SAN FRANCISCO — The city of Vallejo, Calif., must disclose more information about the role of its mayor and bankruptcy law firm in past bond deals due to accusations of conflicts of interest, a federal judge ruled Tuesday.
A group of retirees has alleged that Vallejo Mayor Osby Davis and Orrick, Herrington & Sutcliffe LLP have a conflict because of their roles as counsel on certificates of participation that constitute a big chunk of the debt the bankrupt city owes.
“The amended disclosure statement must briefly describe who Mr. Davis and Orrick represented, the nature of their representation, when their representation ended, and whether any claim or demand has been made against them by the city or their client as a result of this representation,” U.S. Bankruptcy Judge Michael McManus said in his three-page ruling.
Davis served as disclosure counsel for five series of certificates of participation issued by the city in 1999, 2000, 2001, 2002 and 2003.
Orrick served as bond counsel in April 2006 in relation to a letter-of-credit associated with the 2001 COPs.
R. Dale Ginter, the retirees’ lawyer from Downey Brand LLP, has alleged that the lawyers have breached their duty of loyalty because they could be targets of lawsuits due to their legal roles, and thus have an interest in the city settling with debt holders.
Ginter was unavailable for comment Wednesday.
“The judge is requiring brief disclosure about the role of Mayor Davis and Orrick in the legal opinions they gave years ago,” said the city’s bankruptcy lawyer, Marc Levinson, a partner at Orrick. “As you will see, the information to be disclosed is very basic, and the city has no problem with the ruling or in complying.”
The proposed plan to exit bankruptcy reduces and restructures payments on $50 million of COPs — around $45 million owned by Union Bank and about $5 million owned by bondholders insured by National Public Finance Guarantee Corp.
While Union Bank will take a 40% haircut under the proposed plan, unsecured creditors — mostly union members, retirees and general liability claims — would be paid only 5% to 20% of their claims out of a $6 million pool over two years. Some would have access to an insurance pool as well.
The legal exit plan is based on a five-year road map approved by the City Council that tackles $195 million in unfunded pension obligations, cuts payments for retiree health care, reduces pension benefits for new employees, raises pension contributions for current workers, and creates a rainy-day fund.
Vallejo has received more than a thousand claims, both secured and unsecured, worth almost $500 million, according to city officials.
Union representatives have also tipped their hat that they are ready to join the fight for more funds later in the case.
The judge made several rulings on objections by the retirees to the bankruptcy plan’s disclosure statement, which gives a simple explanation of the proposal to creditors so they may make an informed vote.
Once the disclosure statement is approved by the judge, it will be sent to creditors so they may vote on the city’s debt restructuring. When the voting is complete, a confirmation hearing will be held to determine the merits of the plan and for potential approval by McManus in the eastern district court in Sacramento.
McManus has said he wants the confirmation hearing to be held by early June at the latest.
The judge also ruled that the city must provide more information about the restructuring of the Union Bank debt, including how it calculated the 40% haircut, the exact amount owed, and the value of the properties leased to back the debt and the income they generate to pay the COPs.
The retirees have said Vallejo could save the city millions by cancelling the Union Bank leases. But the city’s attorneys have argued that a legal fight with the bank may cost millions and could be a lost cause.
However, Levinson said he was pleased with McManus’ ruling because it does not require the city to give all the pros and cons about the settlement with Union Bank and National Public Finance Guarantee Corp.
Vallejo had already agreed to provide an amended disclosure statement before the end of the month that would include many of the judge’s rulings and other recommendations from creditors.
“In sum, the ruling allows the city to press forward toward exiting Chapter 9,” Levinson said.
Vallejo, a 50-square mile city in the Bay Area with a population of 120,000, filed for bankruptcy in May 2008 in response to dwindling tax collections and what it called unsustainable labor contracts. The filing represents the largest municipal bankruptcy in California since Orange County in 1994.