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Town of Mammoth leaves 2010 with a whistle and a prayer

December 30, 2010

Hot Creek Aviation lawsuit still in appeal

There’s nothing quite like whistling past the graveyard.

Except now, with the $30 million Hot Creek Aviation litigation having gone against the Town, Mammoth Lakes is way past the graveyard.

Now it is wandering about in the never-never land of appeal.

Having made its argument in Sacramento in October, town officials came back to the High Country in low spirits.

“It would be the worst travesty of justice I’ve seen in 34 years of practicing law,” said outgoing Town Attorney Peter Tracy in late December.

Nevertheless, the town is girding for just that possible outcome.

“Based on the comments and questions made at a Sacramento hearing by a panel of judges, the Town Council has concluded that there is a significant risk that the trial court verdict will be upheld,” the Town said in a press release in October.

“In preparation for a potential negative ruling, the Council is exploring options. Among them are:

• The filing of a Petition for Review with the California Supreme Court

• Challenging the denial of the Town’s insurance coverage, and seeking legal advice on municipal bankruptcy options.

• Special municipal bankruptcy laws have been enacted to assure continuity of service to the public in the face of severe financial challenges.

This 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 the Mammoth Yosemite Airport, and allegations that the town must be held responsible for the FAA’s interference with the project.

Another chance

In December, the town got another chance, however.

Because of the retirement of one of the justices who was present for the original oral argument a new argument date set in Sacramento on Monday, Dec. 20. Town officials said they were pleased with the proceeding, but who knows?

The re-hearing provided an opportunity for the Town to address issues that were raised by the panel and to present its arguments to the new judge. After the case was re-argued, the Court had another 90 days to issue its decision.

Should the final argument go against the Town, Mammoth could be plunged into Chapter 9 bankruptcy, the effects of which 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 because of 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, which is unknown, pending the result of the judgment, said Town Manager Rob Clark.

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.

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 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, then distributes the assets to creditors. In a Chapter 9 bankruptcy for municipalities, the law helps 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.

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