Calif. Court Denies Authorization Challenge

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SAN FRANCISCO - The California Supreme Court this week denied a petition to hear a challenge to an appeals court ruling that favored the Foothill-De Anza Community College District, which had filed a validation action for a $491 million bond authorization approved by voters in June 2006.

Two plaintiffs had challenged the validation action.

One plaintiff, Melvin Emerich, argued that the district had failed to meet the accountability requirements set forth in the state constitution, particularly with regard to the list that was presented to voters of the projects the measure is intended to fund.

The other, Aaron Katz, argued that the election was not valid because the property owners taxed to repay the bonds do not get to vote if they don't live in the district. Local government general obligation bonds in California are backed by a special property tax that is approved as part of the bond measure.

A trial court rejected those arguments in December 2006, and the Sixth District Court of Appeal ruled 3 to 0 in favor of the San Jose-area college district in December 2007.

The Supreme Court announced Tuesday that it will not hear the case, although one justice, Lydia Kennard, wanted to grant the petition for review, according to court records.

"It is all over now; there are no other avenues of recourse," Stradling Yocca Carlson & Rauth partner David Casnocha said. His firm is bond counsel to the district and handled the validation action.

"The Board of Trustees and the entire campus community are thrilled that we can finally move ahead to renovate our aging facilities and construct the science and technology buildings that are so important to the education of students in our community," college district board president Bruce Swenson said in a statement. "We are pleased that the California Supreme Court clearly and definitively affirmed the standards for accountability and oversight of these bonds, which received strong support from our local residents."

More than 65% of the district's voters approved measure C in 2006.

Located in the Silicon Valley, the district serves Cupertino, Los Altos, Los Altos Hills, Mountain View, Palo Alto, Sunnyvale, and portions of San Jose.

To be able to move quickly after a favorable court outcome, the college district issued $250 million in GOs in May 2007, though they were issued with a qualified opinion, pending the outcome of the validation case. All but $10 million of the proceeds were placed in escrow.

The 2007 bonds were to be sold only to approved institutional buyers who agreed to limit secondary market transactions to similarly approved institutional buyers until final judgment was entered, according to the official statement.

The Ambac Assurance Corp. bond insurance policy was written so that, if a legal judgment had nullified the bonds and triggered a special mandatory redemption, the policy would have ensured the full redemption was made to investors, according to the OS.

Morgan Stanley and UBS Securities LLC were underwriters for the bonds. William Euphrat Municipal Finance Inc. was financial adviser. Fulbright & Jaworski LLP was underwriters' counsel.

Katz, who argued that the property taxes approved in Measure C were unconstitutional because he couldn't vote on them, did not appeal to the Supreme Court, according to case information published by the court.

Though his case was arguably a legal stretch, Katz had filed lawsuits on similar grounds against two other San Jose-area districts who paid him financial settlements rather than engage in protracted litigation over their GO bond measures.

"Trial courts will now be able to dispose of meritless claims without protracted litigation, thus reducing a litigant's leverage to force a monetary settlement," the Foothill-De Anza district's attorney, John Shupe, said in a statement. "The public benefit achieved is enormous.''

The other plaintiff, Emerich, did appeal the Foothill-De Anza ruling. He had argued that the bond measure violated terms of Proposition 39, a state constitutional amendment approved by voters in 2000. That measure permits most school GO bonds to be approved by a 55% majority instead of the previously required two-thirds, while adding accountability requirements.

Emerich had argued that the list of projects the district submitted to voters was too vague under those accountability requirements.

The 2007 appellate ruling, which will stand now that the Supreme Court declined to hear the case, is significant in that it sets a legal precedent school districts can use to comply with Proposition 39.

"As more California districts turn to Proposition 39 to meet their critical facility needs, this decision is of great significance because it clarifies for the first time the 'project list' requirements under Proposition 39," Sean Absher of Stradling Yocca, who represented the district as the lead litigation attorney, said in a statement. "It makes clear the project list should be broadly interpreted to give districts flexibility in meeting their facility needs as they evolve."

In January, after the appeals court decision was announced, another law firm, Orrick, Herrington & Sutcliffe LLP, published a bulletin for its school and community college district clients, highlighting the importance of the decision.

"Based on the Foothill decision, school and community college districts should now feel comfortable proposing bond project lists to their voters that identify project types instead of individual projects, and that do not specifically tie projects to a given site or campus," the bulletin said.

 

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