HUNTINGTON BEACH CITY ATTORNEY’S DECISION

DID GAROFALO PROFIT FROM CITY BUSINESS?

“No definitive answer can be provided because the facts concerning the

sale of the publishing contract [from David P. Garofalo & Associates to

Coatings Resource Corp.] are not fully known, and because how a court

would apply Section 1090 [that prohibits council members from doing

business with the city] to these transactions is uncertain.

“Nonetheless, regardless of any pending investigation, the city should

place its relationship with the [Conference & Visitors] Bureau on an

unassailable foundation. Any transactions that have any potential of

being invalid should be avoided. Using this admittedly high criteria as

our standard, it is our conclusion that the publishing contract is

potentially invalid, and that the bureau should take steps to immediately

terminate it. If the bureau fails to do so, we recommend terminating the

funding contract between the city and the bureau.”

ON GAROFALO’S SALE OF THE LOCAL NEWS IN JANUARY 1998

The January 1998 purchase agreement between David P. Garofalo &

Associates and Coatings Resource Corp. provides that:

* “[David P. Garofalo & Associates] will act as ‘publisher’ of all

[The Local News] properties for 36 months.”

* “[David P. Garofalo & Associates] will consult on the mechanical and

technical aspects of publishing, pursuant to an independent contractor to

be established under separate cover.”

* “Sales price is $220,000, with $20,000 down, and the remainder as a

promissory note due in 36 months, carrying an annual interest rate of

7%.”

ON THE FEBRUARY 1998 AMENDMENT TO THE SALE

In February 1998, the parties entered into an amendment to the

agreement to purchase, providing that:

* “‘Given that [Coatings Resource Corp.] is required to pay the

purchase price of $220,000 under the agreement regardless whether [The

Local News] makes a profit,’ [David P. Garofalo & Associates] will

‘attend to the publication of [The Local News] for the exclusive benefit

of Coatings. All of the profits generated by [The Local News] shall

belong exclusively to Coatings.’ Profits are to be applied to paying down

the note...”

* David P. Garofalo & Associates is “to create a new bank account for

[The Local News], which is to be owned by [Coatings Resource Corp.].

[David P. Garofalo & Associates is] to have full check writing authority

over this account, and Garofalo is to use it to pay himself compensation

for publishing [The Local News] and for paying down the note.”

ON GAROFALO’S CONTINUED ROLE AS PUBLISHER

“It appears that Garofalo acted as publisher in all respects for The

Local News, as well as the Visitor’s Guide and Chamber of Commerce

Directory from 1998 [to] 2000. His activities included the sale of

advertising.”

ON GAROFALO’S FINANCIAL INTERESTS

“On its face, the [Local News] agreement supports a sale of the

business. However, the surrounding record suggests that the [Local News]

agreement may not have fully divested Garofalo of a financial interest in

the publishing contract.

“The [Local News] agreement states that Garofalo will receive his

payment for [The Local News] regardless of the success of the

publications, but also provides that the profits from the advertising

revenue are to be used to pay down the promissory note. Naturally,

Garofalo has an interest in a quick pay-down period, particularly because

the note is unsecured. Further, Garofalo is being paid $10,000 annually

as a ‘consulting’ fee. Both these facts suggest that Garofalo may have a

material interest in the success of the publishing contract.”

ON POSSIBLE CONFLICTS OF INTEREST

“It would appear there is a reasonable likelihood a court will find

that a violation of [state law] occurred when the city entered into the

funding contract with the bureau.”

Hutton wrote that the concerns were based in part on the following

conclusions:

* “The funding contract clearly enhanced the publishing contract. But

for the funding contract, the bureau would never exist, and but for the

bureau, there could not be a publishing contract.”

* “Although there are unresolved factual issues whether Mayor Garofalo

has truly divested himself from the publishing contract, it is reasonable

to conclude that he still has a financial interest in that contract.

Consequently, any vote to approve the funding contract effectively

enhances the value of the publishing contract in which Garofalo has at

least a potential financial interest.”

* “The courts also recognize that in circumstances such as these,

where officials have financial interest in contracts in violation of

[state law] when they take office, the courts have held that such

preexisting contracts remain valid.... However, such contracts may not be

renewed.... Consequently, when Garofalo took office, the publishing

contract remained valid at least through its existing term. However, once

the contract expired, it could not be validly renewed by the bureau in

July 1999, without triggering [a state law violation].”

THE FINAL WORD

“This is an extremely difficult area of law, which ultimately can only

be adjudicated by the court. The issue is complex, and the answer is not

black and white. Our analysis herein could carry little weight, but in

light of [the] California courts’ strict treatment of this issue, it is

important to apply an abundance of caution. Consequently, we conclude

that the publishing contract between the bureau and [Coatings Resource

Corp.] is potentially invalid, and that the bureau must take action to

terminate that contract and immediately put it out to bid.”