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August 27, 2014

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Bankrupt Fontainebleau seeking $1 million for bonuses

Company official says bonuses needed to keep executives from leaving before sale complete

Fontainebleau Resort

The Fontainebleau, construction stopped, is seen dark along the Strip. Launch slideshow »

With a Fontainebleau Las Vegas secretary earning $48,000 annually, its chief restructuring officer making $720,000 and unemployment running at 13 percent, the bankrupt company encountered skepticism Thursday when it proposed spending some $1 million on management bonuses.

Howard Karawan, chief restructuring officer, testified during a hearing in Miami’s U.S. Bankruptcy Court that the company needs the extra money so the handful of remaining Fontainebleau executives and managers will focus not on finding new jobs but on stabilizing the casino-resort building and assisting with the auction process in which Fontainebleau is due to be sold next month.

The company, which filed for bankruptcy protection in June after lenders halted funding, had 115 employees at that time. After waves of layoffs and resignations, the company is down to 24 employees — 14 of whom would receive bonuses if they continue working through Feb. 9.

By then, a new owner may be in charge of the project and the existing employees may or may not have jobs. Financier Carl Icahn has offered $156.2 million in cash and financing for the stalled project, and Karawan testified Thursday that another 17 to 20 parties had been “kicking the tires” as potential bidders.

Fontainebleau employees felt they had long-term employment prospects when Penn National Gaming was the stalking horse bidder, but Icahn has not indicated if he will continue the construction or mothball the project, and employees know nothing about their career futures if Icahn wins the auction, Karawan said.

“There’s total uncertainty,” he testified.

With the remaining skeleton staff and key executives weighing employment options elsewhere, Karawan said, “I don’t know how we’re going to get through the sales process.”

Karawan offered to give up his own proposed bonus if that’s what it takes to keep the remaining staff together.

But banks, other lenders and construction lien holders opposed the bonus plan, in part because they would end up paying for it.

The creditors aren’t interested in parting with any more money as, already, they likely will recover just pennies on the dollar in the case. That’s because Fontainebleau’s liabilities exceed $2 billion, yet the most offered for the unfinished resort so far is Icahn’s $156.2 million.

Judge A. Jay Cristol, who has not yet ruled on the plan, said Thursday that “the court is not an enthusiast of either retention or incentive bonuses.”

“This is a difficult situation. This whole thing is a difficult mess,” Cristol said, repeating a sentiment he has expressed frequently because of the huge gap between what Fontainebleau may fetch at auction and what its creditors are owed.

Contractors attorney Philip Landau noted the unemployment rate is 13 percent in Las Vegas and that a Fontainebleau salary schedule showed a secretary was earning $48,000.

“It’s hard to say anyone is (underpaid),” Landau said.

Proposed bonuses mentioned during the hearing were $300,000 for Karawan, $100,000 for a financial officer, $75,000 for an attorney and $9,000 for a security chief.

“I can’t get this job done without these people,” Karawan said.

Attorneys for the U.S. Trustee’s Office objected to the bonus plan.

Bankruptcy law “requires that the debtors show that the retention of each such insider is essential to the survival of the business,’’ they said in court papers.

“The debtors merely state that the loss of the employees ‘has the potential to derail the debtors’ ability to consummate the sale’ and this is simply not enough to meet the standard. The debtors must show that without these insiders the sale process will not take place,” attorneys for the trustee’s office wrote.

The trustee’s office also pointed out that several Fontainebleau Las Vegas executives also are on the payroll of Fontainebleau’s non-bankrupt parent company.

The Las Vegas casino-resort was developed by Jeff Soffer, who heads Miami-based Turnberry Associates. Turnberry and its Turnberry West Construction are known in Las Vegas for building high-rise condominiums and the Town Square Shopping Center.

Multiple roles within Fontainebleau and the other Turnberry companies by Soffer and Karawan were cited in September by term lenders when they complained of “pervasive conflicts of interest” among the bankrupt casino-resort company and its officers, managers and related parties.

The context of the complaint was a motion by the lenders that the Chapter 11 case be converted to a Chapter 7 liquidation, after Fontainebleau lost the support of the lenders. Rather than converting the case to Chapter 7, Cristol ordered the appointment of an examiner to supervise the sale of the unfinished resort.

Attorneys for the examiner in the case supported the proposed bonus plan, writing in a court filing: “The examiner agrees that the debtors’ employees are necessary in order to effectuate the stabilization of the project and to obtain the highest and best value for the project through the sales process.”

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