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Specter of bankruptcy: The lights won't go out

November 19, 2010

Uh-oh

If and when the Town of Mammoth Lakes loses its appeal of the $30 million Hot Creek litigation against it, Mammoth could be thrown into a Chapter 9 bankruptcy whose effects could last many years.

But citizens who are anticipating the immediate effects of such a predicament are unlikely to notice anything different at all.

“The notion that the town would be shut down because of bankruptcy is a layman’s misunderstanding of how it actually works,” said one of the participants in the court battle, who preferred anonymity over concerns in interfering with the ruling.

“Suing the government is a very different thing than suing an individual.”

There will still be snow removal. The lights won’t go out. The streets will continue to be repaired.
As for the effect such a Chapter 9 bankruptcy would have on the town’s tourism operations, that is unknown, pending the result of the judgment, said Town Manager Rob Clark.

The $30 million judgment currently is under appeal. The appeal hearing, in Sacramento, took place on Oct. 18, and the court can make its judgment between 30 days from the hearing to 90 days out.
Should the court rule against Mammoth Lakes, Clark said the Town still has options, although they are dwindling.

The Town could, he said, file a Petition for Review with the California Supreme Court or challenge the denial of the Town’s insurance coverage and seek legal advice on municipal bankruptcy options.

The litigation arose when the Hot Creek developer claimed that the Town interfered with its rights under a development agreement to build a 250-room condominium hotel at Mammoth Yosemite Airport, and allegations that the town must be held responsible for the Federal Aviation Administration’s interference in the project.

Assuming there is a victory for the litigants and a loss for the Town, the biggest impact would be in the town’s derailment of its already shaky bond rating and its credit rating.

The revenues the Town has now, such as the Transient Occupancy Tax, are revenue streams over a period of time that have great value to the municipality in that they can be financed and the Town could build projects with them, for example.

Should a $30 million judgment come up from the court, the chances that the Town’s revenue streams can be financed are severely reduced.

The bond ratings, meanwhile, have a lot to do with whether the Town can raise funds or not.

If a town has a big judgment hanging over its head, its ability to go out and raise bonds for, say, an ice rink or any new facility not covered by Measure R fund or Measure U funds, would be dramatically impaired.

Clark said another factor is that the court may not award the full $30 million judgment.

“We’re pessimistic,” he said, “but we haven’t given up hope that there’s something in the middle.”
One other factor to bear in mind is in settling the judgment.

In very few municipal bankruptcy cases, if any at all, it is unlikely that a judge would require the Town to pay more than it could reasonably pay on an annual basis toward the judgment.

“It’s very unlikely that a judge would ask a town to put its citizens in a position where a municipality could not serve its citizens just to pay a judgment for a civil issue like this,” one of the participants said.

Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities.

It is unlike a bankruptcy by an individual or company, in which assets are paid to a bankruptcy court, which then distributes the assets to creditors.

In a Chapter 9 bankruptcy for municipalities, the law helps them in the restructuring of debts, according to the U.S. Courts web site.

The purpose of Chapter 9 is to provide a financially distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts.

Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest or refinancing the debt by obtaining a new loan.
Most famously, Chapter 9 was used by Orange County in 1994 to adjust its debts.

Previous to the creation of Chapter 9 bankruptcy, the only remedy when a municipality was unable to pay its creditors was for the creditors to compel the municipality to raise taxes.

During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities.

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