Court sides with contractors in $100 million dispute over Fontainebleau bankruptcy

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

Fontainebleau Resort

The Fontainebleau, construction stopped, is seen dark along the Strip. Launch slideshow »

Contractors rather than banks are entitled to receive a $100 million payout from the Fontainebleau Las Vegas bankruptcy case, the Nevada Supreme Court said in an opinion today.

Attorneys said the opinion is significant for Nevada contracting companies because it gives them more protections in situations like those involving the $2.9 billion Fontainebleau, a casino resort that failed while still under construction in 2009.

The failure left lenders, bondholders and contractors owed some $2.1 billion and caused hardships for some contractors that had their own bills to pay.

With just $100 million available to pay Fontainebleau debts after the project was auctioned to investor Carl Icahn during its bankruptcy, court fights have been raging around the country over that money, as well as claims that Fontainebleau’s nonbankrupt developer misled lenders and is liable for their losses.

Icahn, in the meantime, hasn’t indicated what, if anything, he plans to do with the massive, 68-story, unfinished structure.

In the case at issue today, the Fontainebleau bankruptcy judge in Miami responsible for distributing the $100 million had asked the Nevada Supreme Court for guidance on whether the liens of contractors or the liens of lenders were in first position at the Fontainebleau.

The case involved the legal concept of “equitable subrogation.” That covers a situation where a lender refinancing a first-position loan expects to remain in first position, ahead of the claims of contractors and others who might have filed liens prior to the refinancing.

In the Fontainebleau case, attorneys for more than 300 contractors argued that when the Fontainebleau debt was refinanced, the refinancing lenders moved to second position behind the contractors because the contractors’ liens were filed before the refinancing.

They urged the Nevada Supreme Court to reject claims by lenders that under the “equitable subrogation” doctrine, the refinancing lenders were in first position.

The court, in its opinion today, found Nevada law “expressly provides” that mortgages obtained after work begins on a project have a second position behind contractors’ liens filed prior to the refinancing being recorded.

“We conclude that equitable subrogation does not apply against mechanic’s lien (contractor) claimants,” the court wrote in its opinion for the Miami bankruptcy court.

“In a nutshell, the court ruled that mechanic’s lien (contractor) claimants are in a vulnerable position and are entitled to special protections set out in Nevada statutes,” said Las Vegas attorney Brian Pezzillo, whose firm Pezzillo Lloyd represented Fontainebleau contractors and suppliers such as Cashman Equipment Co., Graybar Electric Co. and Quality Cabinet and Fixture Co.

“It is a crucial victory for mechanic’s (contractors) lien claimants in this case and will have far-reaching implications in Nevada as the court ruled that mechanic’s lien claimants are a class of claimants that are afforded special protections.”

Another attorney for contractors, Gregory Garman of the firm Gordon Silver in Las Vegas, said the opinion reinforces protections for building companies already spelled out in Nevada law.

“There’s no way the banks can get around that now,” he said. “It is a complete and total victory for the contractors.”

Garman said it may take several months for the bankruptcy court to clear up remaining issues before the approximately $100 million can be distributed.

A request for comment was placed with an attorney for the lenders.

Today’s opinion said lenders like those at the Fontainebleau can obtain first-position liens against construction projects — ahead of contractors already working on jobs — if everyone complies with the law governing waivers contractors need to grant in such circumstances.

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  1. Boom!

    Hopefully this building falls in the hands of somebody that can make the Fontainebleau happen.

  2. I recognize no ruling will please everyone and that this one entails losses for many. But, having said that, this ruling is the best outcome for those involved. Putting contractors at the head of the line for payments is the right option as they will pass those monies down the line. And, banks and lenders have the ability to write down losses easier as well as absorb them.

  3. Thank goodness the court sided with the contractors. It would be a shame to see local companies suffer additional losses for perfroming work on the Fontainebleau..