In reversal, Fontainebleau lenders suggest liquidation

Key lenders file motion urging case be converted to Chapter 7 bankruptcy

Justin M. Bowen

Fontainebleau Resort on the north end of the Las Vegas Strip is shown under construction.

By Steve Green (contact)

Published Friday, Sept. 25, 2009 | 3:55 p.m.

Updated Saturday, Sept. 26, 2009 | 3:07 p.m.

See the lenders' motion

Fontainebleau: Bank no longer ‘seeking to destroy’ project (9-17-2009)
Potential buyer in negotiations for stalled Fontainebleau project (9-15-2009)
Fontainebleau contractors seek lien claims in state court (9-14-2009)
Fontainebleau suit against lenders moved from bankruptcy court (8-5-2009)
Another lawsuit alleges unpaid work at Fontainebleau (7-14-2009)
Fontainebleau builder says it’s protected from paying severance (7-14-2009)
Fontainebleau fires back, outlines bank dispute (7-8-2009)
Fontainebleau developers: Design change could help costs (7-6-2009)
Court filings shed light on Fontainebleau financing (7-2-2009)
Practice of building before designs are done hits wall at Fontainebleau (6-28-2009)
Flood of new hotel rooms dims Vegas outlook for '10 (6-23-2009)
More subcontractors accuse Fontainebleau of failing to pay for work (6-23-2009)
Fontainebleau subcontractors want bankruptcy case moved (6-22-09)
State gaming regulators shied away from policing borrowing (6-21-2009)
Fontainebleau subcontractors say contractor conflicted (6-19-09)

A key group of lenders to the stalled Fontainebleau resort in Las Vegas has lost confidence that the $2.9 billion project can be revived through the Chapter 11 bankruptcy process, and moved Friday that the project be converted to a Chapter 7 liquidation.

The Term Lender Steering Group filed a motion in Miami's U.S. Bankruptcy Court that the Chapter 11 case be converted to a sales process that would be supervised by a trustee.

Friday's filing represents an about-face for the term lenders, which had previously supported Fontainebleau's reorganization effort.

"Although more than $16 million of the Term Lenders' cash collateral has already been depleted, no meaningful progress has been achieved by the debtors and there is no reasonable likelihood of their rehabilitation," the lenders said in their motion.

"With completion of the project by the debtors not possible, 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 creditors," the lenders said.

While Fontainebleau has disclosed it has been in talks with potential investors -- which the Sun reported last month included Penn National Gaming -- observers have been skeptical of a deal anytime soon given the enormous costs to complete the project, the demands of creditors seeking to be paid and the depressed state of the Las Vegas gaming market.

The term lenders -- participants in more than $1 billion in term loans to the project -- noted Fontainebleau had pinned its hopes on a lawsuit seeking to force another group of revolving-loan lenders to provide $656 million in funding for the project. That lawsuit has not been successful for Fontainebleau.

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. The revolving lenders cited cost overruns and other problems with the project and said Fontainebleau had defaulted on a key credit agreement.

Fontainebleau has not yet responded to Friday's motion that the case be converted to a Chapter 7 liquidation and it has stopped commenting to the media on its bankruptcy case.

In their motion Friday, the lenders also said progress has been hindered in the case because of "pervasive conflicts of interest that exist among the debtors on the one hand, and their principals, officers, managers, affiliates and related parties on the other hand."

Miami developer Jeff Soffer and Fontainebleau Chief Restructuring Officer Howard Karawan, for instance, serve in a variety of other capacities for Fontainebleau affiliates including some not in bankruptcy, the lenders said. At the same time, Soffer and other entities related to the debtors are liable to third parties, including the term lenders, under various guaranty and indemnity agreements.

The term lenders said that unless the case is converted to a Chapter 7 and a trustee is appointed to supervise the company and the sales process, "conflicts faced by the debtors will poison any sale process."

The lenders said Soffer has recently discussed with certain term lenders a transaction in lieu of a sale.

"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.

They cited numerous alleged conflicts including Soffer's control of non-bankrupt Turnberry West Construction, which has filed a $675 million claim against the project including $63.9 million for its own fee. Turnberry West also asserts its construction lien is superior to that of lenders' liens.

"The Soffer family will benefit if Turnberry West prevails in those claims against the debtors and the term lenders," the lenders complained.

When Fontainebleau filed for bankruptcy protection in June, it said the Term Lender Steering Group had consented to the use of the group members' cash collateral to finance Fontainebleau's post-bankruptcy operations.

At that time, Fontainebleau said the steering group members held more than $350 million of the outstanding term loans, or about 34 percent of the total. More recent filings indicate those lenders hold about 27 percent of the term-loan debt.

