by Ted S. McGregor Jr.
You're at a party, and all the cool people are standing by the bar, deep in conversation. You sidle up and start to listen in -- there's talk of bonds, some kind of foundation and somebody even drops Betsy Cowles' name. Wow, this is some high-falutin' party! Then somebody brings up HUD, and you see your opening: "Oh, that's a great movie -- I just love Paul Newman." Blank stares melt into laughter, then catcalls as you run away in shame -- "Hey, loser, come back when you understand the River Park Square garage dispute!"
If this sounds all too familiar, don't worry -- we can help. River Park Square Garage Litigation For Dummies is just what you need to join in on the witty repartee around the water cooler with such bon mots as: "That Steve Eugster -- he sure likes to sue people!" Or, "That crazy John Powers, thinking he could fix this mess -- what was he thinking!?"
But seriously, it appears the time is ripe for a little review. People on the street know there are legal issues in play, but few understand what they are and who may or may not be most liable if a jury decides the issue that has occupied Spokane politics for the past five years. So while there's nothing particularly new here, and you'll find some repetition if you dare to read it all, hopefully this section will provide a little clarification.
This issue is both simple and complex, but by breaking it down into its pieces, from individuals involved to key documents to turning points in the project's history, we can enable a better understanding of what's happening as litigation gets underway.
Rather than jump right into the legal issues, however, let's start with a quick look at the perspectives of the major parties involved.
Perspectives -- In the view of the developer of the project, Spokane's Cowles family, this dispute never would have exploded into the mess it is today if the city hadn't precipitated the crisis with the institutions and individuals who own the bonds sold to buy the parking garage. If the city had simply lived with the contracts it entered into back in 1997, there would be no legal quagmire.
"This has gone from a little scrimmage to World War III," says Betsy Cowles, leader of the downtown redevelopment project. "What's frustrating is that it didn't need to. Downtown is such a success, and this is such a waste. The city had its eyes wide open, and it has gotten the benefits it bargained for."
Now that they, too, are in the legal crosshairs of angry bondholders, who see their investments jeopardized, they are quick to make some important points. They did not hire the appraisers who set the garage's price at $26 million; they did not instruct them to use the investment value model. The city did both. Also, later, when the garage developed problems related to its validation system, the Parking Development Authority, not the developer, changed the garage's rate structure, creating a hole in its own budget and guaranteeing it would never live up to the expectations created for it by Walker Parking Consultants. And the developer has made two settlement offers, including what they characterize as significant financial concessions. With this ammunition, the developer's legal team appears ready to go the distance if necessary.
"There are some controversies that the courts just have to solve," says Les Weatherhead, lead attorney for the developer. "We need to start getting things decided, for good or ill, win or lose. I need to know, and the community needs to know."
The city has arrived at its current perspective through a rocky road characterized by changing leadership with different views on the garage. The council of 1997 got behind the deal 100 percent. But the city council of 1999 just wanted out of the deal in any way possible. Now, with Mayor John Powers in charge, the city is willing to remain in the partnership, but it has concluded it can't be responsible for $2 million per year in support, as some scenarios show it could be.
In short, the city would like to see the deal redone to reflect reality more accurately. They would like to see the price of the garage adjusted, as well as the amount of rent that is charged to the garage by the developer. After those adjustments, the whole deal could be refinanced.
"Refinancing is absolutely something the city would look at as part of a global solution," says Laurel Siddoway, special counsel to the mayor. "But it wouldn't do it without concessions from other parties."
Some members of the city council, led by Steve Eugster, would still like to see the whole deal rescinded. They don't believe any mistakes were made; they see it as pure calculation.
"I look at this very simplistically," says Eugster. "They knew what they were doing all along."
The bondholders, four of the nation's largest mutual funds and a handful of smaller investors, don't really care about Spokane's little political intrigues -- they just want their money (including their expected return on investment). As they have done in federal court, they will accuse any and all potentially liable parties to make sure that happens. They have extremely deep pockets, meaning that drawn-out, expensive legal fights play to their advantage. Bond professionals, who have a deep belief that their system should weed out all bad deals, also take personal offense at bonds that try to beat the system, as they are charging these bonds tried to do.
But the bond professionals on the other side of the deal, the sellers (in this case the underwriter, Prudential Securities), may be equally irritated. They likely resent the impulse that seems to spit "bond fraud" out every time somebody's investment doesn't turn out the way they'd hoped. There are no guarantees in the markets -- just look at the dot-com debacle. The bond prospectus for the deal was filled with disclaimers of all sorts, the bonds were rated BBB- (the lowest above "junk" status) -- and the buyers are still saying the risks weren't spelled out to them?
