Fontainebleau: Bank wanted to minimize Cosmopolitan competition

Published Tuesday, May 12, 2009 | 5:08 p.m.

Updated Tuesday, May 12, 2009 | 6:14 p.m.

Download the amended complaint

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More headlines from the Vegas gaming industry

Tuesday's news release from Fontainebleau Las Vegas

Fontainebleau Las Vegas

In an amended lawsuit filed Tuesday, developers of the Fontainebleau Las Vegas resort allege that Deutsche Bank – among a group of lenders that had agreed to finance the property's construction – conspired to hurt Fontainebleau to minimize competition with the Cosmopolitan, an under-construction resort the bank acquired out of foreclosure last year.

The future of the Fontainebleau Las Vegas, which is more than halfway complete, remains in jeopardy after lenders last month pulled $770 million in financing needed to finish the property. Fontainebleau developers have filed suit, alleging the banks unlawfully reneged on their financing obligations.

The amended complaint states that Deutsche Bank also sought to persuade other banks to pull funding for Fontainebleau Las Vegas and has worked to discourage other banks from working out their differences with the project's developers.

"This claim is an attempt by the Fontainebleau's developers to distract from the fact that they have breached their loan covenants," Deutsche Bank spokesman John Gallagher said. " We will defend ourselves vigorously against this meritless allegation."

The Cosmopolitan, with nearly 3,000 rooms, is under construction at the corner of Harmon Avenue and Las Vegas Boulevard for an expected opening next year. Fontainebleau was scheduled to open in October with more than 3,800 rooms between the Riviera and Sahara casinos. Both multibillion-dollar resorts plan to offer condominium-hotel units that owners purchase and rent to visitors.

In a letter sent to Fontainebleau Las Vegas, Bank of America – the lead bank arranging the $770 million loan – said developers defaulted on a loan agreement but did not elaborate. Fontainebleau denies any default on their part.

Work has slowed dramatically on the Fontainebleau and many construction workers have been laid off.

Deutsche Bank also provided funding for CityCenter, an $8.6 billion resort complex owned by MGM Mirage and Dubai World that will in open in stages this year.

Bank of America, Royal Bank of Scotland and Sumitomo Mitsui bank, which also loaned money for CityCenter, are Fontainebleau lenders named in the suit but are not the subject of conflict of interest allegations.

Deutsche Bank acquired the Cosmopolitan for about $1 billion after the developer defaulted on a construction loan. The developer had put less than $50 million into the project as equity.

Discussion: 6 comments so far…

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By CynicalObserver

May 12, 2009

6:03 p.m.

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It certainly will be interesting to learn what internal communications at Deutsche Bank, or from Deutsche Bank to the other Fontainebleu lenders, will say, supporting Fontainebleu's claim that Deutsche Bank wanted to stop construction on Fontainebleu to create a more favorable market in which Deutsche Bank's Cosmopolitan can compete once it opens. The beauty of Fontainebleu's claim against Deutsche Bank is that it is a tort theory, where Fontaineblue could, some day, recover "consequential damages".

Unfortunately, all of the claims against the other lenders to Fontainebleu are just breach of contract claims. Under both New York and Nevada law, even if Fontainbleu proves the lenders breached their contract, contract damages generally are not allowed to include the domino like disasters for Fontainebleu caused by the loan funding cut off.

That is a defect in Nevada law which these tough economic times will show Nevada's Legislature needs to correct. If a party intentionally breaches a contract, when it has the ability to perform, the courts should be able to award the injured parties consequential damages. Otherwise, banks and other huge corporations can intentionally harm Nevadans with impunity.

Realistically, Fontainebleu needs to bring a motion in court, as quickly as possible, to force these banks to fund the rest of construction. It will be tough to bring and win that motion in a Nevada court until after a lot of discovery has taken place, meaning that the project may be shut down for many months. It may well be that a Chapter 11 bankruptcy will be the fastest way Fontainebleu can force these lenders to perform, if in fact Fontainebleu is not in default on its loans.

The only "additional leverage" which can be created against these banks is a separate lawsuit, filed by the project's contractor and subcontractors, saying that the banks tortiously interfered with the contractors' contracts with Fontainebleu, by making it impossible for Fontainebleu to pay them. These sorts of lawsuits are being filed in California courts, and seem to be the only way to punish large banks for the harm they do to businesses and their employees when banks imperiously cut off construction loan funding. Wrongful construction loan funding cut-off was common during the Savings and Loan Crisis of the late 1980's and early 1990's, as insolvent banks tried to hide their cash flow shortfalls. It's time for the general contractor and subcontractors on the Fontainebleu to get organized, and file their own tort lawsuit against these banks.

For good measure, a construction worker class action against the banks should be filed as a parallel case, alleging interference with economic advantage. It's the only way the economic harm caused to this community by these large banks will even begin to be addressed.
By bdover

May 12, 2009

8:27 p.m.

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What a great post by Cynical. One thing I have been told is that the subcontractors are already pulling their job trailers off the job site. This is telling, since moving into/off a job site is costly, and is a sign that things will be messy for a while. My other thought is that we know that the subs pulled off because they fear not getting paid for their outstanding monthly requisitions, so the question is:

Has our uneducated redneck state ever changed the laws that allowed Sheldon and the Venetian to withhold payments to the General Contractor in the 90's for whatever reason, and drove many of the subs to near bankruptcy? Maybe this is why they pulled out so quickly. Mechanics liens here are about as viable as a lawsuit being filed by a waitress after being groped by a useless, politically connected dumbbell governor....
By CynicalObserver

May 12, 2009

10:55 p.m.

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I read something on the RJ's website tonight, which I think is important for the Las Vegas Sun's readers and publishers to ponder. One reader suggested that Deutsche Bank had financed the Nazis building their concentration camps, and another reader came up with references to several internet stories which also made that claim. See:

http://www.jcpa.org/phas/phas-urban-f05....

http://www.bulldognews.net/issues_deutsc...

http://www.hbs.edu/bhr/archives/bookrevi...

http://www.cambridge.org/catalogue/catal...

http://www.hartford-hwp.com/archives/61/...

Apparently Wikipedia also has quite a detailed story about Deutsche Bank's exploits during World War II; the occupation authorities breaking up the bank after the war; and Deutche Bank's determined reconstruction of its former self during the ensuing years.

On the one occasion when I dealt with Deutsche Bank officers, they were presumptuous, stubborn, rude and vindictive. Perhaps my experience of "the stereotype" was not unique.

Las Vegas has a very large Jewish community, including its prominent business and civic leaders. It is not inappropriate to wonder if our community and the Fontainbleu borrower would be treated as badly if we were named Milwaukee or New Braunfels or Germantown.

Given the world news item that elderly Jews were beaten and shot at by Neo-Nazis at a Holocaust remembrance event in Austria YESTERDAY, it makes me wonder if Germanic Europeans are once again turning against a Jewish community.
By Harley

May 12, 2009

11:16 p.m.

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Obviously banks aren't in the lending racket nowadays, Governments are.

Those seeking funds need to contact their appropriate 'congressional loan officer' to get on a waiting list.
By bdover

May 12, 2009

11:32 p.m.

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Cynical, great point. Now let's talk about Pope Benny and the young Nazi's that he belonged to. Really interesting, since he gave such a weak speech regarding the Holocaust yesterday.

BTW-I'm as Irish as Paddy's pig, but I care about human rights. I do wonder about those German nationalists, however...
By jsvegas

May 13, 2009

1:31 a.m.

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hmm, I feel some paranoia in here......