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twitterFontainebleau files $3 billion suit over funding
Published Thursday, April 23, 2009 | 5:52 p.m.
Updated Friday, April 24, 2009 | 3:56 p.m.
Construction continues at Fontainebleau Las Vegas on the north end of the Strip in November 2008.
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Beyond the Sun
Fontainebleau Las Vegas
Fontainebleau Las Vegas filed a $3 billion lawsuit against a group of bank lenders Thursday, saying the banks reneged on their commitments to provide funding for the resort in a "baseless attempt to walk away from the project."
Pulling the funding could force the 3,800-room resort to stop construction, threatening the jobs of some 3,300 construction workers building the project between the Riviera and Sahara casinos on the east side of the Las Vegas Strip and resulting in the loss of more than 6,000 jobs at the resort, according to the lawsuit.
A Fontainebleau spokesman today the company has more than $130 million in cash that will allow construction to proceed. The company is in "active discussions to secure financing if lenders don't live up to their commitment," spokesman Lance Ignon said.
The lawsuit alleges that the banks refused to commit to prearranged financing of $800 million for the resort under construction on the Strip, in spite of the billions of dollars they received as part of a federal bailout program to loosen credit.
The banks "abandoned their lending commitments solely to try to extricate themselves from a loan they no longer wish to make, notwithstanding that those commitments are clear, unequivocal and binding and that the plaintiff and thousands of employees and their families are relying on those commitments to be performed," the lawsuit states. A Bank of America spokeswoman declined to comment on the lawsuit Friday.
The $800 million revolving loan facility is in addition to more than $2 billion in debt and equity that Fontainebleau Las Vegas had borrowed and invested to build the project.
Another group of lenders has loaned more than $1 billion to Fontainebleau Las Vegas through a separate term loan.
The banks informed Fontainebleau executives Monday that they were terminating the $800 million revolving loan facility based on "one or more events of default" that were unspecified.
The lawsuit contends that no default occurred that could allow the banks to pull out of the loan agreement.
"(T)here is no contractual basis whatsoever for the revolver banks’ breach of their clear and unambiguous obligations," it states.
The terms of the loan agreement aren't public, and Fontainebleau Las Vegas, a joint venture between Las Vegas casino executives and condominium developer Turnberry Associates, is a privately held company.
Fontainebleau officials said work is nearly 70 percent done on the 24-acre, 63-story project. Officials expect an October opening for the $3 billion resort.
Fontainebleau said last fall that it planned to raise between $700 and $900 million through condominium sales at the property on the north end of the Las Vegas Strip.
But spokesman Dave Satterfield said Friday that Fontainebleau does not currently have any condos on the market and the resort is taking “interested names.” Fontainebleau would not disclose how many names are on their list of interested parties or when condos will go up for sale.
Satterfield said because of the depressed condo market, Fontainebleau is evaluating when to put the condos on the market and at what price.
The resort is expected to open with 3,185 rooms -- 1,000 of which developers are hoping to sell as condo units -- but Fontainebleau might take a look at that original plan, Satterfield said.
“They were always intended to be condo hotel units that would be up for rent and if they didn’t sell as condos, they would be hotel rooms. Given the economy, Fontainebleau is continually reassessing the mix of what those should be,” Satterfield said.
Senate Majority Leader Harry Reid said in a statement Thursday that he's hoping for a quick resolution "because thousands of families are counting on it and so is Nevada’s economy."
"It is wrong, plain and simple, that the banks named in the lawsuit are trying to back out on their commitment to this important project," Reid said. "One of the issues I have been working on hardest is freeing the flow of credit for job-creating projects like this one. When banks, especially ones that have received taxpayer dollars, make a commitment to finance a worthy project with thousands of existing jobs on the line, they have an obligation to keep that promise."
Fontainebleau Las Vegas is represented in the lawsuit by Kasowitz, Benson, Torres & Friedman LLP of New York, and Morris Peterson of Las Vegas.
Sun reporter Amanda Finnegan contributed to this report.
Discussion: 13 comments so far…
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Comment Part 1:
Well written complaint, but let's pick it apart.
The causes of action in the complaint are for breach of contract. Yet the plaintiff fails to attach the contract. The complaint says that the lenders are in error, in stopping the funding of the loans because there is not enough money left in the loan budget to finish the project. Yet the plaintiff fails to attach the letters where the banks erroneously and wrongfully breached the contract. In many cases, the omission of those exhibits is a death knell to the complaint surviving an initial challenge by the defendants that "the complaint is not properly plead". It's sort of a put up the whole story or shut up rule.
The complaint also says the contracts are governed by New York law, yet the lawsuit is filed in Nevada. Probably, if the loan agreement was attached as an exhibit to the complaint, it would show that the borrower had stipulated that all litigation would have to occur in New York courts. So, we might see the bank defendants try to move the case to New York, even if the banks are planning on filing a complaint for the appointment of a receiver and foreclosure here in Nevada.
In addition, this sort of lawsuit typically contains an allegation that a "business tort" by the banks, harming the borrower, has occurred. A business tort is sometimes the one and only claim that anchors a lawsuit to a state outside of New York, because tort cases are supposed to be filed where the tort occurred. Why the plaintiffs didn't file a business tort claim in their case is beyond me.
All in all, the complaint looks like the typical pre-emptive strike lawsuit that commercial real estate borrowers file when they realize that their lenders are going to file a foreclosure lawsuit, and try to seize control of a project through a state court receiver.
