An aerial view in June shows progress on the downtown arena. A court ruling Friday was a victory for Sacramento officials who committed $255 million in subsidies to the half-billion dollar arena. Randy Pench rpench@sacbee.com
An aerial view in June shows progress on the downtown arena. A court ruling Friday was a victory for Sacramento officials who committed $255 million in subsidies to the half-billion dollar arena. Randy Pench rpench@sacbee.com

Arena

Judge rules in city’s favor in Sacramento arena lawsuit

By Tony Bizjak and Dale Kasler

tbizjak@sacbee.com

July 24, 2015 12:41 PM

UPDATED July 25, 2015 09:03 AM

In an extensive ruling Friday, a judge handed the city of Sacramento a resounding victory by rejecting a lawsuit challenging its 2014 deal with the Kings to subsidize a new downtown arena.

The opinion by Sacramento Superior Court Judge Timothy Frawley is listed as a “proposed statement of decision.” The plaintiffs have 15 days to file objections for the judge to consider before finalizing his decision. But city officials say they plan to move forward in the next few weeks on their stalled plans to finance their share of arena construction.

Frawley, in his 41-page statement, sided with the city on every key point, saying the plaintiffs “failed to meet their burden of proof” on allegations that the city struck a secret side deal with the Kings’ owners last year to help them finance the purchase of the team. “The testimony consistently showed that there was no secret subsidy asked for or given,” he said.

Never miss a local story.

Sign up today for a free 30 day free trial of unlimited digital access.

The judge’s comments were at times critical of the plaintiffs. At one point, Frawley wrote their claims “amount to nothing more than speculation, based largely on taking statements out of context and assuming facts not in evidence.”

He concluded that the city is entitled to recover certain costs of the lawsuit.

City officials reacted gleefully to the decision. Councilman Steve Hansen, who represents downtown and testified during the recent trial, called the ruling “a huge catharsis” that should allow the city to move forward on financing the arena.

“Reason and facts prevailed over ideology, exactly how the courts are supposed to work,” Hansen tweeted. “Time to move the city of Sacramento forward.”

Mayor Kevin Johnson and Kings President Chris Granger also hailed the decision. The mayor called the lawsuit an obstruction and said the ruling represents validation of a public-private partnership that was openly discussed and vetted.

Frawley conducted an 11-day trial that ended in early July and included such witnesses as the mayor and Kings principal owner Vivek Ranadive. The case centered on the 2014 deal between the city and the new Kings ownership to jointly finance an arena at Downtown Plaza. The arena, estimated in the $500 million range, is under construction and scheduled for completion in October 2016. The city will own the facility. The Kings will operate it and pay rent.

The city agreed to kick in $255 million in cash and land. The city also gave the Kings control of 3,700 parking spaces at the former Downtown Plaza site and gave the team entitlements to build six digital signboards rent-free on city land next to freeways.

Neighborhood activist Isaac Gonzalez, retired state consultant Jim Cathcart and Julian Camacho, also a state retiree, challenged the agreement, contending that the parking spaces and billboard rights were part of a side deal in which the city helped compensate the Kings group for overpaying to buy the team in a 2013 bidding war with a group that planned to move it to Seattle. They were represented by attorneys Patrick Soluri and Jeffrey Anderson.

The plaintiffs and their attorneys could not be reached for comment or to say if they plan to challenge the ruling.

All along, city officials said they didn’t hide anything and contended their accusers were trying to disrupt the project because they oppose the use of taxpayer money. City officials said they expect to have spent $2 million to defend themselves in the case. The city’s recoverable court costs, however, are estimated at $54,000 or $98,000, depending on how they are measured, officials said.

Frawley, who heard the case without a jury, previously decided two other arena-related cases in the city’s favor. One was an environmental suit that claimed the city didn’t adequately study traffic impacts and that an arena would lead to street riots. Another was an attempt to qualify petition signatures for a public vote on the arena deal. The judge ruled the signature gatherers failed to follow proper legal steps.

