Mammoth Lakes needs to do a Half Moon Bay

July 3, 2012

Mammoth Lakes, a popular northern California ski town, has filed for Chapter 9 bankruptcy after mediation talks failed with its largest creditor, a developer who was awarded a $30 million settlement against the town in April 2008. The settlement has since ballooned to $43 million, including lawyer fees. Lawyers for the creditor, Mammoth Lakes Land Acquisition, say that the town is solvent and is just using the bankruptcy court to hide from the judgment they owe the company. Reuters’ Jim Christie reports:

Lawyer Dan Brockett said the town invited Mammoth Lakes Land Acquisition to enter into mediation only to follow the law until it could move forward with a bankruptcy filing.

“The mediation in our view was something they would do to check a box,” Brockett told Reuters, adding that his client will contest the town’s eligibility for bankruptcy.

“We’re going to fight this,” Brockett said. “This whole idea we forced them into bankruptcy is nonsense.”

Brockett said the town snubbed a plan by his client that would allow it to pay off the judgment over 30 years.

“We structured a very reasonable proposal to resolve this,” Brockett said. “They’re not even insolvent.”

Mammoth Lakes is in a position very similar to that of another California vacation town, Half Moon Bay, which in 2009 considered filing bankruptcy over an $18 million legal settlement it owed a property developer. The similarities between Half Moon Bay and Mammoth Lakes are striking: Both are small tourist towns that derive a lot of their revenues from hotel and sales taxes and a relatively small amount from property taxes. Both also became entangled with property developers and ended up paying a big price. But there is a large difference in the way the two towns handled the judgment.

To pay off its settlement, Half Moon Bay issued $16.7 million of judgment obligation bonds in 2009 (page 13). This was a reasonable way for the town to pay the settlement and continue operating. Among the adjustments the town made to its budget in 2009 was to contract police services out to the San Mateo County Sheriff and recreation services out to the City of San Carlos. The important thing that Half Moon Bay understood was that a bankruptcy court has no authority to eliminate a legal judgment against it. Mammoth Lakes seems to believe that it can find relief from its property development settlement in bankruptcy court. I’m not sure that is a legitimate approach.

Both Mammoth Lakes and Half Moon Bay are well-to-do small towns that made bad decisions about property development. Mammoth Lakes will spend millions of dollars in bankruptcy court and is unlikely to extinguish its major liability. It seems its best bet to issue some judgment obligation bonds and get this issue behind it.

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