equitable subordination and recharacterization: looming...
TRANSCRIPT
Equitable Subordination and Recharacterization: Looming Threats in Bankruptcy
Strategies for Lenders Creditors and Private Equity Sponsors to Avoidpresents Strategies for Lenders, Creditors and Private Equity Sponsors to Avoid Claim Loss and Maintain Preference Status
presents
A Live 90-Minute Teleconference/Webinar with Interactive Q&A
Today's panel features:Ronald A. Landen, Senior Associate, Weil Gotshal & Manges, Boston
J. Thomas Beckett, Shareholder, Parsons Behle & Latimer, Salt Lake City, Utah
Tuesday, April 13, 2010
The conference begins at:1 pm Easternp12 pm Central
11 am Mountain10 am Pacific
CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS.
You can access the audio portion of the conference on the telephone or by using your computer's speakers.Please refer to the dial in/ log in instructions emailed to registrations.
If no column is present: click Bookmarks or Pages on the left side of the window.
If no icons are present: Click View, select Navigational Panels, and chose either Bookmarks or Pages.
If you need assistance or to register for the audio portion, please call Strafford customer service at 800-926-7926 ext. 10
CHARLES W. HINGLE (#1947)SHANE P. COLEMAN (#3417)HOLLAND & HART LLP401 NORTH 31st STREET, SUITE 1500BILLINGS, MONTANA 59101(406) 252-2166 (PHONE)(406) 252-1669 (FAX)[email protected] (EMAIL)[email protected] (EMAIL)
MARK S. CHEHI SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLPONE RODNEY SQUAREP.O. BOX 636WILMINGTON, DELAWARE 19899(302) 651-3000 (PHONE)[email protected] (EMAIL)Admitted Pro Hac Vice
ATTORNEYS FOR PLAINTIFF, CREDIT SUISSEAdditional Counsel listed on signature page
IN THE UNITED STATES BANKRUPTCY COURTFOR THE DISTRICT OF MONTANA
In re:
YELLOWSTONE MOUNTAIN CLUB, LLC, et al.,
Debtors.
Case No. 08-61570-11-RBK
Jointly Administered with 08-61571, 08-61572, and 08-61573
Chapter 11
CREDIT SUISSE, CAYMAN ISLANDS BRANCH,
Plaintiff,
vs.
OFFICIAL COMMITTEE OF UNSECURED CREDITORS, YELLOWSTONE MOUNTAIN CLUB, LLC, YELLOWSTONE DEVELOPMENT, LLC, BIG SKY RIDGE, LLC, and YELLOWSTONE CLUB CONSTRUCTION COMPANY, LLC,
Defendants.
Adversary No. _______
COMPLAINT
(DECLARATORY JUDGMENT)
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 1 of 14
- 2 -
Credit Suisse, Cayman Islands Branch on behalf of itself and as agent for the
Prepetition Lenders (as defined below) ("Credit Suisse), by and through its undersigned counsel,
herein states its causes of action and claims for relief against The Official Committee of
Unsecured Creditors (the "Committee"), Yellowstone Mountain Club, LLC ("YMC"), and its
debtor affiliates, Yellowstone Development, LLC ("YD"), Big Sky Ridge, LLC ("BSR") and
Yellowstone Club Construction Company, LLC (collectively, the "Debtors"), as follows:
INTRODUCTION
1. By this action, Credit Suisse seeks an expedited declaratory judgment
confirming the validity of the secured claim of Credit Suisse and other Prepetition Lenders
against the Debtors in the principal amount of $309,021,984.26, together with interest, fees and
expenses thereon, arising out of a $375 million pre-petition secured loan (the "Prepetition Loan")
to YMC, YD, and BSR under a Credit Agreement dated as September 30, 2005 (the "Loan
Agreement") from Credit Suisse, as administrative agent and collateral agent, for a group of
lenders (the "Prepetition Lenders").
2. On February 11, 2009, the Committee moved for leave to file a
Complaint against Credit Suisse to disallow and subordinate Credit Suisse's claim. According to
the Committee's proposed Complaint, Timothy and Edra Blixseth (the "Blixseths") were the
owners of the Debtors, controlled the Debtors, and caused the Debtors to enter into the Loan
Agreement and grant liens on nearly all of the Debtors' assets to enable the Blixseths to use the
Prepetition Loan proceeds for purposes unrelated to the Debtors' business. The proposed
Complaint charges, among other things, that (i) the Loan Agreement was a fraudulent transfer, (ii)
entering into the Loan Agreement constituted a breach of the Blixseths' fiduciary duties to the
Debtors and their creditors, and (iii) Credit Suisse knowingly aided and abetted the Blixseths'
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 2 of 14
- 3 -
breach of their fiduciary duties; and seeks relief disallowing the claims of Credit Suisse and the
other Prepetition Lenders, equitably subordinating these claims, and avoiding the liens, security
interests, and mortgages granted in connection with the Loan Agreement.
3. There is no merit to the Committee's proposed Complaint. The proposed
fraudulent transfer claims, on their face, are fatally flawed because the Debtors were solvent at
the time the Prepetition Loan was made, and remained solvent thereafter. The Debtors received
unqualified audit opinions, thus attesting to their solvency at the time the Prepetition Loan was
made and thereafter. Indeed, this Court's Memorandum of Decision granting a priming lien in
connection with the Debtors' application for post-petition financing expressly adopted the
“credible expert” appraisal establishing that collateral securing the Prepetition Loan was worth a
minimum of $310 million – and excluding from this figure the value of 107 excluded dwelling
unit rights, and existing neighborhoods with completed plats and infrastructure, including
Andesite Ridge, Miller Point Duplexes, Mountain Chalets and the Warren Miller Lodge.
(Memorandum of Decision, dated December 17, 2008, at 8; [Docket No. 139 at 53; 65]). It
bears emphasis that the real estate market was significantly better in 2005 when the loans were
originally issued. Moreover, as recently as March 2008, the Debtors were party to a sale contract
to sell most of their assets for $470 million. [Docket No. 341, Exh. 12 at 16; Exh. K]. As the
Debtors were solvent at the time the Prepetition Loan was made and remained solvent thereafter,
the Committee's fraudulent transfer claim cannot stand. Furthermore, as the directors of solvent
entities owe no fiduciary duties to creditors, the Committee's claims against Credit Suisse for
aiding and abetting breaches of fiduciary duty to creditors falls of its own weight.
4. As set forth below, the remaining claims for aiding and abetting breaches
of fiduciary duties are equally baseless -- and the Committee knows it. Indeed, while the
Committee alleges that “[t]he Blixseths represented themselves and their personal interests in the
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 3 of 14
- 4 -
loan negotiations [and] [t]he Yellowstone Club was unrepresented in those negotiations”
(Proposed Compl. ¶9), in truth the Chairman of the Committee and his law firm represented the
Debtors as special Montana counsel in the very Loan Agreement which the Committee now
claims was unlawful; and the Committee Chairman's firm issued a legal opinion that the Debtors'
entering into the Loan Agreement “does not . . . violate any laws”, and that the liens granted to
Credit Suisse and the Prepetition Lenders, once properly recorded, were valid and enforceable
liens. (A copy of this legal opinion is annexed hereto as Exhibit A). The Opinion was
personally signed by the Committee Chairman himself. (Exh. A at 6).
5. As set forth below, the Committee Chairman was right -- the Loan
Agreement was a valid transaction, and the liens granted to Credit Suisse and the Prepetition
Lenders were, and are, valid and enforceable in all respects.
6. Despite the utter absence of merit to the Committee's proposed Complaint,
the Debtors have proposed a Plan of Reorganization which is premised largely upon the
unfounded assumption that the Committee's position is correct, and therefore unilaterally strips
Credit Suisse of its full secured claim. Moreover, the Debtors seek confirmation of their Plan no
later than April 30, 2009. Given the foregoing, the Committee clearly has no incentive to pursue
the unfounded allegations in their proposed Complaint, since the proposed Plan of
Reorganization, if confirmed, may moot the Committee's need to expeditiously attempt to prove
its charges. Therefore, Credit Suisse brings this declaratory judgment action to vindicate its
status and the status of the other Prepetition Lenders as secured creditors with an allowed
secured claim in the principal amount of $309,021,984.26, plus interest, fees and expenses, and
seeks such declaratory judgment on an expedited basis to ensure they receive fair and just
treatment in the ultimate plan of reorganization confirmed by the Court.
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 4 of 14
- 5 -
PARTIES
7. Plaintiff Credit Suisse is a financial services company and secured creditor
of YMC, YD and BSR.
8. Defendant the Committee is the statutory representative of the unsecured
creditors of the Debtors, pursuant to section 1102 of the United States Bankruptcy Code, 11
U.S.C. §§ 101, et. seq. (the "Bankruptcy Code"). The Committee has sought leave to file a
Complaint against Credit Suisse, on behalf of and for the benefit of the Debtors, their estates, and
the creditors thereof, captioned Official Committee of Unsecured Creditors v. Credit Suisse,
Cayman Islands Branch, and John Does 1-15, in connection with case number 08-61570-11-
RBK (the “Unfiled Complaint”).
9. BGI is an Oregon Corporation and the majority owner of YMC and YD.
10. The Debtors filed a petition for relief under Chapter 11 of title 11 of the
United States Code, 11 U.S.C. §§ 101, et. seq., as amended, and continue to operate their
business and manage their properties as debtors and debtors-in-possession pursuant to Sections
1107(a) and 1108 of the Bankruptcy Code.
11. YCW is a Washington State limited liability company. It was majority
owned by Timothy Blixseth until August of 2008, when it was turned over to Ms. Blixseth. An
involuntary petition for relief under section 303 of the Bankruptcy Code is pending against YCW.
JURISDICTION AND VENUE
12. This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §
1334 and as a core proceeding pursuant to 28 U.S.C. § 157(b)(2).
13. Venue is proper in this Court pursuant to 28 U.S.C. § 1409.
14. This action is brought as an adversary proceeding in In re Yellowstone
Mountain Club, LLC, et al., chapter 11 cases, procedurally consolidated under case number 08-
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 5 of 14
- 6 -
61570-11-RBK, currently pending in the United States Bankruptcy Court for the District of
Montana. This action is directly related to the Unfiled Complaint.
GENERAL ALLEGATIONS
A. Factual Background.
The Pre-Petition Loan Agreement
15. Pursuant to the Loan Agreement, the Debtors entered into a $375 million
credit facility with the Prepetition Lenders headed by Credit Suisse as Administrative Agent,
Collateral Agent, Paying Agent, Sole Lead Arranger and Sole Bookrunner. In conjunction with
the Loan Agreement, the Debtors also: executed a Security Agreement, dated September 30,
2005, granting Credit Suisse and the Prepetition Lenders mortgages, security interests and liens
on nearly all of the Debtors' properties; and executed and caused to be recorded a Mortgage,
Security Agreement, Assignment of Rents and Leases, dated September 30, 2005, covering
nearly all of the Debtor's properties (collectively, the "Security Documents").
16. There was nothing hidden or unusual about the Prepetition 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. Nothing required Debtors to develop the Yellowstone Club without
construction financing and nothing restricted them from realizing on the equity value they
funded and created.
The Post-Petition Financing Proceedings
17. By motion dated November 10, 2008, the Debtors moved for an Order (the
“DIP Motion”) authorizing them to obtain post-petition financing from Credit Suisse, as
administrative agent and collateral agent for a syndicate of lenders. On November 13, 2008, the
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 6 of 14
- 7 -
Court entered an Interim Order Authorizing the Debtors to Obtain Post-Petition Financing (the
“Interim Order”).
18. Pursuant to the Interim Order, the Debtor irrevocably admitted, stipulated
and agreed as follows with respect to their obligations and Credit Suisse's rights under the Loan
Agreement:
(a) “As of the Petition Date, (i) the Debtors were truly and justly indebted and liable to (i) the Prepetition Lenders, without defense, counterclaim or offset of any kind, in the aggregate principal amount of approximately $307,000,000 in respect of [the Loan Agreement] plus, accrued and unpaid interest thereon . . .”
(b) “[T]he Prepetition Secured Obligations constitute the legal, valid and binding obligations of the Debtors, enforceable in accordance with their terms . . .”
(c) “[N]o portion of the Prepetition Secured Obligations are subject to avoidance, recharacterization, recovery or subordination pursuant to the Bankruptcy Code or applicable nonbankruptcy law;”
(d) "[T]he Debtors do not have, and hereby forever release, any claims, counterclaims, causes of action, defenses or setoff rights, . . ., against the Prepetition Agent, the Prepetition Lenders and their affiliates, . . . with respect to the Prepetition Secured Obligations,” and
(e) “[T]he liens and security interests granted to the Prepetition Agent and the Prepetition Lenders . . . are (i) valid, binding, perfected, enforceable first priority liens on and security interests in the Prepetition Collateral, [and] (ii) not subject to avoidance, recharacterization or subordination pursuant to the Bankruptcy or applicable nonbankrupty law . . .”
(Interim Order at Docket No. 40, ¶ 4)
19. Under the terms of the Interim Order, the aforesaid stipulations and
admissions are “binding upon the Debtors in all circumstances.” (Id. at 20, ¶ 18).
The Committee's Moves to File a Complaint Against Credit Suisse
20. On February 11, 2009, the Committee filed a Notice of Claim Against
Credit Suisse, Objection to Claim of Credit Suisse and Motion for Authorization to File
Complaint Against Credit Suisse, which attached as an exhibit the "Unfiled Complaint." The
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 7 of 14
- 8 -
Unfiled Complaint challenges the validity of the Loan Agreement and the liens granted pursuant
to the Security Documents, and purports to assert claims against Credit Suisse for Aiding and
Abetting Breach of Fiduciary Duty, Avoidance of Fraudulent Transfer, Disallowance of Claims,
Subordination of Claims, Turnover, and Declaratory Judgments.
21. The gravamen of the Unfiled Complaint is that the Blixseths, as the
owners and controlling persons of the Debtors, caused the Debtors to enter into the Loan
Agreement for the purpose of borrowing $375 million and using the loan proceeds for purposes
unrelated to the Debtors. According to the Unfiled Complaint, by granting liens in the Debtors'
properties as security for a loan whose proceeds would be used for purposes unrelated to the
Debtors, the transaction was a breach of the Blixseths' fiduciary duties, and Credit Suisse's
participation in the transaction aided and abetted this breach of fiduciary duty. The Unfiled
Complaint also alleges that the loan transaction was a fraudulent transfer under the Montana
Uniform Fraudulent Transfer Act. MONT. CODE ANN. § 31-2-339(a) (2007). In addition, the
Unfiled Complaint seeks to recharacterize the loan as only a $67 million loan to the Debtors
which has been repaid, and the remaining $208.8 million loan as an unsecured personal loan to
the Blixseths.
22. On February 13, 2009 , the Debtors filed a Joint Plan of Reorganization
(the "Proposed Plan"). The Proposed Plan is premised entirely on the theory that the
unsubstantiated assertions in the Unfiled Complaint are valid. As such, the Proposed Plan
provides for treatment of Credit Suisse and the Prepetition Lenders as unsecured creditors rather
than secured creditors with respect to $208.8 million owed under the Loan Agreement.
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 8 of 14
- 9 -
FIRST CLAIM FOR RELIEF
[Declaratory Judgment that the Committee is Barred From Pursuing the Unfiled ComplaintUnder the Doctrine of In Pari Delicto]
23. Credit Suisse repeats and realleges the allegations of the preceding
paragraphs as if fully set forth herein.
24. The gravamen of the Unfiled Compliant is that the Blixseths acted
wrongfully and in breach of their fiduciary duties by causing the Debtors to enter into the Loan
Agreement and, in conjunction therewith, causing the Debtors to grant liens, security interests,
and mortgages to Credit Suisse on virtually all of the Debtors' properties.
25. In addition, according to the Unfiled Complaint, Timothy and/or Edra
Blixseth dominated and controlled the Debtors at all relevant times, and was the controlling
shareholder and sole decision maker of the Debtors. Specifically, the Committee alleges that
“Timothy Blixseth . . . was the controlling shareholder of BGI and . . . YCW through August of
2008. As such, he controlled BGI, YMC, YD and YCW” (Unfiled Comp. ¶ 21); and “Edra
Blixseth . . . was Chief Operating Officer of YMC until she resigned in late 2005 or early
2006 . . . in August, 2008, Ms. Blixseth became the majority owner of BGI and YCW. As such,
she now controls BGI, YMC, YD and YCW." (Id. ¶¶22-23). In addition, this Court has
explicitly determined that “Blixseth, through an entity known as Blixseth Group or BGI, owns
the Debtors.” (Memorandum and Decision, dated November 26, 2008, at 3); see also
Memorandum and Decision, dated December 17, 2008 at 4 (“Blixseth . . . owns and is the
managing member of the Debtors”); In re Yellowstone Mountain Club, et al., 08-61570-11, 8 n.2
(Bankr. D. Mont. Feb. 18, 2009) ("Edra Blixseth is the President and 100% equity owner of BLX
Group, Inc." which "owns substantially all the interests in the Debtors").
