Fontainebleau Las Vegas developers fight ‘vulture investors’ lawsuit

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

Heavy hitters in the worldwide casino and real estate industries have flooded a Nevada court with legal briefs denying they’re responsible for the failure of the $2.9 billion Fontainebleau Las Vegas casino resort development.

The briefs were filed in a lawsuit initiated March 25 in Clark County District Court by a group of about 45 corporate investors in Fontainebleau’s $2.84 billion credit facility.

Construction on Fontainebleau was halted in the summer of 2009, and its initial developer, 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 and cost overruns. Costs to finish the project could reach $1.5 billion, bankruptcy court filings say.

Investor Carl Icahn bought the property during a bankruptcy auction for $148 million and has signaled construction won’t resume until the economy turns around.

The plaintiffs -- hedge funds that invested in Fontainebleau's distressed debt -- complained in the March lawsuit that Fontainebleau’s developers, including Miami real estate developer Jeff Soffer and Australian gaming captain James Packer, defrauded the lenders by failing to disclose the true cost off the project, hiding cost overruns and producing false architectural drawings to deceive the lenders, among other things.

It’s unknown how much of the Fontainebleau debt the investors hold or what they paid for it.

Their suit sought unspecified damages against the defendants.

Locally, the best known defendant is Soffer, known not just for the Fontainebleau Las Vegas resort but for developing high-rise condominiums in Las Vegas as well as the Town Square shopping center, which he lost to lenders in March after loan defaults.

Motions seeking dismissal of the Fontainebleau loan lawsuit were filed last week by attorneys for the defendants. They’re represented by some of the top corporate law firms in Las Vegas and New York: Fennemore Craig, Kolesar & Leatham, Morris Peterson and Lionel Sawyer & Collins in Las Vegas; and Skadden, Arps, Slate, Meagher & Flom in New York.

An Aug. 30 filing for Soffer said the loan investors’ lawsuit is fundamentally flawed because the credit agreement at issue is a contract to which Soffer personally was not a party.

His attorneys noted the actual borrowers were two of Soffer’s companies, Fontainebleau Las Vegas LLC and Fontainebleau Las Vegas II LLC, which are in Chapter 7 bankruptcy liquidation in Florida.

"The plaintiffs do not allege breach of contract against the borrowers because such claims have been extinguished by the borrowers’ bankruptcy," Soffer’s filing said. "Rather they come to this court seeking recovery in tort (wrongdoing) from individuals and entities allegedly related to the borrowers, although the complaint does not allege that the plaintiffs dealt with or had a relationship with the defendants that would support their tort claims.

"This is a significant and substantive defect in the complaint," Soffer’s filing said.

Soffer’s attorneys also argued the lawsuit was defective in that it failed to specify key details such as how or when the approximately 45 "opportunistic" plaintiffs acquired their interests in the debt at issue, as they were not a party to the credit agreement.

The lead plaintiff, described as a hedge fund, is Brigade Leveraged Capital Structures Fund. It’s affiliated with Brigade Capital Management LLC of New York, a well-known investor in distressed debt.

"Plaintiffs fail to allege sufficient facts to establish that they are real parties in interest who have standing to maintain this lawsuit," Soffer’s filing said.

And while the debt holders’ lawsuit complains about "material misrepresentations," Soffer’s reply said the plaintiffs failed to spell out who said what to who about the status of the Fontainebleau development.

The lenders also assert fraud allegations in a "conclusory fashion" without offering facts to back up their charges, Soffer’s response said.

"The fact that the project eventually went over budget does not, in any way, support Brigade’s conclusion that cost overruns were the product of fraud," Soffer’s reply said.

Similar motions to dismiss were filed by defendants including Soffer companies Fontainebleau Resorts LLC, Turnberry Ltd. and Turnberry West Construction, general contractor for the resort; Packer, his Australian gaming company Crown Ltd.; former Fontainebleau Las Vegas executive Glenn Schaeffer; and Union Labor Life Insurance Co. (ULLICO).

ULLICO’s filing said the credit agreement involved "highly sophisticated lenders" including Bank of America and that "the reality is that all participants in the project, including ULLICO, lost money due to the unanticipated, unprecedented and extraordinary economic circumstances at the time."

Packer and Crown’s filing charged: "Plaintiffs are vulture investors who, subsequent to the events alleged in the complaint, apparently acquired the defaulted debt that the project borrowers owed to various original term lenders."

"Plaintiffs’ fraud claim against each of the Crown defendants fails because they do not allege that any of the Crown defendants made representations to them, let alone a false representation," said the filing on behalf of Packer and Crown.

As for the pending Fontainebleau bankruptcy, the Nevada state court filing for Soffer said: "The defendants owed no duty to the plaintiffs, so they could not be their fiduciaries or liable to them for any other species of tort. Only the trustee in the Florida bankruptcies can make such claims."

In the Florida bankruptcy case, the Fontainebleau Las Vegas trustee did sue Soffer and related companies June 8 to recover damages for alleged breach of fiduciary duty and to recover alleged “fraudulent transfers” related to development of the stalled resort.

Soffer and his codefendants denied the trustee’s allegations and are also fighting that suit.

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  1. As the old saying goes: Success has many
    fathers, but failure is an orphan.

  2. cubnten,

    You don't know Mr. Icahn and you have no factual knowledge of what his plans are for this property.

    How to do you figure the "taxpayers" are going to pick up the tab on this? It is his private property and there is no public money involved. There is no "bill" for you to eat.

  3. I don't think Ican is hiding anything; he has no idea now which way he will go. I can say with 100% certainty that he is not looking to burden the taxpayers of Clark County with the costs to do anything with the property. He might get some valuation reduced, but making the County pay for remediation is something that he isn't going to do. He can dismantle the entire property and make enough money to cover his cost and make a little profit. Then he can sell the land for a profit. There is a long term real estate play here, but it is not a "killing", IMO.

  4. In days of old, commercial mortgage lenders would get really angry when borrowers filed tort based lawsuits against the lenders. Now, the tables are turned, and commercial mortgage lenders are making tort claims against the ultimate owners of "non-recourse entities" when the lenders lack a loan repayment guarantee. Were the mortgage lenders on the Fontainebleau too stupid to demand a repayment guarantee against these individuals, and thus reduced to suing in tort? If yes, this case will be quite interesting, because I don't believe the Nevada Supreme Court has developed an extensive body of case law on these issues. When fraud is involved, it's very hard to get rid of these sorts of cases on motions to dismiss, simply because they are, in essence "he said, she said" cases, unless the defendant's internal documents or communications to the lead lender disclose otherwise. A fun time will be had by all, lawyers that is. Keep on billing gentlemen.