Idaho Development, LLC v. Teton View Golf Estates, LLC ( 2011 )

IN THE SUPREME COURT OF THE STATE OF IDAHO
Docket No. 37771
IDAHO DEVELOPMENT, LLC, a Utah )
limited liability company, )
)
Plaintiff-Appellant, )
) Pocatello, August 2011 Term
v. )
) 2011 Opinion No. 112
TETON VIEW GOLF ESTATES, LLC, a )
Utah limited liability company; ) Filed: November 3, 2011
AMERITITLE COMPANY; ZBS, LLC., an )
Idaho limited liability company; ) Stephen W. Kenyon, Clerk
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. )
_________________________________________
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. The award of attorney’s fees and costs is vacated.
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. Mark Fuller
argued.
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
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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
1
The deed of trust was recorded as Instrument # 1292699 in Bonneville County, Idaho.
2
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. Third-
party 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
unnecessary to decide whether the Motion to Reconsider was improperly denied. Idaho
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. Whether the district court improperly granted summary judgment by recharacterizing
Idaho Development’s $1,100,000 advance as a capital contribution?
2. Whether the summary judgment should be affirmed on the alternative basis that equitable
subordination should be applied?
3. Whether the district court improperly granted summary judgment establishing ZBS’
priority over Idaho Development?
4. 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.
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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, 748–49 (6th Cir. 2001) (emphasis in original)); see also In re
Aradigm Commc’ns., 616 F.3d at 658 (“[W]hen a claim is equitably subordinated, a court
disregards a party’s formal rights; when a claim is recharacterized, a court determines what those
formal rights are in the first instance.”). The aim of debt recharacterization is to determine what
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the transaction actually is, because “persons making capital contributions are not corporate
creditors.” Tanzi v. Fiberglass Swimming Pools, Inc., 414 A.2d 484, 489 (R.I. 1980).
The district court in the present case utilized the simple and practical approach of the
Third Circuit, which calls for “a commonsense conclusion that the party infusing funds does so
as a banker (the party expects to be repaid with interest no matter the borrower’s fortunes;
therefore the funds are debt) or as an investor (the funds infused are repaid based on the
borrower’s fortunes; hence they are equity).” In re SubMicron Sys. Corp., 432 F.3d 448, 456 (3d
Cir. 2006). Thus, the “determinative inquiry in classifying advances as debt or equity is the
intent of the parties as it existed at the time of the transactions.” Id. at 457. “That intent may be
inferred from what the parties say in their contracts, from what they do through their actions, and
from the economic reality of the surrounding circumstances. Answers lie in facts that confer
context case-by-case.” Id. at 456.
The Court similarly characterized advancements as capital contributions rather than loans
in two cases cited by the district court, Lettunich v. Lettunich, 141 Idaho 425, 111 P.3d 110(2005) and Vreeken v. Lockwood Engineering, B.V., 148 Idaho 89, 218 P.3d 1150 (2009). The
district court stated, and the Respondents argued, that those cases did not involve “debt
recharacterization” because the court in those cases determined that the assets were capital
contributions, rather than loans that should be “recharacterized” as capital contributions. This
argument misses the purpose of “debt recharacterization” which is to characterize what the
substance of the advance is, based on the intent of the parties, regardless of what label the parties
may have put on it. Therefore, it should be recognized that in both Lettunich and Vreeken, the
Court did “recharacterize” the advances as capital contributions. In essence, this Court has
already used the Third Circuit’s streamlined common-sense approach in Lettunich and Vreeken.
Thus, in recharacterizing debt, this Court looks to the true intent of the parties in entering the
transaction.
