In Re Las Vegas Monorail Company
| Decision Date | 26 April 2010 |
| Docket Number | No. BK-S-10-10464-BAM.,BK-S-10-10464-BAM. |
| Citation | 429 B.R. 770 |
| Parties | In re LAS VEGAS MONORAIL COMPANY, Debtor. |
| Court | U.S. Bankruptcy Court — District of Nevada |
COPYRIGHT MATERIAL OMITTED
Erika Pike Turner, Gabrielle A. Hamm, Matthew C. Zirzow, Gordon & Silver, Ltd., Gerald M. Gordon, William M. Noall, Las Vegas, NV, for Debtor.
Las Vegas Monorail Company (“LVMC”), the debtor and debtor in possession in this case, owns and operates a 3.9 mile long monorail which connects nine hotels in Las Vegas. LVMC seeks to serve the transportation needs of the Las Vegas resort corridor, and caters mostly to tourists and other visitors to Las Vegas. The monorail, however, does not connect to the local airport, and it does not connect to Las Vegas' downtown area. While it does connect to the local convention center, the closest it gets to the principal thoroughfare in Las Vegas, the Las Vegas Strip, is approximately 1,000 to 1,500 feet.
LVMC's somewhat complicated capital structure, and its disappointing ridership, has hampered its ability to expand to better serve its goals. LVMC's immediate predecessor was a joint venture between two local hotels. Starting in 1998, this predecessor took advantage of a change in Nevada law that allowed private companies to operate a public monorail, and obtained a franchise from the local county government to operate the then-one-mile-long monorail. In 2000, the private joint venture sought to expand to its present length. As part of that expansion, the joint venture merged with a nonprofit corporation to form the present LVMC.1 LVMC then arranged for structured financing to acquire the existing track and to expand it.
The financing required the participation of the Director (“Director”) of the Nevada Department of Business and Industry (“Department”). This participation consisted of the Director's sponsoring the issuance of around $650 million of municipal bonds (“Bonds”). These Bonds were offered for sale pursuant to an Offering Statement dated September 12, 2000 (the “Offering Statement”). 2 Specifically, the Bonds were issued under an indenture (“Indenture”) between Wells Fargo Bank (“Trustee”) and the Director. The financing then called for the Director to simultaneously lend the bond proceeds to LVMC pursuant to a separate financing agreement between LVMC and the Director (the “Financing Agreement”). Under the Financing Agreement, the Director lent the bond proceeds to LVMC, and LVMC agreed to repay the loan. It supported its promise with a grant of a security interest in, among other things, its net revenues (but not in any of its track or trains).
A key component of the transaction, known to all, was that the State of Nevada would not be liable on the Bonds. Indeed the Director and other public officials assured the public that no tax revenues would be used to acquire or operate the monorail. Structurally, this promise was honored by making the Bonds nonrecourse as to the State of Nevada. This was explicit in the offering; the only recourse for bondholders was the collateral the Director assigned to the Trustee, and the insurance mentioned below.
As a result, those buying the Bonds did so knowing that the primary source of repayment on the Bonds was the Financing Agreement-and the security interests it contained-which the Director had assigned to the Trustee. The only other potential source of repayment was insurance purchased from Ambac Assurance Corp. (“Ambac”) which insured payment of principal and interest on the first series of the Bonds.
This type of financing-called variously conduit financing or industrial revenue bond financing or special revenue financing-is a common way to finance municipal infrastructures. It is expressly recognized by the Internal Revenue Code. See 26 U.S.C. § 103. It allows a State or municipality to secure financing for the construction and operation of enterprises with a public purpose while offering tax-free interest to buyers of the bonds issued as part of the transaction. As part of this effort to obtain tax exempt status, LVMC signed a “Tax Certificate and Agreement” (the “Tax Certification”) which expressly states that LVMC “is an instrumentality of the State of Nevada, ... controlled by the Governor of the State of Nevada.” 3
As time passed, the payments on the Bonds proved to be too much for LVMC to service from its revenues. LVMC's ridership has never met projections; many of its potential patrons use services provided by the Regional Transportation Commission (“RTC”), a public agency charged with meeting the transportation needs of most of Las Vegas's residents. This is not to say that LVMC bleeds money; to the contrary, its revenues exceed its expenses,4 with more than $5 million annual profit before debt service. This $5 million, however, is barely enough to cover 10% of the scheduled debt service on the Bonds.
To address its financial distress, LVMC filed for Chapter 11 bankruptcy protection on January 13, 2010. Within hours of its filing, Ambac moved to dismiss LVMC's case. Ambac contends that LVMC is a “municipality” as defined by the Bankruptcy Code, and...
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