HELENA – A federal bankruptcy judge ruled Tuesday that a $375 million loan Credit Suisse made to a resort for the ultrarich was predatory and should be subordinated to other debts.
Judge Ralph Kirscher wrote in a partial and interim order that the Swiss bank “lined its pockets” on the backs of the Yellowstone Club’s creditors and that it devised a scheme to encourage developers of high-end residential resorts to borrow large sums without regard for their ability to repay.
Kirscher said Credit Suisse’s actions “were so far overreaching and self-serving that they shocked the conscience of the court.”
Under the order, Credit Suisse’s lien for $232 million in repayment on the 2005 loan will be subordinated to the claims of other creditors. Kirscher did not say when he would issue a final decision.
The bank did not immediately respond to messages seeking comment. But a Credit Suisse official testified last week that the loan was legitimate and there was no way the club’s financial demise could have been foreseen, especially considering it was valued at about $470 million even into 2008.
The mountain resort in southwestern Montana filed for Chapter 11 bankruptcy protection in November, a few months after Edra Blixseth took over its control from her former husband, Tim Blixseth.
Kirscher also found that the international firm authorized Tim Blixseth to use $209 million of the loan for “purposes unrelated” to the club.
Most of the $209 million was moved into Tim Blixseth’s personal accounts and $27 million of it was used to pay off existing debts on luxury jets and estates, including Porcupine Creek, a huge estate near Palm Springs, Calif., with a 30,000-square-foot house and a private championship golf course.
Another $80 million from the loan total went toward real estate purchases including private estates in Scotland, France and Mexico, according to an accountant who testified on behalf of the club during the trial.
Once attorneys involved in the loan were paid and Credit Suisse took its $7.4 million cut, just $38 million was left over for the club.
“The only plausible explanation for Credit Suisse’s actions is that it was simply driven by the fees it was extracting from the loans it was selling, and letting the chips fall where they may,” Kirscher wrote.
According to the ruling, Credit Suisse made similar loans to at least five other havens for the wealthy that have since failed or declared bankruptcy, including Tamarack Resort in Idaho.
With its gated entrance, private ski mountain and multi-million-dollar real estate, the Yellowstone Club once sat at the pinnacle of American wealth, with an elite membership roster including Dan Quayle and Bill Gates. But crashing real estate sales, mounting debts and the Blixseths’ messy divorce have left the 13,600 acre resort in financial tatters.
The partial ruling leaves a number of issues unsettled, including whether Credit Suisse could now turn to Tim Blixseth for repayment of the debt. Tim Blixseth did not immediately respond to requests for comment. Edra Blixseth’s spokesman, Bill Keegan, said the club needed more time to review the ruling.
The club, which has debts of more than $400 million, is scheduled to be sold at auction Wednesday in Billings. James Patten, a lawyer for the club, said Monday that there were only two bids — one from the Boston-based investment firm Crossharbor Capital Partners for $100 million and the other from Credit Suisse.
Under the ruling, the firm may still make a “credit bid” for the $232 million it is owed, but it will have to provide funds to pay off the other debts that the judge has said will take precedence.
That includes at least $23 million owed to Crossharbor and some of the lawyers’ fees in the bankruptcy trial. It also includes millions of dollars owed to a group of more than 300 creditors.
“I’m especially happy because the moms and pops and the small businesses are going to be paid,” said Thomas Beckett, a lawyer for the creditors.