Crossville Chronicle, Crossville, TN

July 25, 2013

Bankruptcy leaves POA with questions

By Heather Mullinix
Assistant editor

— Parties to a number of lawsuits surrounding the Lake Tansi sewer system gathered July 15 for the purpose of working toward a solution in the different lawsuits and moving forward. What they learned was that a May bankruptcy filing by Tansi Waste Management, Inc., could have dramatic impact on the lawsuits.

Danny Plumlee, president of the POA, said, "We're one of the creditors in line [for TWMI]. With the bankruptcy, we couldn't settle anything at that meeting."

John McLemore, bankruptcy trustee, explained bankruptcy law allowed the court to nullify the transfer of an asset that was made within four years of a bankruptcy filing if the transfer was made without adequate consideration, and that provision could allow the court to nullify the transfer of the wastewater treatment facility and sewer system from TWMI to Tansi Sewer Utility District made Sept. 1, 2010.

"What happens? I get the sewer system back...Something has to be done with the sewer system. I am going to sell it," he said. 

In a bankruptcy sale, the property to be sold would be appraised to determine worth and bids solicited. All creditors would be notified if a bid was received. If there is no objection, the sale is completed in 22 days. If there is an objection and a creditor returns with a bid higher than the bid received, then an auction is held that is open to anyone and the assets sold to the highest bidder.

The sewer system is an "unusual" asset, McLemore noted, and buyers would be subject to regulatory issues and that some interested bidders would be better positioned to take the system if they had alliances with others.

"That's your business," McLemore said. "I put the asset on the table and somebody will buy it."

The Lake Tansi POA allowed TWMI to use a line of credit established by the POA at First National Bank of Tennessee. Promissory notes were issued by TWMI that included the principal and interest rate of 6.25 percent from the date of the loan, with all notes titled "due on demand promissory note." Eleven such notes were issued from Feb. 17, 2009, through June 15, 2010, with about $1.3 million in loans made and only $187,438.15 paid back to the POA. The POA filed suit against TWMI seeking default judgement against the non-profit corporation.

TWMI had constructed the wastewater treatment facility but that asset, along with sewer collection lines, were transferred to Tansi Sewer Utility District Sept. 1, 2010. TSUD did not pay for the assets nor has the sewer utility district paid toward the outstanding loan balance.

The only other asset TWMI has is a building, currently serving as the TSUD office, which is fully encumbered.

Also at issue are bills of upward of $430,000 for engineering services from ECE Engineering Services. TSUD voted at its July meeting to remove those charges from its financial statements, as the board does not agree TSUD is responsible for the charges.

Such lawsuits against TWMI would become claims against the bankruptcy, McLemore explained, with creditors submitting a claim and documentation. A value of the claims is determined and those lawsuits become claims that are dealt with in the bankruptcy system. If there isn't enough money to cover all the claims after assets are liquidated, creditors will receive less than what they are owed, he said.

Plumee said the POA secured the loan funds from First Tennessee Bank with property owned by the POA, including Fisherman's Point and the cabins at the beach. The POA was also paying on the loan even though it had not received loan payments from TWMI or TSUD.

The sewer system serves POA amenities, RCI condominiums and seven private residences. If there is not a buyer for the sewer system, it could return to the POA, Plumlee said.

"In my opinion, I don't think we can run a sewer system without losing money because we can't get the public money others could," Plumlee said. "We'd either lose money or have to charge our customers exorbitant fees. I'm worried that people on the sewer could be left out in the cold."

He said the POA was working to rid itself of the debt caused by the sewer system, with a five-year plan created to pay the loan off.

"But that's causing us to put all our resources into debt relief instead of maintaining our amenities," Plumlee said.

The financial constraints have led the POA to tighten its belt and reduce its budget, with layoffs and amenity cutbacks as well as increases in some fees.

"We're doing everything we can financially to keep us solvent," Plumlee said.

Plumlee said the hope was the POA would benefit from proceeds from the sale of assets in the bankruptcy case. The Crossville City Council briefly discussed the possibility of a merger or purchase of the system during a work session at the mediation conference, with Mayor J.H. Graham III stating he would need to know what the sale of the asset included before considering.

Graham has previously proposed a merger between TSUD, South Cumberland Utility District and the city. At the work session, he discussed using the Brown Elementary sewer line to transport effluent to the city's treatment plant. That would require a few line connections and pump station.

However, he noted the area would need sewer service for continued growth. He's identified 529 homes around the golf course and lake, and 1,129 lots, that would benefit from sewer service at an estimated cost of about $5 million.

He has previously proposed requiring 51 percent of those on a street agree to take sewer service and pay tap fees before the system would be expanded. When asked if those who did not want to use or pay for sewer service would have to pay, Graham noted it would depend on the type of financing secured, but added the cost for servicing the debt would be greatly reduced if shared by all affected property owners.

Jay Brown, chairman of the SCUD board of commissioners, told the council he would want 51 percent of the district's water customers, many of whom live outside of the area affected by the sewer system, to approve any merger.

He added he wanted the city to present a unanimous position.

"We will not get into your fights," he told the council. "If you can agree to this, we'll consider it. But we won't go into this with a 3-2 vote."

Councilman Pete Souza responded, "I can tell you there won't be a unanimous decision."

Councilman Jesse Kerley questioned how a water supply project and regional water district proposed by COUD would affect the city's current water and sewer operations. Interim City Manager Jack Miller noted the city and SCUD have a 10-year contract for water purchase.

Graham said he wanted to discuss the parameters the council would like to see in any merger or purchase agreement.

"We've got to know what they are," he said. "We all have ideas. To say no before we hear those ideas is not fair."

He noted that his conditions included a merger with SCUD to provide water service to the area, which is necessary to make the proposal economically viable, he said, and that Lake Tansi would maintain Lake Hiawatha and the dam at Lake Tansi.

"We have to have SCUD to do this," Graham said.

Miller added, "We would not expand the system until there were the customers to support it."

Graham said, "It has to be economically feasible. If not, we won't do it."

Souza said the city's water and sewer debt, about $31 million, would not support additional debt to purchase, operate and expand the TSUD system.

Graham said the city had assets of $81 million in its water and sewer systems and did not have a cash flow problem. The assets of SCUD would be integral to any future bond financing, he noted.