By Joseph T. O’Connor ExploreBigSky.com Editor

BIG SKY – There hasn’t been much public news concerning the Club at Spanish Peaks since its Chapter 7 bankruptcy filing in October 2011, when the club laid off more than 100 employees and closed its club operations. But work to find a buyer has been ongoing behind the scenes, and now the moss is beginning to come off this slowly rolling stone.

Ross Richardson, the trustee appointed to oversee the club’s property and other assets, and Eastdil Secured, the brokerage Richardson hired to market and sell those assets, have laid out a timeline that was approved by the Montana bankruptcy court in Butte on March 5.

In doing so, they set dates for three significant events that will decide the future of the 5,300-acre private ski and golf community.

The first, April 19, is the deadline for interested parties to submit stalking horse bids, setting the bar against which subsequent bids will be measured. Next, on May 2, Richardson will choose one of these initial bids as the stalking horse – the highest or most qualified. Finally, on June 3, an auction will take place in the bankruptcy court in Butte, where potential buyers will place their final bids on the club.

The Weekly surveyed the players in order to explain the terms, timeline, and significance of events surrounding this complex sale.

What is a stalking horse bid?

A stalking horse bid is a way to test the market in a bankruptcy case. The trustee chooses this initial bid to maximize the worth of the debtor’s assets and uses it as a template for future bids.

Essentially, it’s buyer protection, says J. Thomas Beckett, a Salt Lake City lawyer retained by the Spanish Peaks ad hoc group to follow the case.

“The stalking horse offer goes in the lead and takes the risk, but they’re recompensed.”

In bankruptcy cases, bidders incur due diligence, including research, fees associated with lawyers and other expenses. The stalking horse advantage is twofold:

– First, the bidder receives overbid protection, which requires a future bidder to put forth a bid equal to that of the stalking horse, plus 2.5 percent.

– Second, the stalking horse bidder receives a breakup fee of 2 percent of the bid. This compensates him for fees incurred through due diligence and incentivizes groups to obtain the initial bid.

Bankruptcy: Chapter 11 versus Chapter 7

Chapter 11 of the U.S. Bankruptcy Code – which is the process both the Yellowstone Club and Moonlight Basin went through in recent years – permits any company to reorganize under its original management, if unable to pay debts or pay off creditors.

“It’s a lot more expensive,” said J. Thomas Beckett, “In Chapter 11 bankruptcy, the debtor pays for its own lawyers [as well as] lawyers for the unsecured creditors committee.”

Secured lenders or creditors, such as Oaktree, in the Club at Spanish Peaks’ Chapter 7 case, have collateral, Beckett said, by essentially owning the property. This type of bankruptcy requires debtors to pay off creditors through the sale of assets – everything is liquidated.

But the Club at Spanish Peaks is an atypical Chapter 7, according to Beckett, who represented the unsecured creditors committee in the Yellowstone Club’s 2008 Chapter 11 bankruptcy case. The ad hoc group wants the Club at Spanish Peaks to sell as a single entity.

“[In this case,] you’re not liquidating by chopping [the club] up and selling it in pieces,” he said. “The trustee and Eastdil are very smart. Everyone understands this needs to sell as a whole – as an operating, successful club.”

In January 2012, the Spanish Peaks’ bankruptcy case was moved from a court in Delaware to one in Montana. Until then, the trustee in the Delaware case was working toward liquidating assets at the club, according to the Montana trustee, Richardson.

At this point, Richardson expects buyers to bid for the entire club, because the whole club is worth more than the sum of its assets.

The Spanish Peaks ad hoc group represents 83 percent of the 180 current club members. Each ad hoc member paid $1,500 for Beckett to represent the group’s interests.

The deal

Face value on The Club at Spanish Peaks’ debt is more than $122 million, according to Richardson, who will likely take the highest offer for the assets. But the sale could go for as low as $20 million, which is the floor price the secured lenders set under an agreement with Richardson.

“Nobody’s going to buy [the Club at Spanish Peaks] for $120 or $130 million,” Richardson said. “Not anywhere near. It’s not worth [that much money].”

If that minimum price of $20 million isn’t met, the secured lenders can choose to accept a lower bid or assume ownership of the club, said John Romney, a member of a steering committee representing the ad hoc members group.

According to court documents, Richardson will receive a $750,000 “carve out” from the secured lenders once a sale is finalized. This money will come out of the total sale of the property and will be used to pay administrative costs and court and lawyer expenses, including Richardson, as well as Eastdil for its work initiating a sale. Some money is expected to go to unsecured lenders.

If the property sells for more than $20 million, secured lenders will add 2 percent of any additional sale money to the carve out, which could go to unsecured creditors, pending the amount of Richardson’s trustee fee. At print time, Richardson was unavailable for comment.

While it’s unknown who will put in for a stalking horse bid or bid at the auction, sources close to the situation say there could be as many as 10 interested parties.

“There is a good bit of interest in the offering,” affirmed Randall Evans, managing director of Eastdil Secured. “Fortunately, the second-home market is coming back across the country. Some people had the expectation that no one would show up to bid [for the Club at Spanish Peaks], but that’s not the case.”

Because of the complexity of the sale, Romney isn’t as optimistic.

“I think there will be interest but not a lot of bids,” he said. “It will probably cost a half a million bucks for due diligence, and [prospective bidders] only have a month to do it.”

This is an ongoing story in the Weekly, which will feature subsequent installments as information becomes available.

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The players

Brokerage – Eastdil Secured, international real estate investment company

Trustee – Ross Richardson, real estate lawyer in Butte, appointed as trustee in January 2012

Secured lenders – Consortium of banks led by Oaktree Capital Management, an investment management firm headquartered in Los Angeles

Members – The Club at Spanish Peaks’ ad hoc group, a 150-member Spanish Peaks homeowners group

Lawyer for members – J. Thomas Beckett, lawyer retained by ad hoc group in October 2011

Bidders – unknown