Legal fight continues over unfinished Fountainbleau resort

At a daylong hearing Monday in Clark County District Court, attorneys representing executives and companies tied to the hotel, the most visible casualty of the Las Vegas real estate crash at 63 unfinished floors, tried to dismiss a lawsuit brought by entities holding about $800 million in loans at face value. Although the Fontainebleau itself is still grinding through bankruptcy proceedings in Florida, the debt holders seek to tap a money vein among the 16 solvent people and companies involved in the project.

The basic case, which trickled out after leader lender Bank of America refused further loans to Fontainebleau in April 2009, centers on mismanagement, cost overruns of an estimated $400 million and alleged efforts to hide them in order to keep financing flowing.

“There was a massive fraud,” said Los Angeles attorney Kirk Dillman, representing the debt holders who brought the case. “They ran it, they controlled it and we suffered from it.”

But attorney Steve Morris, speaking for Fontainbleau’s Miami-based developer Jeffrey Soffer and some of his entities, questioned whether current debt holders had lost anything because they came to the project late. Many purchased their pieces of the construction loan at a steep discount after Fontainebleau’s default. Even if a cover-up existed, according to Morris, the resort’s dire condition had already surfaced before they put their money in.

“These are wholly anonymous and faceless plaintiffs who didn’t negotiate or contract with the defendants,” Morris said.

Of the 46 debt holders in the case, 36 are incorporated in the Cayman Islands. Claims against the Fontainebleau itself remain within the bankruptcy, with a problematic chance of a payout. However, Dillman’s targets, such as Soffer and Australian business magnate James Packer, who purchased a 19.6 percent share of the Fontainebleau for $250 million, have remained outside the bankruptcy.

Clark County District Court Judge Mark Denton said he would review the arguments, but did not specify a timetable for issuing a ruling.

Besides the question of whether the debt holders were duped, Denton must contend with technical questions such as whether Nevada law allows an original lender to transfer potential economic damage claims to someone else.

The Fontainebleau, budgeted at about $2.9 billion for 3,800 rooms, got under way after Bank of America led a group of lenders in furnishing the main construction loan at $1.85 billion. But the problems within Fontainebleau, coupled with the severe recession, brought work to a halt in less than two years and resulted in a $150 million liquidation sale to New York investor Carl Icahn in early 2010.

As part of the collateral damage, a number of original lenders sold their positions at less than face value to investors that specialize in distressed real estate. Trading on bad loans has happened at various projects across the valley, including hotel-casinos such as the M Resort and the Palms.

Several of the defendants, who hired most of the dozen lawyers sitting in on the Monday hearing, contended they had little or nothing to do with the $1.85 billion loan. For example, Ullico, an investment and insurance company for labor unions, had chipped in to a separate
$315 million loan and never dealt with the debt holders in the case, according to its attorney.

But Dillman contends Ullico covered four months of contributions required of Lehman Bros. after the Wall Street firm collapsed in September 2008. Ullico was in turn reimbursed by Soffer, an act that Dillman depicted as an arm of the broader cover-up of Fontainbleau’s woes.

Contact reporter Tim O’Reiley at
toreiley@reviewjournal.com or 702-387-5290.