We are pleased to include here the comments of colleague, Allan Ickowitz, Co-Chair of Nossaman's Financial Services and Bankruptcy Practice Group.
Public agency project owners can breathe a sigh of relief over a recent bankruptcy court decision in the Las Vegas monorail case. They will not be held liable for the debts of non profit corporations established to build public infrastructure simply because the corporation was formed “on behalf” of a public agency.
When the Las Vegas Monorail Company filed a Chapter 11 bankruptcy petition on January 13, 2010, the Ambac Assurance Corp. filed a motion to dismiss. The Monorail bankruptcy filing and Ambac’s motion raised concerns in the US infrastructure industry about the potential liability for public agency sponsors of these types of projects for the liabilities of the non-profit corporation’s formed on their behalf to develop and finance infrastructure projects. Ambac had insured $450 million of the bonds issued to finance the Monorail project, and argued that the Monorail shouldn’t be able to file under Chapter 11 on the grounds that the Monorail was a "municipality" for purposes of the Bankruptcy Code and, therefore, ineligible to file a bankruptcy case under any Chapter other than Chapter 9. (A dismissal of the Monorail's Chapter 11 case would render the Monorail unable to seek bankruptcy protection because the company was not specifically authorized by Nevada law to file a Chapter 9 bankruptcy case, a requirement that applies municipalities filing bankruptcy under Chapter 9.) Ambac argued that the Monorail was an "instrumentality" of the State of Nevada, because, among other things, the Monorail was controlled by the Governor, identified itself as an "instrumentality" of the State of Nevada controlled by the Governor in the tax certification in connection with obtaining tax exempt status for its bonds, and because the bonds were issued by the state (and various exemptions granted to the monorail company by the Clark County government).
This public private partnership structure (sometimes referred to as a 63-20 Corporation) is designed to shift financial risk away from the public agency. The bond documents used in this financing are explicit that neither the full faith and credit or any assets of the public issuer, the state, or the county are liable for the debts of the corporation, even though for federal tax purposes the corporation was formed 'on behalf of' a public agency.
The Bankruptcy Court rejected Ambac's arguments and issued a ruling entered on April 26th denying Ambac's motion. The court in effect, and based upon the totality of circumstances in the case, found that the Monorail should be treated as a nonprofit corporation as was intended. It was organized to be a non-profit under Nevada state law and the certification of the entity as an "instrumentality" for tax purposes did not change its status under bankruptcy law. In ruling this way, the court has helped protect the integrity of the type of conduit financing. The Monorail's bonds, issued by a state to finance operation of a project by a private nonprofit corporation – albeit for public purposes under significant oversight and control by the state are the responsibility of the nonprofit, not the public agency.
Ambac has initiated appeal proceedings seeking to reverse the Bankruptcy Court’s decision.
-Allan Ickowitz
