Yellowstone Club Bankruptcy

Bankers on Trial: Credit Suisse, the Yellowstone Club, and the Real Estate Collapse

By Jonathan Weber , 4-14-09

	J. Thomas Beckett of Parsons Behle & Latimer, lead attorney for the Yellowstone Club Creditors Committee, outside the Butte courthouse.

In September of 2005, when the luxury real estate market was in full flower, a group of Credit Suisse investment bankers and their clients boarded private planes in New York and Los Angeles for a trip to the Yellowstone Club near Big Sky, Montana. The agenda for the two-day trip included discussion of a $330 million loan for what was touted as the world’s only private ski-and-golf resort, as well as fly fishing and golf and cocktails and dinner. The Yellowstone Club and its founder, Tim Blixseth, seemed to have nowhere to go but up, and Credit Suisse was all-too-eager to help them along.

A few weeks later, the deal was inked - for $375 million. The bankers received a $7.4 million fee. Tim Blixseth and his then-wife Edra—permitted by the loan agreement to take much of the money as a “return on capital”—went on a spending spree that eventually included the purchase of a castle in France, resorts in Mexico and the Caribbean, and the payoff of numerous debts for cars, airplanes, and other personal properties. While the loan eventually prompted a lawsuit from minority shareholders in the club, led by former cycling great Greg LeMond, it raised few eyebrows at the time.

But today, that transaction is at the center of a lawsuit that’s turning into a case study in the kind of fast-and-loose financial practices that led to the global economic crisis. Set for trial next week as part of the Yellowstone Club bankruptcy case, the lawsuit could have major implications for Credit Suisse and other financial institutions that for years made extravagant loans based on dubious appraisals, minimal due-diligence, and little in the way of ongoing oversight.

Indeed, Credit Suisse alone made numerous similar loans around the world, and a number of the recipients - including Promontory Club in Utah, Tamarack Resort in Idaho, Lake Las Vegas in Nevada, Ginn Resorts in Florida, and Turtle Bay in Hawaii - are now in bankruptcy. The Yellowstone Club lawsuit, formally being brought by the committee representing unsecured creditors of the club, alleges among other things that the Credit Suisse resort loans were made out of a Cayman Islands entity in order to avoid U.S. laws.

“The Committee believes that many of the Similar Loans were made by an off-shore ‘branch’ of Credit Suisse (in the Cayman Islands) so they would not have to comply with U.S. banking regulations concerning ‘fair market value’ ‘appraisals.’ Neither the Yellowstone Loan nor the Similar Loans would have complied with those regulations,” the Creditors Committee said in court documents.

The upcoming trial also promises to reveal quite clearly how club founders Tim and Edra Blixseth spent all the money, and could help determine whether Tim Blixseth might ultimately be forced to surrender cash and assets - notably the Tamarindo resort property in Mexico and a private island in Turks and Caicos - that he now owns personally. Tim Blixseth says in court papers that any money he took from the club for his own use was a loan (the club holds $275 million in promissory notes from BGI, the Blixseth family holding company) and that he paid some of it back before ownership of BGI was transferred to Edra as part of their divorce settlement last year.

The lawsuit formally pits the Creditors Committee against both Tim Blixseth and Credit Suisse, which was the agent for the 2005 loan deal and now represents the institutional investors who purchased the notes. The Committee alleges that because most of the proceeds of the loan went directly to the Blixseths and not to the club, the transaction was a “fraudulent transfer” that led directly to the club’s bankruptcy.

“Enticed by the riches available from Credit Suisse, the Blixseth’s chose to breach their fiduciary duties, abandon the Yellowstone Club, and participate in a loan transaction that gave windfalls to them and Credit Suisse, at the expense of the Yellowstone Club,” the Committee’s complaint states. If the Committee prevails, the $310 million remaining on the loan would be null and void, and Credit Suisse and its loan syndicate could be forced to pay back more than $100 million in principal and interest that they have already received.

The bank says the loan was entirely legal and had nothing to do with the club’s subsequent financial troubles. Blixseth echoes that, and also asserts a number of other defenses, ranging from the statute of limitations on fraudulent transfer to the claim that the Club’s bankruptcy was a result of a long-running plot by Edra Blixseth and Sam Byrne of CrossHarbor Capital Partners. (CrossHarbor has been trying to buy the club for some time, and is now the interim lender and the “stalking horse bidder” in the upcoming court-supervised auction of the club.)

“The fundamental issues before the Court in this proceeding arise out of the tortious misconduct of Edra Blixseth and Sam Byrne – Byrne to get the Yellowstone Club on the cheap in breach of Cross Harbor’s purchase contract; and Ms. Blixseth’s devastating degradation of the value of the Club in breach of her fiduciary duties compelled by her obsessive mania to get control of the Club in her divorce proceedings,” Blixseth attorney Michael Flynn asserted in a court filing this week.

Edra Blixseth did indeed receive ownership of the Yellowstone Club in August of last year. But the club, staggered by the real estate collapse and, arguably, an unsustainable debt load, was forced to file for bankruptcy protection just three months later, and Edra Blixseth filed for personal bankruptcy last month. The Creditor’s Committee makes it clear that it holds Tim Blixseth, rather than Edra, responsible for the loan and how the proceeds were used. (While the original Creditors Committee lawsuit did not name Tim Blixseth, he intervened in the case with his own suit against the club and the Committee and thus is now a defendant in the Committee’s action.)

The Creditors Committee argues that Credit Suisse conceived and marketed its resort loan program specifically as a way for developers to cash in, without regard for the long-term risks.

“This new financial product enriched Credit Suisse and more than one luxury development owner, but it left those developments too thinly capitalized to survive,” the Committee lawsuit states. “In August, 2005, Credit Suisse made one of these deeply-flawed loans to [the Yellowstone Club]....The loan enriched the Blixseths (who took most of the proceeds) and Credit Suisse (which earned a seven-figure fee, plus interest). But it saddled the Yellowstone Club with an enormous burden – a debt for which it received almost no benefit.”

The bank counters that is was all business as usual: “There was nothing hidden or unusual about the [Yellowstone] Loan. The loan was similar to more than $140 Billion in commercial loans that were rated by Standard & Poor’s rating service since 2000 that funded equity distributions or payments to business owners or the millions of home equity loans that are funded each year allowing homeowners to realize the value of their assets.”

Many of the basic facts surrounding the loan are not in dispute. Of the $375 million, $7.4 million was paid in fees to Credit Suisse and $1.2 million was paid in fees to other parties; $24 million was designated for club development and payoff of existing debts; $209 million was paid to BGI (the Blixseth family holding company) for “purposes unrelated to the Yellowstone [Club],”; and $142 million was allocated to “unrestricted subsidiaries” for “purposes unrelated to the Yellowstone [Club].” The lawsuit details where most of that money ultimately went - much of it to purchase the overseas properties that were supposed to be part of the Yellowstone World Club, and much of it into personal bank accounts and to pay off existing obligations of the Blixseths.

While high-stakes litigation of this sort normally takes years to play out, U.S. Bankruptcy Judge Ralph Kirscher has kept this case on an extraordinarily fast track, as the issues need to be resolved before the Club’s bankruptcy reorganization and the accompanying sale at auction can take place. Blixseth argued this week that the timetable was so rapid that it violated his due process rights, but Kirscher said in a telephone hearing Tuesday that Blixseth “has done everything he can to hold [the trial] up,” and that he did not appreciate all the maneuvering.

A court-ordered mediation session is scheduled for this Friday, and given the high risks on all sides a settlement remains possible. But if the history of this case is any indication, look for a courthouse full of lawyers ready to fight it out next week.

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