LOS ANGELES — Orrick Herrington & Sutcliffe, the largest municipal bond counsel firm, has settled a lawsuit claiming it was negligent as bond and disclosure counsel in a deal for a northern California charter school that ultimately went bankrupt.
Tri-Valley Learning Corp., the charter school operator, filed for Chapter 11 bankruptcy to reorganize its debts in November 2016 and converted that bankruptcy to Chapter 7 liquidation eight months later.
UMB Bank, the successor bond trustee to The Bank of New York Mellon Trust Co., filed the lawsuit against Orrick in December 2016 in Orange County Superior Court, for “alleged professional negligence and alleged violations of the California Securities Act” in connection with a 2012 bond issue for Tri-Valley.
The UMB suit was "about matters unrelated to Orrick's opinions," John Sullivan, a partner with Long & Levit LLP, said in an email. Long & Levit represented Orrick.
"Orrick believes the suit was entirely without merit," Sullivan said.
The settlement was reached before the deadline for Orrick to file its motion for summary judgment on July 26. It had been scheduled for trial in November.
"The firm reached a mutually acceptable settlement to avoid the uncertainty and expense of litigation, and to focus entirely on serving its clients," Sullivan said.
He didn't disclose the amount of the settlement. UMB had originally asked for $1.4 million in damages, according to court documents.
The case was moved to San Francisco County Superior Court before Judge Harold Kahn. Delays resulted this summer, because a witness that UMB wanted to depose was traveling, according to court documents.
UMB claimed in court filings that Orrick failed “to perfect or confirm the perfection of certain security interests in the charter schools’ assets, including facilities and equipment located in Livermore, within sufficient time to establish a first-priority security interest for the bondholders before the bond’s default,” according to its original complaint.
Orrick attorneys Michael C. Weed and Rabindra M. David wrote in an Oct. 23, 2017 filing that Orrick denied all of the allegations. Weed and David work in Orrick’s Complex Litigation & Dispute Resolution Group and its White Collar, Investigations, Securities Litigation & Compliance practice, respectively.
"Defendant alleges that any, and all, alleged events, happenings, injuries, losses, and/or damages, if any were directly and proximately caused or contributed to, in whole or in part, by the carelessness and negligence of Plaintiff herein, and therefor the extent of losses, damaged or injuries sustained by Plaintiff, if any, should either be imputed to Plaintiff, or be reduced in proportion to the amount of negligence or fault attributable to said Plaintiff," according to the court filing.
The Orrick attorneys then went on to list 17 contentions in its defense. The filing asked that the court dismiss the case with prejudice by ruling in Orrick’s favor and awarding attorney’s fees and the cost of the suit to Orrick. The filing also asked for a jury trial.
Tri-Valley closed its two Stockton, California, schools, Acacia Elementary and Acacia Middle, in March 2017, then struggled to keep its remaining two schools — Livermore Valley Charter School and Livermore Valley Charter Preparatory School — open through the end of the school year.
Despite issuing $68 million in tax-exempt bonds to construct school buildings, the charter school company “believes that the furniture and fixtures located at the debtor’s Livermore campus likely represent the only assets that are not subject to liens or avoidable liens,” according to a bankruptcy court document filed when it asked the case to be converted from reorganization to liquidation.
The state’s Fiscal Crisis & Management Fiscal Assistance Team released an audit June 8, 2017 that raised questions about use of bond funds and public money by the charter school operator. The audit was conducted at the request of Alameda County Superintendent of Schools Karen Monroe.
The501(c)(3) nonprofit public-benefit corporation issued $27.5 million in tax-exempt bonds through the California School Finance Authority in 2012 and sold an additional $15 million in Qualified School Construction Bonds.
It also issued $25.5 million through another conduit issuer, the California Statewide Communities Development Authority, in 2015.
The bonds issued through the California School Finance Authority were the focus of the UMB lawsuit. The bonds were sold in a private placement using underwriter Westhoff Cone & Holmstedt. CSFA, a conduit issuer under the umbrella of the State Treasurer's Office, has primarily worked to facilitate financing for charter schools, according to its website.
The charter school had defaulted on its bonds by the time of the conversion to liquidation. It made an unscheduled draw of more than $324,000 on debt reserves in October on the 2012 bonds and then missed its June 1, 2017 debt service payments, according to filings on the Municipal Securities Rulemaking Board’s EMMA web site.
The bond transaction documents included the provision that Tri-Valley Learning Center would perfect the bondholders’ security interests in all of its personal property by filing the requisite UCC statements, according to a UMB court filing.
Orrick in its filings argued that TVLC—and not Orrick—was required to perfect the security interests.
Updated July 20, 2018 at 3:03PM: The original version of the story was changed to remove an overly broad definition of an "affirmative defense."