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Letter to Editor: Councilmen Defend Settlement

From Hermosa Beach City Councilmen Kit Bobko and Michael DiVirgilio.

Over the past two weeks Hermosa Beach residents have begun digesting news of the Macpherson settlement. Naturally, after nearly 15-years and more than $4 million of no-holds-barred litigation, there are many questions about the details, such as, “Why did this occur so quickly?” or “Why settle now?” or “Why notride out the trial?” We thought it important to answer those questions as best we could, and to quash the rumors and misinformation we’ve heard circulating in the community.

While we strive to fill in details and address new questions that develop - we also ask you for patience. We’re not asking that you dismiss your questions or concerns or doubts, but only that you not leap to conclusions before getting all the facts. As part of this effort we’ve established a City Council sub-committee of our Mayor and Mayor - Pro Tempore to educate the community on the settlement and to address issues as they arise going-forward.

One of the greatest challenges for the City has always been to effectively communicate with the public about the details of the litigation without compromising the City’s legal defenses or showing our hand to the other side. The City enjoys the same attorney-client and litigation privileges that any individual or corporation has, for the same good reasons. The City, and the public, would be at a pronounced disadvantage if it had to conduct its litigation and settlement discussions in public.

As you probably know, the Macpherson settlement included three transactions. First, a new firm, E&B Natural Resources paid the Macpherson Oil Company $30 million. Macpherson, in turn, assigned E&B all of its rights and privileges to drill for oil in Hermosa Beach and dismissed its lawsuit against the City. In exchange for that payment and the subsequent dismissal, the City committed to place a measure on a future ballot that would allow the community to decide if itwants to repeal the current ban on oil drilling. If the measure passes, the City will reimburse E&B $3.5 million of the $30 million from royalties it will earn from the project. If the measure does not pass, the City must repay E&B $17.5 million.

Some might ask why the City didn’t take its chances at a trial with a sympathetic jury that would naturally side with us against society’s villain du jour – an oil company. This is a partial and romanticized view of our case, and our research with “mock juries” showed otherwise. (“Mock juries” are assembled by professional firms from the LA County juror pool. They are just like a real jury, and give the trial team a chance to run through a dress rehearsal of their case before they start trial.) Our research revealed it was just as likely we would escape with a judgment against us in the tens-of-millions as it was that we would get ajudgment against us in the $100’s of millions.

There are a number of reasons for this, the primary one likely being that Macpherson’s case was simply understood and easily explained. Simplicity can be a huge advantage at trial. To the contrary, our defense required 20 minutes (assuming you were paying attention,) with expert opinions, complex lega ltheories, and the necessity for follow up questions. Add to the mix our knowledge that juries were likely to enter verdicts against us that were anywhere from merely crippling to the financial equivalent of a neutron bomb, and the desire to avoid the risks inherent to a jury trial become even more apparent.

Further, if there had been a trial and a judgment against the City it would have become much harder to negotiate, and incredibly more expensive. This is a lesson we recently learned after losing the tattoo case in the Ninth Circuit Court of Appeals.

But our eyes weren’t the only ones that got a little bigger as we approached trial. Macpherson also realized the potential downside in a jury trial and saw the benefits of settlement. That both sides were within a month of picking jurors and making their opening statements was a scenario that never existed before and would never exist again. As it turns out, there is some truth to the old saying that most settlements occur on the courthouse steps. Last month, we were on the courthouse steps.

Others have said the City should have taken the case to judgment, because even if we lost, we would be able to ward-off any real fiscal pain by declaring bankruptcy. This is not true. In fact, two years ago the two of us made this same argument to the Honorable John E. Ryan, a retired federal district court judge who had graciously offered his services to mediate a settlement between the City and Macpherson. Judge Ryan, who oversaw Orange County’s bankruptcy in the late 1990’s, said two things that informed our approach to this settlement. First, he told us that ours would be a bankruptcy from a judgment and that that was different from other communities with “cash flow” issues (i.e., Vallejo, Stockton) because there was no precedent for it. And, to drive the point home, the former Navy fighter pilot tapped his copy of the U.S. Bankruptcy Code and looked us dead in the eyes and in his thick Boston Irish accent said, “You might get into bankruptcy but there’s no chance of you getting out of it. It is no trapdoor.” In other words, the City wouldn’t escape a judgment because it was more than we could afford. As the judge who presided over the largest municipal bankruptcy in American history, we trust he would know.