Members of the steering group are investment fund managers Brigade Capital Management LLC of New York, Canyon Capital Advisors LLC of Los Angeles, the Carlyle Group of New York, Guggenheim Investment Management LLC of New York and Highland Capital Management LP/Nexbank Tower of Dallas.

Discussion: 24 comments so far…

By vegas1966

9/25/09 at 4:13 p.m.

Suggest removal

Date for Implosion 2010. The building is a danger now. Falling Glass and more to come. Large Parking Lot for now. Hopefully in 10-15 years they can re-build
By stevem

9/25/09 at 5:16 p.m.

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the question is who would buy that ugly freaking building?
By CynicalObserver

9/25/09 at 5:18 p.m.

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Often, when a mortgage lender files a motion to convert a case to a Chapter 11, it is a matter of posturing, to pressure the debtor to be reasonable.

However, in this case, the group of lenders seeking the conversion of the case have already funded litigation against the lender in control of the project Bank of America, to try to force BofA's group of lenders to fund the $600 Million in construction costs they are withholding. The Federal judge in Miami ruled that there will be no fast track to judgment in that case, and that preliminarily he believed BofA's side of the story, as compared to Fontainbleau owners' side of the story. As a result, I suspect the Miami bankruptcy court judge hearing this case WILL order the case converted to a Chapter 7 and the building sold off at a fire sale price by such a trustee.

That sort of sale would mean that mechanics lien claimants, unpaid employees, and unpaid vendors would get nothing out of the bankruptcy. Neither would the second mortgage holders, who are represented by Wells Fargo.

I can only shake my head at the stupidity of the owners of Fontainbleau not using common sense and filing the bankruptcy in Las Vegas. Bankruptcy judge appointments are political appointments, and they are for a fixed term, not a life time like U.S. District Court judges. I can't help but think that the bankruptcy judges in Las Vegas might have been a bit more reasonable in looking at the conduct of Bank of America and its pals, when the Fontainbleau owners, and the Term Lenders described in the story above, asked that the BofA lending group be forced to fund its share of completion of the project.

Even if the Fontainbleau is sold off at fire sale prices, it will be interesting to see how the Term Lenders' lawsuit against the BofA lenders turns out. That case is still pending here in Las Vegas, and would be a jury trial if it happened.
By Harley

9/25/09 at 8:24 p.m.

Suggest removal

Don't envision Fontainebleau ever reaching completion.

Speaking of unfinished projects, what's up with Echelon Place, did Boyd announce an extension of its constuction delay?
By bdover

9/25/09 at 9:25 p.m.

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CynicalObserver, I was waiting for your review, and thank you for your thoughts. I guess my only question is if the FB goes BK under Chapter 7, what do the Term Lenders get if they eventually beat BOA in Las Vegas courts? I.E the building will be going, going, gone, and do they simply force BOA to fund money that won't go to the building, but to the secondary lenders only? For what? Very confusing issue here in Henderson....
By DTJ

9/25/09 at 9:53 p.m.

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The homeless squatters are on their way...
By gettocard

9/26/09 at 2:22 a.m.

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Well...just make it a homeless shelter..
By gqbossing

9/26/09 at 8:49 a.m.

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It will get completed. Any building in LV which has been topped off and is 70% complete will open, it's just timing.

Don't fall into the "things will stay the same" mentality most people are. When it was good it will always be good, when it's bad it will always be bad...

Around the country things are picking up and IMO 6-12 months from now LV will see a lot of stability in tourism. The real issue is immigration into that city from other states and countries. The reason LV has such a high unemployment rate is the increase in people. There are about as many jobs today as there were in 2007, you just have 10% more people. LV needs a year or two of 0 population growth to catch up.
By fosimmons

9/26/09 at 9:45 a.m.

Suggest removal

Based upon the external architectural features of the project, the location and quality of construction materials it would be good judgement move to place this property in the hands of the city and let them use it as a low cost rental for laborers and employees of the casino industry. In their case this would be a move up the ladder and convenient to where they work, a good use of the property and it would pay for itself after Soffer's infusion of what he owes ... about a billion or more and adding the reduction of state property taxes. They might also install a health clinic and a cafeteria plus a huge work out gym. Forcing Stoffer to sell Turnberry and all it affiliates along with this one, yes,he could be busted by this, but who cares, would put the workers in a great position for a good life free from daily worry about eviction and health care and loss of income. Just the parking facilities alone would make life more bearable for these worker bees. Stofer has had the good life way too long and needs to be taken down several notches. Just as Stanford is now jailed, Stoffer should not get this, but he should get into a '98 Volvo and take a place over at Prado del Rio where his brain power and imagination would have lead him to begin with. He just can't develop on that scale, 7-11's are his basci cup of tea.
By James_P_Reza

9/26/09 at 12:12 p.m.

