National Clothesline

The city of Lodi, CA, which a year ago was locked in contentious legal battles with drycleaners and other local businesses over environmental contamination, continued to make progress last month in unsnarling the knot of problems that was costing millions with little advancement toward cleanup.

On March 3 the city agreed to pay Lehman Brothers $6 million to resolve a dispute over a $16 million loan the city had obtained from the Wall Street investment firm to fund its litigation against the local firms. Following the advice of an outside law firm, the city had decided in 1997 to sue the local firms and their insurers to cover the cost of cleaning up contaminated water supplies in the town of 59,000. The plan fell apart, however, when those firms and the insurance companies fought back, contending that the city’s leaky sewers had helped spread the contamination.

By the end of 2003, when a federal judge warned the city that its legal strategy was likely to fail, most of the loan money had been spent and interest was accruing at a rate reported as high as 25 percent. The city subsequently fired both its attorney and the outside legal firm and began pursuing a different path, seeking settlements with the various businesses involved and hoping to proceed with cleanups.

The first settlement came last fall with Busy Bee Cleaners agreeing to pay $475,000 toward cleanup. In December, Guild Cleaners reached a settlement in which its insurers will pay $4.2 million toward cleaning up the main, or “Central,” plume. Soon after, the Lodi-News Sentinel newspaper agreed to pay $2 million from its own assets to settle a claim hat it had contributed to pollution in the Central plume.

Estimates for cleaning up the Central plume, the largest of five plumes that have been identified, range from $16 to $24 million. The city’s own insurance company has agreed to pay $9 million, out of which at least $2.2 million will go toward the Central plume cleanup.

Meanwhile, the city sued Lehman last year to get of from under the loan. Lehman countered with a breach of contract suit against the city. The March 3 agreement to pay Lehman $6 million to settle the suit means the city has paid Lehman about $9 million of the original $16 million loan. As part of the agreement, Lehman will drop its countersuit against the city.

The city has also sued its former outside counsel, Michael Donovan, for fraud and malpractice. The city’s suit against Donovan is pending.

One part of Lodi’s failed legal strategy involved an attempt by the city to shield itself from cleanup liability by adopting the Comprehensive Municipal Environmental Response, Compensation and Liability Ordinance (MERLO). MERLO allowed the city to recoup a wide range of “action abatement costs,” including attorney’s fees and costs of servicing and retiring any financing arrangements it had entered into.

However, the federal court enjoined Lodi from enforcing MERLO, calling it an attempt “to elevate their (the city’s) financial interests above the priorities of cleaning up the pollution and resolution of the legal disputes.”