In Re Fontainebleau Las Vegas Holdings LLC

Decision Date14 July 2010
Docket NumberNo. 09-23683-CIV.,09-23683-CIV.
Citation434 B.R. 716
PartiesIn re FONTAINEBLEAU LAS VEGAS HOLDINGS, LLC, et al., Debtors.Desert Fire Protection, et al., Appellants,v.Fontainebleau Las Vegas Holdings, LLC, et al., Appellees.
CourtU.S. District Court — Southern District of Florida

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Daniel L. Gold, Robert Paul Charbonneau, Ehrenstein Charbonneau Calderin, Miami, FL, Philip Joseph Landau, Shraiberg, Ferrara & Landau, Boca Raton, FL, Robert Chase Meacham, May Meacham & Davell, Fort Lauderdale, FL, for Appellants.

Scott C. Baena, Bilzin Sumberg Baena Price & Axelrod, Miami, FL, for Appellees.

Susan Heath Sharp, Stichter Riedel Blain & Prosser, Tampa, FL, for Trustee.

Brett Michael Amron, Bast Amron LLP, Bernard Allen, Katz Barron Squitero Faust & Berman, Miami, FL, D. Farrington Yates, Sonnenschein Nath & Rosenthal LLP, New York, NY, for Intervenor.

Eric D. Winston, Quinn Emanuel Urquhart Oliver and Hedges, LLP, Los Angeles, CA, Pro Hac Vice.

ORDER

CECILIA M. ALTONAGA, District Judge.

THIS CAUSE came before the Court on the consolidated appeals of the Contractor Claimants, the Lien Claimants, and the M & M Lienholders (collectively, the “Statutory Lienholders”) of eleven orders of the U.S. Bankruptcy Court for the Southern District of Florida, as well as the Motion to Dismiss of the Term Lender Steering Group [ECF No. 79].1 The Court has considered the parties' written submissions,2 the oral arguments presented on March 11, 2010, and the applicable law.

I. BACKGROUND

Before June 2009 six Fontainebleau Las Vegas entities (collectively, the Debtors)3 were building Fontainebleau Las Vegas (the “Project”) on the north end of the Las Vegas Strip. The 63-story glass skyscraper would feature, among other things, a casino, 3,815 “stylishly furnished” guest rooms, a convention center, a theater for live entertainment and shows, and, not to be forgotten, “a 60,000 square-foot state-of-the-art spa.” (Decl. Howard C. Karawan ¶ 7). Once expected to create 8,000 jobs in Las Vegas, the “signature ‘Tier A’ casino hotel resort” was “destined as the launching pad for a global chain of casinos bearing the name of the original Fontainebleau in Miami Beach.” 4

Before Fontainebleau Las Vegas could serve as any launching pad, however, the Project would need to be launched itself. But by late 2008 that seemed far from certain. One of the Project's chief lenders, Lehman Brothers, filed for bankruptcy, marking “a cataclysmic global decline in the credit markets.” (Decl. Karawan ¶ 24). Other lenders failed to meet their funding commitments as well. ( See id. ¶¶ 25-27). Unable to secure new funds, the Debtors were forced to halt construction when the Project was only 70 percent complete. ( See id. ¶ 7). Left with no alternatives, on June 9, 2009 the Resort Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code.5

A group of prepetition lenders called the Term Lenders 6 had financed much of the Project in accordance with a June 2007 credit agreement, which was secured by a first lien on substantially all the Debtors' assets. ( See Mot. 6). The Term Lenders had advanced more than $1 billion in all to the Debtors. ( See id.). When the Debtors filed for bankruptcy in June 2009, $190 million remained in the Debtors' accounts, subject only to the Term Lenders' valid, perfected, and first-priority liens. ( See id.). No entity other than the Term Lenders has claimed an interest in this “cash collateral.” 7

For the next six months the Debtors used this cash collateral-about $18 million in all-to pay their expenses. ( See id. 7). The bankruptcy court authorized the Debtors to do so through twelve separate orders (the “cash-collateral orders”). Of those, five 8 have been appealed from as unlawful under the Bankruptcy Code (the “disputed cash-collateral orders”). Because these appeals concern in large part the propriety of these orders, the Court begins the discussion with a review of the circumstances surrounding their entry.

