Lawsuit seeks to block foreclosure sale of Maxim

David Strow

Wednesday, May 3, 2000 | 10:51 a.m.

The foreclosure auction of the Maxim hotel-casino has been delayed until next week -- and a state judge is now considering whether to allow the sale to proceed at all.

The mortgage holder of the Maxim, claiming it's taking $600,000 in losses each month from the property, says it will be forced to once again shut down the property if the sale is blocked.

The mortgage holder says the $600,000 in losses includes $300,000 in lost interest on its note and $300,000 in operating losses.

The Maxim is currently owned by Dallas-based Premier Interval Resorts Inc., which defaulted on its $42 million mortgage on the Maxim late last year.

Atlanta-based Meralex, the property's mortgage holder, planned to sell the property in a foreclosure auction April 20 by Nevada Title Co., after a Texas bankruptcy court lifted a stay against the sale of Premier assets April 7.

But one day before the auction was to be held, Nevada District Judge Nancy Saitta issued a temporary restraining order preventing the property's immediate sale.

Saitta's order came at the request of three former shareholders in Premier. In their emergency motion, filed April 19, the three investors claimed a sale was "the last step in (a) fraudulent scheme" involving self-dealing between the controlling shareholders of Premier and Meralex. If sold, they claimed, the companies would immediately "hide and dissipate assets" from the sale.

The same day, Saitta issued an order blocking the sale "until after full hearing on the motion and only if the court enters an order allowing the sale to occur." As a result, Meralex postponed the auction until May 1.

Meralex didn't file its response until last Friday, and voluntarily postponed the auction again. The property is now set to be auctioned Tuesday -- one day after Saitta is set to rule on the plaintiffs' motion.

Meralex is warning that a longer delay would be disastrous for the Maxim and its workers.

"The economic reality of expending over $300,000 per month operating the Maxim will force Meralex to shut the Maxim down," Meralex said in a motion filed Friday. "This will result in precisely the same harm to the public interest that the plaintiffs purport to be concerned about: Injury to Nevada employees, vendors and unions."

The Maxim was closed Nov. 21 after its lessor, gaming executive Ed Nigro, said Premier refused to provide $300,000 in financing needed to keep the Maxim operating.

Soon after, Premier declared bankruptcy in Texas, and a federal judge ordered a freeze on all further spending at the Maxim. With these assets frozen -- and facing nearly $5 million in liabilities from the Maxim -- Nigro's Max Gaming was soon after forced to file for bankruptcy protection in Nevada. Nigro is trying to force Premier to honor the Maxim's debts.

In December, Meralex partly reopened the hotel. But without Nigro -- who held the license to operate the Maxim's casino -- the gaming operations remained closed. Since neither Premier nor Meralex hold a Nevada gaming license, the Maxim casino will remain closed unless the property is sold or leased to a Nevada licensee or unless Premier or Meralex get licensed.

Three former Premier shareholders -- Florida time-share developer Hillel Meyers, Nevada investor Donald Saunders and former Premier general counsel Thomas Russell -- are seeking at least $7 million in damages from Premier and Meralex. Far from hurting Meralex, the men claim the bankruptcy and partial closure of the Maxim were coordinated by Premier controlling shareholder Gary Kornman and billionaire Howard Jenkins, owner of Meralex.

The plaintiffs claim they repeatedly reached deals to finance the acquisition of the Maxim, only to find these deals thwarted by Kornman. Kornman provided additional financing after these delays, allowing him to build up his stake in Premier, the plaintiffs claim.

Forced into a position where just days remained before a deal would be canceled, the men claimed Kornman forced them to accept a $42 million loan from Jenkins and Meralex. About $26 million of the $42 million Meralex loan, the plaintiffs claim, was provided by a Kornman-controlled firm.

Once this deal was struck, the men say, Kornman used it as leverage to squeeze the men from their ownership stakes in Premier.

As a final step, the plaintiffs claim, Kornman and Jenkins would divvy up the profits from selling the Maxim. By selling the property, these funds could be shuttled out of Nevada -- and out of the jurisdiction of a Nevada court.

"Defendants almost certainly have a plan to profit from the sale of the Maxim: most likely, they have an interest in or relationship with the entity that ends up with the property at the trustee's sale, or Meralex itself will retain the property and subsequently dispose of it in a way that benefits all defendants," the plaintiffs' motion said. "Once the Maxim is sold and the proceeds disappear out of Nevada, defendants will make it very difficult for plaintiffs to recover on their judgment."

But in its response, Meralex claims the plaintiffs aren't able to prove Meralex or Kornman did anything wrong, branding it an attempt to "spin a tale of malfeasance." Rather, Meralex attorneys claim, the ties between Meralex and Kornman were "purely benevolent."

"Meralex is guilty of only one indiscretion: Entering into a $42 million loan transaction with a borrower that could not live up to its obligation," Meralex said.

Kornman approached Meralex with its loan request just one business day before a Maxim buyout deal would have expired. However, Meralex claims it had just $16 million of the $42 million needed with no way to come up the remainder immediately.

To cover these costs, Meralex said it took the $26 million loan from Kornman, but added that this constituted a short-term bridge loan that was paid in full within three months.

The plaintiffs, Meralex claims, were unable to prove "Meralex intends to transfer its assets out of the jurisdiction of the court."

"Rather, Plaintiffs assume ... that Meralex or some imaginary Meralex ... Kornman proxy will purchase the Maxim, thereby preventing plaintiffs from realizing on a potential judgment," Meralex argued. "An injunction would be of absolutely no benefit to plaintiffs in securing their ability to recover money damages against Meralex."

By contrast, Meralex claims it has pumped $1.39 million into keeping the Maxim going until it could be sold, and is continuing to incur about $300,000 in operating losses per month. These losses will not be reversed until the Maxim's casino reopens, Meralex said.

"If the court enjoins the trustee's sale of the Maxim, Meralex will be forced to make the ... choice of either (1) paying the operating costs of the Maxim during the entire pendency of the underlying action, or (2) shutting the Maxim down during the underlying litigation," Meralex said.

"If the Maxim is shut down, (the) stated fear that Nevada workers, vendors and unions will all be harmed will come to fruition."