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Idaho Development, LLC v. Teton View Golf Estates, LLC
State: Idaho
Court: Supreme Court
Docket No: 37771
Case Date: 12/12/2011
Plaintiff: Idaho Development, LLC
Defendant: Teton View Golf Estates, LLC
Preview:IN THE SUPREME COURT OF THE STATE OF IDAHO Docket No. 37771

) ) ) Plaintiff-Appellant, ) ) v. ) ) TETON VIEW GOLF ESTATES, LLC, a ) ) Utah limited liability company; AMERITITLE COMPANY; ZBS, LLC., an ) ) Idaho limited liability company; ) DEPATCO, INC., an Idaho corporation; SCHIESS & ASSOCIATES, P.C., an Idaho ) ) professional corporation, ) ) Defendants-Respondents, ) ) and ) ROTHCHILD PROPERTIES, LLC, a Utah ) ) limited liability company; WESTERN ) EQUITY, LLC, a Utah limited liability ) company; HD SUPPLY WATERWORKS, ) LTD; DOES 1-3, and ALL PERSONS IN ) POSSESSION OF REAL PROPERTY ) DESCRIBED HEREIN, ) Defendants. ) _________________________________________

IDAHO DEVELOPMENT, LLC, a Utah limited liability company,

Pocatello, August 2011 Term 2011 Opinion No. 131 Filed: December 12, 2011 Stephen W. Kenyon, Clerk

SUBSTITUTE OPINION. THE COURT'S PRIOR OPINION DATED NOVEMBER 3, 2011 IS HEREBY WITHDRAWN

Appeal from the Seventh Judicial District of the State of Idaho, Bonneville County. Hon. Jon J. Shindurling, District Judge. The decision of the district court granting summary judgment is vacated and the case is remanded for further proceedings in accordance with this Opinion. Alan R. Harrison, Idaho Falls, for appellant. Holden, Kidwell, Hahn & Crapo, Idaho Falls, for respondent ZBS. Karl R. Decker argued.

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Fuller & Carr, Idaho Falls, for respondent DePatco, Inc. argued.

Mark Fuller

Beard, St. Clair, Gaffney, P.A., Idaho Falls, for respondent Schiess & Associates. ____________________________ W. JONES, Justice I. NATURE OF THE CASE Idaho Development, LLC ("Idaho Development") advanced $1,100,000.00 to Teton View Golf Estates, LLC ("Teton View"), a joint venture made up of Idaho Development as a 33.3% owner and Rothchild Properties, LLC as a 66.7% owner. Teton View granted Idaho Development a promissory note secured by a deed of trust that specified a set monthly payment and stated that the entire amount was to be paid off in ninety days. Idaho Development filed an action to foreclose on the deed of trust after Teton View failed to satisfy the promissory note. DePatco, Inc., another lienholder on the property, filed a motion for summary judgment to recharacterize Idaho Development's advance as a capital contribution, which was granted. Idaho Development appealed, arguing that there was a genuine issue of fact as to whether the entire $1,100,000 advance was intended to be a capital contribution. Idaho Development also appealed a subsequent summary judgment brought by ZBS, LLC, which relied on the recharacterization determination in holding that ZBS' lien on the property had priority over Idaho Development's lien. II. FACTUAL AND PROCEDURAL BACKGROUND Idaho Development, LLC ("Idaho Development") and Rothchild Properties, LLC ("Rothchild") wanted to form a Limited Liability Company known as Teton View Golf Estates, LLC ("Teton View"). On February 20, 2008, ZBS, LLC ("ZBS") transferred real property by warranty deed to Teton View with the understanding that Teton View would become operative in the upcoming weeks. One day earlier, on February 19, 2008, Teton View granted ZBS a promissory note secured by a deed of trust on the property in favor of ZBS. That deed of trust secured payment of $640,000 to ZBS, but was not immediately recorded. On February 28, 2008, Idaho Development and Rothchild entered into a Joint Venture Agreement forming Teton View. Under the terms of the Joint Venture Agreement, Idaho

Development advanced $1,100,000.00 to the joint venture, "with the understanding that upon the funding of the construction loan, Idaho Development shall be repaid the sum of Eight Hundred 2

