UPDATE: Town of Mammoth Lakes to File Bankruptcy Petition

photo credit: visitmammoth.com

In April, Ski, Esq. ran an article about the possible bankruptcy of the town of Mammoth Lakes, CA.  We reported:

"The town of Mammoth Lakes (CA) - home of Mammoth Mountain - is headed towards bankruptcy. It seems the trouble began back in 1997 when the town made a deal with a developer (Mammoth Lakes Land Acquisition - "MLLA") in which the town agreed to permit the developer to make improvements to the local airport (Mammoth Yosemite: MMH) in exchange for the development rights to a nearby property. Difficulties ensued when the FAA raised concerns about the town's proposed improvements and the town subsequently abandoned expansion plans. The developer sued the municipality for breach of  contract and won a $30M judgment, which with interest now stands at $43M."

Yesterday, the town council, unable to negotiate a settlement with its judgment creditor, unanimously approved a resolution to seek Chapter 9 bankruptcy protection.

Mammoth Lakes is the second California municipality in less than a week to file for Chapter 9 Bankruptcy; the city of Stockton declared bankruptcy last Thursday.  While many readers may have heard of Chapter 7 or Chapter 11 - the sections of the US Bankruptcy Code that deal with liquidation or restructuring of corporate entities - they may be unfamiliar with Chapter 9. 

Chapter 9 controls the reorganization process for municipalities. The process differs slightly from Chapters 7 or 11 for two main reasons. First, because municipalities are considered entities of the "several States," Congress' power to adjust their debts through bankruptcy is constrained by the 10th and 11th Amendments. However, municipalities do not enjoy sovereign immunity under the 11th Amendment (see Jinks v. Richland County, 538 US 456 (2003).  Second, unlike corporations which simply can liquidate and cease to exist if worst comes to worst, public policy generally favors municipalities continued existence. 

In this case, Mammoth Lakes will seek to find a way both to balance its budget and satisfy its judgment creditor. However, MLLA will likely only receive pennies on the dollar. According to a report by the LA Times, "[t]he town plans to ask the bankruptcy court to approve a payment plan it says is the most it can afford without jeopardizing the safety of residents and tourists: $500,000 a year over the next 10 years."

What exactly the bankruptcy means for the town and neighboring Mammoth Ski Resort is unclear, but visitors should not be concerned that hoodlums will over run the street and buildings will be left to burn. For now, municipal services will remain at their existing levels. The town says it will "remain open for business." Ski, Esq. believes the bankruptcy will not have a noticeable effect on operations at Mammoth Ski Resort.

It should be noted that while the judgment may have been the very large straw that broke the mammoth's back, the municipality was already running a large structural deficit. According to the to a press release issued by the town, it projected an initial $2.7M shortfall for FY 2011-2012, which it was able to close through budget cuts. However, presumably spurred by lower tax receipts in the horrific snow winter, revenue projects fell short by an additional $0.9M. The town projects a $2.8M deficit for FY 2012-2013. 

Clearly Mammoth Lakes was in trouble. Even without the crushing weight of the judgment, it is plain to see that the town has been severely mismanaged. Stay tuned to Ski, Esq. for updates as additional information becomes available.

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