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Lehman Brothers loan to Lodi could be challenged

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Posted: Thursday, March 25, 2004 10:00 pm

More than four years ago, a taxpayers group filed suit against the city, trying to block a $16 million Lehman Brothers bond deal that would pay for a precedent-setting pollution lawsuit.

A San Joaquin County Superior Court judge ruled against them five months later, in May 2000. The Wall Street loan was signed the following month.

But the taxpayer lawsuit is still open, and no judgment has ever been entered. Lehman Brothers, meanwhile, has demanded that the city fix that error, but legal experts believe the case could still be appealed.

What effect that will have on the loan, which is gathering annually accrued interest at approximately 25 percent, remains to be seen. The money went to pay attorneys and consultants who were involved in Lodi's groundwater contamination suit.

The city used the taxpayer case to prove whether the loan was legal under California law. Called a "validation action," such a court case is used to make sure a bond agreement is legal, said Clark Kelso, a state law professor at the University of the Pacific's McGeorge School of Law.

When the city won the case, a judge issued an order with his findings. Under legal procedures, the city's attorneys could have then used it to enter a judgment. Although the order was received, no judgment was ever entered.

One lawyer thought U.S. District Judge Frank C. Damrell Jr. could make his own ruling in the taxpayer case, since he is overseeing part of the city's case. The city and numerous local businesses, including the News-Sentinel, will be in Damrell's federal courtroom today for a status conference, though it is not known if the judge will comment on the taxpayer case.

The federal case has been going on since late 2000 when the city sued the businesses in an attempt to force their insurance companies to pay to clean up contaminated groundwater.

Legal bills show that last September, the city's former attorneys were still analyzing cases related to the taxpayer lawsuit, though nothing had been entered in the court file since June 2000.

That was news to Interim City Attorney Stephen Schwabauer, who declined to comment further on the matter.

Don Parsons, who was a member of the San Joaquin County Taxpayers Association, referred questions to attorneys who handled the case. At the time it was filed, city officials questioned whether the suit was an attempt by insurance companies to attack the city.

But, if the taxpayers association hadn't filed suit, the city would have had to file its own validation action before Lehman Brothers would have loaned Lodi the money.

A May 24, 1999, "New Products Committee Meeting" among Lehman Brothers officials outlined the bond strategy and made it clear that the idea would be validated in California court before the bonds were issued, according to a defense document filed in court this month.

Six months later, the taxpayers filed their lawsuit. Their concern, said attorney Peter Smalbach, was that the money would all go to attorneys and nothing would be left for cleanup.

That has since happened.

Because the city never entered a final judgment, Smalbach thought Damrell might be able to make his own ruling.

Or, the case might still be able to be appealed.

What will happen remains to be seen, but in a March 9 letter to the city, Lehman Brothers attorney Helen Duncan demanded that the city "immediately cure its failure to file a form of judgment."

Contact reporter Layla Bohm at layla@lodinews.com.

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