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RE: Echelon

I drive by that project every day. As far as my eyes can see, a skeleton crew continues work on it. If there was a time lapse camera on the property, you'd see some v-e-r-y s-l-o-w progress being made. It's so slow that one wouldn't notice unless they paid attention. Boyd Gaming isn't in the same cash-poor position as most other gaming companies.
By wizardofOz

9/26/09 at 12:33 p.m.

Suggest removal

There's always e-bay...
By felix28

9/26/09 at 12:49 p.m.

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gqbossing - you better read the news. Some reports say we gre at 2% from last year to this year and others say we have lost people. I really do not think it is near 10%

WHO WANTS TO MOVE HERE NOW?
By davidwayneosedach

9/26/09 at 1:40 p.m.

Suggest removal

Everything has its price. Somebody will snap this up at rock bottom prices. Maybe - even the Chinese.
By alexanderh

9/26/09 at 2:04 p.m.

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Finally, Ch 7 is a logical move, should have happened a long time ago. New owner/buyer will start with a clean slate, 70% completed is a good deal, buy it at rock bottom price... and I bet it will open in 2010.
By maybevegas

9/26/09 at 3:22 p.m.

Suggest removal

Harley;
Boyd would rather buy a Station property for cents on the dollar than spend $$$ to finish Echelon. In fact, they would be better served to finish FB across the street. What retailer wants to lease in either of these projects given the current economy? The water is muddy, but Penn National is still circling.
By CynicalObserver

9/26/09 at 3:58 p.m.

Suggest removal

My own practical suggestion is for the Feds to buy the Fontainebleau and make it a national Veteran's Hospital instead of building that new facility in North Las Vegas.
By burnemandturnem

9/26/09 at 5:22 p.m.

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I recently saw another post that referred to this project as "Fountainred". Very witty. It is indeed a fountain of red ink for anyone who contemplates buying it now. Also see vegas1966 above regarding falling glass. I drive by this property every day and, yes, there's more and more missing panes along the facade. Just might be too much for anyone right now if the sale price is more than a token ten bucks.
By DTJ

9/26/09 at 5:27 p.m.

Suggest removal

This is not a matter of just waiting for the economy to catch up with growth. There is far too much capacity in Las Vegas when it comes to: single-family homes, luxury condos, commercial retail space, and hotel rooms. Did I leave anything out?

I'm only half joking when I speak of the homeless squatters. Sure, let go cheaply enough, somebody will buy the Fountain Bleu. But money still has to be sunk into it to complete the construction. And then the cheapened end result must still compete with all the other capacity in this town. The math coming out the other end has to add up for whoever takes this on. It won't be happening overnight. Expect this eyesore on the strip to remain as is for a while.

Meanwhile, let the hi-rise hobo town parties begin! Break out the sterno! Roll out the welcome mat for THIS guy!
http://community.post-gazette.com/cfs-fi...
By Vegasvampire

9/27/09 at 12:39 a.m.

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Just think, if they left Wet N Wild there then we would not have this problem today.
By Vegasvampire

9/27/09 at 12:42 a.m.

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When they have that fire sale, Chapter 7, Boyd will make a killing buying that thing. They will make it their flagship property. It will give them the much needed capital to finish their other project on the strip.
By its2hot

9/27/09 at 8:22 a.m.

Suggest removal

Wet N Wild is still there, it's just buried below the parking lot and batch plant. We can't wait until some unsuspecting developer snags this piece of land and begins the site work. Caching to the change orders, millions it will cost to clean up the below grade debris buried.

Fontainebleau will be purchased but I suspect it will be by Dr. Henry Cheng of New World Development. What most people in Nevada don't realize is that Dr. Henry Cheng is the largest investor in the world and holds the most expensive real estate in the world. He developed Ascaya in Henderson and owns a vast majority of property here and across the world and most of the luxury resorts across the world, see CTF Hotels and Resorts and New World Development, Dr. Henry Cheng.
By leftiebob

9/27/09 at 8:42 a.m.

Suggest removal

Clark County should require these stopped projects to landscape their street side while waiting a final determination. Ugly walls should not be allowed in perpetuity.
By vegasgurl4fun2

9/27/09 at 9:17 a.m.

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Gee, so much for my real estate career of selling high rise condos in Las Vegas. The demise continues. ;(
By BorisR

10/3/09 at 5:45 a.m.

Suggest removal

Will there be enough water for all these gaming joints? Remember, you can't make water our of sand or dust or oil. It's gotta be water that people need to survive. I have a little bit of concern that once Lake Mead resources are used up and that dream-pipeline form anywhere off-state is not ready, there will be a little water shortage to feed all these new condos, casinos, golf courses, water shows, etc.....
Maybe, in order to plan everything nice and neat, also the water shortage coming up should be taken into consideration. Not only growth at no matter-how-much-it-costs.
From Switzerland