City Makes Settlement Offer to Resolve DACHA‐Related Litigation

By Mayor Joe Krovoza, Mayor Pro Tem Rochelle Swanson and Councilmembers Stephen Souza, Sue Greenwald and Dan Wolk   

In response to public interest regarding the Davis Area Cooperative Housing Association (DACHA), the City has decided to release information about settlement offers the City has made to David Thompson, Luke Watkins and the Twin Pines Cooperative Foundation (Twin Pines).

Mr. Thompson and Mr. Watkins are the principals of Neighborhood Partners, and Mr. Thompson is the president of the Twin Pines Board of Directors. Neighborhood Partners sued DACHA in 2006. In 2011, Neighborhood Partners filed a new lawsuit against DACHA and the City. Twin Pines has sued both DACHA and the City in litigation that began in 2008.

The City has extended settlement offers to Neighborhood Partners and Twin Pines on multiple occasions in the interest of resolving all of the DACHA disputes. Although the City took reasonable actions to support and sustain DACHA, and both the Yolo County Grand Jury report (2010-2011) and a bankruptcy court decision (2010) have agreed that these actions were appropriate, defending these lawsuits is expensive and is adversely affecting the low and moderate income families that were DACHA members. Therefore, the City has made and continues to make settlement offers in the interest of moving forward and focusing on the creation of future affordable housing opportunities.

While the City has participated in multiple settlement discussions, two particular City offers were made at pivotal points: April 2010 and the present.

City’s April 2010 Settlement Offer Prior to Foreclosure Sale

In April 2010, prior to the City foreclosing on the DACHA units due to delinquency on mortgage payments due the City, Councilmember Stephen Souza, on behalf of the City Council, conveyed a settlement offer to Neighborhood Partners and Twin Pines of$300,000. This settlement offer would have enabled DACHA to pay off the remaining amount due on Neighborhood Partners’ $331,000 arbitration judgment against DACHA along with some interest. Some of this judgment had already been paid when Neighborhood Partners received $57,000 from levying DACHA’s bank accounts in October 2009, thereby rendering DACHA insolvent and unable to pay its bills, including its mortgage from the City.\This offer would have resulted in a transfer of $300,000 out of the City’s affordable housing funds to DACHA so that DACHA could pay Neighborhood Partners. The City was under no obligation to provide this offer. The City was trying to resolve the dispute between Neighborhood Partners and DACHA even though it had not been a party to that dispute. Twin Pines’ dispute with DACHA would also have been resolved. If Neighborhood Partners had accepted this offer from the City, they would have received more than full payment on their 2009 arbitration , DACHA would have been preserved as a limited equity housing cooperative, the City’s mortgage to DACHA would have been brought out of default, the low and moderate income DACHA households would have retained their investment in DACHA shares and had a stable place to live, attorney’s fees would have been saved by all parties, and the City’s affordable housing program would have safeguarded its funds for use on new projects. Neighborhood Partners and Twin Pines turned down this offer.

City’s January 27, 2012 Settlement Offer

On January 27, 2012, the City again offered a settlement, this time for $280,000. The City feels that this offer is more than reasonable, since nearly two years of additional attorney’s fees have been accumulated to the detriment of the City’s Affordable Housing program and, unlike the April 2010 offer, this offer cannot preserve DACHA because the City now owns the DACHA units and the DACHA Board is pursuing full dissolution of the co‐op. Neighborhood Partners and Twin Pines have turned down this settlement offer as well, but the City has re‐extended the offer in hopes of reaching a reasonable settlement. This is a critical time in the legal disputes, as significant expenses will be incurred by all parties in upcoming months if Neighborhood Partners and Twin Pines continue to press their cases via litigation.

DACHA Background

DACHA was created in late 2002 as a scattered site limited equity housing cooperative, intended to be affordable to low and moderated income families. DACHA was proposed and developed by Neighborhood Partners, a private for‐profit affordable housing developer. DACHA received its 20 houses and some initial loan funds of $1.2 million from the City's affordable housing programs.