In his Friday ruling, Frawley dismissed the testimony of the arena’s most high-profile opponent, former City Councilman Kevin McCarty, now a state assemblyman. McCarty testified in court that he disagreed with the city’s parking analysis and that he suspected the city was giving away valuable assets in a hush-hush manner.

“Mr. McCarty occupies an esteemed position in our government, but he is not a parking expert,” the judge wrote. “His opinion is misguided.”

The judge noted that Johnson and Assistant City Manager John Dangberg erased text messages related to the arena deal after the plaintiffs sent the city a letter notifying them to maintain all communications.

The judge wrote that “sanctions are warranted,” meaning that the judge has the right to draw “an adverse inference” about what was in those texts. He said he believes the text deletions were caused by “carelessness, not malicious intent,” and said he “does not find it reasonable to infer that the deleted text messages were the proverbial ‘smoking gun.’”

During the trial, the plaintiffs produced documents, emails, texts and memos that showed the Kings asked the city to put more cash into the deal. But the documents also stated that city officials refused.

The documents also showed that the Kings and city discussed a variety of potential dollar values for the parking garage spots and billboard rights. Plaintiffs’ attorneys argued those discussions show that the city gave the Kings extra value as part of a backroom deal, and hid that value from the City Council and public.

City officials countered that they put those two assets on the table during negotiations as leverage to get the Kings to give the city some things it wanted, including protection from arena cost overruns and from any future capital improvement costs. The city listed those assets as part of the deal in various public documents.

The judge disagreed with the plaintiffs’ argument that there is no public benefit for the city to join in a public-private financial partnership to solidify the team’s presence in town by building a new arena. “A professional sports team may be a public benefit to a city, just as an orchestra, ballet company, aquarium, art museum, convention center, parade, music festival or farmers’ market etc., may be a public benefit,” he wrote.

He also disagreed with the plaintiffs’ argument that the city was obligated to assign and publish a value of the billboard and parking rights. “These assets may have significant value in the hands of the Kings – time will tell – but the evidence shows they did not have significant value to the City,” the judge wrote. “Plaintiffs’ arguments to the contrary amount to nothing more than speculation, based largely on taking statements out of context and assuming facts not in evidence.”

City officials maintain the Downtown Plaza garages were essentially worthless without expensive improvements. And they said the potential value of the electronic billboard spots is unknown because the billboards haven’t been constructed, and it’s uncertain if they will be, or when.

Even if the city was wrong in its analysis of the garages, Frawley wrote, “plaintiffs have failed to show that defendants knew it was flawed, as plaintiffs must do to show fraud and concealment. Plaintiffs have failed to prove that City officials persuaded its independent consultant to prepare an intentionally fraudulent report.”

The judge said the city also did nothing wrong in assigning zero value to the billboard rights. The city “disclosed this information as the best information available to it. The city did not fraudulently conceal the value of the digital billboard lease.”

Assistant City Attorney Matt Ruyak said the court ruling confirms that the city handled the deal correctly.

“We knew all along that the city negotiated a great deal,” he said. “It is receiving a tremendous return for the low-cost assets it contributed to the deal. The court’s ruling affirms that the City Council’s decision was squarely within its legislative discretion and consistent with the law.”

The ruling appears to clear the way for the city to move ahead on financing its share of the arena project. City Treasurer Russ Fehr said the city will take out a short-term loan in a few weeks from Goldman Sachs to get the city’s money “into the project as quickly as possible.” Eventually the city expects to issue $275 million in long-term bonds, backed in part by the city’s parking revenue.

Fehr said the decision on when to sell long-term bonds will depend in part on whether the plaintiffs appeal Frawley’s ruling. The city could conceivably go to market with the bonds even if an appeal is filed, Fehr said.

Fehr said municipal bond rates have increased slightly in the past few months, but the city still expects to pay lower interest rates than it forecast in May 2014 when the City Council approved the arena deal with the Kings. The city had expected annual debt service on the bonds would come to $21.9 million. Now the city can expect to pay $19.3 million or less, Fehr said.