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Enron loses this time, but Palo Alto lost last year

Original post made by Diana Diamond, Palo Alto Online blogger, on Jul 4, 2006

If Palo Alto had only waited, it may have found out that it really didn’t have to give bankrupt Enron Corp. creditors $21.5 million.

But the City Council caved in, and 14 months ago gave Enron the check, claiming at the time that this handout was a victory. To me, it was a hollow victory.

Snohomish County in the state of Washington was celebrating its own real victory June 29, 2006 because of a ruling from the Federal Energy Regulatory Commission agreeing that Enron was not owed the $122 million it wanted for energy that was never delivered, as was true in Palo Alto’s case. FERC said in a news release that it was denying Enron's claim because the company's "financial fraud induced Snohomish to enter into the contract."

So Snohomish County doesn’t have to pay anything, and Palo Alto had to pay $21.5 million – and give up all claims on getting any money evermore for the Enron fiasco.

Councilmember Bern Beecham, who was city’s point man in explaining the wisdom of the lawsuit settlement, said at the time that the city was lucky because it only had to pay the $21.5 million instead of the $50 million Enron wanted. And this week he said that Snohomish County was lucky because FERC’s decision could have gone either way, and that Palo Alto’s decision was the right one at the time.

I disagree. I don’t think it was a matter of luck, but rather one of judgment. Snohomish officials said their decision to hold out was based not only on the money they might have to pay, but because justice was involved. The same issue was at stake for Palo Alto. Enron reneged on its contract, was not delivering the gas and electricity it promised, and both entities rightfully broke their contracts.

Enron creditors pushed back, saying they were owed the money. Palo Alto finally agreed to pay, fearing they could lose more than the $21.5 million because of additional legal expenses, plus there was no guarantee the city would win. And Senior Assistant City Attorney Grant Kolling said the judge told them to mediate, and they did. Palo Alto could have waited, and I think it should have waited it out.

The council got the wrong legal advice from its own city attorneys, who were too afraid to challenge the judge’s recommendation to mediate. Just because a judge orders the parties to try to mediate doesn’t mean the city has to agree to the terms of the mediation. The city could have walked out of the mediation proceedings at any time. It didn’t.Instead it chose to pay Enron.

Since a whopping amount of money was at stake, the council should have made sure it explored every angle and consulted several legal experts, instead of settling with Enron.

There is a lesson to be learned here. The council needs to understand the mindset that led them to pay Enron $21.5 million. We can learn from their mistakes, and in future settlements, the city could just profit — instead of just pay.

Comments (3)

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Posted by Tom Wyman
a resident of Old Palo Alto
on Jul 4, 2006 at 9:00 pm

We all know how easy it is to Monday morning quarterback. But with $21.5 million riding on the line, with a reputable community facing a discredited company with a record of shyster dealings it’s a travesty that Palo Alto did not have the gumption to ask for its day in court.

Mediation can be a solution, but Palo Alto should have been wary of the legal might and corporate resources that Enron would bring to the table. Better a court of law than backroom mediation. Palo Alto could have used the the additional time to bulwark its case against an opponent that was losing credibility by the day.

The City Attorney should have mustered the best talent available in developing his recommendation. This was not an issue on which city staff had the expertise on which to opine.

Sure, law cases are frequently crap shoots, but here’s a case where Palo Alto did not figure the odds correctly and ended up paying a dishonest dealer — Enron. Palo Alto should have had the spine of Snohomish County and stood by what is right and by principle instead of agreeing to payoff a bunch of crooks for their fraudulent acts. I'm ashamed of our willingness to capitulate.

Like this comment
Posted by Walter_E_Wallis
a resident of Midtown
on Jul 5, 2006 at 9:40 pm

I question the competency of a City Attorney who allowed the signing of a contract that did not have clear requirements for performance and for cancellation. I can understand the reluctance to have such incompetence uncovered. I cannot understand the signing of a contract for wind power that seems not to require the delivery of a product. Apparently political correctness means more than legally protected.

Like this comment
Posted by dp
a resident of another community
on Jul 9, 2006 at 3:27 am

It would be easier to understand Palo Alto's position if it hadn't agreed to have the entire case sealed.

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