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Judge to appoint examiner for Fontainebleau sale

Updated Thursday, Oct. 8, 2009 | 1:24 p.m.

Fontainebleau Resort

The Fontainebleau, construction stopped, is seen dark along the Strip. Launch slideshow »

The Fontainebleau Las Vegas bankruptcy judge today said he's decided to appoint an examiner to supervise the sale of the property.

Citing the lack of progress in reorganizing Fontainebleau's debt and a motion by key lenders that the project be liquidated, U.S. Bankruptcy Judge A. Jay Cristol in Miami last week proposed the appointment of an examiner.

Cristol today said he wouldn't sign the order until next week and encouraged Fontainebleau to continue sales talks with Penn National Gaming. The delay in signing the order will give attorneys a few days to draft the order, spelling out the duties of the examiner.

Cristol, during a hearing in Miami, said an examiner supervising the case and the sale would cost less than conversion of the case to a Chapter 7 liquidation that would be supervised by a trustee.

Term lenders claiming to represent nearly 60 percent of the $1 billion term loan today pushed for the appointment of the examiner, citing the need for transparency in the sales process.

Fontainebleau argued against the motion and said resort developer Jeff Soffer has recused himself from deliberations on the future of the project -- a reaction to claims by lenders that Soffer is conflicted as both a debtor and creditor and as a personal guarantor of some Fontainebleau debt.

Cristol wasn't impressed with that.

"Nobody's going to believe he's not running the show," the judge said.

Fontainebleau said it continues to work with Penn National Gaming on a deal in which Penn National would be the stalking horse bidder with an undisclosed bid -- a bid they said would be substantially less than the previously reported $300 million.

A Fontainebleau attorney said other potential buyers continue to look at buying the 70-percent complete resort, where construction was halted early this summer after banks halted funding due to cost overruns and other problems.

A key battle shaping up in the case is whether construction-lien holders or lenders will recover funds from any sale, with the lenders also potentially making claims for their losses against title insurers, attorneys said today.

Fontainebleau attorney Scott Baena argued against the immediate appointment of an examiner, saying it will take awhile for the examiner to get up to speed on the case and that this could delay the sales process.

He revealed some new details on the potential deal with Penn National: The gaming company would provide some $16 million in debtor in possession financing that would allow Fontainebleau to repay the term lenders their costs to finance the bankruptcy case and provide some funds for stabilizing the project including needed work on the roof and replacement of some windows.

The potential deal includes a financial incentive for the buyer to complete the project for less than $1.5 billion as well as a 3 percent break-up fee of the undisclosed purchase price, he said.

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