By Mark Gutglueck
In a solid majority vote, the San Bernardino City Council this week ended its contract with Straddling Yocca Carlson & Rauth, the law firm to which it turned in 2012 to assist it in its entrance into, and then nearly five years later the penultimate exit from, Chapter 9 bankruptcy. It was Straddling Yocca Carlson & Rauth, and in particular one of the firm’s attorneys, Paul Glassman, who structured the manner in which the city went about stiffing scores of its creditors and vendors, paying some of the more lucky ones 80 percent of what they were owed, with far more receiving half of what they were due from the city, and many others less than that. In 2017, when the city made its official exit from bankruptcy, it had succeeded in stepping out from under slightly more than $350 million in debt, leaving in its wake dozens of those who had in good faith provided it with goods and services and had never been paid and were thus themselves driven right up to or over the precipice of bankruptcy and financial ruin.
The law firm of Straddling Yocca Carlson & Rauth including Glassman, however, was not among those who had nothing – or next to nothing – to show for its association with the city. Indeed, for assisting the city in skipping out on its debts, the firm was paid $25 million.
San Bernardino made the Chapter 9 filing in August 2012 after years of dwindling revenues, expenditures drastically exceeding income, and deteriorating financial numbers that resulted in $80 million in unfunded liabilities and a $49 million annual operating deficit. Chapter 9 of the United States Bankruptcy Code provides a financially distressed entity such as a municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts.
Perhaps predictably, under the terms presented by Glassman to the bankruptcy court and Federal Bankruptcy Judge Meredith Jury, city employees and retirees did relatively well, and the lion’s share of generous pension benefits for then-current and former workers offered through the California Public Employees Retirement System were preserved, though current employees were called upon to make a greater contribution toward those pension plans, and some benefits were marginally reduced or modified. The city’s commitment to the California Public Employees Retirement System, which had been a major factor in breaking the city’s bank, was not erased, though the same level of benefits given to employees in the past through that system were discontinued for new employees.
Virtually every other entity, with only a handful of exceptions, that had made the mistake of dealing with the city both immediately prior to the bankruptcy and during it was treated far more shabbily by the city, as Straddling Yocca Carlson & Rauth and Glassman guided it through bankruptcy court.
Among the city’s creditors that did not fare as well were Luxembourg-based EEPK, holders of the city’s pension bonds, and Ambac Assurance Corp, which indemnified some of those bonds. When the city failed to provide them with the same terms of repayment as the California Public Employees Retirement System, they sued, asserting the bonds and whatever fees are associated with them fall under the same pension obligation as the payments to the pension system. That lawsuit was settled in March 2016 on the basis of an agreement by which the city agreed to pay not 100 percent but rather 40 percent of what is owed to EEPK and Ambac.
One class of creditors who were really burned were litigants and claimants against the city, including ones who had prevailed in certain lawsuits, among them those alleging they had endured civil rights violations relating to excessive use of force by the police department. Those entities and the lawyers representing them were provided with just a penny on the dollar for the first $1 million in judgments against the city.
The heavy legal work with regard to the bankruptcy ended with the city’s official exit from Chapter 9 protection in June 2017 in accordance with Judge Jury having signed four months previously on February 7, 2017 the city’s confirmation order and requested third party injunction preventing any remaining disputed claims from interrupting the bankruptcy exit. While at that point a majority of the city’s creditors had agreed to the plan, some stragglers refused to compromise or were otherwise insisting that the pittance the city had offered did not truly qualify as a compromise. Straddling Yocca Carlson & Rauth and Glassman since June 2017 continued to represent the city with regard to those claims. Coming into Wednesday evening’s council meeting, it was the contention of Mayor John Valdivia and his chief of staff, Bilial Essayli, that Straddling Yocca Carlson & Rauth and Glassman since June 2017 continued to bill the city at a rate of $200,000 per month for what Valdivia and Essayli contend is minor legal mop-up work that should not cost that much.