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 9 of 14
- 10 -
26. As a result of the foregoing allegations and findings of the Court, the
conduct and knowledge of the Blixseths, as the controlling persons and sole decision makers of
the Debtors, is imputed to the Debtors as a matter of law. Therefore, the Debtors are barred by
the doctrine of in pari delicto from asserting claims against third parties for aiding and abetting
the Blixseths' alleged breach of their fiduciary duty.
27. In addition, as a matter of law, anyone who stands in the shoes of the
Debtors is subject to the same defenses, obligations and infirmities that can be asserted against
the Debtors. As the Committee has asserted the claims in the Unfiled Complaint “not for itself,
but on behalf of and for the benefit of the Debtors . . .,” it is subject to all defenses, obligations
and infirmities that can be asserted against the Debtors. Accordingly, the Committee is barred
from asserting any claims on behalf of, or for the benefit of the Debtors, that the Debtors
themselves would be barred from asserting.
28. Credit Suisse is entitled to a declaratory judgment that the Committee is
barred from pursuing the Unfiled Complaint under the doctrine of in pari delicto.
SECOND CLAIM FOR RELIEF
[Declaratory Judgment that the Loan Agreement and Liens Granted in Connection Therewith were Not Fraudulent Transfers]
29. Credit Suisse repeats and realleges the allegations of the preceding
paragraphs as if fully set forth herein.
30. Pursuant to the Montana Uniform Fraudulent Transfer Act, "[a] debtor is
insolvent if the sum of the debtor's debts is greater than all of the debtor's property at a fair
valuation and the debtor is generally not paying his debts as they become due." MONT. CODE
ANN. § 31-2-321 (2007).
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 10 of 14
- 11 -
31. In addition, pursuant to the Montana Uniform Fraudulent Transfer Act, the
party seeking to rescind a transaction must show that the transferee "was engaged . . . in a
business or a transaction for which the remaining assets of the debtor were unreasonably small in
relation to the business or transaction" or "intended to incur . . . debts beyond his ability to pay as
they became due." MONT. CODE ANN. § 31-2-333 (2007).
32. The Debtors were solvent at the time the Prepetition Loan was made and
at all relevant times thereafter, based on their receipt of unqualified audit opinions attesting to
their status as going concerns.
33. In its Memorandum of Decision, dated December 17, 2008, the Court,
after reviewing the evidentiary record, including “credible expert witness” testimony, accepted
an expert appraisal of $310 million as the low-end, going concern value of the Debtors' assets
securing Credit Suisse's lien as of November 10, 2008 for purposes of the Decision. In re
Yellowstone Mountain Club, et al., 08-61570-11, at 8 (Bankr. D. Mont. Dec. 17, 2008). Notably,
this appraisal did not include the value of numerous assets, including Andesite Ridge, Miller
Point Duplexes, Mountain Chalets, and the Warren Miller Lodge. [Docket No. 139, at 53; 65].
Furthermore, as the real estate market had significantly deteriorated since the Prepetition Loan
was originally made, these same assets were worth even more than this appraised amount at the
time the parties entered into the Prepetition Loan.
34. This same credible expert witness also prepared a Total Net Proceeds
evaluation of the Debtors' properties securing Credit Suisse's liens as of August 26, 2008. This
evaluation estimated the total net proceeds, a figure that included the "aggregate sum of master
development net cash flows" and excluded certain items, to be $1.114 billion dollars, more than
sufficient cash flows to pay debts as they matured. In re Yellowstone Mountain Club, et al., 08-
61570-11, at 8 (Bankr. D. Mont. Dec. 17, 2008). In this connection, following the closing, the
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 11 of 14
- 12 -
Debtors sold more than 124 residential lots, generating hundreds of millions of dollars in income.
[Docket No. 341, Exh. 12].
35. Further, the Court noted that the Appraisal did "not appear" to include the
Promissory Notes in an amount of roughly $275 million "owed to the Debtors by BGI, Blixseth
and/or Timothy Blixseth." In re Yellowstone Mountain Club, et al., 08-61570-11, at 21 (Bankr.
D. Mont. Dec. 17, 2008).
36. As late as March 2008, the Debtors were party to a sale contract to sell
most of their assets for $470 million. [Docket No. 341, Exh. 12 at 16; Exh. K].
37. Based on the foregoing, the Debtors were solvent at the time of, and
remained solvent for at least some three years after, entering into the Loan Agreement.
38. Credit Suisse is entitled to a declaratory judgment that the Loan
Agreement and the granting of liens in connection therewith, were not fraudulent transfers, and
that the liens, security interests and mortgages granted under the Loan Agreement and the
Security Documents are not subject to avoidance and are valid and enforceable against the
Debtors and their estates.
THIRD CLAIM FOR RELIEF
[Declaratory Judgment for Allowance of Claims]
39. Credit Suisse repeats and realleges the allegations of the preceding
paragraphs as if fully set forth herein.
40. Credit Suisse is entitled to a declaratory judgment allowing the claims of
Credit Suisse and the Prepetition Lenders in the amount of $309,021,984.26, plus interest, fees,
and expenses, and such claims are not subject to equitable subordination.
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 12 of 14
- 13 -
PRAYER FOR RELIEF
WHEREFORE, Credit Suisse prays for the following judgments against the Committee:
1. That the Court declare that Credit Suisse has an allowed secured claim is
in the principal amount of $309,021,984.26, plus interest, fees and expenses;
2. That the Court declare that the Loan Agreement and the granting of liens
in connection therewith were not fraudulent transfers;
3. That the Committee is barred from pursuing the Unfiled Complaint by the
doctrine of in pari delicto; and
4. That the liens, security interests, and mortgages of Credit Suisse and the
Prepetition Lenders are valid and enforceable and not subject to avoidance or equitable
subordination.
Dated: Billings, MontanaFebruary 25, 2009
_/s/ Charles W. Hingle_______Charles W. HingleShane P. ColemanHOLLAND & HART LLP401 North 31st StreetSuite 1500Billings, Montana 59101(406) 252-2166 (Phone)[email protected] (Email)[email protected] (Email)
Of Counsel:Evan R. Levy (NY No. 2720068)George A. Zimmerman (NY No. _____ , pro hac vice pending)SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLPFour Times SquareNew York, New York 10036(212) 735-3000
– and –
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 13 of 14
- 14 -
Mark S. Chehi (Del. Bar No. 2855)SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLPOne Rodney SquareP.O. Box 636Wilmington, Delaware 19899(302) 651-3000
Attorneys for Credit Suisse,sole administrative agent and collateral agent
4459526_1.DOC
09-00014-RBK Doc#: 1 Filed: 02/25/09 Entered: 02/25/09 16:15:49 Page 14 of 14
1
UNITED STATES BANKRUPTCY COURTFOR THE DISTRICT OF MONTANA
In re
YELLOWSTONE MOUNTAIN CLUB,LLC,
Debtor.
Case No. 08-61570-11
CREDIT SUISSE and TIMOTHY LBLIXSETH,
Plaintiffs.
-vs-
OFFICIAL COMMITTEE OFUNSECURED CREDITORS,YELLOWSTONE MOUNTAIN CLUB,LLC, YELLOWSTONEDEVELOPMENT LLC, BIG SKYRIDGE, LLC, and YELLOWSTONECLUB CONSTRUCTION COMPANYLLC,
Defendants.
Adv No. 09-00014
Partial & InterimORDER
At Butte in said District this 13 day of May, 2009.th
In this Adversary Proceeding, trial was originally scheduled to commence at 09:00 a.m.
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 1 of 20
Blixseth listed George Mack as a trial witness in his Amended List of Witnesses filed1
April 27, 2009. Blixseth testified at trial that George Mack was in Missoula at the time of trialand available to testify. However, Blixseth did not call George Mack as a witness. After trial, aquestion arose regarding the admission into evidence of George Mack's deposition. BecauseGeorge Mack was available to testify, but was not called, the Court declines to consider GeorgeMack's deposition under Fed.R.Civ.P. 32(a), made applicable to this proceeding by F.R.B.P.7032. For the reasons just stated, and because Stephen R. Brown testified, the Court will
2
on Wednesday, April 22, 2009. However, after considering Timothy L. Blixseth's (“Blixseth”)
Expedited Motion to Bifurcate and Continue Trial of Claims Regarding Blixseth filed April 21,
2009, at Docket Entry No. 203, the Court continued the trial date to Wednesday, April 29,
2009. The Debtors were represented at the trial in this Adversary Proceeding by Tom
Hutchinson, Troy Greenfield, Connie Sue Martin and David A. Ernst of Seattle, Washington,
and James A. Patten of Billings, Montana; Credit Suisse was represented by Mark S. Chehi,
Robert S. Saunders and Joseph O. Larkin of Wilmington, Delaware, George A. Zimmerman,
Evan R. Levy and Jeremy M. Falcone of New York, New York, Edward J. Meehan of
Washington, D.C. and Shane Coleman of Billings, Montana; the Official Committee of
Unsecured Creditors was represented by J. Thomas Beckett, Chris P. Wangsgard, Derek
Langton, Sean D. Reyes and Mark W. Dykes of Salt Lake City, Utah, and James P. Cossitt of
Kalispell, Montana; and Blixseth was represented by Michael J. Flynn of Boston,
Massachusetts, Joseph M. Grant of Houston, Texas, and Joel E. Guthals of Billings, Montana.
The Court heard expert testimony from David Abshier, John Hekman, Kent Mordy, and
Christopher Donaldson. The Court heard fact testimony from Blixseth, Michael W. Doyle,
Stephen R. Brown, Moses Moore, Brad Foster, Samuel T. Byrne, Edra Blixseth, Steve
Yankauer, and Robert Sumpter. The testimony of the following witnesses was submitted
through deposition transcript: Jeff Barcy, Dean R. Paauw and William G. Griffon. Exhibit A1
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 2 of 20
similarly not consider the deposition testimony of Stephen R. Brown.
The Court noted that the Final Pretrial Order could be subsequently modified to prevent2
manifest injustice.
3
attached hereto identifies the Exhibits that were offered and admitted into evidence.
Prior to commencement of trial on April 29, 2009, the Official Committee of Unsecured
Creditors (“Committee”), the Debtors and Credit Suisse filed a proposed Final Pretrial Order on
April 27, 2009, at Docket Entry No. 238. Blixseth participated in drafting the aforementioned
proposed Final Pretrial Order but then proposed additional changes that could not be timely
reviewed and approved by the Committee, Debtors and Credit Suisse. Thus, Blixseth instead
filed his own proposed Final Pretrial Order on April 27, 2009, at Docket Entry No. 241. After
hearing comments from counsel and after considering both proposed Final Pretrial Orders, the
Court made some of Blixseth's proposed adjustments to the proposed Final Pretrial Order
submitted by the Committee, Debtors and Credit Suisse and entered a Final Pretrial Order on
April 29, 2009, at Docket Entry No. 257. The Final Pretrial Order approved by the Court
supercedes the pleadings filed by the parties and governed the course of the trial.2
This Order is abbreviated and limited, and serves only as an interim ruling for purposes
of facilitating the upcoming auction of the Debtors' assets. This Order will be followed by a
subsequent detailed Memorandum of Decision and Order that will decide all matters heard at
trial.
HISTORICAL BACKGROUND
Various pleadings introduced in this Adversary Proceeding and in the main bankruptcy
case state that in 1992, Plum Creek Timber Co., a subsidiary of Northern Pacific Railroad
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 3 of 20
Cushman & Wakefield's appraisal as of July 1, 2005, states that the Yellowstone Club3
“appeals to ultra-wealthy families as a second-home (or third-home) location for its privaterecreational facilities (particularly the ski area), views, and proximity to winter and summerrecreation. Prospective buyers are required to have a net worth of over $3 million, but based onthe costs of membership and housing, we would expect nearly all buyers to have investable assetsof at least $5 million, if not $10 million. The membership price for residents is $250,000 for a30-year refundable deposit. The price is expected to be increased during the sell-out period. Annual dues . . . were recently raised from $10,600 to $16,000 per year. Property ownersassociation (POA) dues are currently $5,100 per year.”
4
Company sold its land in the Gallatin National Forest to Blixseth and the McDougal brothers,
foresters from Oregon. Blixseth consolidated his land holdings with three deals with the federal
government to swap 100,000 acres he had just bought for the acreage that now encompasses the
Debtors’ real estate holdings known as the Yellowstone Club located in Madison County,
Montana. The deal with the government also included additional land in several other Montana
counties, plus 250 million feet of salable timber. The land swaps required two separate acts of
Congress. The first, known as the Gallatin Preservation Act of 1993, covered 38,000 acres and
was President Clinton’s first major piece of environmental legislation. The second act, in 1998,
is known as Gallatin II and involved another 54,000-acre swap. The public acquired another
8,100 acres in a third swap that was not subject to Congressional approval. Soon after the
assemblage was completed, Blixseth and the McDougals dissolved their partnership. The
timberland was distributed to the McDougal brothers and Blixseth retained the acreage that
could be developed.
Blixseth and his former wife, Edra Blixseth (“Edra”), formed the Debtor corporations
and on the land that Blixseth retained from his partnership with the McDougal brothers, began
development in late 1999 of the world’s only private ski and golf community, commonly
referred to as the Yellowstone Club. The Yellowstone Club is a membership only master-3
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 4 of 20
5
planned unit development, situated on 13,500 acres of private land in Madison County,
Montana near the northwest corner of Yellowstone National Park.
The Blixseths originally contemplated that the Yellowstone Club would consist of seven
planned residential areas or neighborhoods comprised of roughly 864 fee dwelling units in
2,700 acres of development pods. To get the Yellowstone Club off the ground, the Blixseths
sold equity interests in the Yellowstone Club to various persons, who were referred to as
Pioneer and Frontier Members. The 25 Pioneer and 15 Frontier memberships were sold at
substantially reduced prices.
FACTS
On September 30, 2005, the Debtors were controlled by Blixseth as the sole Class A
Shareholder through his holding company, Blixseth Group, Inc. ("BGI"). Approximately 13%
of the Club was owned by Class B Members who were referred to as the Class B Shareholders
or the "Bs” in this litigation. BGI was an Oregon sub-S corporation, which was solely owned
by Blixseth as President and CEO from 1999 to mid-August of 2008.
In or around December of 2004, Jeffrey Barcy (“Barcy”), a Director in Credit Suisse's
Investment Banking Division, made several attempts to send Blixseth and his secretary or
assistant emails that contained a two to three-page teaser, providing Blixseth with a brief
overview of Credit Suisse and its new loan product referred to as a syndicated term loan, which
was described to Blixseth as something akin to a “home-equity loan.” Blixseth eventually
responded to Barcy's emails by calling Barcy on the telephone. Blixseth and Barcy had a brief
phone conversation and following the telephone conversation, the “next marketing step [for
Barcy and his team] was a trip up to the Yellowstone Club[.]” Following the initial meeting at
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 5 of 20
6
the Yellowstone Club, Barcy testified that although he could not remember exact details, he and
Blixseth “had a number of phone conversations and probably emails back and forth as to why it
would be interesting for [Blixseth] to potentially do a loan on the Club.”
Credit Suisse was specifically trying to "break new ground with a product by doing real
estate loans in the corporate bank loan market." Through its new syndicated term loans, Credit
Suisse was able to offer a loan product the size of which had previously been unavailable to
borrowers. Barcy testified that Credit Suisse's syndicated loan product had previously been
marketed to other master-planned residential and recreational communities such as Tamarack
Resort, Promontory, Ginn, Turtle Bay, and Lake Las Vegas. Each of the above entities received
a syndicated loan from Credit Suisse's Cayman Islands branch, which allowed the equity
holders in said entities to take sizeable distributions from all or part of the Credit Suisse loan
proceeds. According to Steve Yankauer (“Yankauer”), a Managing Director at Credit Suisse,
Credit Suisse's Cayman Islands branch was created in 2005 to facilitate the syndicated loan
product and to Yaunkauer's knowledge, Credit Suisse never had a physical presence in the
Cayman Islands.
Blixseth originally declined Credit Suisse's loan offer, but then contacted Barcy a couple
months later and “said that he might have a use of the proceeds for the loan and would be
interested in talking again.” Following Blixseth's call, Barcy and another person from Credit
Suisse met Blixseth at Blixseth's home in Palm Springs, California. Blixseth initially agreed to
take a loan of only $150 million. After several months of negotiations between Credit Suisse
First Boston and Blixseth, the proposed amount of the loan grew from $150 million to $375
million.
