CITY AND COUNTY OF SAN FRANCISCO

DENNIS J. HERRERA City Attorney

OFFICE OF THE CITY ATTORNEY
DIRECT DIAL: E-MAIL (415) 554-4748 gloria.smith@sfgov.org

MEMORANDUM
TO: Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington Dennis J. Herrera City Attorney Jesse Capin Smith Chief Assistant June 16, 2005 Updated City Attorney Financial Recovery And Savings Report

FROM:

DATE: RE:

The City Attorney's Office defends San Francisco against lawsuits in which millions of public dollars are at stake. We also manage a nationally recognized affirmative litigation program, where the Office prosecutes lawsuits on behalf of San Francisco and the people of the State. These legal actions often result in substantial net monetary recoveries for City departments and for the General Fund, in addition to achieving industry reforms and promoting public integrity. This Office also provides training and day-to-day counsel to the City's departments, boards, commissions and officials on a wide range of legal matters. Through its training and general advice functions, the Office reduces the City's exposure to risk of loss, assists the City in recovering monies owed to it, helps the City realize a greater return on its assets, and safeguards the City's financial interests in contracts. Particularly in these lean budgetary times, we remain focused on helping protect – and improve – the City’s fiscal condition in three principal ways: by effectively devoting resources to defending lawsuits where the City has significant financial exposure; by prosecuting cases in which the City has the opportunity to recover money damages and civil penalties; and by helping minimize the City's exposure to potential liability through counsel and training. In the past few years, the efforts of the top-flight attorneys and staff who make up this Office have resulted in hundreds of millions of dollars in net savings and recoveries for San Francisco. Effectively Devoting Resources to Defend Lawsuits Our deputies represent the City in about 7,500 actions annually, ranging from personal injury and property damage to breach of contract. Early on, we carefully evaluate the merits of every case that is filed against the City. Where the City is not at fault we vigorously defend the cases. When it appears that they City may be liable, we attempt to resolve cases through settlement to reach a fair result, before the parties need to incur significant legal fees. We have
CITY HALL, ROOM 234 ·1 DR. CARLTON B. GOODLETT PLACE· SAN FRANCISCO, CALIFORNIA 94102-4682 RECEPTION: (415) 554-4700 · FACSIMILE: (415) 554-4715

CITY AND COUNTY OF SAN FRANCISCO
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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 2 Updated City Attorney Financial Recovery And Savings Report

developed cost-effective strategies to allocate resources to the cases we defend on behalf of the City, and we are able to handle almost all of those cases with our in-house expertise. Where appropriate, the Office also has programs to leverage pro bono assistance from the private bar. A recent example of such assistance is the same sex marriage case. Prosecuting Cases to Recover Revenues As you know, as part of the City Attorney's public integrity initiative we have filed a number of false claims and unfair business practices lawsuits relating to public contracting with the City, as well as its School District. We have had a number of successes in these cases this year, including, most recently, the settlement with NEC in the E-rate case and the settlement of the SRS case, both described below. While these actions are often costly and difficult to pursue, we expect that San Francisco will recover substantial sums in the coming months and years from these actions. In addition these actions often generate non-monetary public benefits for the City by protecting the integrity of the City contracting process and related City ordinances, and in many instances by reforming industry practices and otherwise improving the quality of life for San Franciscans. During Fiscal Year 2002-2003 we began the Revenue Collection Task Force to assist departments in the collection of monies owed San Francisco from various sources, including fines, penalties, taxes, reimbursements for damage to City vehicles and property and workers' compensation subrogation. This past year we added the Police Department, Fire Department and Department of Parking and Traffic to our program, which already includes work for Muni, the Department of Public Works, the Department of Building Inspection and the Public Utilities Commission. We hope to add other departments to this program in the future and expect to work with departments to intensify revenue collection efforts. In sum, for the first quarter of this Fiscal Year we have helped the City obtain awards and cash recoveries through our various initiatives of over $7,000,000 – and settlements for the School District of over $45,000,000 – and we have saved the City many millions more. Cash recoveries and awards for the City include the following (individual major cases are highlighted in Part I of this memorandum below): o Under our Affirmative Litigation Program, we have obtained cash recoveries and judgments totaling about $3,000,000. o As part of our ongoing code enforcement efforts we have helped the City collect over $3,500,000.

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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 3 Updated City Attorney Financial Recovery And Savings Report o As a result of this Office's Revenue Recovery Program we have collected over $1,000,000. This figure is the sum of recoveries of relatively small amounts from a large number of collection actions. To date we have brought nearly 750 cases, up from 641 cases in the previous fiscal year. And we average collections or more than $85,000 per month, up from $75,000 per month last fiscal year. o We have received over $130,000 in bail bond collections and over $18,000 in for welfare fraud (with judgments in welfare fraud for an additional $16,000). o Our cash receipts for reimbursement of worker's compensation benefits paid as a result of accidents with third parties totals almost $1,000,000. The recovery related to subrogation claims for workers compensation benefits paid out to employees and their medical providers totals an additional almost $1,000,000. Recovery for credit rights totals another about $1,400,000. (These are rights that City has to be relieved of its obligation to pay further employee worker compensation benefits to the extent the employee receives a net recovery because of a settlement or payment of a judgment). And the recovery related to subrogation claims for property damage is an additional $100,000. We expect to receive more funds within the close of the Fiscal Year. Safeguarding the City Against Potential Liability through Counsel and Training

