City Attorney Harriet Steiner last night at the Davis City Council Meeting announced that the Bankruptcy Court, Eastern District of California had ruled in summary judgment to dismiss involuntary bankruptcy proceedings against the alleged debtor, Davis Area Cooperative Housing Association, Inc. Ms. Steiner also reported that the petitioning party, Neighborhood Partners and Twin Pines Cooperative Foundation may also be sanctioned for attorney’s fees and court costs.
Summary judgment is appropriate in cases where there is “no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.” In this case, the key question was whether DACHA was a “moneyed, business, or commercial cooperation,” that may be an involuntary debtor under section 303(a).
In April in an effort to stop or delay foreclosure auctions from occurring Neighborhood Partners and Twin Pines Cooperative Foundation filed for involuntary bankruptcy.
According to the principles involved in this suit, “This petition begins a process that allows a federal bankruptcy judge to fully evaluate the issues that have been at the heart of this dispute. Since the Davis city council refused to authorize its own third party investigation into this matter, late yesterday, after weighing the legal alternatives, we determined that this was the most cost effective approach to halting the foreclosure and getting an impartial evaluation of the situation.”
The court found overwhelming evidence that in fact DACHA is not a moneyed, business, or commercial corporation within the meaning of section 303(a). The court ruled that they are “satisfied that DACHA has a nonprofit nature and character.” This is defined through their original and restated articles of incorporation whereby DACHA declares themselves to be “a nonprofit public benefit corporation and is not organized for the private gain of any person.”
The court further finds that the creditors, “do not challenge the nonprofit nature and character of DACHA” but rather “only DACHA’s nonprofit exempt status.” Thus the court rules, “there is then no disputed material fact that DACHA is nonprofit in nature and character.”
Perhaps as important, the court ruled at least as pertains to this case, “DACHA’s partial refund of initial member contribution was not a dividend as it only refunded contributions. It was not a distribution or return on investments. And it was a one-time distribution, made with the intention of equalizing the members’ interests in DACHA.”
This is an interesting ruling as the petitioners have claimed from the start that this refund represented a violation of the law in which assets could not be transferred from a non-profit to its membership. Here the court rules that not only is this only a refund, rather than a distribution, but they also it was consistent with DACHA’s bylaws.
The court further argued, “The creditors also have not explained how member deductions for mortgage interest and property taxes, and failure to enforce delinquencies on carrying charges, have transformed DACHA from a nonprofit entity into a for-profit entity.”
The court continued, “The opposition does not raise genuine issues of material fact as to DACHA’s conduct. The court is satisfied that the actual conduct of DACHA is consistent with its nonprofit nature and character.”
Based on that reasoning, the court concluded that there was no issue of “material fact” that DACHA was not a moneyed, business, or commercial corporation within the meaning of section 303(a) and therefore they entered a summary judgment in favor of DACHA. They we will determine at future hearing whether DACHA is entitled to attorney’s fees and damages.
The Vanguard received a statement from David Thompson on behalf of Neighborhood Partners early this morning that responded to the ruling.
“With $4 million dollars of public funds at stake NP has always wanted to have an independent review of the numerous allegations of law breaking and cover up that have occurred with DACHA,” said Mr. Thompson.
“We asked the City for an independent review and only Saylor and Heystek supported that effort,” he continued. “We thought that the Federal Court would allow for a third party review, reorganization through a settlement and also preserve the co-op. But once again, without any legal standing the Davis City Attorney jumped right in to oppose an independent review by a federal court.”
The court did rule that the brief filed by the City of Davis and the Redevelopment Agency of the City of Davis “carries no weight as those entities are not parties to the instant proceeding. Moreover, their brief alleges no standing for their appearance on this motion.”
Mr. Thompson goes on to allege that the Davis City Attorney is spending thousands in public money on a court issue in which the City has no standing.
Mr. Thompson does not address the court’s ruling itself or the likelihood that foreclosure proceedings will not commence.
