On September 30, the Vanguard first broke the story on the troubles of DACHA questioning city actions in the summer of 2008 as the city council authorized a loan to the Davis Area Cooperative Housing Association as part of its refinance. Since that time, two law suits against DACHA by Neighborhood Partners and Twin Pines Cooperative have cast serious doubt on the efficacy and legality of that refinance. To this point the city has not been forthcoming as to their role in this and it appears their actions have made the cooperative less secure rather than more secure.
Last week’s council meeting was supposed to shed light on what had occurred but for most it raised more questions than answers, particularly the baffling decision by council, by a 3-2 vote, not to look further into the problem by means of third party review. Moreover, for the first time the city acknowledged that DACHA rests on very shaky ground and is in danger of defaulting on its loan to the city and therefore the city could end up foreclosing on the homes of affordable housing residents.
Councilmember Lamar Heystek at last week’s Davis City Council meeting with the city council acting as members of the Redevelopment Agency board of directors, made the comment that he wanted to understand more about the city’s role as regulators than that of lenders. Indeed, it seemed at times that the city was more interested in protected it’s $4.15 million loan to the DACHA organization than it was interested in getting to the bottom of what had occurred. The RDA announced that its lawyers will begin the necessary legal proceedings to protect the city’s investment.
This is particularly vexing since the city is claiming that its loan is not at risk. What is at risk and would appear to be the city’s top priority, or at least should be, is the future of DACHA itself and the housing of its members.
According to the city staff report, DACHA was current in its payments on the loan up until September. However, as reported last week, the nearly $350,000 arbitration ruling against the organization and subsequent levy on their assets by Neighborhood Partners has put the organization at risk. They missed their October payment.
One of the key issued the Vanguard has raised is the matter of the repayment to the members of the share payment. Each member upon entry was required to pay over $21,000 into the organization. Many could not afford the share payment and therefore borrowed the money. The refinance worked to reduce both the share payment from $21,000 to $6,000 as well as the monthly carrying charge.
However, Twin Pines Cooperative has challenged the legality of the repayment to members arguing that the law forbids redistribution of corporate assets. They cite California Health and Safety Code Section 33007.5.
According to California Health and Safety Code Section 33007.5:
The corporate equity shall not be used for distribution to members, but only for the following purposes … (A) For the benefit of the corporation or the improvement of the real property (B) For the expansion of the corporation by acquisition of additional real property (C) For public benefit or charitable purposes.
Moreover:
Members are only allowed to receive a distribution of “transfer value” at such time as the members ceases to be a permanent member of the corporation.
The city attorney argued both at the meeting and in the staff report that this was simply a refund in an overpayment not a redistribution of the assets.
The point that seems missing from this analysis is the fact that one of the reasons the Health and Safety Code might preclude such redistribution of corporate equity is precisely the reason that we are seeing right now–it leaves the organization vulnerable to take assets from it no matter how good a justification one has.
The record shows that more than $200,000 was transferred from DACHA back to its members, had that money stayed with DACHA, DACHA might not be in danger of foreclosure now and they could have paid off a majority of the judgment against it.
But the truth of the matter is that the city has the choice as to whether or not they need to foreclose on the homes in order to secure payment. There is no need to do that.
As the Enterprise writes:
“In the worst-case scenario, DACHA would declare bankruptcy and dissolve as an organization, or the Redevelopment Agency would foreclose on the homes, Foster said. She added, however, that it is too soon to speculate on the likelihood of those outcomes. “
But it then goes on to state:
“Community Services Director Elvia Garcia said the city has the flexibility to suspend DACHA’s loan payments, extend the payment period or work out other payment options…
Garcia said staff members will do their best to reclaim the city’s investment, while keeping the co-op intact for the families living in those homes. The units are on Arena Drive, Albany Avenue, Marden Drive, Tufts Street and Glacier Drive.
‘The city is not saying we’re going to foreclose and put these people on the street,’ Garcia said.”