It's very interesting that the plaintiff brings into the fray both the issue of the TARP funding by the Federal government, and the harm to Las Vegas economy by the lenders allegedly wrongful decision to stop funding the project. Clearly, the plaintiff hopes to "home town" the big banks, by winning the sympathy of the business court judge, Elizabeth Gonzalez. Whether that will work is open to question.
Comment Part 2:
If the borrower thinks they are on strong ground in this lawsuit, claiming that the lender wrongfully cut off funding, they will move on an expedited basis for a mandatory injunction compelling the banks to fund the remainder of the loan. The "good thing" about Nevada is that it only has one level of appellate courts, so an appeal by the banks of a funding mandate by the trial judge will be resolved a whole lot quicker than in a New York court.
The plaintiff's lawyer also anticipates that the banks will try to move the lawsuit to Federal court, so the plaintiffs plead the appropriate language to show that the case is a simple contract dispute among parties doing business in many states, one of the key grounds for keeping this sort of case in the Nevada state court.
Finally, if the borrower doesn't succeed in getting the Nevada courts to order the immediate funding of the rest of the loan, the borrower might then try filing a Chapter 11 case, perhaps in the Nevada based bankruptcy court. The case law on whether a bankruptcy court judge can order a recalcitrant bank to continue funding a loan, when there is a non-monetary default, is not really good for the borrower/debtor. But if the lenders' excuse for not funding is a monetary default, such as the borrower not having enough of its own money in its own bank account to pay the borrower's share of construction costs, then the bankruptcy case law gives the borrower/debtor a better shot at an order from a bankruptcy court judge requiring that the loan funding be completed, while the original breach of contract lawsuit is fully litigated.
The list of "big name banks" who have decided to pull the plug on their borrower are, by and large, the same big name banks who are doing the same thing on large commercial development projects all over the U.S. The defendant banks here are all part of the typical crew of big trouble makers: Bank of America, JP Morgan Chase, Barclays Bank, and Deutche Bank. What that litigation trend means, in essence, is that the big banks have decided they would rather own and manage these projects than allow the original borrowers to do that work. In England, the banks own most of the commercial real estate. It seems that we are headed that way in the United States as well.
Last person out of Vegas, turn the neon off.....
Do not worry, senator harry is here. When you own the banks you can force them to make loans they don't want to. Ask Bank of America
CynicalObserver, you are very, very good. You explained into layman terms. Thank you!!
The government will own the banks,and the banks will own the properties! Need i say more?
I feel that we are not going the whole story here.
Surely the lenders cannot renegade on their promise to provide fundings if the developer is still in compliance with the loan covenants. A contract is a contract and will have to be honored.
On the other hand, if the developer of Fontainebleau has failed to comply with certain provisions in the covenants, then the lenders are perfectly entitled to stop providing fundings if they so decide.
MGM failed to keep up with their covenants and they are rightly at the mercy of their lenders regarding future construction fundings. Fontainbleau would be in the same situation.
Though I don't think the banks would be too eager to take possession of half-finished massive properties like the Fontainbleau if they have other options.
It"s hard to live with this kind of uncertainty when the economy is so bad. I hope these banks come to their senses real soon.
These banks made a commitment and they should live up to it.
The government gave our money to these banks so theyd keep lending, not so they would yank their loan.
Obviously, there is a lot more to this story than is currently being told.
However, evidence suggests that the REAL story not being told surrounds the financial sector i.e. Wall Street, investment firms, the banking sectors in America which appear to be attempting to conceal the severity of their insolvency. Still holding "toxic" assets with economic conditions continuing to worsen, the bailout funds have been placed on "hold" until the immediate future becomes clearer and it doesn't look good.
NOTHING can begin to improve economically until Wall Street has a clearer direction.
Dispite massive federal monitary infusion intended to restore financial liquidity, lending institutions haven't been lending and should reasonably be expected to continue holding capital (survival mode) until they have an idea where they stand financially, which they won't have a clue until at least their "toxic" assests have been removed, which likely won't happen anytime soon.
America's financial troubles are obviously worsening, capital investors have been badly stung and are very reluctant at this time, if they still have capital, to reinvest it.
Understand, the majority of investor's capital is non-liquid, typically tied up in hard assets such as real estate and we all know what's happened to real estate values let along the dyfunction of its exchange market.
Who can blame banks, investors, wall street for holding what capital remains tightly?
We shouldn't be surprised if the financial community once again comes crawling on their panhandling knees to Congress for additional funding in the not too distant future either.
Fontainebleau has just been placed in a growing line of those needing capital; capital they may never get, and there's nothing an optimistic Goodman, Buckley or a lawsuit can do about it but wait.
This is a massive, troublesome, ill conceived and poorly timed project that has been heading for financial difficulty as the economy has worsened. A serious case of overbuilding. Fontainebleau, Cosmopolitan and City Center are in for some tough times. The Boyd Group was very smart to pull the plug on Echelon. This all reminds me of 1956, on a much larger scale, of course.
Whatever happens to Fontainebleau, just make sure it does not postpone or delay the opening date. For goodness sakes, we need growth and openings in this valley!!!! New resorts provide MORE JOBS, MORE TOURISM, AND MORE RESORTS!!!!
I SEE HOPE COMING FOR VEGAS!!! (in few years.)
Gee,no wonder people are protesting at the IMF and World Bank meetings here in DC today. The banks have us all by the short hairs I'm afraid. Good old fashioned slavery by the banking system.