INLAND EMPIRE FOCUS: Desert city bankruptcy may halt creditors, aid developers: Disincorporation looms for Desert Hot Springs if court kills Chapter 9 filing Published: January 14, 2002 Page: 1 By John Waters Jr. The Business Press The Dec. 19 bankruptcy filing by the city of Desert Hot Springs could have an unintended fringe benefit: a building boom in the Coachella Valley's city on the hill. "There are about a dozen projects that have been waiting for this issue to get resolved for a long time," said Ed Kibbey, president of the Building Industry Association office in Palm Desert. "If the court permits the Chapter 9 (filing), the city will be able to work out a settlement with its creditors and lenders will begin to release their funding. "Lenders will not risk millions on projects in cities that might not be able to pay for services, or that might have to disincorporate," he said. "For years, that is how lenders and developers have looked at Desert Hot Springs. Who wants to invest in projects that might not make a penny?" Los Angeles-based attorney William J. Davis expects to file a motion with the Ninth District Court of Appeals by Jan. 14 to dismiss the bankruptcy. Davis represents Silver Sage Partners Ltd., a group that prevailed against the city in a federal Fair Housing Act lawsuit. Within 28 days of Davis' filing, the appellate court will decide whether the case belongs in bankruptcy court. If the bankruptcy is thrown out, the city will almost certainly face disincorporation, said one building industry official who requested anonymity. "The city seems to prefer (bankruptcy) to paying me or my clients," Davis said Jan. 8. "If you were running the city, why wouldn't you just approach the county to approve bonds to help pay the debt? No one has to file bankruptcy. "The city can make payments, they just don't want to, and is using the bankruptcy court as a litigation tactic to avoid paying the judgment," Davis continued. "I'm confident the court will see their efforts as dishonest." Against the wall The city filed for Chapter 9 in U.S. Bankruptcy Court in Riverside after the U.S. Ninth District Circuit Court of Appeals refused a request by the city to block Davis from seizing city assets to satisfy a $3.1 million judgment. The judgment was handed down in 1994 after a 12-member jury found the city guilty of violating the Fair Housing Act by discriminating against poor and minority families. The judgment was appealed and reduced to $380,000. When Silver Sage, a developer of low and moderate income housing, appealed that reduction, it was further reduced to $1. In May 2001, the federal court reinstated the original amount. Since then, the city has been considering its remedies, which have included filing bankruptcy. The city must also pay the court costs for Silver Sage Partners, an amount that almost equals the amount of judgment in the 12-year legal battle. Additionally, the city is faced with satisfying a federal injunction requiring it to amend its housing element and five-year general plan to "remediate past injustices" to its poor and minority residents, Davis said. "That particular liability is not listed on their bankruptcy petition," he said. The current year's general fund budget is $3.4 million. Davis estimated that he and his clients are owed "about $7.5 million." He said he will not settle for less than the amount of the judgment or his fees. "Finance that at 4.5% over 30 years, and the payments would be in the neighborhood of $456,000 a year," Davis said. "I will see that I and my clients get every last nickel." Davis claims that the city is "not truly insolvent." If the Dec. 19 filing is upheld, Desert Hot Springs will be the only city in California to have ever filed bankruptcy, according to bankruptcy attorney Jim Johnston. Johnston was one of the lawyers hired by Orange County when it filed for bankruptcy protection in the late 1990s. He has been hired by Desert Hot Springs to represent the city in bankruptcy court. "The cases are very different, obviously," Johnston said Jan. 8. "I am hoping I will be able to use some of the expertise I gained from that rather complicated case to help the city satisfy as many of its creditors as it can." Developer not so sure Bay Company Developments, a real estate development company based near Fresno, once scouted the Desert Hot Springs area to locate a project there. But it decided against it, in part because of the city's reputation for being unfriendly toward development. "I find it hard to believe that a developer would even think about going into a city that has filed bankruptcy; the only caveat being that the court appoints some sort of supervisor," said Bay Company President Dwight Long. "My understanding is that the city has only filed bankruptcy to keep from paying this one debt -- which I think that the court will see as pretty transparent. "Developers are subject to a plethora of regulation," Long said. "We take a dim view of cities that repeatedly try to circumvent the legal process." Slow or no growth Desert Hot Springs has grown up on the hills above the rest of the Coachella Valley. Many residents laud its views as "better than the rest of the valley." Its municipal water provider has won national awards for its clean-from-the-tap supply. In the summer, Desert Hot Springs is always 10 degrees cooler than the rest of the cities in the Coachella Valley, yet the city has not experienced the kind of growth found on the valley's floor. There are some 40 resorts, hotels and spas, large and small, in the city. Since the 1960s, according to reports in the community's now-defunct newspaper, the Desert Sentinel, Desert Hot Springs has had a number of slow-growth or no-growth city councils, including the city council that originally shot down the Silver Sage project. "Desert Hot Springs is a wonderful town," Kibbey said. "The area is great. Clean water, and a huge amount of space for development, but it has had some of the dumbest city councils, and the city council that initially turned down that project was perhaps the dumbest one of them all." In 1989, Silver Sage was a project on the move. Although low-income, it was not a welfare project. Among amenities for the low-income families who moved there was free child care. It had originally been approved by Riverside County Board of Supervisors because it was located outside of the city limits and was in line to receive several million dollars in state low-income housing development funds. In 1990, the city annexed the property. Because the property had become a part of an incorporated city, the state required certification of the project by the city council. During a closed-session discussion among city leaders regarding the project, a pair of city council members remarked that they didn't want to see "a bunch of "minority kids running around" that part of town, according to court records. The city council denied the project. "What kind of city council goes against the advice of their own attorney?" Kibbey said. "No developer wants to risk millions on a project that might not make any money because the city might not be able to provide services, or that may no longer be a city. "Developers are going to lose a lot of land for development in the Coachella Valley once the Endangered Species Development Act becomes law, and Desert Hot Springs is wide open for development," he said. "If the court denies the bankruptcy, though, all bets are off." Call Out Box City of Desert Hot Springs Founded: July 12, 1941 by developer L.W. Coffee Incorporated: 1963 Population: 16,800 * Famous for hot mineral water * More than 40 hotels and spas * Award winning municipal water * 2001-2002 general fund budget $4.3 million * Silver Sage judgment and attorney fees could reach $7.5 million Source: city of Desert Hot Springs Art: PHOTO Caption: Photo by John Waters Jr. Heidi Olea, co-owner of Bob's Trains & More in Desert Hot Springs, said the city's bankruptcy filing has already impacted her business. "We've had people call here wanting to know if we were still open." Copyrigh t The Press-Enterprise Co. |