Appeals court: Insurance money from Beach Club fire goes to taxing bodies

May 04--Local taxing authorities have been awarded most of insurance proceeds from an August 2013 fire that destroyed Conneaut Lake Park's Beach Club night club, according to a ruling handed down by the Third Circuit U.S. Court of Appeals.

The 3-0 ruling by the Court of Appeals overturns a May 2016 ruling by U.S. District Court Judge Barbara Rothstein, whose ruling awarded a $611,000 insurance settlement to Park Restoration LLC, the night club's former operator.

Park Restoration operated the night club under a long-term lease with Trustees of Conneaut Lake Park. Park Restoration paid for a fire insurance policy on the Beach Club property, even though it didn't own the property. Park Restoration had leased the Beach Club since 2008 from Trustees, the nonprofit corporation that oversees the amusement park's operations.

Rothstein's ruling was appealed by Crawford County, the Tax Claim Bureau of Crawford County, Conneaut School District and Summit Township claiming the taxing authorities were entitled to $478,260.75 of the settlement to cover delinquent property taxes owed on the club by Conneaut Lake Park.

In December 2014, Trustees of Conneaut Lake Park filed for federal bankruptcy protection to reorganize the amusement park's debts. Trustees owed more than $1.3 million in back real estate taxes, interest and penalties to four area taxing bodies -- Conneaut School District, Crawford County and the townships of Sadsbury and Summit -- dating back to 1997.

Rothstein's ruling reversed a U.S. Bankruptcy Court ruling awarding $478,260.75 of the $611,000 settlement to the taxing authorities for past real estate taxes and interest and penalties owed on that property, with the remainder -- $132,739.25 -- going to Park Restoration LLC.

In writing the Appeals Court opinion, Judge Thomas Hardiman said that under Pennsylvania law, the taxing authorities have first claim to the insurance money. Under his ruling, the taxing bodies would get $478,260.75 and Park Restoration would get $132,739.25.

Hardiman said the Pennsylvania law's purpose is to stop property owners from profiting from arson and applies to those who lease property as well. If not, unscrupulous owners could form a corporation in order to collect insurance proceeds without having to satisfy their delinquent taxes, Hardiman wrote.

In filing the initial appeal of the Bankruptcy Court ruling, John Mizner, Park Restoration's attorney, claimed a violation the Fifth Amendment of the U.S. Constitution, which protects against the confiscation of private property. Park Restoration claimed its property -- the $611,000 in insurance proceeds -- was taken to pay the debt of another -- the back property taxes owed by Conneaut Lake Park.

In a January hearing before the Third Circuit Court of Appeals, Park Restoration additionally argued that if it was liable for tax debt, it should be liable for no more than 9 percent of the park's total $1.3 million tax debt as the Beach Club property was worth only 9 percent of the total value of Conneaut Lake Park. Paying any more would violate constitutional protections against taking private property for public use without proper compensation, Mizner argued.

Hardiman's ruling found since Park Restoration didn't own the Beach Club, it had no property rights protection.

"Park Restoration is disappointed the proceeds of an insurance policy that it paid for has been taken to pay to 17-year-old delinquent tax debt of Trustees of Conneaut Lake Park," Mizner said of the Appeals Court's ruling.

Asked if Park Restoration would appeal to the full Appeals Court or the U.S. Supreme Court, Mizner said Park Restoration was looking at all available options. Mizner said whether either case would hear the appeal was up to the discretion of the respective courts.

Lawrence Bolla, an attorney for the taxing authorities, was pleased by the decision.

"The Third Circuit got it right as a matter of law and the taxing districts have certainly fulfilled their fiduciary duties to their respective constituencies by pursuing this matter to a successful conclusion," Bolla said Wednesday.

Once the appeal period expires, Bolla said he would file a motion with the U.S. Bankruptcy Court requesting disbursement of the funds. Bolla said he then expects a hearing date on the disbursement to be set for about 30 days after the filing of the motion and a court order shortly thereafter.

Bolla said the money then would be distributed on a pro rata basis to each of the taxing authorities.

Over the past few years, Trustees of Conneaut Lake Park have been able to pay down its real estate tax debt through the sale of excess land.

Trustees have sold three lakefront lots sold, generating combined net proceeds of $618,510.95 toward the $1.3 million in real estate taxes, penalties, interest and fees that the park owed. Two additional lot sales are expected to be completed soon to potentially generate $430,000 before deduction of real estate fees, taxes and commissions.

Under the Trustees' Bankruptcy Court-approved reorganization plan, money from the land sales and the fire insurance settlement first is being directed toward the outstanding real estate tax debt. Once that is paid in full, the money then goes toward paying debt owed to Conneaut Lake Park's secured creditors.

When Trustees filed for bankruptcy protection it owed about $3.8 million with $1.3 million of that total in overdue real estate taxes, interest, fees and penalties.

Keith Gushard can be reached at 724-6370 or by email at [email protected].

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