Palm Coast, FL – June 22, 2011 – The Chapter 11 bankruptcy of Crescent Resources and its 130 or so subsidiaries created and funded a Litigation Trust (see note on bankruptcy litigation trusts at the end of this story) to pursue possible claims against other parties for the benefit of creditors in the Crescent bankruptcy. Its most significant effort is the recently amended lawsuit against Crescent's former parent company, Duke Energy, to recover more than $1.187 Billion alleged to be a fraudulent transfer. The Litigation Trust has also sued Ed Burr, LandMar founder and former Crescent Resources executive for $281,441.55 he received in bonuses prior to the bankruptcy filing. Complaints have been filed against other Crescent and Landmar executives too.
Many lawsuits are never resolved on the merits of the underlying allegations. Instead, they fall to the wayside for technical reasons; wrong venue, class status, etc. The suit against Duke Energy may fail for reasons unrelated to the allegations brought by the litigation trust. However, when this non-lawyer reads the recently filed amended complaint, it seems apparent that a huge injustice occurred. The innocent victims most affected by Duke's actions are the hundreds of unsecured creditors of Crescent and its subsidiaries and the thousands of homeowners and club members who bought property within Crescent communities in good faith.
The apparent facts revealed in the amended complaint paint a picture that will anger members of Palm Coast's Grand Club and property owners bordering its closed Matanzas Golf Course. The downturn in the real estate market was not the only reason that caused Crescent subsidiary LandMar to suspend plans to rebuild the Matanzas course and add a new clubhouse. That project and several others were doomed by the Duke Transaction.
Duke's receipt of $1.187 Billion from the Crescent loan proceeds rings similar to Credit Suisse loans to several large resort developers, including the Ginn Company, Lake Las Vegas, Yellowstone Club, and Tamarack Resort. In those cases, multi-million dollar loans were supported by allegedly fraudulent appraisals. In each case (except Tamarack), the developers received large direct distributions from the loan proceeds. Every one of the Credit Suisse loans resulted in the developers' bankruptcy. Credit Suisse now finds itself defendant in a $24 Billion lawsuit alleging a "loan to own scheme."
Duke energy appears to have conspired to first overstate the value of Crescent Resources, its land development subsidiary, to maximize the amount that could be borrowed by it; nearly $1.6 billion. Duke then swept nearly the entire loan proceeds, leaving Crescent with a huge debt obligation and little cash. This was done with Duke's full knowledge at the time that the real estate market was rapidly weakening.
Excerpts from the amended complaint:
"But the Duke Transaction destroyed Crescent's ability to operate as it had historically operated, and deprived Crescent of the resources necessary to continue in business. The transaction immediately rendered Crescent's business model unsustainable…."
"…the Duke Transaction Review Committee (comprised of Duke Energy officials) approved the 2006 Duke Transaction for both Duke and Crescent Resources."
"Crescent Resources did not receive independent and conflict-free legal advice with respect to the Transaction."
"In 2005, Crescent Resources' President and CEO, Defendant Fields, had heralded, as a key part of Crescent Resources' business, that its project debt levels were modest. Fields nevertheless, and in exchange for substantial personal financial benefit, expressly approved the previously unheard of level of debt in this transaction."
"In short, Duke attempted a very highly leveraged transaction in a deflationary market – the results of which were predictable and devastating to the innocent creditors swept along in its wake."
"The Credit Agreement requirements had a devastation effect on Crescent. First, and most critically, development was constrained by the limited cash available for capital expenditures, by the lack of bonding capacity, and by the inability to obtain project-specific financing. Crescent, as a result, was unable to continue with its development operations, could no longer sustain its planned operations, and was immediately and fatally imperiled as a result of the Transaction."
"The transaction, as structured, allowed Duke to take as much or more cash out of Crescent than it would have received by selling the entire entity. The purpose of the Transaction was to allow Duke to cash out its interest in Crescent and shift the risks of Crescent's failing business onto creditors. In fact, Duke's credit rating improved once the transaction closed and Crescent's liabilities left Duke's balance sheet."
"…in its role as lender, Morgan Stanley Senior Funding, Inc. did not actually retain any exposure on the loan, but instead syndicated 100% of its interest in the loans."
"The 2006 Duke Transaction gave Morgan Stanley a way to raise $415 million from its investors, launch a major new fund, and earn roughly $8 million in additional asset management fees on top of the fees it was earning as a financial advisor and lending syndicate arranger."
"Crescent CEO Arthur Fields initially opposed the transaction and argued in favor of keeping Crescent under Duke ownership. This was because, as Fields observed shortly after the closing, without Duke's credit the company lacked the working capital it needed to survive. Then Duke paid Mr. Fields $38 million in cash when the Transaction closed and, based on the transaction valuation, Field' interest in Crescent Holding was valued at an additional $16 million, for a total payout of some $55 million. Mr. Fields than approved the Transaction."
"Defendants' actual knowledge of the deteriorating market conditions, and their approval and participation of the Transaction in spite of such knowledge, constitutes actual intent fraud on Crescent and its Creditors."
"Defendants' actual knowledge of the fact that the Transaction would result in immediate failure to meet the financial covenants of the Credit Agreement (which it did from the first quarter after closing), and their approval and participation of the Transaction in spite of such knowledge, constitutes actual fraud on Crescent and its Creditors."
Note: Bankruptcy Litigation Trusts as described by Eric Morath in DOW JONES DAILY BANKRUPTCY REVIEW
Bankruptcy Litigation Trusts May Be 'Lottery Ticket' For Creditors
"A trust created in the bankruptcy case that allows creditors, or another party, to pursue potential claims against executives, lenders, suppliers and others, while allowing the operating company to be sold or otherwise emerge from bankruptcy. The lawsuits those trusts pursue could provide a "lottery ticket" to creditors otherwise destined for a minimal payout in a Chapter 11 case, said Stephen J. Lubben, a bankruptcy law professor at Seton Hall University. "Unsecured creditors are often left with the dregs," Lubben said. But throw those claims into a "litigation trust and creditors have some basis for a recovery," he added."
"…they can seek to unwind transactions that occurred when the company was insolvent; they can attempt to wrest back payments that benefited certain creditors above others; and they can pursue claims against current and former officers of the failed company."