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 6 of 20
7
Credit Suisse, Cayman Islands Branch, and Blixseth, on behalf of the Debtors,
eventually entered into a credit agreement dated September 30, 2005 ("Credit Agreement"). In
the time leading up to September 20, 2005, Barcy testified that Credit Suisse did “a fair amount
of due diligence.” Such due diligence included doing a background check on Blixseth and
hiring an appraisal firm to provide an “independent assessment” of the Yellowstone Club's cash
flows and a law firm to “do a separate legal investigation into the Club to make sure that the
entities we were financing against truly held the assets that we believed we were financing.”
Curiously, Credit Suisse never requested audited financial statements from the Debtors
and in fact, appears to have relied exclusively on the historical and future projections provided
by Blixseth and the Debtors. Credit Suisse's financial due diligence instead consisted, as stated
above, of commissioning Cushman & Wakefield to do an analysis of the Debtors' cash flows.
Cushman & Wakefield was originally hired to do a fair market appraisal of the Debtors.
However, the terms of engagement were eventually altered to provide that Cushman &
Wakefield would perform a total net value analysis of the Debtors. Barcy explained that Credit
Suisse's capital market group suggested and then developed, in conjunction with Cushman &
Wakefield, a new form of appraisal methodology, which Credit Suisse termed “total net value”.
The Total Net Value methodology was first developed when Credit Suisse was selling its
syndicated loan product to Lake Las Vegas. Credit Suisse's Total Net Value methodology does
not comply with the Financial Institutions Recovery Reform Act of 1989 (“FIRREA”), but that
was not important to Credit Suisse because Credit Suisse was seeking to sell its syndicated
loans “to non bank institutions.”
Barcy also testified that he was aware of a prior limited appraisal of the Debtors'
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 7 of 20
8
property that Cushman & Wakefield did on behalf of American Bank. In that limited appraisal,
as of September 21, 2004, Cushman & Wakefield determined that the “as-is market value” of
those assets that later served as collateral for Credit Suisse's $375 million loan was $420
million. The $420 million as-is valuation was based on a discount rate of 18.5 percent. Barcy
and Credit Suisse apparently gave little, if any, regard to Cushman & Wakefield's September
21, 2004, appraisal and instead placed their reliance solely on Credit Suisse's newly created
Total Net Value valuation.
Similar to the syndicated loans to Tamarack Resort, Promontory, Ginn, Turtle Bay and
Lake Las Vegas, the Yellowstone Club Credit Agreement was originally drafted to provide that
the proceeds of the loan would be used, in part, for “distributions” to members of the Borrower
for purposes unrelated to the Yellowstone Development. During the same period of time that
Blixseth was negotiating with Credit Suisse for his loan, Blixseth was also attempting to buy
the interests of the B shareholders under the guise that Blixseth wanted to repurchase the “B”
shares for estate planning purposes and to involve his children in ownership of the Yellowstone
Club. Not all the B shareholders agreed to Blixseth's proposed purchase and thus, Blixseth
purchased none of the B shareholders' interests because his offer was an all or nothing deal.
Coincidentally, in late August of 2005 or early September of 2005, about the same time
that Blixseth was unsuccessful in buying the B shareholders' interests, Blixseth was allegedly
advised by his attorneys and accountants that he would have to take the Credit Suisse loan
proceeds as a loan rather than a distribution. The reasoning was two-fold. First, Blixseth
would have tax consequences on a distribution. Second, recording such a large distribution on
the Debtors' books would result in negative owners' equity accounts.
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 8 of 20
9
Barcy testified that Credit Suisse knew that “there were a number of minority investors
in the Club.” However, Barcy was not concerned when Blixseth contacted Credit Suisse
sometime between August 22, 2005, and September 4, 2005, and requested that the Credit
Agreement be modified to provide that the loan proceeds could be used: “(I) for distribution or
loans up to [$ ____] to affiliates of the borrower for purposes unrelated to the Yellowstone
Development[.]” Between September 4, 2005, and September 30, 2005, the recitals were once
again amended to finally provide that the proceeds of the loan would be used “(I) for
distribution or loans up to $209,000,000 to members of the Borrower for purposes unrelated to
the Yellowstone Development, (ii) for investments up to $142,000,000 into Unrestricted
Subsidiaries for purposes unrelated to the Yellowstone Development, (iii) to pay the
Transaction Costs, (iv) to refinance the Existing Indebtedness, (v) to finance a portion of the
development and construction costs associated with the Yellowstone Development in
accordance with the Financial Plan[.]” Barcy testified that it was Blixseth's “responsibility to
figure out what he had to do internally to make those distributions or not make those
distributions. And as a controlling shareholder of the Yellowstone Club, that was in his court.”
Nothing in the record suggests that the loan between Credit Suisse and Blixseth
(disregarding, however, the minority shareholders) was not at arm’s length. For instance,
Credit Suisse originally sought a transaction fee of 3 percent, but Blixseth wanted the
transaction fee reduced to 2 percent. Credit Suisse, via Barcy, and Blixseth ultimately agreed
to "flip a coin" to decide the rate. Credit Suisse lost the toss, and Blixseth was thus successful
in reducing the transaction fee to 2 percent.
After several months of negotiations, Credit Suisse and Blixseth finally came to an
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 9 of 20
From what the Court understands, EBITDA can be used to analyze and compare4
profitability between companies and industries because it eliminates the effects of financing andaccounting decisions. However, this is a non-GAAP measure that allows a greater amount ofdiscretion as to what is, and is not, included in the calculation. EBITDA is a good metric toevaluate profitability, but not cash flow.
10
agreement on the terms of the Credit Agreement and executed the same. The Credit Agreement
provided for the disbursement of $375 million in loan proceeds to be distributed in two
significant ways after payment of $7.5 million in fees to Credit Suisse and other expenses
attributable to the loan. First, the Credit Agreement designated up to $209 million of the loan
proceeds to be used as "distributions or loans" for "purposes unrelated" to the Yellowstone
Club. Additionally, up to $142 million was authorized to be used for investments into
"unrestricted subsidiaries" for "purposes unrelated" to Yellowstone Club development. Thus,
the bulk of the loan proceeds, up to $351 million, were designated to be used for purposes
outside of, and unrelated to, the Yellowstone Club.
In the years leading up to the Credit Agreement, the Yellowstone Club carried a debt
load ranging from a low of approximately $4 to $5 million to a high of approximately $60
million on a revolving line of credit. The day before the Loan Transaction, the Yellowstone
Club carried approximately $19 to $20 million in debt on its books, consisting of a combination
of a revolving line of credit and a term loan with American Bank. The majority of this debt was
related to the construction of the Warren Miller Lodge, which was already underway.
The Debtors had also experienced negative cash flows in several of the years leading up
to the Credit Agreement with Credit Suisse. Several of the witnesses made reference to
EDITDA, which is earnings before interest, taxes, depreciation and amortization. Kent Mordy4
(“Mordy”), a certified public accountant and a certified insolvency and reorganization advisor,
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 10 of 20
11
calculated that the Debtors' Cash EBITDA was a negative $15,701,772 in 2002, a positive
$20,369,766 in 2003, and a negative $45,910,598 in 2004. According to Mordy, the Debtors
projected Cash EBITDA of $83,500,000 in 2005 but realized Cash EBITDA of only $19
million. Dr. John S. Hekman (“Hekman”), who has a Ph.D in economics and is employed by
LECG to provide expert witness testimony in the area of real estate and real estate finance, also
did an EBITDA calculation. Hekman's EBITDA calculation for 2005 was $39 million. Mordy
explained that his Cash EBITDA numbers were different from Hekman's EBITDA calculations,
which were positive for 2003, 2004 and 2005, because Hekman did not subtract capital
expenditures and development costs. Yankauer disputed Hekman's and Mordy's EBITDA
calculations for 2005, arguing that such figure was closer to $55,610,953. Whatever the
accurate number, it is clear that even though the Debtors' had nine months of operations under
their belt before the September 30, 2005, Credit Agreement, they missed their profitability
projections by a substantial amount. Such numbers show that Debtors' projections for the
future, upon which Credit Suisse relied without question, had no foundation in historical reality.
Hekman also testified that the Federal Reserve aggressively lowered interest rates in
2001 to counteract the 2001 recession. As a result of the low interest rates, Hekman
characterized 2003 and 2004 as the peak years for real estate. However, due to concerns about
the housing bubble, the Federal Reserve began raising interest rates in 2005, which caused the
beginning of a slowdown in the real estate markets.
Despite all the red flags, the Credit Agreement was consummated and $342,110,262.53
was wired to the Yellowstone Club. This amount reflected the total loan amount of $375
million less fees, administrative costs, and a $24,241,910.98 takeout to payoff preexisting debt.
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 11 of 20
12
On the same date that $342,110,262.53 was transferred to the Debtors, approximately $209
million was transferred out of the Yellowstone Club by Blixseth to BGI. As previously noted,
the transfer of loan proceeds out of the Yellowstone Club was a key feature of the product that
Credit Suisse used to sell the loan. Yankauer testified that the cornerstone of this loan product
was that it allowed preferred resort owners, such as Blixseth, to capitalize on the value of their
asset.
The immediate transfer of funds out of the Yellowstone Club to BGI and then to
Blixseth was not memorialized in any contemporaneous loan documents but was simply
reflected on the Debtors' books with a journal entry. Blixseth, right around the time the B
shareholders were threatening suit against Blixseth and the Yellowstone Club, drafted a
two-page promissory note in the amount of $209 million. The $209 million unsecured demand
note, payable by BGI to the Debtors, was created in May 2006, and backdated to September 30,
2005.
Roughly all of the $209 million proceeds that were transferred to BGI were then
disbursed to various personal accounts and payoffs benefitting Tim and Edra Blixseth
personally. Blixseth testified that the Debtors had no interest in any of these accounts or
payoffs. The Debtors, under Blixseth' direction, never made demand of BGI on the demand
notes, even when the Yellowstone Club needed cash.
From 2005 through the filing of the bankruptcy, the Yellowstone Club was persistently
behind in its accounts payable. When the need for cash would become imperative, Moses
Moore (“Moore”), who worked as a Senior Accountant and then later Comptroller for the
Yellowstone Club, would request money from George Mack (“Mack”), who served at that time
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 12 of 20
13
as the Yellowstone Club's outside accountant. Mack was a go-between between Blixseth and
Moore when Moore needed money to pay the bills at the Yellowstone Club. After Moore
would make a request for funds, Moore testified that money may or may not appear in the
Yellowstone Club's accounts. Moore testified that it was not uncommon to have to shuffle the
Yellowstone Club's accounts payables due to a lack of money, and creditor and vendor invoices
would often go unpaid for 90 days or more.
When funds were tight, rather than make a demand on the BGI promissory note,
Blixseth would instead seek to obtain operating funds from various members of the
Yellowstone Club. One such member that Blixseth approached was Samuel T. Byrne
(“Byrne”). Byrne, the founder and managing partner of CrossHarbor, first visited the
Yellowstone Club in 2004 or 2005 as a guest of another Yellowstone Club member. As a result
of his visit, Byrne purchased two Yellowstone Club lots in 2005. Blixseth approached Byrne
and asked whether he would be interested in making a bulk purchase of Yellowstone Club lots
at a substantially reduced price. Byrne made his first bulk purchase in 2006 by taking over the
58 unit Sunrise Ridge Condominium Development for a price of $60 million. In August of
2007, Blixseth again approached Byrne to purchase 31 lots on the golf course. That sale was
consummated in August of 2007 at a price of $54 million.
The foregoing facts form the basis for the Court's decision regarding the Debtors' and
the Committee's equitable subordination claim. The Court has carefully reviewed the case law
under 11 U.S.C. § 510(c), and concludes that equitable subordination is an appropriate remedy
in this case. Under § 510(c), a court may, based upon equitable considerations, subordinate for
purposes of distribution all or a part of a claim or interest to all or part of another. 11 U.S.C. §
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 13 of 20
14
510(c). This Court's decision to grant the Debtors and the Committee equitable relief is
reviewed for an abuse of discretion. See Grosz-Salomon v. Paul Revere Life Ins. Co., 237 F.3d
1154, 1163 (9th Cir.2001).
In the Ninth Circuit:
The subordination of claims based on equitable considerations generallyrequires three findings: “(1) that the claimant engaged in some type of inequitableconduct, (2) that the misconduct injured creditors or conferred unfair advantageon the claimant, and (3) that subordination would not be inconsistent with theBankruptcy Code.” Feder v. Lazar (In re Lazar), 83 F.3d 306, 309 (9th Cir.1996)(citing Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 699-700 (5thCir.1977)).
In re First Alliance Mortg. Co., 497 F.3d 977, 1006 (9 Cir. 2006). When the remedy ofth
equitable subordination involves a non-insider, non-fiduciary, “the level of pleading and proof
is elevated: gross and egregious conduct will be required before a court [can] equitably
subordinate a claim.” Id.
The court in Waslow v. MNC Commercial Corp. (In re Paolella & Sons, Inc.), 161 B.R.
107, 119 (E.D. Pa. 1993), recognized that equitable subordination is seldom used in a non-
insider, non-fiduciary scenario because,
[a]s Judge Easterbrook pointed out in Kham & Nate's Shoes No. 2, Inc. v. FirstBank, 908 F.2d 1351, 1356 (7th Cir.1990), “[c]ases subordinating the claims ofcreditors that dealt at arm's length with the debtor are few and far between.” Thedearth of cases subordinating the claims of non-insiders is readily explained by thehigh threshold of misconduct that must be established by the objectant innon-insider cases. In In re Osborne, 42 B.R. 988, 996 (W.D.Wis.1984), the courtdiscussed the conduct required for equitable subordination in non-insider cases:
[The degree of misconduct] has been variously described as “verysubstantial” misconduct involving “moral turpitude or some breach of dutyor some misrepresentation whereby other creditors were deceived to theirdamage” or as gross misconduct amounting to fraud, overreaching orspoliation.
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 14 of 20
15
Accord In re Mayo, 112 B.R. 607, 650 (Bankr.D.Vt.1990) (“There are few casesin which gross misconduct has actually been applied to non-insiders, and evenfewer where inequitable misconduct has caused a claim to be subordinated.”); Inre Dry Wall Supply, Inc., 111 B.R. 933, 938 (D.Colo.1990) (noting that “when[the fiduciary] relationship is absent, the party seeking equitable subordination ofa claim must demonstrate even more egregious conduct by the creditor”).Although courts have struggled to articulate the misconduct that must beestablished to subordinate non-insider claims, it is clear that the non-insider'smisconduct must be “gross or egregious.” See Benjamin Weintraub & Alan N.Resnick, BANKRUPTCY LAW MANUAL ¶ 5.15 at 5-96 (3d ed. 1992); see also In reOsborne, 42 B.R. at 997 (stating that “plaintiffs are required to make a showing ofgross or egregious misconduct”). Thus, “[a] mere statement that the creditor isguilty of ‘inequitable conduct’ will not suffice.” In re W.T. Grant, 4 B.R. 53,75-76 (Bankr.S.D.N.Y.1980), aff'd, 699 F.2d 599 (2d Cir.1983). Rather, theplaintiff must prove gross misconduct tantamount to “fraud, overreaching orspoliation.” Id.; see also In re Fabricators, Inc., 926 F.2d 1458, 1465 (5thCir.1991) (“If a claimant is not an insider, then evidence of more egregiousconduct such as fraud, spoliation or overreaching is necessary.”); In re Dry WallSupply, Inc., 111 B.R. 933, 938 (D.Colo.1990) (“The degree of misconduct whichthe plaintiff must show in the case of a noninsider has been variously described asgross misconduct tantamount to fraud, misrepresentation, overreaching orspoliation.”); In re Teltronics, 29 B.R. at 173 (holding that “it is incumbent uponthe [objectant] to demonstrate that [the non-insider] engaged in very substantialmisconduct tantamount to fraud, overreaching or spoliation, which caused othercreditors of [the debtor] to suffer damages”); In re Pinetree Partners, Ltd., 87B.R. 481, 488 (Bankr.N.D.Ohio 1988) (“Where the claimant is a non-insider,egregious conduct must be proven with particularity. It is insufficient for theobjectant in such cases merely to establish sharp dealings; rather, he must provethat the claimant is guilty of gross misconduct tantamount to fraud, overreachingor spoliation to the detriment of others.”). In summary, the “gross or egregiousmisconduct” needed to subordinate claims of non-insiders is much greater thanthe “inequitable conduct” that warrants subordination of insiders and fiduciaries.
