SAN FRANCISCO — The tangled tale involving bonds issued for the failed Copia “wine shrine” in Napa, Calif., could reach a major turning point later this month when a bankruptcy judge will consider confirming a plan to conclude the museum’s almost 11-month-old bankruptcy case.
The nonprofit Copia operated an 80,000-square-foot museum and cultural center in the city of Napa. The late winemaker Robert Mondavi spearheaded construction of the facility, which sought to celebrate good food and wine and opened in 2001.
Construction was originally financed through $70 million in revenue bonds issued in 1999 through the California Infrastructure and Economic Development Bank.
That transaction was refunded in May 2007 with a $77 million bond issue, also through the I-Bank. ACA Financial Guaranty insured both transactions.
The refunding was needed because of continued losses at Copia, where attendance never lived up to hopes and expectations.
The 2007 bond issue was done to provide Copia with several years of debt-service relief, and more than $2 million in working capital, according to its official statement.
The institution’s woes were documented in the OS, which noted more than $19 million in losses over the previous two years, as well as its auditor’s doubts about Copia’s ability to continue as a going concern.
With Standard & Poor’s assigning an A rating solely on the back of the ACA insurance policy, JPMorgan priced the 2007 bonds with yields that topped out at 5.48% for 30-year zero-coupon bonds.
In December 2007, Standard & Poor’s downgraded ACA to CCC. In December 2008, Copia filed for Chapter 11 bankruptcy.
U.S District Bankruptcy Judge Alan Jaroslovsky has scheduled an Oct. 27 hearing to confirm a joint liquidation plan proposed by Copia and ACA.
The plan, if confirmed, calls for ACA to make a $622,000 contribution to the bankruptcy estate, which, among other things, will pay claims for unpaid employees’ wages and consumer deposits, and pay unsecured creditors about 13 cents on the dollar.
The bondholders are secured creditors, and their security is the Copia building and its 12-acre property on a riverfront site in Napa.
“By all accounts, the current market value of the real property and all other collateral is significantly less than the amount of the bond debt,” according to a disclosure document ACA and Copia filed with the bankruptcy court.
The liquidation plan calls for the creation of a trust to handle the property for the benefit of bondholders.
The bankruptcy proceedings have been marked a series of twists and turns driven by a small creditor, Copia Claims LLC, created by a claims trader that bought a small piece of Copia’s debt after the bankruptcy.
Copia Claims, saying the defeasance of the refunded 1999 bonds was botched, argued that the bankruptcy estate could get its best return through a fraudulent-transfer claim to get the 2007 bondholders the money held in escrow for the 1999 bonds, which are callable on Dec. 1.
At one point, Copia Claims and Copia proposed a joint liquidation plan, over the vehement objections of ACA, but the proposed plan was withdrawn, and ACA and Copia were able to negotiate the joint liquidation plan that will go before the court Oct. 27.
Copia Claims objects to that plan, but the court is likely to approve the plan, Copia Claims’ former bankruptcy attorney, William McGrane, said in a phone interview Wednesday.
He is no longer representing Copia Claims in the bankruptcy case. McGrane instead has turned to civil court, launching a class action suit in June in the U.S. District Court in Sacramento, alleging securities fraud in connection with the 2007 bond sale and the defeasance of the 1999 bonds, with the I-Bank, ACA, bond counsel Orrick, Herrington & Sutcliffe LLP, and trustee Bank of New York Mellon Trust Co. as defendants.
“If that succeeds, yeah, there’ll be additional value” for bondholders, McGrane said.
His wife, brother-in-law, and law partners have a financial interest in Copia Claims, according to a document filed in connection with the civil case.
The bankruptcy hearing on the ACA-Copia plan was originally scheduled in August, but postponed until this month to resolve four remaining objections, according to a material events notice filed by BNY Mellon.
Bondholders voted overwhelmingly to back the ACA plan, according to court documents filed by ACA and Copia. That means they will benefit from whatever value is extracted from the Copia property. They also retain the backing of the bond insurance policy issued by ACA — which has been operating in runoff mode since summer 2008 — as part of an agreement brokered by Maryland’s insurance regulator to settle claims related to insured credit-swap policies that went awry after the downgrade of ACA.
In its most recent quarterly financial statement, the insurer estimated that it would need a claim reserve in the range of $50 million to $60 million for Copia, a number that will not be recorded on its financial statements until a payment default occurs, which is not expected until 2011 or 2012 because of the bonds’ debt service reserve.
ACA has already announced the hiring of a real estate advisory firm to market the Copia property.
“This property’s ideal location in the center of a world-renowned wine region, the quality and significance of its existing facilities, and strong support from local government present an exciting opportunity for a new owner to develop a vibrant and valuable commercial and tourism destination,” Jerry Pietroforte, a managing director with Alvarez & Marsal Real Estate Advisory Services LLC, said in a news release Oct. 1.
ACA first retained Alvarez & Marsal in 2008, before Copia even filed for bankruptcy, according to documents filed with the bankruptcy court.
The firm sought bidders for the property and received multiple letters of intent in November 2008, just before the bankruptcy filing, to acquire the property — the highest for $37 million, according to the document, filed by ACA.
“All the people who own the ’07 bonds will have is this weird useless building,” McGrane said. “It’s a real white elephant.”