Washington -- The Superior Court of Contra Costa County Wednesday granted California and the Richmond Unified School District a one-month reprieve from an investor lawsuit over the district's defaulted certificates of participation so they can pursue an out-of-court settlement.
In an order postponing until July 31 the first hearing on the suit, which had been scheduled for today, the court noted that the state, the district, and other defendants had asked for the delay "to allow parties time to discuss the possibility of an amicable resolution of the dispute" over the $9.8 million lease issue. The issue went into default nearly a year ago.
Attorneys for both sides will meet on July 6 to discuss a possible settlement, said Ronald Ryland of Sheppard, Mullin, Richter & Hampton, lead attorney for the issue's trustee, U.S. Trust Co. of New York.
"I'm hopeful, but I hate to predict anything," Mr. Ryland said. If the talks on July 6 produce "enough progress," he said, further negotiating sessions may be scheduled and the trial may be put off further.
Attorneys for the state and the district were not available yesterday for comment on the terms of any possible settlement they might broach with investors. They have previously said that a possible settlement was discussed in negotiations with the trustee before the April lawsuit was filed.
The earlier-discussed settlement, which state attorneys said was suggested by investment bankers connected with the Richmond offering, would require the district to resume paying about $500,000 of interest on the certificates each year. To begin paying such interest, the state probably would have to cut back scheduled payments on its own loans to the district by a like amount, they said.
Such a settlement would mean forgoing, for the time being, the paydown of up to $1 million of principal each year under the certificates' indenture. Sandra Leess, the U.S. Trust vice president who oversees the issue, has acknowledged that such a settlement was discussed in the earlier negotiations.
None of the parties connected with the lawsuit would say, however, whether such a settlement was still a possibility.
While state attorneys would not comment on their reasons for seeking a settlement, observers have said that the state, which was in control of the district during its bankruptcy and default last year, has been under considerable pressure from the state's bond community to resolve the situation.
"They are being pressured by all kinds of institutional interests," said Frank Calton, a Chevron Co. executive who sits on the Richmond school board. "There has been a trickle-down effect, and the situation is costing new school certificate issues between 25 and 50 basis points," he said.
Bond analysts agree that the Richmond situation has been costly for other state school districts, many of which are under financial strains like Richmond because of the recession and cuts in state aid. One analyst said that some institutional buyers have recently dropped out of the market for California school certificates altogether.
Mr. Calton, one of five members on the school board, said he has been a vocal proponent for a settlement with certificate holders, particularly if the district is to have any access to the bond market in the future.
Most other members of the board, which on May 4 took back control of the district from the state, also favor a negotiated resolution of the lawsuit, he said. "It's not in anyone's interest to have protracted litigation."
