Tucked away in the vast investment portfolio of the California teachers pension fund is a luxury resort in Montana that features lavish villas, pristine golf links and world-class ski slopes.
The California State Teachers' Retirement System classifies its $100 million investment in the fund that owns Yellowstone Club as "high-risk, high reward." Whether its investment turns out to be a winner or a loser may depend on the outcome of a raft of lawsuits pending in California and Montana.
CrossHarbor Capital Partners, using money from CalSTRS and other investors, bought the Yellowstone Club out of bankruptcy in 2009 for $115 million.
Now the club's co-founder, Timothy Blixseth, has accused federal bankruptcy judge Ralph B. Kirscher of misconduct in his handling of lawsuits spawned by that bankruptcy. Blixseth alleges that Kirscher facilitated a below-market sale of the club to CrossHarbor's benefit. He also accused the judge of improper communications with Blixseth's legal adversaries.
Kirscher is hearing lawsuits over the exclusive resort community in Big Sky, Mont., which published reports have said counts Microsoft Corp. co-founder Bill Gates and entertainer Justin Timberlake as members. It features mountainside chalets that start at $8 million, according to a sales brochure.
Blixseth's complaint, filed in the U.S. District Court of Appeals for the 9th Circuit in San Francisco, accuses Kirscher of misconduct in numerous lawsuits in which investors and creditors for the upper-crust playground are seeking monetary damages from Blixseth.
A self-made real-estate tycoon, Blixseth once ranked 322 on the Forbes magazine list of wealthiest Americans.
Through a court clerk, Kirscher declined to comment, in keeping with 9th Circuit rules.
The 9th Circuit could dismiss the misconduct claim, censure Kirscher or remove him from office. Or it could opt not to reappoint the judge, whose term expires in November.
The vast majority of such misconduct claims are dismissed for lack of merit. But few involve major commercial cases, and claims filed by established lawyers in high-stakes cases might be taken seriously, said Robert Weisberg, an ethics scholar at Stanford University School of Law.
CalSTRS spokesman Michael Sicilia said the fund's $100 million commitment to CrossHarbor came in 2005, before its acquisition of Yellowstone Club, from a $10 billion "opportunistic investments portfolio," part of CalSTRS' $22 billion in real estate holdings.
After the real estate crash, CalSTRS like its larger counterpart for state employees, the California Public Employees' Retirement System began to move some of those holdings out of riskier ventures.
A 2012 CalSTRS report showed that CrossHarbor had used about $65 million in CalSTRS funds for Yellowstone Club and other properties, and that CalSTRS consistently had shown modest losses on the investment.
CrossHarbor recently increased the amount of CalSTRS funds in its investment pool, and results have improved, Sicilia said, without providing details. CrossHarbor has the right to invest all $100 million committed by CalSTRS.
Blixseth's attorney, Michael Flynn, said his client is seeking "massive" damages, into the hundreds of millions of dollars, from CrossHarbor and others involved in the dispute. The outcome of the many legal cases could dictate the outcome of CalSTRS' CrossHarbor bet.
Sicilia declined to comment about the court fights over the Yellowstone Club. "We take a long-term view on all our investments, and we think that in the long term things will work out," he said.
CrossHarbor executives declined to be interviewed, but in a written statement said that they believe no judicial misconduct occurred. "CrossHarbor has always acted in good faith, and will continue to do so," the statement said, noting that "conspiracy claims" by Blixseth previously had been rejected in court.
The Blixseth complaint also alleges that Kirscher maintained an improper relationship with Missoula law firm Worden Thane PC, where he formerly was a partner. The firm represents former minority shareholders in Yellowstone Club, who say that Blixseth owes them millions of dollars. Kirscher's award of $22 million to that group has been appealed.
Blixseth, a Washington resident, and his ex-wife, Edra Blixseth, have been accused of converting more than $200 million loaned to Yellowstone Club to their personal use, leading to the club's financial collapse.
In a ruling, Kirscher called Blixseth's actions "self dealings" that caused "substantial harm."
After an acrimonious divorce in 2008, Edra Blixseth ended up with sole possession of the couple's majority club ownership. After the credit and real estate collapse, she and Yellowstone Club declared bankruptcy.
According to Blixseth's 9th Circuit complaint, in 2009 Kirscher approved a settlement in the Yellowstone Club bankruptcy that amounted to collusion between Edra Blixseth and CrossHarbor, among others, to improperly make Timothy Blixseth sole target for the club's creditors, including CrossHarbor.
Blixseth had earlier asked Kirscher to recuse himself based on that claim and others. The judge rejected the request as groundless, a ruling affirmed by a separate federal judge.
The complaint to the 9th Circuit adds evidence, said to come from public records, that Kirscher recently maintained an email address at Worden Thane and served as the firm's vice president, then awarded the firm's clients $22 million.
Emails obtained by The Bee show correspondence about the Yellowstone Club case between Kirscher and Worden Thane partner Ronald A. Bender via that email address just prior to the bankruptcy settlement.
The messages could not be independently verified because Kirscher declined to comment and several efforts to reach Bender about the emails were unsuccessful.
Stanford's Weisberg said that if Blixseth's allegations are true, his complaint would expose "a flagrant violation of judicial procedure."
Call The Bee's Charles Piller, (916) 321-1113. Follow him on Twitter @cpiller.