Bankruptcy Drama

Yellowstone Club Creditors Assert Fraud by Credit Suisse

By Jonathan Weber , 1-13-09

The Yellowstone Club bankruptcy saga continues in a Butte courtroom today, with lawyers arguing over who should be charged with trying to collect on $275 million in promissory notes that were issued to the club in 2005 by Blixseth Group Inc. (BGI) - the family holding company once owned by club founders Tim and Edra Blixseth and now controlled by Edra.

The notes were created when the Blixseth’s took for their own purposes some $270 million of the $375 million that was loaned to the club by banking giant Credit Suisse - a transfer which had the approval of the bank, but ultimately led to the club’s current financial crisis. Matthew Brown of the Associated Press does a good job of tracing the sequence of events in his story today.

In a court filing this week, attorneys for the committee of unsecured creditors, which represents a wide range of entities and individuals that are owed money by the bankrupt club, asserted that the original diversion of funds to BGI meant that the Credit Suisse loan was a “fraudulent conveyance” - a significant allegation which could ultimately result in the bank being liable for the money.

Technically the promissory notes are the property of the club, which would have a strong interest in trying to collect on them. But the club is now owned by Edra Blixseth, who also controls BGI, and thus there is an obvious conflict in that Edra would effectively be collecting from herself. (Tim and Edra divorced last year). Credit Suisse, which physically holds the notes as collateral for its loan, would like to lead the collection effort, but the committee of unsecured creditors doesn’t want the bank to be able to collect for itself at the expense of other creditors.

The committee’s legal filing states: “The Committee believes that Credit Suisse’s loan to the Debtor’s in 2005 was a fradulent conveyance under Montana State law. So it contests the extent, validity and priority of Credit Suisse’s liens, including its security interest in the notes.”

The argument over who should collect on the notes is a kind of shadow play. It seems clear that BGI - which Tim Blixseth’s lawyer told the Associated Press is now solely owned by Edra following their divorce - doesn’t have any money; Edra has defaulted on numerous obligations in recent months, including the mortgage on her Palms Springs estate, and rent and salaries at various companies she controls. At best, BGI appears to have assets - including a castle in France - which are expensive to maintain and virtually unsaleable in the current market.

Thus far, Tim Blixseth has managed to avoid any involvement in the bankruptcy case. But he continues to own properties - including a private island in the Caribbean, an estate in Mexico and an historic ranch near Cody - that appear to have been purchased at least in part with the Credit Suisse loan funds. The bank agreed to let the Blixseth’s take the money in the first place as a repayment and dividend on their initial investment in developing the Yellowstone Club. But if that transaction is ultimately found to constitute a fraudulent conveyance - essentially a deal in which one party never delivered its end to the other - that could potentially expose both the bank and Tim Blixseth to legal claims.

Update: Bankruptcy Judge Ralph Kirscher on Tuesday approved a proposal enabling Credit Suisse and the creditors committee to jointly pursue collection of the promissory notes.

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