Lender sued over Lake Las Vegas loans

By Steve Green

Published Thursday, Sept. 3, 2009 | 12:53 p.m.

Updated Thursday, Sept. 3, 2009 | 2:19 p.m.

The lending practices of Credit Suisse Group AG during the mid-decade economic boom came under attack again Wednesday when the company was sued by an insurer over loans for the bankrupt Lake Las Vegas development.

First American Title Insurance Co. of Santa Ana, Calif., filed suit in U.S. District Court in Las Vegas against Credit Suisse, Cayman Islands Branch, seeking a declaration that title insurance provided for Credit Suisse loans to Lake Las Vegas developers provides no coverage for mechanics' liens against the project.

The 3,600-acre Lake Las Vegas, a development 20 miles southeast of the Las Vegas Strip, includes more than 1,600 residential units, golf courses, two luxury hotels and a casino.

The development was financed in part beginning in 2004 by a unique Credit Suisse loan product primarily designed to allow project owner-developers to take out profits early in the development while leaving the property burdened with debt, the lawsuit charges.

This loan product, used in projects around the country, involved Credit Suisse apparently acting as a syndicator for non-bank investors, the suit says. The majority of the loan would be distributed directly to the owners rather than to development costs and Credit Suisse would receive "substantial fees," the lawsuit charges.

Credit Suisse developed an irregular appraisal methodology called "total net value," which does not comply with the Financial Institutions Recovery Reform Act of 1989, the lawsuit said.

The loan program in May was called "predatory" by a bankruptcy judge in the luxury Yellowstone Club case.

"The naked greed in this case combined with Credit Suisse’s complete disregard for the debtors" and others "shocks the conscience of this court," U.S. Bankruptcy Judge Ralph Kirscher wrote in May regarding $309 million owed by the Montana resort to the lender.

The judge later withdrew that ruling, which has been widely quoted in news stories and lawsuits concerning Credit Suisse.

At issue in Tuesday's lawsuit in Nevada are loans made in November 2004 for $560 million, in May 2005 for $135 million and in June 2007 for $540 million.

First American said Credit Suisse is demanding it be provided a legal defense and that it be indemnified for the contractor liens against the development.

Court records show more than $17 million in contractor liens have been filed against two of the main Lake Las Vegas debtors.

The main debtor, Lake at Las Vegas Joint Venture LLC, last month reported it held assets of $191.2 million, mostly in real estate, against liabilities of $728.4 million. Included in the liabilities is $675 million Credit Suisse says it is owed.

First American says in its lawsuit that one of its title loan policies sold to Credit Suisse excluded coverage for certain mechanics' liens and that those liens should be the responsibility of Credit Suisse.

First American said that before and after the bankruptcy of the Lake Las Vegas developers, Credit Suisse controlled the development and therefore is responsible for liens arising from contractors' unpaid invoices.

"Credit Suisse took over and exercised dominion and control of the owners and their finances. ... Credit Suisse is therefore liable, among other things, for the owners' obligation to pay mechanic's liens and/or for any liability of the owners under the indemnity," the insurer's lawsuit said.

"On information and belief, the fair market value of Lake Las Vegas, net of all priority claims, is zero or so small that Credit Suisse will not be able to recover anything on the various loans and amendments with (developers) entered into prior to the bankruptcy proceedings. In addition, Credit Suisse may have permitted or directed that proceeds of the debtor in possession financing be used for improper purposes that adversely affected the mechanics' liens against the Lakes of Las Vegas," First American said in its lawsuit.

Lien lawsuits are now pending in the Lake Las Vegas bankruptcy case, which was initiated in July 2008, and the Official Committee of Unsecured Creditors in the case has asserted that Credit Suisse's claims should be disallowed or subordinated because of deals involving fraudulent conveyance and other irregularities.

The creditors alleged that Credit Suisse willfully overburdened Lake Las Vegas with debt to enrich itself and the developers, and that before the debt ultimately caused the bankruptcy, Credit Suisse controlled the owners and caused the remaining funds to be paid preferentially in a manner that led to the filing of the mechanics' liens at issue, First American's lawsuit says.

"If these allegations are true, then First American should not be required to defend or indemnify Credit Suisse," First American's lawsuit says.

The creditors' adversary action in the bankruptcy case says: "Credit Suisse's predatory lending practices warrant subordinating Credit Suisse's lien."

The creditors say Credit Suisse earned a fee of $12.8 million for arranging the $560 million in financing to Lake Las Vegas developers in November 2004, a fee of $3.7 million for the $135 million loan in May 2005 and a $10.8 million fee for the July 2007 refinancing loan of $540 million.

"The structure of the November 2004 transactions allowed the equity holders of debtors (Lake Las Vegas developers) to individually take out their equity, loans, as well as profits by over mortgaging the development," the creditors charged.

"The loan product offered by Credit Suisse to debtors provided debtors and/or the predecessor equityholders the opportunity to recover their initial investment in the project through leveraging the project rather than through profits over time," the creditors charged. "Credit Suisse would loan the money ..., earn a substantial fee and sell off most of the loan credit to loan participants.

"The development owners would take most of the money out as a return of capital as well as a profit dividend, leaving their developments saddled with enormous debt and no liquidity to honor their contractual or other obligations when they became due," the creditor complaint said. "Credit Suisse and the development owners would benefit, while their developments -- and especially the creditors of their developments -- bore all the risk of loss.

"Credit Suisse knew or had reason to know that, due to the distributions to the predecessor equityholders, debtors were left with too much debt and too little capital to develop the Lake Las Vegas development, meet their financial obligations or pay their obligations when when they became due," the complaint says.

Zurich-based Credit Suisse on Thursday disputed the allegations.

"We believe the complaints are without merit and will defend ourselves vigorously. First American's actions are inconsistent with their obligations," said Credit Suisse spokesman Duncan King.

Bloomberg News has reported that besides the Yellowstone Club and Lake Las Vegas loans, Credit Suisse similarly raised $275 million for Promontory, a high-end ski resort in Utah; $400 million for Turtle Bay Resort in Hawaii; $675 million for Ginn Resorts in Celebration, Fla.; and $475 million for FX Real Estate & Entertainment's failed plan to build an Elvis Presley-themed resort on the Las Vegas Strip.