Crescent Resources Bankruptcy Litigation Trust Amends Its Complaint against Duke Energy
The 69-page amended complaint provides more specificity than the original 38-page complaint. Palm Coast’s Matanzas Golf Course never had a chance of reopening once Duke stripped Crescent’s equity.
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."Crescent Resources Litigation Trust v. Duke Energy Corporation – First Amended Original Complaint
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."
Federal REDRESS – Palm Coast, Inc.
RE: In the Matter of International Telephone and Telegraph Corporation, Et. Al.
Consent Order, Etc., in regard to alleged violation of the Federal Trade Commission Act.
Docket C-2854, Complaint, Dec. 10, 1976 – Decision, Dec. 10, 1976
Consent order requiring a New York City conglomerate and its Miami, Fla., subsidiaries, ITT Community Development Corporation and Palm Coast, Inc., among other thing, to cease misrepresenting or failing to make pertinent oral and or written disclosures regarding the risks, value, and soundness of land development; misrepresenting the degree of development of the land they offer, property’s poximity to waterways, major roads, shopping and recreational facilities; and failing to disclose purchasers’ rights to cancellation and refunds. ——.> Further, the order required construction of particular facilities<———– intended to improve the value of land already sold, and limits the sale of registered lots for a period of fifteen (15) years.
II. CONSUMER INJURY–NECESSITY FOR CONSUMER REDRESS–CONSUMER REDRESS
Most of Palm Coast residential lots are one-quarter of an acre currently selling for a minimum of $ 4,700., i.e., $ 18,800. per acre. By the datee the deed is tranferred to the consumer, usually six to ten years after an installment sales contract is signed, respondents are obligated to clear the lot and provide roads, drainage, utilities, and some recreational amenities. Before execution of the consent order respondents were not obligated to provide a grocery store, a shopping center, an office building, or other indispensible amenities associated with a self-contained or fully developed community which is what Palm Coast is represented to be.
In all of Flagler county, there are only 2,500 households and 7,100 people. The Palm Coast development which is located in Flagler County has less than 700 residences and 1,6000 people. 2/ Consumer interviews, consumer complaints, the paucity of construction activity by homesite purchasers, and the sales techniques and promotional material used by respondents led staff to conclude that the majority of Palm Coast lots were purchased for investment reasons. consumers believe that after a short period of time, their lots can be resold at a profit. However, of the more than 38,000 lots sold, less than one hundred (1000) lots have been resold by individual owners. 3/
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…A fifteen year moratorium on the use of the 51,000 acres surrounding the 42,000 acres under development has also been agreet to . Respondents were unable to accurately compute the cost for implementation of these changes, however, an estimate of almost $ 30,000,000.00 was suggested by respondents to give staff an idea of the magnitude of their expected costs and write-offs.
This order, if accepted, represents
the largest amount of consumer redress
ever ordered by the Federal Trade Commission
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August 1976
Mr. and Mrs. George E. Chuddy
28 Lake Drive
Darien,Connecticut 006820
Dear Mr. and Mrs. Chuddy:
Because you have made a commitment in Palm Coast by establishing your home here, we believe you should be aware of an agreement that we recently reached with the Federal Trade Commission.
ITT Community Development Corporation ( ICDC) has signed a Consent Agreement with the Federal Trade Commission (FTC) concerning the furture development of Palm Coast. Signing the agreement does not constitute an admission that any law has been violated, as the agreement itself states. We feel the agreement is important in order to attain our primary goal — the development of Palm Coast as a balanced, well-rounded community.
An important part of the ‘Consent Agreement’ calls for the execution of plans, within six years, which we believe, in the long run, will be good for Palm Coast. In brief, among other things , we have agreed to the following:
1. A shopping center with at least 400,000 square feet of floor space will be provided.We are already in contact with prospective developers of individual stores, including a supermarket.
2. With appropriate governmental agreement, a traffic interchange on Interstate Highway 95 will be constructed to serve Palm Coast according to plans we submitted to the Florida Department of Transportation in August 1972. ICDC will pay for the interchange as originally designed.
3. An office and research park area will be developed with appropriate roads and utilities to serve it and landscaping to make it an attractive part of Palm Coast. Planning for this already is under way.
———->4. A multi-purpose office building, with at least 5,000 square feet of floor space, will be constructed for———> tenants <———in the office and research park. This structure, also, is under planning.
5. We will move the headquarters of ICDC to Palm Coast. We plan to be substantial employer contributing much to the economy of Palm Coast and Flagler County.
The agreement also provides for us to restrict our developoment efforts to 42,000 acres for a period of 15 years ( with possible extension for another five years). This will allow appropriate construction in areas set aside for commercial establishments, light industry, recreation, preservation and conservation and other residential uses. Moreover, during this 15- or 20-year period, sales will be limited to 48,000 registered lots of which over 36,000 already have been sold.
The aforementioned are some of the most important points contained in the Consent Agreement as it affect you and the balanced development of Palm Coast. You will also be interested in knonwing of additional projects that we believe further enhance the community.. Here are some examples:
We have donated two acres of land, adjoining the furture Emergency Services Building site, to the Palm Coast branch of the YMCA to be used as the location fo a Community Activities Center. We will bear the cost of constructing this facility for all community residents and for sharing in operational expenses during its first three years — a gift totalling more than $400,000.
We have provided as a gift a site of 57 acres to the Flagler County School Board for a junior-senior high school. The first class of proud seniors was graduated from Flagler-Palm Coast High School last spring.
—————>We have designated a number of sites for recreation, parks, preservation and conservation, and other public areas. <——— One site, in Section 1-A, now is being developed and a paved bicycle path has been constructed. Another bike path, starting near the Yacht Club, is in use.
