CrossHarbor. Sam Byrne Bought the Yellowstone Club for $335 Million Reduction then Refuses "Discovery" in Lawsuit over It.

"
1. The Agent and Prepetition Lenders have been seeking informal and formal
discovery of CrossHarbor Capital Partners, LLC and its affiliates and agents
("CrossHarbor") and other insiders of the Debtors since November 18, 2008. Since then,
CrossHarbor repeatedly has evaded such discovery.

Indeed, since these chapter 11 cases commenced, CrossHarbor has produced only two (2) documents (the "MOU" and "Agreement to Form") - - and then only because this Court specifically ordered their production. [Dkt. No. 152]

2. CrossHarbor's Motion-Objection is another attempt to evade prior
discovery orders and directives of this Court authorizing the Agent to obtain legitimate
and proper discovery of CrossHarbor, including

(i) an order, dated December 10, 2008 [Dkt. No. 149],

(ii) the Court's oral ruling on December 17, 2008 overruling
CrossHarbor's objection to the December 10, 2008 discovery order, and

(iii) the Court's most recent Rule 2004 discovery order, dated January 20, 2009 [Dkt. No. 289] (the "2004 Order") authorizing the Agent to take broad discovery of CrossHarbor.2

3. The time has come for CrossHarbor to permit - - and to be ordered to submit to - - Rule 2004 discovery of non-privileged information concerning its numerous prepetition and postpetition insider transactions and relationships with the Debtors, their ultimate control person, Edra Blixseth ("Blixseth"), their manager, Discovery Land Company ("DLC), and other parties.

Without such discovery, there is no way to measure and ensure the integrity of these chapter 11 cases and the plan process.

4. More particularly, the following circumstances justify and warrant the
Rule 2004 discovery that CrossHarbor seeks to evade:

· Less than one year ago, CrossHarbor was contractually obligated to
purchase substantially all of the Debtors' Yellowstone Club assets for
approximately $470 million (the "CrossHarbor Asset Purchase
Transaction"). See Exhibit 1 hereto (Affidavit Of E. Blixseth, dated April
4, 2008) ("Blixseth Affidavit"), ex. K thereto.

· The CrossHarbor Asset Purchase Transaction would have provided funds
sufficient to pay in full all of the Debtors' creditors (including the
Prepetition Lenders), as well as substantial amounts for some of the
Debtors' equity holders. See Exhibit 1 hereto, para. 6-7.

· In mid-March 2008, just a week before CrossHarbor terminated the $470
million CrossHarbor Asset Purchase Transaction, CrossHarbor's principal,
Sam Byrne, attempted to persuade the Debtors to pursue a "prepackaged
bankruptcy" for the Yellowstone Club - - instead of the CrossHarbor Asset
Purchase Transaction. Id., para. 8, ex. C .

· CrossHarbor wanted the Debtors to pursue a "prepackaged bankruptcy" in
order to hinder certain creditors, avoid payment of the Prepetition Lenders,
and presumably allow CrossHarbor to obtain control of the Debtors and
their properties through bankruptcy without paying the full CrossHarbor
Asset Purchase Transaction purchase price. Id.

· CrossHarbor refused to close the CrossHarbor Purchase transaction and
threatened the Debtors in an effort to persuade them to agree to a prepackaged bankruptcy. Id.

· In connection with CrossHarbor's efforts to force the Debtors into
bankruptcy in March 2008 and its termination of the CrossHarbor Asset
Purchase Transaction, CrossHarbor used as leverage rights it purportedly 3
had obtained from Timothy Blixseth and Blixseth Group, Inc.

to (i) exercise development rights under the Yellowstone Club Master Plan of
Development and

(ii) purchase a substantial Yellowstone Club tract now owned or controlled by Blixseth (the "Tract"), to be subdivided with 41 lots for a purchase price of approximately $56 million. Id., ex. D, E. · Shortly after CrossHarbor terminated the $470 million CrossHarbor AssetPurchase Transaction on March 26, 2008, Blixseth filed the Blixseth Affidavit in a Montana state court, in an unsuccessful attempt to intervene in creditor litigation against the Debtors, to take control of the Debtors and advance her personal interests as an indirect shareholder and indirect creditor of the Debtors. Id. 1, 5, 6, 16.

· In the months that followed termination of the CrossHarbor Asset
Purchase Transaction, Blixseth and CrossHarbor formulated plans and
strategies that would permit CrossHarbor to obtain control of the Debtors
for its and Blixseth's benefit. (Dkt. No. 164 (Exs. 14-15: Memorandum of
Understanding dated August 29, 2008; Agreement to Form dated May 13,
2008); Transcript of December 11, 2008 Hearing (Blixseth testimony), at
63:18-65:1)).