While Idaho case law does not expressly refer to “debt recharacterization” by that same
term, it seems to have used a practical approach, similar in substance to the one employed by the
Third Circuit, to determine whether an advance by a shareholder was a valid loan or instead a
capital contribution. Weyerhaeuser Co. v. Clark’s Material Supply Co., 90 Idaho 455, 461, 413
P.2d 180, 183 (1966). The court in Weyerhaeuser found that the facts of the case led to the
conclusion that the shareholders were not creditors of the corporation so as to entitle them to
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share in the distribution of the corporate assets. Id. Those facts were: (1) the shareholders were
not listed on the corporate records as creditors; (2) no note was executed; (3) the proceeds of the
loan were not used by the corporation for corporate purposes; and (4) at least one creditor
advanced credit to the corporation on the representation that the proceeds of the shareholder loan
would be available to satisfy the debt, which they were not. Id. Thus, the Court, in essence,
used its power to place the proper label on the advance, thereby “recharacterizing” it, properly,
as capital after analyzing the parties’ intent.
2. The District Court Improperly Granted Summary Judgment because there Was
Conflicting Evidence as to whether All of the $1,100,000 Advance Was Intended
to be a Capital Contribution
Since this Court has previously held that the test for recharacterization of a debt is to look
at the intent of the parties, the next step is to determine whether there are any genuine issues of
fact. Thus, the Court must determine whether the district court’s conclusion that the advance is a
capital contribution and not a loan is an issue of fact or an issue of law. The Ninth Circuit has
held that the question of whether an advance to a corporation is debt or equity is “primarily
directed at ascertaining the intent of the parties.” A.R. Lantz Co. v. United States, 424 F.2d 1330,
1333 (9th Cir. 1970). Because the question of intent is one of fact, the determination as to
whether to recharacterize an advance as a capital contribution or as a loan is an issue of fact.
Bauer, 748 F.2d at 1367.
Further, this Court has previously acknowledged in prior cases that the determination that
an advance is a capital contribution and not a loan is a factual one. Vreeken, 148 Idaho at 109–
10, 218 P.3d at 1170–71 (2009); Lettunich, 141 Idaho at 433, 111 P.3d at 118 (2005). In
Vreeken, the Court reviewed the district court’s finding of facts following a bench trial, including
the finding that certain assets were capital contributions instead of loans. Id. The Court found
that despite some evidence that the assets may have been intended to be a loan, there was
“substantial and competent evidence,” supporting the conclusion that they were capital
contributions, namely that they were listed as being owned by the corporation and were being
used by the corporation in the normal course of business operations. Id. at 110, 218 P.3d at
1171. In Lettunich, the Court found that although there was conflicting evidence as to whether
the money advanced to the partnership was intended to be a loan or a capital contribution, the
district court’s finding that the advance was a capital contribution was supported by substantial
evidence. 141 Idaho at 433, 111 P.3d at 118. Once again, the determination as to whether the
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advance was a loan or a capital contribution was treated as a factual finding. Thus, the Court
finds that the determination made by the district court in summary judgment that Idaho
Development’s advance was a capital contribution and not a loan was a factual determination.
In ruling on motions for summary judgment without a jury, the court may draw probable
inferences from undisputed evidentiary facts. Losee v. Idaho Co., 148 Idaho 219, 222, 220 P.3d
575, 578 (2009) (citing Banner Life Ins. Co. v. Mark Wallace Dixon Irrevocable Trust, 147
Idaho 117, 124, 206 P.3d 481, 488 (2009)). “Drawing probable inferences under such
circumstances is permissible because the court, as the trier of fact, would be responsible for
resolving conflicting inferences at trial. However, if reasonable persons could reach differing
conclusions or draw conflicting inferences from the evidence presented, then summary judgment
is improper.” Id. (citing Boise Tower Assocs. v. Hogland, 147 Idaho 774, 779, 215 P.3d 494, 499
(2009)). Given the standard of review on a motion for summary judgment, prior to a bench trial,
the district court here improperly granted summary judgment because it made a factual finding
based on conflicting evidence which was not the most probable inference from the facts before it.
