As anyone who follows legal matters in Nevada can attest, the
fate of the partially completed Fontainebleau project is one of the
most visible symbols of the economic downturn across the nation and
Nevada's construction "boom" gone
"bust." Built at a cost of $2.8 billion, the
Fontainebleau employed hundreds of contractors, subcontractors and
materialmen and the building was (approximately) 70% complete
before funds ran dry and the project was shuttered.
In June 2009, the Fontainebleau filed for bankruptcy protection
and a struggle among the property's various creditors ensued,
which continues to this day. In late 2009, financier Carl
Icahn (through his entity, Icahn Nevada Gaming Acquisition, LLC)
purchased the property out of bankruptcy with a successful bid of
$156 million. With the Icahn purchase, the bankruptcy estate
(i.e., the debtor) realized approximately $100 million for
disbursement to the project's creditors.
Thus began a struggle between the bank that had provided
financing for (and held a deed of trust against) the project and
the contractors, subcontractors and materialmen who built the
project and later recorded mechanic's liens against it when
they were not paid as agreed.
In 2007, when construction began, Bank of America (as
representative of a group of committed lenders) had provided a
$1.85 billion loan for the project. In 2009, Wilmington Trust
FSB succeeded Bank of America as representative of the lenders and
then took the position that it now occupied the identical first
priority position on the title to the property that Bank of America
had held, despite the fact that none of the lien claimants had
approved this arrangement.
Not surprisingly, the contractors, subcontractors and
materialmen took the contrary position, claiming that because their
work was performed on the project in the years between Bank of
America's construction loan and Wilmington Trust's
succession, their mechanic's liens enjoyed priority over
Wilmington Trust's later-recorded interest.
The question of priority, which would ultimately determine who
was to claim the $100 million realized from the Icahn purchase, was
recently submitted to the Nevada Supreme Court for decision, at the
request of the United States Bankruptcy Court for the Southern
District of Florida.
In In Re: Fontainebleau Las Vegas Holdings, LLC, 128 Nev. Adv.
Op. 53 (10/25/12), the Nevada Supreme Court addressed the issue of
whether a successor in interest to a lender in first position on a
property is permitted to "step into the shoes" in title
of the prior lender (i.e., place its newly recorded interest in
front of the mechanic's liens of contractors, subcontractors
and materialmen who performed work at the property prior to the new
interest.) This legally-sanctioned re-shuffling of title to a
property is known as "equitable subordination."
Under equitable subordination, for reasons of "fairness,"
one party is permitted to place the interests of other lienholders
on a property behind (and in a position inferior to) its own, newer
In its opinion, the Court stated that, while equitable
subordination certainly applied in the context of mortgages where
various lenders are "jockeying for position" as to the
title of a parcel of property, mechanic's lien claims were to
be treated differently. The Court further explained that
requests for relief not grounded in statute (i.e., equitable
relief) cannot take precedence over statutes which address the same
subject. Thus, because mechanic's liens are creatures of
statute and do not constitute equitable relief, they cannot be
displaced by requests for equitable subrogation. For this
reason, the Court concluded that Wilmington Trust was not permitted
to supplant the interests of the lien claimants on the project as a
simple matter of equitable relief. With this request for
equitable subordination brushed aside, the proceeds of the Icahn
sale will now be apportioned and distributed among the lien
Interestingly, however, the Court did conclude that a lien
claimant's written waiver of the subordination issue (i.e., a
knowing and voluntary relinquishment of a known right) would have
been given legal effect if the statutory scheme for lien waivers
had been followed. Put differently, the Court found it unfair
to hold lien claimants to the letter of subordination agreements
that they had never signed or approved. However, the Court
had no difficulty reaching the opposite conclusion where the
signature and/or approval from the lien claimants had been
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New York Project Development & Finance partner Howard Steinberg has a two-volume book, titled Understanding and Negotiating EPC Contracts, set for June 2014 release by the UK’s Gower Publishing Limited (www.gowerpublishing.com).