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Judge postpones Lodi pollution trial

A federal judge Wednesday said a multi-million dollar deal struck with the Lehman Brothers financial firm to pay for a pollution lawsuit may be illegal.

He also granted the city's request that a trial be postponed for 30 days so the city can find new lawyers.

Judge Frank C. Damrell Jr. questioned whether Wall Street firm Lehman Brothers can collect the $16 million it lent the city at lofty interest rates.

If Damrell's assessment holds up, it could speed attempts by city leaders struggling to bring resolution to the long and costly pollution case.

"The thing's not going to resolve tomorrow, but Lehman's been an 800-pound gorilla that nobody wants to talk about," said defense attorney Aaron Bowers.

Lehman Brothers officials did not return messages left Wednesday afternoon.

Damrell's startling appraisal of the Lehman Brothers deal came during a tumultuous week when the controversial groundwater contamination case was supposed to go to trial.

Instead, the City Council on Tuesday night voted 3-2 to fire City Attorney Randy Hays and special counsel Michael Donovan. The termination followed a court session during which Damrell chastised Donovan as "unprofessional" and said the city's legal tactics reminded him of a Saturday Night Live skit.

On Wednesday, Damrell opened verbal fire on the Lehman Brothers deal.

"On Monday, the light shone on Mr. Donovan's litigation strategy. That's what the court discussed. Today I'm going to put the spotlight on Lehman Brothers," Damrell said, soon after he vacated Wednesday's trial and rescheduled it for mid-February.

He questioned the legality of the agreement the city signed with Lehman Brothers four years ago, pointing out that the investment firm is not a party or defendant in the lawsuit.

Damrell wondered aloud if Lehman Brothers had played a part in drafting a city ordinance and directing the litigation.

"In addition, and perhaps most serious, is the agreement may well have abused the judicial process itself," he said.

"This was much more than an environmental lawsuit. It was a scheme to make money for a party, a non-party who had no interest in cleaning up the environment," he added.

The money, compounded annually at an interest rate of about 25 percent, is a "round number," Damrell said.

He said he thinks the agreement is not legal, meaning that the company cannot collect its money. If Lehman Brothers objects, Damrell said he will drag them into the lawsuit and hold a trial on that matter.

"There will be a trial on the validity, legality and morality of that agreement. I'm sure that will draw a sizable audience of people interested in business ethics and legal ethics," he said.

Mayor Larry Hansen expressed relief after court that Damrell granted the city's request to postpone the trial and was targeting the Lehman deal.

"I'm so grateful we've been given some breathing room and that this issue with Lehman Brothers is going to be discussed," he said.

He added that it was the Lehman Brothers agreement that made the council deliberate for seven hours on Tuesday before finally dismissing Hays and Donovan. There were concerns that the city could be left on the hook for the $16 million, plus interest, if it fired Hays and Donovan.

John Bird, a consultant doing work for the city at the direction of Donovan, sat in the front row Wednesday, occasionally snorting quietly and slightly shaking his head as Damrell spoke. Donovan was also among those gathered in the courtroom, as was Cecelia Fusich, one of the lead attorneys in his firm. Hays was not in attendance.

Wednesday's court appearance marked the second time in three days that Damrell did not hear arguments but instead expressed his opinions and concerns about the lawsuit.

The suit was filed in 2000 against more than a dozen businesses including the News-Sentinel. The city claimed that the businesses were responsible for chemicals called TCE and PCE, and that their insurance companies should pay for the cleanup.

But the businesses and insurance companies fought back, arguing that the city's sewers leaked and helped spread the contamination. More than 100 parties are now involved in the case.

Over the past year, Damrell has criticized the city's strategy and ruled against it. The 9th Circuit Court of Appeals has also struck down several appeals filed by the city, and the U.S. Supreme Court twice declined to look at the matter.

Then, in December, Damrell ruled that the city is potentially responsible for the contamination, meaning that the city could not use its tactic of forcing others to clean it up and pay for the city's legal costs.

At a Monday court hearing attended for the first time by two council members, Damrell went a step further by telling the city's attorneys that they should abandon the entire strategy and talk to the council.

The members of the City Council spent approximately seven hours in discussions Tuesday, and the day ended at 11 p.m., when they fired both Hays and Donovan's Envision Law Group.

On Wednesday, the plaintiff's side of the courtroom was nearly empty, save for Deputy City Attorney Stephen Schwabauer who sat alone behind the table.

He gave Damrell a written letter from Mayor Hansen, asking for a month's time because the city had just fired its attorneys.

"You could probably count the amount of information I know about environment law on my pinkie finger," Schwabauer told the judge.

Damrell, who said he had learned of the events Tuesday night, granted Schwabauer's request, setting a new trial date of Feb. 17 and telling the city to give him a status report by Feb. 6.

Though defense attorneys said after court that they hope to work with the city, Lori Gualco, who represents Guild Cleaners and its owner, Jack Alquist, expressed some concern.

"All defendants understand the severity of the situation the city is facing right at this moment; however, I must say on behalf of all defendant that our clients, particularly Jack Alquist, who is here in the courtroom, have been waiting to have their day in court for over three years," she told Damrell.

Damrell said he wanted to be fair, though all sides will not always be happy with his rulings.

He gave the parties until the end of today to remove the 856 binders lining the walls of the courtroom in preparation for trial. More than half of the binders, including the 6-foot-tall bookcases holding them, are the city's, Hansen said.

Hansen and Vice Mayor John Beckman, who also attended the court hearing, agreed that 30 days is what the city needed, and they both emphasized that cleanup and settlement are the important issues.

"After seven years and $25 to $30 million, we just felt we had to stop the bleeding," Hansen said.

City Manager Dixon Flynn said the city is "ecstatic" about Damrell's decision Wednesday, and added that the city will try to move as quickly as possible to get the case resolved.

Defense attorneys had no arguments, and for the first time, city officials were seen talking to the opposing counsel after court.

Wednesday was a day of "good news for the city," said Stephen Meyer, one of the lead defense attorneys in the case.

Joseph Salazar, another defense attorney, said he was glad that Damrell is asking "deeper questions" about the Lehman Brothers financing, and he pointed out that if it goes to trial, attorneys will depose Lehman officials and ask numerous questions.