Mountain Madness: the bankruptcy of The Yellowstone Club

A large number of interesting financial stories have hit the wires in the last 18 months. From giant companies crumbling, like General Motors and Bear Stearns, to the erosion of the middle class dream of home ownership and suburban comfort. However, few tales of economic setback reflect better the furious, credit-based spending free-for-all of the last several years more so than the bankruptcy of The Yellowstone Club, a private ski resort community near Bozeman, Montana.

It's hard to not to use the term "elitist" when describing the very existence of The Yellowstone Club, which not only gobbled up pristine Montana wild lands to build a secluded residential enclave, but also made potential members demonstrate personal wealth in the millions before even being considered for membership. And, just like the hopeful home buyer in places like Detroit, Phoenix and most parts of Florida, it's collapse simply came down to signing a bad mortgage. In this case, a $370 million mortgage. So nonchalant were the bankers with the club's owner, Tim and Edra Blixseth, that they simply flipped a coin to determine if the bank's fee should be two percent or three. It doesn't matter who won the toss.

However, this is not simply another bankruptcy story. This tale also deals in controversy, aggressive lending, marital warfare, famous names, tons of money and perfectly encapsulates the country's growing animosity toward the reckless spending by some of our country's uber-wealthy.

When The Yellowstone Club finally filed Chapter 11 bankruptcy back in November 2008, it had only $40,000 in its checking account, despite recording $370 million in loans from primary creditor Credit Suisse, $88 million in membership initiation dues and $5 million in annual dues.

Many deals were trying to be worked to prevent the bankruptcy, including more loans from Credit Suisse and a potential buyout from minority creditor CrossHarbor Capital Partners. However, Credit Suisse stated firmly that it would not allow another organization to gain a majority foothold and threatened to fight the potential deal. Their grandstanding paid off, as the club's owners, Tim and Edra Blixseth, who originally favored the CrossHarbor plan, shifted support toward a bridge loan plan from Credit Suisse. The new loan would keep things operating long enough to formulate a long-term plan to keep the club open.

In the midst of the financial plan debates, the Blixseth marriage was racing down the slope of divorce, further complicating a potentially new ownership structure. Thanks to a loan (yes, even more money) of $35 million to Edra from CrossHarbor, she was able to buy out her husband and gain control of the club. Despite her allegiance to Credit Suisse, she put herself on the hook for a whole lot more money to a group she publicly rejected, perpetuating the high-stakes soap opera.

In September 2008, Ms. Blixseth was looking to undermine Credit Suisse. In unison with CrossHarbor, she arranged to have a private neighborhood management company out of Phoenix take over the community's operation and get building back on track. The alleged goal of the new three-way relationship was to push Credit Suisse out of the picture.

Obviously it didn't work. The club's finances were much worse than Ms. Blixseth was communicating to everyone involved. Employees were using personal credit cards to buy club items, quitting in droves and vendors were clamoring to get invoices paid.

Still, Credit Suisse is no victim. As a result of what bankruptcy Judge Ralph Kirscher (who demonstrated exceptional insight and business savvy during the circus-like hearings), called "predatory lending with no regard for its consequences", he stripped Credit Suisse of their first lien position, making them second fiddle after all.

While there are endless spur trails of lawsuits, lost money and endless examples of blatant greed, the whole thing came to rest last week, May 18, with a settlement of $80 million to Credit Suisse and Cross Harbor's majority partner, Sam Byrne, buying the club for $115 million. What a deal.