Credit Suisse's actions in the case were so far overreaching and self-serving that they shocked
the conscience of the Court.
In Cushman & Wakefield's July 1, 2005, appraisal, the Debtors had purportedly sold
243 lots or units, and another 42 lots were listed under contract. The lot sales for 2000 through
2005 are summarized by closing date, lot number, price and type in Addendum B to the
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 15 of 20
16
appraisal. Dean R. Paauw (“Paauw”), a certified Member of the Appraisal Institute (“MAI”)
who prepared Cushman & Wakefield's July 1, 2005, appraisal of the Yellowstone Club, states
on page 65, in discussing an overview of the Yellowstone Club's current and recent real estate
pricing, that there were five remaining lots in inventory in Pine Ridge, a subdivision at the
Yellowstone Club. The five remaining Pine Ridge Lots were listed for sale at asking prices
ranging from $1,950,000 to $4,000,000. Paauw went on to state that “[t]he developer typically
achieves his asking price on his inventory, and [the Pine Ridge] lots are expected to be sold
within the next 12 months.” Paauw's July 1, 2005, appraisal also concludes that “[a]bsorption in
Yellowstone Club has historically been hurt by limited availability in product.”
In 2005, Credit Suisse was offering a new financial product for sale. It was offering the
owners of luxury second-home developments the opportunity to take their profits up front by
mortgaging their development projects to the hilt. Credit Suisse would loan the money on a
non-recourse basis, earn a substantial fee, and sell off most of the credit to loan participants.
The development owners would take most of the money out as a profit dividend, leaving their
developments saddled with enormous debt. Credit Suisse and the development owners would
benefit, while their developments – and especially the creditors of their developments – bore all
the risk of loss. This newly developed syndicated loan product enriched Credit Suisse, its
employees and more than one luxury development owner, but it left the developments too
thinly capitalized to survive. Numerous entities that received Credit Suisse's syndicated loan
product have failed financially, including Tamarack Resort, Promontory, Lake Las Vegas,
Turtle Bay and Ginn. If the foregoing developments were anything like this case, they were
doomed to failure once they received their loans from Credit Suisse.
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 16 of 20
17
Credit Suisse, Barcy, Yankauer and others on the Credit Suisse team only earned fees if
they sold loans. Credit Suisse thus devised a loan scheme whereby it encouraged developers of
high-end residential resorts, such as Blixseth, to take unnecessary loans. The higher the loan
amount, the fatter the fee to Credit Suisse. This program essentially puts the fox in charge of
the hen house and was clearly self-serving for Credit Suisse.
The fee structure was undoubtedly the catalyst that led to the most shocking aspect of
Credit Suisse's newly developed loan product. As noted earlier, Credit Suisse's new loan
product was marketed to developers on grounds that developers were authorized to take a
substantial portion of their Credit Suisse loan proceeds as a distribution, or as Blixseth argues, a
loan. In this case, Credit Suisse had not a single care how Blixseth used a majority of the loan
proceeds, and in fact authorized Blixseth to take $209 million and use it for any purpose
unrelated to the Yellowstone Club. Blixseth, however, had a problem in this case because he
was not the sole owner of the Yellowstone Club and he did not want to share the loan proceeds
with the B shareholders. Thus, Blixseth booked the $209 proceeds that he took from the
Yellowstone Club as a loan months after he actually took the proceeds. Blixseth claims he
always intended to repay the $209 million BGI note, but Blixseth's former wife Edra testified to
the contrary.
Blixseth testified that he always intended to take the $209 loan proceeds as a loan rather
than a distribution because booking the transaction as a distribution would have caused his
owner's equity account to have a negative balance. The negative owner's equity would have
appeared as a qualification on the Debtors' audited financial statements and may have caused
the Debtors' to be out of compliance with the Credit Agreement. A sophisticated lender such as
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 17 of 20
18
Credit Suisse had to have known what a distribution would do to the Debtors' financial
statements, and in particular, their balance sheets, yet Credit Suisse proceeded with the loan,
and thus earned its large fee.
In addition to turning a blind eye to Debtors' financial statements, Credit Suisse's due
diligence with respect to the $375 million loan was almost all but non-existent. Credit Suisse
spent a fair amount of money on legal bills to ascertain that the Debtors did in fact own the
property at the Yellowstone Club, and Credit Suisse also spent a fair amount ensuring that it
was not violating any laws with its loan product. Credit Suisse, however, did little financial
due diligence. Barcy testified that Credit Suisse was aware that Cushman & Wakefield had
appraised Debtors' assets in 2004 and thus either knew or should have known that the collateral
that Blixseth proposed for the Credit Suisse loan had a fair market value of $420 million in
2004. The Court highly doubts that Credit Suisse could have successfully syndicated the
Yellowstone Club loan if the loan to value ratio was 90 percent. Thus, Credit Suisse instead
commissioned Cushman & Wakefield to employ its newly devised valuation methodology. In
applying the new valuation methodology, Credit Suisse relied almost exclusively on the
Debtors' future financial projections, even though such projections bore no relation to the
Debtors' historical or present reality.
Moreover, the Debtors’ past debt had bounced between $4 to $5 million on the low end
to $60 million on the high end. Credit Suisse proposed to increase the Debtors' debt load by at
least six times. Barcy, Yankauer and the rest of the Credit Suisse syndicated loan team could
not have believed under any set of circumstances that the Debtors could service such an
increased debt load, particularly when the Debtors had several years of net operating losses,
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 18 of 20
19
mixed with a couple years of net operating revenues.
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. 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.
The Debtors have provided for the membership claims in their proposed Chapter 11
plan. Accordingly, the Court declines to equitably subordinate Credit Suisse's secured claim to
those of the members, including members of the Ad Hoc Committee of Yellowstone Club
Members or the Ad Hoc Group of Class B Unit Holders.
For purposes of the upcoming auction of Debtors’ assets scheduled for May 13, 2009,
Credit Suisse shall be allowed to submit a credit bid for the amount of its allowed secured claim
of $232 million. However, because Credit Suisse’s claim is equitably subordinated, Credit
Suisse must provide, as a component of its credit bid, sufficient funds to pay the CrossHarbor
debtor-in-possession financing, the administrative fees and costs of the Debtors’ bankruptcy
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 19 of 20
20
estate and the allowed unsecured claims of non-member creditors. For the reasons discussed
herein,
IT IS ORDERED that a separate and final memorandum of decision and judgment will
follow this partial and interim order, wherein judgment will be entered in favor of the Debtors
and the Committee and against Credit Suisse; and pursuant to 11 U.S.C. § 510(c), Credit
Suisse's allowed secured claim of $232 million is equitably subordinated to: (1) CrossHarbor's
debtor-in-possession financing; (2) approved administrative fees and costs of the bankruptcy
estate; and (3) the allowed claims of unsecured creditors. Credit Suisse's $232 million secured
claim is not subordinated with respect to the claims of members resulting from their
membership agreements and is not subordinated to any claims of the Class “B” minority
shareholder members.
09-00014-RBK Doc#: 289 Filed: 05/12/09 Entered: 05/12/09 14:23:15 Page 20 of 20
John S. Hekman EXHIBIT 1 550 South Hope Street Suite 2150 Los Angeles, California 90071 Tel. (424) 204-8872 Fax (213) 243-3710 E-mail: [email protected] EDUCATION Ph.D., Economics, University of Chicago M.B.A., Finance, University of Chicago BA, History, Valparaiso University EMPLOYMENT Principal, LECG, LLC, 2004-present.
Lecturer, MBA program, University of Southern California, 1989-present. Department of Finance and Business Economics.
Past Positions:
Principal, Economic Analysis LLC, 2000-03.
Principal, LECG, LLC, 1998-2000.
Director, Altschuler, Melvoin and Glasser LLP, 1996-98.
Vice President (1993-96), Senior Economist (1992), Economic Analysis Corporation.
Senior Economist, Micronomics, Inc., 1990-92.
Executive Vice President and Director of U.S. Economic Forecasting, Claremont Economics Institute, 1986-90. Editor, The Main Street Journal Investment letter.
Associate Professor of Finance, University of North Carolina, Chapel Hill 1981-86, (academic tenure granted, 1985).
Visiting Scholar, Federal Reserve Bank of Atlanta, 1981-84.
Economist, Federal Reserve Bank of Boston, 1980.
Research Associate, Harvard-MIT Joint Center For Urban Studies, 1978.
4/1/2009 www.lecg.com Page 1 of 8
Assistant Professor of Economics, Boston College, 1975-81.
Instructor, University of Chicago, 1974-75.
TESTIMONY
Morton v. Morton. California Superior Court for the County of Los Angeles. Retained by Thomas Nolan of Skadden, Arps, Meagher & Flom. Deposition March 2009. Bullock v. Philip Morris, Inc. California Superior Court for the County of Los Angeles. Retained by Robert McCarter of Arnold & Porter. Deposition March 2009. Gartner, Inc. v. Parikh, et al. United States District Court for the Central District of California. Retained by Thomas Mackey of Jackson Lewis, August 2008. Deposition October, 2008. Beth Robbins v. Essex Management Corp., et al. California Superior Court for the County of Los Angeles. Retained by Jeremy Dwork of Daley & Heft. Deposition September, 2008. Catherine Blaylock, et al. v. First American Title Insurance Company. United States District Court, Western District of Washington. Retained by Stephen Rummage of Davis Wright Tremaine. Declaration filed January, 2008. Janice Howland v. First American Title Insurance. United States District Court, Northern District of Illinois, Eastern Division. Retained by Douglas Mansfield of Jones, Day. Declaration filed January, 2008. United National Maintenance Inc. v. San Diego Convention Center Corp. California Superior Court, County of San Diego. Retained by Jeffrey Leon of Ungaretti & Harris, LLP. Testimony filed December 2007. Julius Chang and Howard Chen v. Charles Schwab & Company, California Superior Court, County of San Francisco. Retained by Daniel Newland of Seyfarth Shaw LLP. Deposition October, 2007.
Eric Seiken, et al. v. Pearle Vision, Inc., et al. California Superior Court, County of San Diego. Retained by Kevin Quinn of Thorsnes Bartolatta McGuire. Class Certification Declaration submitted September, 2007; deposition November 2007. Tim Wood, SFG Financial Corp. et al. v. Mark Boucher, Investment Research Associates, et al, California Superior Court, County of San Mateo. Retained by Joel Wolosky of Hodgson Russ. Deposition April 2007.
4/1/2009 www.lecg.com Page 2 of 8
Dwight W. Crawford. v. Debra S. Katz, et al., Superior Court for the District of Columbia. Retained by Glenn M. Young of the Young Law Firm. Deposition April 2007. James Ripley v. Wyoming Medical Center et al. United States District Court for the District of Wyoming. Retained by Stephen Kline of Kline Law Office PC. Deposition April 2007. American Medical Response v. City of Stockton United States District Court Eastern District of California. Retained by Michael Higgins of Wulfsberg Reese Colvig & Firstman. Deposition February 2007. Breakdown Services Ltd. v. Now Casting, Inc. California Superior Court, County of Los Angeles. Retained by Stephen P. Krakowsky. Deposition October 2006. RitterRanch Development LLC, debtor. Los Angeles County Waterworks District No. 40 v. Robbin Itkin et al., United States District Court Central District of California. Retained by Parry Cameron of Stephan, Oringher, Richman, Theodora & Miller. Deposition June 2006. Pamela Cunningham and Reet Caldwell v. Mattel, Inc. Circuit Court, Third Judicial Circuit, Madison County, Illinois. Retained by Gerald Hawxhurst of Quinn Emanuel Urquhart Oliver & Hedges. Deposition February 2005. In re Cioffi, California Superior Court, County of Santa Clara. Retained by William Russell of Lakin, Spears. Deposition and trial testimony January 2004. Ederel Sport, Inc. v. Gotcha International, L.P. U.S. Bankruptcy Court, Central District of California. Retained by Michael Adele of Albert, Weiland & Golden. Deposition and trial testimony May 2003. In Re Fuqua Industries Shareholder Litigation, Delaware Chancery Court Civil Action No. 11974. Retained by Lowell Sachnoff of Sachnoff & Weaver. Deposition March 2003. SPC/PomomaLLC v. Medianews Group, Inc. Superior Court of California, County of Los Angeles. Retained by Steven Gardner of Cohon and Gardner. Deposition February 2003; trial testimony April 2003. MGM v. Midway Games, Inc. U. S. District Court, Central District of California, Western Division. Retained by John Williams of Lord, Bissell & Brook. Report submitted October 2002. Freeman Industries LLC v. Eastman Chemical Company, et al., In the Law Court for Sullivan County at Kingsport, Tennessee. Retained by Aton Arbisser of Kaye Scholer. Class Certification Affidavit submitted September 2002.
Keep v. State of California, Superior Court of California, County of Los Angeles. Retained by Vladimir Shalkovich, Deputy Attorney General. Deposition October 2002.
4/1/2009 www.lecg.com Page 3 of 8
IMAX, LTD. v. Krikorian Premiere Theatres, U.S. District Court for the Central District of California. Retained by Glenn Dassoff of Paul, Hastings, Janofsky & Walker. Deposition September 2002.
Betty Bullock v. Phillip Morris, Inc. et al.; California Superior Court, Los Angeles. Retained by Thomas Stoever of Arnold & Porter on behalf of defendant. Deposition May 2002.
International Paper and Masonite v. Affiliated FM Insurance Co, et al.; California Superior Court, San Francisco. Retained by Adam Murray of Howrey, Simon, Arnold & White. Deposition May 2001; trial testimony November 2001.
Copley Press, et al. v. Gray Davis, et al; Tony Strickland, et al. v. Gray Davis, et al.; California Superior Court, San Diego County; retained by Timothy Muscat, Deputy Attorney General. Declaration in Support of Defendant's Opposition Brief submitted May 2001.
Fitzgerald v. Silcott, et al. California Superior Court, County of Los Angeles. Retained by Law Offices of J. Jeffrey Long. Deposition January 2000; trial October 2001.
Formal Complaint of Tesoro Alaska Petroleum Against Amerada Hess, et al., Federal Energy Regulatory Commission and Regulatory Commission of Alaska. Retained by John Donovan of Skadden, Arps, Slate Meagher & Flom. Testimony submitted November 2000.
Alavi v. Kaiser Foundation Hospitals. Retained by Walter Weiss. Arbitration testimony November 2000.
Seguritan v. State of California, et al. Los Angeles County Superior Court. Retained by Anne Hunter, Deputy Attorney General. Deposition July 2000.
Lenehan v. Maryland Casualty. California Superior Court, County of Los Angeles. Retained by Law Offices of J. Jeffrey Long. Deposition May 2000.
Hearing on Green Coke Pricing Issue for TAPS Quality Bank. Federal Energy Regulatory Commission. Retained by John Donovan of Skadden, Arps, Slate, Meagher & Flom. Testimony May 2000.
Tash v. Aviara Land Associates, L.P., et al. San Diego Superior Court. Retained by Jerry Phillips of Richman, Mann, Chizever, Phillips & Duboff. Deposition April 2000; Trial testimony May 2000.
First Pension Corp/Murray v. Belka. California Superior Court, County of Orange. Retained by William Meeske of Latham & Watkins. Deposition February 2000.
Rhonda Jalali v. Assembly of God, Teen Challenge et al. California Superior Court. Retained by George Buehler of Howrey & Simon. Deposition and trial testimony July 1999.
4/1/2009 www.lecg.com Page 4 of 8
Alfred Martino, Jr. v. Northbrook Property and Casualty Company and St. Paul Fire and Marine Insurance Company, Arbitration. Retained by Law Offices of J. Jeffrey Long. Testimony June 1999.
Hugo Valdivia v. MCE Corporation, et al., California Superior Court for the County of Los Angeles. Retained by Andrew Jacobs of the Law Offices of Andrew Hoffman (CNA Insurance). Deposition November 1997; trial January 1998.
Louisville Bedding Company v. Pillowtex Corporation, United States District Court for the Western District of Kentucky. Retained by Hartwell Morse of Welsh & Katz. Deposition November, December 1997.
Infant and Nutritional Products, et al. v. BJ Family Food Center, et al, California Superior Court for the County of Los Angeles. Retained by Farhad Novian of Novian & Novian. Deposition September 1997.
William Gene Norman v. Herbalife International, et al., California Superior Court for the County of Los Angeles. Retained by Ward Benshoof of McClintock Weston Benshoof Rochefort Rubalcava MacCuish. Deposition April 1997.
Jeffrey Alpert v. Gerald Busch, et al, California Superior Court for the county of Los Angeles. Retained by Law Offices of Daniel Hoffman (CNA Insurance). Trial testimony November 1997.