Bondholders v. Everyone -- Right now the main legal attraction is the bondholders' federal lawsuit against River Park Square; the city of Spokane; Prudential Securities and its lawyers, Foster, Pepper; the Parking Development Authority; and Walker Parking Consultants. In their case, they must not only prove that the bonds' official statement understated risks, but they must also prove that the bonds' official statement was prepared with "deliberate recklessness." It's a high bar to clear, but Gary Ceriani, counsel for the bondholders, appears confident that he has the evidence he needs to convince a jury.
Defendants aren't swayed: "It isn't true that anybody set out to do anything other than improve this community," says Weatherhead. "And nobody ever set out to mislead anybody."
Still, Ceriani's modus operandi appears to be to frighten everyone into a settlement -- and his message is plenty frightening: "The bondholders recognize that pursuing their claims for securities fraud -- and there is no other term for it -- will be a lengthy and hugely expensive task," he says. "I anticipate, for example, that pretrial proceedings will take approximately 18 months and that the fees and costs of the bondholders alone will significantly exceed $1 million as thousands of pages of documents are digested and some 75 participants to the transaction formally deposed before the parties commence a trial that will likely consume five full weeks."
Weatherhead believes the city is on the hook for precipitating the crisis in the first place by not applying the parking meter money as it had agreed to. And he believes the disclaimers of risk on the official statement were adequate.
The city has has cross-claimed against Walker and the developer and has named its previous bond counsel, Roy Koegen, in a third-party claim.
"We don't think we did anything wrong, but we're being sued for a poor description of risks in the official statement. [Koegen] was hired to describe those risks," says Siddoway in explaining why Koegen was named (he and his firm were not named in the council's 1999 suit, and he is not named by the bondholders).
Eugster, who thinks the city's strategy is too soft on the developer, wonders why Koegen is named by the city, but Mike Ormsby, bond counsel for the Spokane Downtown Foundation, is not. "Koegen, I believe, was very clever in finding a way to at least provide some protection to the people of Spokane," says Eugster, "despite the fact that he was completely overwhelmed by Betsy Cowles and the council members."
But if litigation of this kind is like musical chairs, you don't want to be left standing when the music stops. That is why the city has made cross-claims, to limit its own liability.
The city is actually focusing on a different argument to get itself out from under the bondholders' suit altogether. It relates to the actual ordinance passed on Jan. 27, 1997. Siddoway's reading of it is that the city should not be responsible for the garage's losses to the degree everyone else believes they are. Explaining the city's argument is a bit tricky, but here goes: Under the widely understood method the garage adopted to pay its bills, it would first pay the bondholders from the revenue it generates from parkers. Then, if the garage was tapped out and couldn't pay its rent or operating expenses, there would be a payment from the city's parking meter fund.
Siddoway argues that it was never intended to work that way, and that the PDA adopted that methodology later in apparent violation of the ordinance. Could that change to the order of payments have been a requirement of the bond sale? Those who know the answer to that question will be deposed in the months ahead.
Under Siddoway's interpretation of the ordinance, rent and operating expenses, not bond payments, would be the first bills to be paid; if there wasn't enough income to cover rent and operations, the city's parking meter fund would be tapped.
This seemingly tiny detail makes a world of difference; under the first scenario, using the garage's current revenues, the city would be tapping its parking meter fund monthly. Under the second scenario, which the city would gladly live with, it would rarely need to write checks, as the garage is making enough to cover rent and operating expenses.
While some say there is no question that everyone knew the order of payments, Siddoway says she has only found one passing reference to it in all the documents she has reviewed (in the Coopers and Lybrand Report). And she believes that the ordinance will be judged on what it says, not on what people believed it said.
A ruling on the interpretation of the ordinance could come early in the process, and if the city is successful, it could deflect the bondholders' attention to the other defendants, especially Prudential. In fact, the underwriter of the bonds, which has been the subject of the least scrutiny to date, could wind up having the most liability. After all, the city is not being sued because the city council of 1997 made a bad decision; the city is being sued because the official statement may have been poorly written.
Prudential, and its counsel at the Seattle firm of Foster, Pepper and Shefelman, was the final firewall for the deal. If it is proven to a jury that Prudential intentionally downplayed the risks of the deal as outlined by Coopers and Lybrand and others, the question will become, Why? Of course all bond sales are designed to look as good as possible -- the sellers are trying to sell the things and make their fee. But perhaps Prudential was looking to gain a new client in Spokane. That would be some sizable business to consider (although Prudential has since left the municipal underwriting business). Or perhaps the working group that helped prepare the official statement got away from them, a group that included Koegen. Whatever the reason, for all the talk surrounding the other defendants, Prudential may have the most to fear from the bondholders' lawsuit.
That doesn't mean the developer is in the clear, however. If they are proven to be the "control person" in the deal -- if such evidence exists -- then the liability can extend to them from Prudential and others who took their cues from the developer.
