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Blixseth v. Byrne

United States District Court, D. Massachusetts

October 11, 2016




         This case is one of many involving the bankruptcy estate of the Yellowstone Club, a luxury property development near Big Sky, Montana, and its founders, Timothy Blixseth and Edra Blixseth, long since divorced. In this iteration, Timothy Blixseth alleges that defendants CrossHarbor Capital Partners, LLC, CIP Yellowstone Lending, and Samuel Byrne (CrossHarbor's founder and managing partner) conspired with Edra Blixseth to ruin him financially. Defendants move to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), for want of a claim worthy of adjudication.


         The saga of this case is too involuted to warrant an attempt to improve on the rendering offered by Bankruptcy Judge Ralph Kirscher in Blixseth v. Kirschner (In re Yellowstone Mountain Club, LLC), 436 B.R. 598 (Bankr. D. Mont. 2010).[1] For present purposes, the essential facts alleged in the First Amended Complaint (Complaint) are as follows.

         Timothy Blixseth, [2] through various limited liability corporations, founded and developed the Yellowstone Club (Club), an exclusive winter ski resort for the super-rich situated on a pristine mountainside. On June 28, 2007, Blixseth agreed to sell the Club to Byrne and CrossHarbor for $510 million. The first phase of the sale was completed in August of 2007, when Byrne and his company paid $54 million for a selection of lots on the Club premises. Upon completion of due diligence in January of 2008, Byrne and his company entered into an asset purchase agreement with Blixseth for the Club totaling over $455 million (after accounting for the previously purchased lots).

         The relationship between Blixseth and the defendants began almost immediately to sour. Blixseth blames the deterioration on a Byzantine conspiracy between Edra and Byrne to steal his interest in the Club in the Blixseths' then-pending divorce proceeding. The conspiracy is alleged to have unfolded as follows. On March 21, 2008, Edra dispatched an unnamed agent to Boston to meet with Byrne. Five days later, on March 26, 2008, Byrne and CrossHarbor terminated the asset purchase agreement. To cast an aura of legitimacy on the termination, Byrne and Edra disseminated letters falsely naming Blixseth as the target of a grand jury investigation.[3]

         Blixseth and Edra reached a marital settlement agreement (MSA) on June 26, 2008. As part of the MSA, Edra released Blixseth from any liability for the numerous debts incurred by the business entities that were transferred to Edra, including those of the Club. The MSA also required Edra to make a multi-million dollar cash payment to Blixseth. On August 7, 2008, Edra took two bridge loans totaling $35 million from CIP Yellowstone Lending (a CrossHarbor subsidiary) and agreed that defendants would collaborate with her on development efforts at the Club.

         According to Blixseth, these transactions gave CrossHarbor “total management and ownership control over the Yellowstone Club and Edra personally, to the extent that Byrne expressly prevented Edra from complying with provisions of the MSA.” Am. Compl. ¶ 69. Blixseth contends that Byrne knew that Edra could never repay the loans, and when she inevitably defaulted, forced her to put the Club into bankruptcy. The plot came to fruition when CrossHarbor purchased the Club in the bankruptcy proceedings at a fire sale price.

         Blixseth filed this action in the Central District of California in April of 2010, asserting ten state-law claims. That court ordered the case transferred to the District of Massachusetts in November of 2010. After the filing of the defendants' motion to dismiss and an initial round of briefing, the court ordered a stay while the bankruptcy proceedings against Blixseth wended their way through the federal courts. Five years later, defendants moved to reopen the case. Blixseth did not oppose that motion. The court then lifted the stay and invited supplemental briefing on the original motion to dismiss. Defendants have supplemented their briefs; Blixseth has not.


         Defendants first argue that Blixseth's claims are barred by the doctrine of issue preclusion (more commonly known as collateral estoppel). Specifically, they point out that in the bankruptcy proceeding, Blixseth claimed “that Edra, in the period of time between mid-August of 2008 and November 10, 2008, concocted a scheme with Byrne to drive the [Club] into bankruptcy so that Byrne could purchase the [Club] at a deep discount.” In re Yellowstone Mtn. Club, 436 B.R. at 641. The argument was intended to support Blixseth's contention that the proximate cause of the bankruptcy was not his own misdeeds, but “the conduct of other persons, including but not limited to, the collusion of Edra, Sam Byrne and CrossHarbor Capital to thwart a purchase of the [Club] by the filing of a Chapter 11 petition in bad faith.” Id. at 643. The Bankruptcy Court, however, dismissed the theory as a gossamer confection. Id. at 641, 663. In its final amended judgment, the Court expressly held that there was no factual foundation to support a finding “that the MSA, and the entire divorce proceeding, was a fraud orchestrated by Byrne.” Blixseth v. Kirschner (In re Yellowstone Mtn. Club, LLC), 2012 WL 6043282, at *3 (Bankr. D. Mont. Dec. 5, 2012).[4]

         As the parties recognize, with respect to issue preclusion, federal law applies. See Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 978 (1st Cir. 1995). Under federal law, the party invoking collateral estoppel must demonstrate “that (1) the issue sought to be precluded in the later action is the same as that involved in the earlier action; (2) the issue was actually litigated; (3) the issue was determined by a valid and binding final judgment; and (4) the determination of the issue was essential to the judgment.” Ramallo Bros. Printing, Inc. v. El Día, Inc., 490 F.3d 86, 90 (1st Cir. 2007). The parties to the second action need not be identical to those in the first action, so long as the party against whom issue preclusion is sought “has had a full and fair opportunity for judicial resolution of the same issue.” Rodríguez-García v. Miranda-Marín, 610 F.3d 756, 771 (1st Cir. 2010) (quoting Fiumara v. Fireman's Fund Ins. Cos., 746 F.2d 87, 92 (1st Cir. 1984)).

         The dispositive issue here is whether the issues litigated in the Montana proceeding are, for all practical purposes, identical to those asserted in his Complaint. To be sure, Blixseth recycles many of the “facts” that he used to buttress his conspiracy theory in the bankruptcy proceeding. See, e.g., Am. Compl. ¶ 43 (“[B]eginning in March 2008, Byrne and Edra created a scheme whereby Edra would insist on obtaining the Yellowstone Club from Mr. Blixseth as a condition of a marital settlement between them, and Byrne would arrange whatever financing would be needed to effectuate the Marital Settlement Agreement for Edra.”). But mere factual similarity is not enough; “the reach of collateral estoppel ‘must be confined to situations where the matter raised in the second suit is identical in all [material] respects to that decided in the first proceeding.'” Faigin v. Kelly, 184 F.3d 67, 78 (1st Cir. 1999) (quoting C.I.R. v. Sunnen, 333 U.S. 591, 599-600 (1948)). Thus, “the issues must be defined by reference to the judicial determinations at stake.” Id.

         The bankruptcy proceeding culminated in three conclusions of import to the issues at hand. First, the Bankruptcy Court found that Blixseth had engaged in a series of fraudulent transfers, including the siphoning of over $200 million from the Club for his personal use. In re Yellowstone Mtn. Club, 436 B.R. at 644, 655-660. Second, it ruled that the releases Blixseth obtained from Edra through the MSA were fraudulent and unenforceable. Id. at 660-668. Finally, it held that Blixseth had breached his ...

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