By DANIEL PERSON, Chronicle Staff Writer
BIG SKY -- At Moonlight Basin Tuesday, a solitary set of pre-season ski tracks cut beneath the Pony Express lift.

Snow has come again to Lone Peak, the 11,166-foot pyramidal mountain in the Spanish Peaks towering over three ski resorts and various multi-million-dollar chalets.

Four years ago, furious building and big-spending visitors here pumped $478 million into Southwest Montana's economy. By comparison, $385 million was spent at Montana State University in the same period.

Those were heady times for the mountain community. Back in 2006, 95 condos and townhouses sold in Big Sky for a combined $47 million, according to the Gallatin Realtors Association. The average price for the homes was $500,000, and they were taking less than three months, on average, to sell.

That same year, then-Yellowstone Club owner Tim Blixseth announced he intended to build, on spec, the most expensive house in the world, a $155 million mountain palace. The driveway of "The Pinnacle," alone was expected to cost $2 million to build.

Meanwhile, people like Melvin and Charline Harbaugh, of Michigan, were plunking down half a million dollars for property in The Club at Spanish Peaks, a gated community with an 18-hole golf course and homes with listing prices well upward of $4 million.

Even as late as the summer of 2008, Moonlight Basin was putting the final touches on a raised ramp that allowed skiers to make turns beside the tops of mature pines and a stone entryway where guests drove beneath glowing chandeliers.

But as last winter's snowpack drew back in the spring, more than prairie grass, rock and lost season passes were exposed on the slopes of Lone Peak. Financial duress brought on by nine-digit loans going into default sent feuds into court and onto the public record.

And while snow has returned to the slopes again, the days of palaces and outdoor chandeliers have not.

The thrones and bank clocks that would have furnished "The Pinnacle" at the Yellowstone Club were auctioned off this weekend in Atlanta at the request of the club's new owners, who bought it after the club's bankruptcy hearings in May.

Moonlight Basin owner and founder Lee Poole is staving off a bankrupt New York bank that wants to remove him from the resort's helm, a court battle Poole this week called "good against bad."

Condos and townhouses are now selling, on average, for about $100,000 less than they did in 2006, even though they are taking, on average, eight months longer to sell.

The Harbaughs are suing The Club at Spanish Peaks, saying the club is not built on solid ground.

And unemployment offices as far away as Livingston, a two-hour drive away, say they are feeling the waves from Big Sky's turmoil.

No place else like it

The boom once attributed to America's desire to live and play in one of the most magnificent places on Earth strikes some as a mirage created by fraud and bad loans.

Yet others chalk up the new financial reality to a healthy cleanse after one hell of a party and say there's lots of reasons to believe things will pick up again.

With a hand wave that took in the snowy slopes outside, the embattled Poole reiterated his belief in Southwest Montana.

"Where (else) are you going to find this?" he said. "You're not."

Local marketers are ramping up a nationwide "Biggest Skiing in America" ad campaign, pitching Big Sky Resort and Moonlight's combined skiable acres.

The expansion of Gallatin Field is breeding optimism that more airport traffic will bring more people to the area, Big Sky resident and Airport Authority board member Kevin Kelleher said.

And Sam Byrne, managing partner of CrossHarbor Capital Partners, which bought the Yellowstone Club in July, said in October that people still want to live in the shadow of Lone Mountain.

Yellowstone Club is "truly a unique asset," he said, "one of the most unique properties in the world."

History of high hopes

Big Sky was meant to be big.

NBC News broadcaster and Cardwell native Chet Huntley and a group of investors bought the Crail Ranch in the Gallatin Canyon in 1969, and by 1973 a resort boasting condominiums, picturesque shops and lodges and a championship golf course was open for business.

Yet the community built on second homes and great snow has never been immune to hardship.

By 1976, Huntley was dead and financial trouble forced the remaining owners to sell Big Sky Resort to Boyne USA resorts, the Michigan-based business that owns the resort today.

It took 15 years after that for Big Sky to get its numbers into the black, Dax Schieffer, spokesman for Big Sky Resort, said in a phone interview this week.

Scheiffer said Big Sky's age has given it some resilience in this recession.

"If you consider Big Sky Resort in the context of its 35-year history, we're in more of a normal economic environment now than compared to the last five years of fast growth," Schieffer said.

But he said it has also benefited from a conservative business model.

"From our perspective, we were watching very fast growth around us -- in many ways this benefited us with more exposure to more people," he said. "We had a model, we were able to stick to that and not get too caught up in the fervor."

Bankruptcy and foreclosure

Critics say the Yellowstone Club and Moonlight Basin, Big Sky Resort's nascent neighbors, can't say the same thing.

Bankruptcy proceedings revealed that a $375 million loan taken out by Yellowstone Club's founder and former owner Tim Blixseth sank that club. The Blixseths last year lost control of Yellowstone Club and have been accused of sacrificing sound business practice for self-indulgence.