He does state, “Yesterday, we emailed the Council to ask once again to not do the foreclosure and enter into settlement discussions which will preserve the co-op. NP would like to stop this continued waste of public funds. However, we fully expect the City to ignore our request.”
David Thompson continued, “We on our part will now strongly pursue our existing rights as well as additional ones. We do not understand the city staff’s waste of resources on their war on cooperatives.”
“You do have to ask why City staff appears so intent on hiding the truth,” he concluded.
The Vanguard continues to believe that it would be in the best interest of the city to know the role that the city of Davis has played in the proceedings. It will be interesting to see if the view of the court hear on the share refunds will hold for later court proceedings.
—David M. Greenwald reporting
In the Federal Court ruling (page 3), the Judge curiously wrote ”… the brief filed by the City of Davis and the Redevelopment Agency carries no weight as those entities are not party to the instant proceeding. Moreover, their brief alleges no standing on this motion”.
So once again the City Attorney is spending thousands of dollars of public money in a court case in which the Federal Court writes that the City has no standing. Yet here are a gaggle of lawyers in the courtroom for DACHA and the City spending more public funds without having any legal standing. I think the highest priced City lawyer at the hearing is charging the City of Davis almost $400 an hour to be in Federal Court. The Citizens of Davis should be watchful of where our public dollars are being spent.
In the midst of all this, has Harriet Steiner shared with the City Council what is happening at her law firm. Many of the lawyers at McDonough, Holland and Allen appear to be attempting to jump ship and trying to get jobs with other legal firms in Sacramento. The main story is that there are unresolvable conflicts between the business and public practices and other difficulties at the firm. Ten lawyers deserted McDonough earlier this year. We have heard from other firms that many more lawyers will soon be leaving McDonough. Will the lawyers being paid by the City of Davis on Monday be with the firm a month from now? I look in the Bee everyday for the story on what will be the fate of McDonough et al. what will that mean to the City of Davis. Perhaps the City will finally have a chance to put the city attorney contract out to bid and gain savings?
When I get the next set of bills from the City Attorney and her firm I think they will show that her firm has now paid and consulted with close to 30 lawyers to the tune of around $200,000 on DACHA. Staff has probably spent another $150,000 in time and Davis public funds of another $150,000 may have been used by DACHA for legal fees. DACHA is a massive waste of a half million dollars of Davis’ public funds.
Among all of this I would like to raise this question. Some of the legal issues that are and will be on the table relate to advice that Harriet’s firm has given the city. I wonder how appropriate it is for Harriet’s firm to be paid to defend those actions. Seems like a conflict of interest to me.
Here we have all this expensive legal work by Harriet and a horde of lawyers McDonough et al. behalf of DACHA, an organization with an improperly seated board, alleged to have broken numerous state laws including taking part of the borrowed public funds and distributing over $200,000 to themselves, a board and members that was delinquent over $60,000, not paying their loan of public funds from the city. And now we learn that DACHA appears to have stiffed their previous lawyer, Geoffrey Goodman for $93,000 and were not, according to the DACHA President a month ago able to pay their present lawyer.
And somehow DACHA is an entity that the City Attorney keeps funneling our public funds to defend.
As the Enterprise headline said earlier this year, “DACHA’s dealings are fishy”.
You can see the Steiner and McDonough billings on line at http://sites.google.com/site/itsthelawdacha/home
Sanctions and court fees are in order. Court costs and attorney fees that the city has been forced to pay played an important part in the apparently continuing strategy(indicated above) to use the cost to the city of NP’s suit to inflame public opinion in its favor.
“The Vanguard continues to believe that it would be in the best interest of the city to know the role that the city of Davis has played in the proceedings.”
NP fully agrees with the Vanguard on this point. Most of the DACHA meetings were held on City property with a City appointee on the board and city staff present.
Quotes from the Arbitration Award filed with the Yolo County Court in June, 2009.
