Yellowstone Mountain Club, LLC

On June 29, 2009, the Bankruptcy Court of Montana issued its order vacating its prior order dated May 12, 2009 wherein it entered a judgment against Credit Suisse and equitably subordinated its $232 million secured claim as to certain other claims, including unsecured creditors.

In its May 12, 2009 decision, the Court explained that pursuant to 11 U.S.C. Section 510(c), a court may subordinate for purposes of distribution all or a part of a claim or interest to all or part of another. The Court noted that per the Ninth Circuit's decision in In re First Alliance Mortg. Co., 3497 F.3d 977, 1006 (9th Cir. 2006) equitable subordination of claims generally requires three findings: "1. that the claimant engaged in some type of inequitable conduct, 2. that the misconduct injured creditors or conferred unfair advantage on the claimant, and 3. that subordination would not be inconsistent with the Bankruptcy Code" and that when equitable subordination involves a non-insider, non-fiduciary, "the level of pleading and proof is elevated: gross and egregious conduct will be required before a court [can] equitably subordinate a claim." The Court reviewed case law that "equitable subordination is seldom used in a non-insider, non-fiduciary scenario..."

The Court found that Credit Suisse's conduct met this high threshold as it was "so far overreaching and self-serving that they shocked the conscience of the Court." The Court found that in 2005, "Credit Suisse was offering a new financial product for sale" in which it real estate developers "to take their profits up front by mortgaging their development projects to the hilt." Pursuant to this program, Credit Suissed lent the funds on a non-recourse basis, earned a substantial fee, and sold off most of the debt to loan participants. The loan enabled the real estate developers to take most of the loan out as a "profit dividend, leaving the developments saddled with enormous debt." The Court found that Credit Suisse and the individual owners of development would benefit, "while their developments-and especially the creditors of their developments-bore all the risk of loss" as the developments were left "too thinly capitalized to survive." The Court found that Credit Suisse turned a "blind eye to Debtor's financial statements" and that its "due diligence with respect to the $375 million loan was almost all but non-existent." The Court also found fault with Credit Suisse's "newly devised valuation methodology...even though such projections bore no relation to the Debtor's historical or present reality." The Court noted that Credit Suisse "could not have believed under any set of circumstances that the Debtors could service such increased debt load."

The Court found that Credit Suisse's actions were "simply driven by the fees it was extracting from the loans it was selling, and letting the chips fall where they may." The Court stated that 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." Based on this conduct, the Court subordinated Credit Suisse's first lien to that of the superpriority dip financing and to the unsecured creditors. The Court did not subordinate the claim to the membership claims.