Legal News

Would Banks Sabotage One Development to Save Others?

By Jennifer Forsyth

In the midst of a dismal real estate market, when projects are failing or close to it, borrowers often get testy with their lenders. It’s unusual, though, for a borrower to allege that a lender is trying to kill its project because the lender wants to see others in its neighborhood succeed instead. But that’s what the owners of Fontainebleau, a massive condo project in Las Vegas, are claiming.

The fight between Fontainebleau Las Vegas LLC and its lenders has been rather odd for some time. The developer’s 11 banks canceled an $800 million revolving loan facility in April, saying the borrower had defaulted on the loan. Fontainebleau filed suit against the lenders, claiming there was no default. Click here for previous LB coverage.

On Tuesday, Fontainbleau upped the ante. In an amended petition filed in state court in Clark County, Nev., the borrower claims that Deutsche Bank breached its contract to prevent the new project from being completed because it wanted to keep Fontainbleau from competing with the Cosmopolitan Resort Casino. The Cosmopolitan is another project Deutsche Bank took control over last year after the developer, Bruce Eichner, defaulted on a $760 million loan. See today’s WSJ story here; and see the amended complaint, thanks to Zero Hedge here.

(The Cosmopolitan, at least as Eichner and his wife Leslie envisioned it before the stodgier DB took it over, was to feature 28-foot industrial robots programmed to box, to dance to "Disco Inferno," and to play 12-foot Fender Stratocaster guitars. The Eichners envisioned some rooms with leopard-skin-patterned wallpaper and others with see-through glass around the bathtubs. "You can come here with your husband, with someone else's husband, whatever," Eichner once told the LB.)

In the WSJ story, reporter Tamara Audi writes: “The complaint underscores the complications that are emerging as more casino and hotel operators fall into bankruptcy or put up properties as collateral. In some cases, their economic struggles are transforming banks that once acted as lenders, into owners, as they take possession of big resorts and commercial properties that have defaulted.”

DB called the developers’ suit an attempt “to distract from the fact that they have breached their loan covenants,” and said it will contest the “meritless allegation.” In addition to DB, Royal Bank of Scotland, Bank of America Corp. and Sumitomo Mitsui Banking Corp. were named as defendants in the Fontainebleau breach of contract suit. Each has stakes in competing casino and resort properties. Bank of America declined to comment. RBS and Sumitomo Mitsui couldn’t be reached for immediate comment.

Full post as published by Law Blog - WSJ.com on May 14, 2009 (boomark / email).