We have implemented risk management and revenue recovery programs that are working, having yielded extensive net additional savings and payments for the City and that could generate more savings and recoveries in the future. On the risk management side, the City Attorney's Office has established a program to provide departments with quantitative information regarding the number, nature and dollar value of claims and litigation against the City. We generate risk management reports regularly and share these reports with department heads and the City's Risk Manager. We also meet regularly with each department to analyze trends and identify remedies. In addition to the risk management reports, the Office develops and conducts a variety of training programs for the City's boards, commissions, departments and officials in an effort to help avert potential liability. We address matters such as the Sunshine Ordinance, conflict of interest and other ethics laws, preventing discrimination and sexual harassment in the workplace, conflict resolution, and accommodating the public and employees with disabilities. We publish an annual update of the Good Government Guide, which includes an overview of the major laws

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governing the conduct of City employees and officials, violation of which can sometimes expose the City, as well as the individual, to liability. In May we distributed the 2005 edition of the Guide, including a new section describing legal requirements and practical issues relating to serving on City boards and commissions. We also make the Good Government Guide available on our web site. In this fiscal year, we also have developed and implemented two new extensive training programs mandated by state law: a program for City supervisors and commissioners to comply with the recent State requirement for sexual harassment training, which we hope will further avoid potential City liability in this area; and a program to implement the new State workers compensation legislation, which could result in significant savings for the City. Overview of Report Format On November 18, 2002, we sent you the first financial recovery and savings report from this Office. This is the seventh update to that report. It highlights matters that have resulted in significant financial recoveries for the City and substantial financial savings to the City during the current fiscal year, which began July 1, 2004 and ends June 30, 2005. The recoveries and savings far outweigh the cost of the lawsuits and other matters. As previously mentioned, we plan to submit to you additional reports on a regular basis, updating this information. This list is not intended to be comprehensive: We list only examples of significant recent matters that produced concrete savings or awards of well more than $100,000. In many other cases where we defend the City we have avoided liability either by obtaining dismissals or by settling for far less than the claimed amounts, and have saved attorneys’ fees and costs, but those savings are difficult to quantify. Also difficult to quantify are the savings we have achieved through structuring and negotiating the City’s business transactions to protect the City’s interests. A brief description of particular cases and matters follows. The first part describes matters that yielded significant financial recoveries to the City. The second part summarizes matters that resulted in key financial savings to San Francisco. I. • FINANCIAL RECOVERIES

Old Republic Title Company and related cases. On behalf of the People of the State of California, we sued Old Republic Title Company for unfair business practices, including illegally collecting interest, withholding escrow funds owed to the state and individual consumers, and imposing improper fees on consumers. This landmark case was the first time in which a city prosecuted a false-claims case on behalf of the state. In 2000, the court found that the City could bring such a case under the False
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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 5 Updated City Attorney Financial Recovery And Savings Report Claims Act and awarded the City $7,568,079 in damages, plus penalties totaling $2,163,832 for unfair business practices. In August 2002, Old Republic conceded some of the City’s claims and paid $1,272,567 plus $48,396 in cost recoveries. In early December 2002, Old Republic paid the City $1,906,878 in penalties. Old Republic challenged the $7.5 million judgment and other claims we have made. On January 20, 2005 the court of appeal upheld the award to the City and reinstated the City's false claims lawsuit against Price Waterhouse, Old Republic's outside accounting firm, for concealing in its annual audit reports submitted to the State Department of Insurance, and Old Republic's failure to pay funds owed to the State Controller. Significantly, the court of appeal affirmed that public entities, including cities, have standing to sue in so called "qui tam" (whistleblower) lawsuits under the State False Claims Act. Shortly after the appellate decision came down, Old Republic paid the judgment in its entirety to the state and the City. The City's share of the final payment was slightly above $6.6 million. The total amount the City recovered from Old Republic, in payments received in 1998, 2002, and this year, was $12.8 million. PriceWaterhouseCoopers petitioned for review to the California Supreme Court, which granted review. The question the Supreme Court will decide is whether a City or other political subdivision of the State can sue under the whistleblower provisions of the False Claims Act. Under the parties' recent agreement, Old Republic's payment of the judgment is final and irrevocable. Therefore, the Supreme Court's decision will not affect the City's right to retain all of the monies received from Old Republic in this case. In related, separate actions by San Francisco against other title companies based on similar claims, we received $450,000 in July 2004 from First American Title Company and $1,137,800 in September 2004 from Fidelity and Chicago Title Companies. • Tobacco Case. In connection with the settlement of our suit against the tobacco companies, San Francisco received a total of $18,362,480 as its annual settlement payment from the tobacco companies in April 2005. San Francisco had received an additional unscheduled payment in the amount $203,219 in August 2004. This unexpected money is a result of payments made by Vibo Corp. of Florida (a.k.a. General Tobacco), which recently signed on to the Master Settlement Agreement as a participating manufacturer. To date, the City has received about over $115 million in tobacco settlement proceeds. In addition San Francisco has received millions of dollars in interest on those revenues. CCSF v. AIMCO. In January 2002, the City filed a code enforcement action against AIMCO and related companies for violations of the building codes, maintaining a