There are three potential inferences that could have been drawn from the evidence presented by
both parties: (1) the entire $1,100,000 was intended to be a capital contribution; (2) the entire
$1,100,000 was intended to be a loan; or (3) part of the $1,100,000 was intended to be a capital
contribution and part of it was intended to be a loan. Only the first of these inferences would
warrant the conclusion reached by the district court, characterizing the advance as a capital
contribution and granting summary judgment. Unless that was the “most probable inference[] to
be drawn from [the] uncontroverted evidentiary facts” presented at summary judgment, the
district court erred in granting it. Loomis v. City of Hailey, 119 Idaho 434, 437, 807 P.2d 1272,
1275 (1991). In this case, the Court finds that the issues were too controverted to ascertain the
intent of the parties.
The district court acknowledged that there was conflicting evidence as to whether the
parties intended part or all of the contribution to be a loan or a capital contribution. The court
stated “there is documentation supporting the argument that the parties intended the advance to
be a loan.” It further noted that the documentation referred to the advance as a loan, and called
for regular payments and interest on that loan. The district court then went on to recognize that
“the documentation also contains elements of an equity investment,” noting that Teton View had
no capital outside of Idaho Development’s advance and that Idaho Development was to receive
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one third of Teton View’s profits by entering into the Joint Venture Agreement. The lower court
concluded that “[t]he subjective and objective intent of the parties demonstrate that Idaho
[Development] sought to be both an investor in and a creditor to Teton View.” It then stated that
because Idaho Development had not differentiated between what money it intended to be used as
a capital investment and what money was to be treated as a loan, the entire amount was to be
recharacterized as a capital investment.
DePatco presented no evidence that the entire $1,100,000 was intended to be a capital
contribution, other than the fact that Teton View did not have any other initial capital
contributions aside from Idaho Development’s advance. It is likely, given that it had no other
capital contributions, that at least a portion of that advance was intended to be used as capital.
Nevertheless, the burden was on DePatco as the movant to show there was no genuine issue of
material fact that the entire amount was intended to be a capital contribution and thus should be
characterized as such. See Foster v. Traul, 141 Idaho 890, 893, 120 P.3d 278, 281 (2005). It is
true that “the non-moving party cannot rely upon bare allegations” but instead “must establish
the existence of an issue of fact with regard to the challenged elements” where “a motion for
summary judgment is supported by an evidentiary showing.” Rincover v. State Dep’t of Fin.,
Sec. Bureau, 128 Idaho 653, 659–60, 917 P.2d 1293, 1299–300 (1996).
However, the evidence presented here by Idaho Development, including the language in
the Joint Venture Agreement regarding repayment of part of the loan upon the funding of a
construction loan, as well as the promissory note secured by the deed of trust providing for
monthly payments of a specified amount plus interest to be completed within ninety days,
provides strong evidence that at least part of the advance was intended to be a loan. The
evidence presented at summary judgment also showed that Idaho Development amended its deed
of trust from $1,100,000 to $850,000, rendering the remaining $250,000 unsecured. This could
tend to show that the $250,000 left unsecured was intended to be a capital contribution.
Similarly, Idaho Development alleges that an account was set up by Teton View in the amount of
$135,000 to cover its likely business expenses. The evidence in the record shows that Teton
View opened an account with Key Bank and deposited $135,000 into that account on March 10,
2008. Idaho Development was paid interest on its loan out of this account. Several other
payments were made by Teton View from this account for business expenses including
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engineering, irrigation application fees, excavation, surface drainage, wages, traffic control, and
appraisals. This could also tend to show that $135,000 was intended to be capital.
The evidence here is similar to the type that the District of Delaware confronted in In re
SubMicron Systems, Corp., 291 B.R. 314 (D. Del. 2003). In that case, the court found that the
advances the corporation received from an insider would not be recharacterized as equity, even
though, at the time the advances were made, the corporation was already severely
undercapitalized, because (1) the intent of the parties was to create debt; (2) the advances were
characterized as loans on the corporate books; and (3) the advances had fixed maturity dates and
rates of interest. Id. at 325–26. The Third Circuit affirmed the court’s determination that the
debt should not be recharacterized, holding that the court’s factual determination was not clearly
erroneous. SubMicron Systems, 432 F.3d at 457. Here, every document pointed to by the
parties, including the Joint Venture Agreement, the promissory note, and the deed of trust, call
the advance a loan, or at the least an advance that is to be repaid. The loan had a fixed monthly
payment, and it had an original maturity date of ninety days (later extended another thirty days).
