LOS ANGELES An official with Arvin, Calif., said the city will file for Chapter 9 bankruptcy and disincorporate if it cannot reach a negotiated settlement with investors who are suing over the city's default last March on $7.89 million of certificates of participation.
The unrated COPs were issued in 1988 to finance the 18-hole Sycamore Canyon golf course, clubhouse, and related facilities. The project is operating at a deficit, city manager Thomas A. Payne said yesterday.
Arvin's general fund budget for the current fiscal year is $1.45 million, while the lease payment on the golf course for 1994 totals $694,482.
Because there is not enough money available in the city coffers to make the lease payment this year- or in future years -- a negotiated settlement "is our only option," Payne said. "If it goes to court, we will lose, and when we lose, we file for Chapter 9 and move for disincorporation. There are no other options."
Chapter 9 is sometimes described as a municipal liquidation. A disincorporation would involve the transfer of city assets and obligations to Kern County, Calif., Payne said.
Kern County Superior Court Judge Rebecca A. Wiseman has set Dec. 14 for a status conference on the suit brought against the city by the certificate holders' trustee, State Street Bank and Trust Co. of California.
The conference originally was scheduled for Nov. 1, but was postponed to give parties more time to settle their differences.
"The city has been in contact with State Street Bank and their counsel on a regular basis," said Larry Peake of Wall. Wall & Peake, a Bakersfield law firm representing Arvin in the court proceedings. He said a negotiated settlement is to everybody's advantage "based upon the economic realities you're faced with in small cities such as Arvin."
Kathleen Johnson, an attorney with Los Angeles-based Morgan Lewis & Bockius, the law firm representing State Street Bank, said she was asked by bank officials to decline comment on the Arvin suit. Robert C. Butzier, a State Street Bank vice president, did not return phone calls.
Arvin is a farming community of nearly 11,000 located about 25 miles southeast of Bakersfield at the southern tip of the San Joaquin Valley, where grapes, potatoes, and cotton are grown.
The golf course default is one of three long-term obligations on which the city has defaulted since 1992, prompting the Kem County grand jury to investigate the city's financial affairs, Payne said.
In October of last year, Arvin failed to make a debt service payment on $2.95 million of COPs that financed the Arvin farm labor center. In January 1992, Arvin defaulted on $1.28 million of assessment bonds that financed the Jewett Square residential development.
"The Kern County grand jury is reviewing the city's involvesent in all three projects," Payne said. "The slow real estate market is prohibiting us from [moving forward] with Jewett Square, and the farm labor project was a concept that didn't work."
Peake, Arvin's lawyer, said the COP-related goff course default "is a matter of concern for the county of Kern because if Arvin is put in a position of having to disincorporate or file Chapter 9 bankruptcy, it has an impact upon the county."
Peake said his firm is representing Arvin; the nonprofit Arvin Development Corp., which leased the golf course to Arvin; and the individual members of the city council.
The council members are involved because State Street Bank is "seeking to obtain an order that they budget in the future for payments toward these lease payments," Peake said.
Arvin failed to make lease payments due on Aug. 15 of last year and on Feb. 15 and Aug. 15 of this year. As a result, no debt service payment was made to certificate holders on March 1 and Sept. 1.
Peake said Arvin would also miss the lease payment due Feb. 15.
According to the annual amortization schedule, the city is responsible for $694,482 in lease payments this year, which it has not paid. The annual lease payments continue through 2018. The payments gradually increase from $694,120 in 1995 to $765,000 in 2009. In 2010 they jump to $1.31 million and remain above $1 million a year until the. issue is paid off.
In the meantime, Peaice indicated that Arvin is considering pursuing litigation of its own. Peake said the city would retain securities counsel, which would be responsible for analyzing the transaction.
"The polite way to put it," he said, is that the city is reserving the right to seek recourse against other parties that worked on the golf-course project if the city fails to work out a compromise with certificate holders.
A city status conference statement, filed with Wiseman's court, said the city was preparing to file a "cross-complaint" against various parties "inyolved in the issuance of the certificates of participation."
"The city of Arvin anticipates that its cross-complaint will result in a significant damage award in favor" of the city, the statement said.
The 1988 COP financing team consisted of underwriter Seidler-Fitzgerald Public Finance and bond counsel Jackson, Hargrove. They, along with CCA Silband Sports Corp., the Texasbased original promoter of the course, would be asked to provide depositions, the statement said.
John C. Fitzgerald, managing director of Seidler-Fitzgerald, said last Friday that he saw no reason why his firm would be open to legal exposure because of its role in the transaction.
"I don't see why we would," Fitzgerald said. "Everything was fully disclosed in the official statement."
The official statement said Arvin is "responsible for appropriating annually enough money to cover the debt service," he said. From an internal budgetary standpoint, the city would get money to make the debt service payment "off the operations of the golf course," he said.
Fitzgerald said the official statement spelled out that Arvin's "general fund had the obligation to annually appropriate to make up any shortfalls" of the golf course. The COP "was a general fund lease by the city, so the city was responsible for the lease payments. And then there is a mortgage on the site, so the bondholders have a mortgage right [to foreclose] also."
Payne, the city manager, said the golf course lost $99,000 in operations alone in 1992 and another $47,000 last year. "This year, it looks like they are going to lose $33,000. That is before a penny goes toward debt service," he said.
Payne said the losses stem from several factors, including the relatively obscure location of the Course, several seasons of unseasonably wet weather, and competition from county-run courses that set "artificially low rates." Moreover, the course is challenging 16 of its 18 holes have water traps. "The good golfers love it, but most golfer's want a relaxing come," he said.
Peake said the city's default came earlier than necessary because of actions by State Street Bank, which he accused of "seizing" $560,000 of the reserve fund from the certificate holders."
Peake said the purpose of the reserve fund is to pay holders "in the event of a missed lease payment."
The March 1 notice of default issued by State Street Bank said the bank kept the funds "as additional collateral 'for the holders of the certificates." The funds were needed "in order to preserve and to protect the value of the property for the benefit of all certificate holders," the notice said.
But Peake asserted that Arvin should be "entitled to the benefit" of the reserve account, which could have been tapped to pay certificate holders and at least temporarily delay the default. The $560,000 represents "that much Jess the city is responsible for paying out of its own pocket which, I think, is zero, anyway" Peake said.
However, State Street Bank said the reserve funds would "enable the trustee to take the actions necessary to maximize the amount of recovery of the holders of the certificates."
Therefore, the notice said, "The trustee does not intend to deliver any portion of these funds to the holders of the certificates to pay debt service on the certificates at the present time."
"Instead," the notice said, "these funds will be used by the trustee to proserve the value of the property and to pay the costs and expenses associated with the exercise of remedies on behalf of the holders of the certificates."
In its court filing, Arvin provided its version of how the golf course transaction came to fruition.
Arvin, "as well as numerous other small cities both in and out of California," were approached by a marketer and developer of golf courses, the document says.
The marketer-developer suggested a "package" proposition that ineluded bond financing to pay for a turnkey golf course operation, the document continues.
"Representations were made to the city officials, including defendants herein, that the city's general fund would have no liability in the event the golf come did not produce sufficient revenues to repay" certificate holders, the document says.
"Because the golf course has not produced revenues sufficient to pay the debt service due on the golf course (lease fees, etc.), State Street Bank, as trustee for the bond holders, now. brings the present suit to foreclose on the course," the document says.
State Street also is attempting "to obtain an order that the court compel Arvin city council members to apply extremely limited budget resources towards moneys alleged to be due on the golf course," the document says.