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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 6 Updated City Attorney Financial Recovery And Savings Report public nuisance and unfair business practices, relating to health hazards, including extensive mold and mildew problems, in four low-income, HUD subsidized apartment buildings in the Bayview/Hunters Point neighborhood. In September 2004, we reached a landmark settlement with AIMCO, approved by the Board of Supervisors and Mayor, providing for abatement of all of the code violations, assurance that the properties will remain affordable through at least 2020, incentives for AIMCO to invest tens of millions of dollars in a renovation of the interior and exterior of the properties, and a $3 million payment to the City, that could potentially grow to $3.5 million. $1 million of the settlement amount, which AIMCO has already paid into escrow, will go toward establishing a new Bayview/Hunter's Point Boys and Girls Club, as further described below, with an associated San Francisco Police Department office to reduce crime, enhance public safety and provide recreational opportunities for neighborhood residents. AIMCO has paid an additional $2 million into a settlement fund controlled by the City; if AIMCO proceeds with its planned renovation of the properties, that payment would satisfy permit fees that would be due to the Department of Building Inspection for the renovation project. AIMCO will pay an additional $500,000 to the City if AIMCO secures, with the City's support, certain tax advantaged financing from the state to complete the renovation. In March 2005, as contemplated by the settlement agreement, the City, working in cooperation with the San Francisco Housing Authority and the Boys and Girls Club of San Francisco (the "BGCSF"), entered into a series of agreements to provide for renovation of the existing buildings and facilities at the Milton Meyer Center, located at 195 Kiska Road, to enable the BGCSF to open and operate a new club on this site, nearby the AIMCO Properties, and for the San Francisco Police Department to have a Police Office with designated community policing officers at these facilities. Under an amendment to the original settlement agreement, AIMCO will pay $1 million of the cost of this project. The new club will provide opportunities for youth in the Bayview - Hunters Point community that they have not had before and help to improve public safety in the Bayview - Hunters Point through programs at the new club, including helping to build trust between the police and the community. Consistent with the settlement agreement, the City has requested an early release of the $1 million from escrow for the project and we are negotiating terms for that release. • Strategic Resource Solutions v. San Francisco Unified School District. On behalf of the People of the State of California, we cross-complained for unfair business practices against Strategic Resource Solutions (SRS) in a lawsuit that SRS initiated against the School District for breach of contract. The lawsuit arose from an approximately $23,000,000 energy services contract between SRS and the School
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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 7 Updated City Attorney Financial Recovery And Savings Report District. We alleged that the contract served as a vehicle for SRS to defraud the District. With the assistance of the School District General Counsel and special outside counsel, we settled the case on behalf of the School District and City for $43,100,000. Of that settlement SRS paid $1,000,000 to the City in January 2005 for prosecuting the claim for SRS's unfair business practices. • E-Rate. On May 27, 2004, the City Attorney's Office, acting on behalf of the San Francisco Unified School District and in concert with the United States Attorney for the Northern District of California, settled a "whistleblower" lawsuit it filed in May 2002 against NEC Business Network Solutions (NEC BNS), a now-defunct U.S. affiliate of the giant Tokyo-based NEC, Inc., and several other corporations, firms and individuals. The NEC BNS settlement came to nearly $16,000,000. The School District received $4,140,286 as its whistleblower share for exposing a nationwide scheme by NEC BNS and others to defraud the federal E-Rate program, which subsidizes telecommunications and information technology purchases by schools and libraries. The lawsuit was based on a year-long City Attorney investigation into bidrigging and fraud in the E-Rate program. In cooperation with the School District General Counsel and in partnership with the United States Attorney's Office, the City Attorney's Office continues to litigate against other named defendants. Indeed, in January the School District received an additional $1,029,000 through a settlement with Inter-Tel. CCSF v. Gannett Fleming, Inc. and CCSF v. AGS, Inc. On behalf of the MTA, our office filed a lawsuit and prosecuted a claim against two engineering and design firms for errors and omissions in the designs of two bus maintenance yards, the Islais Creek Maintenance Facility and the Woods Fuel and Wash Facility. In designing the Islais Facility, the firms failed to include adequate designs for flood control and drainage. The firms' designs for an oil pumping system, an emergency generator, a fire alarm system, and concrete trench covers for the Woods Facility were defective, and the systems failed after construction. When the MTA became aware of the design defects, our office filed claims and a lawsuit to recover damages and costs. Gannett and AGS filed cross-complaints, each seeking approximately $250,000 in unpaid design fees, interest and costs. Under a proposed settlement agreement that is pending approval by the MTA Board of Directors, Gannett will pay the MTA $415,000 and AGS will pay the MTA $110,00, for a total settlement of $525,000. PG&E Overcharges. Working with PUC staff, we completed a mediation before a JAMs judge in December 2004 that resulted in a settlement requiring PG&E to pay the City $425,000 for overcharges related to electric facilities constructed for the
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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 8 Updated City Attorney Financial Recovery And Savings Report City. PG&E had asserted that it did not owe the City anything. The settlement also preserves the City's right to further pursue some issues at FERC. PG&E paid City $7.2 million on agreed claims, as described further below. • PG&E Bankruptcy. In the PG&E bankruptcy case, last year we prepared and submitted an extensive and detailed proof of claims on behalf of the City. The City received over $1,500,000 in interest payments on the claims during the pendency of the case. We vigorously opposed PG&E's request that the Bankruptcy Court place PG&E beyond the regulatory control of the California PUC. We also challenged the CPUC's decision to approve the bankruptcy settlement but in June 2005 Court of Appeal rejected our efforts to get the court to review that decision. Despite San Francisco's opposition to the settlement of the bankruptcy case based primarily on what we argued was an unjustifiably high cost to the ratepayers, the bankruptcy settlement was approved. We continue to work on resolution of the City’s claims against PG&E through negotiations and litigation in the bankruptcy court. In April 2005 the Board of Supervisors and Mayor approved the settlement we negotiated of a number of claims that the City filed in PG&E's bankruptcy case as well as counter claims that PG&E filed against the City. Under the settlement the City received $7.2 million from PG&E, allocated among five City departments, and the City, through the SFPUC, paid PG&E $285,512. In addition, PG&E agreed to settle its utility users tax refund claim, originally $1.47 million, for $115,000. We continue to work to resolve the remaining bankruptcy claims, including a claim by the Port against PG&E and two claims by PG&E against the City. PG&E FERC Tariff Case. PG&E filed a new tariff before the Federal Energy Regulatory Commission (FERC), under which it sought $13.9 million from the City for services provided between April 1998 and December 2003. Working with San Francisco Public Utilities Commission staff and expert consultants, we aggressively defended against these charges and reached a settlement that reduced the City's liability to $7.6 million. In addition, PG&E agreed to withdraw a claim for $1.2 million that it submitted in its bankruptcy case. PG&E also agreed to resolve other ongoing matters that could have resulted in additional, currently unquantifiable, costs to the City. This settlement resulted in quantifiable savings of $6.3 million. The Board's Rules Committee has approved the settlement and it will be considered by the full Board. If the Board and Mayor approve the settlement, to become final FERC must also approve it, which we anticipate FERC will do. El Paso Energy Market Manipulation Settlement. On behalf of the San Francisco Public Utilities Commission, we filed a claim for overcharges related to electricity
