Declaring that Credit Suisse actions in making a $375 million loan to the Yellowstone Club were “so far overreaching and self-serving that they shocked the conscience of this court,” U.S. Bankruptcy Court Judge Ralph B. Kirscher on Tuesday ruled that Credit Suisse’s secured claim to $232 million of the remaining $310 million loan balance would be “subordinated” to the claims of tradesmen, vendors and other unsecured creditors in the case.
The ruling, which follows a week-long trial in bankruptcy court, vastly complicates Credit Suisse’s effort to buy the club in an auction slated for tomorrow. It could also expose the bank to numerous claims from both the institutional investors to whom it sold the Yellowstone Club debt, and from those damaged by similar Credit Suisse loans made to Tamarack Resort, Promontory, Lake Las Vegas and a number of other resorts around the world.
At the same time, Kirscher’s decision makes it likely that most other creditors will get a good chunk of their money. “The main thing is that the moms and pops and small businesses will get paid first, and that’s how it should be,” said J. Thomas Beckett, the Salt Lake City-based attorney for the Unsecured Creditors Committee and leader of the litigation against Credit Suisse. “This is substantial justice.”
Kirscher’s ruling was only a partial judgment and did not address any of the claims against Tim Blixseth or the allegations of breach of fiduciary duty; they will be decided at a later time by the Judge. But the tone of the order suggests that Kirscher found the case brought by the unsecured creditors committee and the club itself against Blixseth and Credit Suisse to be quite convincing. In particular, he found that Credit Suisse’s appraisals of the property and related due-diligence were scandalously lacking and all but guaranteed the eventual failure of the club.
“The only plausible explanation for Credit Suisse’s actions is that it was simply driven by the fees it was extracting from the loans it was selling, and letting the chips fall where they may. Unfortunately for Credit Suisse, those chips fell in this Court with respect to the Yellowstone Club loan. The naked greed in this case combined with Credit Suisse’s complete disregard for the Debtors or any other person or entity who was subordinated to Credit Suisse’s first lien position, shocks the conscience of this Court,” Kirscher wrote.
“While Credit Suisse’s new loan product resulted in enormous fees to Credit Suisse in 2005, it resulted in financial ruin for several residential resort communities. Credit Suisse lined its pockets on the backs of the unsecured creditors. The only equitable remedy to compensate for Credit Suisse’s overreaching and predatory lending practices in this instance is to subordinate Credit Suisse’s first lien position to that of CrossHarbor’s superpriority debtor-in-possession financing and to subordinate such lien to that of the allowed claims of unsecured creditors.”
While about $310 million remains on the Credit Suisse loan balance, the bank conceded last week that the collateral for the loan – most of the assets of the club – was now only worth $232 million. As a secured claim, that $232 million would normally be the first thing to be paid (after the $25 million in interim, or “debtor in possession” financing provided by CrossHarbor), but it will now be put at the back of the line.
Credit Suisse spokesman Duncan King said: “We are disappointed in this ruling and disagree with the court’s findings. We are weighing our options at this time.”
Kirscher stopped short of voiding the Credit Suisse loan entirely, or forcing a payback of interest and principal that had already been paid. And Credit Suisse will still be allowed to bid for the club in the auction with a so-called “credit bid,” in which money that an entity is owed can be used as a form of payment. But Credit Suisse will now have to provide cash to pay off unsecured creditors as part of any credit bid, in addition to the cash any bidder would be required to provide to support club operations.
Beckett said he expected the amount owed to unsecured creditors to be in the $20 millon to $25 million range.
The Judge did not put all claims ahead of Credit Suisse; the member claims, involving their deposits, are already provided for in the reorganization plan (the auction of the club is the central feature of the reorganization plan). And some claims, including those of Greg LeMond, are being disputed and thus will not be paid automatically. It also remains unclear how much money will be available to pay the creditors in the wake of the auction.
Judge Kirscher, in his order, reviews case law to determine whether his ruling is an “abuse of discretion,” and concludes that it is not. The kind of conduct that justifies subordination of a secured claim generally includes “gross misconduct amounting to fraud, overrreaching or spoilation,” or “gross and egregious misconduct,” according to precedent cited by Kirscher. Those terms do not bode well for Credit Suisse when it comes to a final decision on the other claims against it in this case, and potentially in other cases as well.
“It’s troubling that so many similar resort developments were similarly crushed by this loan product,” said Troy Greenfield, an attorney with Bullivant Houser Bailey in Seattle and one of the lead litigators for the club. “Hopefully those that were affected will now have the chance to have responsibility allocated, as in this case.”
A PDF of Judge Kirscher’s full ruling can be found here.