Wrapping Up the Short, Successful Chapter 9 Case of Mammoth Lakes

The recent Mammoth Lakes, California Chapter 9 case represents an unusual example of a municipal bankruptcy concluding in only a matter of months. Although the experience of Mammoth Lakes appears to have been a success, the nature of the troubles that led it to bankruptcy are likely atypical. Given the comparative lack of complexity of the Mammoth Lakes’ issues, the case’s precedential value relative to the ability of other municipalities to navigate the bankruptcy process in a similar time frame is extremely limited.

Mammoth Lakes filed its voluntary petition on July 3, 2012. Although facing a general budget shortfall of $2.8 million owing in part to the effects of the recession on its tourism revenues, the town’s biggest liability, and the primary impetus for its bankruptcy filing, was a $43 million judgment held by Mammoth Lakes Land Acquisition, LLC (MLLA). The judgment stemmed from a development MLLA was to build in Mammoth Lakes but which the town backed out of in 1997. 

Prior to the bankruptcy filing, MLLA  proposed a plan by which Mammoth Lakes would pay off its debt over 30 years, but this was unacceptable to the Mammoth. MLLA then refused to participate in the pre-bankruptcy neutral mediation process due to, in MLLA’s view, the town’s failure to meet the conditions to mediation, including proposing a counter-settlement offer. MLLA’s refusal to mediate allowed Mammoth Lakes to claim it had made a good faith effort, consistent with its obligations under California Assembly Bill 560 to negotiate with its creditors prior to entering bankruptcy. 

Once in bankruptcy, Mammoth Lakes filed its plan of adjustment which, among other things, proposed to pay MLLA a small fraction of its judgment over a 10 year period. MLLA immediately filed an objection. 

The Bankruptcy Court quickly directed the parties into mediation, deferring consideration of the threshold issue of the Mammoth’s Chapter 9 eligibility. That mediation, which took place on August 6, 2012 before Bankruptcy Judge Elizabeth Perris, proved to be the key to resolving the parties’ differences. The parties reached a settlement by which Mammoth Lakes would pay an amount equal to approximately $29 million in present value over 23 annual payments of $2,000,000 and provide other parties related to MLLA with additional payments and assignments of revenues. 

With a plan to satisfy its liability to MLLA in place, Mammoth Lakes moved quickly to dismiss the bankruptcy case, pending receipt of approval from the applicable state court of the parties’ proposed plan for satisfying the MLLA judgment. The remainder of the town’s debt did not require, and apparently was not worth, the expense of Chapter 9. A final order of dismissal was entered on November 16, 2012, less than five months after commencement of the case.

For Mammoth Lakes, its Chapter 9 filing and the subsequently ordered mediation process were enough to change the dynamic of the stalemate with MLLA and fix the one intractable debt that threatened its solvency. 

It is conceivable that other towns facing a single debt might follow the Mammoth Lakes Chapter 9 game plan. In reality, however, most municipalities must deal with ledgers and financial problems far more complex than that of the small ski town in the Sierra Nevadas. Those problems are unlikely to be so quickly and simply resolved within Chapter 9, or otherwise.