Las Vegas Sun

March 29, 2024

Creditors expand claims against Lake Las Vegas investors

Lake Las Vegas

Joe Elbert

Looking down at the MonteLago Village Resort and the shuttered Casino MonteLago from Grand Mediterra Boulevard at Lake Las Vegas.

Creditors in the Lake Las Vegas bankruptcy case have filed an amended lawsuit against the project's developers and investors, including Texas billionaires Lee Bass and Sid Bass, charging mismanagement and sweetheart insider deals caused the collapse of the company.

The amended suit was filed last week in U.S. Bankruptcy Court for Nevada in what is shaping up to be a hotly-contested dispute over $470 million pitting international financial giant Credit Suisse AG against the Bass brothers and codefendants including Transcontinental Corp. of Santa Barbara, Calif.

Just as the 3,600-acre, 1,600-home Lake Las Vegas community in Henderson emerged from bankruptcy in July, its creditors' trust -- led by Credit Suisse -- sued the former Lake Las Vegas developers and insiders charging they had drained the company of equity and doomed it to financial failure.

But Transcontinental, the original developer of Lake Las Vegas, has long argued it was Credit Suisse -- not the developers and investors -- who doomed the development to bankruptcy by providing $670 million in financing and then encouraging the investors to withdraw the $470 million from the company in 2004 as an equity distribution.

Similar arguments have been made against Credit Suisse following the failure of other high-profile developments around the West financed by the bank during the boom years of the mid 2000s including the Yellowstone Club in Montana.

Credit Suisse has denied wrongdoing in these cases in which the developments, like Lake Las Vegas encumbered by hundreds of millions of dollars in debt, were unable to make loan payments after the recession slashed their revenue.

The Credit Suisse-backed creditors' trust now charges the $470 million withdrawn by the Lake Las Vegas investors was a "fraudulent transfer" and wants the money back for the benefit of creditors.

The creditors' trust says Transcontinental entities controlled 50 percent of Lake Las Vegas with the Bass brothers and their associated entities controlling the other half.

The trust says that of the distributions, the late developer Ron Boeddeker received more than $109 million, his company Transcontinental received more than $108 million, Lee Bass received almost $112 million, Sid Bass received more than $108 million and William Hallman, the Bass brothers' longtime attorney, received more than $6 million.

In all, entities associated with Boeddeker received about $235 million and entities associated with the Bass brothers received the other $235 million, the trust says.

In answering the July lawsuit on Oct. 1, attorneys for the Bass brothers and codefendant 820 Management Trust of Fort Worth, Texas, again highlighted the Credit Suisse loan and the investors' assertion it was Credit Suisse that encouraged them to withdraw their share of the $470 million.

"Plaintiff asserts that -- even though the loan documents expressly state that the loan was non-recourse, a portion of the loan proceeds were to be used by Lake Las Vegas to make a one-time distribution to its equity holders (which included some of the defendants) and none of Lake Las Vegas's partners would be personally liable for repaying the loan -- defendants nevertheless ought to repay Lake Las Vegas's loan," said their answer.

"Plaintiff's claims are merit less," said their reply, filed by Houston attorneys David Beck and Matthew P. Whitley of the law firm Beck, Redden & Secrest L.L.P.; as well as Las Vegas attorneys James Pisanelli and Debra Spinelli of the firm Pisanelli Bice PLLC.

Attorneys for the creditors, however, beefed up their complaint with additional allegations and filed it Friday.

The new lawsuit, filed by attorney Lewis LeClair of the firm McKool Smith P.C. in Dallas and Robert Charles Jr. of the firm Lewis and Roca LLP in Las Vegas, charges that after the investors withdrew the $470 million, Lake Las Vegas was "insolvent, seriously undercapitalized and unable to pay its debts as they became due."

The suit charges:

--The defendants faced a cash shortage so in order to keep Lake Las Vegas afloat they arranged "sham," "secretive" and "unusual" transactions and one "suggestive of fraud."

--Still desperate to raise cash, the defendants sold land in bulk to homebuilders for hundreds of millions of dollars but then were unable to perform on contracts requiring them to provide roads and other infrastructure, leaving Lake Las Vegas with "very substantial" obligations to the homebuilders.

"Focusing on just three of the Phase II homebuilders (there are others who were similarly duped by Lake Las Vegas), Toll Brothers purchased land for $35 million, Woodside purchased land for $47 million and Engle purchased land for $65 million for parcels in Phase II. Thus, these three homebuilders spent nearly $150 million purchasing land within Phase II for the purpose of building homes. However, to this day, not a single home has been built on any of these parcels of land because Lake Las Vegas never installed the necessary infrastructure to put the land in a developable condition and/or never provided the necessary approvals that the homebuilders needed in order to begin construction. In essence, Toll Brothers, Woodside, and Engle spent nearly $150 million and bought a vision for the future that never materialized. They all ended up in lawsuits against Lake Las Vegas as a result of its wholesale breaches of its contractual obligations to these builders," the new lawsuit says.

