By Mark Gutglueck
James Markman’s second run as Upland city attorney may be coming toward an end.
Prior to its open public meeting slated to begin at 7 p.m. on October 14, the Upland City Council is scheduled to take up during a closed session what its agenda states is a “public employee performance evaluation and consideration of public employee dismissal and related actions pursuant to California Government Code Section 54957” relating to the “city attorney.”
Markman was the lead attorney with the law firm of Markman Arczynski Hanson Curley & Slough, which was founded in 1982. That firm is no longer active, and several of its members, including Markman and William Curley, subsequently signed on with the law firm of Richards Watson & Gershon. Markman is now a shareholder in Richards Watson & Gershon, where he specializes in representing municipalities and water agencies.
Markman has served as city attorney for the City of La Mirada since 1980 and City Attorney for the City of Rancho Cucamonga since 1985. He is general counsel to the Beaumont-Cherry Valley Water District and the Antelope Valley East Kern Water Agency. He was the city attorney for the City of Brea for 40 years and is now considered the senior attorney there.
In 1993, Markman accepted an assignment with the City of Upland as its redevelopment attorney, while Don Maroney was Upland city attorney. After Maroney’s retirement in 1996, Markman moved into the city attorney’s position. In 2003, after concerns surfaced about the potential conflict in Markman representing Upland and Rancho Cucamonga, which are contiguous, the City of Upland continued to contract with Richards Watson & Gershon as the city’s counsel, but had Curley take on the designation and duty of city attorney.
In 2010, then-Upland Mayor John Pomierski and the entirety of Upland’s governmental structure were enveloped in scandal, with the FBI and IRS carrying out searches of City Hall, Pomierski’s business offices, Pomierski’s home and the offices and homes of Pomierski’s business associates and affiliates. In 2011 Pomierski resigned from office and then was named in a federal indictment alleging bribe taking and political corruption. In 2012, Pomierski pleaded guilty and his handpicked city manager, Robb Quincey, was charged with three felonies relating to corruption in office. The same year, the Upland City Council, having grown alarmed that the city had paid Richards Watson & Gershon over $8 million since Curley took over as city attorney in June 2003 with $6 million of those legal fees having accrued since 2009, jettisoned Richards Watson & Gershon as the city’s legal counsel. For a duration, the city utilized the services of Chino City Attorney Jimmy Gutierrez as interim city attorney, and then brought in the law firm of Jones Mayer as its legal representative, with Kimberly Hall Barlow and Richard L. Adams II serving as city attorney at different times.
In 2017, the Upland City Council abruptly ended its relationship with Jones Mayer, and brought Markman back as city attorney, as the city council as it was then composed did not have the same misgivings about Markman serving as the city attorney in the City of Gracious Living while he filled that role in neighboring Rancho Cucamonga.
For more than a year-and-a-half thereafter, Markman enabled the Upland City Council in carrying out a number of actions a majority of its members were determined to see through.
One of those involved, in 2017, the City of Upland’s application to the San Bernardino County Local Agency Formation Commission to dissolve its 111-year-old municipal fire department and have fire suppression, fire prevention and emergency medical service duties in Upland assumed by the county fire department. A second action taken by the city council under Markman’s guidance was the use of conduit financing in which the city in 2017 lent to San Antonio Regional Hospital its authority pertaining to the issuance of tax exempt bonds, in this case what are called certificates of participation, that were sold to certificate buyers by the hospital so the proceeds from those sales could be used to undertake an expansion of the hospital and its facilities. A third action the council engaged in under Markman’s watch as city attorney was the 2018 sale of 4.631 acres, or 12 percent, of Memorial Park to San Antonio Hospital for that entity to use toward the construction of a multistory parking structure to accommodate the hospital’s growth and influx of patients. In making the sale, the city council agreed to sell the park property to the hospital, the primary campus of which adjoins the 38.5 acre park, at a price of $906,931.55 per acre, deemed to be slightly above the property’s fair market value, according to then-Community Development Director Jeff Zwack, such that the hospital was to pay $4.2 million to acquire the property.
