By AVA TURNQUEST
Tribune Chief Reporter
BAHA Mar President Thomas Dunlap said the path to bankruptcy was lined with extensive construction delays, repeated contract breaches, and other performance failures by an “inexperienced” contractor, China Construction America (CCA), according to court documents filed yesterday.
In an affidavit supporting the Chapter 11 petitions of the resort and its affiliates, Mr Dunlap placed the blame for the $3.5 billion resort’s financial woes solely on the actions of the project’s general contractor and construction manager.
WHAT IS CHAPTER 11 BANKRUPTCY?
UNDER the United States Bankruptcy Code, Chapter 11 permits a business to reorganise under the bankruptcy laws of the United States.
Chapter 11 bankruptcy is available to every business, whether organised as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities.
When a business is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection under Chapter 11. In most instances, the debtor remains in control of its business operations as a debtor in possession (DIP), and is subject to the oversight and jurisdiction of the court.
Chapter 11 affords the DIP a number of mechanisms to restructure its business. A DIP can acquire financing and loans on favourable terms by giving new lenders first priority on the business’ earnings. The court may also permit the DIP to reject and cancel contracts. Debtors are also protected from other litigation against the business through the imposition of an automatic stay, which while in place stops creditors from collection attempts or activities against the debtor in possession.
Most litigation against the debtor is also stayed, or put on hold, until it can be resolved in bankruptcy court, or resumed in its original venue.
If the business is insolvent, its debts exceed its assets and the business is unable to pay debts as they come due, the bankruptcy restructuring may result in the company’s owners being left with nothing; instead, the owners’ rights and interests are ended and the company’s creditors are left with ownership of the newly reorganised company.
Chapter 11 can also be used as a mechanism for liquidation. Debtors may “emerge” from a Chapter 11 bankruptcy within a few months or within several years, depending on the size and complexity of the bankruptcy. The Bankruptcy Code accomplishes this objective through the use of a bankruptcy plan. The DIP typically has the first opportunity to propose a reorganisation plan during 120 days from the date of filing before any other party with interests may put forward a plan. If the debtor proposes a plan within the 120-day period, the debtor has then 180 days from the filing date to gain confirmation of the proposed plan, on which interested creditors vote.
“During the first such delay,” the affidavit read, “CCA acknowledged that the original construction completion date would not be met. As a result of this lead time, the Debtors were able to swiftly implement measures to ensure their ability to operate through at least early April 2015 without generating post-opening revenue or requiring additional liquidity to survive.
“The second missed construction completion date, however, proved disastrous as CCA effectively provided no advance notice that the March 27, 2015, deadline would not be met. This resulted in the Debtors having ramped up to employ over 2,000 employees hired in anticipation of the Project’s opening, at an increased cost of approximately $4 million per month, in addition to other significant sunk costs such as operating supplies, advertising and promotional activities.
“Due to the considerable construction delays, additional expenses incurred mitigating CCA’s breaches and failures to perform, extended operations costs, the significant costs of hiring and retaining the new employees in the hope of opening the Project, the lack of meaningful revenue generation, and the absence of a definitive construction completion date, the Debtors exhausted their liquidity and were forced to commence the Chapter 11 Cases.”
The project is approximately 97 per cent complete, according to Mr Dunlap, who pointed out that the original schedule for the project slated completion by November 20, 2014.
Baha Mar CEO Sarkis Izmirlian entered into a contract with China State Construction Engineering Corp (CSCEC) for the project’s construction on March 9, 2009. CCA is a subsidiary of CSCEC, a state-owned enterprise of the People’s Republic of China. Mr Dunlap explained that CCA helped obtain debt financing for the project from the Export-Import Bank of China (CEXIM), also a China state-owned enterprise. The policy bank provides financing to support the investment of Chinese capital and employment of Chinese labour forces throughout the world.
“Although CSCEC (operating through its various subsidiaries) is one of the world’s largest contractors, it had little experience in constructing single-phase resort projects of the size and complexity of the Project,” Mr Dunlap’s affidavit read.