Accordingly, Valdivia placed on the agenda for the Wednesday, June 5 city council meeting an item that called upon the city council to “review and consider termination of professional services agreement with Stradling Yocca Carlson & Rauth, P.C. for reorganization and financial restructuring advice.”
At the meeting, Valdivia said that as he was emerging from his vehicle in his allotted space in the parking structure at the civic center to come into the meeting, he was approached by “Mr. Clark [Thomas P. Clark, a Straddling Yocca Carlson & Rauth attorney], who was waiting for me.” Valdivia said that while “I respect his [Clark’s] eagerness and passion” with regard to Clark’s firm potentially losing some very lucrative work, he was intent on proceeding with the item before the council. “The point is we met with Mr. Clark,” the mayor said. Valdivia then gave the floor to his chief staff to “allow the public to know what exactly are the issues with the billing.”
“Mr. Glassman has been billing the city at about $200,000 per month in legal services,” Essayli said. “The mayor’s office has done an analysis of his bills along with representatives of the city attorney’s office. We are in agreement that those bills are excessive and frankly unreasonable. The city really can’t afford to wait to move on this item. We spent $2 million last year on legal fees from Mr. Glassman. The city did not have money budgeted for that. They had to dip into reserves in order to cover his legal services. We have budgeted for this upcoming year about $700,000 for legal bills related to the bankruptcy. At the current rate that Mr. Glassman is billing the city, he’s going to blow through that budget in about four months. We believe this work is just about wrapped up. The bankruptcy is done. This stuff is really not complicated. We believe BB&K [Best Best & Krieger, which provides contract city attorney services to San Bernardino] can transition. They are professionals. They can take on this work and do it at a rate that is much more efficient than what Mr. Glassman is charging us. So, if we wait another month, it’s going to be another month of $200,000 in legal services, and then you have to give him 30 days notice, so that is another $200,000, so the cost of waiting is $400,000, money we believe the city doesn’t have. So, if the council votes to terminate tonight, Best, Best & Krieger will work with him over the next month to transition, and if they believe they need Mr. Glassman to advise or consult, they can make that request to the city council. So, we strongly urge that this get heard tonight.”
Essayli went on, “The city still has some bankruptcy cases that are open. We have asked Mr. Glassman for a summary of the pending cases. He has not provided them after numerous requests. We believe the motion work is straightforward. We do not believe it should cost anywhere around $200,000 in monthly legal fees. We believe that should be closer to $50,000, at most. We’ve consulted with our assistant city attorney, and I believe she has a similar viewpoint on that. You can ask her. We think that, frankly, the bills are excessive. We’ve worked with him for the last four months to try to get his bills down, and I believe his statement was, ‘Well, the bills are what they are.’ So at this point, he’s not shown any willingness to rein in his legal bills, and that’s very concerning for us.”
Councilman Fred Shorett made a motion that the item be continued until the city council’s June 19 meeting. Councilman Jim Mulvihill seconded the motion.
Valdivia said, “This is a policy discussion that now goes back to the council, and the floor motion is to terminate the contract tonight. And so…”
“I believe the floor motion was to continue,” City Attorney Gary Saenz broke in.
Saenz disputed Essayli’s suggestion that it would take two months longer to disengage from Straddling Yocca Carlson & Rauth if the action was not taken that night. Essayli stated that what would normally be the council’s first meeting in July has been canceled. Saenz, who was advocating for a continuation of the item, pointed out that the matter could be taken up at the council’s second June meeting. “There’s a meeting on the 19th,” Saenz said. “So, the indication that it is going to take two months longer is incorrect. It’s going to take two weeks longer, at worst, for this item to move forward. Now, this firm has been engaged with the city for seven years. To say that two weeks now is not acceptable after being in the relationship with them for seven years in my mind does not make sense. In the backup material there is an indication that says staff anticipates there will have to be replacement counsel. It has not been determined yet that there will be cost savings. If there will be cost savings, great. I understand that and perhaps Glassman, if he understands that, he might change whatever his attitude has been. But I think he should have an opportunity to be heard by this council as to those issues. And also remember this is an ongoing legal proceeding that is still open and is still in the bankruptcy court. There may be legal ramifications to this that are unknown at this time to this council. We heard Councilman Sanchez tonight and I agree with him wholeheartedly that an uninformed decision should not be made by this council. This council needs information from Glassman. I informed him yesterday. He was surprised that this item was on the agenda. He had not heard that it was on the agenda tonight and he suggested that a closed session at the very least to inform council of the legal ramifications, the legal consequences, perhaps, of removing him at this time, what those might be, so the council is informed. I’m only asking for two weeks. So, the delay will only be, ultimately, two weeks. If the council decides in two weeks they want to terminate the relationship, they can do that. They give him a 30-day notice, and there has been a two week-delay, which after a seven-year contract is not significantly consequential.”