The close-out of the Upland Municipal Fire Department and the effort to reduce the recreational area at Memorial Park proved highly controversial and unpopular with Upland’s residents. In the 2018 election, three of the members of the city council who supported those initiatives – Gino Filippi, Carol Timm and Sid Robinson – were either displaced by the voters or left office in the face of massive resident discontent. The lone member of the council to oppose the shuttering of the fire department and the sale of the parkland – Janice Elliott – was endorsed by the voters, as she ran that year in what was the city’s first by-district election following its 112-year history of at-large elections, when she was chosen to serve as councilwoman in the city’s Second District.
In the meantime, questions emerged about the propriety, ethics, legality, advisability and general wisdom of those actions by the council, as well as the general quality of Markman’s counsel to the council while they were being carried out.
The shuttering of the city’s fire department entailed the annexing of Upland to the county’s neighboring and contiguous West Valley Service Area that included San Antonio Heights, whereupon both San Antonio Heights and Upland were annexed into Fire Protection Service Zone Five, what was at that point a discontiguous fire service district created in 2006 to provide fire safety and emergency medical treatment to the isolated Mojave Desert communities of Helendale and Silverlakes, which lie some 48 miles as the crow flies and 65 miles driving distance from Upland.
The controversial “annexation” of Upland and San Antonio Heights into Fire Protection Service Zone Five entailed the imposition of a $148.68 annual assessment with inflation adjustments into perpetuity. The county and city agreed to the option of tacking on the Fire Protection Service Zone Five service zone tax as part of the agreement to defray the cost of the county fire department providing that service. Upland City officials, with the exception of Elliott, were all for it, as having the county take on the task of operating a fire department on the city’s behalf relieved City Hall of having to pay for fire safety operations. The city’s taxpayers, who throughout the city’s 111-year history had been provided with fire service as a consequence of basic municipal function, took up the financial slack by being consigned to paying the $148.86 assessment. Thereafter, the city committed to turning over 51 percent of its share of property tax collected within the city to the county as part of the deal. Using the never before-imposed assessments paid by the city’s residents, business operators and property owners to offset a substantial portion of the burden of defraying the cost of the city’s fire protection service, the city pocketed the difference it realized from the closure of the fire department, and used the money it netted as it deemed necessary, which in practical terms meant paying down its substantial costs in providing pensions to retired municipal employees.
One small catch attended, however. Under California law, residents have a right to approve whatever newly created tax is to be imposed on them collectively, in some cases by a simple majority vote and in others by a two-thirds majority. Recognizing that there was virtually no possibility that the residents of Upland and San Antonio Heights would approve a $148.68 assessment on themselves to pay for a service they were already receiving, the city, the county and the San Bernardino County Local Agency Formation Commission (LAFCO) rigged the process so that the voting requirement was met not by a traditional balloting in which those participating cast simple “yes” or “no” or “for” or “against” votes but rather through what is known as a protest procedure. Under that process, notifications of the pending ushering of all property owners into the proposed assessment zone expansion area were sent out. Those who lodged a protest within thirty days were deemed to have voted against the annexation. Those who did not lodge a protest were deemed to have voted for the annexation. While a majority of the residents/land owners in 2.619 square mile, 3,371-population San Antonio Heights, galvanized by what the City of Upland and the county were attempting to do to them, lodged protests, that did not prevent the Local Agency Formation Commission from annexing them into Fire Protection Service Zone Five, as the protest process applied to the entirety of Upland and San Antonio Heights, and fewer than two percent of the voting residents/property owners in 15.66 square mile, 76,000 population Upland went on record as being against the annexation.