“In June 2011, to address this concern, CCA agreed that it would partner with one or more experienced contractors on the Project. No such partnerships ever materialised,” the affidavit continued.
Mr Dunlap said that CCA instead agreed to hire more than two dozen top-level personnel from Las Vegas with experience constructing similar projects but ultimately hired less than a dozen such people, most of whom left the Project within a year.
He added that although the resort obtained approval from the Bahamas government for 5,000 worker permits, CCA’s work force never reached that level, even at peak staffing, and on average was substantially lower.
“From the onset of construction,” it continued, “CCA often failed to provide periodically-required procurement schedules or comply with certain of its reporting requirements, which were key to the Debtors’ planning, quality control and insurance coverage.
“As a result, the Debtors had to dispatch their own personnel at a significant unplanned cost over the life of the Project to monitor construction, perform spot inspections, and ensure the safety of the worksite, among numerous other tasks.”
Once it became clear that the November deadline would not be met, Baha Mar and CCA signed a Memorandum of Understanding to increase manpower to accelerate work. The MOU outlined interior finish packages and target completion dates, which included a commitment for 100 per cent access of key ballrooms and meeting rooms of the convention centre on or before March 31, 2014.
However, Mr Dunlap said the MOU was breached within a short period with CCA failing to increase staffing and management, and attempts to negotiate a resolution were unsuccessful.
The parties went before the Dispute Resolution Board, outlined in its construction contract, in May and have several claims still outstanding.
In November, 2014, in-person negotiations were held in Beijing with the CEXIM Bank, CCA and Baha Mar.
“The (November) Meeting Minutes reflected the agreement of the Debtors to essentially “buy” dates certain for the construction completion of the Project in an effort to mitigate the impact of CCA’s breaches of its commitments to achieve such completion as required by the Main Construction Contract,” the affidavit read.
In exchange for receiving a total of $54 million of advances on disputed claims, CCA agreed that “upon January 19, 2015, except for the wedding chapel and elevator tower, the rest of the Convention Centre will be substantially complete and ready for operational start for paying guests,” and to achieve “operational start for paying guests in hotels including amenities” by March 27, 2015.
“To ensure that it met these now-delayed milestones, CCA further agreed to take measures for the “improvement of work productivity” and the “enhancement of on-site management,” it added.
With this new guarantee, Mr Dunlap said the resort’s board of directors voted unanimously to commence taking reservations for the new hotels and convention centre from the public.
The March 27 opening was again confirmed in a January, 2015, Beijing meeting between Mr Izmirlian, Prime Minister Perry Christie and representatives from the CEXIM bank and CCA.
Baha Mar hired an additional 2,070 employees and staff, including more than 1,700 employees that received specialised training for positions in the Project’s new hotels and casino.
“In addition, the Debtors spent substantial funds on their pre-opening marketing and advertising campaigns, fully stocking their facilities with food and beverage supplies and other inventories, and stocking their vault with the $4.5 million in cash necessary to open the casino,” the affidavit read.
Despite failing to meet the January deadline for the convention centre, Mr Dunlap said no notice was given that the March deadline would not be met.
He said that during that period CCA executives began to ask for the release of retain age funds, which are owed to them upon the “substantial” completion of the project. Mr Dunlap also stated that CCA began to submit inflated invoices for work.
“CCA failed to complete construction by March 27, 2015 without providing any effective advance notice to the Debtors,” the affidavit read.
“Upon admitting such failure, rather than provide a new construction completion date, CCA preferred to discuss payment and funding issues. Shortly thereafter, CCA ceased all material work on the Project.
“As a result, the Debtors were forced to cancel months’ worth of room reservations and group meeting events and provide numerous customers with vouchers, refunds, and in certain cases were required to find customers suitable accommodations elsewhere, all at a cost in excess of $6 million.”
Mr Dunlap said Baha Mar’s management team has made three separate attempts in the last two months to negotiate a resolution with no success.
“With its cash exhausted and no other viable options for pursuing continued negotiations, the Debtors commenced the Chapter 11 Cases on the Petition Date,” it added.