Quotes by Kenneth M. Malovos, the attorney jointly chosen by DACHA and Neighborhood Partners and approved by the Yolo County Superior Court.
“What is curious is that representatives of the City of Davis were present throughout the entire time when the new Board took these untoward actions and they did little to discourage the Board”. (Page 5 of Arbitration Award)
“The testimony by three members from DACHA who appeared at the arbitration can only be described as cavalier. For the most part their testimony was characterized by failures of memory, contradictions and a certain inability to admit even their own written words. Two of these members appear to have been in serious arrears in their fees during times that they were members of the Board, in direct contravention of the bylaws”. (Page 7 of the Arbitration Award)
In response to davisite2, the city was not forced to spend a penny on the federal court case as the Federal Judge had said the City had no standing. Yet, I suspect the city will be billed by $350- $375 an hour lawyers. We’re probably up to 30 lawyers (paid or consulted with)that public funds from the City of Davis have paid for re DACHA.
Who keeps approving uneeded, unwarranted and wasteful legal bills that the citizens of Davis are paying for.
When I brought to the City’s attention that the City had lost out on $10 million dollars by not having a community equity second on 52 homes in Wildhorse the City Attorney said they had forgotten.
How much has the City now lost because it forgot to have the right legal documents in place on Sharps and Flats?
There are things amiss and deserve to be uncovered.
DACHA could have(and should)been solved a long time ago.
DT: “Who keeps approving uneeded, unwarranted and wasteful legal bills that the citizens of Davis are paying for.”
The City Council?
DMG: “Perhaps as important, the court ruled at least as pertains to this case, “DACHA’s partial refund of initial member contribution was not a dividend as it only refunded contributions. It was not a distribution or return on investments. And it was a one-time distribution, made with the intention of equalizing the members’ interests in DACHA.””
This would seem to be at odds with what the Arbitrator ruled, perhaps indicating the Arbitrator got it wrong?
On this aspect, which is critical, I believe that the Federal Judge was quite incorrect and our attorney was given only a few minutes to respond to the entire ruling. What the DACHA members received was not just their contributions but an interest rate of up to 7% per year on their share. Not bad at a time of getting 2% at a local bank.
An IRS ruling (Commissioner v Lake Forest Inc) which is case law supported our contention that a housing cooperative was an economic and private cooperative undertaking.
This type of payment is a return on investment and relates only to the member investment. Differently than a patronage refund that is paid by the Davis Food Co-op which is a dividend on your transactions with the cooperative.
DACHA members received $82,823.16 of interest on their shares. One member received an interest payment of $7,600 on their $20,000 share.
California law states that members can only receive their shares back when they leave the co-op and none of these members had left the co-op.
DACHA borrows $4 million of public funds from the city and then uses those funds to distribute about $240,000 to themselves in conflict with the legal opinion that DACHA and the city had received.
On the other point the Arbitrator did get it right.
The bylaws required that if a board member is behind more than 30 days on their carrying charges they must be automatically removed from the board.
The DACHA board members and officers were all behind in their monthly carrying charges so they should have been automatically removed from the board. The City knew this and took no action.
On June 30, 2008, DACHA members were delinquent $64,713.32 to the organization. Was the organization up to date on its loan to the city?
The City of Davis knew this and took no action. The City of Davis was sort of a source of no interest loans to DACHA members. Seems like none of them paid penalties for being behind.
So the Arbitrator got it right and brought it to the attention of the City which chose to take no action on a potential misuse of public funds.
In today’s Enterprise Sue Greenwald said that the city is losing money on DACHA because the co-op’s residents cannot afford to pay rent.”
Really?
The former Treasurer is paying $943 for a single family home in Lake Alhambra Estates. The average one bedroom apartment in Davis according to the UCD Housing study is $947. One of the DACHA members told me she wondered why city staff gave the then Treasurer such a lucrative below market deal?