A sizable group of San Antonio Heights residents, however, banded together as a collective known as the San Antonio Heights Homeowners Association. Represented by attorney Cory Briggs, the San Antonio Heights Homeowners Association, with the financial backing of a handful of Upland residents, filed suit in the summer of 2017, contesting the annexation. That suit survived three attempts by the city, county and the Local Agency Formation Commission to have it dismissed. In January 2019, Judge David Cohn ruled that the Upland and San Antonio Heights assessments were illegally imposed. In his decision, Judge Cohn held that the Local Agency Formation Commission does not have the authority to annex properties into service zones and that while annexation of the city and San Antonio Heights into the district was valid, the narrower annexation into the service zone within the district was not, averring accordingly that the imposition of the $148.86 annual assessment on property owners as a feature of the fire zone expansion was “improper and must be enjoined,” and that the Local Agency Formation Commission, the county and the city seeking and then approving an annexation that is specifically prohibited by law was a prejudicial abuse of the agency’s discretion. Upland, the county and the Local Agency Formation Commission have appealed Cohn’s ruling.
Because it was anticipated that the sale of the 4.631 acres of Memorial Park would raise the hackles of the community, Markman advised the city council in 2018 to authorize him to file a so-called validation proceeding intended to foreclose any procedural or future legal challenge to the sale. The council authorized him to do so. In its validation action filed with the court, the city invited anyone opposed to the sale to lodge a protest, which would then be heard by a judge rather than being subjected to a vote. The challenge to the validation had to be filed within 60 days. Once the court validated the sale, any future lawsuits contesting the sale would be barred. Markman’s calculation was that no one would go to the expense of hiring an attorney to make an answer to the validation petition.
The validation procedure was directed to the courtroom of Judge David Cohn in San Bernardino. To the chagrin of city officials, Marjorie Mikels, an attorney living in the city, as well as Cory Briggs, who had represented the San Antonio Heights Homeowners Association in its suit against the city relating to the fire service district service zone annexation also heard by Cohn, filed answers to the validation action. Mikels did so on behalf of herself and a few Upland residents. Briggs did so as an attorney retained by other Upland residents.
Those responses took issue with the sale on multiple grounds. Among those was that the city selling off a slice of the park – in particular the one sold by the council on March 26, 2018, which includes a long-extant and actively used baseball field – is tantamount to abandoning public property. Such abandonments, under state law, cannot be effectuated without a vote of the citizens residing in the jurisdiction that owns that property.
Having miscalculated in his assumption that no one would come forward to contest the sale in the course of the validation proceeding, Markman was obliged in the face of Briggs’ and Mikels’ filings to make a convincing case to Judge Cohn that the city council, acting on its own authority, was within its rights to sell off city land. Faced with the argument that a municipality’s abandonment of property it owned and was putting to beneficial public use had to be subjected to a vote, Markman asserted that selling the property did not constitute an abandonment.
Ultimately, some 14 months after the sale of the park property was approved by the city council, on May 29, 2019, Judge Cohn, after hearing the responses to the validation action, dismissed the city’s petition for validation. In effect, anyone with standing – meaning essentially any city resident – was yet at liberty to file a lawsuit challenging the sale.
Markman, who together with his law firm had billed the city for its representation of the city with regard to the validation action, made a motion to deny Briggs’ and Mikels’ recovery of their legal fees as the prevailing party in the validation action. Considering that Briggs and Mikels had expended their efforts in preserving city residents’ rights under California law, Markman’s request, which Judge Cohn granted, was seen as an effort to inhibit the ability of Upland’s residents to protect themselves from governmental overreach and the violation of their rights in the future. The city council by that point had undergone a makeover in which three of its members who had authorized the parkland sale were no longer on the panel. At least two of the members of the city council as it is now composed were likewise taken aback by Markman’s action.
By most definitions, San Antonio Hospital is Upland’s most prestigious institution, one that has been in existence in Upland, previously at a different location, since 1907. It is the city’s largest employer, larger than the Upland Unified School District and the City of Upland combined. As the City of Gracious Living’s major non-governmental entity, it is also the city’s single largest provider of services to individuals living outside the city, thus representing a major draw of revenue into the city.
In 2011, upon Harris Koenig becoming San Antonio Community Hospital’s president and chief executive officer, the hospital embarked on a six-year long series of planned expansion stages, Over that span, the number of beds at the facility increased from 271 to over 400. Included in that expansion was the $160 million four-story Vineyard Tower at 999 San Bernardino Road, which upped the number of stations in the hospital’s emergency room from 34 to 52, while creating and outfitting 12 more intensive care units. By 2015, San Antonio had transitioned from a community hospital intended as a care facility for those living in Upland and at its periphery to a regional hospital, and that uprating was reflected in its name.