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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 9 Updated City Attorney Financial Recovery And Savings Report purchased by Hetch Hetchy during the period November 1, 2000 through May 31, 2001. The El Paso energy companies settled a number of lawsuits alleging that El Paso’s market and price manipulation increased the price of electricity throughout the California market. In June 2004, Hetch Hetchy received a payment of $805,000 (not previously reported), representing its pro rata share of settlement proceeds based on the amount of electricity purchased by Hetch Hetchy during the settlement period. In addition to the $805,000 we received initially, the Public Utilities Commission has received two additional payments totaling about $150,000. • Duke Energy Market Manipulation. Duke Energy is one of the defendants in the City's unfair competition case against the energy companies, CCSF v. Dynegy, et al., that we filed in January 2001. Working with the State Attorney General and other plaintiffs, we reached a settlement with Duke that provided $500,000 to the City for energy efficiency, renewable energy or environmental justice projects in areas adversely impacted electric generation. In December 2004, the Board of Supervisors and Mayor approved the settlement. The $500,000 was allocated evenly between a City program for installing solar energy equipment on low income homes and nonprofit offices and a program for planting trees in southeast San Francisco. In December 2002 the Board of Supervisors and Mayor approved a settlement with Williams Energy, another defendant in the case. The City's case continues against the remaining defendants for market manipulation. San Remo Hotel. This case involves a challenge to the City's Residential Hotel Conversion Ordinance, which limits the conversion or demolition of residential hotel units, which are an important source of affordable housing in San Francisco. We have prevailed in the many legal challenges to the ordinance that have reached final judgment. In this case, the owner of the San Remo Hotel, a 62 unit building, paid a $567,000 replacement housing fee to convert to a tourist hotel and then sued for a refund, claiming that the ordinance constituted an unconstitutional taking of private property. In March 2002 we prevailed in the California Supreme Court. Then, the owner of the hotel attempted to revive its taking challenge by suing the City in federal court. On April 4, 2004, the Ninth Circuit Court of Appeals dismissed San Remo's challenge to the ordinance in a ruling with significant precedential import for local government. And the ruling preserved the City's right to use the $567,000 payment, plus interest on that amount from March 1996, for the creation of new affordable housing, as well as helping safeguard the City's right to payments in other conversion cases. There are about 500 residential hotels containing more than 18,000 single room occupancy units in San Francisco. In December 2004, the United States Supreme Court accepted the hotel's petition for review of the Ninth Circuit's decision,
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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 10 Updated City Attorney Financial Recovery And Savings Report on the issue of whether the hotel is entitled to proceed with a claim in federal court after exhausting its remedies in state court. Oral argument was held on March 28, 2005. We anticipate that the Supreme Court will issue its decision in June 2005. A decision denying claimants "two bites at the apple" will save the City substantial litigation costs in future takings cases. • CCSF v. Boyd Hotel, LLC. DBI referred this case after defendants had failed to abate numerous Notices of Violation and Orders to Abate issued for the residential hotel at 41 Jones, known as the Boyd Hotel. The tenants of the hotel, some disabled, were frequently forced to endure substandard housing conditions for long periods of time, including the inability to use the Hotel's sole elevator which was frequently out of service. After a trial, the court awarded approximately $60,000 in civil penalties and ongoing civil penalties of $50.00 per day beginning May 6, 2003 and continuing until the defendant complies with the Sprinkler Ordinance, which now totals more than $15,000. The court also awarded $244,000 for attorneys' fees and litigation costs. We appealed the judgment because we believed that the court erred in not imposing additional penalties and in not issuing an injunction. The defendants cross-appealed the award of attorneys' fees. On appeal, the court affirmed the award of attorneys' fees, and remanded the case to the trial court for the court to consider imposing additional penalties against the defendants. Potter v. Palace of Fine Arts. In this case we obtained an insurance recovery related to a disabled access lawsuit at the Palace of Fine Arts. The insurer, One Beacon, withdrew its defense of the City and denied any coverage obligation in the Potter complaint, on the basis that Potter sought injunctive relief under the ADA. We filed a complaint alleging bad faith breach of insurance contract and unfair competition against One Beacon. In August 2004, One Beacon agreed to settle the plaintiff's personal injury claim and attorneys fees claim for a total of $195,000. One Beacon will also pay damages of $100,000 to the Palace of Fine Arts and $50,000 to the City. Those funds can be used to implement disabled access improvements at the Palace of Fine Arts. This settlement is subject to Board of Supervisors approval. St. Paul Fire and Marine Insurance Co. v. City and County of San Francisco, San Francisco Port Commission, et al.; U.S. District Court, Northern District of California, Case No. C04-0339JL: This litigation arises from the insurance coverage dispute concerning the underlying case entitled F. Alioto Fish Co., dba Alioto/Lazio v. CCSF involving the condition of a Port pier. The Port’s liability insurer, St. Paul Fire and Marine, agreed to defend the underlying case, subject to a reservation of rights to dispute coverage for the damages alleged by the Port’s tenant, F. Alioto Fish Co.
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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 11 Updated City Attorney Financial Recovery And Savings Report After the Court of Appeal affirmed the judgment, St. Paul filed this action on January 26, 2004, against the Port, seeking a declaration that it was not responsible to pay any portion of the judgment or attorney's fee awards, and is entitled to a refund of the $450,000 in attorney's fees it paid for the defense of the Port in the underlying litigation. At a mediation on September 9, 2004, the parties agreed to settle the matter with St. Paul's payment of $750,000 for partial indemnification of the judgment in the underlying litigation, and its waiver of any claim for the $450,000 in reimbursement of the Port’s defense costs incurred through trial and appeal, for a total value of $1,200,000. • CCSF v. Suad Abbushi, et al. In May 2002, we filed a code enforcement case against the owners and operators of the All Nite Market, a liquor store located at 5190-3rd Street that was a notorious hub of criminal activity in the Bayview District. Through litigation, we were able to close the market, significantly reducing the criminal activity in and around the property. In August 2004, we reached a settlement with the owner of the property as well as the owner of the liquor license for monetary penalties and costs of approximately $100,000. Those settlements also included injunctive terms to prevent the property from being a public nuisance. In August 2004, we also proceeded to trial against the five remaining defendants in the case, the operators of the Market. In January 2005, the Superior Court issued a judgment and injunction, finding that the defendants violated the Drug Abatement Act, the Unlawful Liquor Sales Abatement Act, Civil Code 3479 & 3480 related to general nuisance, and B&P Section 17200. The Court's injunction is for five years, and enjoins them from, among other things, owning or operating a business that sells alcohol. The judgment totals $157,000. In addition, we were awarded attorney's fees and costs of about $183,404. Thus, the total of the judgments we obtained in this case is about $440,000. CCSF v. Patel. DBI referred this case to us for housing code violations at the Franciscan Hotel, forty-three-unit single room occupancy hotel. On October 3, 2002, we filed a code enforcement action because the owners had failed to correct building code violations that were initially cited in July 2001. We later amended the complaint to allege violations of the sprinkler ordinance. During discovery, we learned of violations of the Hotel Conversion Ordinance. In February 2005, we settled the matter with a Stipulated Injunction and Judgment. The Injunction required the defendants to finish installing the sprinklers, and to maintain the property in conformance with law for five years. Additionally, the defendants paid $140,000 in penalties, fees, and costs.

