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September 1, 2014

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Bankrupt Lake Las Vegas targeting former investors

The bankrupt Lake Las Vegas development is seeking court permission to hire a high-powered Dallas law firm to file fraud lawsuits against former investors in Lake Las Vegas, including four Texas billionaires.

Lake Las Vegas, which is financed by financial giant Credit Suisse Group AG, on April 6 asked the bankruptcy court in Las Vegas for permission to hire the law firm McKool Smith, which says that in both 2008 and 2009 it won more Top 100 verdicts than any other law firm in the United States.

Lake Las Vegas, which filed for bankruptcy protection in 2008, is a high-end residential and resort community 20 miles southeast of the Las Vegas Strip in the city of Henderson. Located near Lake Mead and surrounding a man-made lake, the 3,600-acre Lake Las Vegas includes 1,700 homes with room for 5,000 more.

Launched in 1987, the community boomed until the recession hit the nation and Southern Nevada. Land and home values there have plummeted, two of its three golf courses are closed, its lone casino closed in March and one of two resort hotels there -- the Ritz-Carlton -- is closing in May.

Conditions at the community aren't likely to improve soon, Lake Las Vegas says.

"During 2009, 42 new homes have sold at prices that are up to 70 percent less than previous closing prices for the same type of home," attorneys for Lake Las Vegas said in an April 2 court filing. "Conversely, while foreclosures were at a record high within the community, record levels of resales also occurred. For calendar year 2009, 294 resales have been consummated at prices up to 80 percent below their original purchase prices (some of which were purchased less than two years ago)."

Encumbered by $753 million in debt and facing another $228 million in bankruptcy court claims, the development company estimates its raw land holdings and other assets at Lake Las Vegas are now worth just $83.9 million.

With Credit Suisse alone owed some $670 million, Lake Las Vegas now plans to go after former insiders it claims wrongly drained the property of $470 million in equity through a 2004 financing deal that it says later contributed to the bankruptcy.

The targets to be sued by McKool Smith, according to the Lake Las Vegas bankruptcy reorganization plan, include Texas billionaire brothers Lee M. Bass, Robert Bass and Sid R. Bass; and fellow Texan Richard Rainwater, who formerly managed Bass family investments before becoming a billionaire in his own right.

Another target is Carmel Land & Cattle Co., a company Lake Las Vegas says is controlled by attorney William Hallman Jr., whose Kelly Hart & Hallman law firm in Fort Worth has long represented the Bass family.

Also targeted are developer Ron Boeddeker and his company Transcontinental Corp. of Santa Barbara, Calif.

The involvement of the Bass brothers, Hallman and Boeddeker in Lake Las Vegas has previously been reported. The involvement of Rainwater is a new twist and Lake Las Vegas hasn't yet disclosed his role in the case.

Rainwater is known in Las Vegas for investing in the 1990s in slot machine maker Alliance Gaming Corp., now called Bally Technologies Inc.; and for unsuccessfully trying to acquire gaming companies Station Casinos Inc. and Santa Fe Gaming Corp.

Also, Rainwater's Crescent Real Estate Equities in 2004 acquired and later sold the 115-acre Hughes Center office park in midtown Las Vegas, just east of the Las Vegas Strip.

The plan to sue the former Lake Las Vegas insiders is spelled out in the bankrupt development's April 2 disclosure statement seeking approval for its plan of reorganization.

Besides seeking to recover the $470 million in equity that was allegedly paid to insiders in 2004, the reorganization plan calls for:

--Conversion of liens held by Credit Suisse and other lenders totaling about $627 million into equity in the development and 80 percent of any money won in litigation against the former insiders.

--A provision for $29 million in financing to cover the development's operating costs and continued community development work in advance of future home building.

--Cash payments of $1 million to general unsecured creditors owed $22 million, giving them about 4 1/2 cents per dollar owed.

--Funding of $8 million in infrastructure work and vendor claims for a local improvement district called T-16.

--Cash payments, over three years, to holders of allowed construction lien claims; or the exchange of the liens for property secured by the liens. A mediation procedure will be established to resolve about $26.4 million in mechanics' lien claims.

--Additional payments to general unsecured creditors, local improvement district vendors and landowners in Phase II of the development from a 20 percent share of any money won in litigation against the former insiders. The Phase II landowners have asserted claims of about $200 million against Lake Las Vegas, charging the development's failure to develop infrastructure has prevented them from developing their properties.

