LOS ANGELES -- A legal spat between a financial advisor and a Mendocino County, Calif. school district is closer to trial after a judge denied challenges to the district’s cross-complaint.
Superior Court Judge Diane Price overruled advisory firm Caldwell Flores Winters, Inc.’s objections to issues in Willits Unified School District’s cross-complaint.
CFW sued the school district of 1,800 students in April 2012 for breach of contract, which resulted in a counter-complaint from Willits Unified.
In 2009, CFW was hired to advise the school district on a bond program and charged a $1.075 million fee for its services, to be paid over the course of three years. CFW sued after the school district cancelled the contract, seeking six months of payments plus a $108,993 cancellation fee for a total of $278,961.
In a cross-complaint filed in December 2012, Willits Unified claimed that CFW violated state conflict of interest laws and breached fiduciary duty by advising the district to seek the highest amount of possible authorization for its bond program, which resulted in higher compensation for the firm, because it charged a percentage of the total amount.
CFW raised four objections to the counter complaint, all of which were overruled by Judge Price in a court order notice released on Aug. 28.
“It sounds to me like the judge got it right,” said Tim Schaefer, principal owner of Magis Advisors, an independent municipal financial advisor in Newport Beach, Calif. He has said such compensation is “just outrageous” for any advisor to ask for.
CFW objected to the district’s allegation that the firm’s fees constituted false claims because “it is impossible for CFW to have knowingly presented a false claim.” CFW said the contract states that it shall be compensated 2.5% of the total estimated cost of the adopted capital program, payable in 36 equal monthly payments after the bond election.
The district received voter authorization for a $43 million bond program, one of four options presented to the school board to submit for the election. The lowest option was a $28 million bond program. CFW used the total $43 million bond program amount to determine its $1.075 million fee, even though the district hasn’t issued anywhere near that much debt.
The authorization led to the issuance of four series of bonds totaling $18.87 million in July 2010, which will cost a total of $38.6 million in debt service. The sale included $3.78 million of capital appreciation bonds that will cost $21.9 million at maturity, according to the official statement.
The district argued that the estimated amount of funds available for bond-related construction projects during the five-year term of the CFW contract was $18 million, but it only had $14.5 million available because it had to repay an earlier $5 million bond it had issued on CFW’s “faulty recommendation.” Willits argues that this figure should be used to calculate the fee.
The judge said that the “total estimated cost of the adopted capital program” was not defined in the contract and overruled CFW’s objection.
The judge also overruled CFW’s other two objections. One asserted that it is a private corporation — not a government employee and not a public official — and therefore, not subject to government conflict of interest laws.
In its last objection, CFW argued that it is not a licensed architect or engineer and not a government employee, so the bidding process required by government law does not apply to the firm. The district said in its complaint that there was no bidding process to select CFW for its construction management services for the bond projects.
The judge said CFW’s arguments are “not persuasive” and overruled the objection.
Attorneys for the advisory firm and the school district did not return calls for comment.
According to court documents, CFW did not challenge the district’s allegations that the firm breached fiduciary duty. The district said it relied heavily on CFW’s “asserted expertise” and that the firm knew the district lacked such expertise.
Specifically, the district claims that CFW breached its fiduciary duties through self-dealing, making recommendations that advanced personal interests, failing to disclose material information, and submitting claims for compensation for services it had not performed.
“If you know that you’re a municipal advisor, in other words, you’re not an airport consultant or you’re not a parking consultant, but you’re in the business of advising public entities in administration of their debt and sale of their debt, it’s inconceivable to me that anyone can say the federal law of fiduciary standard doesn’t apply to them,” Schaefer said.
CFW has within ten days of the Aug. 28 ruling to file an answer to the cross-complaint.
The judge also granted Willits Unified’s motion to continue to trial. A date has not yet been set.