· In August 2008, Blixseth obtained equity control of the Debtors through a
Marital Settlement Agreement with her ex-husband, Timothy Blixseth.

Blixseth's financial obligations under the Marital Settlement Agreement
were funded by CrossHarbor, and perpetuated CrossHarbor's control over
the Tract to be subdivided with 41 lots and valuable Yellowstone Club
development rights. (Transcript of December 11, 2008 Hearing (Blixseth
testimony), at 71:19-72:15)

· As a result of CrossHarbor's funding of Blixseth and other agreements and
understandings between the parties, she is effectively dominated by
CrossHarbor.

In particular, Blixseth and her affiliate, BLX Group Inc.
("BGI") are indebted to CrossHarbor in an amount exceeding $35 million.

Such indebtedness is secured by Blixseth's personal residence – owned by
BGI – and CrossHarbor is now enforcing such indebtedness (Transcript of
January 13, 2008 Hearing (Blixseth testimony), at 42:6-43:1).
· Upon obtaining ownership control of the Debtors, Blixseth gave
CrossHarbor (through its agent, Joseph Harris, acting as Chief Operating
Officer) full management control over the Debtors' Yellowstone Club
businesses and properties.

(Blixseth Dep. Tr. at 26:4-27:18; 61:14-62:17)
· After obtaining ownership control of the Debtors, Blixseth reached an
agreement in principle with CrossHarbor for a "global" recapitalization
and restructuring of the Debtors - - and entered into written agreements
(an "Agreement to Form" and "MOU") with CrossHarbor and DLC to 4
restructure the Debtors' businesses and advance their common interests in
giving CrossHarbor ownership and control of the Debtors' properties and
businesses. (Blixseth Dep. Tr. At 33:11-49:22; Transcript of December 11,
2008 Hearing (Blixseth Testimony) at 87:7-23).

· The Agreement to Form (which has not been terminated) calls for a
comprehensive development of Yellowstone Club property by
CrossHarbor.

This includes the platting of the Tract and CrossHarbor's
exercise of valuable development rights of the Debtors for Blixseth's and
CrossHarbor's benefit. Such platting and development by CrossHarbor
effectively reduces the number of lots that can be platted on the Debtors'
property because the overall Yellowstone Club development plan density
has not increased. (Ex. 2 hereto Madison County Planning Board Meeting
Minutes, dated April 7, 2008).

· On or about September 1, 2008, DLC began managing the Debtors
pursuant to a memorandum of understanding between the Debtors and
DLC (the "MOU"). (Blixseth Dep. Tr. 29:8-21)

· DLC has continued to manage all of the Debtors' operations and sales and
marketing functions, but was paid little if any compensation prepetition
and initially postpetition under the MOU.

The MOU entitles DLC to receive an equity participation in the restructured Debtors. (Blixseth Dep. Tr. 20:22-22:14)

· DLC is participating in the chapter 11 process in anticipation of achieving
the outcome for DLC contemplated by the MOU and Agreement to Form,
including acquisition of a "financial interest" in the Debtors. (Blixseth Dep.
Tr. 51:19-54:17)

· Just prior to commencement of these chapter 11 cases, Blixseth and
CrossHarbor steered the Debtors into bankruptcy, including by having
CrossHarbor's counsel prepare the Debtor's chapter 11 bankruptcy papers -
- at a time when the Debtors had no separate or independent bankruptcy
counsel. (Blixseth Dep. Tr. at 64:15-65:22)

· The Debtors' Chief Restructuring Officer, Ronald Greenspan
("Greenspan"), was selected and introduced to the Debtors by Blixseth's
personal counsel.

CrossHarbor, Blixseth and Greenspan have caused the
Debtors to deal exclusively with CrossHarbor in their formulation of plan
of reorganization terms.

· CrossHarbor's principal, Sam Byrne, has negotiated and reached putative
agreements with Blixseth on plan of reorganization terms - - without
involvement of Debtors' counsel.

· BGI is obligated to the Debtors on notes aggregating in excess of $200

million and thus, it follows, the Debtors and their estates and creditors are

competing against CrossHarbor in respect of its claims against Blixseth

and BGI's assets (Transcript of December 13, 2008 Hearing, 19:14-22,

27:19-22, 37:8-16)

5. The foregoing web of insider circumstances, relationships, agreements and

actions involving CrossHarbor, Blixseth and DLC pose substantial conflicts of interest

and self-dealing that undermine the prospects for a fair and lawful reorganization that

maximizes the value of the Debtors' estates for legitimate creditors.

Such conflicts of interest risks are compounded by the terms of the Final DIP Financing Order, which gives CrossHarbor approval rights over any plan of reorganization and asset sales.