"Tim and his approach was a little less conventional," said Charlie Callander, a sales and marketing representative at the Yellowstone Club. "The approach now is setting up business plan, make future planning a component of this plan"

Moonlight Basin, meanwhile, got into trouble after borrowing $100 million from Lehman Brothers in September 2007, with the 7,800-acre resort, its ski lifts, condos, spa and a Jack Nicklaus-designed golf course put up as collateral, according to foreclosure records filed in Madison County.

That loan came due in September 2008, according to the papers filed by Lehman, and Moonlight defaulted. Lehman itself went bankrupt in September 2008 and blamed its troubles on a collapse in the real estate market that left it upside down.

Big Sky was not only corner of America experiencing a development boom in the mid-2000s. Across the nation, furious growth was partially fueled by easy credit. By the time builders realized the seemingly insatiable appetite for real estate was in fact finite, banks like the 150-year-old Lehman Brothers collapsed and threatened to take the economy with them.

"I think this is a real cleansing process," Poole said last week, sipping a Diet Pepsi in the resort's woody ski lodge. "The banks got way out of line.... Everybody got caught up in this. Things were going well and people were buying on prospect. It collapsed and it's still collapsing."

Moonlight laid off about 80 workers in October of last year -- a move Poole attributed to the collapse of Lehman, though that was also shortly after the $100 million loan went into default. Most of the workers were hired back before ski season opened in early December.

But the resort was, and is, also trying to sell real estate, just the kind of property that was especially vulnerable when the economy got rocky, said Russ McElyea, Moonlight's chief operating officer.

"Second-home, resort real estate is the first thing to go in a soft economy," he said. "It's going to take a while. ... Is it around the corner? No, it's not. Is there opportunity for long-term economic growth? Yes, sir."

Whether that will happen on Poole's watch is up to a District Court judge in Madison County.

Lehman Brothers is reorganizing its assets, and it's coming for the resort that it claims owes it $92 million. The firm is asking Judge Loren Tucker to put Douglas Wilson in charge of the resort, a San Diego man who has taken over other distressed resorts caught too deep in debt to weather a dry housing market.

In court documents, Lehman claims it has Moonlight on life support, infusing the resort with more than $3 million to keep operating since it Lehman filed its foreclosure complaint Sept.11.

But Moonlight is fighting the foreclosure, saying that the $100 million loan in question was always intended to be a loan to keep Moonlight moving forward as Lehman searched for a buyer of the resort. Moonlight took the loan, its lawyers claim, only with the promise that Lehman would either sell the resort for $300 million to $400 million dollars within three months or provide the resort with long-term financing.

The bank broke didn't do either, Moonlight argues.

"We're going to fight this thing extremely hard," Poole said, a three-ring binder with 42 affidavits asking Tucker to keep Poole in charge sitting on the desk in front of him. "The community is behind us. Our suppliers, it's been a good relationship. This is good against evil, plain and simple."

Shifting ground

While the Moonlight and Yellowstone Club managers try to find a new way forward, The Club at Spanish Peaks faces its own legal battle.

The Harbaughs bought property in the development and had planned to build themselves a home, according to a lawsuit filed in Gallatin County District Court in August.

But those dreams were scrapped when they learned the lots were located on an "active landslide" -- a geological feature their suit contends the club had known about since 2003.

The suit quotes a 2004 e-mail sent to the Spanish Peaks sales department by a senior executive with the club. If anyone asks for geological reports, Wade Pannell allegedly wrote in the e-mail, "try to baffle them with BS rather than provide the actual reports."

Another lawsuit against Spanish Peaks, which alleged that the developers covered up reports that some lots should not be built on, was settled out of court for an undisclosed amount of money.

The club has countered in legal documents that the Harbaughs showed negligence when buying the lots that "exceeds the negligence, if any," of Spanish Peaks.

Lessons learned

These days, the Yellowstone Club's Sam Byrne is prescribing a dose of modesty when it comes to development.

"The club's goal now is to stabilize itself, stabilize its reputation, and not sell a lot in the next three years," he said at a conference in Missoula hosted by NewWest.net.

Callander explained the new approach at the Yellowstone Club.

"Their approach is, 'Hey, we're not coming out of the box here expecting to catch the real estate world on fire,'" he said. "The marketplace is the marketplace. It's not 2005, 06, 07. Their approach is, 'Let's be conscious, let's create a business plan to bring Yellowstone Club back.'"

Byrne and the managers at Moonlight envision architects ratcheting down the size of homes being built.

"In the near term, you're probably not going to see as many 15,000- to 20,000- square-foot homes," McElyea said.

But McElyea rejects the suggestion that Moonlight was at all reckless as it charged forward with development, including spending the $100 million from Lehman.

"I don't think the market foresaw what was going on. It's pretty easy to quarterback the game after it is over," he said. "Would it have been nice to have a crystal ball? It would have been great. The market has to adjust. Once that happens, you're in a position to go forward."

Daniel Person can be reached at dperson@dailychronicle.com or 582-2665.