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Nevada Supreme Court to Weigh in on Who Should Receive the $100 million
Remaining from the $156 million Bankruptcy Auction of the Stalled
$2.9 billion Fontainebleau Las Vegas Resort

By Steve Green, Las Vegas SunMcClatchy-Tribune Regional News

June 06, 2012--The Nevada Supreme Court is weighing whether contractors or lenders should receive about $100 million left over from the $156 million bankruptcy auction of the stalled Fontainebleau Las Vegas resort.

Because of disputes in the $2.9 billion Fontainebleau Las Vegas bankruptcy case in Florida over which group has rights to the money, the bankruptcy judge there asked the Nevada high court to weigh in on the issue.

While $100 million is a lot of money, it pales in comparison to losses faced by contractors, lenders and bondholders at Fontainebleau.

After construction was halted on the 3,815-room casino resort and it filed for bankruptcy in 2009, contractors asserted they were owed $467 million, lenders said they were owed $1 billion and bondholders were owed another $675 million.

Multiple court fights are under way including in Clark County District Court in Las Vegas and in Miami's bankruptcy court as investors try to recover losses and Fontainebleau's bankruptcy trustee seeks damages to be paid to the bankruptcy estate.

The issue at the Nevada Supreme Court involves factual disputes that likely will be resolved by the Bankruptcy Court in Miami, not the Nevada Supreme Court.

Nevertheless, the Supreme Court is participating to interpret a section of Nevada law involving the legal concepts of "subordination" and "subrogation."

Under these concepts, lenders say that if they have a first-priority lien against a project because of a loan, their lien stays in first place in the event the debt is refinanced.

That's true even if contractors performed work on the project and filed liens in the period between the first and second financings, lenders say.

This concept has been affirmed before as the law in the Nevada, lenders' attorney Rew Goodenow told the court during oral arguments on Tuesday.

"Nothing gets built without the loan," he said.

Attorneys for some of the more than 300 Fontainebleau contractors have argued that the lenders' subordination theory doesn't apply to Fontainebleau because of some specific events at the project that, according to them, put the contractors' liens in first position to get paid in the event of a loan default.

In the contractors' view, here's what happened:

--Bank of America in March 2005 filed a $150.7 million deed of trust against the property to protect its interest in a loan to Fontainebleau's development company, headed by Miami businessman Jeff Soffer.

--Work started on the project in January 2007.

--Lenders under a new $1.85 billion construction financing credit facility filed a new deed of trust on June 7, 2007.

--Fontainebleau's developer had paid off the March 2005 loan on June 6, 2007, a day before the $1.85 billion deed of trust was filed. The March 2005 loan was paid off because lenders had required Fontainebleau's owner to contribute $370 million in equity to the project and to use some of that money to pay off the March 2005 loan.

This means the March 2005 loan wasn't paid off by the lenders and their $1.85 billion lien is in second place behind the contractors, one group of contractors attorneys argued.

"Thus, this court should reject the doctrine of equitable subrogation as factually and legally inapplicable," one group of contractors argued.

Attorney Gregory Garman, representing another group of contractors during oral arguments in the case Tuesday, agreed that Fontainebleau's developer -- not the lenders -- had paid off the 2005 loan.

Garman said the sophisticated lenders had plenty of opportunities to protect their interest in Fontainebleau without harming the contractors, but had failed to do so and now want to earn a windfall at the expense of contractors.

"These are lenders that did not protect their own interests. What they're attempting to do is shift the burden of their poor business judgment in hindsight on to the shoulders of the mechanic's lien holders (contractors)," Garman said.

Investor Carl Icahn, who purchased the Fontainebleau project out of bankruptcy, continues to hold on to the mothballed property that sits an estimated 70 percent completed.


(c)2012 the Las Vegas Sun (Las Vegas, Nev.)

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