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October 20, 2014

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Fontainebleau judge wants quick sale of bankrupt project

Fontainebleau Resort

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

The Fontainebleau Las Vegas bankruptcy judge is pushing for a quick sale of the stalled, partially-completed $2.9 billion casino resort on the Las Vegas Strip.

Citing the lack of progress in reorganizing Fontainebleau's debt and a motion by key lenders that the project be liquidated, U.S. Bankruptcy Judge A. Jay Cristol in Miami ordered Fontainebleau attorneys on Thursday to appear at a hearing next Wednesday to show cause why an examiner should not be appointed.

Cristol proposed the appointment of an examiner without being requested to do so and on his own initiative.

He said this makes more sense than to convert the case from a Chapter 11 reorganization to a Chapter 7 liquidation and appoint a trustee to supervise a sale, as proposed by the lenders. A hearing on the Chapter 7 conversion is set for Oct. 28.

"The court believes it is more expeditious to proceed with any potential sale as soon as possible rather than to wait until Oct. 28, when a trustee, if appointed, would be required to expend a significant amount of time to obtain counsel, familiarize himself or herself with this case and effectuate a sale," Cristol said in his order. "It also appears more economical to immediately appoint an examiner than to appoint a trustee whose fees and expenses would likely far exceed the costs and expenses of an examiner. The court therefore believes it is in the best interest of the estate and all parties to appoint an examiner at this time to examine, negotiate and supervise a sale of debtors’ assets."

The judge also wrote:

"The record in this case indicates that the parties to these proceedings are not cooperating with one another. A motion to convert has been filed by the Term Lender Steering Group seeking to convert this case to one under Chapter 7 of the (bankruptcy) code. The motion is premised upon the lack of meaningful progress made thus far in this case, despite the fact that more than $16 million of the Term Lender Steering Group’s cash collateral has been used during the administration of this case.

"The Term Lender Steering Group submits that completion of the Las Vegas project is not possible and a sale of the project to a third party and liquidation of the remaining assets is the only viable course to realize any meaningful value for the creditors.

"The debtors have indicated they have made efforts to arrange a sale of the Las Vegas project, but the Term Lenders appear to be concerned about a possible conflict of interest and accordingly filed the motion to convert."

The steering group lenders hold some 27 percent of the project's $1 billion in term loans, court records show.

On Sept. 25, they filed the motion to convert the case to a Chapter 7 liquidation.

They said sales efforts have been complicated by Fontainebleau developer Jeff Soffer's conflicts of interest.

Soffer, for instance, is essentially both a debtor and a creditor as his Turnberry West construction company has filed a $675 million claim against the project. Soffer is a Miami businessman known in Las Vegas for developing luxury Turnberry condominiums and the Town Square shopping center.

Creditors have also argued Fontainebleau's developers no longer have any equity in the project given its debt, costs to complete it and the weak gaming market.

"Given that the debtors' shareholders lack any economic stake in the debtors, efforts by Mr. Soffer to formulate a transaction under which he will receive some consideration or benefit will, unless he is forced to negotiate at arms-length with an independent trustee, divert value that belongs to the estate from creditors," the lenders said in their motion last week.

Penn National Gaming and other parties have been looking at buying the Fontainebleau casino-resort project, but have found it to be a difficult deal because creditors want to be satisfied and because costs to complete it may top $2 billion at a time when the Las Vegas gaming market is already saturated with hotel rooms and slot machines -- a situation that will worsen when the CityCenter project begins to open in December.

Fontainebleau, which filed for bankruptcy protection in June, had been banking on success in a lawsuit accusing Bank of America and other revolving loan lenders of wrongfully terminating the project's funding. But Fontainebleau this summer lost a key summary judgment ruling in the lawsuit, in which the banks said they were justified in canceling $656 million in funding for the project early this year because of cost overruns and other problems. A federal judge in that ruling sided with the banks in their interpretation of the credit contract at issue.

It was the revolving lenders' decision this spring to halt funding for the project that caused construction to stop, with 70 percent of the resort completed, sending it into bankruptcy.

Fontainebleau has not yet responded to last week's motion that the case be converted to a Chapter 7 liquidation or to the judge's order of Thursday proposing that an examiner sell the project.

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