Yellowstone Mountain Club LLC (Yellowstone Club) developed land near Yellowstone National Park in Montana as a high-end residential development with a private ski and golf club.
The development of Yellowstone Club didn’t progress as promptly or as smoothly as projected. Memberships ended up being sold at substantially discounted prices.
In 2005, Credit Suisse contacted the owner of the Class A stock of Yellowstone Club (the Owner) to see if he was interested in a new loan product called a Syndicated Term Loan, which Credit Suisse described as being like a home equity loan. The Owner of Yellowstone Club expressed interest in a loan of about $150 million. By the time the loan transaction closed, the amount borrowed by Yellowstone Club totaled $375 million.
The Syndicated Term Loan was made by a Cayman Islands branch of Credit Suisse, purportedly because this allowed the Owner of Yellowstone Club to take a sizeable distribution from the loan proceeds. In fact, most of the loan proceeds went for purposes unrelated to the assets or business of Yellowstone Club. Credit Suisse sold participation interests in the loan and made its money mostly from the $7.5 million fee it charged.
Credit Suisse did not do much due diligence regarding the financial status of Yellowstone Club. Probably most importantly, Credit Suisse knew there were several layers of shareholder interests when it agreed that the loan proceeds could be used for purposes unrelated to the business of Yellowstone Club.
At the time of the Credit Suisse loan, Yellowstone Club owed its creditors about $20 million which was paid from Credit Suisse loan proceeds.
After the Credit Suisse loan was made, Yellowstone Club had consistent and significant cash flow problems. It filed a Chapter 11 in 2008.
In an adversary proceeding in the Yellowstone Club Chapter 11, the Bankruptcy Court found that the result of the Credit Suisse loan left Yellowstone Club with more debt than it could pay, benefited the owner, was detrimental to the interests of junior shareholder classes and the interests of other creditors, was made without any serious due diligence and was motivated by “naked greed”. As a result, the Bankruptcy Court subordinated the Credit Suisse claim to all other claims in the Chapter 11. No doubt an appeal will follow.