As in SubMicron Systems, this Court finds that the evidence was at least conflicting as to
whether the entire advance was intended to be a capital contribution. The party seeking to
recharacterize the advance carries the burden of proof as to showing how much of the
advancement was intended to be a capital contribution. Therefore, the district court erred in
shifting the burden of proof from the movant challenging the characterization as a loan onto the
non-movant party. Idaho Development did not have the burden to prove how much of the
advance was a loan and how much of it was a capital contribution. Thus, this Court holds that
the district court erred in granting summary judgment by recharacterizing the entire amount as a
capital contribution despite conflicting evidence.
B. The District Court Did Not Err In Declining to Apply Equitable Subordination
DePatco argues that if the Court finds that summary judgment was improperly granted
because the advance was not properly characterized as a capital contribution, then the Court
should equitably subordinate Idaho Development’s claim to DePatco’s lien. Idaho Development
argues that under I.A.R. 15, DePatco may not raise this argument without a cross-appeal because
the district court rested its summary judgment decision on the debt recharacterization issue. The
record shows that DePatco raised the equitable subordination issue before the district court. The
district court declined to apply equitable subordination and instead applied debt
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recharacterization. DePatco “is not seeking to reverse or vacate the judgment, nor is [DePatco]
seeking a reversal of finding upon which the judgment is based” such that I.A.R. 15 applies to
require a cross-appeal. McKay v. Boise Project Bd. of Control, 141 Idaho 463, 468, 111 P.3d
148, 153 (2005). Rather, DePatco is seeking to affirm the district court’s decision, to
subordinate Idaho Development’s loan to DePatco’s loan on an alternative basis, that the loan
should be equitably subordinated if recharacterization was not appropriate. The Court finds that
Idaho Appellate Rule 15 does not apply and DePatco was not required to file a cross-appeal on
this issue.
The district court held that equitable subordination was not the law in Idaho and therefore
declined to apply it. The court acknowledged that Alaska appeared to be the only state to
expressly endorse the use of equitable subordination outside of the bankruptcy context, and that
the vast majority of courts to consider the issue have declined to do so. Because equitable
subordination is a tool developed and used almost exclusively by the bankruptcy courts, this
Court declines to create new law by applying it here for the first time. See HBE Leasing Corp. v.
Frank, 48 F.3d 623, 634 (2d Cir. 1995) (“Equitable subordination is distinctly a power of federal
bankruptcy courts, as courts of equity, to subordinate the claims of one creditor to those of
others.”).
C. The Court Finds that the Advance was Improperly Recharacterized on Summary
Judgment and Instructs the Court on Remand that any Portion Characterized as a
Loan Has Priority over ZBS’ Claim
In its motion for summary judgment, ZBS asserted that its deed of trust was the first and
paramount lien on the property. Subsequent to the motion, ZBS entered into an agreement with
DePatco and Schiess, the two other lienholders on the property who had not yet settled, to jointly
foreclose their liens. Idaho Development was the only party opposing this summary judgment.
The district court made an oral ruling on the motion, holding that pursuant to the earlier
summary judgment recharacterizing the entire loan as a capital contribution, there was no interest
upon which a deed of trust could be based. Therefore, it reasoned that ZBS’ interest could not
have been subordinated to Idaho Development’s claim because Idaho Development had no
interest. As the district court recognized, whether ZBS has priority over Idaho Development’s
claim is dependent on how the Court resolves the first issue in this case. This Court finds that
the district court improperly granted summary judgment because Idaho Development’s entire
advance was improperly recharacterized as a capital contribution when there were issues of fact
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remaining regarding how much of the $1,100,000 was intended to be a capital contribution. As
such, the Court must look to the priority of the loans to determine the subordination of claims.
