Update, 4/30, 4:45 p.m.: Day two of the trail started with questioning of Michael Doyle, Tim Blixseth’s long-time attorney, on the issue of when and how the decision was made to make the $209 million payout to Tim Blixseth from the Credit Suisse loan a “loan” rather than a “distribution.” But for the better part of the day Missoula attorney and creditors committee chairman Steve Brown was on the stand, with Blixseth attorney Michael Flynn trying to prove that Brown is hopelessly conflicted because he represented – and “technically” still represents – Blixseth in various other legal matters, including the LeMond litigation.Flynn is seeking to have the case against Blixseth dismissed because of this issue. Judge Ralph B. Kirscher has said he will rule on that after the week-long trial is over. While Brown does appear to have a conflict, it’s not clear what it has to do with the core issues in the case.
Yellowstone Club founder Tim Blixseth took the witness stand in a Missoula courtroom Tuesday, asserting that he did nothing wrong in connection with a $375 million loan from investment bank Credit Suisse.
“I started the club with a pick-up truck and a hammer,” Blixseth said in explaining why business procedures were informal and thus certain key transactions were not documented until long after the fact.
Blixseth was the first witness in a high-stakes trial that pits the bankrupt club and the committee representing unsecured creditors against Blixseth and Credit Suisse. The committee alleges that the 2005 Credit Suisse loan was a “fraudulent transfer” because the bulk of the proceeds did not benefit the club but in fact went to Blixseth and his then-wife Edra. The committee and the club also allege that the Blixseth breached his fiduciary duty by taking about $200 million of the loan for himself, and that Credit Suisse aided and abetted him in doing that.
“The Credit Suisse loan is very odd, very peculiar,” said creditors committee attorney Tom Beckett in his opening argument. He cited its “enormity,” the fact that is was a term loan rather than the credit line that’s usually used in development loans, that is was made without a “fair market value” appraisal (and thus had to be made out of a Cayman Islands subsidiary of Credit Suisse since U.S. law requires such an appraisal), and that there was “a huge distribution of cash to the owner.”
Atttorney Troy Greenfield, also representing the club, said Credit Suisse itself has referred to this loan product as a “gravy train,” and “that gravy train ran wildly off the rails.” Credit Suisse made similar loans to a number of other development projects that soon went bankrupt, including Promontory in Utah, Tamarack Resort in Idaho, Lake Las Vegas in Nevada, and Ginn Resorts in Florida.
“The corporate greed of Credit Suisse and Mr. Blixseth’s sense of entitlement” were a toxic combination, Greenfield said. And, in a pungent illustration of the fast-and-loose dealing in high-end real estate in 2005, Greenfield said — and Blixseth confirmed in his testimony — that a dispute over whether the Credit Suisse fee should be 2% (about $7.4 million) or 3% was resolved by Blixseth and lead Credit Suisse banker Jeff Barcy flipping a coin in the middle of a road at the club.
No one disputes that the Credit Suisse loan agreement allowed Blixseth to take up to $209 million cash out for himself. Technically, that sum was a loan from the club to BGI, Blixseth’s wholly-owned holding company, and Blixseth in turn borrowed some $190 million of that personally from BGI. But the club and the creditors committee allege these were in effect sham loans that Blixseth never intended to repay — and cite as evidence the fact that the promissory notes for those loans were not secured and were created many months after the fact.
Indeed, the questioning by attorney Thomas Hutchinson, representing the club, focused on showing that the reason Blixseth took the funds as a loan rather than a simple dividend payment (which would have also been allowed under the loan agreement) was to avoid paying part of it to the minority shareholders in the club, including former cycling great Greg LeMond. LeMond sued over this in 2006 and Blixseth eventually settled with him for $38 million – about half of which has been paid.
Blixseth, soft-spoken but grim-faced on the stand, countered that taking the money as a loan rather than a dividend provided more security for the loan, and that it was required for accounting reasons.
Blixseth’s real defense, though, is that the club was fine until 2008, and that its bankruptcy was a result of a conspiracy by his ex-wife Edra and Sam Byrne of CrossHarbor Capital Partners. “It was Edra Blixseth’s obsession to control the Yellowstone Club that caused this bankruptcy,” said Blixseth attorney Michael Flynn.
But U.S. Bankruptcy Judge Ralph B. Kirscher has effectively excluded that defense, ruling that this trial has to focus on the events and circumstances surrounding the 2005 loans, and not what happened in the couple’s divorce and in the March, 2008 collapse of a deal for CrossHarbor to buy the club for $407 million.
Credit Suisse, for its part, argues that it is not responsible for Blixseth’s actions, and that the loan was fine and did not render the club insolvent – as evidenced by the fact that CrossHarbor was willing to buy it three years later for an amount that would have paid off the debt.
The trial continues tomorrow and is expected to last about a week.