Bank of America Corporation (BAC) has settled its lawsuit related to Fontainebleau Las Vegas, LLC by agreeing to reimburse $300 million, as disclosed by the bank in its regulatory filing yesterday. This was one of the many probes and litigations gnawing the company at present.
Lawsuit History
BofA, which acted as the disbursement agent for a syndicate of lenders, provided $150 million in 2005 and $1.85 billion in 2007 to the $2.9 billion Fontainebleau project for construction financing. The project was envisioned to include over 3,800 rooms, a casino and a convention center along with restaurants as well as bars.
However, the project's developer filed for bankruptcy in Jun 2009 laden with cost overruns, declining condominium sales and the bankruptcy of the major lender Lehman Brothers in Sep 2008 that left the project incomplete. The unfinished resort was later sold to billionaire investor Carl Icahn through the bankruptcy court in 2010.
But trouble cropped up for BofA in the form of a lawsuit filed against it in 2009 by certain Fontainebleau project lenders, including hedge funds Avenue Capital Group, Brigade Capital Management and Caspian Capital LP and private equity firm The Carlyle Group LP (CG) among others.
The plaintiffs alleged that BofA continued to finance Fontainebleau when it should have been aware of the deteriorating financial condition of the entire project and thus, breached the disbursement agreement. According to a federal court filing, however, the bank did not fund the project after it found out about the cost overruns.
Final Settlement
Though a monetary damage of over $700 million was sought by the plaintiffs, the final amount was settled at $300 million. The settlement will not affect BofA’s upcoming financial results as the bank will use an existing reserve to pay the sum.
Our Take
Last year, huge litigation expenses hurt BofA’s recovery story. While the detection of an accounting error in the first half compelled the bank to revise its capital ratios downward, a huge settlement in the second half removed an overhang related to its wrongdoings prior to the crisis.
Having wrapped up all major settlements, we believe that BofA will see a smoother return to the recovery track going forward, backed by its underlying strength.
Currently, BofA has a Zacks Rank #4 (Sell). Better-ranked finance stocks include Meridian Bancorp, Inc. (EBSB) and Provident Financial Holdings, Inc. (PROV). Both these stocks sport a Zacks Rank #1 (Strong Buy).
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