Contributed by Marvin Mills
On November 18, 2011, the United States Bankruptcy Court for the District of Nevada entered an order denying confirmation of the chapter 11 reorganization plan proposed by Las Vegas Monorail Company (LVMC) for lack of feasibility. Early in its chapter 11 case, LVMC survived a creditor’s motion to dismiss the case on the basis that LVMC was a municipality and, therefore, only eligible to be a chapter 9 debtor. A year and a half later, LVMC found itself unable to emerge from bankruptcy. In its order denying confirmation, the bankruptcy court described the monorail as a “fiasco,” and sua sponte determined that LVMC had failed to carry its burden to demonstrate that its proposed reorganization plan was feasible.
Starting off on the wrong track
In 2000, LVMC sought to expand its one-mile monorail service to its current 3.9 mile track. Notably, the monorail does not connect to the local airport or Las Vegas’s downtown area, nor does it provide immediate access to the well-known “Las Vegas Strip.” In order to expand its service, in 2000, LVMC arranged for the State of Nevada to sponsor the issuance of approximately $650 million of municipal bonds. The financing arrangement related to such issuance provided that Nevada would lend to LVMC the proceeds from the issuance of the municipal bonds, and LVMC agreed to repay the loan (and, indirectly, the amounts owed on the municipal bonds). Recourse for bondholders was the limited to net revenues from the monorail and the insurance that LVMC purchased to cover payment of principal and interest on the first series of the bonds. Over time, LVMC became unable to service the bonds with the revenues from the monorail and, on January 13, 2010, LVMC filed a chapter 11 petition.
After months of negotiations, LVMC proposed a chapter 11 reorganization plan that provided, among other things, for the issuance of $40.35 million in new bonds. Despite the substantial loss, bondholders overwhelming voted in favor of the plan (97% of voting bondholders), and LVMC resolved all other objections to confirmation of its plan. Prior the confirmation hearing, in two separate orders, the bankruptcy court expressed its “concerns about feasibility,” including, among other things, whether LVMC would be able to obtain funding to satisfy its proposed debt obligations. The disclosure statement for LVMC’s reorganization plan stated that current projections indicated that LVMC would not be able to make a final payment on a portion of the proposed restructuring debt that would come due in seven years.
Bankruptcy court pulls the brake on confirmation
Despite the general support for the proposed plan, the bankruptcy court recognized its independent duty to ensure that the plan complied with the requirements of section 1129 of the Bankruptcy Code. In so doing, the bankruptcy court focused on feasibility. Section 1129(a)(11) requires that confirmation of a debtor’s reorganization plan not likely “be followed by the liquidation, or the need for further financial reorganization, of the debtor.” The bankruptcy court began its feasibility analysis by highlighting that, based upon the projections offered by LVMC’s financial expert, LVMC would be unable to make a final balloon payment on a portion of the proposed debt that would become due in 2018. The bankruptcy court observed that the projected shortfall – $38.4 million – was not an “insignificant sum.”
In its order denying confirmation, the bankruptcy court indicated that it was not convinced by the testimony of LVMC’s witnesses, who asserted that there would be adequate funds to cover the anticipated shortfall. According to the bankruptcy court, neither LVMC’s chief executive officer nor its financial expert “gave any real assurance as to their ability to accurately predict financial performance.” The bankruptcy court also was not convinced as to the likelihood of certain potential sources of additional funding resulting from “upside scenarios” described by LVMC’s witnesses, which scenarios the bankruptcy court labeled a “visionary scheme.”
Upon consideration of an alternate six-factor feasibility test, including the adequacy of the debtor’s capital structure, the bankruptcy court again concluded that feasibility was not satisfied. Specifically, the bankruptcy court determined that LVMC’s purported reorganization value (approximately $16 million to $20 million) could not sustain the anticipated reorganization debt load ($40.35 million).
Although LVMC argued that its plan satisfied the Bankruptcy Code’s feasibility requirement, the bankruptcy court disagreed. The bankruptcy court flatly rejected LVMC’s contention that its status as a nonprofit entity rendered a traditional feasibility analysis inappropriate, finding that LVMC would not have sufficient cash flow to amortize the debt at issue. Likewise, the bankruptcy court dismissed LVMC’s argument that the plan was feasible because it contained a liquidation option. The bankruptcy court reframed that argument as a request to permit LVMC to “float along until it sinks” without regard to “how creditors will make it onto the life raft – or even whether there will be a life raft available.” With regard to LVMC’s argument that the monorail produces a positive cash flow and benefits the community, the bankruptcy court explained that the function of a feasibility analysis is not limited to assessing whether a debtor will generate positive cash flow, but whether an entity will be financially sustainable. Ultimately, the bankruptcy court concluded that LVMC had failed to make the requisite showing of feasibility.
The feasibility ruling in In re Las Vegas Monorail Company underscores the statutory burden on a plan proponent to demonstrate that its proposed plan will enable the debtor to avoid bankruptcy in the future. The other takeaway from LVMC’s case, which should go without saying, is that, if a bankruptcy court expresses its concerns (by order, twice) as to the feasibility of a proposed plan, the proponent should ensure that it adduces sufficient evidence at the confirmation hearing to dispel the court’s doubts.