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Lenders behind the city’s Civic Center Plaza lease trying to evict the city from the downtown high-rise after the city halted rent payments are pushing back against the city’s central argument: They can’t be punished for an alleged conflict of interest they didn’t know about, they contend.
Representatives for the lenders claim they weren’t aware of city landlord Cisterra Development’s $9.4 million in payments to former volunteer city real estate adviser Jason Hughes, checks that attorneys for the city say should void the Civic Center and 101 Ash St. leases.
An attorney for Wilmington Trust, an investment management firm representing lenders who supplied upfront cash for both leases, contends that lack of knowledge legally protects the lenders – and thus the leases.
Lawyers representing the lender and the city are likely to tangle over this argument in San Diego Superior Court next week before a judge presiding over the eviction case.
The argument rests on a 1981 caveat tacked onto Government Code Section 1090, the state anti-corruption law that bars government officials – including contractors and consultants like Hughes – from having financial interests in contracts they broker in their official capacities.
While violations of that state anti-corruption law can lead to voided contracts, Government Code Section 1092.5 declares that deals involving a “good faith lessee, purchaser or encumbrancer” who didn’t know there was a violation of that anti-corruption law can’t be quashed.
Lenders behind the Civic Center Plaza and 101 Ash St. leases received monthly rent checks from the city in return for upfront loans they gave Cisterra to execute the deals. Loan closing statements obtained by Voice of San Diego show payments to Hughes were not listed in the breakdown of expenses for either deal.
Wilmington Trust attorney Craig S. Ganz noted in a July 14 demand letter to the city that 1981 legislative staff reports on the law called out an intent to protect lenders who were unaware of conflicts.
“The legislative history of Section 1092.5 confirms that the purpose of Section 1092.5 is to protect lender in this circumstance, noting that Section 1092.5 protects ‘a lender who had no knowledge of illegality in making the contract [who] might [otherwise] have his trust deed security placed in jeopardy if the public agency or another party sought to avoid the contract,’” Ganz wrote.
But Hilary Nemchik, a spokeswoman for City Attorney Mara Elliott’s office, said the city doesn’t believe 1092.5 protects the Civic Center Plaza lenders.
“Because Wilmington Trust has not purchased anything from the city, leased anything from the city or loaned any money to the city, it has no rights against the city under 1092.5,” Nemchik wrote in an email to VOSD.
Instead, Nemchik noted, lenders provided upfront funds to Cisterra.
Yet city officials also signed off on documents describing lenders’ interest in Civic Center Plaza and pledged to make rent payments to lenders, agreements Ganz referenced in his letter.
Multiple attorneys told VOSD that said the lenders’ argument may be viable.
Former senior assistant attorney general Gary Schons, who later advised governments on issues including 1090, and attorney Gil Cabrera, former chair of the city’s ethics commission, predicted the city will seek reams of communications between the parties in the Civic Center deal to try to establish whether lenders truly were truly in the dark.
Absent new revelations, Schons said a judge could decide the lenders are protected.
“I think they have a very plausible argument that they are covered,” Schons said.
Bay Area attorney Ann Ravel, former chair of both the Federal Election Commission and California Fair Political Practices Commission, said the case will likely come down to a judge’s evaluation of arguments about the relationship between the lender and the city, and the due diligence lenders performed.
She said there aren’t past legal cases further establishing the parameters of 1092.5, which means a judge will need to further interpret it.
“I just don’t think you can say that there’s a clear legal standard here,” Ravel said.