Janelle Flores v. Dapo Popoola, MD, et al., California Superior Court for the County of Los Angeles. Retained by Henry Tovmassian of Kehr, Crook, Tovmassian & Fox. Deposition September 1997.
Ridgecrest Homeowners Association v. Nihon Lancre America, Inc., et al., California Superior Court for the County of Los Angeles. Retained by Ronald Caswell of Richmond, Lawrence, Mann, Greene, Chizever, Friedman & Phillips. Deposition June 1997.
Harvey W. Stuart, et al. v. Kraft Foods, Inc. et al., United States District Court for the Eastern District of Wisconsin. Retained by Michael Freed of Much Shelist Freed Denenberg Ament Bell & Rubenstein. Affidavit November 1996; deposition and court testimony December 1996.
Albert and Estelle Binder, et al. v. Thomas Gillespie, et al., United States District Court for the District of Idaho. Retained by Robert Bretz of Robert H. Bretz, PC. Affidavit December 1996.
Ernst Paul Lehmann Patentwerk v. San-Val Discount, Inc., United States District Court, Central District of California. Retained by Douglas Adler of Skadden, Arps, Slate, Meagher & Flom. Affidavit submitted March 1996.
4/1/2009 www.lecg.com Page 5 of 8
JAR-PR Associates v. Unocal, Superior Court of the State of California, County of Los Angeles. Retained by George Crook of Kehr, Crook, Tovmassian & Fox. Deposition and trial testimony, March 1996.
Sarkis v. State of California, California Superior Court, County of Kern. Retained by Deputy Attorney General Daniel Helfat. Deposition, January 1996.
Casper Boso v. Chicago Bears. Retained by Steven Wolf of Wolf & Ouimet to testify regarding the average career length of NFL players. Arbitration testimony November 1994.
Styling Research Company v. Conair Corporation, Superior Court of the State of California, County of Los Angeles. Retained by Phillip Belleville of Latham & Watkins. Deposition August 1992.
Medical Designs, Inc. v. Donjoy, Inc., United States District Court, Southern District of California. Retained by Paul C. Van Slyke of Pravel, Gambrell, Hewitt, Kimball & Krieger. Deposition October 1991.
California Grocers Association v. Bank of America, Superior Court of the State of California for the County of Alameda, Northern District. Retained by Arne Wagner of Bank of America. Deposition May 1991.
CONSULTANT
Simpson Thatcher & Bartlett, New York, NY, Kenneth Logan; Ronald Cleveland, et al. v. Viacom, Blockbuster, et al. United States District Court for the Western District of Texas, 2002. In Re Maguire Thomas Partners – Grand Place Tower, Ltd. United States Bankruptcy Court, Central District of California. Retained by Bennett Silverman of Gibson, Dunn & Crutcher on behalf of Sumitomo Bank, 1999.
Howrey & Simon, Washington, DC, Thomas Heyer; Litton Systems, Inc. v. Honeywell, Inc., 1995-1996.
Thelen, Marrin, Johnson & Bridges, San Francisco, Steven V. O’Neal; IBM v. Fasco Industries, 1994-1995.
Packard Bell Electronics, Inc. v. Teledyne Industries, Inc., Superior Court of the State of California, County of Los Angeles. Retained by Ronald M. St. Marie of Ervin, Cohen & Jessup. August 1995.
O’Melveny & Myers, Los Angeles, Charles Diamond, Randy Oppenheimer; Exxon Valdez Oil Spill Litigation, 1993-1994; 2000; 2002.
4/1/2009 www.lecg.com Page 6 of 8
PUBLICATIONS
“California Under Siege: A Call for Perspective” (with Ken Agid, et al.), California Real Estate Roundtable, April 1991.
“Should We Reform Deposit Insurance?” Los Angeles Times, March 11, 1990, D3.
“New England’s Economy in the 1980s” (with Lynn Browne), in The Massachusetts Miracle, David R. Lampe (ed.), The MIT Press: Cambridge, MA, 1988.
“Real Estate Returns and Inflation” (with David Hartzell and Mike Miles), American Real Estate and Urban Economics Association Journal (AREUEA), Spring 1987.
“Factors Affecting Manufacturing Location in North Carolina,” in Dale Whittington (ed.), High Hopes for High Tech: Microelectronics in North Carolina, University of North Carolina Press, 1987.
“Diversification Categories in Investment Real Estate” (with David Hartzell and Mike Miles), AREUEA Journal, Summer 1986.
Land Supply Monitoring: A Guide for Improving Public and Private Urban Development Decisions (with D. Godshalk, S. Bollens, and M. Miles), Oelgeschlager, Gunn & Hain: Boston, 1985.
“Rental Price Adjustment and Investment in the Office Construction Market,” AREUEA Journal, Spring 1985.
“Branch Plant Location and the Product Cycle in Computer Manufacturing,” Journal of Economics and Business, May 1985.
“Venture Capital and Economic Development in the Southeast” (with Mike Miles), Economic Review, Federal Reserve Bank of Atlanta, July 1983.
“Optimal Allocation of Economic Development Funds” (with Mike Miles, et al.), N.C. Department of Natural Resources and Community Development, January 1983.
“What are Businesses Looking for? A Survey of Industrial Firms in the South,” Economic Review, Federal Reserve Bank of Atlanta, June 1982.
“Behind the Sunbelt’s Growth: Industrial Decentralization” (with Alan Smith), Economic Review, Federal Reserve Bank of Atlanta, March 1982.
“Impact of Environmental Regulations on Industrial Development in North Carolina” (with Raymond Burby, et al.), North Carolina Department of Natural Resources and Community Development, February 1982.
4/1/2009 www.lecg.com Page 7 of 8
4/1/2009 www.lecg.com Page 8 of 8
“The Evolution of New England Industry” (with John Strong), New England Economic Review, March-April 1981.
“New England’s Economy in the 1980s” (with Lynn Browne), New England Economic Review, January-February 1981.
“Income, Labor Supply and Urban Residence,” American Economic Review, September 1980.
“Is there a Case for Plant Closing Laws?” (with John Strong), New England Economic Review, July-August 1980.
“The Product Cycle and New England Textiles,” Quarterly Journal of Economics, June 1980.
“Can New England Hold Onto its High Technology Industry?” New England Economic Review, April 1980.
“Regions Don’t Grow Old, Products Do,” The New York Times, Sunday Business, November 4, 1979.
“What Attracts Industry to New England?” New England Economic indicators, December 1978.
“An Analysis of the Changing Location of Iron and Steel Production in the Twentieth Century,” American Economic Review, March 1978.
Exhibit 2 Report of John S. Hekman
Exhibit 2
List of Materials Reviewed
1. Complaint: Official Committee of Unsecured Creditors, Plaintiff vs. Credit Suisse, Cayman Islands Branch, et al., in the United States Bankruptcy Court for the District of Montana, March 3, 2009.
2. Committee’s Answers to Credit Suisse’s Interrogatories.
3. Credit Suisse Cayman Islands LLC Credit Agreement with Yellowstone Mountain Club, et al., September 30, 2005 (RKM000389-483); GLR000434-39; Exhibits: GLR000676-809; Schedules GLR000840-869; Security Agreement GLR000881-919.
4. Yellowstone Mountain Club Appraisal, August 2005, by Cushman & Wakefield of
Colorado, Inc., transmittal letter (CSVC00002975-3092)
5. “Paradise Lost”, Fortune, February 6, 2008.
6. Yellowstone Mountain Club Appraisal by Cushman & Wakefield, September 2004 (CSVC00000332-393).
7. Cushman & Wakefield of Oregon, Inc. Appraisal June 2006 (RKM000267-325)
8. November 10, 2008 Appraisal of Yellowstone Club (YUCC2023040-2023145)
9. emails: CSVC00003440; CSVC00012907-12908; CSVC00026895.
10. Loan amount and term sheet drafts and related emails: CSVC00000001-07; CSVC00000013-19; CSVC00000152; 156-161.
11. Engagement letter drafts and related emails: CSVC00000473-476; CSVC00000139.
12. Internal memorandum to “Bank and High Yield Finance Committee” of Credit Suisse First Boston from Jeff Barcy, Jeff Tuckel, Jeremy Rogers and Akira Okubo dated January 6, 2005 (CSVC00110291-98)
13. “Credit Suisse Resort Loans Default From Beverly Hills to Idaho” www.bloomberg.com, March 5, 2009
14. Yellowstone Mountain Club and Yellowstone Development Financial Statements, 2001 (CSVC00000234-251); 2002 (CSVC00000252-269); 2003 (CSVC00000270-288); 2004 (CSVC00000289-306); 2007 (KPMG).
15. Yellowstone Mountain Club, LLC and Subsidiary, Yellowstone Development, LLC and subsidiaries and Big Sky Ridge, LLC Combined Financial Statements, December 31, 2006 and 2005 (RKM000135-173).
16. Yellowstone Mountain Club Lot sales data (Excel sheet).
17. Engagement letter May 2, 2005, from Cushman & Wakefield of Colorado, Inc. to Mr. Jeff Barcy, Credit Suisse First Boston LLC, re: appraisal of Yellowstone Club, Madison County, Montana (CVSC00000116-120)
18. Private rating letter, Moody’s Investor’s Service (CSVC00017353-55)
19. Private rating letter, Standard & Poor’s to Chris Campbell, Vice President of Finance,
1
Exhibit 2 Report of John S. Hekman
2
Yellowstone Club, rating $375 million Senior Secured First Lien Credit Facility, dated September 27, 2005 (CVSC00015551-15555)
20. Confidential Information Memorandum re: $330,000,000 Senior Secured Credit Facility for Yellowstone Mountain Club, LLC, prepared by Credit Suisse First Boston, dated September 2005. (CSSU00090-140)
21. Investment Offering Memorandum re: offering of 100% ownership in the equity of the reorganized debtor entity, real estate and all assets involved with the operation of Yellowstone Club, prepared by CB Richard Ellis, Inc.©2009.
22. “Up to $230.0 Million Senior Secured Credit Facility Engagement Letter” by and between Credit Suisse First Boston and Yellowstone Mountain Club LLC and Yellowstone Development LLC dated May 6, 2005. (CSSU 00001- CSSU00014)
23. “Yellowstone Club $330,000,000 Senior Secured Credit Facility”, prepared by Syndicated Loan Group. (CSVC00041548)
24. “Project Powder” analysis CSVC00000177-206.
Official Committee of Unsecured Creditors v. Credit Suisse Cayman Islands Branch
EXHIBIT 3YELLOWSTONE CLUB APPRAISAL2006 CUSHMAN AND WAKEFIELD
Report of John S. Hekman
2006 2007 2008 2009 2010 2011 2012 TotalsTotal Land Sales Revenues $117,500,000 $164,550,000 $226,877,050 $198,167,234 $203,448,777 $210,344,741 $251,976,145 $1,372,863,947Less Expenses/Profit -$33,420,000 -$50,642,000 -$51,894,534 -$26,864,650 -$17,613,399 -$15,047,579 -$12,224,092 -$207,706,254Cash Flow $84,080,000 $113,908,000 $174,982,516 $171,302,584 $185,835,378 $195,297,162 $239,752,053 $1,165,157,693Discount Factor 15% 0.86957 0.75614 0.65752 0.57175 0.49718 0.43233 0.37594discounted cash flow $73,113,043 $86,130,813 $115,053,845 $97,942,808 $92,393,027 $84,432,353 $90,131,677 $639,197,566NPV cash flows $639,197,566
rounded $639,000,000
Source: April 2006 Appraisal of Yellowstone Mountain Club, Cushman & Wakefield, Exhibit B
Prepared by LECG
Official Committee of Unsecured Creditors v. Credit Suisse Cayman Islands Branch
EXHIBIT 4ACTUAL AND PROJECTED LOT/UNIT SALES
Report of John S. Hekman
Actual ProjectedLot/Unit Lot/Unit
Sales Sales2000 19 2006 412001 40 2007 602002 28 2008 892003 52 2009 872004 56 2010 852005 48 2011 85
2012 66
Total 243 513
Average2000-2005 40.5 2006-2012 73.32001-2005 44.8
source: August 2005 Appraisal of Yellowstone Club, pages 68, 70
Preared by LECG
Official Committee of Unsecured Creditorsv. Credit Suisse Cayman Islands Branch
EXHIBIT 5LOT SALES 2000-2005
YELLOWSTONE CLUB
Report of John S. Hekman
Year Units Lot Sales Average Price2000 19 23,945,000$ 1,260,263$ 2001 37 20,480,000 553,514 2002 28 28,030,000 1,001,071 2003 51 65,447,500 1,283,284 2004 52 82,900,000 1,594,231 2005 47 108,270,000 2,303,617
234 329,072,500$ 1,406,293$
Source: August 2005 Appraisal by Cushman & WakefieldAddendum B: Summary of Lot Sales
Prepared by LECG Draft prepared by LECG, LLC 4/1/2009 11:23 AM
Official Committee of Unsecured Creditorsv. Credit Suisse Cayman Islands Branch
EXHIBIT 6AUGUST 2005 APPRAISAL
CASH FLOW PROJECTIONS
Report of John S. Hekman
Revenues Fiscal YearPrice 1 2 3 4 5 6 7
# Lots Unit/Lot 2006 2007 2008 2009 2010 2011 2012 Total Revenues
Improved ProductPioneer Mtn. Condos - land value 70 $1,000,000 $0 $0 $10,609,000 $16,390,905 $16,882,632 $17,389,111 $17,910,784 $79,182,432Beginner Lift Condos - land value 30 $1,000,000 0 0 0 10,927,270 11,255,088 11,592,741 0 $33,775,099Big Springs Suites - land value 24 $1,000,000 0 0 12,730,800 13,112,724 0 0 0 $25,843,524Golf Course Chalets - land value 60 $1,500,000 0 0 15,913,500 16,390,905 25,323,948 26,083,667 17,910,784 $101,622,804Rainbow Pointe Chalets - land value 90 $1,500,000 0 23,175,000 23,870,250 24,586,358 25,323,948 26,083,667 26,866,177 $149,905,400
Lot SalesAndesite Ridge - South 1 $1,500,000 1,500,000 0 0 0 0 0 0 $1,500,000Big Sky Ridge 72 $2,500,000 62,500,000 64,375,000 58,349,500 0 0 0 0 $185,224,500Pine Ridge (Phase 3) 5 $2,750,000 13,750,000 0 0 0 0 0 0 $13,750,000Yellow mule Ridge (Golf Course Lots) 60 $3,000,000 30,000,000 61,800,000 63,654,000 32,781,810 0 0 0 $188,235,810Eglise Ridge 101 $2,500,000 0 0 0 40,977,263 84,413,161 86,945,556 77,613,399 $289,949,379TOTAL 513
Total Land Sales Revenues $107,750,000 $149,350,000 $185,127,050 $155,167,235 $163,198,777 $168,094,742 $140,301,144 $1,068,988,948# Lots Sold 41 60 89 87 85 85 66 513
# Lots Remaining 472 412 323 236 151 66 0
Net Income from Club Operations -5,500,000 -4,800,000 -3,500,000 0 1,000,000 3,000,000 3,000,000 (6,800,000)
Reversion from Sale of Club to Members 74,175,000 74,175,000
Membership Deposit Revenue 15,250,000 20,000,000 45,250,000 43,000,000 39,250,000 39,250,000 34,500,000 236,500,000
