CHICAGO – The Lombard, Ill., Public Facilities Corp. can continue its efforts to restructure it $190 million of Westin Hotel and Conference Center debt after a bankruptcy court judge rejected arguments that the agency is too closely linked to its village sponsor to be eligible for Chapter 11.
“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,” U.S. Bankruptcy Court Judge Jacqueline Cox wrote in her 18-page opinion this week.
While 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, it is 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, who presides in the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, in Chicago.
After years of defaults and failed attempts to restructure the 2005 bonds outside of the court system, the LPFC and ACA Financial Guaranty Corp. along with several key investors agreed to terms that paved the way for a restructuring using Chapter 11. ACA is the controlling party based on bond indenture provisions. The proposed restructuring offers differing levels of haircuts depending on what series of bonds investors hold.
One holder, Lord Abbett Municipal Income Fund Inc., which stands to suffer losses, challenged the July filing. The firm was joined by MidAmerica Hotel Partners LLC, which developed and managed the project, and the U.S. Trustee. They argued the LPFC didn’t qualify under corporate bankruptcy rules because as an instrument of the village it’s a “governmental unit” that is ineligible for Chapter 11.
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 Chapter 9.
Backers of the motion to dismiss argued in court filings and during several days of evidentiary hearings that from its inception and nearly up until its petition filing on July 28, the corporation was simply an instrument of Lombard, created to finance the hotel and convention center project.
“The village is in control of the debtor,” the U.S. Trustee’s attorney Kimberly Bacher told the court during hearings last month. Filings and testimony outlines how intertwined the village and corporation were through ordinances, offering documents, and intergovernmental agreements.
The LPFC and ACA dismissed those links as applicable to the consideration of whether the corporation qualified for Chapter 11. “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 argued.
The corporation’s position cited precedent set in the Las Vegas Monorail bankruptcy, arguing that it passed the same three-part test applied in the case to determine whether the debtor agency was considered an instrumentality of a governmental entity.
As in the monorail case, the LPFC argued that it doesn’t operate as a municipality, that its day-to-day operations were overseen by operating managers and not the village despite some control imposed by the village, and that it’s not considered a unit of local government under state law.
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 did not operate as a municipal entity.
Cox concluded that while the connection between the village and project may have run deep, the ties were limited.
“The village’s taxing power and full faith and credit were not pledged as security for any of the bonds," Cox wrote. "This aspect of the project shows that the village and project are very separate. This lack of liability and responsibility shows that the debtor is not the village’s agent.”
Cox also cited the LPFC’s loss of legal battles asking the state Department of Revenue to find that it is a governmental unit. The state appellate court found the debtor did not have authority to impose taxes, maintain a police force, provide water or sewage treatment and had not received a charter from the state recognizing it as a governmental body.
Cox rejected the notion that the transfer of project ownership to the village once the debt is retired renders the LPFC a unit of government, finding the “future benefit is merely a future expectancy” and not an indication of ownership necessary to find that the debtor is a unit of government.
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 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.
Westin Hotel Management LP and Oppenheimer Rochester High Yield Municipal Fund are also in favor of the restructuring plans.
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.
The village believes the bankruptcy will better align the capital structure with estimated project revenues. 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.
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.
The B bonds have traded recently at around 24 cents on the dollar. 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.
James Spiotto, a managing director at Chapman Strategic Advisors LLC.
said he was not surprised by the trustee’s decision to join the case, given that the “general traditional view is that an entity created by a municipality is a governmental unit, an instrument or agency of it and therefore is not a ‘person’ that can file Chapter 11.”
“For the trustee this is a matter of policy…there comes a time to establish policy” as a priority over striking settlement agreements, he added.
Bankruptcy court rulings can be appealed to the U.S. District Court in Chicago and appeals of that court’s rulings are heard by the Seventh Circuit Court of Appeals. Lawyers for the trustee and Lord Abbett did not respond immediately to a request for comment.
The court also this week granted the LPFC’s request to extend until Feb. 23 the period during which it can exclusively file a reorganization plan and until April 24 to win approval for the restructuring.