Lodi Settles Suit Against Lehman Bros.

The Central Valley grape town of Lodi has agreed to pay Lehman Bros. $6 million and drop a lawsuit against the Wall Street giant, nearly resolving an eight-year environmental cleanup scandal that had threatened to bankrupt the town.

As part of the deal, Lehman agreed to drop a countersuit against the city.

The settlement is a compromise for Lodi, which owed Lehman $31 million. But city officials maintained that the investment bank had conspired with the city’s former environmental lawyer, Michael Donovan, to profit at the city’s expense.

The city had initially borrowed $16 million from Lehman, at 25% interest, to finance litigation intended to force insurers and others to pay for the cleanup of the town’s pervasive groundwater contamination, caused by dry cleaners and other local businesses.

Under the terms of the deal, Lehman and Donovan would be paid first, before any money went toward the cleanup.

As the strategy unraveled in late 2003, a federal judge in Sacramento blasted Donovan’s creative approach as “environmental litigation for profit” and virtually invited the city to sue Lehman.

The city fired Donovan, along with City Atty. Randall Hays, and later filed suit against Lehman.

A separate city lawsuit against Donovan that alleges legal malpractice and fraud is pending, as is a criminal investigation of Donovan and his associates, including Lehman.

Donovan called the claims “unfounded and extremely derogatory” in a recent legal filing and maintains that he and his Envision Law Group acted with full backing from city officials.

Lehman Bros. spokeswoman Kerrie Cohen declined to comment Tuesday.

Lodi officials, meanwhile, lauded the recent Lehman settlement, which brings the total paid to the firm on its $16-million loan to about $9 million.

City Councilman Larry Hanson, who is a former mayor, said city officials feared the Wall Street giant could vastly outspend them in a legal battle.

“This gets rid of a black cloud that’s been hanging over the city of Lodi,” said Hanson.

According to documents, Donovan persuaded the state Department of Toxic Substances Control in 1997 to let Lodi impose the cleanup work on others, even though the city was among those potentially responsible.

Lodi then passed a law -- later deemed unconstitutional -- granting itself unprecedented powers to go directly after insurance carriers to pay not just the cleanup costs, but legal fees and -- eventually -- the sky-high Lehman interest. Those fees covered private planes and limousines for Donovan.

Insurers and attorneys for Lodi’s small businesses fought back aggressively in court.

When Lodi ran out of money to finance the battles, Donovan and Hays in 2000 brokered the Lehman loan.

If Lodi had won against insurers in court, Lehman and Donovan would have received a significant profit. Only then would cleanup have begun. It never did.

City Councilwoman Susan Hitchcock, who was the first official to question the deal, said some payment to Lehman was appropriate because council members who are no longer in office approved the loan.

Under City Atty. Steve Schwabauer, Lodi in recent months has settled lawsuits against most of the businesses that allegedly dumped or leaked solvents.

The firms have agreed to pay more than $8 million toward cleanup.

The city and its insurer have also agreed to contribute millions because regulators found that Lodi’s leaky sewers exacerbated the contamination.

Lori J. Gualco, an attorney for polluter Guild Cleaners, worked most aggressively to expose the roles of Donovan, Lehman and the Department of Toxic Substances Control to U.S. District Court Judge Frank Damrell.

“It’s wonderful,” she said of the recent progress. “What has happened in the last year is what should have happened in the 1990s when they were first dealing with this problem.”