Palm Coast, FL – May 11, 2010 – Drew Dillworth, Chapter 7 Trustee for the consolidated Ginn-LA Tesoro and Quail West bankruptcies filed a complaint yesterday alleging fraudulent transfers in the distribution of proceeds from a $675 million Credit Suisse loan. In addition to Bobby Ginn and Lubert-Adler entities, the lawsuit names as Defendants John Doe 1 – 50, later described as Lubert Adler Fund III & IV investors reported to include: the Maryland State Retirement and Pension System; the Ohio Police and Fire Pension Fund; the Pennsylvania State Employees; and Public School Employees' Retirement Systems; Harvard University; Yale University; Princeton University; Drexel University; the University of Michigan Endowment; and the John D. and Catherine T. Mac Arthur Foundation, among others.
The lawsuit is the latest in a growing list against the beleaguered GINNdom of Bobby Ginn and his financial partner Lubert-Adler (Ginn-LA). More recent lawsuits have named defendants beyond the Ginn-LA entities; real estate sales companies, appraisers, title companies, loan originators and banks (Credit Suisse, Wachovia, SunTrust, and Fifth Third). But Dillworth's complaint is the first to encompass high-profile Lubert-Adler Fund investors. It's also the first to seek return of CS loan proceeds totaling over $325 million that were dispersed directly to Ginn/Lubert-Adler. And it's the first that cannot be blamed on "disgruntled investors."
The Dillworth complaint arises from Ginn-LA's June '08 default on a $675 million credit facility with Credit Suisse. That story was broken exclusively by GoToby.com. <story> Coinciding with the real estate market collapse, the default triggered the decline of the GINNdom. Parts of the empire have survived. The Hammock Beach Resort is even doing quite well. But Bobby Ginn is essentially out of the picture as Lubert-Adler has chosen new partners; most prominently Reynolds Plantation.
At the time of the default, the CS loan was secured by the assets of four Ginn projects. Through a complex Master Restructuring Agreement between Ginn-LA and Credit Suisse these assets were disposed of as follows:
Ginn sur Mer (on Grand Bahama) – Settled through foreclosure and a joint venture agreement <story>
Laurelmor (near Blowing Rock, NC) – Sold to Reynolds Plantation renamed Reynolds Blue Ridge <story>
Tesoro (Port St. Lucie, FL) – Chapter 7 bankruptcy – assets sold for $10.9 million <story>
Quail West (Naples, FL) – Chapter 7 bankruptcy – assets sold for $13.5 million <story>
Dillworth is the court appointed Chapter 7 Trustee for the consolidated Tesoro/Quail West bankruptcy.
Credit Suisse made huge loans to several developers of luxury communities and resorts. Ginn's was not the only one; just the largest. Lake Las Vegas, Yellowstone Club, Promontory, Turtle Bay, and Tamarack developers participated as well. <story>
Each Credit Suisse loan provided substantial distributions directly to the developers' equity partners from the loan proceeds. Ginn and Lubert-Adler entities reportedly received approximately $323 million of the $675 million loan.
Credit Suisse allegedly enticed the developer borrowers to overextend themselves by employing "Total Net Value," an asset appraisal methodology not approved in the U.S.
Credit Suisse allegedly collected exorbitant fees for originating and administering the loans. CS collected in excess of $15 million in fees plus closing costs from the Ginn-LA loan.
Credit Suisse did not lend its own money. CS consolidated funds from several private investors, avoiding the risk themselves.
Each developer to whom CS made this same type of loan defaulted.
Another lawsuit, Gibson v. Credit Suisse, alleges that through a "Loan to Own" scheme, Credit Suisse intentionally loaned money to developers based on fraudulently inflated appraisals (by Cushman & Wakefield appraisals), knowing that they would end in default, at which time CS would step in using proxy lenders to take over the projects for pennies on the dollar. <story>
Dillworths complaint is more narrowly drawn. It seeks to recover the funds it claims were fraudulently transferred to Ginn and Lubert-Adler from CS loan proceeds.
Excerpted from the Complaint:
From the $675 million loan, "Credit Suisse took substantial fees in excess of $15 million, and sold off most if not all of the credit to loan participants."
