defense has no impact on the disgorgement remedy and is irrelevant to the fraudulent

transfer claims.

14 The YCLT believes that some of the Cross Harbor financial accommodations to BGI at the date of the MSA were themselves fraudulent transfers; however, this does not mean that there was a conspiracy between Cross Harbor and Edra Blixseth because most of the funds loaned to Edra to consummate the MSA were paid to and for the benefit of Tim Blixseth.


{4653\00\00152806.DOC / 1} 29

This Court, therefore, should reject Blixseth’s contorted argument that blindly

asserts that the “conspiracy” between Credit Suisse, Edra, Cross Harbor and Byrne —

which allegedly occurred three years after Blixseth breached his fiduciary duties and

engaged in a fraudulent transfer transaction by stealing money from the Debtors —

constitutes a defense to Blixseth’s intentional misconduct. Blixseth took the money in

2005. Nothing that took place in 2008 provides a legal defense to Blixseth’s breach of

his fiduciary duties or to the fraudulent transfers.

CONCLUSION

Timothy Blixseth implemented a scheme whereby he took hundreds of millions of

dollars from Debtors with no return to them of their value. He now seeks this Court to

allow him to walk away from his obligations to Debtors with zero liability.

Unfortunately for Mr. Blixseth, the law does not permit him to take all of the benefits

without giving something in return.

Blixseth breached his fiduciary duties to the Debtors by entering into the CS loan

and subsequent transactions that benefited no one but him. The transfers of monies from

the Debtors for Blixseth’s benefit were fraudulent conveyances which should be set

aside. The purported releases entered into by Blixseth and the various entities as part of

the Blixseth divorce proceedings are invalid and provide Blixseth with no defense. Based

on these facts, at the close of the evidence this Court should enter judgment in favor of

the Trust for the amount the Trust will prove at trial which is $286.4 million plus interest

and attorneys’ fees.


{4653\00\00152806.DOC / 1} 30

Dated: February 22, 2010 Respectfully submitted,

/s/ Charles W. HingleCharles W. HingleShane P. ColemanHOLLAND & HART LLP401 North 31st Street, Suite 1500P.O. Box 639Billings, Montana 59103-0639(406) 252-2166 (telephone)(406) 252-1669 (facsimile)

ATTORNEYS FOR MARC S. KIRSCHNER, TRUSTEE OF THE YELLOWSTONE CLUB LIQUIDATING TRUST

CO-COUNSEL:

Brian A. GlasserAthanasios BasdekisBAILEY & GLASSER, LLP209 Capitol StreetCharleston, WV 25301

Steven L. HoardJohn G. Turner, IIIRobert R. BellMULLIN HOARD & BROWN, LLP500 South Taylor, Suite 800, LB# 213P.O. Box 31656Amarillo, Texas 79120-1656

CERTIFICATE OF SERVICE

I, the undersigned, certify under penalty of perjury that on February 22, 2010, or as soon as possible thereafter, copies of the foregoing pleading were served electronically by the Court’s ECF notice to all persons/entities requesting special notice or otherwise entitled to the same and that in addition service by mailing a true and correct copy, first class mail, postage prepaid, was made to the following persons/entities who are not ECF registered users: none.

/s/ Charles W. HingleCharles W. Hingle


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