Spanish Peaks Lawsuit Alleges Deception on Landslide Risk

By Guest Writer, 8-10-09

The Club at Spanish Peaks, a luxury second-home development in Big Sky, allegedly failed to disclose to at least one buyer what it knew about geological hazards on the property, according to a previously unpublicized lawsuit, shining a bright light on a complex issue that confronts many developers in Big Sky and other mountain locations.

In a lawsuit filed in 2007 in Gallatin County court, Terrence O’Reilly, the former Vice President of Construction at Spanish Peaks and the owner of lot 87 on the Spanish Peaks Estates subdivision, alleges that the developer deliberately withheld information about potentially unstable geology on his lot.

Internal Spanish Peaks emails obtained as part of the discovery process in the lawsuit appear to show that, as a matter of policy, Spanish Peaks did not disclose to potential buyers the results of geotechnical studies conducted on the property.

In one email, the vice president of development suggests that the response of the sales staff to customer inquiries about the issue should be to “baffle them with BS rather than provide the actual reports.”

Stephen Brown, a Missoula attorney representing Spanish Peaks, said the lawsuit had been settled and that everyone in the case was bound by a confidentiality agreement. While he declined to comment on the specific case, Brown said: “It’s Spanish Peaks’ position that they have made all the disclosures required by law.”

Trent Gardner, O’Reilly’s attorney, confirmed that the case had been settled but declined further comment, citing the confidentiality agreement. The settlement agreement was reached several weeks ago and finalized by court order on Monday.

Spanish Peaks, launched in 2004, was founded by Pittsburg businessman James Dolan, and was envisioned as an “unpretentious” private community for families with “recreational lifestyles.” Featuring a Tom Weiskopf golf course, a few private ski runs, and ski-in, ski-out access to Big Sky Resort, the 5,700-acre Spanish Peaks property is directly adjacent to the Yellowstone Club near Big Sky, MT. Dolan is a close associate of Yellowstone Club founder Tim Blixseth.

Dolan did not return calls seeking comment.

The O’Reilly lawsuit says that after purchasing lot 87 on February 18, 2005 at a discounted employee price of $385,000, O’Reilly put the lot on the market for resale. However, he was then allegedly forced to take the lot off the market after he encountered a “geotechnical reconnaissance report” which outlined geotechnical hazards affecting the property - in particular the risk of landslides.

Prepared by NTL Engineering and Geoscience on March 28, 2000, the purpose of the report was to determine if there was anything that might indicate slope stability problems for the planned residential development. Such studies are often required as part of the subdivision approval process, and Brown said the geotechnical reports at Spanish Peaks had been submitted as part of the subdivision review.

There is no specific legal requirement that buyers be informed of geological issues, but in general sellers are required to disclose “adverse material facts” if they are aware of them.

The NTL report divided the property into four sections and color-coded them according to the geotechnical hazards affecting each lot. O’Reilly’s property was colored orange, which according to the report meant that it had potential slope instability and expansive soils, and was recommended to have a “detailed investigation/stability analysis to evaluate stabilization needs.”

According to court documents, O’Reilly was unaware of the report’s existence. He sued Spanish Peaks and several of its executives on a number of counts, including fraud and negligent misrepresentation. 

In an email exchange between then- Vice President of Design and Construction Wade Pannell and Vice President of Sales and Marketing Mark West, on Feb. 9, 2004, West addressed Pannell, asking, “Soil tests and stability seem to be coming up pretty regularly with potential buyers. Any suggestions on how to handle this based on your past experiences?”

Pannell responded in part: “With regard to geotechnical stability, this seems to be one of those areas where we should try to baffle them with BS rather than provide the actual reports.”

Two years later, Pannell wrote an email to defendant and former Club President Peter Forsch, in which Pannell expressed similar reluctance to inform potenitial buyers and property owners about potential risks.

Pannell wrote: “Any interim report would open the lodge and settlement up to scrutiny. The more information in the public eye today may only cause additional and unnecessary concern in the public that will leak its way into the real estate community and the approval process.”

The possible geological hazards are not unique to Spanish Peaks. In many parts of Big Sky, the underlying rock is Cretaceous Shale, a weak sedimentary rock that can create problems because of its ability to morph into betonitic shale—a slippery, clay-like substance—when saturated with water.

Further, because Big Sky lies within the Intermountain Seismic Belt--the part of the intermountain west with the highest earthquake potential—the risk of sudden landslides is that much greater. Numerous landslides have been mapped in the area.

In 1959, an earthquake with a 7.5 magnitude struck part of Madison Valley, about 30 miles south of the Big Sky-Moonlight Basin area, triggering a landslide that killed 28 people. After damming a section of the Madison River, this event created “Quake Lake.” The quake marks its 50th anniversary this Sunday.

Many developers and engineers say that geological hazards can be mitigated with good stabilization techniques during the construction process. Brown, the Spanish Peaks attorney, points out that many mountain areas are subject to ground movement and it’s by nature one of the risks of building in the mountains.

But some scientists are less sanguine. Montana State University Professor of Earth Sciences Stephan Custer, speaking generally and not about the Spanish Peaks situation, said that although some structures are engineered to resist current or upcoming ground movement, it can be a roll of the dice.

“Can we build on landslides?” Custer said. “To some degree. But the cost is transferred to the future.”

For Spanish Peaks, the geological issues and the O’Reilly lawsuit are part of a long list of troubles. Construction of the main lodge at the development has been halted, apparently due to cash-flow problems. Contractors are complaining that they haven’t been paid – one even mounted a picket line at the Spanish Peaks entrance last week in a successful effort to obtain some $20,000 in back-due money.

Spanish Peaks has substantial debt, according to sources familiar with the project, and with the luxury real estate market all but dead for the moment, it’s unclear how the financial problems might be resolved.