CHICAGO – The fight over whether the Lombard, Ill. Public Facilities Corp. can restructure its $190 million of hotel and conference center bonds in Chapter 11 resumes Tuesday.

The federal bankruptcy trustee has joined the asset manager that developed and managed the project and one investor group to argue that the LPFC doesn’t qualify under corporate bankruptcy rules and the case should be dismissed.

Westin Hotel, Lombard, Illinois, financed with Lombard Public Facilities Corp. bonds
The financial failings of the bond-financed Westin hotel in Lombard, Ill. led to a court fight over the bond issuer's eligibility to file for bankruptcy.

They argue that from its inception and nearly up until its petition filing on July 28, the corporation was simply an instrument of the Lombard village government, used to oversee and finance the hotel and convention center project.

A governmental unit doesn’t qualify for Chapter 11. Illinois lacks a statute that would allow the LPFC to file a Chapter 9 municipal bankruptcy.

“The village is in control of the debtor” and it’s “not eligible for bankruptcy relief” under Chapter 11, U.S. Trustee’s attorney Kimberly Bacher told U.S. Bankruptcy Court Judge Jacqueline P. Cox in her Chicago courtroom during the first day of an evidentiary hearing that began last week on the challenge. The case is being heard in the U.S. Bankruptcy Court for the Northern District of Illinois Eastern Division.

If the bankruptcy filing survives the challenge and its reorganization is approved, the LPFC would seek a vote to conduct a bond exchange for the 2005 issue.

The reorganization submitted to the court earlier this month calls for A-1 series holders to recover 77% of their $71 million claim; A-2 holders to recover 76% of their $58 million claim; and B holders to reclaim 86% of their $48 million claim. The C bondholders’ $72 million claim would be canceled. The indenture requires A and B holders be repaid in full before unsecured C payments are made.

The LPFC is seeking a Jan. 4 voting deadline and wants a Jan. 11 court hearing on the plan.

MOTION TO DISMISS

The parties challenging the motion have filed piles of documents outlining how intertwined the village and corporation were from its inception. They range from the original village ordinances, offering documents on the 2005 issue, intergovernmental agreements in which the village provides a tax rebate agreement and moral obligation backing for a portion of the bonds.

The village turned to the corporation because it lacked the bonding capacity to support the project but was required to put some backing on portions of the financing to show to investors it had “skin in the game,” testified Thomas McGuigan, whose firm served as asset manager. “The role of the village is substantial.”

“LPFC has never hid the fact that it is an instrumentality of the village. It issued tax-exempt government bonds on that basis, and it made that representation to investors and taxing authorities. Moreover, its governing documents, the tax rebate agreement and applicable Illinois law all acknowledge LPFC’s essential government functions and its control by the village,” says the initial motion to dismiss filed by bondholder Lord Abbett Municipal Income Fund, Inc.

After the motion was filed, the asset manager MidAmerica Hotel Partners LLC -- which holds a portion of the unsecured C bonds that would be wiped out -- and the U.S. Trustee joined in the effort.

DEFENSE

The LPFC and ACA Financial Guaranty Corp., which is the controlling party based on indenture provisions, are fighting the effort to toss the Chapter 11 case. Westin Hotel Management LP and Oppenheimer Rochester High Yield Municipal Fund are also in favor of the restructuring plans.

“Ultimately, the legal analysis and rhetoric boils down to a simple fact: the debtor is a corporation that owns and operates a hotel and two restaurants. There is a fundamental difference between this proprietary purpose and that of an instrumentality—such as a utility, a special district, a public educational institution, a public hospital, or a conduit for government pension funds—whose purpose is to implement a traditional government function,” the corporation argues in its filing.

The corporation’s position cited precedent set in the Las Vegas Monorail bankruptcy. The corporation argues that it passes the same three-part test applied in the former case to determine whether the debtor agency was considered an instrumentality of a governmental entity.

Like in the monorail case, the LPFC argues it doesn’t operate as a municipality, its day-to-day operations were overseen by operating managers and not the village despite some control imposed by the village, and it’s not considered a unit of local government under applicable state law.

“Moreover, as the Monorail Case explains in detail, calling an entity an instrumentality for purposes of tax law is very different than calling it an instrumentality for purposes of bankruptcy eligibility,” the LPFC filing reads.

The LPFC also argues that based on established case law the date of the petition filing is the “watershed date” the court should use in determining status. The LPFC had shed some operational ties to the village ahead of the filing. The LPFC and Lord Abbett asked Cox to toss many of the documents submitted by the opposing parties outlining the deep and lengthy connection but she denied the motion last week during the hearing.

The Las Vegas Monorail Co. sold $600 million of tax-exempt revenue bonds in 2000 for the project. Ambac Assurance Corp. which insured a portion and the trustee argued the agency was in fact a governmental entity with the state exercising significant control. The court in a 2010 ruling found that the monorail agency, which was organized as a nonprofit, did not operate as a municipal entity.

BACKGROUND

The Lombard project suffered from a drop in tourism and meeting business during the recession and never got up to speed to meet debt service. The LPFC, village officials, ACA and other key bondholders including Nuveen Asset Management have been at the negotiating table for years as the project faltered and reserves were drained.

A tender exchange failed in 2011 as did a restructuring proposal offered to bondholders in 2015, due to the differing interests of various holders.

The village believes the bankruptcy will better align the capital structure with estimated project revenues. The village also has proposed establishing a tax increment financing district to raise new revenue for needed work at the hotel.

The village is also hoping the restructuring provides a “roadmap” to stabilize and eventually improve its now junk ratings by demonstrating its “commitment to a solution.”

The affluent village of about 43,000 located west of Chicago lost its high-grade, double-A rating from S&P Global Ratings after it reneged on its appropriation pledge attached to the B series.

A turning point occurred last year when ACA last year acted on its post-default rights as the controlling party and directed the trustee Amalgamated Bank of Chicago to accelerate bond repayment. That meant the LPFC owed the full outstanding principal and interest on much of the debt.

In addition to insuring the bonds, ACA holds $19 million of the series. Both A series carry an indirect appropriation pledge from a village rebate agreement.

The facility includes a 500-room hotel, two restaurants, 39,000 square feet of meeting and convention space, a 25-meter indoor swimming pool and fitness center, and a 675-car, four-story parking deck.

Negotiations eventually resulted in a consensus among a majority that includes 83.54% of the A-1 Bonds, 100% of the A-2 Bonds, 56.58% of the B Bonds, and 43.12% of the C Bonds on the proposed restructuring.

The filing warns that foreclosure is a poor option and would likely result in a recovery of “one-third of the outstanding balance of the A Bonds, with no remaining funds available for any other bonds.”

The B bonds traded at around 24 cents on the dollar last week. The insured A bonds traded earlier in September in the 82 to 87 cents on the dollar and the uninsured A bonds traded last year at 24 cents on the dollar, according to trade data on the Municipal Securities Rulemaking Board’s EMMA site.

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