6. Given the resistance of CrossHarbor, Blixseth and others to cooperate with

the Agent's discovery of facts germane to the integrity of these chapter 11 cases - - and

the numerous alleged and admitted conflicts of interest and irregularities in the

prepetition and postpetition management of the Debtors, their properties and financial

condition - - the Agent is filing contemporaneously herewith its motion under 11 U.S.C.

§ 1104 for mandatory appointment of an examiner (the "Examiner Motion").

7. For the reasons set forth more fully below and in the Examiner Motion,

the Court should deny CrossHarbor's Motion-Objection and enter an order compelling

CrossHarbor to provide the discovery authorized by the 2004 Order.

Need For Rule 2004 Discovery Of CrossHarbor

8. A plethora of insider relationships, agreements, understandings,

obligations and commitments exist between and among CrossHarbor, the Debtors, DLC

and other parties in interest. Each of the foregoing named parties are "insiders" within

the meaning of the Bankruptcy Code. See 11 U.S.C. § 101(31) ("insiders" include an 6

"officer", "person in control of the debtor", "affiliate, or insider of an affiliate as if such

affiliate were the debtor", and "managing agent of the debtor").

9. CrossHarbor is an "insider" given its prepetition and postpetition control

over the Debtors, directly and indirectly through its present control and influence over

Blixseth and her financial condition; its liens in the amount of $35 million on Blixseth's

personal residence, which is property owned by BGI - - the entity that owns and directly

controls the Debtors; its direct prepetition management control of the Debtors through

CrossHarbor's agent, Joseph Harris, who acted as the Chief Operating Officer of the

Debtors' Yellowstone Club businesses and properties before the petition date;

its activities steering the Debtors into chapter 11 before they engaged their own counsel; and

numerous contractual and other arrangements that continue to give CrossHarbor, among

other things, rights to act for the Debtors and control their development rights, including

land development platting rights.

10. Rule 2004 discovery of CrossHarbor is needed to uncover non-privileged

information that will permit the Court and all parties in interest a fair opportunity to

understand CrossHarbor's current and historical roles, involvements, intentions and

exercises of control over the Debtors and their properties, both prepetition and in

connection with these chapter 11 cases. Such information is needed before the Court

proceeds with approval of any disclosure statement for any plan of reorganization in

these cases.

The Court Should Overrule The CrossHarbor Motion-Objection

11. The Court should overrule the Motion-Objection because good cause

exists for examination of CrossHarbor under the 2004 Order. "The purpose of a Rule 7

2004 examination is to assist a party in interest in . . . assessing whether wrongdoing has

occurred."

In re Recoton Corp., 307 B.R. 751, 755 (Bankr. S.D.N.Y. 2004); see also

Commodity Futures Trading Com. v. Weintraub, 471 U.S. 343, 353-54 (1985) (noting

that uncovering insider fraud is a "goal" of the Bankruptcy Code). This extends "beyond

the debtor to persons associated with [them] as well as to those persons who may have

had business dealings with the debtor." In Re Symington, 209 B.R. 678, 690 (Bankr. D.

Md. 1997).

Accordingly, "good cause is shown if the [2004] examination is necessary to

establish the claim of the party seeking the examination," In re Dinubilo, 177 B.R. 932,

943 (E.D. Ca. May 10, 1993), and "inquiries that are tightly-focused on the creditor's

relationship with a particular debtor will require a low level of good cause because they

represent a low level of intrusion into the creditor's business affairs and a low risk of

abuse."

In re Countrywide Home Loans, 384 B.R. 373, 393 (Bankr. W.D. Pa. 2008).

12. Good cause is amply present here. A web of material insider relationships

exists between and among CrossHarbor, the Debtors, Blixseth, the various Blixseth
controlled entities, DLC and other parties in interest.

Such relationships continue to

threaten the integrity of chapter 11 cases and any plan of reorganization process.

Moreover, any plan in these cases will implicate the treatment of the Prepetition Lenders'

claims - - and, therefore, discovery of issues going to the integrity of the plan proposal

and confirmation process is cause for enforcing the 2004 Order.

13. Blixseth and others have admitted CrossHarbor's indisputable prepetition

and postpetition involvements in the Debtors' and Blixseth's affairs. As such, there is no

merit to CrossHarbor's position in its Motion-Objection (pp. 9-10) that the discovery

being sought is outside the ambit of Rule 2004. CrossHarbor is not merely a "third party" 8

witness having "no relationship" to the Debtors' affairs or the administration of these

cases.

As the record of these cases already reflects - - and as Rule 2004 discovery will

show more completely - - CrossHarbor is a knowledgeable prepetition and postpetition

"insider" of the Debtors within the meaning of section 101(31) of the Bankruptcy Code.

