Dick Fuld wants a mulligan.
Once dubbed the “Gorilla of Wall Street,” Fuld, the former chief executive of Lehman Brothers, is a partner in the Malibu Golf Club, the star-crossed course nestled among lush pine trees in the canyons of the Santa Monica Mountains.
He and his partners in Malibu Associates bought the roughly 650-acre property in 2006 for $32.8 million and took out millions more in loans to help with their grand plans to restore the course and add resort-style amenities. Yet while the course itself has performed well, the partnership has suffered under the weight of the debt it took on to finance the purchase and its pursuit of entitlements.
Last month it filed for Chapter 11 bankruptcy, the second time it has sought court protection.
The move came after Malibu Associates sought to delay foreclosure proceedings brought by its lender, U.S. Bank, which moved to seize the property after the partnership defaulted on its $46.7 million debt, which includes accumulated interest and penalties.
Kathleen O’Prey Truman, a partner at downtown L.A.’s Truman & Elliott representing Malibu Associates in the development and entitlement processes, said the bank’s action caught her off guard.
“This is not a typical bankruptcy,” she said. “They were forced to file.”
The bank had set an October deadline for the partnership to gain the necessary entitlements, and when the deadline passed it moved to seize the property. Final approvals were issued last month, Truman said, too late to forestall the foreclosure proceedings. The club was closed after the foreclosure commenced.
Through the process, the investors had been negotiating with potential new partners but were unable to close on a deal until the project secured all the necessary government approvals, Truman said. The goal was to secure another partner or buyer to pay off the debt and fund construction.
At one point, court records show, Malibu Associates had a deal pending with a potential buyer contingent on securing the final entitlements. Nonetheless, the foreclosure proceedings went forward and that deal fell through.
Fit to a tee
At $100 a round, Malibu Golf Club was among local golfers’ favorite places to tee off, at least until it closed in November. It did not require a membership to play, and as one of the few courses on the Westside, it wasn’t uncommon to spot a celebrity or local athlete on the greens of the 18-hole, par 72 course, said Kevin Heaney, executive director of the Southern California Golf Association.
“It’s always been a fairly sought-after golf course,” he said. “It’s (mostly used by) the people who live out that way who want to play golf but may not necessarily belong to a private club.”
As an enterprise, the club’s business appeared to be strong relative to the rest of the industry. Court records show Malibu Associates’ gross income topped $2.7 million in 2013, the last full year it was open, at the high end of the average American course.
Still, the golf industry has struggled to shake off the effects of the recession.
Some people place much of the blame for that recession on Fuld, who has joked in the past he’s “the most hated man in America” because of his role in the collapse of Lehman Brothers, which was liquidated after it filed for bankruptcy in 2008 with $619 billion in debt – the largest bankruptcy filing in U.S. history.
Fuld holds an 8 percent stake in Malibu Associates. His partners include Bay Area developer Tom Hix; Mark Kvamme, a venture capitalist in Columbus, Ohio; and Newport Beach developer Jeffrey Klein. (Klein told the Business Journal in December he was talking to two National Football League teams interested in moving to Carson; the Oakland Raiders and San Diego Chargers later announced their intention to do so.)
Diverse as the investor group is, they shared a vision of restoring the golf course, built in 1976. The course has a standard clubhouse with a restaurant, but the investors envisioned creating a retreat suitable for corporate conclaves. It would have 40 bungalows, meeting facilities and a new clubhouse complete with a fitness center and restaurant. The buildings would meet high environmental standards and the grounds would be restored by replacing invasive species with native plants. The habitat would be made wildlife friendly; the developers even hired Lee Kats, a biologist and professor at nearby Pepperdine University, to assist.
Those changes required approvals from the California Coastal Commission. (The course, despite its name, is not in Malibu but in unincorporated Los Angeles County.)
Through their attorney, the partners declined to talk about the project.
