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September 18, 2019

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Investment companies sue banks over Fontainebleau financing

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Fontainebleau Resort

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Even as the $2.9 billion Las Vegas Fontainebleau resort moved into bankruptcy Tuesday, a new lawsuit was filed over the development -- this one pitting numerous lenders against each other.

Bank of America and other banks, already accused by Fontainebleau of wrongly shutting off construction financing for the resort, were sued Tuesday in U.S. District Court in Las Vegas by about 120 investment companies that have loaned money to the project.

The investment companies are mostly little-known limited liability companies.

Their lawsuit accuses Bank of America of improperly inducing the investment companies to loan the project hundreds of millions of dollars -- and of then improperly teaming up with other banks to cut off their own financing to the resort.

First, the suit says Bank of America, as lead banker for the project and disbursement agent for construction monies, approved a construction loan draw request in which the investment companies in March advanced $336 million to Fontainebleau.

But, the lawsuit charges, Bank of America's approval of this draw was improper because Bank of America should have known the borrower was already in default on part of its loan agreement; or should have blocked the loan due to misrepresentations.

The investment companies say they would not have funded the construction draw if they had known the borrower was in default.

Second, the investment companies say Bank of America and the other banks were then wrong to assert the borrowers were in default in denying access to a separate $790 million revolving loan -- and have not specified what the event of default is.

If there is no actual default on the part of Fontainebleau, the investors claim, B of A and the other banks are now wrongly failing to fund their loan commitment of $790 million -- funds Fontainebleau has said are needed to finish the 70 percent-finished resort.

The investors charge that the refusal by Bank of America and the other banks to fund their $790 million commitment has shut down the project -- reducing the value of the investors' collateral and making it difficult for the borrower to repay the funds advanced by the investors.

Bank of America, which has previously said it has been in talks with Fontainebleau on revised financing for the project, had no comment on the new suit, spokeswoman Shirley Norton said Wednesday.

The suit was filed by attorneys with the Los Angeles law firm of Hennigan, Bennett and Dorman LLP on behalf of the about 120 investment companies including the first named in the suit, Avenue CLO Fund Ltd.

The investment companies say they were approached in 2007 by a syndicate of investment bankers and asked to participate in $1.85 billion in bank financing for the resort. Besides the bank financing, the project was supposed to be built with cash provided by the borrowers and a $675 million second mortgage note offering, the suit says.

Of the $1.85 billion in bank funding, the first $700 million was funded as a term loan in 2007 and included funds provided by the plaintiff investment companies, the suit says.

Another $350 million was to come from a delay draw loan and the final $800 million was to come from the revolving loan, the suit says. The plaintiffs say they were to fund the draw loan and that the defendant banks were to fund the revolving loan.

In March of this year, the plaintiffs say, Fontainebleau requested and was granted funds from the construction draw loan.

"At the time of these notices of borrowing, the plaintiffs were unaware of the existence of any event of default and no lender's obligation to fund loans under the credit agreement had been terminated," the lawsuit says.

After B of A and the other revolver lenders refused to fund the remainder of the revolving loan, the suit says B of A sought a meeting with Fontainebleau and representatives of the investment companies to discuss "construction concerns."

"B of A's concerns were based upon information it obtained regarding the project and the borrowers, including the borrowers' ability to complete the project using available funds, the borrowers' ability to repay outstanding amounts under the revolver facility ... and/or that one or more events of default might have occurred," the suit says. "B of A thereafter undertook to avoid its obligations under the credit agreement, and preferred the interests of the revolver facility lenders, including itself, over the delay draw facility lenders by failing to provide information in its possession to plaintiffs concerning the status and financial condition of the project (and) the potential existence of events of default under the credit agreement ..."

The investment companies said some of the money they funded under the draw loan was used to repay the outstanding balance under the revolving loan, "including loans made by B of A, thus benefiting the defendants, to the detriment of the plaintiffs."

The suit claims, "Either B of A was aware of defaults or misrepresentations by the borrowers, or the revolver facility lenders' failure to fund the revolver facility ... was a default under the financing agreements."

"Either way, B of A should not have approved the advance request," the suit charges.

"Either there existed an event of default on March 3 (date of the draw request), which, had it been known by plaintiffs, would have allowed all lenders to terminate their unfunded commitments, or there was no such event, leaving all lenders equally obligated to fund (the requested advances),'' the investment companies charge.

"Plainly, the world's economic circumstances have negatively impacted the project. These economic circumstances, however, do not justify defendants' refusal to find their loan commitments and their wrongful termination of the credit agreement at this critical juncture,'' the suit charges. "As a consequence of defendants' wrongful refusal to fund and their termination of the revolver facility commitments, the project has been derailed.

"More importantly ... defendants' failure to perform their contractual obligations reduced the amount and value of the collateral securing plaintiffs' loans."

The suit seeks unspecified damages and a judicial declaration that the defendant banks have breached their contractual duties under the credit agreement.

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