Champerty in the suites: “Lehman Brothers’ hopes of underwriting some juicy tort litigation crashed badly, leaving behind the toxic residue of avarice and gullibility.” Forbes examines one California town’s “man-made legal disaster”, a saga previously covered in our posts of Jan. 12, Jan. 17 and May 8 (Scott Woolley, “Municipal bombs”, Forbes, Jun. 21).
Another look at the “man-made legal disaster” (see Jan. 12, Jan. 17) suffered by the taxpayers of Lodi, California after the collapse of a would-be innovative scheme “to force Lodi businesses and their insurance companies to pay to clean up the city’s pollution while immunizing the city from any liability”. The city borrowed $16 million from Lehman Brothers at 25 percent interest to foot the bills of lawyers like the “manipulative” and “astoundingly greedy” Michael Donovan, who concocted the scheme with an assist from Lehman. (Ken Garcia, “Lawyer shows time wounds all heels”, San Francisco Chronicle, Apr. 26).
Scathing Sacramento Bee editorial on the growing embarrassment, fiscal and otherwise, facing the city of Lodi in California’s San Joaquin County over a too-cute-by-half plan to recoup groundwater cleanup expenses by passing the bill to insurers for local businesses. Lodi officials “came up with a novel strategy: Assume authority from the state and federal governments for the clean-up, and then pass a local law that forces the polluters (or their insurance companies) to pay whatever legal costs the city might run up during the process of prosecuting the case,” even though the city’s own actions contributed to the toxic mess. Armed with the law requiring opponents to pay its fees, the city invested “$6.3 million of its own money in lawsuits against several downtown businesses and their insurers. The balance of $16 million spent on legal outlays was borrowed at credit-card interest rates from the investment banking firm Lehman Brothers of New York”.
The scheme hit the rocks last month when U.S. District Judge Frank C. Damrell Jr. ruled that the city’s cleanup ordinance conflicts with federal law and is unconstitutional. Judge Damrell said Lodi’s attorneys “have often produced unnecessarily voluminous or redundant filings and imaginative ploys that have sent this litigation needlessly down paths”. The result: “important remediation efforts have been brought to a grinding halt.” The city’s “cost recovery scheme generates the opportunity for a financial windfall for some few fortunate professionals, as well as Lehman Brothers, Inc., an investment bank, which has no interest in cleaning up the contaminated site,” Damrell said. The editorialists conclude: “Lodi is left with a problem far greater than its underground pollution and it has only itself to blame.” (Jan. 3; Cameron Jahn, “Court ruling may put Lodi on the spot for millions”, Sacramento Bee, Dec. 24). Updates: Jan. 17 (city fires attorneys responsible for litigation strategy); May 8 (messy aftermath).
Davey Alba and Jennifer Chaussee at Wired quote me on Peter Thiel’s financing of the Hulk Hogan lawsuit as part of a campaign to take down Gawker Media (earlier here, here). The episode, which follows Frank VanderSloot’s announcement that he wishes to devote $1 million to endowing a fund for lawsuits against the “liberal press,” is likely not to be the last such, and I speculate on a nightmare scenario in which multiple clearinghouses claiming the public interest banner (and presumably based on tax-deductible donations) get up and running with the objective of taking down various sectors of the press disliked by one group or another.
Related: I’m a bit surprised that the successful legal takedown of the tawdry 1950s-era Confidential magazine, told in Henry Scott’s book Shocking True Story, hasn’t figured in more Gawker coverage. Megan McArdle at Bloomberg View weighs in on various aspects of the Thiel/Hogan story, and as usual is worth reading. Max Kennerly has a detailed analysis of legal issues in the coming Hogan v. Gawker appeal [earlier on verdict] And a flashback: how the late Lehman Brothers got in a ton of trouble by dabbling in champerty.