HMB’s attorneys explain why paying Keenan is the only option they recommend

By on Tue, May 19, 2009

Half Moon Bay’s attorneys explained why the city must now pay developer Chop Keenan the $18 million they agreed to pay him in their April 2008 settlement in a sobering presentation to the city council at Tuesday night’s city council meeting.

There were few comments or questions from the sparse audience, and no one from the public tried to argue with the high-priced attorneys on the dais.

The mood from the city council was one of acceptance—the final stage of grief. Mayor John Muller said that he’d still work to get assistance from the state, and that it was time for "some individuals who sit on the sidelines and don’t get involved" to support the city in its efforts. Naomi Patridge and Muller expressed their determination not to declare bankruptcy, but the city’s attorneys had already said that wasn’t really an option in any event.

The attorneys laid out the city’s options, or lack of them, one at a time. City attorney Tony Condotti spoke first.

Condotti said that the city can’t reinterpret its definition of wetlands because the interpretation came from state appellate court. In its decision, the court said it wasn’t bound by the city’s interpretation, and that interpreting the law is a "judicial function".

However, he believes the city may be able to change the buffer zones around the wetlands on Beachwood, which are part of the city’s zoning code. The code says that there is should be 100 ft buffer around ponds, lakes, and marshes. The city attorney suggested that the wetlands at Beachwood may not be among those that need a 100 ft buffer.

The city attorney also said that disincorporation would not remove the city’s $18 million liability to Keenan. Disincorporation would have to go before the Local Area Formation Commission, and LAFCO would be obligated deal with the city’s assets and liabilities—including its debt to Keenan.

John Knox of Orrick, Herrington & Sutcliffe said that when the successor bills to AB1991 (SB863 and AB/SB 650) began to falter that they began to consider their options, and they have been preparing to issue bonds to pay the settlement.

The city has a very strong credit rating for a city of its size. S&P has just rated it AA-. If it issued bonds right now, it should be able to get an interest rate of 5 to 5 1/2% on 30 year general obligation bonds of $18 million. The city is not likely to ask for the full amount. It still has $5 million from ABAG and may be able to raise money from other sources.

Under those terms, the city would have to pay $1.2 million/year for 30 years to finance $18 million, and $800,000 a year to pay off $13 million.

Mark Levinson, a bankruptcy attorney with Orrick, said that the city will not be able to get out of its obligation to Keenan by declaring bankruptcy, because "you have the ability to solve the problem [by issuing bonds] and you’re choosing not to do it".

Levinson’s advice was to pay the judgement and not spend more money on lawyers, saying "John (Knox) and I are really expensive". He noted that if the city does not pay Keenan by August 29, it will owe 6% interest on $18 million going back to December 2007—another $2 million.