Fontainebleau Las Vegas fraud lawsuit to continue
7 December 2011
13 Dec. 2011 9:31 a.m.
Update: On Dec. 12, former Fontainebleau Las Vegas executive Glenn Schaeffer said he'd been advised that all counts in the lawsuit against him had been dropped.
A state judge refused Wednesday to dismiss much of a lawsuit charging the developer of the stalled Fontainebleau casino resort in Las Vegas hid cost overruns and other problems from lenders to the $2.9 billion project.
The lawsuit was filed after it became clear in the Fontainebleau Las Vegas bankruptcy case that creditors might recover just pennies on the dollar in the bankruptcy process, causing some of the creditors to set their sights on Fontainebleau’s non-bankrupt officers and affiliated companies.
Clark County District Court Judge Mark Denton issued the order keeping the lawsuit alive Wednesday after weighing arguments made Nov. 21 on motions for dismissal filed by attorneys for defendants including some of the top names in the development and gaming worlds: They include Miami developer Jeff Soffer, former Fontainebleau and Mandalay Resort Group executive Glenn Schaeffer and Australian casino titan James Packer and his firm Crown Ltd.
Denton denied several dismissal motions involving key defendants Soffer and his companies Fontainebleau Resorts LLC and Turnberry West Construction Inc., general contractor for the resort that sits unfinished on the Las Vegas Strip and is now owned by investor Carl Icahn.
Attorneys for some of the defendants did succeed in getting some of the counts in the massive lawsuit dropped.
The ruling means the lawsuit can move to the discovery, or fact-finding stage, and potentially more dismissal motions. Those motions may be followed by motions to resolve the suit on a summary judgment basis — though a trial is possible, as well.
The suit was filed by 46 investment funds that were either direct lenders to Fontainebleau Las Vegas in its $700 million term loan, or purchased their interests in that debt at a discount from other lenders.
Attorneys for the defendants complained the plaintiff investment funds were “vulture hedge funds.” The investment funds countered that there’s nothing wrong with investing in defaulted debt.
The defense attorneys said that, for the most part, the funds lacked standing to sue as they were trafficking in fraud claims and — in many cases — were distressed debt investors as opposed to direct lenders.
Denton, however, in Wednesday’s order said the funds’ standing to sue as either lenders or assignees of debt can be sorted out as the suit moves forward. He denied motions for dismissal of the lawsuit based on the standing issue requested by Soffer, Fontainebleau Resorts LLC and Turnberry West Construction Inc.
In another victory for the plaintiff investment funds, Denton rejected arguments they had not provided enough detail in alleging intentional misrepresentations on the part of Fontainebleau Resorts and Turnberry West.
This means the lawsuit can continue on those counts in which the lenders said they kept pumping money into Fontainebleau Las Vegas because they had been falsely assured it was solvent.
The judge, in his order, differentiated between the meanings of "failure to disclose," "concealment" and "intentional misrepresentations."
"While someone would be expected to know what was said to him, he might not have any idea of what is being concealed from him," Denton wrote in his order.
On this basis, he allowed claims of fraudulent concealment/non-disclosure to proceed against Soffer, Fontainebleau Resorts and Turnberry West.
Fraud claims, however, were dismissed against most of the other individual defendants — a group of Fontainebleau and Turnberry executives — when the judge ruled those claims had not been pled with specificity.
"Each of the parties who has been sued for fraud has the right to know what representations he, she or it made; when they were made, and to whom; that they were false and known to be so; and what reliance a given plaintiff may have made to his, her or its detriment," Denton ruled.
Schaeffer wasn’t mentioned in Wednesday’s ruling — it wasn’t clear late Wednesday if Denton intended to include him in the group of executives for which most of the lawsuit counts were dismissed.
The judge specifically allowed counts alleging aiding, abetting and conspiracy related to alleged concealments to proceed against Packer and Crown. Allegations of aiding, abetting and conspiracy to make intentional misrepresentations against those defendants were dismissed.
Union Labor Life Insurance Co. was dismissed from the suit entirely.
In what could develop as a problem for the plaintiffs, Denton questioned in his order whether provisions in assignments of tort (wrongdoing) claims can be binding on non-parties to the assignments like the defendants.
In another setback for the plaintiff funds, Denton dismissed fiduciary breach of duty claims after the defendants said case law doesn’t allow creditors to make such claims against the officers and managers of insolvent companies.
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