A Montana bankruptcy judge reluctantly breathed three weeks of life into the Yellowstone Club in a Missoula courtroom Thursday when he OK’d a three-week loan to keep the club operating during the next stage of bankruptcy hearings.
“Why am I doing this?” asked U.S. Bankruptcy Court Judge Ralph B. Kirscher, who called it “troubling” and “overkill” that his order included the terms and conditions of a $4.4 million temporary bailout loan from lender Credit Suisse to the luxurious-but-broke private club.
“What happens if I don’t sign this order?” Kirscher said. “If you would have asked me at one o’clock last night, I would have said, ‘This isn’t going to get signed. I’ll let things fall where they may.'”
The judge posed his questions in the second day of emergency hearings in the Chapter 11 bankruptcy case of one of the world’s pre-eminent leisure communities for the mega-rich.
The four companies that operate collectively as the Yellowstone Club filed for bankruptcy on Monday, citing debts of about $360 million, most of it owed to a consortium of lenders led by international bank Credit Suisse. Chapter 11 allows a business to operate while it reorganizes its debt. The filing comes in the wake of an ugly divorce, allegations of large-scale financial impropriety and the collapse of the high-end real estate market as well as the credit markets that funded it.
Last week, the club’s checking account had only about $40,000, not nearly enough to cover weekly operating expenses such as payroll ($246,000), utilities ($98,000) and other necessities, according to court documents.
“If we don’t have an order today, we’ll have a financial train wreck,” answered James Patten, attorney for Edra Blixseth and the Yellowstone Club.
But without another bailout, the club may wreck anyway, the judge rejoined.
“It certainly isn’t perfect… but it’s what we have,” Patten said.
The idea is that the three-week loan will allow club managers and its creditors to work out a long-term plan to save club.
One underlying question behind the hearing was who would emerge as the owner of the club after the dust settles, and at what price.
Those vying for ownership positions included Credit Suisse, the club’s long-time lender, which is owed about $307 million, and CrossHarbor Capital Partners, a Boston-based hedge fund led by investor and club member Sam Byrne. CrossHarbor negotiated for more than a year to buy the club before the crisis hit, and apparently saw an opening in the wake of the divorce of Tim and Edra Blixseth. According to testimony Wednesday, CrossHarbor loaned some $35 million to Edra to help her buy out ex-husband and founder Tim Blixseth.
CrossHarbor had offered a loan of $18 million to keep the club open until February 13, at which point — in the peak of the ski season — it would presumably have to be sold.
“We’re really in a crunch,” Judge Kirscher said, referring to the club’s lack of cash as well as the hurried pace of the proceedings.
“Either we let this thing go, or I say, ‘No,’ and it ends up being converted by the middle of next week,” Kirscher said. “This may be just deferring the inevitable. I don’t know what else to do with it, to be honest.” (In bankruptcy court parlance, to “convert” it would mean to move form Chapter 11 protection to Chapter 7 – immediate liquidation.)
With that, Kirscher overruled the legal objections of club members and of other parties and said he would sign the order allowing the Credit Suisse loan. He also set the next hearing for Nov. 25 at the federal courthouse in Butte.
At that point, Patten and the lawyer for Credit Suisse anxiously asked Kirscher to immediately sign the order. The club had been operating without cash for a week or more.
“We need to get the money moving as soon as we can,” Patten said. A wire transfer would move the first installment of the loan, first thing Friday morning.