The city government in Mammoth Lakes, California is contemplating bankruptcy. The decision stems from an inability to pay a legal judgment from 1997 totaling $43 million. The ski resort town entered into mediation and, under a new California law, has 90 days to reach agreements with its creditors. This has raised a number of doubts about the future of this “get away” town in the Sierra Nevadas.

City Hopeful that Civil Mediation Will Prevent Bankruptcy

Officials have stated that they are hopeful that mediation will enable them to avoid the bankruptcy. Mammoth Lakes Land Acquisition, the developer that was awarded the judgment in the lawsuit, has thus far refused to comply with the process. Mammoth Lakes already faces steep budget cuts and has already lost some services to full time residents, but now may lose tourist services as well. Jo Bacon, the mayor said in an interview recently that, “We’re afraid if the services drop too low, people will choose not to come, and then it becomes a downward spiral.”

Events Prior to Invoking Mediation Services

The case began with a 1997 deal with the development firm. Mammoth Lakes granted the developer rights to construct a hotel, residential and retail project close to the airport in return for making airport improvements. Local government then rescinded the rights when the Federal Aviation Administration objected to the development. The developer sued for breach of contract in 2006, winning a judgment for $30 million. Last year, the town used all of its legal appeals and the amount owed now stands at $43 million.

Mammoth Lakes is the second municipality after Stockton to utilize the new state law. This law requires that local governments enter into 3rd party civil mediation prior to Chapter 9 bankruptcy in order to negotiate with creditors. The law, backed by the union has made it more difficult for these local governments to file bankruptcy cases and was originally intended to protect public employees.