Valdivia said, “My growing concern, Mr. Saenz, is that we have attempted patiently, we have done our due diligence to address the issue with Straddling Yocca since on or about the beginning of February. And we have waited patiently. Staff has worked with Mr. Glassman. We have attempted to reconstruct priorities and scopes of services, and the idea that he is somehow surprised is alarming. We have asked him to provide the bills and the invoices and to redirect priorities on expediting some of these cases. I don’t know where this is coming from that he needs another two weeks; we have a seven-year relationship. In fairness, the taxpayers of this community have already paid $25 million to Straddling Yocca, so as the Book of Ecclesiastes says “There is a time for everything.”
Saenz retorted, “Well, I understand that there has been $25 million expended. At the same time, his performance in the bankruptcy court has resulted in the saving of over $300 million. I think that’s pretty good bang for the buck, if you ask me. All I’m suggesting is he should have an opportunity to inform this council as to what the ramifications, the impact and consequences of that might be. And if he’s not able to do that, then of course this council is certainly justified in terminating the relationship, but not, I think, until they have that information, until he has the opportunity to respond to this council and in a closed session as well to discuss the legal issues as they pertain to the bankruptcy.”
“Why wouldn’t our city attorney advise us of that?” Essayli said, his reference to the city attorney being to the law firm of Best Best & Krieger.
Councilman Fred Shorett leapt into the breach. “Excuse me,” Shorett said. “Thank you, Mr. Essayli. You are staff, not our city attorney. I tend to follow the experts or the people we pay to do that. I can’t see that after seven years and this horrible thing that we’ve gone through called bankruptcy that we can’t wait two more weeks, particularly at the request of our own city attorney. This is a legal matter. I am particularly interested in your characterization of ‘we,’” Shorett said, referring to Valdivia. “We, who have been working diligently and waiting patiently and talking to Straddling Yocca and these people to resolve some of the concerns that ‘we’ have?” he said. “’We,’ meaning who? Not I. I’m really concerned about it. I would like to hear from them before we pull the ripcord and cut him lose and I cannot imagine that two weeks is going to make a difference, not in this case, not to end something that is so important. And if he’s just saying, ‘I’m billing,’ and we’re not getting bang for our buck, we’re getting billed $200,000 a month and not getting service, I’ll be the first one to end that contract, the very first one, I’ll lead the charge, and I’ll sue them to get it back for lack of service or for malpractice.”
“I concur with that,” said Saenz. “If the bills are excessive relative to what the city is receiving for those services, then I agree that it should be terminated. But I think we need the specifics on that before we take this action.”
Shorett moved to continue the action on firing Straddling Yocca Carlson & Rauth and Glassman until the June 19 council meeting. Mulvihill again seconded the motion.
Councilwoman Sandra Ibarra then weighed in. She referenced the payment registry on that evening’s agenda, specifying, “In case no one saw it, Straddling Yocca, the total payout for the financial restructuring period ending 2/28/2019, a hundred and three, almost one hundred and four thousand [dollars]. Again, for the month of March, the financial restructuring period ending 3/31, they charged us an additional $128,622. That’s a total of $232,600, just about, for those two months. Do we have information on this restructuring? I know this came before us in February, that we were trying to transfer over to BBK [Best Best & Krieger]. That was the understanding. Can they provide us an update at the Tuesday meeting [June 11] during closed session instead of waiting until the 19th, since they already billed us for those two months?”
