Mammoth Lakes fears financial ruin after legal judgment

Reporting from Mammoth Lakes, Calif. —  An appellate court decision upholding a $30-million judgment against this High Sierra ski resort has left civic leaders scrambling to avoid financial catastrophe.

Residents reacted bitterly to the breach-of-contract judgment, blaming the town of Mammoth Lake’s five-member council and its staffers for the fiscal dilemma that has overshadowed the snowiest winter in memory in the scenic Mono County community of 7,500 year-round residents, situated about 300 miles north of Los Angeles on Highway 395.

“We’re fed up with the Town Council,” fumed Steve Schwind, a real estate broker and 30-year resident. “We have lost confidence in its ability to serve.”

“I’m scared the situation may be worse than town officials are willing to admit,” said John Walters, spokesman for the group Advocates for Mammoth.

That kind of talk worries Mammoth Lakes Councilman Rick Wood.

“There is an undercurrent of bungling by Town Council members and legal staffers because we lost the trial and we lost the appeal of the judgment,” Wood said. “It will be terrible if the town splinters into angry factions.”

Facing a judgment roughly twice the size of the town’s annual operating budget, the Town Council last week retained a law firm that specializes in appellate litigation and also is developing settlement negotiation options, seeking legal advice on municipal bankruptcy and studying controversial proposals to raise taxes and make cuts in basic services to pay off the judgment, which bears a 7% annual interest rate.

Because few petitions are heard by the California Supreme Court, prospects for a favorable review of the appellate court decision are considered slim.

Seated at a table in the rustic Base Camp Café he has operated here for three decades, Mammoth Lakes Mayor Skip Harvey took a deep breath and said, “We’re all weary and frustrated over this. But we have to be careful about how we proceed. The ramifications of this judgment are complicated, and potentially devastating.

“The time for finger-pointing is over,” he said. “We must work together

on the best possible solutions.”

The three-judge panel’s unanimous decision was handed down Dec. 30 in a 66-page ruling that chastised the town for trying to back out of a development agreement it signed in 1997 with Mammoth Lakes Land Acquisition.

The agreement required the developer to make improvements to nearby Mammoth Yosemite Airport’s fixed-base operations. In return, it would receive rights to develop a $400-million Hot Creek hotel project on 25 acres at the airport and an option to buy the land.

Mammoth Lakes changed its priorities in 2007, the court found, after it determined that the project would interfere with Federal Aviation Administration policy governing the use of airport property for aeronautical purposes and, as a result, derail the town’s plans to extend the runway to accommodate Boeing 757 passenger jets.

The developer, which had invested in some improvements to the airport, filed a breach of contract lawsuit against the town after it refused to move forward with the hotel project until the FAA policy issues were resolved.

The court found that the town did not live up to its end of the bargain.

Mark Rosenthal, a spokesman for the development company, declined to comment on the matter because, he said, “the town of Mammoth Lakes has chosen to re-engage the legal process through a petition to the California Supreme Court.”

The town has until Feb. 8 to file the petition. The court would have 90 days after the filing to decide whether to hear the case.

In the meantime, town officials have been spending much of their time trying to anticipate the plaintiff’s next move and how to respond without making things worse.

Can the plaintiff raid special emergency reserves, equal to 25% of the town budget, that were created to help the town continue to operate in times of economic uncertainty? How would drastic cuts in basic services, or filing for municipal bankruptcy, affect investment, tourism and property values in a town where the median price of a single-family home is $1.1 million and 65% of the budget comes from transient occupancy taxes?

“The extent of the unknown is gigantic,” Wood said. “I suspect the plaintiff may want to attach the town’s revenue stream, in which case we will file for bankruptcy and argue with them over that for years and years.

“That is, if we are even eligible for municipal bankruptcy,” he said.

The legal fees for filing for protection under Chapter 9 of the U.S. Bankruptcy Code are enormous, and the process is viewed by legal experts as a move of last resort that can send shock waves through every level of government and trigger severe economic consequences that might take years to overcome.

Mammoth Lakes Town Manager Rob Clark said, “We would not anticipate that municipal bankruptcy would take away our ability to pay for emergency response services or snow removal, which are matters of life or death. But we would be required to make the plaintiff whole as quickly as possible and at the same time ensure that people would not have to worry about whether it is safe or not to come to Mammoth.”

Nearly half of the four-square-mile town’s residents are employed by adjacent Mammoth Mountain’s skiing and related operations, which rank among the nation’s most-visited ski areas. Every Friday night in winter, thousands of vehicles stream across the Mojave Desert from Southern California, bringing an estimated 1.5 million skiers to the region during the season.

The Town Council has been under fire before. In 2005 it imposed higher development impact fees to help pay for infrastructure and civic improvements, including street repairs and new municipal government headquarters. A year ago, the town cut staff, including the dog catcher and code enforcement officer, as part of an effort to make up a $9-million shortfall that resulted from a miscalculation in expected revenue in fiscal year 2007, officials said.

Now, with the area enveloped in political tensions and anxiety, town officials plan to host public and private meetings with business leaders and residents to figure out its next move.

“This is one of the most challenging junctures in the town’s young history,” said Mammoth Mountain Chief Executive Rusty Gregory of the town that incorporated in 1984. “I’m hoping that once the yelling and screaming stops, people will come together and figure a way out of it.”

louis.sahagun@latimes.com