Goldman Sachs denies Las Vegas Hilton foreclosure aimed at helping Stratosphere

The Race and Sports SuperBook at the Las Vegas Hilton is seen on Tuesday, March 15, 2011.

Las Vegas Hilton lender Goldman Sachs Mortgage Co. is denying suggestions its foreclosure of the Hilton is part of a plan to boost the fortunes of the nearby Stratosphere hotel-casino.

The Hilton has complained Goldman Sachs is conflicted in the foreclosure because the lender’s parent, investment bank Goldman Sachs, owns 40 percent of the Hilton as well as the Stratosphere’s parent company, American Casino & Entertainment Properties LLC.

The majority owner of the Hilton is an affiliate of billionaire investor Thomas Barrack’s Los Angeles company Colony Capital LLC.

The 2,950-room Hilton hotel-casino, which has been losing money in the recession, is fighting the foreclosure as well as a lawsuit in Clark County District Court in which Goldman Sachs Mortgage is trying to install a receiver to run the property until it’s foreclosed on.

In a court filing Friday, attorneys for Goldman Sachs Mortgage denied assertions that Goldman Sachs’ position as both a lender to and investor in the Hilton are influencing the foreclosure effort.

These assertions involve "rank and irrelevant speculation" and the Hilton can’t dispute it’s in default on its $252 million mortgage and that the loan agreement authorizes the appointment of a receiver in the event of a default, the Goldman Sachs’ filing said.

The Hilton "speculates that Goldman Sachs Mortgage Co. may have orchestrated events to favor its interests in the Stratosphere to the detriment of the Las Vegas Hilton, but does not offer a single fact to support those suspicions," Goldman Sachs’ filing said.

The lender noted that Steve DuCharme, a former state Gaming Control Board chairman, was appointed in May 2007 as compliance officer to monitor the Goldman Sachs Mortgage/Goldman Sachs investment bank relationship at the Hilton as directed by the Nevada Gaming Commission, which was concerned about potential conflicts, and DuCharme continues to serve in that position.

DuCharme said in a court declaration that as the independent compliance officer, he submits confidential quarterly reports on the Goldman Sachs lender/investor relationship at the Hilton to the State Gaming Control Board.

"That a financial institution may have an interest in two casino properties located in Las Vegas is not an adequate ground for accusations of improper behavior. (The Hilton) is well aware of this fact, since its own affiliate (Barrack) has an interest in Station Casinos," the Goldman Sachs filing said.

Colony Capital and the Fertitta family took Station private in 2007 in a leveraged $8.7 billion deal. Station later filed for, and emerged from, Chapter 11 bankruptcy.

Goldman Sachs Commercial Mortgage also disputed suggestions by the Hilton that the appointment of a receiver could destroy the Hilton’s goodwill with the community by leading to mass layoffs and termination of contracts with suppliers.

The Hilton "has conjured up a laundry list of harms which might befall the Las Vegas Hilton if a receiver is appointed. The proposed (receivership) order, however, does not permit such conduct" the Goldman Sachs filing said.

The Hilton’s "mudslinging and disregard for the facts should not be countenanced by the court," Goldman Sachs Commercial Mortgage said in its filing. "(The Hilton) has failed to meet its obligations under the loan documents, demonstrating an inability to operate and maintain the Las Vegas Hilton under the terms it accepted. Such an occurrence is precisely the reason for the provisions of the loan agreements here invoked by Goldman Sachs Commercial Mortgage, and the proposed (receivership) order properly provides for full operational control in the hands of a receiver with duties to all interested parties."

Goldman Sachs Commercial Mortgage is represented in the dispute by the Las Vegas law firm McDonald Carano Wilson LLP and the New York firm Morrison & Foerster LLP.

Clark County District Court Judge Elizabeth Gonzalez has yet to rule on whether Barrack’s company that controls the Hilton, Colony Resorts LVH Acquisitions LLC, can conduct fact-finding discovery on the relationship between the Goldman Sachs lending and investment arms at the Hilton and Goldman Sachs' control of the 2,427-room Stratosphere and its parent company.

She's also been asked to rule on a request to intervene by another Barrack company, Colony Investors VI LP, which said in a court filing it’s concerned the Hilton receivership application may cause Goldman Sachs to "erroneously claim" Colony Investors VI is obligated to pay more than $250 million as a loan guarantor.

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  1. Real estate developers and hotel owners/operators have been doing deals with financial institutions, for at least the last 25 years, where the financial institution buys both a part ownership interest and makes a mortgage loan. Twenty five or so years ago, the "fiduciary duty" of the financial institution as a partner with the developer/hotel operator, and the incongruity of the financial institution's status as mortgage lender with an absolute right to foreclose for non-payment of the mortgage, was debated in national professional real estate lawyering circles. Ultimately, the lawyers came up with "magic mumbo jumbo" legal language in mortgages and partnership agreements, where the developer/hotel operator waived fiduciary duty claims against the financial institutions, and this issue died.

    We are sitting in the 9th Circuit of the U.S. Court of Appeals. Over the last 18 months, in supervising bankruptcy cases 9th Circuit's Bankruptcy Appellate Panel and U.S. District Court in California have repeatedly shot down developers' arguments that their partners in ownership cannot foreclose on real estate jointly owned. The decisions were in the SunCal v. Lehman Brothers cases, none of which are in Las Vegas. That's the case law Barrack is up against with the Hilton.

    As a result, to see Barrack raising the issue of "conflicting loyalties" as to the Hilton is simply silly. The mortgage documents were prepared by a sophisticated real estate law firm, and contain the "magic language" to waive such a claim. The "magic language" has worked all across the United States.

    The simple fact is that the Barrack-run Hilton hasn't made its mortgage payments. The natural consequence is the beginning of a foreclosure, with the appointment of a receiver over the hotel. If Barrack doesn't like that state court outcome, he should just go ahead and put the Hilton into a Chapter 11. Of course, the end result will be the mortgage lenders getting approval from the bankruptcy judge to take over ownership of the hotel.

    All this Hilton case amounts to are silly games being played in Nevada courts, which will not produce any startling result. No one is going to profit from these shenanigans except for the lawyers on all sides of the case.

    Even if Barrack cannot win in state or bankruptcy court, maybe the Nevada Bar Association could give him an award thanking him for putting money in a lot of lawyers pockets. Sort of a public-service-to-lawyers award. Then again, the Nevada 8th District Court should sanction him for wasting the court's time, which is paid for by the taxpayers.

  2. Man, are the Hilton people way off. In the casino business, as with retail stores, nearby business brings in more business. The last thing the lender would want to do is create even more of an island effect for Stratosphere. The North end of The Strip does not need to lose yet another reason to go there.

    One issue I've not seen raised in the Hilton coverage is impact on the Monorail. If the Hilton closes, the last two stops of the Monorail on the North end will be at dead casinos. It's already struggling. Closure of the Hilton could be the last nail in the coffin.