Total Gross Revenues $117,500,000 $164,550,000 $226,877,050 $198,167,235 $203,448,777 $210,344,742 $251,976,144 $1,372,863,948
Development Costs and Expenses
Reimburse Pioneer and Frontier Members $2,500,000 $2,500,000 $4,750,000 $9,750,000Community/Club Infrastructure 14,300,000 26,059,000 26,840,770 4,261,635 787,856 72,249,261Neighborhood Infrastructure 2,500,000 4,635,000 4,243,600 3,059,636 1,969,640 16,407,876Cost of Sales/Closing Costs 8% 8,620,000 11,948,000 14,810,164 12,413,379 13,055,902 13,447,579 11,224,092 85,519,116Admin./Taxes/Overhead/Misc. 8,000,000 5,500,000 3,500,000 2,200,000 1,800,000 1,600,000 1,000,000 23,600,000
Total Expenses and Profit $33,420,000 $50,642,000 $51,894,534 $26,684,650 $17,613,398 $15,047,579 $12,224,092 $207,526,253
Cash Flow $84,080,000 $113,908,000 $174,982,516 $171,482,585 $185,835,379 $195,297,163 $239,752,052 $1,165,337,695
TOTAL NET VALUE INDICATION $1,165,337,695Rounded to $1,165,000,000
AssumptionsTotal # Lots/Units 513 $2,270,955 per unit/lot (513)Total Retail value of Lots $976,750,000Total Retail Value of Club Memberships $310,675,000Expense Inflation 3%Lot/Unit Appreciation 3%
2006 Average Assumed Price per Lot $2,628,048.78
Source: August 2005 Appraisal, Cushman & Wakefield, CW1432; and LECG calculations
Prepared by LECG
Official Committee of Unsecured Creditorsv. Credit Suisse Cayman Islands Branch
EXHIBIT 7YMC AND YD OPERATING INCOME
2001-2004
Report of John S. Hekman
Operating Income (Loss)
YellowstoneYellowstone MountainDevelopment Club Total
2004 29.50$ (12.97)$ 16.53$ 2003 4.85$ 18.30$ 23.15$ 2002 (1.57)$ 1.16$ (0.41)$ 2001 (1.43)$ 1.35$ (0.08)$
Source: 2001 (CSVC00000234-251); 2002 (CSVC00000252-269); 2003 (CSVC00000270-288); 2004 (CSVC00000289-306)
Prepared by LECG
Official Committee of Unsecured Creditorsv. Credit Suisse Cayman Islands Branch
EXHIBIT 8AUGUST 2005 APPRAISAL
2003-2004 PRICES
Report of John S. Hekman
Revenues Fiscal YearPrice 1 2 3 4 5 6 7
# Lots Unit/Lot 2006 2007 2008 2009 2010 2011 2012 Total Revenues
Improved ProductPioneer Mtn. Condos - land value 70 $1,000,000 $0 $0 $10,000,000 $15,000,000 $15,000,000 $15,000,000 $15,000,000 $70,000,000Beginner Lift Condos - land value 30 $1,000,000 - - - 10,000,000 10,000,000 10,000,000 - $30,000,000Big Springs Suites - land value 24 $1,000,000 - - 12,000,000 12,000,000 - - - $24,000,000Golf Course Chalets - land value 60 $1,500,000 - - 15,000,000 15,000,000 22,500,000 22,500,000 15,000,000 $90,000,000Rainbow Pointe Chalets - land value 90 $1,500,000 - 22,500,000 22,500,000 22,500,000 22,500,000 22,500,000 22,500,000 $135,000,000
Lot SalesAndesite Ridge - South 1 $1,438,758 1,438,758 - - - - - - $1,438,758Big Sky Ridge 72 $1,438,758 35,968,939 35,968,939 31,652,666 - - - - $103,590,543Pine Ridge (Phase 3) 5 $1,438,758 7,193,788 - - - - - - $7,193,788Yellow mule Ridge (Golf Course Lots) 60 $1,438,758 14,387,575 28,775,151 28,775,151 14,387,575 - - - $86,325,452Eglise Ridge 101 $1,438,758 - - - 21,581,363 43,162,726 43,162,726 37,407,696 $145,314,512TOTAL 513
Total Land Sales Revenues $58,989,059 $87,244,089 $119,927,817 $110,468,939 $113,162,726 $113,162,726 $89,907,696 $692,863,052# Lots Sold 41 60 89 87 85 85 66 513
# Lots Remaining 472 412 323 236 151 66 0
Net Income from Club Operations -5,500,000 -4,800,000 -3,500,000 0 1,000,000 3,000,000 3,000,000 (6,800,000)
Reversion from Sale of Club to Members 74,175,000 74,175,000
Membership Deposit Revenue 15,250,000 20,000,000 45,250,000 43,000,000 39,250,000 39,250,000 34,500,000 236,500,000
Total Gross Revenues $68,739,059 $102,444,089 $161,677,817 $153,468,939 $153,412,726 $155,412,726 $201,582,696 $996,738,052
Development Costs and Expenses
Reimburse Pioneer and Frontier Members $2,500,000 $2,500,000 $4,750,000 $9,750,000Community/Club Infrastructure 14,300,000 26,059,000 26,840,770 4,261,635 787,856 72,249,261Neighborhood Infrastructure 2,500,000 4,635,000 4,243,600 3,059,636 1,969,640 16,407,876Cost of Sales/Closing Costs 8% 4,719,125 6,979,527 9,594,225 8,837,515 9,053,018 9,053,018 7,192,616 55,429,044Admin./Taxes/Overhead/Misc. 8,000,000 5,500,000 3,500,000 2,200,000 1,800,000 1,600,000 1,000,000 23,600,000
Total Expenses and Profit $29,519,125 $45,673,527 $46,678,595 $23,108,786 $13,610,514 $10,653,018 $8,192,616 $177,436,181
Cash Flow $39,219,934 $56,770,562 $114,999,221 $130,360,152 $139,802,212 $144,759,708 $193,390,080 $819,301,871
TOTAL NET VALUE INDICATION $819,301,871
NET PRESENT VALUE FACTOR: 15% 1 0.869565 0.756144 0.657516 0.571753 0.497177 0.432328
NET PRESENT VALUE $39,219,934 $49,365,706 $86,955,933 $85,713,916 $79,932,369 $71,971,159 $83,607,869 $496,766,886
AssumptionsTotal # Lots/Units 513Total Retail value of Lots $692,863,052Total Retail Value of Club Memberships $310,675,000Expense Inflation 3%Lot/Unit Appreciation 0%
Source: August 2005 Appraisal by Cushman & WakefieldCW1432 adjusted by LECG
Prepared by LECG
Official Committee of Unsecured Creditorsv. Credit Suisse Cayman Islands Branch
EXHIBIT 9AUGUST 2005 APPRAISAL
2003-2004 PRICES AND LOT SALES
Report of John S. Hekman
Revenues Fiscal YearPrice 1 2 3 4 5 6 7 8 9 10
# Lots Unit/Lot 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total Revenues
Improved ProductPioneer Mtn. Condos - land value 70 $1,000,000 $0 $0 $5,000,000 $10,000,000 $9,000,000 $9,000,000 $12,000,000 $12,000,000 $13,000,000 $0 $70,000,000Beginner Lift Condos - land value 30 $1,000,000 - - - 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 - - $30,000,000Big Springs Suites - land value 24 $1,000,000 - - 12,000,000 12,000,000 - - - - - - $24,000,000Golf Course Chalets - land value 60 $1,500,000 - - 4,500,000 7,500,000 15,000,000 15,000,000 12,000,000 12,000,000 15,000,000 9,000,000 $90,000,000Rainbow Pointe Chalets - land value 90 $1,500,000 - 18,000,000 12,000,000 13,500,000 13,500,000 13,500,000 18,000,000 15,000,000 19,500,000 12,000,000 $135,000,000
Lot SalesAndesite Ridge - South 1 $1,438,758 1,438,758 - - - - - - - - - $1,438,758Big Sky Ridge 72 $1,438,758 48,917,756 34,530,181 20,142,606 - - - - - - - $103,590,543Pine Ridge (Phase 3) 5 $1,438,758 7,193,788 - - - - - - - - - $7,193,788Yellow mule Ridge (Golf Course Lots) 60 $1,438,758 20,142,606 25,897,636 17,265,090 8,632,545 8,632,545 5,755,030 - - - - $86,325,452Eglise Ridge 101 $1,438,758 - - - 8,632,545 20,142,606 23,020,121 23,020,121 25,897,636 25,897,636 18,703,848 $145,314,512TOTAL 513
Total Land Sales Revenues $77,692,907 $78,427,817 $70,907,696 $66,265,090 $72,275,151 $72,275,151 $71,020,121 $70,897,636 $73,397,636 $39,703,848 $692,863,052# Lots Sold 54 54 54 54 54 54 54 54 54 27 513
# Lots Remaining 459 405 351 297 243 189 135 81 27 0
Net Income from Club Operations -5,500,000 -4,800,000 -3,500,000 0 1,000,000 3,000,000 3,000,000 0 0 0 (6,800,000)
Reversion from Sale of Club to Members 0 0 0 0 0 0 74,175,000 0 0 0 74,175,000
Membership Deposit Revenue 15,250,000 20,000,000 45,250,000 43,000,000 39,250,000 39,250,000 34,500,000 0 0 0 236,500,000
Total Gross Revenues $87,442,907 $93,627,817 $112,657,696 $109,265,090 $112,525,151 $114,525,151 $182,695,121 $70,897,636 $73,397,636 $39,703,848 $996,738,052
Development Costs and Expenses
Reimburse Pioneer and Frontier Members $2,500,000 $2,500,000 $4,750,000 $9,750,000Community/Club Infrastructure 14,300,000 26,059,000 26,840,770 4,261,635 787,856 72,249,261Neighborhood Infrastructure 2,500,000 4,635,000 4,243,600 3,059,636 1,969,640 16,407,876Cost of Sales/Closing Costs 8% 6,215,433 6,274,225 5,672,616 5,301,207 5,782,012 5,782,012 5,681,610 5,671,811 5,871,811 3,176,308 55,429,044Admin./Taxes/Overhead/Misc. 8,000,000 5,500,000 3,500,000 2,200,000 1,800,000 1,600,000 1,000,000 23,600,000
Total Gross Revenues $31,015,433 $44,968,225 $42,756,986 $19,572,478 $10,339,508 $7,382,012 $6,681,610 $5,671,811 $5,871,811 $3,176,308 $177,436,181
Cash Flow $56,427,475 $48,659,591 $69,900,710 $89,692,612 $102,185,643 $107,143,139 $176,013,511 $65,225,825 $67,525,825 $36,527,540 $819,301,871
TOTAL NET VALUE INDICATION $819,301,871
NET PRESENT VALUE FACTOR: 15% 1 0.869565 0.756144 0.657516 0.571753 0.497177 0.432328 0.375937 0.326902 0.284262
NET PRESENT VALUE $56,427,475 $42,312,688 $52,854,980 $58,974,348 $58,424,973 $53,269,076 $76,095,498 $24,520,804 $22,074,312 $10,383,407 $455,337,559.89
AssumptionsTotal # Lots/Units 513Total Retail value of Lots $692,863,052Total Retail Value of Club Memberships $310,675,000Expense Inflation 3%Lot/Unit Appreciation 0%
Source: August 2005 Appraisal by Cushman & WakefieldCW1432 adjusted by LECG
Prepared by LECG
Official Committee of Unsecured Creditorsv. Credit Suisse Cayman Islands Branch
EXHIBT 10AUGUST 2005 APPRAISAL
2005 PRICES AND LOT SALES
Report of John S. Hekman
Revenues Fiscal YearPrice 1 2 3 4 5 6 7 8 9 10 11
# Lots Unit/Lot 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Revenues
Improved ProductPioneer Mtn. Condos - land value 70 $1,000,000 $0 $0 $5,000,000 $7,000,000 $8,000,000 $8,000,000 $9,000,000 $11,000,000 $12,000,000 $7,000,000 $3,000,000 $70,000,000Beginner Lift Condos - land value 30 $1,000,000 - - - 6,000,000 6,000,000 6,000,000 6,000,000 6,000,000 - - - $30,000,000Big Springs Suites - land value 24 $1,000,000 - - 11,000,000 11,000,000 2,000,000 - - - - - - $24,000,000Golf Course Chalets - land value 60 $1,500,000 - - 4,500,000 4,500,000 9,000,000 9,000,000 9,000,000 9,000,000 12,000,000 21,000,000 12,000,000 $90,000,000Rainbow Pointe Chalets - land value 90 $1,500,000 - 16,500,000 9,000,000 9,000,000 12,000,000 13,500,000 15,000,000 13,500,000 18,000,000 18,000,000 10,500,000 $135,000,000
Lot SalesAndesite Ridge - South 1 $2,303,617 2,303,617 - - - - - - - - - - $2,303,617Big Sky Ridge 72 $2,303,617 69,108,511 48,375,957 27,643,404 16,125,319 4,607,234 - - - - - - $165,860,426Pine Ridge (Phase 3) 5 $2,303,617 11,518,085 - - - - - - - - - - $11,518,085Yellow mule Ridge (Golf Course Lots) 60 $2,303,617 27,643,404 36,857,872 25,339,787 11,518,085 13,821,702 13,821,702 9,214,468 - - - - $138,217,021Eglise Ridge 101 $2,303,617 - - - 6,910,851 23,036,170 29,947,021 29,947,021 36,857,872 36,857,872 34,554,255 34,554,255 $232,665,319TOTAL 513
Total Land Sales Revenues $110,573,617 $101,733,830 $82,483,191 $72,054,255 $78,465,106 $80,268,723 $78,161,489 $76,357,872 $78,857,872 $80,554,255 $60,054,255 $899,564,468# Lots Sold 48 48 48 48 48 48 48 48 48 48 33 513
# Lots Remaining 465 417 369 321 273 225 177 129 81 33 0
Net Income from Club Operations -5,500,000 -4,800,000 -3,500,000 0 1,000,000 3,000,000 3,000,000 0 0 0 0 (6,800,000)
Reversion from Sale of Club to Members 0 0 0 0 0 0 74,175,000 0 0 0 0 74,175,000
Membership Deposit Revenue 15,250,000 20,000,000 45,250,000 43,000,000 39,250,000 39,250,000 34,500,000 0 0 0 0 236,500,000
Total Gross Revenues $120,323,617 $116,933,830 $124,233,191 $115,054,255 $118,715,106 $122,518,723 $189,836,489 $76,357,872 $78,857,872 $80,554,255 $60,054,255 $1,203,439,468
Development Costs and Expenses
Reimburse Pioneer and Frontier Members $2,500,000 $2,500,000 $4,750,000 $9,750,000Community/Club Infrastructure 14,300,000 26,059,000 26,840,770 4,261,635 787,856 72,249,261Neighborhood Infrastructure 2,500,000 4,635,000 4,243,600 3,059,636 1,969,640 16,407,876Cost of Sales/Closing Costs 8% 8,845,889 8,138,706 6,598,655 5,764,340 6,277,209 6,421,498 6,252,919 6,108,630 6,308,630 6,444,340 4,804,340 71,965,157Admin./Taxes/Overhead/Misc. 8,000,000 5,500,000 3,500,000 2,200,000 1,800,000 1,600,000 1,000,000 23,600,000
Total Gross Revenues $33,645,889 $46,832,706 $43,683,025 $20,035,611 $10,834,705 $8,021,498 $7,252,919 $6,108,630 $6,308,630 $6,444,340 $4,804,340 $193,972,294
Cash Flow $86,677,728 $70,101,123 $80,550,166 $95,018,644 $107,880,402 $114,497,226 $182,583,570 $70,249,243 $72,549,243 $74,109,915 $55,249,915 $1,009,467,174
Net Present Value Factor @ 15% 1 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472Present Value of Cash Flows $86,677,728 $60,957,499 $60,907,498 $62,476,301 $61,680,970 $56,925,357 $78,935,916 $26,409,292 $23,716,476 $21,066,663 $13,656,934 $553,410,633
AssumptionsTotal # Lots/Units 513Total Retail value of Lots $899,564,468Total Retail Value of Club Memberships $310,675,000Expense Inflation 3%Lot/Unit Appreciation 0%
Source: August 2005 Appraisal by Cushman & WakefieldCW1432 adjusted by LECG
Prepared by LECG
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 1 of 25
J. THOMAS BECKETT (UTAH #5587) DAVID P. BILLINGS (UTAH #11510) PARSONS BEHLE & LATIMER Admitted Pro Hac Vice (Docket # 156) One Utah Center 201 South Main Street, Suite 1800 Salt Lake City, UT 84111 Telephone: (801) 532-1234 Facsimile: (801) 536-6111 Email: [email protected] [email protected] Counsel to the Official Committee
JAMES H. COSSITT (MONT. # 4773) JAMES H. COSSITT, PC 40 – 2nd East Suite 202 Kalispell, MT 59901-6112 Telephone: (406) 752-5616 Email: [email protected]
IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MONTANA
In re: YELLOWSTONE MOUNTAIN CLUB, LLC, et al., Debtors.
Case No. 08-61570-11-RBK Jointly Administered with 08-61571, 08-61572, and08-61573 Chapter 11
OFFICIAL COMMITTEE OF UNSECURED CREDITORS,
Plaintiff,
vs.
CREDIT SUISSE, CAYMAN ISLANDS BRANCH, and JOHN DOES 1-15,
Defendants.
COMPLAINT
(AIDING AND ABETTING BREACH OF FIDUCIARY DUTY, AVOIDANCE
OF FRAUDULENT TRANSFER, DISALLOWANCE OF CLAIMS, SUBORDINATION OF CLAIMS,
TURNOVER, AND DECLARATORY JUDGMENTS)
Adv. Pro. No.
