Wednesday, October 4, 2023
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Belly-Up Casino Funds to Reach Contractors First

LAS VEGAS (CN) - Contractors, not banks, are entitled to $100 million from the unfinished Fontainebleu hotel on the Las Vegas Strip, the Nevada Supreme Court ruled.

The decision means dozens of contractors stand to recover some of the $350 million they claimed in losses after the hotel went belly up while still under construction in 2009.

The U.S. Bankruptcy Court for the Southern District of Florida asked the Nevada Supreme Court to weigh in on whether lenders' mortgages are senior to mechanics' liens.

The high court found that mechanics' liens are to be repaid ahead of lenders that replaced the original lenders and came into the project afterward.

"Although this court has adopted mortgage subrogation principles ... we have never addressed whether equitable subrogation applies in the mechanic's lien context," Justice Michael Cherry wrote for the court.

"The Legislature has spoken and has created a specific statutory scheme whereby a mechanic's lien is afforded priority over a subsequent lien, mortgage, or encumbrance in order to safeguard payment for work and materials provided for construction or improvements on land," Cherry wrote. "Therefore, we conclude that the plain and unambiguous language [of the law] precludes application of the doctrine of equitable subrogation, as it unequivocally places mechanic's lien claimants at an unassailable priority position."

The Fontainebleau sought to build the $2.8 billion hotel-casino, and Bank of America loaned the project $150 million in 2005. More than 300 contractors and suppliers started construction.

In 2007, Bank of America agreed to loan the project an additional $1.85 billion to be dispersed in three stages.

"At some point it appears that Bank of America refused to advance further funds under the existing loan commitments," Cherry wrote.

Work ceased, and Fontainebleau filed for Chapter 11 bankruptcy.

Icahn Nevada Gaming Acquisition bought the property, which is only about 70 percent complete, with the liens attached to the proceeds, and the Chapter 11 was converted to a Chapter 7 liquidation.

Wilmington Trust FSB succeeded BofA as administrative agent for the lenders. In 2009, it filed an adversary proceeding in bankruptcy court against the hotel, a multitude of contractors, subcontractors and suppliers who have asserted statutory mechanics' liens against the property.

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