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GoErie.com: Judge reverses insurance ruling in Conneaut Lake Park bankruptcy

This is an August 2013 file photo, taken Aug. 2, 2013, of the aftermath of a fire that destroyed the Beach Club & The Dockside at Conneaut Lake Park along Conneaut Lake on Aug. 1, 2013. ANDY COLWELL/ERIE TIMES-NEWS

This is an August 2013 file photo, taken Aug. 2, 2013, of the aftermath of a fire that destroyed the Beach Club & The Dockside at Conneaut Lake Park along Conneaut Lake on Aug. 1, 2013. ANDY COLWELL/ERIE TIMES-NEWS

Conneaut Lake Park's bankruptcy case is nearing the finish line.

But a court decision this week could be costly to some park creditors.

The park and major creditors have reached an agreement on how the park will settle its debts. The mediated agreement is due to be jointly filed in U.S. Bankruptcy Court in Erie by June 3.

The decision in U.S. District Court for the Western District of Pennsylvania on Wednesday could mean that secondary creditors will wait longer to be paid, or might not be paid at all. The decision awards a $611,000 insurance settlement to the company that operated the park Beach Club, reversing a December decision by U.S. Bankruptcy Judge Jeffery Deller awarding $478,261 of the settlement to local taxing authorities.

Park trustees planned to sell property not essential to the amusement park to pay the remainder of its $1 million property tax debt. Other debts would have been paid with remaining property sale proceeds, and then in quarterly installments funded by park operations, through 2027.

Wednesday's ruling means that less money from property sales will go to secondary creditors, including the Conneaut Lake Joint Municipal Authority and park vendors.

"Now the taxing authorities can claim $478,000 more from the property sales than they would have yesterday," said George Snyder, lawyer for park trustees. "The junior creditors now have less opportunity to be paid from the land sales and will have to rely on park operations."

Crawford County, the Conneaut School District and Summit and Sadsbury townships have priority claims for payment.

"From the taxing authorities' standpoint, (the decision) does not affect by one penny the taxes due on (park) property; they will get paid when the Flynn property is sold. Who the decision affects are all of the claims that are behind the taxing authorities, all the other people with liens on the real estate," said Larry Bolla, lawyer for the taxing bodies.

The Flynn property includes park-owned parcels along Conneaut Lake. Two parcels have already been sold. A handful more are for sale.

Park trustees had appealed Deller's decision awarding Beach Club operators a $132,739 share of the insurance settlement, claiming that the park, as club owner, should be entitled to the money.

Park Restoration LLC, which operated the Beach Club through a management agreement with trustees from 2008 until the club burned to the ground on Aug. 1, 2013, also appealed Deller's ruling, which awarded the lion's share of the settlement to park trustees. The company argued that it is not responsible for park debts, paid the insurance premiums on the club and is entitled to the settlement.

Wednesday's court decision affirms those claims, said lawyer John Mizner, representing Park Restoration.

The ruling "affirmed what we have always said, namely that a fundamental underpinning of our legal system is that individuals generally are not held responsible for the debt of others," Mizner said in a statement. "And that is exactly what these taxing authorities tried to do to cover up their own failure to collect these taxes for almost two decades and the trustees' failure to get insurance as ordered by a judge."

Taxing bodies and park trustees "acted with a toxic combination of arrogance and ignorance" throughout the court proceedings, Mizner said.

U.S. District Court Judge Barbara Rothstein, in her decision Wednesday, concluded that Park Restoration did not agree to assume the park's tax debt by insuring the Beach Club.

"(It) did not agree to assume the debtor's tax liability simply by purchasing an insurance policy on debtor's property," Rothstein said in her decision.

The decision further found that property owners are responsible for paying property taxes; that Park Restoration had an insurable interest in the club, since it suffered financially when the club burned; that the insurance policy on the club does not list park trustees as a beneficiary; and that state law that insurance settlements pay tax debts before beneficiaries is ambiguous.

Trustees and taxing authorities have 30 days to appeal Rothstein's decision to the 3rd U.S. Circuit Court of Appeals. "There will be discussion in a meeting of counsel for the debtor, the commonwealth and ourselves to determine what if any appeal we're going to make," Bolla said. "I don't know the answer to that."

How the court decision might affect the mediated agreement between the park and its creditors also is not known, Snyder said. "We just haven't had time to process whether the court decision will have any negative impact," he said.

Trustees filed for bankruptcy protection for Conneaut Lake Park in December 2014. The park is expected to open this spring.

Original story published by: VALERIE MYERS, GoErie.com can be reached at 878-1913 or by e-mail. Follow her on Twitter at twitter.com/ETNmyers.