Judge: Ralph B. Kirscher
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 1 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 2 of 25
The Official Committee of Unsecured Creditors (the “Committee”) of Yellowstone
Mountain Club, LLC (“YMC”) and its debtor affiliates, Yellowstone Development, LLC
(“YD”), Big Sky Ridge, LLC (“BSR”) and Yellowstone Club Construction Company, LLC
(collectively, the “Debtors”), by and through its undersigned counsel, herein states its causes of
action and claims for relief against Credit Suisse, Cayman Islands Branch and John Does 1-15,
as follows:
INTRODUCTION
1. In 2005, Credit Suisse was offering a new financial product for sale.
2. It was offering the owners of luxury second-home developments the opportunity
to take their profits out early by mortgaging their development projects to the hilt. Credit Suisse
would loan the money on a non-recourse basis, earn a substantial fee, and sell off most of the
credit to loan participants. The development owners would take most of the money out as a
profit dividend, leaving their developments saddled with enormous debt.
3. Credit Suisse and the development owners would benefit, while their develop-
ments – and especially the creditors of their developments – bore all the risk.
4. This new financial product enriched Credit Suisse and more than one luxury
development owner, but it left those developments too thinly capitalized to survive.
5. In August, 2005, Credit Suisse made one of these deeply-flawed loans to YMC,
YD and BSR. Those entities, which were controlled by the Blixseths, owned one of Montana’s
most spectacular ski and golf resort communities, the Yellowstone Club.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 2 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 3 of 25
6. 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.
7. The architects and proponents of this loan were Credit Suisse and Blixseth. But
the very structure of the loan created a deep conflict for the Blixseths: On the one hand, they
wanted to withdraw a profit dividend; on the other hand, they owed fiduciary duties to the
Yellowstone Club and its members, minority owners and unsecured creditors.
8. Enticed by the riches available from Credit Suisse, the Blixseths 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.
9. The Blixseths represented themselves and their own personal interests in the loan
negotiations. The Yellowstone Club was effectively unrepresented in those negotiations; it truly
did not participate in any meaningful way.
10. Credit Suisse knew the Blixseths were breaching their fiduciary duties. It
approved of and supported the Blixseths’ decision. And it assisted the Blixseths in concealing
their breaches from the beneficiaries of their duties.
* * * * *
11. In its very first sentence, Credit Suisse’s loan agreement baldly acknowledges that
the loan was a secured, non-recourse loan being made primarily “for purposes unrelated” to the
Yellowstone Club. That is, for mortgaging nearly everything it owned, the Yellowstone Club
would receive very little benefit. All it received, in fact, was the risk.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 3 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 4 of 25
12. The inevitable failure of this loan drove the Yellowstone Club into bankruptcy.
That failure inflicted substantial harm on the Club’s unwitting members and unsecured creditors.
13. This lawsuit invokes the statutory and common laws of the United States and the
States of Montana and New York and seeks:
a. A judgment of this Court that Credit Suisse knowingly aided and abetted a breach of fiduciary duties by the Blixseths. To remedy that injustice, Credit Suisse must be held to account for the damages suffered by the Blixseths’ breach, or the loan documents must be reformed to reflect the original and actual intent of the parties: that Credit Suisse made a substantial loan to the Blixseths and a much smaller loan to the Yellowstone Club.
b. In the alternative, a judgment by this Court that the loan was a fraudulent transfer that must be avoided to return those involved or effected to their original positions, with all the legal consequences that that entails.
14. This lawsuit seeks redress for the substantial damages suffered by the unwitting
unsecured creditors of the Yellowstone Club who were harmed by this loan transaction,
including hundreds of trade vendors who have not been paid for goods and services they
provided to the Yellowstone Club, and including the Club’s other owners and members whose
interests, membership deposits and real estate investments are now unnecessarily at grave risk.
PARTIES
15. The Committee is the plaintiff.
16. Pursuant to section 1102 of the United States Bankruptcy Code, 11 U.S.C. §§ 101,
et seq. (the “Bankruptcy Code”), the Committee is the statutory representative of the unsecured
creditors of the Debtors.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 4 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 5 of 25
17. The Committee is authorized to bring this action virtue of an order of this Court
dated February 27, 2009. The Committee prosecutes the claims herein, not for itself, but on
behalf of and for the benefit of the Debtors, their estates, and the creditors thereof.
18. Defendant Credit Suisse is a financial services company that purports to be a
secured creditor of YMC, YD and BSR. Credit Suisse is headquartered in Zurich, Switzerland.
19. Defendants John Does 1-15 are parties who breached duties as complained of
herein, aided and abetted in the breaches of those duties, or who hold property of the Debtors’
estates pursuant to avoidable transfers.
20. Blixseth Group, Inc. n/k/a/ BLX Group, Inc. (“BGI”) is an Oregon corporation. It
is the majority owner of YMC and YD.
21. Timothy L. Blixseth (“Blixseth”) is a resident of the State of Washington. He was
the controlling shareholder of BGI and Yellowstone Club World, LLC (“YCW”) through August
of 2008. As such, he controlled BGI, YMC, YD and YCW.
22. Edra E. Blixseth (“Ms. Blixseth”; together with Blixseth, the “Blixseths”) was
Chief Operating Officer of YMC until she resigned in late 2005 or early 2006. She resigned, in
large part, because of her concerns about the Credit Suisse loan.
23. Upon her divorce from Blixseth in August, 2008, Ms. Blixseth became the
majority owner of BGI and YCW. As such, she now controls BGI, YMC, YD and YCW. She is
a resident of the State of California.
24. Until January 2007, she was paid a six-figure salary as Chief Operating Officer of
YMC. She was reinstated to that position in August, 2008, after the divorce was finalized.
25. BGI and the Blixseths are insiders of the Debtors.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 5 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 6 of 25
26. YCW is a Washington State limited liability company. It was majority owned by
Blixseth. Since the divorce, YCW has been majority owned by Ms. Blixseth, although
Washington State records still reflect that it is majority owned by her ex-husband. YCW was
conceived by Blixseth as a world-wide corollary of the Yellowstone Club. But it never got off
the ground.
27. An involuntary petition for relief under section 303 of the Bankruptcy Code is
pending against YCW. YCW presently enjoys the protections of the automatic stay of section
362 of the Bankruptcy Code.
JURISDICTION AND VENUE
28. This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334, and
as this is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). Pursuant to Rule
7008(a) of the Federal Rules of Bankruptcy Procedure, if any claims are determined to be non-
core, Plaintiff consents to the entry of final orders by the Bankruptcy Court.
29. Venue is proper in this court pursuant to 28 U.S.C. § 1409.
30. This action is brought as an adversary proceeding in in re Yellowstone Mountain
Club, LLC, et al., chapter 11 cases, procedurally consolidated under case number 08-61570,
currently pending in the United States Bankruptcy Court for the District of Montana.
GENERAL ALLEGATIONS
A. The Yellowstone Club.
31. The Blixseths conceived of and developed the Yellowstone Club.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 6 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 7 of 25
32. The Club is a 13,500 acre exclusive membership resort comprising, among other
things, a 2,200 acre private ski resort, a championship golf course, second homes, sold lots
awaiting development, unsold platted and unplatted inventory and open space land, and the
125,000 square foot Warren Miller Lodge.
B. The Credit Suisse Loan Transaction.
33. As of September 29, 2005, the Yellowstone Club’s properties carried less than
$25 million of secured debt.
34. On September 30, 2005, Credit Suisse purported to loan $375 million to YMC,
YD and BSR in a loan transaction (the “Loan Transaction”) pursuant to which Credit Suisse
purported to obtain mortgages, liens and security interests in nearly all these entities’ properties.
35. But the Loan Transaction was not made for the benefit of the Yellowstone Club; it
was made for unrelated purposes. The credit agreement evidencing the Loan Transaction (the
“Credit Agreement”) provided that nearly all the proceeds of the loan were intended to be used
“for purposes unrelated” to the Yellowstone Club. Indeed, the first recital of the Credit
Agreement expressly provides:
WHEREAS, the Borrower desires that the Lenders extend certain senior term loans to the Borrower hereunder, the proceeds of which will be used:
(i) for distribution or loans up to $209,000,000 to [BGI] for purposes unrelated to the Yellowstone [Club],
(ii) for investments up to $142,000,000 into Unrestricted Subsidiaries for purposes unrelated to the Yellowstone [Club],
(iii) to pay the Transaction Costs,
(iv) to refinance the Existing Indebtedness, and
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 7 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 8 of 25
(v) to finance a portion of the development and construc-tion costs associated with the Yellowstone [Club] in accordance with the Financial Plan.
36. Remarkably, on the face of the Credit Agreement – in the very first recital – the
parties admitted that up to $351 million of the $375 million loan (94%) was intended “for
purposes unrelated to” the Yellowstone Club.
37. Section 2.6 of the Credit Agreement, which is substantially identical to the very
first recital of the Credit Agreement, in fact required that up to 94% of the face amount of the
loan would be used “for purposes unrelated” to the Yellowstone Club.
38. All the Credit Agreement required of the Yellowstone Club, and its unsecured
creditors and members, was that they shoulder all the risk.
39. The Loan Transaction was not intended to benefit the Yellowstone Club. The
Club was supposedly represented in the Loan Transaction negotiations by the Blixseths. But the
Blixseths were representing only their own interests in those negotiations. The Club did not
really participate in the Loan Transaction negotiations at all.
40. Consequently, as set forth in more detail below, the Loan Transaction was
intended to benefit, and it did in fact benefit, only Credit Suisse and the Blixseths.
C. Nearly all the Proceeds of the Loan Transaction were used “for Purposes Unrelated” to the Yellowstone Club.
41. As explained in some detail below, a vast majority of the Loan Transaction pro-
ceeds were used, as required by paragraphs 2.6(i) – (v) of the Credit Agreement, “for purposes
unrelated” to the Yellowstone Club.
42. As agent bank, Credit Suisse knew or should have known that a vast majority of
the Loan Transaction proceeds were used “for purposes unrelated” to the Yellowstone Club.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 8 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 9 of 25
Loan Transaction Proceeds Distributed Pursuant to Paragraph 2.6(i) of the
Credit Agreement
43. Paragraph 2.6(i) of the Credit Agreement provided that up to $209 million of the
Loan Transaction proceeds were required to be “distributed or loaned to [BGI] for purposes
unrelated” to the Yellowstone Club.
44. Pursuant to that provision, YMC immediately distributed $208,831,158.45 of the
Loan Transaction proceeds for “purposes unrelated to” the Yellowstone Club, as follows:
a. $25,000,000 certificate of deposit at First Bank in BGI’s name.
b. $11,939,495 payoff to First Bank for the Blixseth’s primary residence at Porcupine Creek in Rancho Mirage, California.
c. $17,000,000 certificate of deposit at Palm National Bank in the Blixseths’ name.
d. $14,016,227.87 deposit into a money-market account at Palm Desert National Bank in Blixseth’s name.
e. $4,133,623.50 payoff to Palm Desert National Bank for the following debts:
(1) $3,169,118.75 for charges related to “Desert Ranch,” Blixseth’s personal housing development near Palm Springs, California.
(2) $79,629.54 payoff of “Edra’s Condo,” a condo owned by Ms. Blixseth in Palm Desert, California.
(3) $402,546.02 payoff of the Blixseths’ personal line of credit.
(4) $482,329.19 payoff of Ms. Blixseth’s personal line of credit.
f. $15,000,000 certificate of deposit at Jackson State Bank in Blixseth’s name.
g. $3,068,749.99 payoff to American Bank for unknown purposes.
h. $975,908.57 payoff to American Bank for unknown purposes.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 9 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 10 of 25
i. $1,515,250 payoff to American Bank for unknown purposes.
j. $896,423.28 payoff to American Bank for unknown purposes.
k. $977,894.92 payoff to American Bank for unknown purposes.
l. $100,000,000 certificate of deposit at U.S. Bank in the Blixseths’ name, from which $28,000,000 was used to purchase a private island in Turks and Caicos.
m. $5,000,000 certificate of deposit at Pacific Western Bank in the Blixseths’ name.
n. $2,971,443.02 payoff of a personal note to Pacific Western Bank.
o. $160,765.83 payoff to Union Bank for a rental home owned by Blixseth.
p. $175,376.23 payoff to Union Bank for a rental home owned by Blixseth.
q. $2,007,930.55 payoff to Commercial Bank for unrelated purposes.
r. $1,403,547 payoff to GECC for an airplane owned by a Blixseth owned company in which neither Yellowstone Mountain Club nor Yellowstone Development have an interest.
s. $2,484,774 payoff to GECC for an airplane owned by a Blixseth owned company in which neither Yellowstone Mountain Club nor Yellowstone Development have an interest.
t. $272,590 payoff to World Savings for a rental home owned by the Blixseths.
45. In respect of the funds disbursed pursuant to paragraph 2.6(i) of the Credit Agree-
ment, and although it received little benefit therefrom, BGI executed an unsecured demand note
(dated as of September 30, 2005, but prepared months thereafter) (the “First BGI Note”) in favor
of YMC in the amount of $208,831,158.45.
46. It has been alleged that BGI has made up to $90 million of interest and principal
reduction payments to YMC in respect of the First BGI Note. The Committee has not at this
time been able to verify whether these amounts were in fact paid or credited.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 10 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 11 of 25
47. The First BGI Note was hardly consideration to YMC for the benefits conferred
on the Blixseths for the funds they received from the Loan Transaction proceeds.
48. BGI ultimately received little if any benefit from the $208,831,158.45 of funds
disbursed by YMC.
49. In addition, the First BGI Note was made payable on demand by YMC (controlled
at that time by Blixseth) from BGI (also controlled at that time by Blixseth). Obviously, it was
unlikely that Blixseth’s YMC would ever make a demand on Blixseth’s BGI.
50. The First BGI Note was never intended by any of the parties to be collectable or
collected.
51. The First BGI Note’s real value may be inconsequential in comparison to its face
value because BGI is insolvent.
52. The Blixseths breached their fiduciary duties to the Yellowstone Club when they
allowed Credit Suisse to place $208,831,158.45 of liens on Club properties, for expenditures
made pursuant to paragraph 2.6(i) of the Credit Agreement.
53. The Debtors received less than reasonably equivalent value – in fact no value
whatsoever – for the $208,831,158.45 of liens placed upon their properties pursuant to paragraph
2.6(i) of the Credit Agreement.
Loan Transaction Proceeds Distributed Pursuant to Paragraph 2.6(ii) of the
Credit Agreement
54. Paragraph 2.6(ii) of the Credit Agreement provided that up to $142 million of the
Loan Transaction proceeds would be invested by others, “for purposes unrelated” to the
Yellowstone Club.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 11 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 12 of 25
55. Pursuant to paragraph 2.6(ii) of the Credit Agreement, $133,110,262.53 of Loan
Agreement proceeds were disbursed to YD as follows:
a. $100 million was placed in a six-month certificate of deposit at U.S. Bank in YD’s name;
b. $30 million was placed in a six-month certificate of deposit at American Bank in YD’s name; and
c. $3,110,262.53 remained in YD’s checking account, although at least $225,000 of those funds were used for marketing YCW.
56. $80 million of the $130 million that was placed in the two certificates of deposit
referred to above was further disbursed as follows:
a. $28 million was used to purchase Chateau de Farcheville located in France;
b. $40 million was used to purchase a resort known as Tamarindo located in Mexico;
c. $12 million was used to purchase and improve a golf property located in St. Andrews, Scotland.
57. Pursuant to the Credit Suisse loan agreement, these properties were purchased
“for purposes unrelated” to the Yellowstone Club. And only the Farcheville and St. Andrews
properties are currently owned indirectly by YD. YD sold Tamarindo to Ms. Blixseth in August,
2008, for a $40 million unsecured note, $31.2 million of which remains outstanding. She
thereafter transferred it to Blixseth for unknown consideration.
58. The Committee has not yet traced the $50 million balance from the certificates of
deposit referred to above, but, on information and belief, it alleges that the Yellowstone Club
received less than reasonably equivalent value for the $50 million of liens placed on Club
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 12 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 13 of 25
properties, in respect of such expenditures, pursuant to paragraph 2.6(ii) of the Credit Agree-
ment.
59. The Blixseths breached their fiduciary duties to the Yellowstone Club when they
allowed Credit Suisse to place $133,110,262.53 of liens on Club properties pursuant to paragraph
2.6(ii) of the Credit Agreement.
60. The Debtors received less than reasonably equivalent value for the
$133,110,262.53 of liens placed upon its properties pursuant to paragraph 2.6(ii) of the Credit
Agreement.
Loan Transaction Proceeds Distributed Pursuant to Paragraph 2.6(iii) of the
Credit Agreement
61. Paragraph 2.6(iii) of Credit Agreement provided that Loan Transaction proceeds
would be spent for “transaction costs.”