And so if she is not paying her rent then it is the City that is not being paid? Are we the citizens coughing up the $20,000 a month that Sue Greenwald said the city is losing on DACHA?
The President of the Co-op told us in April that the former Treasurer had run up her delinquencies to DACHA into the thousands of dollars. If the City is losing $20,000 a month sounds like a lot of residents are not paying but we the citizens of Davis are?
Sensibly, the DACHA President said she went to city staff in probably March and asked for money to evict the non-payers. She told us the City staff said they would not let her do that. Why is city staff protecting non-payers?
Why is the city allowing such waste to go on. At $20,000 a month, they could have easily partially settled the debt to us.
The effort by DACHA and the City to not have us paid our rightful legal claim has probably consumed almost a million dollars in legal fees, lost rent, staff time, unpaid debts to the city, lower interest income,and preferential rent levels at 80% for which no member has been qualifed. This is a huge amount of waste that the City Council needs to have an independent investigation of but will no.
Why is the city not collecting rent and why is the city allowing major delinquencies to mount? One of the advantages of bankruptcy court would have been to appoint a trustee who would move quickly to make DACHA viable and would have evicted chronic delinquents. Any normal lender would have taken action.
As a Davis citizen I dislike the preferential treatment the city staff have given DACHA residents for a number of years. If your rent is $943 and you happen to have been delinquent for five years as the records show and the mortgage to the city is not being paid you have to ask what is going on between the city staff and some DACHA members. Yet the residents and the city fought the bankruptcy.
A full disclosing of what DACHA owes the city and who at DACHA is delinquent is needed. These are our taxpayer dollars.
Once again a legal obligation is not being met by DACHA and city staff are seemingly taking no action to protect the city’s interests.
DACHA’s dealings are definitely Fishy!
The question of whether DACHA violated state law by refunding part of member shares (plus interest) before the members left the co-op is an issue that will be decided in state court. The federal judge simply expressed his opinion that distributing those funds to the members was not a “dividend” for the purposes of his deciding whether DACHA was a “moneyed interest”. He made no comment about whether that action was legal according to state law. A jury in Yolo Superior Court will decide that issue beginning in September.
What is truly baffling about DACHA’s successful effort to remove their organization from the legal protection of Chapter 11 bankruptcy is why they would fight to allow the city to foreclose on them. You would think that they would not want to lose their homes and their equity.
One explanation for DACHA’s cooperation with the city in fighting the bankruptcy filing is that DACHA has made some kind of “deal” with the city to get something in exchange for its cooperation.
In today’s paper Sue indicated that about $20,000 is being “lost by DACHA, because its members are not paying their rent. Our understanding from reviewing DACHA’s rent roles is that this behavior has been going on for a number of months now. If so, then why have these people not been evicted for non-payment of rent? Perhaps the city is allowing them to fall behind in their rents so that by the time the foreclosure occurs the members un-paid rents will be equal to the amount of their equity that would be wiped out in the city’s foreclosure?
Is is not legal for a debtor to collude with one creditor to ensure payment of their debt, while denying the debtor’s other creditors a chance to collect their debts. That behavior would have been examined closely in federal bankruptcy court. Perhaps that is why DACHA and the city fought so fiercely to squash the federal review of their actions.
The judge had ruled and is considering sanctions, not very auspicious if one is considering putting up another $70,000 plus for an appeal.
I don’t believe you can appeal summary judgment. The bankruptcy action seems a long shot given the parameters of the law which the judge was able to rule on. State court actions will not face such a clear cut restraint.
LW: “In today’s paper Sue indicated that about $20,000 is being “lost by DACHA, because its members are not paying their rent. Our understanding from reviewing DACHA’s rent roles is that this behavior has been going on for a number of months now. If so, then why have these people not been evicted for non-payment of rent? Perhaps the city is allowing them to fall behind in their rents so that by the time the foreclosure occurs the members un-paid rents will be equal to the amount of their equity that would be wiped out in the city’s foreclosure?”