In 2017, San Antonio Regional Hospital undertook a partnership with the City of Hope, looking to expand even further, entailing the erection of a $30 million, 60,000-square foot structure at 1100 San Bernardino Road to house an ambulatory care center as well as a City of Hope outpatient cancer center on the first floor.
The City of Hope-affiliated facilities entail ones offering chemotherapy, radiation, and surgical services, intended to be of benefit to local cancer patients undergoing chemotherapy, as the treatment regimen they are subjected to can greatly weaken and fatigue them. Having the outpatient center in Upland can reduce the traveling distance for many of those patients and their families by as much as 24 miles, the distance between San Antonio Hospital and the City of Hope in Duarte.
The more than five-years of expansion initiated in 2011 had been paid for in no small measure by conduit financing, which was based upon the City of Upland using its authority as a municipality and public agency to issue tax-exempt bonds. In 2011, while Bill Curley was yet city attorney, the Upland City Council as it was then composed authorized the issuance of $125,000,000 in certificates of participation for San Antonio Hospital. Theoretically, in serving as a conduit in such arrangements, the city accrues no risk whatsoever in lending its tax-exempt bonding authority to those entities it deems fit. The city extends this generosity based upon the public benefit offered by those institutions – such as in the instant case San Antonio Hospital or in other cases developers of senior citizen or low to moderate-income housing. Even though the issuance of the bonds or certificates of participation is done through the city, the entities to whom the revenue from the sale of the certificates is passed through to are wholly responsible for the debt service entailed in the 20-to-30 years of bond payments the holders of the certificates are entitled to receive. Because the city’s authority as a public entity is brought to bear in making the issuances, the certificates of participation are marketed as tax-exempt instruments, making them more attractive to potential “participants,” that is, the certificate purchasers. Since the purchasers do not need to pay taxes on the regular repayments they receive as holders of the certificates, San Antonio Hospital did not need to pay them as high of an interest rate return, thus decreasing the hospital’s expansion financing costs.
On December 4, 2017, the Upland City Council voted to authorize another round of issuances of the $125,000,000 in certificates of participation its predecessor council had created in 2011 for the express purpose of creating financing to benefit San Antonio Regional Hospital, thus providing the capital needed to allow the next round of the hospital’s ongoing expansion to proceed. The law firm of Orrick, Herrington & Sutcliffe, the city’s bond counsel, prepared and reviewed the documents relevant to the sale with regard to documentation and procedure, as did Markman as the city attorney, to move the transaction forward. San Antonio Hospital agreed to indemnify the city and its officers, agents and employees with respect to the financing and to reimburse the city for its costs incurred in the financing.
While San Antonio Hospital indeed saw growth in its earnings over the eight-year period that its aggressive expansion effort has been ongoing, that income increase was outrun substantially by the costs of engaging in the expansion. Though the hospital had reserves as well as the ability to seek bridge loans and make other arrangements to remain solvent, by late this spring the reserves were exhausted and red ink was hemorrhaging from the institution’s books. This situation had alarmed San Antonio’s board of directors.
According to a report from moodys.com dated May 8, 2019 obtained by the Sentinel, Moody’s Investors Services downgraded San Antonio Regional Hospital’s bond revenue rating from Baa3 to Baa2. Simultaneously, the hospital’s fiscal outlook was revised from stable to negative. That particular action immediately impacted $1.42 million of rated debt issued by the City of Upland.
Indications were that San Antonio Hospital’s reach had substantially exceeded its grasp in undertaking the expansion. According to Moody’s, the hospital was suffering from poor operating performance and its debt service coverage was out of balance. It had a marked decline in its liquidity and was facing increasing competitive pressures just as its affiliation with the City of Hope was diluting its income stream, according to Moody’s.