Thousand Dollars ($800,000)." The remaining sum of $300,000 was to be subordinated to the construction loan. Idaho Development made no other advancement to Teton View. Rothchild contributed its time, skill, technology and know-how to Teton View. In exchange for Idaho Development's advancement of $1,100,000.00, Idaho Development shared 33.3% of Teton View's profits and losses, while Rothchild shared 66.7% of the company's profits and losses. The next day, on February 29, 2008, Idaho Development obtained a promissory note for repayment of $1,100,000.00 from Teton View, secured by a deed of trust on the same property as the ZBS deed of trust. 1 In an effort to compromise ZBS' and Idaho Development's conflicting interests, Idaho Development agreed to reduce the deed of trust from $1,100,000 to $850,000, but refused to subordinate its deed of trust behind ZBS. As a result, on March 7, 2008, Idaho Development's deed of trust was amended to an amount of $850,000. On March 10, 2008, both Idaho Development and ZBS recorded their deeds of trust, but Idaho Development's deed of trust bears a lower instrument number evidencing that ZBS recorded behind Idaho Development. 2 Idaho Development's promissory note called for six percent annual interest with monthly payments by Teton View of $5,595.06. It required the balance to be paid in full no later than ninety days from the date of the note, or in other words, by May 28, 2008. It also provided that Idaho Development was to receive 15% of the net proceeds from each lot sale. Teton View did not satisfy the terms of the promissory note. Idaho Development agreed to extend the due date on the promissory note until the end of June 2008 in exchange for a $10,000 payment. Again, Teton View failed to satisfy the note by the extended deadline, and Idaho Development filed a complaint to foreclose its deed of trust against all junior interests. In its amended complaint, Idaho Development listed several defendants, including Teton View, Rothchild, and ZBS. It also listed Western Equity, LLC ("Western Equity"); Amerititle Company ("Amerititle"); DePatco, Inc. ("DePatco"); Schiess & Associates, P.C. ("Schiess"); and HD Supply Waterworks, Ltd. ("HD Supply") as defendants. DePatco worked on the

property at issue and recorded a lien on the property on October 20, 2008, after both Idaho Development and ZBS recorded their deeds of trust. Teton View, Rothchild and Western Equity
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The deed of trust was recorded as Instrument # 1292699 in Bonneville County, Idaho.

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Idaho Development's amended deed of trust was recorded at 12:51 p.m., the same time as ZBS' deed of trust, but Idaho Development's bears a lower instrument number, # 1292697.

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filed counter-claims against Idaho Development.

Those parties stipulated to dismiss those

claims on August 14, 2009. On January 5, 2010, DePatco filed a motion for partial summary judgment seeking recharacterization of Idaho Development's advancement, or alternatively, seeking equitable subordination of Idaho Development's lien to its own. In its Opinion, Decision and Order, the district court granted DePatco's motion and recharacterized the loan as a capital contribution, thereby moving Idaho Development's priority to last in line behind all other legitimate creditors, including ZBS, DePatco and Schiess. ZBS subsequently filed a motion for summary judgment to establish ZBS' priority over Idaho Development's claims. Idaho Development opposed the motion, arguing that ZBS had agreed to subordinate its claim to Idaho Development after it amended its deed of trust from $1,100,000 to $850,000 and thus ZBS should not be given priority. Idaho Development also filed a Motion to Reconsider the first summary judgment which had recharacterized the advancement as a contribution to capital. ZBS, DePatco, and Schiess entered into an agreement to jointly foreclose their liens. Because Teton View failed to appear and answer with respect to the claims of ZBS and Schiess, the court entered default judgment against Teton View. Thirdparty defendants, Amerititle and Idaho Title & Trust, Inc., as trustees of the deeds of trust at issue in this case, stipulated to entry of judgment. The court entered judgment on May 11, 2010 establishing that ZBS' deed of trust, DePatco's deed of trust and Schiess' lien, were valid first liens on the property. It ordered judgment of foreclosure against Teton View and in favor of ZBS, DePatco and Schiess. The district court issued a Rule 54(b) certificate with its judgment, allowing that judgment to be appealed to this Court. Idaho Development's Motion to Reconsider was denied on August 30, 2010. Idaho Development provided argument on appeal as to why the Motion to Reconsider was improperly denied. Although it did not appeal from that order, and the Notice of Appeal was filed almost three months before the Motion to Reconsider was denied, Idaho Appellate Rule 17 instructs that all interlocutory or final orders entered after the final judgment appealed from shall be deemed included on appeal. Nevertheless, given the outcome of this opinion, the Court finds it Idaho

unnecessary to decide whether the Motion to Reconsider was improperly denied.

Development filed its Notice of Appeal on June 3, 2010 and properly appealed from the May 11, 2010 Judgment certified by the Rule 54(b) certificate.

