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Judge weighing arguments in $700 million Fontainebleau fraud lawsuit

The unfinished Fontainebleau is seen Thursday, July 28, 2011.

With potentially $700 million in damages at stake, it was little surprise when 23 attorneys packed into a Las Vegas courtroom Monday to argue about whether a fraud lawsuit could continue over the failed $2.9 billion Fontainebleau Las Vegas casino resort.

In what was described as a colossal case involving complicated facts, 46 lenders and investments funds are suing some of the top names in the development and gaming industries in hopes of recovering some of their Fontainebleau losses.

After a hearing that lasted most of the day, Clark County District Court Judge Mark Denton didn’t immediately rule on motions by the defendants that the case be dismissed on the pleadings, even before discovery gets under way.

The suit was filed in March by lender/investors led by Brigade Leveraged Capital Structures Fund Ltd., which charged Fontainebleau executives and associated companies hid cost overruns and other problems from lenders, inducing them to continue pumping money into the casino resort that later fell unfinished into bankruptcy in 2009.

The plaintiffs — called vulture hedge funds by defendants — say they provided some $700 million of Fontainebleau’s planned $2.84 billion in financing. (By the time the project was halted, just $1.675 billion of that had been borrowed).

With little hope of recovering their losses in Fontainebleau’s bankruptcy case, the lender/investors are now trying to win damages in multiple lawsuits from Fontainebleau developers as well as its main lender and loan disbursement agent, Bank of America.

The defendants in the Las Vegas suit include Miami developer Jeff Soffer and several of his Turnberry and Fontainebleau companies; Las Vegas gaming executive Glenn Schaeffer, who resigned from Fontainebleau’s board of managers in May 2009; investors Australian gaming titan James Packer and Packer’s company Crown Ltd.; and lender Union Labor Life Insurance Co. (ULLICO).

Soffer, the lead Fontainebleau developer, was known in Las Vegas for developing high-rise Turnberry condominium towers and the Town Square shopping center before launching the Fontainebleau casino resort project with Schaeffer, previously a top executive at Mandalay Resort Group, now part of MGM Resorts International.

Construction on Fontainebleau was halted in the summer of 2009, and its initial developer, Soffer’s company Fontainebleau Las Vegas, filed for bankruptcy after banks halted funding for what had been envisioned as a $2.9 billion, 3,815-room resort.

The project was hurt by declining revenue projections because of the recession, an associated lack of condominium sales, cost overruns and the September 2008 bankruptcy of lender Lehman Brothers. Costs to finish the Fontainebleau casino resort — now indefinitely mothballed by new owner Carl Icahn — could reach $1.5 billion, bankruptcy court filings say.

During arguments in Monday’s lawsuit hearing, Soffer attorney Steve Morris of the Las Vegas law firm Morris Peterson argued the lawsuit should be thrown out because the plaintiffs are trafficking in fraud claims — something not allowed in Nevada.

“These faceless plaintiffs had nothing to do with the defendants they are suing,” Morris said, charging the plaintiffs had purchased the debt they are suing over at a discount and now are trying to assert assigned fraud claims, something he said wasn’t allowed in Nevada.

He and other defense attorneys also charged the lawsuit didn’t include specific information to put their clients on notice as to who they supposedly defrauded and how that was allegedly accomplished.

Plaintiffs’ attorney Kirk Dillman of the Los Angeles office of the law firm McKool Smith, however, said some of the plaintiffs were original lenders — so no assignments were involved.

Others did buy the debt and are suing over fraud assignments, which he said were allowed in Nevada.

Distressed debt investors buy billions of dollars every day and there’s nothing inappropriate about that, he said.

“It’s part of the financial system,” Dillman said. “We own the debt and all the claims that go with it.”

Dillman said the lawsuit spelled out with plenty of specifics how Soffer, fellow executives and associated companies hid more than $400 million in Fontainebleau cost overruns and submitted false financial information to lenders.

“This was a massive fraud,” he said.

The lawsuit in state court in Las Vegas is just one of many under way around the country as Fontainebleau Las Vegas creditors, investors and contractors try to recover some of their losses.

In one case pending in U.S. District Court in Miami, some of the same lenders in the Nevada lawsuit are suing Bank of America, charging B of A should have detected problems at Fontainebleau and stopped disbursing the lenders’ money earlier.

Bank of America attorneys dispute this and they say the Nevada lawsuit undercuts the lenders’ federal suit in Miami.

“Plaintiffs’ fraud allegations in the Brigade complaint (in Las Vegas) are inconsistent with their claim here that Bank of America breached its agent duties under the credit and disbursement agreements,” B of A attorneys wrote in a court filing last month in that case.

"It is inconceivable that at the same time that it was attempting to defraud Lenders, Fontainebleau would have disclosed the fraud to the lenders’ agent,’’ Bank of America attorneys wrote in their filing.

Lenders disputed the bank’s reasoning.

“B of A asserts that the Brigade action (in Las Vegas) is at cross-purposes with the claims that B of A wrongfully disbursed funds to the borrowers. It isn’t. The fact that the borrowers were dishonest does not excuse B of A’s improper disbursements. It makes them all the worse. Had B of A done its job and not disbursed funds at times when it knew that conditions precedent to disbursement had not been satisfied, the plaintiffs’ funds would have remained safe and sound, regardless of the borrowers’ integrity or lack thereof,” charged an October filing by attorneys there representing certain lenders.

In the main Fontainebleau bankruptcy case in Miami, the case’s trustee sued Soffer and other executives in June, alleging breach of fiduciary duty and fraudulent transfers — charges denied by Soffer and his codefendants.

And in Nevada, the state Supreme Court has yet to rule on a dispute over whether lenders or contractors that built the resort have the first priority to receive payments from the approximately $100 million left over in the bankruptcy court fund from the bankruptcy court auction of the resort to investor Icahn for about $156 million.

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  1. Move on already, people. Everyone lost money on mega-failures like FB - from the developers to the contractors and lenders as well. The only ones who will profit from beating this dead horse from here on out are the lawyers.

  2. I Love Carl Icahn, picked the banks off on the buy,More bad paper,Get in line for nothing investors. Now watch Icahn Resorts, make money off your bad investments,You will have a story to tell your friends when you come to Las Vegas and drive by the big blue how are company lost money hear,bad bet ,and the casino was not even open yet.

  3. A Nevada judge needs to make sure the contractors who have over 25% completion in FB are paid at least 50% on the dollar in the BK proceeding.