At the last meeting, Councilmember Souza attempted to coax DACHA and Twin Pines to reach a settlement, but from this, the city appears to hold as many if not more cards than Twin Pines. The city is the lender here and their priority should be to secure the DACHA organization and then recoup the loan from the Redevelopment Agency rather than the reverse.
A settlement on payment arrangements is necessarily a tricky thing anyway since there is the payments from the previous lawsuit and the pending current lawsuit to deal with.
Several of the questions that have arisen about the legality of city actions as well as the legality of the DACHA will be addressed in the next lawsuit, but if it proceeds to trial, it will take several years that the organization likely does not have to figure things out.
What is clear is that the city is now completely entangled in this issue, but for the most part they hold the cards here. They determine whether or not to suspend DACHA’s loan payments as they attempt to pay off their legal debt. So it would appear that the threat of bankruptcy or foreclosure is a move to put pressure on Twin Pines and possibly DACHA as well.
In the meantime, someone really needs to untangle what happened here, if it is not going to be a third party employed by the city, it is going to have to be the Grand Jury who has the authority to subpoena documents and compel testimony.
—David M. Greenwald reporting
I’m not convinced. The card that the city holds is called foreclosure. It could be a fine time to play that card. The courts have agreed with NP/TP every time that DACHA isn’t paying its bills. More lawsuits are only going to make things worse.
I understand the goal of providing limited-income housing. The problem is that this is some of the most expensive charity that I’ve ever seen.
By the way, David, the expiration problem is not fixed. After 5-10 minutes, the page now thinks that I am logged out, even though I’m not. My best solution is to shift-reload the page to post the comment. There shouldn’t be any expiration of this sort. Even if there were a reason for such an expiration, it’s a malfunction if the comment page calls me logged out while the login page calls me logged in. (Indeed, my old solution was a greater hassle. By saying that I was not logged in, the comment page was asking me to log out and then log back in again, so that is what I would do.)
I disagree with your analysis, given the award resulted from a dispute between DACHA and NP. At the end of this dance Twin Pines will fail in their lawsuit because Steiner’s interpretation is correct: the City/RDA stepped in to provide some rational financing, and vastly improved the financial outlook for DACHA going forward. No fees, commissions, or ‘private loans’ required.
Why does this all have a familiar ring ? Oh, yes, the self-serving real estate/financial dealings that have brought our country’s economy to the brink of collapse. It looks like the mandatory consultant for DACHA gave bad “advice” to the citizen DACHA board who relied on said expert’s advice to take on unsustainable loans, issued by self-same consultant or group(s) he was closely affiliated with. How the “moral hazard” concept here? Those who made the bad loans should take the lion’ share of the “hit”.
Davisite: So I’m clear, “Those who made the bad loans should take the lion’ share of the “hit”.” Are we talking about the city, NP/ TP, or DACHA? (I see some blame to spread around here, but I also know which people are most vulnerable).
Neighborhood Partners and Twin Pines.. NO BAILOUTS.
The problem is that right now you are not bailing out NP or TP. They have no current responsibility or liability in this. If nothing happens, DACHA, the members lose out. You would have to take NP or TP to court to make them responsible and so far the courts have ruled in their favor.
If DACHA declares bankruptcy and is restructured under a different name (with city support in the interim), won’t the amount of its debt responsibilities to NP/TP be decided in bankruptcy court with NP/TP well back in the creditor line?
I believe that the debt to NP/TP was wiped out when the city loaned DACHA the $4.15 million. So I do not believe they owe anything to NP. Maybe David or Luke can post and clarify on that point.
After watching the CC last week and following the conversation on the blog, the Enterprise article did more to confuse than illuminate. Can someone give a clear summary of where the city and 20 homeowners are presently and the options available?
PS: low blow to show the large YES ON P ad when registering for the blog!
Mr. Greenwald, I too would be interested to know how much of (or whether any of) the loan from the city went to service or pay off loans made to DACHA members by Neighborhood Partners.
