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Steve Green

Fontainebleau's suit against lenders moved from bankruptcy court

5 August 2009

LAS VEGAS, Nevada -- Major bank lenders to the Fontainebleau Las Vegas hotel-casino have won a tactical victory in their legal dispute with the bankrupt resort.

U.S. District Judge Alan Gold in Miami has granted the banks' motion to move Fontainebleau's lawsuit against them from the bankruptcy court to the federal district court in Miami.

The suit, initially filed in Clark County District Court on April 23, was later moved to federal district court in Las Vegas. When Fontainebleau filed for bankruptcy in June, it dismissed the lawsuit and re-filed it in Miami bankruptcy court.

Fontainebleau claims in the lawsuit that Bank of America and other big lenders in a revolving loan agreement this spring improperly refused to loan the resort $656.5 million needed for continued construction. Fontainebleau says it had to halt construction of the $2.9 billion resort and file for bankruptcy because the banks breached the lending contract.

The banks, however, say they stopped financing the project because Fontainebleau had defaulted on the credit agreement because of cost overruns and other problems.

In filing for bankruptcy, Fontainebleau said the lawsuit belonged in the bankruptcy court because it's a core part of its reorganization and because the litigation would proceed faster in bankruptcy court.

But the banks said the $656.5 million sought in the lawsuit are not a key part of Fontainebleau's plan to reorganize and resume construction on the resort, since creditors could assert claims against those funds.

The banks also said it would be more efficient to handle the case in district court for two reasons:

-- A related lawsuit against the banks filed by term lenders to Fontainebleau is pending in district court. The cases involve similar issues and it makes sense for depositions and other evidence-gathering procedures to proceed under the supervision of the same court.

-- Any ruling by the bankruptcy court would be subject to review by the district court, so the move to district court will remove one step from the process.

In a ruling filed Tuesday, Gold sided with the banks in the dispute.

"Without the turnover (of the money) claim, plaintiff's claims neither involve a right created by bankruptcy law nor do they arise only in bankruptcy. As defendants have noted, plaintiff's breach of contract claims were raised pre-(bankruptcy) petition in substantially similar form in Nevada state court,' Gold wrote in his ruling.

Fontainebleau on Wednesday said it had no comment on Gold's ruling or whether court-ordered mediation with the banks was still under way.

The defendants in the lawsuit are Bank of America, its subsidiary Merrill Lynch Capital Corp., JPMorgan Chase Bank, Barclays Bank PLC, Deutsche Bank Trust Company Americas, the Royal Bank of Scotland plc, Sumitomo Mitsui Banking Corp., Bank of Scotland plc and HSH Nordbank AG.

In arguing to move the lawsuit out of bankruptcy court, attorneys for the banks wrote in court papers:

"These and other overlapping issues between this case and the term lender (lawsuit) involve questions of state law that could have been, were, and indeed still are, the subject matter of a non-bankruptcy lawsuit that is in no way dependent upon this bankruptcy case and does not arise in or under the Bankruptcy Code.

"Fontainebleau's attempt to convert its action into a core proceeding by appending a 'turnover' claim is unavailing. The purported turnover claim adds no new theories of entitlement or damages; rather it simply reiterates the basis for its alleged breach of contract claims. These contract claims are not payable on demand and are vigorously disputed, and are thus inappropriate for turnover.'