Fired lawyer gets $1 million

The Lodi City Council is paying $1.2 million to a pollution lawyer it had fired and then sued for fraud and negligence.

Attorney Michael C. Donovan had already received roughly $14 million for his work over a number of years.

The Wednesday night settlement came six weeks before the city was set to go to trial against Donovan.

The trial would have lasted for six weeks and cost about $2.5 million, City Attorney Steve Schwabauer said. The 4-year-old lawsuit had already run up nearly that much in bills for specialized outside attorneys and various fees for expert witnesses and documents.

"Although it made me sick to my stomach, I felt it was the right thing to do," said Mayor Larry Hansen, one of the three council members who voted for the settlement.

"I saw it as the lesser of two evils. Do we continue to pour money into the trial or do we pay the snake in the grass a settlement to be done with it?" added Hansen, who was well aware of the fact that he has previously gone on record saying he never wanted to pay Donovan a dime.

Councilwoman Susan Hitchcock, who voted against settling, likened the move to deciding not to go after a rape suspect because it costs money to prosecute someone.

Reactions to settlement with Donovan

"We could continue to go forward with the trial at a cost of $1.5 to $2 million just for the trial. ... I weighed that against this thing being over finally, forever, at a cost of $1 million. I also factored in that we had investigative work that we paid for to look into (Michael) Donovan's finances and he's got nothing. He's got no assets, no money, no nothing. Even if we won, we'd have a judgment with no way of getting the money."
— Mayor Larry Hansen

"It's analogous to making a financial decision, whether we win or lose. ... I would love to see the bag shoved up the guy's (Donovan's) nose. ... But we are moving on and he is never to darken our door again."
— Councilman Bob Johnson

"A settlement offer was highly unexpected but in my mind it was simple math: We could either spend another 3 million trying to win a case. Donovan has no money, it's like suing a stone to get water out of it. ... If the cost outweighs the benefit you need to be thinking with the interest of the taxpayers in mind."
— Councilwoman JoAnne Mounce

"When we made the initial decision to prosecute him, it was based on the right thing to do, to vindicate the city and to prevent him from taking advantage of other cities that might be in the same naive position the city of Lodi had been in. ... This has to do with ethics. We pay to prosecute cases because it's the right thing to do."
— Councilwoman Susan Hitchcock

"I'm not sure why it happened. We had budgeted the money, we were on track," she said Thursday. "It appears to me that we really let the citizens of Lodi down. We had an opportunity to nail this man to the wall and prevent him from raping other cities and taking advantage of other naive people."

One fact that several council members said made them vote for settlement is that Donovan has no assets in his name, including property and vehicles. That would make it virtually impossible to recover any money from him even if the city won at trial and appeal.

Hansen also noted that Donovan does not completely walk away free: He will pay $200,000 — the limit of his malpractice insurance — to the city, meaning that he'll come out $1 million ahead. However, a number of Donovan's former employees testified in depositions that they have judgments against him totaling $400,000.

Donovan's attorney, Kevin Cifarelli, is also expected to get a hefty cut of the money. He did not return a phone message Thursday.

Additionally, the settlement could affect Donovan's license to practice law in California. Any claim for fraud must be reported to the State Bar, which can revoke an attorney's license.

A State Bar spokeswoman declined to comment, but a legal ethics expert said the bar typically waits until a civil case is done before taking action. The bar could very well be looking at the matter already, said Diane Karpman, a Los Angeles attorney who has represented many attorneys in such cases.

Because Donovan is also paying in the settlement, that could be seen as a judgment against him in a case alleging fraud and malpractice.

The city filed the lawsuit in January 2005, alleging that Donovan had led the city in a flawed strategy aimed at recovering millions of dollars to pay for a costly cleanup of contaminated groundwater.

Under the strategy, the city borrowed $16 million at a high interest rate from Wall Street firm Lehman Brothers — long before its recent collapse — to pay Donovan's legal bills. Then the city sued a number of local businesses, including the News-Sentinel, that were believed to have dumped cleaning chemicals into the ground back in the 1950s.

The goal, the city said, was to go after the insurance companies that represented the businesses, and get millions of dollars from them. The money would repay the Wall Street loan, Donovan would get 20 percent of the settlement money and the rest would clean up the chemicals, known as TCE and PCE.

But after years of litigation, a federal judge grew increasingly skeptical of the plan that required many millions of dollars just to pay back the loan and Donovan before cleanup could begin. Federal environmental laws limit such schemes. Additionally, the city's water pipes had leaked, which meant it potentially had a role in the pollution — though Lodi was acting as prosecutor.

The City Council ultimately fired Donovan in 2004 and settled the contamination cases.

Donovan's firm had received some $14 million in the previous eight years. After the firing, the city found numerous instances of double billing and subsequently sued him.

Donovan, in turn, sued the city for many more millions of dollars, seeking $7 million in fees, his original 20 percent of all money received, including settlements for cleanup and interest going back a number of years.

Schwabauer said Thursday that he still thinks the city had a very strong case against Donovan, and that the settlement was difficult for him. It came down to the dollar amount, he said, especially in light of an economy where city employees are likely facing furloughs.

Other council members agreed.

"We settled because it made economic sense. If there's no money at the end, what is the point of going to trial?" said Councilwoman JoAnne Mounce, who voted in favor of the settlement. "I would have loved to send Donovan a message that you cannot do this to small cities, but the citizens of Lodi should not have to foot that bill."

Vice Mayor Phil Katzakian, the third councilman who voted in favor of the settlement did not return a call for comment. Prior to joining the council, Katzakian, the owner of Lodi Printing, also settled a contamination claim with the city.

Councilman Bob Johnson voted against the agreement, but said he did so mainly because he wanted a little more time to make sure the money was coming out of correct funds.

The settlement offer arrived Wednesday afternoon, hand-delivered from Donovan's attorney to Lodi's outside law firm, both of which are located in San Francisco. Schwabauer obtained it that day and presented the option to the council in closed session at the regular council meeting.

All involved said it came as a surprise.

The council had 30 days to respond to the settlement offer and could have delayed the vote to the next meeting. In the meantime, the city would have continued moving toward the March trial date.

"I would love to run the guy right into the ground, but we're looking at a budget of an excess of $2 million-plus to go to trial and what would happen if there were appeals after trial? Would that be another million?" Johnson said.

Contact reporter Layla Bohm at layla@lodinews.com.

Reader Feedback

loadeye wrote on Feb 8, 2009 7:19 PM:

" http://www.fppc.ca.gov/index.html?id=224

Check out this fair political practice website and see which persons and contractors have been caught and fined by the FPPC for contributing money under the table without reporting it. Check the whole list, it won't take you long, and you'll see these cheats have also contributed to council members who assure they get these city and county contracts. Our contractor doing the boat dock at Lodi Lake is one of those guilty parties. "

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