62. Approximately $7.4 million of the Loan Transaction proceeds were paid in fees to
Credit Suisse. An additional $1.2 million were paid to other parties in fees.
63. The Blixseths breached their fiduciary duties to the Yellowstone Club when they
allowed Credit Suisse to place $8.6 million of liens on Club properties for expenditures made
pursuant to paragraph 2.6(iii) of the Credit Agreement.
64. The Debtors received less than reasonably equivalent value for the $8.6 million of
liens placed upon their properties pursuant to paragraph 2.6(iii) of the Credit Agreement.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 13 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 14 of 25
Loan Transaction Proceeds Distributed Pursuant to Paragraph 2.6(iv) of the
Credit Agreement
65. Paragraph 2.6(iv) of the Credit Agreement provided that Loan Transaction pro-
ceeds would be spent “to refinance the Existing Indebtedness.”
66. At most, $24.2 million of Loan Transaction proceeds were used to refinance exist-
ing secured indebtedness owed by YMC, YD and/or BSR.
67. The Debtors received no incremental benefit from the refinancing of the Existing
Indebtedness. In fact, the refinancing inured principally to the benefit of Credit Suisse inasmuch
as it provided Credit Suisse with a first mortgage, remedy-controlling, position on the Debtors’
assets.
Loan Transaction Proceeds Distributed Pursuant to Paragraph 2.6(v) of the
Credit Agreement
68. Paragraph 2.6(v) of the Credit Agreement provided that Loan Transaction pro-
ceeds would be spent “to finance a portion of the development and construction costs associated
with the Yellowstone [Club] in accordance with the Financial Plan.”
69. Only $258,579.10 of Loan Transaction proceeds remained, after the expenditures
referenced above, but not including those unaccounted for, to finance development and construc-
tion costs associated with the Yellowstone Club.
D. The Debtors did Not Receive Reasonably Equivalent Value in Consideration for the $375 million of Liens Placed on their Properties.
70. With respect to paragraph 2.6(i) of the Credit Agreement, the Debtors received no
value for the $208,831,158.45 of liens placed on Club properties in connection with the Loan
Transaction.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 14 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 15 of 25
71. With respect to paragraph 2.6(ii) of the Credit Agreement, the Debtors received
less than reasonably equivalent value for the $133,110,262.53 of liens placed on Club properties
in connection with the Loan Transaction.
72. With respect to paragraph 2.6(iii) of the Credit Agreement, the Debtors received
less than reasonably equivalent value for the $8,600,000 of liens placed on Club properties in
connection with the Loan Transaction.
73. Even assuming that the Debtors did receive reasonably equivalent value with
respect to the $24.2 million and $258,579.10 disbursed pursuant to paragraphs 2.6(iv) and 2.6(v)
of the Credit Agreement, it presently appears the Debtors only received between $67,343,841.53
(the value of the refinance, plus the purchase prices of St. Andrews and Farcheville, plus the
amount remaining for operations, plus the amount remaining in YD’s bank account) (17.9%) and
$166,168,841.55 (all disbursements excepting the $208,831,158.45 disbursed to the Blixseths)
(44.3%) of value in consideration for the $375 million of liens placed on the Club’s properties in
connection with the Loan Transaction.
74. In either event, the Debtors received far less than reasonably equivalent value –
between 17.9% and 44.3% – in consideration for the $375 million of liens placed on the Club’s
properties by Credit Suisse in connection with the Loan Transaction.
E. Payments Made by the Debtors to Credit Suisse Pursuant to the Loan Transaction.
75. Pursuant to the Credit Agreement, the Debtors have paid Credit Suisse approxi-
mately $139 million since August, 2005. Approximately $68 million of that has reduced the
principal amount outstanding under the Credit Agreement. Approximately $71 million of that
has been paid as interest on the entire outstanding loan balance.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 15 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 16 of 25
F. The Yellowstone Club’s Inevitable Bankruptcy.
76. By November, 2008, the Debtors were unable to make the interest payments
required by the Credit Agreement.
77. But for numerous “bail-out” land purchases made by interested parties prior to
that time, the Debtors may have been unable to meet their interest expense obligations long
before.
78. As a consequence of the Loan Transaction, the Debtors were rendered insolvent
and required to seek Bankruptcy protection.
G. Additional Promissory Notes Constituting Indebtedness of BGI to the Debtors.
79. BGI executed another unsecured demand note (dated as of September 30, 2005,
but prepared months thereafter) in favor of YD in the amount of $55,798,796.68 (the “Second
BGI Note”).
80. BGI executed a third unsecured demand note (dated as of September 30, 2005,
but prepared months thereafter) in favor of YMC in the amount of $7,800,000 (the “Third BGI
Note”).
81. Demand has properly been made in respect of the Second and Third BGI Notes.
82. Neither the Second nor the Third BGI Notes pertain to any obligation to repay
funds disbursed pursuant to the Loan Transaction.
H. Damages Suffered by the Debtors’ Creditors.
83. Presently, the Debtors’ unsecured creditors hold an estimated $25 to $50 million
of extant claims against the Debtors and the defendants herein for unpaid-for goods and services
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 16 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 17 of 25
and other legal obligations. Those claims are directly attributable to the failure of the Loan
Transaction.
84. If their Club membership agreements are not assumed pursuant to section 365 of
the Bankruptcy Code, the Yellowstone Club’s members will hold an additional $80 million of
claims against the Debtors and the defendants herein on account of their Club membership
deposits. Those contingent claims, if they matured, would also be directly attributable to the
failure of the Loan Transaction.
85. If the Yellowstone Club amenities cease to be provided, the Yellowstone Club’s
members’ individual claims against the Debtors and the defendants will be titanic.
86. Ultimately, the quantum of the claims of the unsecured creditors of the Yellow-
stone Club – claims that are attributable to the failure of the Loan Transaction – will not be
known until the Debtors either successfully reorganize under chapter 11 of the Bankruptcy Code
or fail.
87. Those claims will be minimized when the Yellowstone Club’s members’
membership agreements are assumed, and when Club amenities are guaranteed, in a successful
reorganization.
88. But those claims will metastasize if the reorganization effort fails.
FIRST CAUSE OF ACTION
(Against Credit Suisse)
Aiding and Abetting the Blixseths’ Breaches of Fiduciary Duty
89. The Committee incorporates by reference all the prior allegations of this
Complaint.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 17 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 18 of 25
90. As the owners of YMC, YD and BSR, the Blixseths owed fiduciary duties to
YMC, YD BSR, the minority owners of those entities, and the Club and its members, to protect
their interests in connection with the Loan Transaction.
91. The Blixseths breached those duties in connection with the Loan Transaction by
abandoning the Yellowstone Club and allowing it to be effectively unrepresented in the
negotiations leading up to the Loan Transaction, and by allowing it to participate in that
transaction, which benefited only the Blixseths and Credit Suisse.
92. Credit Suisse induced the Blixseths to breach their fiduciary duties.
93. Credit Suisse knowingly participated in the Blixseth’s breach of fiduciary duty by
encouraging and affirmatively assisting the Blixseth’s breach of that duty.
94. Credit Suisse helped the Blixseths conceal their breach of fiduciary duty from
YMC, YD, BSR, the minority owners of those entities and the Club’s members and other
unsecured creditors.
95. The Credit Agreement should and must be reformed to reflect the actual intent of
the parties and actual consequences of the Loan Transaction. To wit,
a. Credit Suisse made a loan of between $67,343,841.53 and $166,168,841.55 to YMC, YD and BSR; and
b. Credit Suisse made a loan of between $208,831,158.55 and $307,656,158.53 to the Blixseths, and that loan is secured by the First BGI Note, which Credit Suisse and/or its loan participants may seek recovery on.
96. The Debtors have made $68 million of principal payments pursuant to the Loan
Transaction.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 18 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 19 of 25
97. Upon such reformation, therefore, the Court should and must find that Credit
Suisse’s loan to YMC, YD and BSR has been substantially repaid or repaid in its entirety.
98. If the Loan Transaction is not reformed as described above, then Credit Suisse
must be held to account for the full measure of damages, including interest, suffered by those
who should have been the beneficiaries of the Blixseth’s fiduciary duties.
SECOND CAUSE OF ACTION
(Against Credit Suisse)
Turnover of Excess Interest Payments Made
99. The Committee incorporates by reference all the prior allegations of this
Complaint.
100. If the Loan Transaction is reformed as described above, then YMC, YD and BSR
have substantially overpaid Credit Suisse’s interest charges pursuant to the Loan Transaction.
101. In that case, the Committee is entitled to a judgment compelling Credit Suisse,
under section 541 of the Bankruptcy Code, to turn over to the Debtors’ estates the amount of the
Debtors’ overpayment of interest, approximately $39 and $59 million.
THIRD CAUSE OF ACTION
(Against all Defendants)
Avoidance of Loan Transaction Pursuant to Montana Uniform Fraudulent Transfer Act
102. The Committee incorporates by reference all the prior allegations of this
Complaint.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 19 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 20 of 25
103. YC, YD and BSR did not receive reasonable equivalent value in exchange for the
mortgages, liens and security interests given to Credit Suisse in connection with the Loan
Transaction.
104. Those Debtors were engaged in a real estate venture for which their remaining
assets, after the Loan Transaction, were unreasonably small.
105. In connection with the Loan Transaction, those Debtors knew or should have
known they were incurring a debt they would not be able to repay.
106. In connection with the Loan Transaction, each of the defendants knew or should
have known that those Debtors were incurring a debt they would not be able to repay.
107. Pursuant to section 544(b) of the Bankruptcy Code, the Loan Transaction was a
constructively fraudulent transfer under Mont. Code. Ann. 31-2-333(1)(b). As such, it can be
avoided pursuant to section 550 of the Bankruptcy Code and Mont. Code. Ann. 31-2-339(a).
108. Upon such avoidance, Credit Suisse must release the mortgages, liens and
security interests it obtained from the Debtors in connection with the Loan Transaction.
109. Upon such avoidance, Credit Suisse must turn over to the Debtors the $139
million paid to it by the Debtors for interest expenses and principal reductions, as well as the
$7.4 million paid by the Debtors for Credit Suisse’s fee.
FOURTH CAUSE OF ACTION
(Against all Defendants)
Declaratory Judgment that the Yellowstone Club Received Less Than Reasonably Equivalent Value in
Connection with the Loan Transaction
110. The Committee incorporates by reference all the prior allegations of this
Complaint.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 20 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 21 of 25
111. The Committee is entitled to a declaratory judgment that the Debtors did not
receive reasonably equivalent value in connection with the Loan Transaction.
FIFTH CAUSE OF ACTION
(Against Credit Suisse)
Declaratory Judgment that Credit Suisse’s Bankruptcy Claim Should be Disallowed Pending its Release of all Mortgages and its Return of all
Cash Received in Connection with the Loan Transaction
112. The Committee incorporates by reference all the prior allegations of this
Complaint.
113. The Committee is entitled to a declaratory judgment that, pursuant to section
502(d) of the Bankruptcy Code, any and all claims that are made in these Bankruptcy cases by
Credit Suisse in connection with the Loan Transaction must be disallowed until Credit Suisse
releases the mortgages, liens and security interests it obtained on the Debtors’ property and
returns the approximately $146.4 million it has been paid in connection with the Loan Transac-
tion.
114. The Committee is entitled to a declaratory judgment that Credit Suisse’s
bankruptcy claim should be disallowed pending its release of all mortages, liens and security
interests, and its return of all cash it received in connection with the Loan Transaction.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 21 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 22 of 25
SIXTH CAUSE OF ACTION
(Against Credit Suisse)
Declaratory Judgment that Credit Suisse’s Claims are to be Equitably Subordinated to the Claims of
Debtors’ General Unsecured Creditors
115. The Committee incorporates by reference all the prior allegations of this
Complaint.
116. Credit Suisse was a knowing and willing participant in (i) the Blixseths’ breaches
of fiduciary duty, and/or (ii) the Loan Transaction that was a fraudulent transfer.
117. In either event, Credit Suisse cannot equitably participate in the recoveries sought
herein for the damages caused by their participation until the Debtors’ unsecured creditors, who
suffered from that participation, are recompensed in full.
118. Consequently, the Committee is entitled to a declaratory judgment that Credit
Suisse’s bankruptcy claim, if and when allowed under subsections 502(a) and 502(d) of the
Bankruptcy Code, must be equitably subordinated to the claims of general unsecured creditors
pursuant to subsection 510(c) of the Bankruptcy Code.
SEVENTH CAUSE OF ACTION
(Against Credit Suisse)
Declaratory Judgment that the Credit Suisse Liens are in Bona Fide Dispute
119. The Committee incorporates by reference all the prior allegations of this
Complaint.
120. The Committee is entitled to a declaratory judgment that, by virtue of this lawsuit,
the purported interest of Credit Suisse in the Debtors’ properties is in bona fide dispute.
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 22 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 23 of 25
121. Consequently, until the Committee’s contentions herein are resolved, such proper-
ties may be sold free and clear of Credit Suisse’s purported mortgages, liens and security
interests pursuant to section 363(f)(4) of the Bankruptcy Code, and Credit Suisse may not be
allowed to credit bid at any such sale.
122. Furthermore, Credit Suisse, and the loan participants for whom it acts as agent,
may be disallowed from making any election under section 1111(b) of the Bankruptcy Code or
credit bidding at any sale conducted pursuant to sections 363 or 1123 of the Bankruptcy Code.
EIGHTH CAUSE OF ACTION
(Against all Defendants)
Attorneys Fees
123. The Committee incorporates by reference all the prior allegations of this
Complaint.
124. To the extent allowed by any of the applicable contracts, or otherwise by law, the
Committee is entitled to recover its attorneys fees from the defendants.
PRAYER FOR RELIEF
WHEREFORE, the Committee prays for the following judgments against Credit Suisse
and John Does 1-15:
1. That Credit Suisse aided and abetted the Blixseths in a breach of their fiduciary duties and must account for the damages suffered thereby;
2. That the Loan Transaction be reformed to reflect the parties’ actual origi-nal intent: that Credit Suisse made (i) a relatively small loan to the Debtors that has been paid down substantially or paid off in full, and (ii) a substantially larger loan to BGI and/or the Blixseths, secured by the First BGI Note, or else Credit Suisse must be held to account for the damages suffered;
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 23 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 24 of 25
3. That, if the Loan Transaction is so reformed, Credit Suisse must turn over to the Debtors’ estates the amount that the Debtors have overpaid in interest charges, plus interest;
4. That the Court declare that the Debtors did not receive reasonably equiva-lent value in connection with the Loan Transaction;
5. That the Loan Transaction be annulled, terminated, avoided and unwound, as having been a fraudulent transfer;
6. That Credit Suisse be required to release all its mortgages, liens and secu-rity interests in the Debtors’ properties to the extent obtained in connection with the Loan Transaction;
7. That Credit Suisse be required to turn over to the Debtors the $146.4 million it received from the Debtors in connection with the Loan Transaction;
8. That the Court declare that Credit Suisse’s bankruptcy claims shall be disallowed pending its release of such mortgages and security interests, and its return of approximately $146.4 million in cash to the Debtors;
9. That the Court declare that Credit Suisse’s bankruptcy claims, if and when allowed, shall be equitably subordinated to the claims of the Debtors’ general unsecured creditors;
10. That the Court declare that, by virtue of this lawsuit, Credit Suisse’s purported claims against and interests in the Debtors’ properties are in bona fide dispute;
11. For interest, costs, and attorneys’ fees; and
12. For such other and further relief as the Court deems just or as warranted by Rule 7054(c) of the Federal Rules of Bankruptcy Procedure.
DATED this 3rd day of March, 2009.
PARSONS BEHLE & LATIMER __/s/ J. Thomas Beckett ________ J. Thomas Beckett David P. Billings 201 S. Main Street, Suite 1800 Salt Lake City, Utah 84111
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 24 of 25
In re YMC, LLC Chapter 11 # 08-61570 Official Committee v. Credit Suisse, AP 09-___ Complaint Page 25 of 25
JAMES H. COSSITT, PC __/s/ James H. Cossitt _________ James H. Cossitt
40 – 2nd East Suite 202 Kalispell, MT 59901-6112 Attorneys for the Official Committee Plaintiff’s Address: Official Committee of Unsecured Creditors c/o J. Thomas Beckett Parsons Behle & Latimer 201 South Main St. Suite 1800 Salt Lake City Utah 84111 L:\Clients\YMC\FT Lawsuit\09 03 03 Final from Beckett.doc
09-00017-RBK Doc#: 1 Filed: 03/03/09 Entered: 03/03/09 14:35:36 Page 25 of 25