"Existing third party debt of approximately $158 million was replaced with new [CS] debt."
"Ginn and Lubert-Adler took out and paid themselves and their investors approximately $323 million, as return of capital contributions, interest, preferred return, and/or profit."
"Each of the Debtors and Other Project Entities issued a guaranty on the full amount of the loans, and granted liens on substantially all of its assets."
"In short, Ginn, the Lubert-Adler entities, and the Fund III & IV investors reaped substantial benefits, while the Debtors and Other Project Entities – and their creditors – bore the risk of loss."
"Ginn and Lubert-Adler records indicate that over $148 million of the $323 million of loan proceeds which they took out and paid themselves and their investors was credited to the Tesoro and Quail West Debtors."
"The Debtors' transfer of that $148 million, and of the guaranties and liens they issued in connection with the loan transaction, was made with actual intent to hinder, delay, or defraud present and future creditors."
"The Debtors did not receive fair consideration or reasonably equivalent value for the transfer of that $148 million, or the guaranties and liens they issued in connection with the loan transaction. Quite the contrary, if the Debtors were not already insolvent at the time of the transfers, they were rendered insolvent thereby, and were left much too thinly capitalized to survive."
Citing Ginn/Lubert-Adler's own records, this is how the $675 million was distributed:
Credit Suisse Loan Fee and Other Closing Costs - $23,446,764.94
Replacement of Existing Third-Party Debt - $158,291,252.86
Distributions to Ginn/Lubert-Adler Entities - $328,261,982.20
Total - $510,000,000.00
[Leaving only $165,000,000.00 out of $675.000.000 for working capital]
"Although Credit Suisse was the entity to whom the guarantees and liens were issued, the Defendants – who stood to receive the lion's share of the loan proceeds – were the entities for whose benefit the guaranties and liens were issued."
According to their own records, the Ginn/Lubert-Adler distribution was broken down as follows:
Ginn - $7,142,726.47
Lubert-Adler Debt/Accrued Interest - $104,010,550.47
Lubert-Adler Equity/Preferred Return - $183,690,802.75
Lubert-Adler Profit - $28,419,902.50
Subtotal – $323,263,982,19
Note that Lubert-Adler received the bulk of the distribution. But the $7+ million Ginn distribution and the $28+ million Lubert-Adler profit distribution fit the often-quoted 20:80 profit sharing formula of the Ginn-LA projects.
Underlying Loan Appraisals
Echoing the Gibson v Credit Suisse lawsuit, the Dillworth complaint alleges that the underlying loan appraisals were fraudulent because they did not comply with U.S. banking laws.
"Cushman & Wakefield appraisals defined the 'Total Net Value' of each Project as 'the sum of the market value of the bulk lots of the entire planned community, as if all of the bulk lots were complete…and available for sale to merchant builders, as of the date of the appraisal,' without deduction or discounting for pertinent risk factors or the time value of money." The result was an appraised value much higher than actual as-is fair market value.
"For example, whereas the St. Lucie County Property Appraiser assessed the value of all Tesoro real and tangible property in 2006 to be $74,910,626, Cushman & Wakefield's appraisal of the 'Total Net Value' of just the unsold Tesoro lots as of April 14, 2006 was $210,000,000."
In other words, the appraisals were based on Ginn sales projections which "had no basis in historical reality, and were vastly overstated."
"…although Ginn and Lubert-Adler missed their original projections for the Tesoro East 'launch' by a huge margin (they had projected 421 lot closings by January 1, 2006, but achieved fewer than 40, with the real estate market in Port St. Lucie worsening with every day), the projections supplied to Cushman & Wakefield for use in its appraisals nonetheless forecasted a total of 74 additional lot and condominium unit closings during the second half of 2006 alone, and 290 more by the end of 2008. In actuality, they achieved fewer than 40 additional lot closings, and 0 condominium unit closings, through the end of 2008."
It will be interesting to watch this lawsuit unfold. I wonder how long I can continue to picture the Ginn Blimp in a horizontal position. And how long will it be before the private investors get on the lawsuit bandwagon against Credit Suisse?
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