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III. ISSUES ON APPEAL 1. 2. 3. 4. Whether the district court improperly granted summary judgment by recharacterizing Idaho Development's $1,100,000 advance as a capital contribution? Whether the summary judgment should be affirmed on the alternative basis that equitable subordination should be applied? Whether the district court improperly granted summary judgment establishing ZBS' priority over Idaho Development? Whether either party is entitled to attorney's fees on appeal? IV. STANDARD OF REVIEW "When reviewing a grant of summary judgment, this Court applies the same standard of review used by the district court in ruling on the motion." Mortensen v. Stewart Title Guar. Co., 149 Idaho 437, 441, 235 P.3d 387, 391 (2010). A grant of summary judgment is warranted where "the pleadings, depositions and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." I.R.C.P. 56(c). The facts must be liberally construed in favor of the non-moving party. Renzo v. Idaho State Dep't. of Agric., 149 Idaho 777, 779, 241 P.3d 950, 952 (2010). "The burden of proving the absence of an issue of material fact rests at all times upon the moving party." Blickenstaff v. Clegg, 140 Idaho 572, 577, 97 P.3d 439, 444 (2004). "When an action will be tried before a court without a jury, the court may, in ruling on the motions for summary judgment, draw probable inferences arising from the undisputed evidentiary facts." Losee v. Idaho Co., 148 Idaho 219, 222, 220 P.3d 575, 578 (2009). V. ANALYSIS A. The District Court Erred in Granting Summary Judgment to DePatco by Recharacterizing Idaho Development's Advance to Teton View as a Capital Contribution because there Was a Genuine Issue of Fact as to whether the Entire Advance Was Intended to be a Capital Contribution 1. This Court Has Previously Held that Debt Recharacterization of an Advance as a Loan or as Capital Contribution Depends on the Intent of the Parties

Debt recharacterization is a tool developed by federal bankruptcy courts as an alternative to equitable subordination. Debt recharacterization "rests on the substance of the transaction giving rise to the claimant's demand" instead of the court's "assessment of the creditor's behavior," and thus most courts do not require inequitable conduct to be shown in order to apply recharacterization. In re Official Comm. of Unsecured Creditors for Dornier Aviation, Inc., 453 F.3d 225, 232 (4th Cir. 2006); see also In re N & D Props., Inc., 799 F.2d 726, 733 (11th Cir. 5

1986) (applying debt characterization if there was initial under-capitalization of the corporation or if no other disinterested lender would have extended credit); In re SubMicron Sys. Corp., 432 F.3d 448, 456 n.8 (3d Cir. 2006) (identifying several similar multi-factor tests utilized by federal courts). In actuality, the label "recharacterization" is somewhat of a misnomer. The real aim of the trial court is to make "the determination whether an advance is debt or equity," which "depends on the distinction between a creditor who seeks a definite obligation that is payable in any event, and a shareholder who seeks to make an investment and to share in the profits and risks of loss in the venture;" thus the court really is engaging in a `characterization' rather than a `recharacterization.' Bauer v. C.I.R., 748 F.2d 1365, 1367 (9th Cir. 1984); see also In re Airadigm Commc'ns., Inc., 616 F.3d 642, 653 (7th Cir. 2010) ("Recharacterization is a theory, adopted by the overwhelming majority of courts to have considered the question, that bankruptcy courts may place the proper label of `claim' (generally, debt) or `interest' (equity) on an advance of funds, regardless of what the parties call it."). Equitable subordination and debt recharacterization both end up reaching the same result: the insider advance is subordinated to the loans of the legitimate outside creditors. However, for the purposes of equitable subordination, the subordination itself is the remedy in equity. While for the purposes of recharacterization, subordination is merely a consequence of the loan no longer being characterized as a loan, but as a capital contribution, thereby necessarily downgrading its priority to the back of the line. As the Tenth Circuit stated: Recharacterization cases turn on whether a debt actually exists, not on whether the claim should be equitably subordinated. In a recharacterization analysis, if the court determines that the advance of money is equity and not debt, the claim is recharacterized and the effect is subordination of the claim as a proprietary interest because the corporation repays capital contributions only after satisfying all other obligations of the corporation. In an equitable subordination analysis, the court is reviewing whether a legitimate creditor engaged in inequitable conduct, in which case the remedy is subordination of the creditor's claim to that of another creditor only to the extent necessary to offset injury or damage suffered by the creditor in whose favor the equitable doctrine may be effective. In re Hedged-Invs. Assocs., Inc., 380 F.3d 1292, 1297 (10th Cir. 2004) (quoting In re AutoStyle Plastics, Inc., 269 F.3d 726, 748
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