Action seems to favor Fontainebleau sale

The judge hearing the Fontainebleau Las Vegas bankruptcy case appears ready to fast-track a sale of the stalled project instead of going through the more expensive liquidation process.

Miami Bankruptcy Court Judge A. Jay Cristol on Thursday ordered the parties to explain why he shouldn't appoint an examiner to negotiate and supervise a sale of the property rather having him name a trustee to liquidate it, which he said would take more time and be far costlier.

In his order, Cristol said he "believes it is in the best interest of the estate and all parties to appoint an examiner at this time to examine, negotiate and supervise a sale of debtors' assets."

The order added that if Fontainebleau Las Vegas's Chapter 11 case has to be converted to a Chapter 7 liquidation, a trustee will have to be appointed and "would be required to expend a significant amount of time to obtain counsel (to) familiarize himself or herself with this case" before the property could be sold.

The judge plans to hear arguments about appointing an examiner Wednesday.

A group of term lenders has asked the judge to convert the bankruptcy case to a liquidation case, arguing that there has been no meaningful progress in talks to get the Strip project restarted. Cristol will hold a hearing on that motion on Oct. 28.

The term lenders argue that a trustee needs to be appointed to sell the property because of "pervasive conflicts of interest that exists among the debtors on the one hand, and their principals, officers, managers, affiliates and related parties on the other hand."

The term lenders believe the lack of progress in negotiations means that there is no longer any hope of completing the project under Chapter 11 protection and that a sale of the stalled multibillion-dollar project is the only way for creditors to "realize any meaningful value" from the project.

Construction on the mixed-use project is 70 percent complete and it has been estimated at least another $1.5 billion would be needed to complete it.

The term lenders, including Los Angeles-based Canyon Capital Advisors, which recently acquired the Greek Isles; New York-based Carlyle Group, and Guggenheim Investment Management, hold more than $1 billion in loans.

Attorneys for the project's developer have told the court that it has held talks on selling the project, but Cristol's order said "the record in this case indicates that the parties to these proceedings are not cooperating with one another."

Fontainebleau officials declined to comment on Cristol's order.

Cristol said the term lenders' opinion on the issue "should be given substantial weight" since they are the holders of the largest secured claims and have liens on $16 million in cash collateral that has been used since the company filed for Chapter 11 bankruptcy protection in June.

Nancy Rapoport, a bankruptcy law professor at the University of Nevada, Las Vegas, said the judge's decision to seek to appoint an examiner is unusual, although "bankruptcy courts are courts of equity so they can do it,"

An examiner would be given limited powers to conduct whatever business the court directs. If the judge appoints a trustee, however, that person would replace the company's current management and have leeway to liquidate the company and act on his own.

The Fontainebleau Las Vegas has been in court-ordered mediation with its creditors to try to get the project restarted under new ownership.

The Review-Journal reported in July that Apollo Management, which owns half of Harrah's Entertainment, was interested in the project.

A Penn National Gaming executive said Wednesday the company is considering acquiring the project, although the company said it would be "a tough project" because of the money needed to finish.

"Clearly we're looking at it," Chief Financial Officer William Clifford said during an investors meeting. "We're looking at a lot of properties in Las Vegas."

He added that the project, which sits on 24 acres on the corner of Las Vegas and Riviera boulevards, "is worth about zero right now."

Contact reporter Arnold M. Knightly at aknightly@reviewjournal.com or 702-477-3893. Reuters contributed to this report.