Score One For The Contractors: The Nevada Supreme Court Declines To Subject Mechanic’s Lien Claimants To Equitable Subrogation

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...