REPORT FROM THE U.S.—A judge’s opinion on a bankruptcy case in Montana could have far-reaching implications for other lenders and borrowers in the hotel industry.
In a document filed 13 May 2009 in the U.S. Bankruptcy Court in Butte, Montana, Judge Ralph B. Kirscher ruled that owners of the Yellowstone Mountain Club LLC in Big Sky, Montana, were indeed loaned money in 2005 by Credit Suisse in an egregious manner in an effort to increase Credit Suisse’s fees received through syndication. In addition, Kirscher ruled that Credit Suisse’s due diligence on the US$375 million loan was “almost all but nonexistent.”
View Kirscher's court order as a PDF.
This decision is a blow to an already ailing hotel real estate lending community, said Thomas Morone, principal of Warnick + Co. “It doesn’t need that kind of pain right now.
“The issue is that now there’s a precedent,” he said. “You have to step into that hole as a borrower or as a borrower’s lender. You don’t want to let this opportunity pass.”
“This is a huge decision,” said David Neff, co-chair of the Hotel & Leisure Group at Perkins Coie LLP in Chicago. “What the judge held up in
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David Neff |
the opinion is, ‘Not so fast—the way you obtained your claim to the debt is inequitable and harmed other creditors.’” The only explanation for Credit Suisse’s actions is that it was driven to extract fees from the loans it was selling, and “letting the chips fall where they may,” Kirscher said in his judgment. “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.”
Kirscher determined the lender’s claim to US$232 million of the loan was equitably subordinated. In other words, the unsecured creditors and fees associated with the debtors’ bankruptcy claim will be repaid with the auction proceeds of Yellowstone Club before Credit Suisse gets a dime. As the holder of the first mortgage on the property, Credit Suisse should have been first in line to reclaim funds.
In fact, CrossHarbor Capital Partners of Boston yesterday won the resort auction with a bid of US$115 million, of which the creditors received US$30 million and Credit Suisse received an US$80-million promissory note, according to published reports.
“The judge is all but suggesting to the creditors of other resorts in bankruptcy that they should bring action against Credit Suisse,” Neff said.
Credit Suisse’s public relations department did not respond to an interview request from HotelNewsNow.com.
Other projects that have syndicated loans from the same program from Credit Suisse’s Cayman Islands branch that are now facing bankruptcy or default are Tamarack (Idaho) Resort; Promontory in Park City, Utah; Lake Las Vegas in Henderson, Nevada; Turtle Bay Resort in Oahu, Hawaii; and Ginn Resorts in Burke, Vermont, and Grand Bahama Island. In his decision, Kirscher said if these developments are anything like the Yellowstone case, “they were doomed to failure once they received their loans from Credit Suisse.”
Attempts by HotelNewsNow.com to contact the owners of these properties were unsuccessful.
The credit agreements with these other resort projects were 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 development, according to Kirscher’s opinion.
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Thomas Morone |
“It’s just going to open up the door,” Morone said. “We’ve heard before that if you bought or built and opened a hotel in the last five years your equity is gone. Those owners in default on their loans will think, ‘Why not go back and try to get a break on mine?’ It’s not good for Credit Suisse.” “Other borrowers are going to make this claim against other lenders, if for no other reason than to gain leverage,” Neff said.
Total net value methodology
The decision from Montana also called into question the total net value appraisal methodology developed by Credit Suisse in conjunction with Cushman & Wakefield. It was first created when Credit Suisse was selling the syndicated loan product to Lake Las Vegas, according to the judge’s opinion.
Kirscher pointed out that, in the case of Yellowstone Club, the loan-to-value ratio should have been in the neighborhood of 90 percent, and the likelihood of syndicating the loan would have been small. Instead Credit Suisse commissioned Cushman & Wakefield to use its new valuation methodology, which relied almost exclusively on the debtors’ future financial projections, “even though such projections bore no relation to the debtors’ historical or present reality.”
The take away
The bottom line is that many other borrowers and their creditors will be looking at this decision, Neff said.
“This argument has been raised many times before, but has rarely been successful,” he said. “The facts of this case were particularly egregious, but that doesn’t mean creditors won’t try to use it to try and gain some leverage with lenders in dealing with workouts and bankruptcies. There are plenty of properties underwater—loans made in 2007 and 2008 were made with minimal equity.”