“If that’s council’s wish, they can make that request,” said Saenz. “My suggestion would be agendizing it for that meeting [June 11] and also for the closed session of that meeting. If council is that anxious, rather than having it at the regular meeting, I have no problem with that. But I think they should be given an opportunity to inform this council, before this council makes such a vital decision.”
Essayli said, “Mr. Glassman was here in February in both closed session and open session. If you remember his report, frankly, it wasn’t a very good report and it was hard to get a clear answer from him. That’s the trouble with him. So, we’ve tried for four months. He’s not acting in good faith, in our belief. So, we don’t believe two weeks is going to do anything other than incur the city more legal expenses.”
Councilwoman Bessine Richard asked for Sonia Carvalho, an employee with the firm of Best Best & Krieger, which has been hired to augment Saenz in his function as city attorney as his final year as elected city attorney winds down in accordance with the charter amendment approved by the city’s voters in 2016, which eliminated the elected city clerk’s and elected city attorney’s position as of Spring 2020. Best Best & Krieger is then scheduled to move in as the city attorney. By eliminating Straddling Yocca Carlson & Rauth as the city’s legal representative with regard to the remaining issues pertaining to its August 2012 filing for Chapter 9 bankruptcy protection, the city will very likely increase the workload Best Best & Krieger will undertake, and thus the amount of remuneration it will receive.
Encouraged by that prospect, Assistant City Attorney Carvalho said, “I was just looking through some notes here. Following the city council’s closed session in February, the city council had directed me to reach out to Mr. Glassman and have a conversation with him. I sent an email to several members of our administrative staff in March. My email read as follows: ‘As directed by the city council, today City Manager [sic] Gary Saenz, Richard Egger and I had a conference call with Paul Glassman and his staff. Paul provided a thorough update.’ I go on to list the four actions, specific actions, [that] would be taken, that the small property claims, Paul would draft a letter to be sent to all claimants along with checks. We decided this would be an efficient way for him to handle these matters, and that he was to send out the letter no later than March 28. I don’t know from our finance staff whether that occurred, but that was what we had discussed and that was a summary of the email I sent. We were also to receive summaries of proofs of claims and Paul would prepare a letter to resolve four particular matters. I am aware that those four particular matters, that the letters did go out. There was also an issue about Paul speaking with someone at the county and school district to settle a number of the very difficult claims, and in that I had requested that your former city manager, ‘Please give us the contact information,’ as it was my understanding that she had begun to talk to them about those cases. We were also to get a summary of all of the 910 claims,” Carvalho said, without explaining what she meant by the term 910. “Paul was to prepare a brief strategy statement for all of the claims on this list. He was also supposed to identify an action plan, and provide an estimated timeline and budget. And finally, we asked him to prepare a summary of all the lawsuits. He was to prepare a brief strategy statement for each of these, a strategy statement so we could help evaluate whether we could resolve these and how much they would take, rather than just sort of letting them move forward on their own. He also identified cases that previous in-house counsel was managing, and had asked us for a review of these cases, which my partner, Richard Eggar, has been reviewing. So, that is what I did. That is what the council directed me to do, that is the work I did. I communicated that work. Our city attorney was on the phone with us, and he is familiar with the things we asked Paul to do. I don’t have a particular opinion on this. I take ethics very seriously, and I don’t feel that I should have any say in what your decision is. I just wanted to communicate to you that I did what you asked me to do, and I believe we need to continue to monitor this very carefully and be more proactive in making sure we get these cases closed as soon as possible”
“Did he provide the reports you requested, though?” Essayli asked.
“I have not received the reports that we had indicated in this email,” Carvalho said. “He did receive a copy of it.”