To live in a DACHA unit, as structured by Neighborhood Partners, a member needed to invest $18,000 to $20,000 per household to buy a share in the cooperative. Neighborhood Partners appointed the initial DACHA Board because there were no DACHA co‐op members to serve on the Board until prospective occupants purchased co‐ op shares. This original non‐member DACHA Board contracted with Neighborhood Partners to provide consultant and developer services to the co‐op. Neighborhood Partners, in creating the DACHA articles of incorporation, designated Twin Pines, whose president is David Thompson, as the entity that, should DACHA dissolve, would receive any DACHA assets, if any still existed, after the payment of all DACHA debts, even though the houses were part of the City’s affordable housing program.

After a few years, rents at DACHA started rising to near market‐rate rents and DACHA was having trouble finding members for new units and replacement members for members who wished to move out. In May 2005, DACHA members requested an audit and help from the City due to increasing housing costs. In response, the City commissioned an audit and facilitated meetings between DACHA members, the DACHA Board, and Neighborhood Partners. In June 2006, the auditor recommended that the cooperative refrain from purchasing new units and that it consider restructuring.

By late 2005, DACHA members had replaced the initial predominantly non‐member Board that had been appointed by Neighborhood Partners. After receiving the auditor's report, the member Board decided against adding new units to DACHA.

In 2006, Neighborhood Partners sued DACHA for consulting fees and for developer fees it would have obtained if DACHA had continued to add units. This suit was based on agreements Neighborhood Partners had made with the original non‐member Board appointed by Neighborhood Partners that had obligated future DACHA Boards to expand the co‐op and to pay Neighborhood Partners for each new unit, regardless of the fiscal feasibility, the desires of future boards, or whether or not the City was willing to provide the affordable units. The City was not a party to these agreements.

In 2007‐2008, the City decided to assist DACHA and improve the affordability of its units by refinancing the co‐op’s multiple loans through a new low‐interest long‐term four million dollar mortgage loan secured by the houses. These funds allowed DACHA to pay‐off the outstanding private loans that helped purchased the 20 units and to stabilize DACHA by restructuring and reducing the membership buy‐in share costs to $6250 per share, and reducing the maximum allowable rent, making DACHA more affordable to low and moderate income families.

In June 2009, Neighborhood Partners obtained a $331,000 judgment against DACHA in a private arbitration of its 2006 lawsuit. In October 2009, Neighborhood Partners, in its

attempt to collect this judgment, levied against and emptied DACHA’s bank accounts, obtaining $57,000, and rendering the co‐op insolvent and unable to pay the City’s mortgage.

In April 2010, the City proposed a settlement to preserve the DACHA co‐op. In late April 2010, Neighborhood Partners and Twin Pines, jointly, filed an action in Bankruptcy Court to try to force DACHA into bankruptcy. DACHA opposed this filing and the Bankruptcy Court ruled in favor of DACHA, dismissing the case. The Court also entered an order requiring Neighborhood Partners and Twin Pines to pay DACHA $48,000 in attorneys’ fees and costs. This attorneys’ fee award has not been paid.

After the settlement proposal failed and the bankruptcy action was dismissed on July 1, 2010, the City foreclosed on the units to safeguard the public investment and became the owner of the DACHA units. The City was the only party to appear at the foreclosure sale and its bid was accepted. As the current owner of the 20 former DACHA units, the City has rented the units at affordable rents to those DACHA members who wished to stay in the units. Approximately half of the units remain occupied. The City Council will decide this month how to manage the vacant units.

Neighborhood Partners and Twin Pines continue to pursue litigation against the City and DACHA. Each DACHA household has lost its $6250 member share price. DACHA has no assets. so, , with its members’ support, DACHA filed for dissolution in 2011, and the City provided the notice and held a public hearing on the dissolution as required by state law. In February 2012, the City forwarded the dissolution request to the state’s Attorney General for final resolution.

As discussed above, the City’s January 27, 2012 settlement offer was rejected by Neighborhood Partners and Twin Pines Cooperative Foundation. The City remains committed to settling this matter and avoiding the expenses of litigation for both parties.

Suggested further reading related to DACHA:

• DACHA History, Assets, and Liabilities in the Organizational Dissolution Plan Application and Staff Report (February 7, 2012)
• Yolo County Grand Jury Report on the City of Davis Affordable Housing Program (May 19, 2011)
• Bankruptcy Court Ruling on Involuntary Bankruptcy Case Against DACHA (June 14, 2010)
• Audit Report from Gilbert Associates, Inc. CPAs and Advisors and Staff Report (June 20, 2006)

Additional information is available on the City of Davis website: www.cityofdavis.org