Deal in Focus: Misplaced Drain May Trigger $100M'Judgment Deal' in California County

February 09, 2007, 2:00 a.m. EST 4 Min Read

SAN FRANCISCO - A major courtroom loss by San Bernardino County could soon result in a $100 million-plus bond issue to finance the judgment.

The dispute stems from the construction of a storm drain and a flood basin in the Southern California county.

The developers of a large mixed-use development in the city of Upland charged that the county, through the San Bernardino County Flood Control District, illegally constructed a new storm drain that emptied onto their property.

The developers of the Colonies argued that because of the drain, they were forced to build a 67-acre flood control basin on their property, much larger than would have otherwise been required, effectively denying them the use of part of their property.

The two sides argued it out in court last year, leading to a Superior Court ruling that strongly favored the developers.

In November, the county Board of Supervisors, acting as the governing board for the flood control district, ended months of debate by voting to agree to a $102 million settlement with the developers -- a settlement they intend to finance with a judgment obligation bond issue.

The settlement included $22 million in immediate cash, with $80 million to follow within 180 days.

The county flood district has a strong incentive to issue bonds to come up with the cash. If it doesn't come up with the $80 million balance within 180 days, the agreement converts to a loan at 9% interest, according to a staff report prepared for the Jan. 23 meeting of the Board of Supervisors.

"The district's goal is to have the bonds issued and proceeds distributed by mid to late May," said county spokesman David Wert. The planned judgment obligation bonds would cover the cost of the entire settlement, allowing the district to recoup the $22 million it has already spent.

"This isn't a financial obligation of the county," Wert said. "It's the Flood Control District, which is a separate entity."

The storm drain that sparked the dispute was constructed in connection with the extension of the 210 freeway through San Bernardino County.

The developers of the Colonies argued that the storm drain forced them to build a large flood-control basin that ate up a large part of their property that could have been developed.

They went to court, and last summer the trial court judge found that the district lacked the necessary easements for such a large flood control facility on the developer's land, according to a statement issued by the Colonies' law firm, Timken Johnson Hwang LLP.

The November settlement agreement ended the case before the court could rule on the amount of compensation the developers were owed.

In January, the flood control district filed a validation action in Superior Court to clear the way for the issuance of the bonds.

UBS Securities LLC and Goldman, Sachs & Co. have been named as underwriters, Wert said.

Gardner, Underwood & Bacon LLC will be the financial adviser. Orrick, Herrington & Sutcliffe LLP is bond counsel and Hawkins Delafield & Wood LLC is disclosure counsel.

"The district is working on a financing plan and debt structure," Wert said. "At this point, no decision has been made; the indenture filed with the validation action allows either variable [rate], fixed, or some combination."

The settlement agreement did not by any means bring an end to litigation over the issue.

Wert said the Flood Control District, in addition to blaming the county, believes Upland and the San Bernardino Associated Governments, a regional transportation body, share responsibility because of their roles in construction of the 210 freeway extension and the associated storm drain.

"The county's position has been that they're partially responsible for this situation," Wert said, adding that the district has commenced new litigation against the two entities.

The Colonies settlement has drawn a lot of attention in the county; local newspapers covered the case extensively and there has been a fair amount of grumbling about the size of the settlement.

County officials were originally working on a settlement that would have mixed about $80 million in cash and some property transfers to the developers, but the deal collapsed because the property transfer required the votes of four of the five county supervisors, and only three voted in favor.

Supervisor Josie Gonzales said she voted no because the developers hadn't documented their financial losses.

"I could not in good conscience approve a $102-million settlement without proper documentation," she said in a statement. "The public deserves to know what they are paying for."

The final cash settlement was approved 3 to 2 with the same two supervisors, Gonzales and Dennis Hansberger, voting against.

A local attorney, Robert Ferguson, representing an organization called San Bernardino County Taxpayers for a Fair Resolution, has challenged the settlement. In comments to local newspapers, Ferguson said the agreement is illegal because supervisors violated the state's open meetings law when they agreed to it.