--Deferral of development in Phase III of the development so Lake Las Vegas can focus on additional development of Phase II.

A June 21 hearing is planned on whether the reorganization plan should be approved.

As for the threatened litigation against the former insiders, the dispute is likely to revolve around whether the $470 million they allegedly withdrew as an equity distribution was proper.

Attorneys for Transcontinental have repeatedly argued that the equity distribution was part of the plan promoted by Credit Suisse when it provided $670 million in financing to Lake Las Vegas during the economic boom. Transcontinental, which handed control of Lake Las Vegas to a Credit Suisse-backed company in 2007, has charged the entire bankruptcy case is a sham since Credit Suisse is the main debtor and creditor.

Transcontinental has argued that in 2004, thanks to hundreds of millions of dollars in equity investments over two decades, Lake Las Vegas was "solidly solvent" with just $48 million in debt.

"Against this backdrop, Credit Suisse approached the equity owners and proposed a credit facility that would pay off the then-existing debt and allow the former equity owners, at long last, to appreciate a return on the hundreds of millions of personal funds they had invested. In furtherance of this loan, Credit Suisse obtained an appraisal of the property for approximately $1.2 billion," Transcontinental has argued.

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

That suit, which is pending, charges Credit Suisse provided Lake Las Vegas a loan product primarily designed to allow project owner-developers to take out profits early in the development stage while leaving the property burdened with debt.

This loan product, used in resort 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 charged.

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

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

But Credit Suisse denies wrongdoing in connection with the Lake Las Vegas loan and similar loans around the country.

Credit Suisse maintains, according to the Lake Las Vegas reorganization disclosure document, that it obtained appraisals (including a FIRREA-compliant appraisal in 2007) showing the 2004 loan was "substantially oversecured."

At one point in the Lake Las Vegas bankruptcy case, the case's Official Committee of Unsecured Creditors had sided with Transcontinental, charging that Credit Suisse willfully overburdened Lake Las Vegas with debt to enrich itself and asking the court to require that unsecured creditors be paid before Credit Suisse be allowed to recover on its $670 million claim.

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

But the unsecured creditors later changed sides and now support the proposed reorganization plan.

The reorganization plan disclosure statement says that while the unsecured creditors had no funding to pursue their legal claim, "Credit Suisse has the resources to manage a vigorous and overwhelming defense."

The disclosure document also notes that even if the unsecured creditors won their case against Credit Suisse, there would be no assets remaining for them to recover since Lake Las Vegas is encumbered by a $127 million debtor in possession loan made after the bankruptcy was filed -- a loan arranged by Credit Suisse and that has priority over the unsecured creditors' claims.

"The debtors estimate that their community-related assets are worth substantially less than $127 million," Lake Las Vegas said in its disclosure statement.

"The (unsecured creditors) committee believes that the outcome for unsecured creditors under the reorganization plan (which includes sharing in the litigation against the former insiders and others) is more favorable than a positive litigation outcome, and avoids the risk, delay and cost of litigating with the (pre-bankruptcy) lenders," the document says.

As for the coming litigation, court papers show McKool Smith has agreed to be retained by Lake Las Vegas on a contingency fee basis in which it could earn up to 33 percent of any litigation proceeds.

The McKool Smith attorneys assigned to the case would be in addition to at least 10 lawyers already representing Lake Las Vegas in the bankruptcy. The current attorneys are with law firms in Las Vegas, Los Angeles and Washington, D.C.

In their April 6 court filing, Lake Las Vegas attorneys indicated the lawsuits against the former insiders could include a wide range of claims including breach of fiduciary duty, knowing participation in breach of fiduciary duty, negligence and gross negligence, conversion, unlawful dividend, embezzlement, breach of contract, tortious interference with contract, breach of trust, fraud, negligent misrepresentation, mismanagement, conspiracy, fraudulent conveyance, fraudulent transfer, and violations of state and federal securities and racketeering laws.

In a court filing, Gary Cruciani, a principal at McKool Smith, said he and colleague Lewis LeClair would be leading the case for Lake Las Vegas.

"McKool is recognized as one of the premier trial law firms in the United States based on significant courtroom victories and substantial settlements for domestic and international clients," Cruciani said in his filing. "With more than 120 attorneys in Austin, Dallas, Houston, Marshall, Texas, New York, and Washington DC, the firm handles complex commercial litigation, intellectual property claims, bankruptcy matters, and white collar litigation for companies and individuals across the globe."

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