July 3 (Bloomberg) -- Mammoth Lakes, California, has decided to file for bankruptcy in an effort protect itself from a $43 million court judgment, the resort town said.
The city council voted to seek bankruptcy after its largest creditor, Mammoth Lakes Land Acquisition, won a court order requiring the city to pay the judgment by June 30, according to a statement on the city’s website. Under Chapter 9 of the U.S. Bankruptcy Code, municipalities can halt court actions against it while they seek to reorganize their finances. The tactic is common among corporations that file so-called Chapter 11 bankruptcies.
“Bankruptcy, unfortunately, is the only option that the town is left with,” the city said in the statement.
The city didn’t say when the filing would occur.
The decision comes five days after the northern California city of Stockton filed for bankruptcy with plans to try to impose cuts on bondholders and employees. Vallejo, California, filed bankruptcy in 2008 and used court protection to cut benefits to retirees, renegotiate labor contracts and reduce the interest it was paying lenders. The city exited bankruptcy last year.
California’s cities have been struggling to pay their debts in the wake of the financial and housing crisis in part because of the property tax reform adopted in the 1970s known as Proposition 13, Richard Ciccarone, chief research officer at McDonnell Investment Management LLC in Oak Brook, Illinois, said in an interview last week.
“California cities are a greater worry because of their debt structure,” Ciccarone said. “Thank you Prop 13. It’s coming home to roost.”
Mammoth Lakes, a ski resort community of 8,200 near Yosemite National Park, has an annual budget of $19 million.
Mammoth Lakes Land Acquisition refused to participate in the mediation process between Mammoth Lakes and its creditors, according to a statement on the city website. That mediation, required under California law, is designed to help cities and counties avoid bankruptcy.
The company sued the town in 2006 for allegedly breaching a development agreement allowing the company to build homes, retail space, hangars and other structural improvements near the Mammoth Yosemite Airport.
In 2008, a state court awarded the company $30 million, which the town appealed. An appeals court sided with the developer, and the California Supreme Court refused to hear the case last year. The judgment has increased to $43 million with interest and legal fees, according to a statement on the town’s website.
The development company has tried to reach a compromise with the town, said Daniel L. Brockett, a partner at Quinn, Emanuel Urquhart & Sullivan LLP in New York, which represented the developer.
The town rebuffed the developer’s offer for $2.7 million annual payments over 30 years, Brockett said in a telephone interview.
“There was no point in us participating in the mediation,” he said. “The mediation was simply so they could check off a box before going to bankruptcy court.
‘‘They just keep putting their heads in the sand and hoping that some guy in a black robe will bail them out.’’
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