Councilman Ted Sanchez asked Carvalho, “You’ve had an opportunity to review their billable hours for the last 12 months, right?”
“Actually, just the last several months, because it wasn’t until you met in closed session that you asked me to specifically work with our city attorney to review those,” Carvalho said.
“Did those bills in your legal opinion seem excessive for the work being done?” Sanchez pressed.
“So, I mean always when you see a six figure bill for a month, you question why that amount is so high,” Carvalho said. “I don’t think that I’m personally qualified to tell you whether in fact any particular bill was wrong or not. Given what our conversation was in February, I would expect them to be more pro-actively managing this. I did not ask him to get his bills at any particular level. What I asked him to do was to explain to me in advance if he was going to send us a bill that exceeded a hundred thousand dollars. Actually, what I said in my email to him was, ‘If you are going to send us a bill that exceeds $67,000,’ because that’s how much we budgeted, ‘I would expect for you to send me in advance an explanation as to why the bill is more than $67,000.’ And I will say he did that the first month. Not in the subsequent months.”
“I think we have our answer,” Sanchez said. “This city is being taken advantage of by this firm, and they’re not acting in good faith as our partners guiding us through this bankruptcy. We need to seek legal services elsewhere. So, I make a substitute motion that we terminate the contract with Straddling Yocca and that we go into negotiations to contract this bankruptcy legal work to Best Best & Krieger.”
Councilwoman Bessine Richard seconded the motion.
Councilman Jim Mulvihill asked if Straddling Yocca could challenge the termination legally.
“In compliance with the contract, we can terminate by giving thirty days notice, and that’s the end of the deal,” Saenz said. “I wouldn’t expect there to be any liability or breach of contract as a result of doing that.”
Carvalho said, “I think the real issue here is whether or how – if you decide to do this, how you would go about doing this in terms of conversations with them in terms of transitioning, getting and files and really I think if you take this action this evening I would ask for the ability to continue to work with Mr. Glassman and in the event if there is something it would seem irresponsible for us to assume, that we would come back to council and have that conversation.“
“From my point of view they’ve been working on this for years, and so, if we were to terminate them, we’d be starting from point zero,” Mulvihill said.
“I don’t believe we would be starting from ground zero,” Saenz said. “There’s been a lot of work done pursuant to the contract to engage in a transition of sorts, to provide us with documents, with all of the work product that they have, and so on. So it’s not a situation where we would be starting from ground zero. There would be transition issues. There may be difficulties in the court that I’m not aware of that only Mr. Glassman could explain to you. I know there are current pending issues in the bankruptcy court itself relative to bankruptcy law that he is engaged in. So, this council should be provided with that information, and once they have the information, then make an informed decision rather than an uninformed decision as to what the full ramifications of those are. If we are not getting enough for our money, than I would applaud the termination myself. I’m not opposed to a termination. What I am suggesting is that without him [Glassman] present or without an opportunity for him to be heard, as I suggested when I told him last night that this is on the agenda, he was not aware that it was and would like the opportunity to be heard and believes that a closed session would be of value to the council in making this decision, a closed session regarding the legal issues currently pending in the bankruptcy court.”
“Paul Glassman was one of the keys to getting us through bankruptcy,” Mulvihill said. “The kind of briefs and presentations that he provided to the bankruptcy court, I think, eased our way through the bankruptcy process. So, I just think, from what the city attorney has said, wait two weeks. Let’s hear from them.”
“We believe it’s inappropriate for Mr. Glassman to advise the city on the legal ramifications or consequences of terminating his own contract,” Essayli said. “It’s a conflict of interest. He did provide a service to the city and he has been handsomely compensated, to the tune of $25 million.”
“This appears to be another one of those contracts that this administration wants to get rid of, and they want to do it their way, and I’m sorry, but the mayor and his chief of staff do not run this city,” Shorett said. “It’s the city council. We make these decisions.”
Sanchez’s substitute motion was voted upon and passed 5-to-2 with Shorett and Mulvihill dissenting.