We are working with the Palm Coast Civic Association so that Palm Coast residents can form a legal entity to which we can donate oa one-acre site and an Emergency Services Building to house fire and security forces, an ambulance, and facilities for community activities. A preliminary blueprint fo the structure has been approved by a committeee from the Community.
As you know, we donated a $36,000 pumper fire truck to the Palm Coast Volunteer Fire Department , which will be stationed in the Emergency Services Building..
Palm Coast’s first church building, St. Mark by the Sea Lutheran Church, ws dedicated on the morning of July 4. Catholic and Baptist church organizations have purchased sites for their proposed churches. And Temple Beth Shalom is considering building a Synagogue. We at ICDC are very pleased, as we know citizens of Palm Coast are, to witness this growth and progress in the vitally important religioius life of our community.
Palm Coast’s first financial institution, a branch of the Security First Federal Savings and Loan Association, recently opened for business. We believe others will follow with the growth of the community.
These and many other facilitites will be needed to serve Palm Coast’s growing population. And it is growing. During the last nine months, construction of over 200 homes began. We now have over 1,000 people living and enjoying the good life at Palm Coast.
In closing, let me assure you that the ITT Community Development Corporation believes very strongly in the furture of Palm Coast and that we are determined that it will grow and progress in a balanced and healthy manner.
Sincerely yours
Alan Smolen
ITT CDC President
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RE; Federally ordered 15 year ‘Compliance Report’ with Exhibits A and Exhibits B:
Federal Trade Commission
Page Two of Three
December 1, 1989
Federal Trade Commission
Page Three of Three
December 1, 1989
….The 4 Industrial Parks mentioned abovve, currently home to approximately 35 companies, have been developed to balance the economic developoment of the community and provide employment. Some facilities are in the construction stage and negotiations continue with more than 30 additional industrial prospects. Exhibit A attached to this letter provides a complete listing of present industrial operations in Palm Coast.
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…Recreation has always been an important ingredient of Palm Coast lifestyle, ———->CDC has constructed three 18 hole Championship Golf Courses and the fourth Championship golf course is currently under construction.<———-> The Palm Coast Player Club, opened in 1986, is a 18 court tennis complex that is one of the few in the nation with hard court, clay and grass tennis playing surfaces. The Club earned the distinction of ‘1987 Court of the Year" from Tennis Industry.Magazine and the American Society of Landscape Architects. The Belle Terre Swim and Racquet Club is a complete fitness facility with a 25 meter heated pool, four tennis courts and comprehensive Nautilus room. The Palm Coast Marina, recognized as one of the finest harbors between Hilton Head and Fort Lauderdale, opened in 1979 and serves boaters with 80 slips and comprehensive services, including a ships’ store for supplies and gifts. The marina is now part of a Resort setting on the Intracoastal Waterway that included CDC’s 154 room Waterfront Sheraton and the Harbor Club Vacation Resort. Exhibit B attached to this letter provides a more in depth description of recreational failities in Palm Coast…
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RE: Federally ordered ’15 Year Compliance Report’ Exhibit B:
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Matanzas Woods Golf Club – Ed Crowell, PGA Head Professional
Lakeview Boulevard
18 Hole Championship Course
6,985 Yards, Par 72
Arnold Palmer and Ed Seay Design
Practive Range and Putting Green
Snack Bar and Lounge
Shoe Lockers
Pro Shop 445-1903 7 a.m. – 6 p.m. Daily
Club rentals and repairs, lessons, clothing, shoes, golf equipment, gifts and starting times. Proper golf attire required
Par-Tee Room 445-3977 See ‘Eating Establishments’:
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Palm Coast Fee Structure: June 1, 1989
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Palm Coast Players Club 18 Tennis Courts ( Hard, Clay & Grass), Pro Shop, Lunge & Cafe, Locker & Shoer Facilities, Aerobics Room, Racquetball and Seasonal Pool: Annual $ 685, Semi Annual $ 535 Seasonal Pool: ( April – October and Locker & Shower Facilities $ 200
Palm Coast Beach Club – Sunsport Beach Club: Seasonal Pool; Sun Deck with Chairs and Lounges; Towels; Dune Walkover to Beach; Restrooms, Snack Bar and Refreshments; Fishing Equipment Rentals; Retail Beach Supplies Annual $ 250.
Dual Clubs Membership in any two SunSport Golf Clubs Annual $ 1895 Family, Single 1350
Gold Card Membership in all three Sunsport Golf Clubs Annual $ 2250 Family, Single $ 1800.
Recorded with HUD –
Florida Public Offering Statement
filed by
ITT Community Developement Corporation
for Palm Coast, Inc.
Part II ( Page 4 of 10 )
AREA FACILITIES:
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Recreation: An 18 hole golf course and clubhouse ( 2 miles) have been constructed at Palm Coast, east of Interstate 95 and north of Palm Coast Parkway, adjacent to Palm Coast section 8. A second 18 hole golf course and semi-private Country Club, including 2 tennis courts and swimming pool (2.5 miles ) are located west of I 95 adjacent to Palm Coast Section 22. A third 18 hole Golf Course and clubhouse (9 miles) are located west of I -95 adjacent to Palm Coast Section 37. A fourth Golf Course and clubhouse (8 miles) are completed west of I 95 adjacent to Section 34.
The Company has also constructed an 80 Slip Marina (2 miles) and ships’ store adjacent to Palm Coast Section 8. Boat launching and docking facilities are available at the Marina and public boat launching facilities exist at Flagler Beach ( 3 miles) Fishing, both fresh and salt water, is available within ten miles. A Swim and Racquet Club with a 25 meter pool and 4 tennis courts ( 3 miles) have been constructed in Section 24. The Company has constructed the Players Club an 18 court tennis facility which includes a swimming pool, racquetball courts and locker facilities.
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