Fontainebleau suffers defeat as judge sides with banks

By Steve Green

Published Wednesday, Aug. 26, 2009 | 6:55 p.m.

Updated Wednesday, Aug. 26, 2009 | 8:48 p.m.

The bankrupt Fontainebleau resort in Las Vegas suffered a legal defeat Wednesday when a judge ruled in favor of banks it is suing on key legal questions.

In denying Fontainebleau’s motion for partial summary judgment and an order requiring the banks to immediately provide $656 million in funding, U.S. District Judge Alan Gold in Miami sided with Bank of America and other banks being sued.

He ruled the banks, not Fontainebleau, are correct in their interpretation of a key lending contract at the heart of the lawsuit.

“Defendants are legally correct in their interpretation of the credit agreement as a matter of law,” Gold wrote. “Alternatively, defendants’ interpretation of the credit agreement is reasonable, warranting further discovery and extrinsic evidence; and material issues of fact exist as to whether defendants were excused from their obligations under the credit agreement.”

The ruling puts the case on track for a trial, but it’s not yet clear if a trial will occur.

Given the judge’s ruling strongly backing the banks Wednesday, it’s unknown if Fontainebleau will expend the resources necessary to pursue the suit.

And a settlement is possible as the banks and Fontainebleau have engaged in court-ordered mediation of the dispute. The banks and Fontainebleau have reported to the court that unnamed investors may step in to rescue the stalled, 70-percent complete, resort on Las Vegas Boulevard.

Financing costs for the project -- not including equity investments -- have ranged up to $3.2 billion.

In his ruling, the judge reviewed the bank financing for the project that included a $700 million term loan, a $350 million delay-draw term loan and an $800 million revolving loan facility.

Besides the bank funding, the project was financed by $675 million in bonds and separate financing for its retail component.

After the $700 million term loan was funded, Fontainebleau on March 2 of this year asked the lenders to fund the $350 million delay-draw loan and $656.5 million from the revolving loan facility.

The loan agreement required funding requests to be made in a certain order and included “in-balance” tests to ensure the project was within its budget.

Bank of America, as a lender and administrative agent for the banks, refused to fund the $1 billion requested on March 2, saying the request did not conform to the requirements of the credit agreement.

The agreement says that unless the total delay-draw loan was “fully drawn,” the balance under the revolving loans could not exceed $150 million.

Fontainebleau argued “fully drawn” meant requested; the banks argued “fully drawn” meant “funded.”

Fontainebleau revised its request, and B of A did approve $337 million in funding under the delay-draw loan agreement.

A separate group of lenders called the term lenders is now suing B of A for approving that loan and later refusing to fund the rest of the project -- a refusal the term lenders say harmed the value of their collateral by shutting down the project.

After approving the term loan, B of A continued to refuse to fund the $656 million sought under the revolving-loan agreement -- a refusal Fontainebleau blamed for the shut-down of the project and its bankruptcy.

Fontainebleau on April 13 notified the banks that an event had occurred that could cause the project to fail the “in-balance” test. The revolver banks then canceled the loan agreement, saying Fontainebleau was in default of its terms.

Gold, in siding with the banks Wednesday, said the phrase “fully drawn” in the context of the contract is unambiguous and means “fully funded,” not “requested.”

The judge went on to write that even if “drawn” meant “requested,” he was “persuaded by the defendants’ arguments that they were entitled to reject the March 2 notice on the basis of the plaintiff’s default.”

Gold wrote, however, that there are issues of fact to be explored as to whether Fontainebleau was in default on March 3, the day after the initial draw request at issue.

In court papers, Bank of America and others have said Fontainebleau missed its budget and was insolvent on March 3 because of cost overruns, a lack of condominium sales and other problems.

The bank has also accused Fontainebleau of making “materially inaccurate” statements about its financial condition before March 3.

The bank has said that based on an appraisal, Fontainebleau’s value if it opened would be less than the debt against it, making it economically unfeasible for lenders to advance more funds under the current capital structure.

An appraisal submitted by the bank this summer, and taking into account the economic slowdown in Las Vegas, showed the project would be worth $1.764 billion if it opened next May. That’s far less than the $1.675 billion already loaned to the project and another $1.5 billion needed to complete it, B of A said.

Besides Bank of America, the banks being sued are B of A subsidiary Merrill Lynch Capital Corp., JP Morgan Chase Bank, Barclays Bank, Deutsche Bank, the Royal Bank of Scotland, Sumitomo Mitsui Banking Corp., Bank of Scotland, HSH Nordbank and MB Financial Bank.