CHICAGO – The Lombard, Ill., Public Facilities Corp. is pushing forward with plans to restructure $190 million of hotel and conference debt as opponents pursue efforts to kick it out of bankruptcy court.
U.S. Bankruptcy Court Judge Jacqueline Cox early last month rejected arguments that the agency is a governmental unit that is too closely linked to its village sponsor – Lombard – to be eligible for Chapter 11. The village established the LPFC to oversee construction and operation of the Westin Lombard Yorktown Center, a hotel and conference venue.
The Chapter 11 filing survived bondholder Lord Abbett Municipal Income Fund Inc.’s motion to dismiss the case, but the firm is now pursuing an appeal to the U.S. District Court for the Northern District of Illinois Eastern Division. The U.S. trustee and the project’s asset manager, Mid-America Hotel Partners LLC, also backed the challenge to Chapter 11 eligibility.
“The Bankruptcy Code broadly defines the term ‘governmental unit’ to include not only a municipality, but also to include an ‘instrumentality’ of a municipality. Consequently, any instrumentality of a municipality is a governmental unit that is ineligible for Chapter 11 bankruptcy relief,” Lord Abbett’s district court filing says.
Illinois public facilities corporations are described in the Illinois Municipal Code as serving as a business agent of the municipality, the filing says. “As set forth in more detail below, this appeal presents a pure, controlling and contestable question of law, and its success would terminate the Bankruptcy Case immediately,” Lord Abbett argues.
A hearing before U.S. District Court Judge Edmund Chang in Chicago on whether the district court should hear the appeal is set for Jan. 24.
Bankruptcy attorneys who work with local governments on project financing are paying close attention.
“Only a small number of cases have addressed the eligibility of quasi-governmental entities for bankruptcy protection under Chapter 11 of the Bankruptcy Code,” Chapman and Cutler LLP wrote in a report on the decision last week. “This addition to the case law canon confirms that such eligibility analyses are intensely fact-specific inquiries. Thus, practitioners should seek advice regarding bankruptcy eligibility before any transaction closes to properly assess any bankruptcy risk.”
While the legislative history of the bankruptcy code suggests that courts should interpret the definition of governmental unit broadly, Cox concluded the definition should not be interpreted so broadly as to encompass an entity not actually carrying out some governmental function, the Chapman and Cutler report said.
The court looked at similar factors considered in the Las Vegas Monorail Co. Chapter 11 case. The Monorail filing also faced a challenge but its eligibility was upheld in 2010. The court considered three key factors -- assessing its traditional governmental attributes, the extent of state control over the entity, and the state categorization of the entity. It applied the same three to the Lombard case.
Factors that supported the court’s finding on the LPFC’s eligibility included the lack of a full faith and credit pledge on the bonds, that the hotel project was not a traditional governmental or essential function, and that the special entity did not act as a traditional government that operated a police force and imposed taxes.
“Because the court finds that the village of Lombard is not actively engaged in running or managing the debtor’s business operations, the motions to dismiss will be denied,” Cox’s December decision said.
The court agreed that the village did provide some support for the project’s financing in the form of a moral obligation pledge on a portion of bonds and a tax abatement agreement, but it was not an obligor on the bonds. “The village is involved with this project however it does so from a distance without binding financial obligations,” wrote Cox.
After years of defaults and failed attempts to restructure the 2005 bonds outside of the court system, the LPFC and ACA Financial Guaranty Corp., which insures a portion of the bonds and is also a holder, along with several key investors, agreed to terms paving the way for a restructuring using Chapter 11. The LPFC filed in July.
ACA is the controlling party based on bond indenture provisions. The LPFC, ACA, and other parties, including bondholder Oppenheimer Rochester High Yield Municipal Fund and Westin Hotel Management, are seeking to block what’s known as an interlocutory appeal to the district court.
“The debtor has endured two additional months in bankruptcy as a result of Lord Abbett’s motion to dismiss; those two months consisted of extensive briefing, discovery disputes, depositions of multiple witnesses, and a two-day evidentiary hearing which resulted in hundreds of thousands of dollars in legal fees for the Debtor and the Restructuring Support Parties,” the objection filed this month says.
“Ultimately, Lord Abbett disagrees with the bankruptcy court’s factual findings. Displeasure over factual findings cannot support a request for an interlocutory appeal, particularly where the Debtor is on the verge of exiting Chapter 11,” the objection says.
Chapter 9 municipal bankruptcy is not an option. The state lacks such a statute and the corporation would not meet the legal characteristics of a municipality that could take advantage of Chapter 9.
Objections to the LPFC’s restructuring plan are due Feb. 7. Votes will be tabulated March 2 and a hearing on the confirmation plan is set for March 6.
The LPFC is seeking court approval for a restructuring under which it would conduct a bond exchange for the 2005 issue.
The reorganization calls for A-1 series holders to recover roughly 77% of their $71 million claim; A-2 holders to recover roughly 76% of their $58 million claim; and B holders to reclaim 86% of their $48 million claim. The replacement bonds include two series of senior bonds and two subordinate ones on the A claims and restructured sales tax bonds and a subordinated series for the B claims.
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 restructuring would give the LPFC more time to repay its debts.
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 Chicago suburb since January 2014 has reneged on its pledge to cover revenue shortfalls needed to avoid defaults on a portion of the bonds after its officials took the position that village taxpayers were not legally required to do so.
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. ACA last summer acted on its post-default rights as the controlling party and directed the trustee Amalgamated Bank of Chicago to accelerate bond repayment. The move was viewed by some sources familiar with negotiations as an effort to sway some holdouts in negotiations.
The village believes the bankruptcy will better align the capital structure with estimated project revenues. The affluent community of 43,000 west of Chicago lost its double-A rating from S&P Global Ratings after it reneged on its appropriation pledge attached to the B series. The A series carries 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.
Some existing B bonds traded as recently as last month at around 22 cents on the dollar. The insured A bonds have recently traded around 85 to 87 cents on the dollar and the uninsured A bonds traded in 2016 at 24 cents on the dollar, according to trade data on the Municipal Securities Rulemaking Board’s EMMA site.
Filings warn 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” with the restructuring likely providing “a far superior return for holders of the bonds and other parties.”