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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 12 Updated City Attorney Financial Recovery And Savings Report CCSF v. Lem/Ray Properties, LLC: This case involves two properties at which the owners failed to comply with the Sprinkler Ordinance. Both properties are single room occupancy hotels, one with 20 units and the other with 114 units. We filed the initial complaint in December 2004, and an amended complaint in January 2005. We promptly entered into settlement negotiations to resolve this case as well as a case we had not yet filed against the same owner, who had failed to seismically upgrade a third property. The parties are putting the finishing touches on an injunction and judgment, which will require the owner to abate the violations at all three properties, and to pay the City $105,000 in penalties, fees, and costs. NBC Advertising Stencils: In June 2004, NBC Universal, Inc. and related companies were responsible for stenciling about 64 graffiti stencils reading “The 4400 Are Coming” for an upcoming USA Network television program on City sidewalks, without the permission of the City. The Department of Public Works (DPW) received complaints about the images, and expended resources to remove the images from the sidewalks. We prepared to file a lawsuit for unfair business practices against NBC and its affiliates, but the parties were able to reach a settlement before we filed our case. NBC agreed to pay the City $7,000 to reimburse the City for its costs incurred in responding to the stencils on the sidewalks, and also agreed to make a donation in the amount of $96,000 to the San Francisco Clean City Coalition, a nonprofit organization. As part of the Settlement, NBC and its affiliates also agreed to use their best efforts to prevent the perpetration of similar acts in the future. CCSF v. Wong, et al., - 736 Commercial Street. This case was an administrative complaint filed by this Office on behalf of the Department of Public Health. The case involved illegal asbestos removal from an occupied residential property located at 261 Commercial Street. The property owners failed to comply with state and local law relating to asbestos containment and removal. On July 30, 2004, the matter was settled through mediation, in which the defendants agreed pay the City $100,000 in penalties, fees and investigative costs. Tank Protect v. CCSF. This case arose out of a City-wide project conducted by DPW to install or replace underground storage tanks in compliance with state and federal requirements. The construction company, Tank Protect, was supposed to install two underground storage tanks behind the Hall of Justice. Due to improper construction techniques, there was ground movement and a dangerous cave-in occurred at the construction site. Tank Protect sued for construction costs and CCSF crosscomplained for the costs of repair of the construction site and proper installation of the tanks. After a bench trial, the Court denied Tank Project's claim in its entirety and
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Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 13 Updated City Attorney Financial Recovery And Savings Report awarded the City $234,412. The City also filed a memorandum of costs for $14,213 for a total amount of $248,625. The construction company is no longer doing business in California, but the City is exploring possible other options to enforce the judgment. • Renaissance Parents of Success, Inc. v. MUNI, et al. (PROVEN). During the course of constructing three utility duct banks beneath Islais Creek in San Francisco, contractor ProVen Management, Inc. ("Proven"), caused settlement beneath a 60" sewer force main owned by San Francisco. As a result, the force main broke. San Francisco's litigation experts established that ProVen's failure to grout the annulus of the duct bank drill-hole created the settlement that caused the force main to break. San Francisco sued ProVen for the costs to repair the force main and for liquidated damages for delay. ProVen and its subcontractors cross-complained for delay and impact costs. San Francisco received a total settlement payment of $675,000. As part of the Settlement, San Francisco agreed to release the contract balance and to pay ProVen $316,000 for the costs of completing the remedial work. Litigation continues between the duct bank designers. San Francisco has been dismissed from that action. II. • FINANCIAL SAVINGS