See 11 U.S.C. § 101(31). As an insider, CrossHarbor is properly and fairly subject to

Rule 2004 discovery - - and such scrutiny is all the more necessary because of

CrossHarbor's central role and control over the Debtors' postpetition financing and plan

process.

14. There is no merit to CrossHarbor's allegations that the discovery the Agent

seeks is an "abuse or harassment" or a "scorched earth" tactic, because the discovery

sought falls squarely within Rule 2004. It is CrossHarbor that is abusing and

manipulating the Rule 2004 examination process and these cases with repeated attempts

to evade prior discovery requests and orders of the Court.

15. Despite CrossHarbor's rhetoric about its "extensive efforts to

accommodate Credit Suisse 's discovery demands" in these proceedings – CrossHarbor

has merely evaded the Agent's attempts to take meaningful discovery by insisting upon

patently unreasonable restrictions on the scope of any production.

However, inquiries under Rule 2004 are properly very broad. In re W&S Investments, Inc., 1993 WL 18272 (9th Cir. January 28, 1993) at *2 (citing In re Wilcher, 56 B.R. 428, 433 (Bankr. N.D. Ill. 1985). CrossHarbor's Proposed Limits On Discovery Are Inappropriate

16. The Court should not countenance CrossHarbor's efforts to limit the scope

of Rule 2004 discovery to time periods and information set by CrossHarbor that will 9

preclude proper Rule 2004 examinations. Given the circumstances identified above,

there is abundant need and cause for Rule 2004 examination of non-privileged documents,

communications and other information that sheds light on CrossHarbor's: numerous

involvements with the Debtors and their properties; its insider relationships with the

Debtors, Blixseth, DLC and others; its prepetition actions and intentions to accomplish an

acquisition of the Debtors' assets within the last year (including efforts to force the

Debtors into bankruptcy as early as March 2008);

its termination of such acquisition and related efforts to force the Debtors to commence "prepackaged" bankruptcy cases in March 2008; its actions and intentions when directly controlling the management of the Debtors businesses prior to the commencement of these cases; its actions and intentions steering the Debtors toward commencing these chapter 11 cases; and its subsequent postpetition actions and intentions related to the Debtors' cases, Blixseth and DLC.

17. In short, the Court should overrule the Motion-Objection because it is only

another attempt by CrossHarbor to delay, hinder and avoid legitimate inquiry into

CrossHarbor's insider status, relationships, actions and intentions that go to the integrity

of these chapter 11 cases, numerous prepetition transactions involving CrossHarbor, and

any reorganization plan proposed by CrossHarbor and the Debtors.

18. CrossHarbor's agreements and relationships with Tim and Edra Blixseth

existed long before Edra Blixseth regained control of the Debtors in August 2008, and

CrossHarbor has been deeply involved with the Debtors and Blixseth in connection with

debtor-in-possession and undisclosed reorganization plan proposals, understandings and

agreements in these cases.

Although CrossHarbor wants to limit discovery only to the period ranging from May 19, 2008 to November 26, 2008, in the circumstances identified 10 above, it is entirely appropriate and necessary that the discovery period be January 1, 2007 through to the present.

19. CrossHarbor's objection to producing its non-privileged internal business

communications and documents is also without merit.

The Agent should be permitted to examine internal CrossHarbor communications to effectively evaluate both the nature and scope of CrossHarbor's material insider relationships, as well as CrossHarbor's intentions with respect to prepetition and postpetition actions, transactions and proposals involving the Debtors and their property, including without limitation any possible insider intentions and actions undertaken to delay or hinder the Debtors' legitimate creditors.

Certainly, non-privileged internal communications between individuals at CrossHarbor

concerning such issues goes directly to "the acts, conduct, or property or to the liabilities

and financial condition of the debtor."

In re MMH Auto. Group, LLC, 346 B.R. 229, 233

(Bankr. S.D. Fla. 2006) (quoting In re Wilcher, 56 B.R. 428 (Bankr. N.D. Ill. 1985)). To

the extent any of those communications are either privileged or irrelevant, CrossHarbor

may designate them as such.

WHEREFORE, the Agent respectfully requests entry of an order (i)

denying the Objection, (ii) compelling CrossHarbor to produce all material, nonprivileged information possessed by them pursuant to the Court's Order for Rule 2004

Examination dated January 20, 2009, and (iii) granting the Agent and Prepetition Lenders

such other and further relief as is just and proper.

Dated: Billings, Montana

February 3, 2009 ... "

Source of Post and Full Document

http://ycmembers.org/docs/20090210_usbc_discovery.pdf

Crystal L. Cox

Investigative Blogger

Crystal@CrystalCox.com