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July 22, 2014

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Fontainebleau contractor says its liens take priority over lenders

A new issue emerged in the Fontainebleau Las Vegas bankruptcy case Tuesday when the resort's general contractor asserted it and the resort's subcontractors hold liens superior to those of the Fontainebleau lenders.

Turnberry West Construction filed suit in Miami's bankruptcy court against its sister company, Fontainebleau Las Vegas LLC, as well as hundreds of term and revolving loan lenders and second mortgage note holders.

The lawsuit revealed that in 2007, Fontainebleau casino-resort developer Jeffrey Soffer agreed with lenders providing $1.735 billion in financing that their collateral liens in the resort would take priority over the liens of the Fontainebleau companies.

Turnberry West Construction, one of Soffer's companies, is now trying to repudiate that agreement -- saying it's illegal under Nevada law.

Lawyers say that in determining the order of payment for bankrupt or troubled projects, Nevada law explicitly places confirmed construction liens ahead of lenders' liens. That's one of the reasons some subcontractors are seeking to move the bankruptcy case to Nevada, where they say judges are familiar with Nevada lien laws.

The 2007 subordination agreement with the lenders explicitly says: “This agreement shall be governed by and construed in accordance with the laws of the state of New York.”

But Turnberry West said in Tuesday's lawsuit that Nevada law applies to the contract because work on the project was performed in Nevada.

"The underlying policy for the law is the ‘notion that contractors are generally in a vulnerable position because they extend large blocks of credit; invest significant time, labor, and materials into a project; and have any number of workers vitally depend upon them for eventual payment,’” Turnberry West lawyers argued in the lawsuit.

Turnberry West said it filed a lien against the resort for $668 million on June 4.

”The vast majority of this amount is for money owed to various subcontractors who have performed work for which they have not been paid because Turnberry West Construction, in turn, has not been paid by Fontainebleau Las Vegas because its funding has been cut off,” the Turnberry West lawsuit said.

Soffer and his companies, in the 2007 subordination agreement, agreed that: "Each Fontainebleau affiliate and each Fontainebleau company covenants and agrees that any lien held by such Fontainebleau affiliate on the property of any Fontainebleau company, regardless of its origin, shall be subordinate, junior and inferior and postponed in priority, operation and effect, to the priority, operation and effect of all of the liens securing all or any part of the senior debt."

The suit suggests the term lenders are forcing the issue of determining the priority of liens against the project.

”TWC (Turnberry West) did not wish to bring this lawsuit at this time. TWC attempted to persuade the term lenders to not require the filing of this adversary (lawsuit) as a condition precedent to its consent to the debtors' use of cash collateral,” the lawsuit says. ”TWC does not wish to destabilize this case and believes that the issues raised in this complaint could have been more efficiently and effectively resolved later and at a less fragile time in the case. TWC failed to persuade the term lenders to eliminate the requirement that this complaint be filed on or before July 14, 2009."

The lenders have not yet responded to the lawsuit, which promises to further complicate a case in which:

-- Fontainebleau is suing Bank of America and other banks in a revolving loan agreement for cutting off $656 million in planned funding, forcing a halt to construction. Bank of America and the other banks have filed counterclaims alleging misrepresentations and defaults on the part of Fontainebleau. That dispute has been referred to mediation.

-- The term lenders are suing B of A and the other revolving loan bank lenders, claiming the banks induced the term lenders into financing the project but then withheld their own funds -- halting construction and reducing the value of the term lenders' collateral.

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