Messieurs Thompson and Watkins, can you provide any context or background on this behalf? It seems one of your complaints regarding DACHA is over whether city funds went to service loans made by NP. If this is the case, why would it be a matter for complaint?
“I believe that the debt to NP/TP was wiped out when the city loaned DACHA the $4.15 million. “
It was very difficult to follow the Council discussion but I thought that this issue was raised from the dais, asking for reassurance that “reserve monies”(was this the loan that the city was to give to DACHA?) would not be available for servicing these loans.
“…..so far the courts have ruled in their favor.”
There’s a world of difference between receiving a judgement and being able to COLLLECT.
For almost four years the DACHA leadership has pursued dissolution of DACHA which would result in $4 million dollars of public good being transferred to private gain, ie each DACHA member obtaining $200,000 of gain over a short period of years.
We would not be in this mess if city staff had stepped in and said no.
Blowing the whistle on the city staff forgetting to put a community equity second on 52 homes in Wildhorse, 7 on Marden and 6 in Willowbank amounts to up to $13 million in lost income to the City’s affordable housing program.
Twin Pines Cooperative Foundation provided to the City the legal opinion that it was wrong to distribute to members and dissolve the corporation in favor of existing members. The city received this prior to the distribution but completely ignored the legal opinion. In fact the later response from the City Attorney critiqued me for not bringing it up when I have the evidence to show I had. The City Attorney also threw everyone off the scent by writing it on September 17 when in fact DACHA had made a distribution to the members on September 10.
Here are some quotes from the City Attorney’s letter written to NP’s lawyer on September 17.
“ it is my understanding that DACHA is not providing any cash benefits to members with the share stabilization,…”there was no cash distribution or dividend payment based on each member’s ownership” and ”there was no distribution to the members”.
From the information I now have, on September 10, DACHA sent a check to 16 members of DACHA from the taxpayer funds it had just received. From the breakdown of the records of those 16 checks, DACHA paid approximately $73,000 in interest to DACHA members and used those same taxpayer funds to pay off nearly $22,000 in individual member delinquencies.
According to California Health and Safety Code Section 33007.5
The corporate equity shall not be used for distribution to members, but only for the following purposes … (A) For the benefit of the corporation or the improvement of the real property (B) For the expansion of the corporation by acquisition of additional real property (C) For public benefit or charitable purposes.
Does this jibe with what the City Attorney said in the quotes above and state law?
David Thompson, Neighborhood Partners. LLC.
David,
While in your view the previous DACHA leadership may have pursued dissolution, I don’t have anything beyond your word to verify or disprove this statement. Yet. Nevertheless, be assured that I will investigate this claim. In contrast however, I can state with authority that just as our attorney stated last week, dissolution is not the goal of current DACHA leadership, nor is it, I am certain, the goal of the vast majority of DACHA residents. We seek to remain a viable cooperative, which means achieving financial stability and meeting our obligations to you. We do not, repeat DO NOT seek an undue gain of taxpayer dollars by dissolving DACHA in the manner you described.
Any suggestions on how we might meet our obligations to you are welcomed; our membership is as I have stated multiple times now, too unfamiliar with the process of litigation and frankly still too shell-shocked to come up with any solution we can put on letterhead and send to your attorney. Asking us to present a repayment solution before you negotiate with us is, frankly, setting us an unattainable goal. Most of us can’t really conceive of $350,000. Very, very few of us will ever see that kind of money at one time in our lives, and the fact that we have to pay such a sum is, frankly, terrifying. Therefore when we were presented with news of this reward it’s not surprising the residents have reacted in the way that they have. We’ve got our heads together now; we’ve got a new board and we’re keen to come to the table with you and hear solutions on how we might meet our obligations.
While your post definitely provides some background context, it merely reiterates those points you brought up last week and here on Vanguard. You have failed to answer my question regarding the use of taxpayer funds, however. I am curious over this statement in particular:
“…used those same taxpayer funds to pay off nearly $22,000 in individual member delinquencies.”
