MARTINEZ, CALIF. The California Superior Court of Contra Costa County Friday dismissed on procedural grounds a motion to force the Richmond Unified School District to start budgeting payments again on its defaulted certificates of participation.
In a bench ruling, Judge John F. Van de Poel said there is no statutory basis for him to compel budgetary action by the district~s school board or to force the state to go along with any such action. His ruling comes in response to the first motion in the lawsuit filed this spring by the $9.8 million issue's trustee, U.S. Trust Co. of New York.
The judge stressed he was "not judging this case on the merits by any stretch of the imagination." He did not address the district's and the state's controversial argument that the 1988 certificates of participation issue was unconstitutional.
But his ruling nevertheless appears to strike a blow at a provision in the Richmond lease contract that is common to most lease financings in California - a covenant by the issuer to budget and appropriate lease payments each year.
The trustee's attorney, D. Ronald Ryland of Sheppard, Mullin, Richter & Hampton, pointed out to the court that the covenants have been added to lease contracts at the behest of rating agencies and investors to provide more "certainty" that lease payments will be made.
"The covenant to budget and appropriate is part of these financings. It is important to the financial market," he said.
In an analysis of the Richmond lawsuit this spring, Standard & Poor's Corp. also emphasized the importance of the budgetary covenants and said it was watching the suit to see if the court upholds them. The rating agency said that because of such covenants, it generally has given California lease financings higher ratings than lease issues in other states where issuers retain the right not to appropriate lease payments each year.
But the attorney for the district, Martha Buell Scott of Breon, O'Donnell, Miller, Brown & Dannis, said she believed the judge's ruling should not trouble the bond market much because he focused only narrowly on the enforceability of the Richmond lease's covenant. "I don't think this should be that bad for the market," she said.
At the end of Friday's hearing, Van De Poel asked Scott to work with his office and other attorneys on the case to draft an order that lays his ruling out in writing.
Ryland attempted to get the judge to change his mind during the hearing, arguing that several state Supreme Court cases established a precedent for enforcing provisions of a governmental lease contract once it is established that the contract is valid.
But the judge swept those arguments aside and insisted that he needed a statutory basis for enforcing the district's covenant.
"Whoever drew up [the Richmond contract] made a sincere attempt to make the contract a law," he said, citing language in the contract that said it "shall be deemed and construed as law." But that language was "not in furtherance of any statute," and cannot be enforced, the judge said.
Van de Poel said he did not come to his decision lightly. "I conceive of this as an important part of this litigation. I want you to know I spent a lot of time on this," he told Ryland.
Ryland said after the hearing that he and the trustee are considering appealing the ruling, considering its importance for California lease issues.
But he said his most immediate action will be to ask the court to compel the district to repay principal, interest, and penalties due on three lease payments totaling over $2 million that the district has missed since its default last year.
The judge indicated in his remarks that he would be more sympathetic to a demand for payments past due, which represent real damage to the investors, than he was to the request for assurance of future payments, Ryland said. Despite the presence of five state attorneys, including three from the attorney general's office, the state was for the most part mute at the hearing.
The judge said in his ruling he could not enforce the trustee's request that the court issue a writ of mandate preventing the state from interfering with efforts by the district to resume lease payments.
"A writ of mandate can't go to a prospective act," he said. "I don't think this could ever apply to the state."
The state was in control of the school district when it went into bankruptcy and default last year and continues to have veto power. over the school board's actions.