WASHINGTON - Negotiations broke off between parties in the lawsuit over the Richmond, Calif., Unified School District's defaulted certificates of participation after a brief session Monday, and attorneys said yesterday they moving full speed ahead with the case.
"No offers were made, and no further meetings were set," said Ronald Ryland of Sheppard, Mullin, Richter & Hampton, lead attorney for the issue's trustee, U.S. Trust Co. of New York. after a 90-minute-long meeting with attorneys for the district and the state.
He added that after the other parties called the meeting, he was "somewhat surprised" that they did not even broach a settlement. As the district approaches the first anniversary of its default, it now appears poised to miss its third $1.1 million payment on the $9.8 million lease issue scheduled for July 15, he said, bringing the total past due close to $2.5 million.
Michael E. Hersher, deputy general counsel of the state education department, said the state and the district requested the meeting last month because the district's five-member school board at the time was discussing starting up payment on the certificates again and dropping the lawsuit.
The board on Monday still had not decided, however, whether to make an offer to the trustee, which would involve revising its budget for school year 1992-93 to permit at least partial repayment of the certificates, Mr. Hersher said.
As of yesterday, the district was "still thinking about making payment" and would continue to deliberate on the matter in a board meeting scheduled for Thursday, he added.
Officials of the board and district could not be reached yesterday for comment.
Frank Calton, a member of the board who favors a negotiated resolution, has previously said the board is likely to put off settlement for a while and let the state push ahead with its move in court to invalidate the certificates. If the Contra Costa County Superior Court nullifies the certificates, the district would be freed from any further need to pay, he said.
The state rocked the California leasing market in May with its argument that the Richmond lease issue was invalid because it was in violation of the state constitution's requirement that long-term debt be approved by voters.
The state's position, outlined in an initial filing before the court, prompted Standard & Poor's Corp. to warn that billions of dollars of lease securities outstanding in the state could be struck down if the court broadly upheld the state's constitutional argument.
That controversial argument will be fleshed out in a brief to be filed on Monday under a schedule laid out by the court, if the board does not first approach the trustee with a possible settlement, Mr. Hersher said.
After that, the court will consider the validity of the lease contract in its first hearing in the case, scheduled for July 31.
Also at that hearing, the court will consider the trustee's move to compel the district to include lease payments on the certificates in its annual budget once again, as required under the lease contract.
Standard & Poor's said it will be watching for the court's ruling on the trustee's motion, which also could be a critical one for California leases. Most lease contracts within the state contain covenants like Richmond's, committing the issuer to make lease payments as long as the money is available.
Because of such pledges, the ratings agency said, it gives California lease securities higher ratings than the lease securities in other states, where issuers can opt out of appropriating lease payments each year.
Because of the high stakes for both sides in the case, as well as for the broader leasing market, Mr. Hersher said he expects the case to be appealed, regardless of which way the superior court rules. Mr. Hersher has been working with the state attorney general as well as the. district in drafting a defense.
"We will go for broke, and expect appeals by the losing party." he said.
Regardless of the ruling, he added, he expects the case to spawn countersuits by the losing parties in an attempt to share blame and responsibility for the defaulted issue.
The district, for example, is examining whether to file a cross-complaint against the state to compel the state to share the burden of any economic remedy for the certificate holders ordered by the court, Mr. Calton said.
But if the court voids the certificates, the certificate holders most likely will turn on the issue's bond counsel and underwriters, and sue for compensation, Mr. Hersher said.
"After the first round. the case will break into a whole bunch of finger pointing," he said.