--Lake Las Vegas investors and managers engaged in "accounting irregularities and improper practices in which Lake Las Vegas’s management materially misstated the company’s true financial condition."

"The events at Lake Las Vegas demonstrate wrongful distributions, breaches of fiduciary duties and other actions by certain of the insider defendants, including self-dealing, and usurpation of corporate opportunities," the suit charges. "A project that could have been and should have been successful and sturdy enough to survive the swings of the real estate market was instead stripped of critical assets and left unable to operate on its own even in the "`good times."'

The defendants haven't yet responded the amended suit.

A class-action lawsuit pending in Idaho against Credit Suisse, and a pending bankruptcy case in Montana, however, may provide both sides in the Nevada dispute with ammunition.

In the Montana case, which is now part of the Idaho case docket, Judge Ralph Kirscher on Aug. 16 found developer Tim Blixseth partially responsible for the failure of the luxury Yellowstone Club development -- a development that had received a loan similar to the Credit Suisse loan to Lake Las Vegas.

But in a September ruling, Kirscher said Credit Suisse’s "greedy antics" bar it from collecting $229 million from its Yellowstone Club loan

All sides have denied wrongdoing in the Yellowstone Club case and part of the club's reorganization has been successfully appealed.

Kirscher, in the August ruling, found fault not just with Blixseth but with Credit Suisse.

"As a result of the Credit Suisse transaction, the debtors were unable to pay their bills as they became due," the judge wrote in the Yellowstone Club case.

In the ruling, he re-published findings from May 2009 -- findings that were later vacated.

"The only plausible explanation for Credit Suisse's actions is that it was simply driven by the fees it was extracting from the loans it was selling, and letting the chips fall where they may. Unfortunately for Credit Suisse, those chips fell in this court with respect to the Yellowstone Club loan," Kirscher had written in 2009. "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. While Credit Suisse's new loan product resulted in enormous fees to Credit Suisse in 2005, it resulted in financial ruin for several residential resort communities. Credit Suisse lined its pockets on the backs of the unsecured creditors."

In the August ruling, Kirscher wrote: "While the court agreed to vacate its partial & interim order (criticizing Credit Suisse in 2009), the court cannot and will not ignore the findings therein."

"If Credit Suisse had wanted to go after Blixseth in the event of a default, it should have included such provision in the credit agreement. This it did not do. Blixseth and Credit Suisse have done a lot of finger pointing in this case, but in the end, their conduct prompted debtors’ bankruptcies," he wrote.

In the August ruling, Kirscher recounted that: "Sometime prior to 2004, a team at Credit Suisse First Boston crafted a new syndicated loan product that allowed Credit Suisse to offer a loan product the size of which had previously been unavailable to borrowers in the corporate bank loan market. The loan product was designed to allow owners of high-end master-planned residential and recreational communities to realize their anticipated future profits from their developments through distributions made possible by Credit Suisse’s syndicated equity recapitalization loan."

In his ruling, Kirscher noted how the new loan product was marketed to resort developments including Tamarack Resort in Idaho, Promontory in Utah, Ginn Sur Mer in the Grand Bahamas, Turtle Bay in Hawaii and Lake Las Vegas.

Kirscher's ruling noted testimony in the Montana case about the unusual nature of the new Credit Suisse loan product.

For instance, David Abshier who performs financial advisory services for the global consulting firm LECG and specializes in credit and risk management, testified about unusual features of the Credit Suisse loans in Montana, Nevada and elsewhere.

A story on his testimony from the Bozeman (Mont.) Daily Chronicle said he compared the Yellowstone Club's loans with other high-profile Credit Suisse loans to upscale resorts including Lake Las Vegas.

"In each case it allows for a large distribution," he said, according to the story. "In all cases the borrowers are either in default or bankruptcy."

All of the loans were issued out of a Credit Suisse branch in the Cayman Islands, likely to avoid U.S. law and standard lending practices, Abshier was quoted as saying.

"It circumvents federal regulation, it circumvents industry standards," he testified, according to the Daily Chronicle story.

In his ruling, Kirscher noted Abshier began his testimony by noting that the Credit Suisse loan agreement with the Yellowstone Club did not comply with the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA").

Because the new loan product was not FIRREA-compliant, Credit Suisse First Boston had to syndicate the loan through its newly-formed Cayman Islands Branch, the judge noted.

The loans at issue used an unusual new appraisal methodology called "total net value" that relied on projected gross revenue rather than the standard present fair market value method.

The judge noted Abshier found the Yellowstone Club loan was nonconforming in that 100 percent of the loan proceeds were disbursed on the closing date, which is not customary for real estate development loans.

Instead, such projects are generally completed in phases and loan funds are disbursed in phases.

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