A rare appellate court ruling in completion guarantees was issued by New York's First Department on August 28, 2012 (Turnberry Residential v. Wilmington Trust FSB). Turnberry Residential signed a completion guaranty for the Fontainebleau Resort and Casino in Las Vegas. The guaranty was backed by a $50 million account pledged to Wilmington Trust as administrative agent for the lenders. The property was sold under a bankruptcy court supervised sale after the developer filed for bankruptcy before the project was completed. The fight was about how to allocate the net proceeds between the lenders and the mechanics who had filed $300 million of liens against the property. The sale did not generate enough cash to pay all claims.
Turnberry claimed that because not all loan proceeds were advanced and with the property now sold there were no "applicable project costs" to pay. The Court upheld the trial court's grant of summary judgment in favor of the lenders citing in part the bankruptcy court order requiring Wilmington to use the funds only to pay applicable completion costs, presumably the unpaid mechanics liens.
Putting aside a complex analysis of the language of the loan documents, which is beyond the scope of this post, the lesson of this situation is that it will be difficult for a completion guarantor to avoid liability for amounts unpaid to mechanics even if a defaulted project is sold via a bankruptcy sale.
PartnerTom represents owners, operators and developers in the acquisition, financing, development, ground leasing, and sale of significant properties. His experience includes office towers, commercial condominiums, industrial ...