Vernon pays former administrator $500,000 to settle contract provision

The city of Vernon has paid $500,000 to a former top administrator who last month pleaded guilty to felony corruption charges involving questionable business deals between the city and his wife.

The payment this week was made to Donal O’Callaghan, who was forced out of his position last year after The Times reported that he had overseen his wife’s hiring as a city contractor. L.A. County prosecutors later charged him with conflict of interest and misappropriation of public funds.

O’Callaghan had demanded $1.2 million from the city, his attorney said, or roughly 15 months’ pay. The settlement prevents a potentially embarrassing courtroom fight as lawmakers consider whether to disband the embattled city.

“The city approached this situation in an entirely rational fashion,” said David Schindler, an outside attorney representing Vernon. “It made an intelligent business decision that was in the best interest of the city.”

O’Callaghan’s contract, which was obtained by The Times through a Public Records Act Request, included a provision that allowed Vernon to terminate him with cause if he was convicted of a “felony involving moral turpitude.” Schindler said he wasn’t certain the city could win the case, adding that it was far from clear that a violation of state conflict-of-interest codes amounted to “moral turpitude.”

Other experts in municipal law said they were surprised Vernon didn’t try to challenge O’Callaghan in court, particularly given his guilty plea.

Michael Jenkins, an adjunct professor of law at USC who also is city attorney for West Hollywood and Diamond Bar, noted a separate provision in O’Callaghan’s contract that allowed the city to terminate him for committing “willful misconduct.”

Jenkins also said Vernon could have argued that O’Callaghan’s crime did constitute moral turpitude because it was “a crime of dishonesty.”

“It’s just a lot of money, and if it was important enough for the city to stand firm, it would have cost considerably less to arbitrate the case,” said Jenkins, who reviewed a copy of O’Callaghan’s agreement.

“The question is why wasn’t it important enough, especially in light of everything that’s been going on in the city and all the notoriety it’s earned?”

Kevin Duggan, the West Coast regional director of the International City/County Management Assn., said he was also puzzled by Vernon’s decision to settle the case for such a large sum. “This settlement is very unusual, and it communicates an unfortunate message,” he said: that public officials can receive generous compensation even when they break the law.

O’Callaghan was one of the highest paid public employees in the state in recent years, making as much as $785,000 in 2009. During his five-year tenure in Vernon, he served as the director of the city’s power utility and its top administrator.

He was also one of a select group of Vernon officials who worked under special contracts that were automatically renewed every three years, permitted the officials to work from any location they chose and allowed them to charge the city for any “extra hours.”

It was under such a contract that former city administrator Eric T. Fresch, O’Callaghan’s predecessor, was paid $1.65 million in 2008, a year in which he commuted to Vernon from his home in the San Francisco Bay Area. Fresch now works for Vernon as a legal consultant under a different agreement, Schindler said. Another official who had received a special contract, former city attorney Jeffrey Harrison, left Vernon with a $1-million settlement in early 2010.

Schindler said this week that those contracts are no longer used in Vernon and that the city is now focused on reforms.

In July, O’Callaghan was sentenced to one year summary probation and 200 hours of community service. Vernon came to an agreement with him on the final payout around the same time, Schindler said.

O’Callaghan said he did not know he was violating state conflict of interest codes when his wife began working for the city. Schindler said the nature of the crime would have made it difficult for the city to argue it had the grounds to terminate O’Callaghan with cause.

Deputy Dist. Atty. Max Huntsman, who prosecuted the case, said a violation of state conflict of interest codes would not automatically be a crime of moral turpitude. He also said the city would have had trouble challenging O’Callaghan in court given how many other top Vernon officials have hired relatives to work under subcontracts.

“They had everyone and their cousin on the payroll, so I’m not sure they can shed crocodile tears and say they are shocked and scandalized that their city administrator did this,” Huntsman said. “But that’s the pitch they would have to give to a jury.”

Litigation over O’Callaghan’s claims, and lengthy testimony from city officials on contracts and compensation, could have given more ammunition to critics trying to disband the city.

Mark Werksman, O’Callaghan’s attorney, said the settlement was “totally lawful and appropriate.”

“The guy had a contract, it was valid, and he was entitled to a lot more,” Werksman said. “He wanted to resolve this and move on.”

O’Callaghan is the third top Vernon official to be convicted of public corruption charges in the last five years. In 2009, Leonis Malburg, the city’s longtime mayor, was convicted of voter fraud.

Earlier this year, former city administrator Bruce Malkenhorst pleaded guilty to misappropriation of public funds. Despite his conviction, Malkenhorst still receives the highest pension in the California Public Employees Retirement system: $509,664 a year.

Backers of disincorporating the city argue that problems there run so deep — and have occurred over so many decades — that disbanding City Hall is the only way to clean up Vernon.

Michael Colantuono, a local government lawyer who has advised Assembly Speaker John Pérez, the author of the disincorporation bill, said O’Callaghan would have had a hard time persuading the jury he deserved the money.

“An average juror is going to be very skeptical about a public employee deserving this much money, especially an employee who has admitted to committing a crime in the workplace,” he said.

sam.allen@latimes.com

hector.becerra@latimes.com