Regarding the coming oil project proposal, it is understandable that residents want conclusive answers about safety, the environment, noise, height, pollution, and the potential upside as well. We await these details as well, and the City Council structured the settlement with an eye towards these concerns. In other words,E&B will be educating us on the full scope of their project proposal, both impacts and benefits, well in advance of making any decision. The project proposal will go through an environmental review process that includes feedback from the community before ultimately being placed on the ballot for a yes or no vote by the residents of Hermosa Beach.

At a minimum, we’re confident E&B will propose a different project than Macpherson did. Why? Because this isn’t 1992. Whatever project E&B finally proposes will have the advantage of 20-years of technology advancements, and E&B’s size and the high price of oil today will allow them to address issues Macpherson couldn’t have.

One last point. Some have said the Council was wrong to even allow the prospect of a vote on oil drilling. “We have already voted it down once,” they say, “and we shouldn’t have to vote again.” Fine. When the measure comes up for a vote your choice is clear. In fact, the settlement was designed to allow folks to disagree. More so, we think this is the way the process is supposed to work; that the voters get to decide the City’s future on major issues. Not the City Council. Not a jury. Not a bankruptcy judge. Voters do. You do. After considering all the facts and circumstances the residents of Hermosa Beach will get to decide.

More than anything, we are ecstatic that the lawsuit is finally over. The threat of hundreds of millions of dollars is gone, and this is the first time for nearly a generation that Hermosa Beach does not face the prospect of financial ruin from the Macpherson lawsuit. Our potential liability of $750 million is capped at $17.5 million. Viewed another way, a $750 million judgment breaks down to a liability of more than $100,000 per parcel. The $17.5 million equates to a liability of $2,500 per parcel. That alone is enough for us to be pleased with the settlement, but our knowledge of the lawsuit makes us even more certain that the City is walking away with a very good deal.

Dave Andrews March 22, 2012 at 10:00 PM
17. If we vote no to the oil drilling your letter states: "$17.5 million equates to a liability of $2,500 per parcel." - Are you going to bill the citizens this amount if the drilling is not approved? - What if I moved into the area after the lawsuit and was not notified about the lawsuit? Do I still have to pay? - The bigger question is as renters are YOU personally going to pay $2500 towards the liability you have committed to the citizens of Hermosa Beach? 18. What are the solutions to pay $17.5 million? - How much money do we have in the bank? - What assets does Hermosa Beach own? - Can we get a bond from the state of California? - What research have you done to figure out how to pay back any amount let alone the $17.5 million? 19. Now that you have settled the lawsuit what side are you on? I feel that you have drawn a line in the sand and now you should state whether you are for drilling or against drilling. - This is only fair to the citizens of the city. - What are the pro's and con's from each of your perspectives?
Michael Keegan March 22, 2012 at 11:12 PM
I hope residents understand that any oil derived from offf the shore of Hermosa Beach will need to be spent west of mean tide. Thus, it cannot be used on streets and for general fund purposes. We will have a nice Pier.
Dave Andrews March 23, 2012 at 12:08 AM
Hi Michael, So what you are saying is that we cannot use it for schools at all in anyway shape or form. Correct? I have heard this too then I have heard conflicting rumors we could use it for schools. That information should be on a website from the city so anyone anywhere at anytime can get the facts
Dave Andrews March 23, 2012 at 03:22 PM
20. How late can drilling take place? Is it 24/7/365? - How noisy is it? -- I can hear the Redondo Power Plant at 4am release steam that practically shakes my windows. Will we have any noise at all and if so how loud and at what times?
Bob Atkins March 23, 2012 at 06:38 PM
I really don't understand how the royalties that the city earns on any oil revenues are limited to being spent on stuff that is west of mean tide??? What law/agency enforces this absurdity and what can be done to obtain an exception? Royalties should be able to benefit the entire city. That said - if this entire project hadn't been mismanaged by a screwball city council of selfish interests years ago we wouldn't have spent $4M on legal fees and be talking about another $17.5M - instead at the very least our Pier would put Santa Monica's to shame and maybe - just maybe we might have been able to craft a deal where we could have the cheapest gas in town too. Think outside of the box (financially) and maybe this project can benefit all of Hermosa.

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