SAN FRANCISCO — A California appeals court appears to have removed two potential legal threats to school general obligation bond issuers in the state. In an opinion issued last Wednesday, the state’s Sixth District Court of Appeal ruled in a 3-to-0 vote in favor of the Foothill-De Anza Community College District, upholding a trial court ruling supporting the district’s validation action for a $491 million bond authorization approved by voters in 2006. The courts rejected two separate legal arguments. One of the men who challenged the validation action argued that the district did not qualify to issue bonds under the terms of Proposition 39, a 2000 state ballot measure that allows most school GO bonds to be approved by a 55% majority instead of the previously required two-thirds. The Foothill-De Anza bond measure was approved with just less than two-thirds of the vote. The other man argued that the elections were not valid because property owners who will be taxed 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. “This published opinion is significant for all school and community college districts who have sought voter-approved general obligation bonds, as well as being a significant ruling for all California public agencies who issue tax-backed bonds,” Stradling Yocca Carlson & Rauth partner David Casnocha said in a statement. The firm is bond counsel to the district and handled the validation action. Voters in the San Jose-area Community College District approved the bond measure on June 6, 2006. The CCD filed a validation action the next day. The validation action came because the district was expecting a lawsuit from attorney Aaron Katz. Katz, a Nevada resident according to court records, owns property around San Jose’s suburbs, and had previously sued two other local districts that had passed bond measures. Katz, citing the equal protection clause of the federal constitution, argued that he was unfairly denied the right to vote on those property taxes because, even though he was not resident in those districts, he owned property there and would have to pay the taxes. Previously, the El Camino Hospital District of Mountain View settled with Katz for $200,000 in 2006 in ordre to resolve his lawsuit and begin projects funded by a $148 million bond measure approved three years earlier. The West Valley-Mission Community College District reportedly settled with him for $60,000. The Foothill-De Anza CCD went so far as to personally serve Katz with the validation complaint, according to an official statement issued by the district. Validation complaints get preference in court scheduling, Casnocha said in a phone interview.“We thought we could accelerate the resolution of any issue if [Katz] answered the complaint,” he said. “We could narrow the focus of the debate as to how it affects the validation of the bonds.”The district prevailed at the trial court level before winning again last week at the appellate level. In his opinion, Court of Appeal Judge Eugene Premo agreed that the trial court was correct to reject Katz’s argument, saying that the precedent in California and federal law is clear.“The voting scheme did not offend Katz’s right to equal protection,” Premo wrote. One other man, Melvin Emerich, responded to the validation, arguing that Foothill-De Anza’s bond measure failed to meet the accountability requirements set forth in Proposition 39, particularly with regard to the list of projects the measure is intended to fund that had been presented to the voters. “My client, Mr. Emerich, believes this is essentially a slush fund that could be used for virtually anything, and that isn’t what Proposition 39 contemplates,” said his attorney, Gary Wesley. Premo found that the district clearly identified the types of projects to be funded in the bond measure. “The list of projects submitted to the voters must be specific enough that the voters know what it is they are voting for and the auditors know how to evaluate the district’s performance,” the judge wrote, summarizing the intent of Proposition 39. The specificity Emerich asked for “is impractical and unnecessary,” Premo wrote, saying that it would be overreaching to demand, for example, that the district identify every specific fire door that it intends to replace. “It is sufficient that the district clearly identified the particular types of projects, such as roof repair or installation of safety equipment,” he wrote. “Those are the projects the voters approved and those are the projects any overseer will look for in determining whether the district is using the bond funds as proposed.” Wesley said his client, Emerich, is reviewing a potential appeal. The state Supreme Court is not obligated to hear the case. Katz represented himself. Since he challenged the validation action on federal constitutional grounds, he would have the right to petition to the U.S. Supreme Court if California’s high court declines to hear the case or rules against him. The Foothill-De Anza CCD issued $250 million of GOs in May from the 2006 authorization, but they were issued with a qualified legal opinion, pending the outcome of the validation case. The decision was made to move ahead with a qualified legal opinion because Stradling Yocca concluded that the litigation was “most likely without merit,” Casnocha said. But he said bond insurer Ambac Assurance Corp. has thus far only agreed to the spending of $10 million of bond proceeds, with the remainder held in reserve until an unqualified legal opinion is delivered. According to the official statement, the bonds were only sold to approved institutional buyers who agreed that secondary market transactions would be limited to similar approved institutional buyers until final judgment is entered. In the event of a legal judgment nullifying the bonds and triggering a special mandatory redemption, Ambac’s insurance policy would ensure the full redemption is made to investors, according to the OS. Casnocha said that, in the wake of the appeals court decision, Stradling Yocca is determining whether it can render an unqualified opinion based on the ruling, or whether it should wait for the possible appeal. “The college is spending cash reserves, with the belief they’ll get reimbursed,” he said. Last week’s appeal court opinion was certified for publication, giving it value as precedent in state law. That is significant for all school bond issuers in California, Casnocha said, because it means there is a court-approved template for school bond language that meets the standard of Proposition 39. The complete text of the bond measure was included in the opinion. “All districts can rely upon the conclusion, and we finally have some guidance as to how specific a project list for Proposition 39 bonds can be,” he said.