City Labor Negotiations. Last year, working closely with the Mayor's Office, the Controller's Office and the Department of Human Resources, a team of senior Deputy City Attorneys provided coordination, negotiation, mediation, arbitration and other legal services to city-wide labor negotiations. These negotiations resulted in 47 new labor contracts and generated approximately $150 million in total savings and $90 million in General Fund savings to the City for this Fiscal Year and helped avoid layoffs and service reductions in a difficult budget year. We also assisted in the negotiation for ten memoranda of understanding that will go into effect next Fiscal Year. With these ten contracts and the two year contracts we helped negotiate last year, the renegotiated agreements will generate over $53 million in total savings for next Fiscal Year and will help significantly in closing the budget gap for next Fiscal Year. Property Tax Reassessments. Working with the Assessor's Office, we achieved successful decisions on reassessment requests for two major downtown buildings. First, on August 6, 2004, the Assessment Appeals Board upheld 95% of the Assessor's valuation of the Bank of America building at 555 California Street. The property owner had requested the $768,400,000 assessment be reduced to
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CITY AND COUNTY OF SAN FRANCISCO
Memorandum TO: DATE: PAGE: RE:

OFFICE OF THE CITY ATTORNEY

Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 14 Updated City Attorney Financial Recovery And Savings Report $501,600,000, which would have resulted in an approximately $2,930,000 refund. Second, on August 25, 2004, the Assessment Appeals Board granted the owner of the Embarcadero Center complex a reassessment of only $473,000; the owner had requested an approximately $80,000,000 reduction. In addition, we prevailed in Ballard v. CCSF, a San Francisco Superior Court case involving a challenge to a property tax reassessment of an apartment building by the Assessor, which was upheld at the Assessment Appeals Board, based on a transfer of ownership. On August 23, 2004 the San Francisco Superior Court upheld the Assessment Appeals Board's determination that resulted in a savings of $108,000. • The One Market Plaza property tax fraud case. In 2001, the San Francisco Assessment Appeals Board upheld the Assessor's finding that the IBM Personal Pension Plan and Equitable Life Assurance Company had committed tax fraud by concealing an assessable change of ownership of One Market Plaza, a large downtown San Francisco office complex. The total amount of back property taxes and fraud penalties imposed by the Assessor and upheld by the Assessment Appeals Board was approximately $35.5 million. The City collected this entire amount. In 2002, the Pension Plan filed a lawsuit seeking a refund of the fraud penalties, which amount to approximately $15 million. The Pension Plan did not seek any refund of the back taxes. Last year, the trial court upheld the finding of fraud and rejected the Pension Plan's claim for a refund of the $15 million in fraud penalties. The Court of Appeal heard the Pension Plan's appeal on June 15, 2005. Refunding Bonds. We worked with the Mayor's Office of Public Finance (MOPF), together with other departments of the City, on refunding transactions of the City’s bonded indebtedness to take advantage of low interest rates and thereby lower borrowing costs on the City’s capital projects. In August 2004, we assisted the Port with the issuance of $19,940,000 of its refunding revenue bonds. This transaction – which resulted in a true interest cost of 2.62% – produced approximately $1,136,000 in net debt service savings to the City's Port over the remaining term of the bonds. In July 2004, we assisted MOPF with the City's $39,350,000 refunding certificates of participation for the Courthouse Project. This transaction produced debt service savings of approximately $7,429,000 over the remaining term of the bonds. In June 2004, we assisted MOPF and the Redevelopment Agency (RDA) with the amendment of a lease and the issuance of $33,565,000 of RDA refunding lease revenue bonds for the Moscone Convention Center. This transaction produced debt service savings to the general fund of approximately $12,837,000 over the remaining term of the bonds. In May 2004, assisted MOPF with the issuance of $21,930,000 of the City’s general obligation refunding bonds. The transaction produced approximately $916,000 of
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CITY AND COUNTY OF SAN FRANCISCO
Memorandum TO: DATE: PAGE: RE:

OFFICE OF THE CITY ATTORNEY

Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 15 Updated City Attorney Financial Recovery And Savings Report debt savings over the remaining term of the bonds. In December 2003, assisted MOPF with the issuance of $44,275,000 of the City’s settlement obligation refunding bonds. This refunding transaction produced debt service savings to the general fund of approximately $1,995,000 over the remaining life of the bonds. • Laguna Honda Hospital Bonds. Working with the Mayor's Office of Public Finance and the Department of Public Health, we assisted in the City's issuance on May 26, 2005 of $120,000,000 principal amount of general obligation bonds for the reconstruction of Laguna Honda Hospital. We believe this was the first issuance of variable rate general obligation bond debt in the State's history. As such, the transaction presented many novel legal and logistical issues. The issuance of these bonds as variable rate obligations enabled the City to diversity its debt portfolio and provide the potential for significant debt service savings over the life of the bonds, depending on the future interest environment. Lingle v. Chevron. We participated as amicus (friend of the court) in this landmark U.S. Supreme Court decision addressing the appropriate tests to determine whether a local ordinance constitutes a taking, for which the government needs to pay compensation to a property owner. The decision in this case is a huge victory for local governments and helps protect the City from potential takings challenges to its local ordinances. In this case, in May 2005 the U.S. Supreme Court rejected a property-rights challenge to a Hawaii law capping commercial rent rates for gasoline stations. In doing so, the Court rejected a long-standing decision that a government regulation could be a considered a taking of property if it did not substantially advance a legitimate state interest. Through the decision, the Court has significantly narrowed the types of government action that it would consider to be regulatory takings and given local governments more deference in the judicial review of local regulations. TWA Bankruptcy Preference Claim. We assisted in structuring, negotiating, and documenting a settlement of a bankruptcy preference claim brought by the bankruptcy trustee for Trans World Airlines (TWA) against the City's Airport. The Bankruptcy Code permits a trustee to recover from creditors payments made shortly before the bankruptcy filing where the payment gave the creditor more than other, similarly situated creditors would get through the bankruptcy process, a so-called “preference”. TWA’s preference claim was for $1,332,834, and we helped successfully negotiate this amount down to only $47,500.

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CITY AND COUNTY OF SAN FRANCISCO
Memorandum TO: DATE: PAGE: RE: •

OFFICE OF THE CITY ATTORNEY

Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 16 Updated City Attorney Financial Recovery And Savings Report Renaissance Parents of Success, Inc. v. MUNI, et al. (PROVEN). During the course of constructing three utility duct banks beneath Islais Creek in San Francisco, contractor ProVen Management, Inc. ("Proven"), caused settlement beneath a 60" sewer force main owned by San Francisco. As a result, the force main broke. San Francisco's litigation experts established that ProVen's failure to grout the annulus of the duct bank drill-hole created the settlement that caused the force main to break. San Francisco sued ProVen for the costs to repair the force main and for liquidated damages for delay. ProVen and its subcontractors cross-complained for delay and impact costs. San Francisco received a total settlement payment of $675,000. As part of the Settlement, San Francisco agreed to release the contract balance and to pay ProVen $316,000 for the costs of completing the remedial work. Litigation continues between the duct bank designers. San Francisco has been dismissed from that action. Esmaili. In February 2001, a catastrophic landslide destroyed one home and damaged thirteen others in Milbrae, California. The landslide occurred one-quarter mile from the San Andreas Reservoir and adjacent to the Harry Tracy Water Treatment Plant, both owned by San Francisco. Plaintiffs sought damages from the City exceeding $20,000,000. Plaintiffs claimed that water from the Reservoir and/or the treatment plant seeped underground, causing the landslide. Our litigation experts established that neither the lake nor the treatment plant caused or contributed to plaintiffs' harm. The landslide repair costs exceeded $8,000,000. Plaintiffs recovered in excess of $4,500,000 from defendants other than San Francisco. San Francisco contributed $49,500 to the total settlement amount. Estimated costs of trial exceeded $500,000. Litigation continues regarding the landslide repair design. San Francisco has been dismissed from that action. Long-Term Power Purchase Agreements. In 2001, San Francisco filed lawsuits against the Modesto Irrigation District and the Turlock Irrigation District seeking to terminate its 1987 Long-Term Power Sales Agreements with the Districts. San Francisco invoked its rights to terminate under the so-called "protection clause" in the Agreements, based on the City's inability to substantially realize the benefits of its original bargain due to the volatility of the energy market following actions in the mid-1990's by the Federal Energy Regulatory Commission and the State to change the regulatory scheme for pricing electricity from cost-based to market-based. In 2003, the City settled the litigation with the Modesto Irrigation District, and executed an amended and restated long term power sales agreement. Under the new agreement the City will step down its firm power obligation to MID in December 2004, and then terminate the firm power obligation entirely in December 2007. In April 2005, the City executed an amended and restated long term power sales agreement with
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CITY AND COUNTY OF SAN FRANCISCO
Memorandum TO: DATE: PAGE: RE:

OFFICE OF THE CITY ATTORNEY

Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 17 Updated City Attorney Financial Recovery And Savings Report Turlock Irrigation District. The City will terminate its firm power obligation to TID in December 2005, and thereafter only provide Raker Act power and limited rights to excess energy available from the Hetch Hetchy Project. The amended and restated agreements will save the City tens of millions of dollars in potential power purchases to firm Hetch Hetchy power while restoring the City's rights to use more Hetch Hetchy Project energy for its own purposes. • Red Light Camera Case. The City adopted a Red Light Photo Enforcement Program to address pedestrian safety. There have been legal challenges to the program in both the criminal and civil courts. The parties to these suits claim, in part, that the City is implementing the program contrary to the enabling legislation under the state Vehicle Code and that the technology used is not reliable or accepted by the general scientific community. As a result the parties request that the courts strike down the program and/or exclude any evidence presented in the criminal cases brought against persons cited for running a red light. On October 13, 2004 the criminal court Commissioner ruled in favor of the People by finding that the City was implementing the program in a manner that did not violate the Vehicle Code and that the technology used was reliable and generally accepted by the scientific community. As such, the City may continue to cite and prosecute red light violators. This will allow the City to continue to receive revenue allocated to it by the state for fines collected from violators. The civil case is currently in litigation. Ramps at Treasure Island/Yerba Buena Island: Working with the Mayor's Office, we assisted in negotiating and documenting agreements for Caltrans to assume responsibility for the on and off ramps connecting the Bay Bridge to Yerba Buena Island. These agreements save the City at least $30,000,000. School District Bonds Audit. Working with the School District's General Counsel and outside bond counsel, we helped secure a no-cost closing agreement from the Internal Revenue Service (IRS) regarding its audit of the 1999 General Obligation bonds that the City issued for the San Francisco Unified School District. Earlier, the IRS had made a preliminary finding that San Francisco could be liable for millions of dollars arising from claims of misuse of bond funds. Small Property Owners of San Francisco v. CCSF. Three landlords of small buildings brought a class action lawsuit on behalf of 62,000 landlords of small residential buildings challenging S.F. Administrative Code § 49.2, requiring residential landlords to pay 5% annual interest on tenant security deposits. The landlords claimed that the difference between the 5% rate and market rates of interest
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CITY AND COUNTY OF SAN FRANCISCO
Memorandum TO: DATE: PAGE: RE:

OFFICE OF THE CITY ATTORNEY

Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 18 Updated City Attorney Financial Recovery And Savings Report for the 16-month window from April 2001, when interest rates for money market funds dropped below 5%, and August 4, 2002, the date the Board amended the ordinance to tie the interest to the market rate, was "taken" from them and demanded compensation. The landlord's case was based on a Court of Appeal decision from Southern California finding that the City of Santa Monica was liable to landlords for damages based on a similar ordinance requiring the payment of interest on tenant security deposits. Plaintiffs calculated their total damages to exceed $7.5 million. On June 16, 2004, the Superior Court ruled in favor of the City on all issues. The plaintiffs have appealed. • Citizens for Better Streets v. CCSF. Citizens for Better Streets challenged the City's below-market lease of property at Embarcadero and Broadway to the Chinatown Neighborhood Development Corporation (CNDC) for a 110-unit affordable housing project. The plaintiff contended that the state law under which Caltrans transferred the property to the City following demolition of the Embarcadero Freeway, Streets and Highways Code § 72, required the City to lease the property at full market rent. CNDC's housing project would not be financially feasible were CNDC required to pay market rent. The Superior Court denied the plaintiff's motion for a preliminary injunction. Wall appealed. In a published 2-1 decision, the Court of Appeal affirmed the denial of the preliminary injunction and, in the process, decided the legal issue concerning § 72 in favor of City. The Supreme Court denied the plaintiffs request for review. Although the plaintiffs added new claims to their action, on April 12, 2004, the Superior Court entered summary judgment for the City on all claims. The Plaintiffs appealed, but then this summer dismissed their appeal. The case is now final. The CNDC housing project, financially feasible due to the reduced rent, will soon begin construction. Empress Hotel v. CCSF. The owner of long-abandoned tourist hotel spent more than $1,000,000 to renovate the Empress Hotel as a tourist hotel, but the Planning Department and the Board of Appeals ruled that the tourist hotel use had been abandoned and the current zoning allows only residential use. The owner claimed that law permitted tourist use and that the City's enforcement of the Planning Code to preclude tourist use was motivated by racial animus against the owner. The owner further alleged that the City had improperly delegated its permitting authority to the Tenderloin Housing Clinic. The owner demanded damages from the City in excess of $1,000,000. The federal court dismissed the owner's federal claims against the City. The owner then filed suit against the City in state court. In January 2004, the court granted judgment for the City on all claims. The owner

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CITY AND COUNTY OF SAN FRANCISCO
Memorandum TO: DATE: PAGE: RE:

OFFICE OF THE CITY ATTORNEY

Mayor Gavin Newsom Board of Supervisors Controller Edward Harrington June 16, 2005 19 Updated City Attorney Financial Recovery And Savings Report appealed, but in July 2004 leased the building to the City to operate the property as a residential hotel and dismissed his appeal. • San Remo Hotel v. CCSF. The owners of a mixed use hotel sued the City ten years ago challenging the Hotel Conversion Ordinance as a taking of property without just compensation. The case bounced back and forth between federal and state court, but ultimately was decided in the state court system, with the California Supreme Court upholding the HCO. The Plaintiffs sought to relitigate the issue in the federal courts, but the City argued that the state court decision was binding under the doctrine of collateral estoppel. The lower federal courts agreed with the City, but the Plaintiffs sought review in the United States Supreme Court, which granted review. The case was argued in March and we are anticipating a favorable ruling shortly. If, as we anticipate, we prevail in the United States Supreme Court, the result will save the City millions of dollars in the cost of litigating twice, in two different court systems every challenge to the City's zoning and land use laws that is based on the Takings Clause. The result will also save the City millions of dollars of exposure to other property owners who, had we not been successful, would seek to recover the amounts they have paid the City in fees under the HCO to convert their hotels to tourist use or the claimed losses in revenue or value resulting from not converting their properties to tourist use. Real Estate Consolidation and One South Van Ness Avenue. The City Attorney's Office has worked with the Mayor's Civic Center Task Force and the Department of Real Estate to consolidate City departments into cheaper privately-owned rental space, and into City-owned space, resulting in significant long-term savings to the City. The current planning effort envisions converting over 800,000 square feet of City-leased space into City-owned space, helping to insulate the City from the risk of possible future increases in rents in the local real estate market. The first part of this strategy involved the lease of space in the building at One South Van Ness Avenue, with a City right to purchase this building on or before January 2008. The purchase price is set at $71,500,000. The current fair market value of the building, as determined by an independent appraisal, is $77,000,000. If the City decides not to purchase the building, the Budget Analyst has estimated rent savings to the City, over the first 10 years of the lease, to be approximately $2,900,000.

As City Attorney I am pleased with these results and I trust you are as well. Please let us know if you have any questions about anything in this report. We look forward to working with all of you to address the financial issues and meet the challenges that San Francisco faces.
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