Though a call to Kvamme was not returned, his wife, Megan Kvamme, spoke briefly about the project. A former investment banker in Ohio, she recently took over the project’s accounting and said she remained hopeful the course will reopen one day.
“No matter who you talk with – real estate experts, financiers or visitors to the property, what stands out is what a gem of an asset this property is for the community and region,” she said. “There’s simply nothing else like it.”
Though she would not comment on the details of the dispute with the bank, she did confirm that Malibu Associates retained broker Colliers International last week to market the property in hopes of securing either a partner or buyer to pay off the current debt.
Keith Cubba, Colliers’ national director of golf course brokerage, said his firm would start marketing the property to potential investors April 7. He wouldn’t disclose the asking price.
Truman, the group’s land-use lawyer, was also optimistic.
“It’s a shame that we’re in this situation right now,” she said, “but, in the end, I truly believe the project is going to be built.”
The plans have been brewing for a decade.
Malibu Associates was formed in 2005. The partners put up several million dollars and got a pair of loans from California National Bank. The first, for $28.5 million, helped finance the purchase of the land; the second, for $11.5 million, was intended to fund the entitlement process, court records show.
But the fallout from Lehman’s collapse soon carried over to the Malibu project.
CalNational contacted the investors in 2009, asking for Fuld to submit updated personal financial statements, according to documents filed by Malibu Associates’ counsel that year in bankruptcy court. Fuld, who joined Lehman Brothers in 1969, became chief executive in 1993 and served in that role until the company declared bankruptcy after becoming heavily involved in subprime mortgage lending. Court records show he still lives in New York; his financials were not made public.
“Although these statements showed a decline in his net worth, they demonstrated that his net worth and liquidity still vastly exceeded the total amount of the indebtedness,” the partnership’s filing said.
But a day after Fuld submitted his statements, CalNational froze the company’s credit line “due to Mr. Fuld’s impaired financial status.” The bank also doubled the interest rate on the debt.
CalNational then attempted to foreclose on the property, forcing Malibu Associates into its first bankruptcy in 2009.
But even as it was putting the squeeze on Fuld and his partners, CalNational faced its own financial troubles. Regulators closed the bank, which had lost $1 billion in the market collapse, and transferred its assets to U.S. Bank.
The partnership came to an agreement with U.S. Bank in 2011 that called for the two CalNational loans to be consolidated and the maturity date pushed back – on the condition that the developers complete the entitlement process by October 2014.
But those entitlements came five months too late, and the bank moved to foreclose. Malibu Associates now claims the bank set it up to fail by implementing unrealistic requirements, according to a March 27 court filing. It has countered the banks claims, saying the lender owes it at least $30 million, plus interest and attorneys’ fees, for its alleged bad-faith dealings.
“By the time of the settlement negotiations, Malibu (Associates) had already invested well over $15 million into the project, and with the foreclosure litigation still pending it could not feasibly start over with another lender,” the partnership’s document said.
A U.S. Bank spokesman and a lawyer representing the bank declined to talk about the case.
Bankruptcy lawyer Jennifer Nassiri, partner in the Century City office of Venable who represents debtors and creditors, is not involved in this matter but reviewed parts of the case for the Business Journal.
In general, she said this dispute mirrors most single-asset bankruptcy cases. She pointed out that, at the end of the day, lenders are entitled to be repaid for loans granted and can usually foreclose on assets in the event of a default.
“The lender has discretion to determine whether to accommodate a borrower’s request,” Nassiri said. “There is no obligation on the part of a lender to agree to any of the debtors’ requests, including a request to extend a maturity date, depending on the facts and circumstances of the particular case.”
The bankruptcy filing holds off creditors, at least for a time. The owners, by shopping around the property now that they have entitlements, hope to bring in new partners with fresh money to pay off the existing debt and help bankroll construction.
“We are excited to begin an aggressive and strategic marketing campaign with Colliers International and their partners this week,” Megan Kvamme said. “Through this, I am confident that a joint venture partner or purchaser will emerge in no time.”
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