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February 2013: Victory in Ground-Breaking Mammoth Lakes Chapter 9 Case

February 2013

On behalf of Mammoth Lakes Land Acquisition (“MLLA”), the firm recently obtained the dismissal of the In re Town of Mammoth Lakes, California Chapter 9 case commenced by the Town of Mammoth Lakes (“Mammoth Lakes”) in the United States Bankruptcy Court for the Eastern District of California. The dismissal, as a condition to a successful mediation between Mammoth Lakes and MLLA commenced at MLLA’s suggestion, results in a 90% recovery for the firm’s client.

The Mammoth Lakes Chapter 9 bankruptcy case is one of three closely watched California municipal bankruptcies implicating a California statute enacted in late 2011; while the Mammoth Lakes case has been dismissed at MLLA’s urging, the City of Stockton and City of San Bernardino remain in protracted litigation.

In 2008, the firm obtained a $30 million verdict on behalf of MLLA against Mammoth Lakes, the location of a world renowned ski resort. By 2012, following appeals, the amount Mammoth Lakes owed was $43 million. However, under California law, Mammoth Lakes had the option to pay the judgment over 10 years, with minimal interest, such that the present value of the judgment was approximately $33 million.

Chapter 9 is the chapter of the United States Bankruptcy Code applicable to municipalities. In order to be eligible under Chapter 9, a municipality must show state law permits it to seek bankruptcy, that it is insolvent, and that the municipality tried to negotiate in good faith before filing for bankruptcy. In 2011, California enacted AB 506, a law intended to make it more difficult for California municipalities to seek bankruptcy protection by requiring municipalities to either mediate with their creditors or declare fiscal emergencies. Mammoth Lakes invoked the mediation option and invited MLLA, along with dozens of other creditors, to participate. MLLA was concerned that Mammoth Lakes was using the mediation process, as required by California, as a pretext to satisfy the “good faith negotiation” requirement. MLLA declined to participate in the mediation, and, through Quinn Emanuel, invited the town to participate in direct negotiations. Mammoth Lakes refused; in July 2012, Mammoth Lakes filed its Chapter 9, presenting expert testimony that the most the Town could ever pay MLLA was $500,000 for 10 years, interest-free. Mammoth Lakes also requested an expedited schedule on determining its eligibility as a debtor under Chapter 9.

The firm was able to convince the bankruptcy court to delay the schedule and instead order Mammoth Lakes to participate in a mediation, supervised by Bankruptcy Judge Elizabeth Perris, directly with MLLA. Within weeks that mediation produced a settlement pursuant to which the Town is obligated to pay MLLA the present value of $29.5 million, equaling a 90% recovery. In addition, Mammoth Lakes agreed to accept the issuance of a writ of mandate as security in the event that Mammoth Lakes were default under the settlement agreement. Further, Mammoth Lakes agreed as part of the settlement to dismiss its Chapter 9 case, as opposed to seeking confirmation of a Chapter 9 plan of adjustment (with its attendant costs and risks).

The Mammoth Lakes case provides an important roadmap for any creditor of a California municipality in financial distress, demonstrating the importance of understanding, and planning to address, the requirements of California’s AB 506 statute and Chapter 9 eligibility requirements before the municipality files its bankruptcy case.