In an unusual ruling recently entered in the Chapter 11 case of Yellowstone Mountain Club, LLC and certain of its subsidiaries, the United States Bankruptcy Court for the District of Montana equitably subordinated the claim of a non-insider senior secured lender. While the equitable subordination of a claim is rare, the Yellowstone decision may signal that courts will be looking at loan transactions with a highly critical eye.

The Court explained why it determined that the senior secured claim of Credit Suisse should be equitably subordinated to the claims of substantially all creditors, including those holding general unsecured claims.


Timothy Blixseth and his wife Edra began developing the Yellowstone Club, an ultra-exclusive private ski resort and golf club located in Montana, in 1999. Timothy Blixseth, through a holding company, Blixseth Group, Inc., was the sole shareholder of Class A shares of the Yellowstone Club and thus controlled its affairs.

According to the Court’s decision, Credit Suisse first approached the Blixseths in December 2004 to discuss a new loan product being offered by Credit Suisse. At the time, the Debtors had approximately $19 to $20 million in debt on its books. Ultimately, on September 30, 2005, Credit Suisse and the Debtors entered into a credit agreement, pursuant to which Credit Suisse agreed to loan up to $375 million to the Debtors. According to the Court, Credit Suisse syndicated the loan to "non bank institutions." The non-recourse loan was secured by a lien on the Debtors’ assets. Pursuant to the terms of the credit agreement, up to $209 million of proceeds of the loan could be used for “distributions or loans” to affiliates of the Debtors for “purposes unrelated” to the Yellowstone Club, and up to $142 million of loan proceeds could be used for investments in “unrestricted subsidiaries” of Yellowstone Club for “purposes unrelated” to the development of the Yellowstone Club. On the very same day that Credit Suisse wired the proceeds of the $375 million loan to the Debtors, the Debtors wired $209 million to BGI, the holding company controlled by Blixseth. In connection with the loan to the Debtors, Credit Suisse received a fee equal to 2% of the aggregate loan amount. (Incidentally, the Court’s decision reveals that the amount of the fee, which had been the subject of negotiation between the Blixseth and Credit Suisse, was decided by a coin toss won by Blixseth; the fee would have been 3% if Credit Suisse had won).

According to the Court’s decision, after September 2005, the Debtors were “persistently behind” with respect to their accounts payable. Faced with liquidity shortfalls, the Debtors filed for protection under Chapter 11 in November 2008.

Equitable Subordination  

Equitable subordination is a severe remedy. Citing Ninth Circuit precedent, the Court noted that equitable subordination of a claim usually requires that a Court make three findings:

  1. the claimant engaged in inequitable conduct;
  2. such misconduct resulted in harm to creditors or conferred an unfair advantage upon the claimant; and
  3. subordination of such claim would not be inconsistent with the Bankruptcy Code.

In the case of a non-insider claimant such as Credit Suisse, equitable subordination is quite rare, and, as noted by the Court, requires demonstration of “gross and egregious” conduct on the part of the non-insider.

In determining that equitable subordination was the appropriate remedy, the Court noted that “Credit Suisse’s actions in the case were so far overreaching and self-serving that they shocked the conscience of the Court.” The Court found that Credit Suisse’s new “loan scheme” – whereby it sold unnecessary loans to high-end developments, allowing their owners to take out large amounts of capital and earning Credit Suisse a hefty fee – amounted to putting the “fox in charge of the henhouse” and “was clearly self-serving for Credit Suisse.” The Court noted that several other luxury developments to which Credit Suisse has made similar loans in recent years have failed financially.

The Court was especially troubled by the relative lack of due diligence conducted by Credit Suisse in connection with its loan to the Debtors, noting that Credit Suisse did not even receive audited financial statements from the Debtors, but instead relied upon the Debtors’ own projections, which the Court found “had no foundation in historical reality.” The Court, citing “naked greed” on the part of Credit Suisse, found that the “only plausible explanation” for Credit Suisse’s actions in this case was that “it was simply driven by the fees it was extracting.”

The Court concluded by finding that the only equitable remedy for Credit Suisse’s conduct was to subordinate Credit Suisse’s claim to the superpriority claim of CrossHarbor Capital on account of the debtor-in-possession financing it provided and to the claims of the Debtor’s general unsecured creditors.

In its decision, the Court announced that Credit Suisse would be allowed to submit a credit bid for the Debtor’s assets in the amount of its allowed secured claim, $232 million, but as part of any bid, would have to provide sufficient funds to satisfy the Debtors’ obligations to CrossHarbor in connection with debtor-in-possession financing, the Debtors’ administrative expenses and non-insider general unsecured claims. Following an auction and related disputes, the Debtors, CrossHarbor, Credit Suisse and other parties-in-interest reached a settlement that provides that CrossHarbor will purchase the Debtors’ assets in exchange for $115 million, $80 million of which would be in the form of a promissory note payable to Credit Suisse. The settlement agreement is contingent upon the Court vacating the order equitably subordinating Credit Suisse’s claim. Following a hearing on June 1, 2009, the Court approved Yellowstone’s plan of reorganization, which incorporates the terms of the settlement agreement.


Equitable subordination of a claim, particularly when the claimant is a non-insider, is a rare event. In this case, the Court had an extremely negative reaction to the unusual loan transaction. The Court’s decision should be viewed in light of the especially contentious nature of the Debtors’ bankruptcy proceedings. However, the Yellowstone decision might be a signal that, in the current economic climate, courts will look at loan transactions with increased scrutiny.