Friday, Jan. 22, 2010 | 2 a.m.
Beyond the Sun
Since the inception of the Las Vegas Monorail, Nevadans have been repeatedly reassured that they will not wind up on the hook for its bills.
Nevermind the high salaries monorail executives and board members are getting, that won’t ever wind up coming out of the public’s pockets.
The Nevada Business and Industry Department’s issuance of $650 million in tax-exempt bonds to construct the transit system? Not to worry, no liability there.
Granting state sales tax and county property tax exemptions to the monorail? Yes, it helped the monorail system avoid putting millions of dollars in the public coffers, but it was the right thing to do.
Clark County’s approval of the monorail’s exclusive franchise agreement? Just a formality.
Having a five-member board appointed by the governor to oversee the operation? That’s just to protect taxpayers’ interests.
Now that the monorail’s long predicted bankruptcy is in front of a federal judge, however, the cozy relationship between the system and state and local governments has become a crucial issue and is again raising the question of whether taxpayers will wind up on the hook for any or all of the monorail’s $500 million to $1 billion in debt.
Banking giant Wells Fargo and the insurer of $450 million of the monorail’s bond, in fact, are arguing that the monorail is closer to a municipal government than a private corporation. Las Vegas Monorail filed last week for Chapter 11 bankruptcy protection, seeking to hold back the debt collectors while it reorganizes. But Wells Fargo and Ambac Assurance Corp. of Wisconsin are telling the bankruptcy judge that the appropriate bankruptcy for the monorail is Chapter 9, which is reserved for city and county governments, public schools and special improvement districts.
U.S. Bankruptcy Judge Bruce Markell is to decide Feb. 17 whether the Chapter 11 filing will proceed. If he decides to throw out the case, it could force the monorail to pursue Chapter 9.
Wells Fargo noted that the monorail would need the Legislature’s approval to file under Chapter 9. Short of Gov. Jim Gibbons calling a special session, the soonest the Legislature meets is in 2011.
What would happen to the monorail until then is anybody’s guess — as is whether taxpayers might wind up bailing out the system.
Once a case moves into Bankruptcy Court, just about anything is possible.
For instance, under its tax agreements with the state, the monorail said it would not sell any of its facilities — trains and rail, for example — before January 2040. The bankruptcy judge could say it doesn’t have to wait until then.
Reworking of agreements is part of what Bankruptcy Court does, notes Las Vegas attorney James Patrick Shea, an executive committee member of the American Bankruptcy Institute, a nonprofit research organization.
“If you didn’t have latitude to modify your contractual obligations, why file for bankruptcy?” Shea says.
Nevada Taxpayers Association President Carole Vilardo is among those who think state law shields taxpayers from liability for nonpayment of the bond debt. But she worries that might not stop a creditor, such as the company that insured the bonds, from trying to sue the state because it issued the bonds.
Her association issued a position paper in 2000 that addressed the state’s possible exposure to lawsuits in the event the bonds went into default.
“Since the government entity has a responsibility to perform due diligence as to the financial feasibility of the project and thus, the bond issue, it cannot completely escape legal exposure,” the association concluded.
Las Vegas financial adviser Guy Hobbs, managing director of Hobbs, Ong and Associates, had advised the county against serving as an issuer of the monorail bonds precisely because of concerns about the potential for lawsuits in case of a default. The county followed his advice, but the state decided to issue the bonds.
Now, Hobbs warns, “Even though there is no legal obligation by the state to make the bond payments, there is some question as to whether a creditor would look to the state as a conduit.”
Lon DeWeese, chief financial officer of the Business and Industry Department, says the state issued the bonds because the county convinced officials that the monorail would serve a public purpose by relieving traffic congestion on the Strip.
“The state stands by its decision to issue the bonds and it followed the law,” DeWeese says.
He won’t speculate about whether Ambac or other creditors will sue the state over the bonds, but concedes that the Bankruptcy Court could alter the bond contracts if it so desired.
The state is concerned enough that it hired a private attorney from Southern California, Rebecca Winthrop, to represent its business division. Winthrop did not return calls.
Don Burnette, Clark County’s chief administrative officer, says the county’s position is that it “is not a party” to any monorail debt obligations.
But he acknowledges that the county has $7.9 million in a fund from the initial financing for the monorail. It could spend that money on removing the monorail structures installed in the county’s rights-of-way if the monorail shuts down. But the county also could spend the money to keep operating the system “should the monorail be abandoned or the franchise terminated,” Burnette says.
Legal experts and other interested observers say that as it stands, it’s difficult to see how taxpayers would be held liable should the monorail continue to fail to pay its debts.
The bond documents clearly say the state is not liable for any bond indebtedness, so state law shifts the responsibility to the company to pay off the bonds and the county bears no liability for merely approving a franchise agreement, experts say.
But that doesn’t mean there aren’t any “what if” scenarios lurking. As in, what if a court-supervised bankruptcy reorganization failed and the monorail had to be bailed out? Burnette had hinted at that scenario when he talked about the county’s option to spend millions to keep the monorail operating.
Ambac’s lead bankruptcy attorney, William Smith of Chicago, declined to comment on how a Chapter 9 bankruptcy filing by the monorail would be better for his company than a Chapter 11, and attorneys with no involvement in the case tell the Sun they are not sure how Ambac would benefit from a Chapter 9 filing.
“It would either give the creditors an increased number of tools or reduce the number of tools that would be available to the monorail under Chapter 11,” Shea says.
Boyd Law School professor Nancy Rapoport, who specializes in bankruptcies, says creditors might think they would have more say over any potential sale of monorail assets outside the conduct of ordinary business under Chapter 9 than under Chapter 11.
Part of the reason for the uncertainty it that Chapter 9 is rarely used, with fewer than 600 such cases filed in this country since the Great Depression; 14,745 Chapter 11 bankruptcies were filed from September 2008 to September 2009.
The most notable Chapter 9 case was filed in 1994 by Orange County, Calif., after it lost $1.7 billion through risky investments.
Only time will tell whether it will be eclipsed in notoriety by a new Chapter 9 case in Las Vegas.