This is what I had a question about. Taxpayer funds were used to pay off delinquencies to whom? DACHA itself? Neighborhood Partners? If those funds went to pay off loans that may have threatened the stability of DACHA as an organization, it would seem that such a use of funds would fall under the first sentence of clause (A) of §33007.5 – for the benefit of the corporation. It seems to me that the actions of DACHA would then indeed have jived with state law, but naturally a determination from a judge would be required to settle that argument. Therefore I ask you again: did money from the city’s refinance go to pay off loans made to DACHA members by Neighborhood Partners? If so, why is this a source of complaint?
Hell, we could argue over our personal interpretations of all kinds of laws and regulations until we’re blue in the face — but let’s talk about what’s behind the issue: over the past few years there’s been a lot of acrimony between you and a few select members of DACHA. It is perfectly understandable that you would want to litigate your interpretation of the law to punish those individuals for their behavior toward you. I understand very well that your business suffered a loss. It would seem to me that both you, Luke and your respective businesses could easily weather such harm — easily, at least, in comparison to that which currently faces all the DACHA residents. For the harm you were done you were awarded a judgment of $350,000+ — for which, as I keep saying, we are keen to work with you to come to a solution on how to pay.
I would ask you to please recognize that there are many, many other people in the cooperative beyond those few individuals with whom you have a bad history. These people mean you no harm or ill will, but are at real risk of harm themselves by your continued litigation; a far greater harm than any of us are capable of weathering. As a representative of these individuals who represent the majority of DACHA, I am pleading with you to set aside your grudges and negotiate some kind of resolution with us.
I ask you again, what do you have to lose by negotiating with us?
Regards,
Ethan Ireland
DACHA Treasurer
[i]Most of us can’t really conceive of $350,000.[/i]
But you don’t have to. You only have to conceive of $17,500, because that is the amount owed per house.
[i]It is perfectly understandable that you would want to litigate your interpretation of the law to punish those individuals for their behavior toward you.[/i]
Did the judgment include punitive damages? Because from the sound of it, this wasn’t about “punishing” anyone, it was about unpaid bills.
The city attorney has provided explanations and then different explanations to defend the unlawful distribution. Today’s information was new because by breaking down the structure of the payment we arrive at $73,000 in interest that was paid to members. The City Attorney argued first that there was no distribution (see previous posts) and then later there was no dividend. The debts of almost $22,000 that was paid off were delinquencies that individual DACHA members had to DACHA not anyone else. Seventeen of the seventeen members I have records for all were behind in their carrying charges to DACHA to the tune of $22,000.
From the information we have city staff appear to have designed and now defend the refinance program. Did the city staff tell DACHA members that this plan was legal?
If I add in the delinquencies of the three members that number comes to well over $30,000. At one point in June of 2008 I believe that the DACHA members were behind $64,000 in delinquencies to the organization.
NP made no loans to DACHA or DACHA members.
If the DACHA board at the time had set aside some of this as a reserve to cover any settlement then that would have been a prudent action to take. However, what do you call distributing over $200,000 to the members in contravention of the law after having received a legal opinion against it?
Courts do call back all transactions that are found to be illegal.
The City is the only entity that talks about foreclosure. It is regrettable that the City does this as that of course is scary to DACHA members. Neither NP nor TPCF brought up foreclosure.
It is not our interpretation of the law that is up for discussion here it is the law itself. Your lawyer was given an opportunity to get the case kicked out and could not. The judge rule there was merit to the allegations.
A note for Ethan. I am glad there are new faces on the board and we welcome a new perspective. There were no punitive damages in the NP award just an award based upon a contract not fulfilled by DACHA. Luke and I are interested is seeing the award paid and California law for cooperatives and the Davis Stirling Act upheld.
However, NP will not be discussing the award process here but through appropriate channels which best protect all parties.
What we will discuss here will be the facts associated with the different laws and legal issues and to counter any mistruths or inaccuracies that are raised on the blog. Ethan we are also grateful that you use your own name and we ask that all contributors on this matter identify themselves.
David Thompson, Neighborhood Partners. LLC.