Foley & Lardner on the Yellowstone Club Case: New Concerns Are Raised Regarding Subordination of Secured Creditors Claims

Foley & Lardner on the Yellowstone Club Case: New Concerns Are Raised Regarding Subordination of Secured Creditors Claims


In May 2009, the United States Bankruptcy Court, Montana District, issued an interim order causing serious concern to secured creditors counting on the priority of their claim against a debtor’s bankruptcy estate. In this commentary, Cherie Raidy and Archana Acharya of Foley & Lardner LLP discuss the decision in In re Yellowstone Mt. Club, LLC, 2009 Bankr. LEXIS 1158 (Bankr. D. Mont. May 12, 2009) and examine the potential impact upon creditors. They write:
 
     Timothy Blixseth and his wife formed Yellowstone Mountain Club, LLC (the Debtor), and retained most of the control over the company. Blixseth was approached by a director in Credit Suisse's Investment Banking Division about a new syndicated term loan that allowed Credit Suisse to offer a sizable loan that allowed equity holders to extract distributions for purposes unrelated to the development. Rather than review the Yellowstone Club's audited financial statements prior to issuing the loan, Credit Suisse's financial due diligence consisted of Blixseth's historical and future projections for the development and a non-FIRREA compliant methodology developed by Credit Suisse for its syndicated loan products.
 
     Despite the Club's then-current $20 million debt, Credit Suisse granted the $375 million loan, and in return, received a transaction fee of two percent ($7.5 million). The Loan Agreement authorized a total of $351 million to be used for personal accounts and investments unrelated to the Yellowstone Club. The day the loan was finalized, Blixseth extracted $209 million from Yellowstone Club's account and issued a promissory note to the Club for the same amount. Blixseth never made a demand on the promissory note, even when the Yellowstone Club, persistently behind in its accounts payable, needed the funds.
 
     When the Yellowstone Club filed for bankruptcy, Credit Suisse filed for a $232 million claim. Rather than grant the lender's claim, or even a portion of it, the Court held that the appropriate remedy for Credit Suisse's "overreaching and predatory lending practices in this instance" was equitable subordination of its secured creditor status to that of an unsecured creditor.
 

Subscribers can access the complete commentary on lexis.com. Additional fees may be incurred. (approx. 3 pages)