In his Nov. 19 rejection of motions to dismiss the bondholders' lawsuit, U.S. District Judge Edward Shea provided a glimpse of what jurors might conclude. Keep in mind, however, that this statement accepts the bondholders' facts as presented; they would still need to prove them in court. But if they can do so to a jury's satisfaction -- and that's really the wild card in all this -- then these words might be a crystal ball into the future.
"The City knew that the [official statement] was misleading, based on the Auble Report, the Barrett Report, the Sabey Reports, and the Coopers & amp; Lybrand Report," wrote Shea. "However, it proceeded to use the Walker Report as the financial feasibility analysis provided to investors. All defendants either knew of the critical reports, or recklessly failed to review the reports, and therefore participated in bond issuance based on false and misleading statements... The defendants entered a scheme to sell the garage for $26 million in bond funds."
Other Claims -- Over in state court, Eugster still has an argument alive that, he says, could make the whole ordinance null and void. He argues that the city council took the action illegally because it engaged in meetings that should have been open to the public. Eugster charges that on Friday, Jan. 24, 1997, four days before the ordinance would be adopted, the council was broken into two groups of three (the seventh, Chris Anderson was more or less AWOL at this point). Neither of the groups added up to a quorum, so the public meeting act was not invoked. Eugster says, however, that the meetings were identical and crucial information about the decision was discussed, meaning they should have been open meetings. In Eugster's view of the law, that taints the ordinance.
"All I need to do is prove that the meeting took place on Friday," Eugster claims.
For now, Eugster is holding back on getting a ruling, as he hopes to have the issue taken up in federal court along with the rest of the proceedings. He may be invited into federal court by the other attorneys (provided he promises to not file too many motions that could create additional work for everyone) as they may want to keep all the loose ends together. It's also possible that Judge James Murphy could put a stay on all state proceedings until the federal case is over. While Eugster might agree to that, the developer would not like it, as that could shut down their efforts to get the city to pay up.
But if Eugster wins his open meeting issue, he may put the city he serves at even more risk. While it's unclear what the fallout would be if the ordinance was rescinded, one outcome could be that the city would be sued, since the open meeting violation (if indeed there was one) was given the green light by then-City Attorney James Sloane. The city might find itself liable on an entirely new front if that happens.
Eugster is also considering pursuing an anti-corruption case against the developer. Usually used by state attorneys general in busting up cigarette smugglers, Eugster may not have standing to bring such a case as an individual (the city council recently declined his request to back such a lawsuit). Eugster also wants to wrest control of the litigation away from the mayor's office, and he thinks he questions the way the money from the project was spent, although he hasn't yet made a legal case out of it.
The developer continues to pursue a judge's order that the city council to start sending money to the project from the parking meter fund. And they may continue to pursue individual council members for allegedly defaming their project. Earlier this week, their claims were rejected, but they are free to refile if they attach specific claims and instances in which individuals defamed their project.
Crunch Time -- Nov. 3, 2003. Circle that date on your calendar. Oh yeah, you probably don't have a calendar for 2003. Well, just remember it then, because that's the bondholders' proposed starting date for the federal trial. Two years of depositions, discovery and stymied public progress due to the kind of political stalemates we've seen these past five years. Obviously it's a sobering thought, which is why hope may still be faintly alive that cooler heads will prevail and a settlement will emerge.
"If the city's got a proposal, my phone works," says Weatherhead.
"With the risk and expense everybody faces, it makes all the sense in the world to sit down and come to a solution," says Siddoway.
"It would seem to make sense," says Ceriani, "for the parties to at least discuss ways to pay the bonds before the hole gets even deeper."
These people really should talk.
And so even a dummy can see that a solution has long been hiding in plain sight. The city issues tax-free revenue bonds of its own, say $20 million worth. The developer coughs up a chunk of change, say $7 million -- cash or credit. Essentially the city and the developer would be buying back the garage (for which they originally paid $26 million) at a price of $27 million. So naturally the one-time partners would need to pass the hat to the rest of the gang who, for whatever reason, concocted such a spectacularly bad deal. If those contributions (often made from insurance policies) could add up to $10 million, then the price of the garage looks more like $17 million, and, along with some other tricks, it could probably start to pay its own way.
It's not perfect, it's not cheap and it wouldn't be easy. And yes, the developer probably still would end up with a better deal than they would have if they had self-financed back in 1997. That might make some people mad, but it's also a good reason for the developer to justify the contribution. And yes, the city winds up closer to the deal, not farther away from it, as many are wanting.
But then, the other option is to roll the dice and let the jury decide.
Hey, we're on the case and have been since 1995. To review all the stories we've written on the subject, go to www.inlander.com and click on the "River Park Square Coverage" button.