Hmmmmmmm… it is normal common sense practice for a homeowner not to continue making mortgage payments if the homeowner is being foreclosed on… in fact banks will insist that there be a cessation of mortgage payments before the homeowner is eligible for a loan remodification…
And if a tenant of a leasehold knew s/he were to be evicted, why would s/he continue paying rent? A co-op is sort of a hybrid of the two, no?
Dear Vanguard Readers,
I find it deeply ironic that Mr. Thompson is unhappy about the city’s potentially paying DACHA’s legal fees, because had he not brought the suit in the first place, nobody would have had to spend any funds for legal action – not even he himself. Nevertheless, I don’t think the taxpayers have much to worry about. Considering that the judge laughed Mr. Thompson’s forced bankruptcy suit out of court, and considering he issued a summary judgment awarding damages and legal fees to DACHA because he ruled the suit frivolous (also further describing Mr. Thompson’s interpretation of case law as “artful dodging”), it’s likely the city won’t be spending dime one on DACHA’s legal defense – at least for this case.
It seems that most of the actions Mr. Thompson takes result in consequences he doesn’t like and spends a great deal of time complaining about. I’ll provide an example, one that will also address some of the questions I see above. There’s concern being voiced over our residents’ unpaid share assessments, and concern (and not a little conspiracy theorizing) over why DACHA hasn’t taken action to evict said residents. Simple Newtonian physics: for every action, there’s a reaction. Mr. Thompson froze our accounts; we had no funds to prosecute an eviction proceeding. Evictions are expensive; they require a $700 filing fee plus additional associated legal fees. If our accounts were frozen such that we couldn’t even hire someone to clean a single resident’s gutters, I ask how we could have paid to prosecute an eviction? The financial situation only changed as a result of Mr. Thompson’s filing the forced bankruptcy lawsuit. Now that the city has ensured we can pay for legal fees, we’re taking action against the delinquent residents.
I will acknowledge that one of Mr. Thompson’s complaints has merit: we have some issues with share equity. A (very) few residents’ assessments are lower than others relative to the size of the units, and a single unit, the one Mr. Thompson cited, is below the average rental price in Davis. This does not mean that *all* the units in DACHA are as low as he appears to infer, however.
This single unit, and the problems with equity it represented, was one of the reasons the residents were dissatisfied with the old board. It’s why they elected the new board of which I am a part. The new board created and approved a plan to both increase share assessments (thus bringing them more in line with the Yolo County affordable housing guidelines) and to make shares more equitable. However, there has been no point in implementing the plan however, due to the increasing legal threat from Mr. Thompson. Since our accounts were frozen anyhow, it seemed equally pointless to incur additional burden on our residents until any of us knew what was going to happen; whether DACHA would even survive. Implementing any financial plan was equivalent to rearranging deck chairs on the Titanic. Thus the plan was tabled.
Here’s another Newtonian action/reaction resulting from Mr. Thompson’s freezing of our accounts: the City foreclosed when we inevitably defaulted. Many of the residents didn’t (and still don’t) know what to do or even who or whether to pay. I cannot speculate on what they’ve been advised by their own personal counsel, but I do know this: DACHA would have been able to make its loan payments – and meet its obligations to the oft-cited damage award – had the levy not occurred. Note the newly-elected board attempted to enter negotiation with Mr. Thompson about the levy all the way back in October when it happened, but his lawyers did not respond to our entreaties.
Mr. Thompson seems incapable of acknowledging that his Quixotic crusade is what’s costing both him and the Davis taxpayers, not DACHA. DACHA would not be under threat of collapse or foreclosure, or its residents under threat of eviction if it wasn’t creaking under the weight of Mr. Thompson’s avalanche of frivolous litigation. He is the architect of his own misery and of ours; only he can make his problems go away.
Sincerely,
Ethan Ireland
DACHA Treasurer