Opinion ID: 874074
Heading Depth: 1
Heading Rank: 8

Heading: 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

Text: 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 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 Dixson 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 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 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.