Sweet and sour: Credit Suisse loan profited developers and doomed property owners, complaint alleges

        A complaint filed in behalf of property owners at now bankrupt Florida golf communities Tesoro and Quail West and reported today at the web site GoToby.com alleges that Credit Suisse and controversial developer Bobby Ginn essentially colluded to provide the bank with enormous transaction fees and the developers with up-front profits, at the expense of investors in the properties.  Famed institutions like Harvard College and the MacArthur Foundation have been named as defendants in the complaint as well.

        According to the filing by Drew M. Dillworth, the Chapter 7 Trustee for the Tesoro & Quail West bankruptcies, Credit Suisse, the

Ginn Companies, Lubert-Adler (a limited partnership investment firm) and the many investors in Lubert, including universities, foundations and pension funds, engaged in the “fraudulent transfer” of more than $600 million.  The complaint alleges that after Hurricane Wilma in 2005, property sales in Ginn-Lubert-Adler-managed Florida communities, slowed to a trickle.  Revenues from property sales would have helped pay for the unbuilt amenities.

        Later, the lawsuit alleges, Credit Suisse and Ginn-Lubert-Adler arranged for the bank to provide $675 million in funds through a “new financial product” that gave the defendants in the suit an opportunity to take their profits up front by mortgaging their golf communities “to the hilt.”  Credit Suisse took $15 million in fees from the transfer, according to the complaint, and Ginn/Lubert-Adler split $323 million among themselves and their investors (including the universities, foundation and pension funds).  The remaining $158 million was used to replace third-party debt with new debt. 

        Meanwhile, the development’s property owners unknowingly wound up with all the risk.  The communities were “too thinly capitalized to survive” once the loans were made, according to the filing.  Other Ginn/Lubert-Adler projects in the “recapitalize and take profits” scheme, according to the complaint, were the Hammock Beach River Club and The Gardens in Palm Beach, FL; Laurelmor in the North Carolina mountains; and Ginn sur Mer in the Bahamas.  Yellowstone Mountain Club, the huge Montana community that also went bankrupt, is mentioned as an example of another development in which a similar Credit Suisse loan was used to the detriment of property owners there.

        According to the Tesoro and Quail West trustee’s complaint, less than a quarter of the total Credit Suisse loan was earmarked for capital developments

and the completion of amenities in the affected communities.  As “guaranty” for the loan, the developer granted liens on virtually all its existing assets which, the complaint alleges, “not only enriched themselves [Ginn and Lubert-Adler] and their investors at the expense of the Debtors [property owners] and Other Project Entities, [but also] effectively looted the Debtors and Other Project Entities and shifted the risks associated with the Projects to creditors, leaving those creditors with a virtual certainty of loss.”

        Ginn/Lubert-Adler filed Chapter 7 bankruptcy on the developments named in the filing in December 2008 after a series of defaults and attempts to restructure the loans, at which time Mr. Dillworth was named trustee by the U.S. Trustee Office.  Ginn/Lubert-Adler investors Harvard, the John D. and Catherine T. MacArthur Foundation as well as the University of Michigan, the Maryland State Retirement and Pension System, the Ohio Police and Fire Pension Fund, and the retirement systems for state employees and teachers in Pennsylvania received proceeds from the alleged fraudulent loan.

        The complaint also alleges that, in order to value the developments highly enough to qualify for the large Credit Suisse loan, real estate giant Cushman & Wakefield appraised the properties as if all lots had been developed and were ready for sale to builders “without deduction or discounting for pertinent risk factors or the time value of money.”  In effect, according to the filing, the appraisal significantly inflated the value of the Tesoro and Quail West projects.  Ginn/Lubert-Adler, the complaint alleges, provided Cushman & Wakefield with sales projections that had no basis in reality.

        Trustee Dillworth, of course, is asking for all loan transfers from Credit Suisse to Ginn/Lubert-Adler for Tesoro and Quail West, and payments to the developer’s investors to be recovered ("avoidance" is the legal term in the document).  This Ginn debacle may not have the overall impact of the credit default swap mess, but try telling that to the owners at Tesoro and Qual West.  For them, it’s personal.

        You can download a copy of the trustee’s complaint from GoToby.com.