## Facts

- Real estate developer Timothy (“Tim”) Blixseth assembled about 13,500 acres near Yellowstone National Park to build an exclusive, master-planned ski and golf resort known as Yellowstone Mountain Club.
- Tim and his then-wife, Edra Blixseth, formed multiple related corporations (the debtors) to develop and operate the resort.
- Tim controlled the debtors through his holding company, Blixseth Group Inc. (BGI), the debtors’ sole Class A shareholder.
- Credit Suisse marketed a syndicated loan product to master-planned communities that permitted equity holders to take large distributions from loan proceeds.
- The debtors borrowed $375 million under a syndicated term loan arranged by Credit Suisse, and Credit Suisse received a 2% transaction fee ($7.5 million).
- Before this transaction, the resort historically carried far less debt (at most about $60 million), owed roughly $20 million at the time, and had negative cash flows.
- Credit Suisse conducted some diligence, but did not request audited financial statements and instead relied largely on projections supplied by Blixseth that did not match historical performance.
- The credit agreement specified that $209 million of the loan proceeds would be used as “distributions or loans” for “purposes unrelated” to the resort.
- On the same day the loan funded, Blixseth caused $209 million to be transferred out of the debtors to BGI; the transfer was recorded as a journal entry without contemporaneous loan documentation.
- After other shareholders threatened litigation, Blixseth drafted and backdated a short demand note to characterize the $209 million transfer as a loan.
- The $209 million was used in ways that benefited Tim and Edra personally (including payoffs and transfers to accounts outside the resort’s operations).
- The debtors later filed Chapter 11 and proposed a reorganization plan that would address members’ claims; the unsecured creditors’ committee and debtor-in-possession lenders sought equitable subordination of Credit Suisse’s claim.

## Issues

1. Whether Credit Suisse engaged in inequitable conduct, as a non-insider lender, by structuring and funding a loan designed to permit a large, immediate equity distribution unrelated to the resort’s business.
2. Whether Credit Suisse’s conduct caused injury to other creditors or conferred an unfair advantage supporting equitable subordination under 11 U.S.C. § 510(c).
3. What remedy, if any, was appropriate under § 510(c) (including subordination of a secured claim and related lien relief) consistent with bankruptcy distribution rules.

## Decision

- The court granted equitable subordination relief under 11 U.S.C. § 510(c) against Credit Suisse based on its role in a financing that enabled a $209 million extraction for insider benefit while leaving the resort inadequately supported for its operating and development needs.
- Applying the equitable subordination framework to a non-insider claimant, the court found the lender’s conduct sufficiently wrongful in light of the loan’s purpose and structure, the limited diligence performed relative to the transaction’s risks, and the predictable effect on other creditors.
- The court concluded that other creditors were harmed (and Credit Suisse gained an advantage) because the transaction shifted value to equity while saddling the debtors with a debt load disconnected from the project’s demonstrated ability to service it.
- The decision identified subordination as a remedy aimed at restoring fairness in distributions rather than canceling the debt, and it fashioned relief directed to the harm proven.
- The Westlaw decision was later vacated. See 2009 WL 10624435.

## Legal Principles

- Equitable subordination under 11 U.S.C. § 510(c) generally requires: (1) inequitable conduct by the claimant, (2) resulting injury to creditors or an unfair advantage to the claimant, and (3) a remedy consistent with the Bankruptcy Code.
- When the claimant is a non-insider lender, courts apply a stricter misconduct standard than for insiders; subordination typically requires serious lender misconduct rather than mere poor judgment.
- A lender’s purposeful participation in a transaction structured to facilitate a large equity “cash-out” from loan proceeds, coupled with disregard of obvious repayment risk and foreseeable creditor harm, can satisfy the inequitable-conduct and causation elements.
- Equitable subordination is remedial and case-specific: the court may reorder payment priority to the extent needed to address the injury shown, and § 510(c)(2) permits lien-related relief in appropriate circumstances.
- Because this decision was vacated, it should not be treated as binding authority for the propositions discussed.

## Conclusion

In this vacated decision, the bankruptcy court concluded that Credit Suisse’s role in arranging and funding a $375 million facility—expressly permitting $209 million to be diverted for purposes unrelated to the resort and immediately transferred to the owner’s holding company—constituted inequitable conduct that harmed other creditors, justifying equitable subordination relief under § 510(c).


In Re Yellowstone Mountain Club, LLC, 2009 WL 3094930 [Vacated, 2009 WL 10624435] (2009)