A. From a Reorganization ...

The bankruptcy court entered the first and second cash-collateral orders without objection from the parties and with the consent of the Term Lenders. 9 These and the other cash-collateral orders granted the Term Lenders adequate protection of their interest in the cash collateral “for and equal in amount to the amount of Cash Collateral used ..., and the aggregate diminution in the value of the Prepetition Secured Parties' interests in the Prepetition Collateral.” ( E.g., Third Cash-Collateral Order ¶ 6). The orders accomplished this by granting replacement liens (the “adequate-protection liens”) on the Debtors' collateral, including all “prepetition and postpetition assets.” ( E.g., id. ¶ 6(a)). The orders also prohibited the adequate-protection liens from being “subordinated to or made pari passu[10] with any other Lien, whether under 364(d) of the Bankruptcy Code or otherwise.” ( E.g., id. ¶ 11(e)). And before any liens senior to the Term Lenders' adequate-protection liens could be granted, the orders required the “indefeasible payment in full in cash” of the obligations of the Debtors to provide adequate protection. ( E.g., id.). Last, the orders provided that any later modification, amendment, or vacatur could not affect any previously granted liens the bankruptcy court had granted to the Term Lenders. ( E.g., ¶ 16). These provisions exist in substantially the same form in each of the cash-collateral orders, and they are central to the Term Lenders' Motion to Dismiss.

The Appellants, whom the Court will call the Statutory Lienholders, are “the folks that built th[e] building.” (Hr'g Tr. 8:8-9, Mar. 11, 2010 [ECF No. 100] ). The Statutory Lienholders, who have filed about $615 million in mechanics' liens against the Project, disagree that the Term Lenders hold first-priority liens on the Project. ( See Br. Appellants 15 [ECF No. 56] ). They contend that because they began work on the Project before the Term Lenders secured a lien on the Debtors' assets under the June 2007 credit agreement, their liens, and not the Term Lenders', are first in priority under Nevada law, which is “unique” and is “heavily favored in the side of the contractors and materialmen.” (Hr'g Tr. 8:16-17, Mar. 11, 2010 see also Br. Appellants 16-17 (citing Nev.Rev.Stat. § 108.225)). The Statutory Lienholders' assertion that their liens are first in priority, which the Term Lenders “vigorously contest” ( see Mot. 9), has been made known since the Debtors filed for bankruptcy ( see Decl. Karawan ¶ 27), and will be decided in one or more adversary proceedings in the bankruptcy court.11 This issue of priority-more specifically, the fact that it is an issue-is highly relevant to these appeals. But the ultimate issue of “Who's on first?,” as the attorneys in this case have called it, is not before the Court. The Court expresses no opinion on the matter one way or the other.

It was during the build-up to the third cash-collateral order, which the bankruptcy court entered on July 31, 2009, that the issue of priority became relevant to these appeals. The Term Lenders had become increasingly reluctant to consent to the Debtors' further use of the cash collateral. The Debtors were not operating and generating cash as a run-of-the-mill debtor in possession might; the Debtors, rather, were “effectively a building that was three quarters of the way completed and nothing more.” (Hr'g Tr. 8:3-4, Mar. 11, 2010). It appeared increasingly unlikely that the cash collateral would be replenished. ( See Hr'g Tr. 11:17-21, July 27, 2009). Moreover, it was perceived to be unfair that the Debtors would use the cash collateral, to which the Term Lenders held an undisputed first-priority lien, for the benefit of all the creditors. ( See id.). The Term Lenders, understandably, were not keen on the Debtors using the cash collateral to maintain assets to which the Statutory Lienholders asserted first-priority liens because of the possibility the Term Lenders' liens would later be found junior to those of the Statutory Lienholders. This was especially so thanks to a May 2009 valuation of the Debtors' assets at $318.7 million: if the Statutory Lienholders were “on first,” under this valuation the Term Lenders would take nothing. ( See Br. Appellants 18 & n. 20). In short, the Term Lenders were concerned about the Debtors' ability to protect the Term Lenders' interest in the cash collateral.

To that end, the Term Lenders “refused to consent to the further use of their cash collateral ... unless [they] received priming liens with priority over Appellants that did not hinge on the outcome of the dispute over the priority of the prepetition liens.” (Mot. 9 (emphasis added)). A “priming lien” is a lien granted senior or equal to an existing lien. See 3 Collier on Bankruptcy ¶ 364.01, at 364-3 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2010). The Debtors agreed and moved the bankruptcy court to authorize the grant of a priming lien in the amount of the decrease of the cash collateral they would use under the third cash-collateral order. After notice and a hearing, the bankruptcy court, under the heading, “Prepetition Debt and Adequate Protection Obligations Deemed to Be Postpetition Debt Secured by Senior Lien Under Section 364(d) of the Bankruptcy Code,” found:

While no creditor has asserted a lien in the Cash Collateral senior to the Prepetition Secured Parties, certain creditors have, subsequent to the Petition Date, asserted the existence of statutory liens with priority over the real property subject to the Prepetition Liens. The Term Lender Steering Group is unwilling to consent to use of their Cash Collateral unless any Cash Collateral used since the Petition Date under this Order is deemed to have been repaid to the Prepetition Secured Parties in satisfaction of payment Obligations
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