Fontainebleau contractors say sales process is flawed

By Steve Green

Friday, Nov. 20, 2009 | 3:14 p.m.

Contractors that claim to be owed $424 million today objected to the Fontainebleau Las Vegas sales process in which Penn National Gaming could pick up the unfinished project for less than $102 million.

Fontainebleau attorneys have said that Monday's "stalking horse" bid by Penn National was the start of an auction process that hopefully would produce additional bidders.

But attorneys for the contractors, having reviewed the issue this week, asserted Friday that the sales motion proposed to Fontainebleau's bankruptcy court in Miami wasn't written to encourage competitive bids.

The contractors, represented by the law firm Gordon Silver in Las Vegas and the firms Shraiberg, Ferrara & Landau P.A. and Ehrenstein Charbonneau Calderin in Boca Raton and Miami, Fla., charged in a court filing that the proposed Penn-Fontainebleau sales process is flawed in that it doesn't allow the contractors to make a competing "credit bid" so they can acquire the project for what they're owed.

Several of the contractors, even before Penn National made its bid Monday, had been looking for financing and a partner to bid for the project because they feared a Penn bid wouldn't cover their liens.

Penn National offered to pay $50 million for the project, subject to adjustments downward of up to $10 million. Penn would also provide a debtor in possession (DIP) loan of $51.5 million -- a loan that would be forgiven if the sale to Penn goes through.

"Both the DIP credit facility and the ... sale proposed by Penn National Gaming and the debtors cannot be approved over the objection of the statutory lienholders as a matter of law. Based upon the onerous and commercially unreasonable terms proposed by the prospective buyer, the (contractors) do not consent," the lien holders said in a court filing.

The contractors specifically complained about terms in the credit agreement favoring lenders over the contractors and providing for a $1.5 million breakup fee to be paid to Penn National should its deal fall apart, which they said inhibits bidding.

They said the sales motion and bid procedures "effectively preclude credit bids for everyone except (Penn)."

"First priority, statutory lienholders ... are precluded from placing a credit bid that counts as a 'qualified bid' unless they hold a judgment or order that determines their liens to be in first position as a matter of law. These bidding restrictions are unfair, will chill bidding, will preclude otherwise lawful credit bids from competing for the project and will depress the price paid for the project," the contractors' filing said. "The proposed bid procedures will guarantee that the (Penn National) bid is the winning bid, and the amount of cash that will be distributed to the first lien position, statutory lienholders will be depressed."

The contractors asked the court to hold a hearing to determine the extent of the asserted liens so they could make their own bid.

Penn National, in its bid, indicated it planned to spend $1.46 billion to finish the project -- but the company hasn't determined when construction would resume.

Once valued at $2.9 billion, some $1.675 billion has already been borrowed against the 3,815-room Fontainebleau.

Construction of the project on Las Vegas Boulevard shut down this summer after Bank of America and other big banks canceled a loan agreement because of cost overruns and other problems.