Diablo Grande has buyer, but no deal

SACRAMENTO -- Diablo Grande officials have identified a potential buyer, but still have not completed a sale.

The buyer is World International LLC, a corporation reportedly formed by partners who are Mexican nationals with broad experience in resort, hotel and industrial development, with properties in Cancún, Mexico City and Cabo San Lucas.

Michael Ahrens, an attorney representing the partnership that owns Diablo Grande, revealed the buyer in U.S. Bankruptcy Court on Thursday. He asked the court for an additional 12 days to complete a sale agreement and settlement among the creditors. World International offered $21 million for Diablo Grande.

The 28,500-acre resort in the hills west of Patterson filed a Chapter 11 reorganization bankruptcy in March after the slumping housing market dried up cash flow. Diablo Grande includes two championship golf courses and about 400 homes. Plans called for a hotel and convention center, retail shops and 2,300 homes.

The resort has continued to lose money, which led the partnership to try to sell the property in an auction. Four bids were received and World International's was the highest, Ahrens said.

World International's bid was $5 million less than the minimum bid specified by the Diablo Grande partnership, Ahrens said. The Bank of Scotland, which is the biggest creditor in the bankruptcy, and the two partners in Diablo Grande Limited Partnership -- Donald Panoz and Morton Davis -- agreed to come up with the shortfall to get other creditors to agree to the sale, Ahrens said.

Judge Robert S. Bardwil continued to express misgivings about the sale and settlement agreement, which defines how the money from the sale is disbursed among creditors, including an $850,000 pool of money for unsecured creditors. Bardwil said the settlement bypasses the payout process spelled out in bankruptcy codes.

The judge said he was concerned about how insiders such as Panoz, Davis and various corporations they control are treated in the settlement. More than $11 million owed to Diablo Grande by insiders is released in the agreement, Bardwil said.

"It suggests the settlement is made to the benefit of insiders," Bardwil said. "The lack of disclosure is strongly suggestive of insiders trying to pull a fast one."

Ahrens said that wasn't the case and told the judge the deal came together under intense time pressure with hectic telephone negotiations between the major creditors, the partners and the resort. "From day one, we've been very open with the (creditors) committee and the bank," he said.

Attorneys for several creditors pleaded with the judge to accept the sale and settlement, saying the alternative was a Chapter 7 liquidation, with disastrous results for homeowners at the resort. A Chapter 7 likely would result in years of litigation, a government takeover of the water system and continued health issues with water quality, attorneys said.

Craig Stuppi, an attorney representing the committee of unsecured creditors, told the judge that many of them are small contractors who provided services and labor in the construction of the resort. They can't wait through what potentially could be years of litigation, he said.

"Time is important. They need money now. They are not interested in lawsuits to get 100 percent or 50 percent years from now. Or nothing," Stuppi said.

Ahrens said that Diablo Grande was running out of money to operate and needed an additional $900,000 to continue through the end of September. He is negotiating with the partners for the money, he said.

Bardwil agreed to continue the hearing until Sept. 9 in Sacramento, so the sale agreement can be made final and the settlement payout issues can be resolved.

Diablo Grande, first proposed in 1990, survived numerous lawsuits filed by environmentalists over its water sources and impact on the oak-studded valley. The first golf course opened in June 1996, followed by some estate homes and a winery. The hotel, convention center and spa -- part of Panoz's original dream -- never developed. Instead, single-family homes sprang up in the center of the development. The second golf course opened in May 1998.

Bee staff writer Tim Moran can be reached at tmoran@modbee.com or 578-2349.

This story was originally published August 29, 2008 at 1:41 AM with the headline "Diablo Grande has buyer, but no deal."