$24 Billion Credit Suisse Lawsuit Can Proceed
Judge finds credence in claims of breach of fiduciary duty, tortuous interference, negligence, and conspiracy. Plaintiffs can move forward with discovery and its pursuit of class action status.
Palm Coast, FL – February 23, 2011 – Credit Suisse and Cushman & Wakefield are on the hot seat. When a group of 7 attorneys filed a $24B lawsuit [Gibson v. Credit Suisse] in January 2010 claiming a “loan to own scheme,” [link to story] by Credit Suisse, facilitated by Cushman & Wakefield, a lot of watchers did not take it seriously. Well the watchers were wrong. U.S. Magistrate Judge Ronald E. Bush ruled January 17 that plaintiffs can proceed with its lawsuit against Credit Suisse on the following claims:
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Breach of fiduciary duty
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Tortious interference with contractual relations
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Negligence
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Conspiracy
Breach of fiduciary duty and tortuous interference are subject to punitive damages, raising the $8 billion lawsuit potentially to $24 billion. A RICO claim was dismissed. Common law fraud, negligent misrepresentation, and unjust enrichment claims were "dismissed without prejudice," meaning plaintiffs are permitted to amend and allege other necessary facts supporting these claims.
Cushman & Wakefield will face negligence and conspiracy claims. The tortious interference claim against C&W was dismissed without prejudice.
The Players
Defendant Credit Suisse is one of the world’s largest banking institutions. Cushman & Wakefield is one of the largest real estate service firms. Lead counsel for the plaintiffs legal team is Mike Flynn, a well known Boston trial lawyer. The team also includes a former federal prosecutor and Robert C. Huntley, former Justice of the Supreme Court of Idaho, experienced litigators from Texas, the Flood brothers, and Colorado counsel.
Background
Credit Suisse made several multi-million dollar loans to luxury resort developers, among them: Yellowstone Club, Lake Las Vegas, Tamarack Resort, and Ginn sur Mer. Each loan value was supported by appraisals provided by Cushman & Wakefield on behalf of Credit Suisse. The loans were marketed by Credit Suisse First Boston. The appraisals were inflated. For instance, on September 21, 2004, Cushman & Wakefield had determined that the "as-is-market value" of Yellowstone Club was $420 million. One year later, Cushman & Wakefield used the non-FIRREA-compliant "total net value" method to establish the value of the club at $1,165 million. To dodge the federal appraisal regulations, CS set up an offshore Cayman Islands branch. The loans to the other developers were structured and marketed similarly using C&S inflated appraisals.
In several cases, developers were urged by CS to take advance profit payments directly from the proceeds of the loans at closing. In each case, the developments soon defaulted and went into bankruptcy. The lawsuit alleges CS intentionally burdened the developments with debt knowing the loans would ultimately default at which time CS or its nominee would swoop in and take over control of the resorts.
CS fared poorly in the precedent-setting Yellowstone Bankruptcy proceedings where Bankruptcy Judge Marc S. Kirchner placed first lienholder Credit Suisse behind the position of unsecured creditors. He stated:
"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 communities. Credit Suisse lined its pockets on the backs of the unsecured creditors. The only equitable remedy to compensate for Credit Suisse’s overreaching an predatory lending practices in this instance is to subordinate Credit Suisse’s first lien position to…..that of the allowed claims of unsecured creditors."
What does Bush’s ruling mean?
By allowing the three charges to go forward, Judge Bush gives credence to the allegations. The ruling allows plaintiffs to proceed with class certification and discovery. The devil is in the discovery.
One particularly interesting avenue to pursue through discovery stems from statements made in an affidavit by Tim Blixseth, one of the plaintiffs and the founder of Yellowstone Club. He says that Credit Suisse approached him offering to sell Credit Default Swaps, which were essentially bets against the loans to Yellowstone Club. What role did Credit Default Swaps play in CS’s overall plans?
Bush accepts the theory that plaintiffs are not claiming diminution of value alone. That charge could be defended by citing market conditions beyond the control of the developer. The charge of tortuous interference alleges that the CS scheme prevented the completion of the developers contractual duties which included building out the amenities plus their duty of care and of loyalty. Failure to complete contractual obligations caused a loss of value.
C&W is alleged to be a co-developer with CS (or co-conspirators). In this regard they are jointly and severally liable. The individual appraisers may also be subject to penalties and loss of license from the Appraisal Institute, which has investigation and enforcement duties under FIRREA.
When it comes to bad news, Credit Suisse is on a roll. They were first castigated by Judge Kirchner in the Yellowstone Bankruptcy ruling. Now they face serious charges with astronomical economic consequences. And that’s not all. A Google news search unearthed the following recent events:
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Reuters: U.S. authorities have arrested a Credit Suisse banker as a "material witness" in a tax avoidance scheme.
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Reuters: Police in Brazil arrested a Credit Suisse banker as part of a two-year-old money laundering and tax evasion probe of the Swiss firm.
Because GoToby.com also reports on Ginn developments, I will continue to monitor this very interesting case to follow.
Ginn sur Mer property owners – please contact me with information related to your individual transaction(s). The information will assist council in determining damages.
Great
So this goes to court, the plaintiffs win, and the award goes to the poor developers (and their hedge fund partners) who were tricked and fooled by the evil Credit Suisse. The small guy still get nothing but constant calls from banks, ruined credit, threat of lawsuits, and possible bankruptcy.
I guess things are getting back to normal!
Reply to John
The developers are not the plaintiffs. The class will be made up of property owners.