According to Moody’s, the hospital had operating revenues in Fiscal Year 2017 of $323 million, but is carrying the liability of certificates of participation issued in 2017 and issued in 2011 which are secured by a gross receivable pledge of the hospital. Meanwhile, the hospital has no debt service reserve fund. Covenants impacting the hospital include an ongoing debt service coverage test of 1.1 times, and additional indebtedness tests.
Last month, on September 10, the San Antonio Hospital board terminated Koenig as the hospital’s president and chief executive officer.
That development garnered the attention of a wide cross section of the Upland community and sparked an examination of the cavalier approach the city had taken in lending its authority to orchestrate tax-exempt financing for the hospital, and by extension, the concept of conduit financing altogether.
Given the value they saw in promoting the hospital which unquestionably represents a public benefit to Upland and its residents, previous city councils were willing to assist the hospital where they could, and utilized the city’s authority as a governmental entity to make tax-exempt bond issuances to finance the institution’s growth. Quite plainly, however, those council members collectively had at best an imperfect understanding of the processes and implication of conduit financing. This made the council highly dependent on the far more worldly and sophisticated Markman, a graduate of Cornell Law School who has been practicing law for a half century after having been admitted as a member of the California Bar in 1969, and who is a stockholder in a major Southern California law firm.
A full examination of Markman’s role in advising the city with regard to conduit financing has turned up some troubling issues. The conduit financing for San Antonio Hospital was not the only such arrangement entered into by the City of Upland in 2017 under Markman’s watch. On June 26, 2017, the Upland City Council approved a promissory note and loan agreement for refinancing the Sunset Ridge Apartments. According to the staff report accompanying that item, Markman’s firm, Richards Watson & Gershon, was appointed as bond council with regard to the issuance. Exactly one month later, on July 26, 2017, there was a $14,865,000 issuance of a 2017 bond series in the form of a multifamily housing revenue note for the Sunset Ridge Apartments and Village Apartments.
Typically, bond counsel is provided with .25 to .5 percent of the entire issuance as a fee for services rendered with regard to the attendant legalities involved in preparing and making such issuances. Thus, it would appear that Richards Watson & Gershon netted at least $37,162.50 in connection with the issuance of the $14.865 million Sunset Ridge Apartments and Village Apartments revenue note. The precise percentage of the bond amount Markman’s firm was paid in the Sunset Ridge/Village issuance, which existed in the form of certificates of participation, is not shown in any of the documentation of the issuance put out by the city at the time.
Markman in this way churned legal fees for his law firm based on counsel he was providing the city council when he advised its members it was okay for the city to proceed with assisting the owners of the Sunset Ridge Apartments and the Village Apartments through the June 2017 conduit financing involving the promissory note and loan agreement. As a shareholder in Richard Watson & Gershon, Markman is entitled to a percentage of the profits the law firm realizes in its operations and representations of clients. According to a California Attorney General’s opinion provided in 2016, California Government Code section 1090 prohibits public officials, such as city employees, from being financially interested in contracts made by them in their official capacities, including an attorney contracting with a city to perform city attorney legal services acting as bond counsel for the same city and being paid a percentage of the bond issuance for providing such services.
Three of the current members of the council were not on the 2017 council that approved the issuance of the $14.865 million Sunset Ridge Apartments and Village Apartments revenue note. There has been no public statement issued from the council or any of its members with regard to whether the council collectively or any of its members individually believe the conflict inherent in Markman advising the city as to whether it should engage in conduit financing arrangements and the income he has personally derived as a consequence of his firm’s involvement in the resultant bond/certificate issuances has compromised his ability to render unbiased service to the city. That the council has scheduled Monday’s performance evaluation and consideration of dismissal is a sign, the Sentinel was informed, that there are at least two members of the council who have questions in that regard, and that they too are troubled by Markman’s performance with regard to shuttering of the city’s fire department simultaneous with the city’s property owners being straitjacketed without a vote into what a judge now says is an illegally imposed assessment zone, as well as his continuing efforts to deny the city’s residents the ability to vote on reducing their park acreage.
By Mark Gutglueck