Idaho Development recorded its deed of trust before ZBS, as evidenced by its lower
instrument number. Because Idaho Development’s loan was recorded first, it had the first right
to be paid before ZBS. See Blickenstaff v. Clegg, 140 Idaho 572, 580, 97 P.3d 439, 447 (2004)
(“Because M&D’s deed of trust was recorded before the second U.S. Bank Lien, M&D has the
right to be paid . . . before U.S. Bank receives any payment on its second loan.”). The facts are
conflicting on the factual issue as to what amount, if any, of Idaho Development’s advance is
properly characterized as a loan. Therefore, the Court finds that summary judgment was
improperly entered when the court recharacterized the entire loan as a capital contribution. The
Court further instructs the district court on remand that any portion of the advance that was
intended to be a loan and thus is characterized as a loan, has priority over ZBS’ later-recorded
deed of trust. Any portion that was intended to be a capital contribution and thus is properly
characterized as a capital contribution will be last in priority behind all of Teton View’s
legitimate outside creditors.
D. Neither Party is Entitled to Attorney’s Fees on Appeal
Idaho Development does not request attorney’s fees on appeal. DePatco, Schiess and
ZBS request attorney’s fees on appeal under I.C. § 12-121, arguing that Idaho Development
brought the appeal frivolously, unreasonably, or without foundation. ZBS alternatively requests
attorney’s fees on appeal under I.C. § 12-120(3), arguing that ZBS’ claim is based on a
promissory note secured by a deed of trust and is therefore a commercial transaction. Because
this Court is vacating the district court’s grant of summary judgment, neither DePatco, Schiess
nor ZBS are prevailing parties on appeal. Thus, “it is not necessary to discuss whether this
appeal involves a ‘commercial transaction’ under § 12-120(3) or whether the appeal was brought
or defended unreasonably under § 12-121.” Caldwell v. Cometto, 151 Idaho 34, 41, 253 P.3d
708, 715 (2011). No attorney’s fees are awarded to the Respondents.
VI. CONCLUSION
Because there was a genuine issue of fact as to whether the entire $1,100,000 was
intended to be a capital contribution, the district court improperly granted summary judgment.
Therefore, the decision of the district court granting summary judgment is vacated and the case is
remanded for further proceedings in accordance with this Opinion. Additionally, the award of
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attorney’s fees and costs shall also be vacated as the prevailing party has yet to be determined in
this case.
Chief Justice BURDICK, Justices EISMANN and HORTON, CONCUR.
J. JONES, J., specially concurring.
I concur in the Court’s opinion in all respects. Although not necessary to the decision of
the issues presented on appeal, it is worth observing that a litigant’s interests are not always best
served by taking an all-or-nothing approach in the litigation. That appears to have been the
situation in this case. Had Idaho Development not taken the position that the entire $1,100,000
paid to Teton View was a loan, it would likely have fared much better in district court. Based on
the facts contained in the record, Idaho Development could have presented a strong case that its
loan to Teton View was initially in the amount of $800,000 and that the loan was subsequently
amended to $850,000. The documentation provides substantial support for this view. A loan of
$850,000, which would result in an equity contribution of $250,000, would be difficult to
dispute. By trying to extend its secured interest to the entire $1,100,000, Idaho Development
simply overplayed its hand. By taking an all-or-nothing posture in the litigation, Idaho
Development muddled its message and jeopardized what appeared to be a legitimate claim to
secured priority for the $850,000 amount. If the entire $1,100,000 was a loan, that would leave
the company with no equity. The district court appears to have been frustrated by this all-or-
nothing position, resulting in the characterization of the entire payment as equity.
On the other hand, the respondents have not ultimately benefitted by asserting an all-or-
nothing position on their own behalf. Had they recognized the implausibility of the entire
payment to Teton View being characterized as an equity contribution, and offered some proof as
to how the payment should be divided between the equity pot and the loan pot, they may well
have fared somewhat better.
On remand, the parties will have an opportunity to dispense with their all-or-nothing
positions and present a more realistic picture to the district court. They would be well advised to
do so.
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