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Lynne Plambeck: Bankruptcy and public interest

Environmentally Speaking

Posted: July 22, 2009 10:09 p.m.
Updated: July 23, 2009 4:55 a.m.
Recently, several large bankruptcies have made nationwide headlines.

Now, LandSource and Newhall Land and Farming Company, owners of undeveloped land in Valencia, commercial properties throughout the Santa Clarita Valley and Newhall Ranch are set to emerge from Chapter 11 under a reorganization plan sponsored by their mortgage lender.

The lender and its hedge fund investors will own 85 percent of the new companies and a Lennar subsidiary will own 15 percent.

The resolution of these financial issues may seem good on the surface, and the arcane twists and turns of bankruptcy courts in Delaware may seem way beyond the comprehension of most of us, anyway.

But in the midst of the new financial plans and court orders, regular people get hurt.

There is more to these rulings than certain companies losing money or getting cents back on the dollar for money owed.

For instance, in both the Chysler and GM bankruptcies, the companies were released from all damage claims filed by people who were injured by malfunctioning or poorly built Chrysler and GM automobiles prior to the approval of the reorganization plans — even if the injured people had a Court order granting them a monetary judgment or settlement.

People expecting funds to compensate them for injuries will not receive the money they thought they could depend on to rebuild their lives.

Will such relief be an incentive for the reorganized auto companies to be more careful or will they not worry so much in the future about the safety of their vehicles?

On page 54, the LandSource reorganization plan states: “On the effective date and except as otherwise provided herein, the reorganized debtors and the Releasees will be deemed forever released and discharged from all claims, obligations, suits ... etc., whether for tort, fraud, contract violations of federal or state securities laws, or otherwise, whether known or unknown, whether foreseen or unforeseen, existing or hereafter arising, held by any person, based in whole or in part upon any act or omission, transaction, or other occurrence ... taking place on or before the effective date.”

This is pretty complicated language meaning simply, among other things, that no one can go after Newhall Land or its past, present or future owners, including Lennar or LNR (Cerberus) for defective grading or infrastructure at their homes.

No one may pursue fraud or breach of warranty under state law or failure to fully disclose potential or existing problems in a security transaction as is required by federal law and regulations of the Securities and Exchange Commission.

Also, the term “claims” specifically included known environmental contamination at or flowing out of any LandSource subsidiaries’ properties through the effective date of the plan.

Neither the California Public Employees Retirement System or our attorney general can pursue any wrongdoing such as fraud or failure to disclose important facts or issues that might have occurred in connection the $1 billion loss incurred by CalPers as a result of its purchase of its ownership interest in LandSource in early 2007, or any wrongdoing afterwards.

CalPers lost its entire investment in LandSource, and the reorganization plan gives them nothing for their $1 billion.

That news came on the same day the Los Angeles Times reported CalPers has lost 26 percent of its assets in the last year.

Now don’t get me wrong, I am definitely NOT saying there was any fraud or law-breaking. But if some mischief occurred, shouldn’t the public be able to get the law enforced?

Should a bankruptcy court in Delaware wave a magic wand and relieve this New LandSource or the “releasees” (the old owners) of the obligation to live by the rules in addition to making all their regular, non-mortgage debts go away at 46 cents on the dollar?

A billion-dollar loss is a lot of money for even an entity as large as CalPers.

Added to other losses in the real estate market, CalPers ultimately may have to raise its contribution rate to be sure it can provide its contracted retirement obligations.

That means costs to local public entities will be increased. And that means that you and I will be paying more to cover the costs of public services.

If bankrupt entities are also protected from failure to proper disclosure in bankruptcy court, how can investors in a new LandSource ever make good investment decisions?

If uncertainty of water supply, potential oil well contaminants or other water pollution or the full costs of infrastructure such as a new sanitation plant are not disclosed, how did the new investors decide whether their purchases of “memberships” in the new LandSource are fairly priced?

And what incentive is there to fix such environmental problems if companies can shed them in a bankruptcy?

We depend on the fair and equitable enforcement of all sorts of laws to ensure our quality of life.

The growing practice of setting aside laws that protect the public in bankruptcy court may only serve to make large companies less responsible and less responsive to the public in the future.

Lynne Plambeck is president of the Santa Clarita Organization for Planning and the Environment (SCOPE) and a Santa Clarita resident. Her column reflects her own views and not necessarily those of The Signal. “Environmentally Speaking” appears Thursdays in The Signal and rotates among local environmentalists.


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