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Bankruptcy Judge Approves Lehman Cash to Clean Up SunCal Oak Knoll Project Site

Today, the City of Oakland issued a press release announcing that a U.S. Bankruptcy Court judge has approved a court stipulation to use roughly $4 million of Lehman Brothers cash to clean up the SunCal Oak Knoll project site. Even though SunCal is a 10% partner in the Oak Knoll project, none of the money is coming from that firm. Lehman Brothers continues to operate in Chapter 11 bankruptcy, under a caretaker CEO and the supervision of the bankruptcy court. SunCal removed their presence from the site in October, 2008, within a month after Lehman’s bankruptcy filing.

The full press release from the City of Oakland is provided below:

OAKLAND, CA – After months of community concern and legal wrangling, a deal to secure $3.7 million from failed Wall Street giant Lehman to abate health and safety hazards at the former Oak Knoll Naval base has been approved by a U.S. Bankruptcy Court judge in Santa Ana.

Thousands of creditors have lined up to get cash from Lehman as it undergoes restructuring in the biggest bankruptcy case in U.S. history. Given the enormous number of claims, City officials said it was extraordinary that Oakland was able to secure a significant amount of funding for the long-neglected base, a 167-acre property in the East Oakland hills that was formerly home to a U.S. Navy hospital.

“According to Lehman’s own numbers, more than 65,000 claims totaling $830 billion have been filed in the company’s bankruptcy case,” City Attorney John Russo said. “Under these circumstances, I am very pleased that Lehman stepped up to meet the demands of this community, and that this deal was ultimately approved by the court.”

Oakland is likely the only local government in California – and perhaps the first city in the nation – to secure this level of funding from the Lehman bankruptcy estate.

Russo credited the Sequoyah Hills/Oak Knoll neighbors for their work and leadership on this issue.

The former Oak Knoll base was set to be developed by SunCal Oak Knoll LLC with financial backing from Lehman. But after the collapse of Lehman and the subsequent bankruptcy of the SunCal Oak Knoll partnership, contractors walked away from the property leaving more than 90 half-demolished buildings, piles of asbestos, overgrown vegetation and other problems. The Oakland Fire Chief declared the property a major fire hazard in a city that, 18 years ago, experienced one of the worst fire disasters in modern U.S. history.

After work on the development stalled, the City ordered the abatement of the nuisances on the property in June 2009. In late 2009, the City brought representatives from Lehman and SunCal Oak Knoll to the table and brokered the agreement approved by a judge last week (January 5).

In the agreement, Lehman will fund $3.7 million to demolish ramshackle, World War II-era buildings, remove asbestos, clean up debris and secure the vacant Oak Knoll hospital. The funding is in addition to $550,000 already released by Lehman to pay for armed security guards, improvements to fences and “goat deployment” to eradicate the fire threat posed by overgrown vegetation. SunCal Companies is responsible for managing and directing the clean-up of the property.

4 comments to Bankruptcy Judge Approves Lehman Cash to Clean Up SunCal Oak Knoll Project Site

  • Alan2009

    It sure would have been nice if City Attorney Russo, or his publicity flak, would have actually read the Stipulation and Court Order which became effective last week:

    (1) The Stipulation shows that the money is being provided by Lehman Ali, Inc., a not-bankrupt mortgage company with millions of dollars in monthly income. Lehman Ali, Inc. is listed in the Lehman Brothers Holdings Inc. bankruptcy court filings as being the wholly owned subsidiary of that bankrupt company. The distinction between bankrupt and not-bankrupt Lehman entities is important, because under most circumstances the Lehman bankruptcy court judge in New York has to sign orders approving deals made by the bankrupt Lehman entities, but no orders by that judge are required to approve deals by the not-bankrupt Lehman entities. The New York bankruptcy judge didn’t sign any order in the case of Oak Knoll. Instead, the court order was signed by the Santa Ana based bankruptcy judge with jurisdiction over SunCal Oak Knoll, LLC.

    (2) Under the Stipulation, the money being provided by Lehman Ali, Inc. for Oak Knoll is $4.4 Million not $3.7 Million. So, City Attorney Russo did a better job than he thought.

    (3) It turned out that the asbestos abatement contractor who had a mechanics lien on Oak Knoll would not return and finish the work unless he was paid his $3+ Million in invoices sent to SunCal in 2008. As a result, not only did Lehman Ali, Inc. have to cough up $4.4 Million for new work at Oak Knoll, Lehman Ali, Inc. had to “buy” the asbestos abatement contractor’s bankruptcy claim against SunCal Oak Knoll, LLC for cash, in order to get the asbestos abatement contractor to come back on the job. As a result, Lehman Ali, Inc. is coming up with $7.4 Million in cash for Oak Knoll not the $3.7 Million referred to in the City Attorney’s press releases.

