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Blixseth v. Kirschner (In re Yellowstone Mt. Club, LLC) - 436 B.R. 598 (Bankr. D. Mont. 2010)

Rule:

Montana's Uniform Fraudulent Transfer Act, Mont. Code Ann. § 31-2-333(1)(b), provides, in part, that transfer of an asset by a debtor is fraudulent as to existing and future creditors if the debtor transferred the asset without receiving a reasonably equivalent value in exchange for the transfer 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 or she would incur, debts beyond his or her ability to pay as they became due. § 31-2-333(1)(b). The language of § 31-2-333(1)(b) implies that constructive fraud does not require proof of intent.

Facts:

Timothy L. Blixseth ("Blixseth"), the plaintiff-in-intervention and the now captioned Plaintiff in this matter, and his former spouse, Edra Blixseth ("Edra"), were the founders of Yellowstone Mountain Club, LLC ("YMC"), Yellowstone Development, LLC ("YD"), Big Sky Ridge, LLC, and Yellowstone Club Construction Company, LLC. The four aforementioned limited liability companies comprise the Yellowstone Club and will be referred to generally as the Debtors or the Yellowstone Club entities. Through the Yellowstone Club entities, Blixseth and Edra began development in the late 1990's of the Yellowstone Club on land that Blixseth acquired through various transactions. The parties maintain that the Yellowstone Club is the world's only private ski and golf community. The Yellowstone Club is a members only master-planned unit development, situated on 13,500 acres of private land in Madison County near Big Sky, Montana. At its conclusion, the Blixseths contemplated that the Yellowstone Club would consist of roughly 864 dwelling units situated in seven planned residential areas or neighborhoods. The principal borrowed money on behalf of the debtors. He then siphoned a substantial portion of the loan proceeds for his own personal benefit or the benefit of other entities in which he held an interest. The principal claimed that the transfers were a loan, not a distribution, and that the claims were time barred. He also claimed he obtained a release of any claims against him during divorce proceedings when control of the debtors was transferred to his estranged wife. 

Issue:

Were the transfers constructively fraudulent under § 548(a)(1) and § 31-2-333(1)(b)?

Answer:

Yes.

Conclusion:

The court held that the applicable statutes of limitations were tolled during the time that the principal was in total control of the debtors. The court held that the purported loans were in fact distributions because the notes were not created until after litigation was threatened and the purported loan was evidenced by nothing more than a journal entry. The court held that the transfers and the release were constructively fraudulent transfers under § 548(a)(1) and § 31-2-333(1)(b)because the debtors did not receive reasonably equivalent value for the transfers of the funds or the release and the debtors were then insolvent. The court further held that the principal breached his fiduciary duties to the debtors.

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