The City of Wasco has been ordered to pay an attorney that represented the city in complicated bond finance dealings during the mid-1990s. The First District Court of Appeal rejected the city’s argument that the payments violated the state constitution’s ban on incurring general fund debt.

The history of Wasco’s bond finance troubles is long and complicated (see CP&DR Legal Digest, May 2003; CP&DR, August 1998, July 1998, January 1998; CP&DR Deals, December 1995). Essentially, the city in 1989 issued $35 million of Marks-Roos bonds and invested a substantial portion of the proceeds in speculative real estate development projects in Wasco, Rosamond, Ione and Nevada County. In 1995, the city hired attorney Cary Lapidus to represent it in the $7 million Rosamond deal, which was going sour.

Lapidus first represented the city on an hourly basis and, later, on a contingency basis. Lapidus helped negotiate three agreements with the bond underwriter in exchange for a one-third contingency payment. When he did not get paid, Lapidus initiated an arbitration proceeding against the city. The arbitrator determined that Lapidus was due $484,155. However, because the city had not received all of the money from the agreements, the arbitrator determined Lapidus was presently owed only $86,170 plus 10% annual interest, $21,437 for arbitration costs, and another $10,000 from a trust account. In May 1998, a superior court judge entered an order confirming the arbitrator’s decision.

The city still did not pay Lapidus all the money he was owed, so the attorney filed a lawsuit seeking to compel payment. After deducting credits of $95,000 and adding interest accrued since May 1998, San Francisco Superior Court Judge David Garcia determined the city owned Lapidus $83,043, plus interest accruing at about $17 per day. In April 2003, Garcia ordered the city "to make appropriate budgetary appropriations for payment."

Instead, the city appealed Garcia’s decision. The city argued that article XVI, § 18 of the state constitution prohibited the city from incurring debt or liability in excess of any year’s revenues without two-thirds voter approval. The section essentially mandates balanced budgets. But a unanimous three-judge panel of the First District, Division Three, rejected the city’s argument.

The state Supreme Court ruled in Rider v. City of San Diego, (1998) 18 Cal.4th 1035, that three exceptions to § 18 exist. One of those exceptions applied in Wasco’s case, the First District ruled: The limitation does not apply to local government debts to be paid from nontax revenues held in a special fund. Typically, this exception permits bond financing where revenues from a project constructed with the bonds are used to retire the debt. In this case, Lapidus was to be paid by money he helped secure — money that was separate from the general fund.

"The issue here has arisen because [the city] failed to apply the proceeds of the recovery procured by Lapidus in the manner required by the contingency fee agreement," Justice Stuart Pollak wrote for the court. "By failing to pay Lapidus from the proceeds of the recovery, Wasco breached the contingency fee agreement, the terms of which were fully consistent with § 18. The city thereby became liable to Lapidus in an amount equal to the unpaid fees … Section 18 provides no excuse for avoiding an obligation which, if performed in accordance with its terms, would not have violated the constitutional restriction."

The Case:
Law Offices of Cary S. Lapidus v. City of Wasco, No. A102772, 04 C.D.O.S. 566, 2004 DJDAR 712. Filed January 21, 2004.

The Lawyers:
For Lapidus: Robert D. Links, Berger, Nadel & Vannelli, (415) 362-1940.
For the city: N. Thomas McCartney, (661) 327-4147.