    In addition to the work by Oakland’s City Attorney and his hired gun bankruptcy lawyer Larry Jacobsen, this settlement was brought about by the good work of the law firm for the Oak Knoll Chapter 11 Trustee, The Lobel Firm out of Newport Beach, and by the good work of the law firm for all of the Lehman Brothers entities involved in the Oak Knoll Case, Pachulski Stang Ziehl & Jones out of Los Angeles.

    Pachulski’s rational nature and work was particularly important because Lehman Brothers’ main lawyers in New York, Weil Gotschal & Manges, the biggest Chapter 11 law firm in the United States, are particularly imperious and stubborn, and have generally gotten their way on all issues in the Lehman New York bankruptcy cases. As a result, the Oakland City Attorney’s and Alameda District Attorney’s effectiveness in solving the problems at Oak Knoll are probably particularly humbling to the egos of the New York lawyers running the case for Lehman.

    Also, kudos to the Chief Restructuring Officer / Chief Executive Officer of all of the Lehman Brothers entities, bankrupt and not, Bryan Marsal, and his partners at Alvarez & Marsal, an insolvency management firm, for “seeing the light”. Mr. Marsal devoted his personal attention to the risks to the entire Oakland community which were being created by his company’s and Lehman’s remaining employees’ refusals to fund the fire and asbestos hazard abatement at Oak Knoll. Mr. Marsal and his company were not dragged kicking and screaming to the settlement table, but acted in a responsible way once they understood what Lehman’s prior management had done to Oak Knoll.

    Finally, it is important to note that the ultimate owner of 90% of SunCal Oak Knoll, LLC is Lehman Brothers Real Estate Partners II, L.P., whose limited partners are a broad spectrum of investors, many of whom are state employees pension funds. The general partner in that ownership entity, Lehman Brothers Real Estate Company II is jointly owned by another subsidiary bankrupt Lehman Brothers Holdings, Inc. and the “key employees” who formally ran Lehman Brothers. Those “key employees” including Mark Walsh, Brett Bossung and Mark Newman have been trying to buy LBREC II and obtain the consent of the limited partners to begin to act as the general partner of LBREP II (whose money was pulled out of Oak Knoll) but so far, according to the financial press, they do not have the full consent of the limited partners to that sale and transfer of power. As a result, Oakland residents were fortunate that LBREP II and LBREC II were still controlled by Mr. Marsal and his company so that this resolution of trouble at Oak Knoll could be achieved.

    It should be noted that the various Lehman Brothers entities are renewing their efforts, in the Santa Ana bankruptcy court, to get a Chapter 11 Plan approved which would allow Lehman Ali, Inc. to foreclose its $150 Million mortgage on Oak Knoll and eliminate any ownership interest in the project on the part of SunCal. Hearings on that Chapter 11 plan will occur in Santa Ana over the next few months.

    At the same time, SunCal’s owners are proposing a “competing” Chapter 11 Plan which would allow a public auction sale of the Oak Knoll property, at which Lehman Ali, Inc. would NOT be allowed to credit bid its $150 Million mortgage debt on the property and instead be forced to show up with cash and bid against a D. E. Shaw group entity which would have a management contract with a SunCal entity. Whoever won the property at that auction would have to immediately pay Lehman Ali, Inc. the $7.4 Million advanced for the Oak Knoll abatement.

    Who ultimately ends up owning Oak Knoll, a Lehman Brothers entity or a D.E. Shaw controlled entity, will be determined by the majority vote of the unsecured creditors of SunCal Oak Knoll, LLC and perhaps (if SunCal gets their way) by the unsecured creditors of the other 25 Lehman/SunCal entities in bankruptcy in Santa Ana as well.

    As a result, no one should believe rhetoric by SunCal that they and D.E. Shaw will soon own Oak Knoll, first because the voting by the unsecured creditors has not occurred and second because if Lehman Ali, Inc. is not allowed to credit bid its mortgages it is inevitable that there will be an appeal by Lehman Ali, Inc. which make take several years.

    Stay turned for the continuing soap opera called “SunCal Oak Knoll”.

  • barb

    Thanks for the great update Alan. One can only hope that there is no SUNCAL Alameda Point to add a sequel to SUNCAL Oak Knoll. What a forever mess. By the time it is sorted out, Russo and O’Malley will be playing with their grandchildren. They all deserve our gratitutde for trying to right an unthinkable wrong.

  • Zoe Robinette

    To Alan and related authors on the continued Oak Knoll, SunCal fiasco. What is the latest on the actual site? Will there be a new community, refurbished historic buildings, and community center? Please provide additional information about the future of that lovely building site.


  • They are still cleaning up the asbestos and other problems created when SunCal’s project special-entity walked away, leaving contractors un-paid, and bags of contaminated material on the ground, open to the elements, to kids, to squatters. This happened in sep/oct 2008.

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