by Ted S. McGregor Jr.
More than seven years ago, the City of Spokane used an emergency ordinance to join the River Park Square public private partnership in order to "save downtown," as public officials put it at the time. Now a new set of public officials may act on the same emergency basis to get the city out of the partnership.
The City Council may be asked as early as next week to endorse Mayor Jim West's plan to pay off angry bondholders before federal litigation gets underway on April 19 in Richland. Since time is so short, the measure would have to be enacted as an emergency, meaning that as with the original decision to join the project, the citizens would never have a chance to vote on the plan. Bond issues that the city can fund out of their regular cash flow -- called councilmanic bonds -- do not require a public vote, either. City Council deliberation over the plan would be held in public, however, either on Monday night or at the following meeting, April 12.
"We've been in mediation without a lot of success. It's my desire that we not end up in court," West told a gathering of reporters on Monday at City Hall. "We're looking for the best result for the citizens."
The plan calls for the city to issue $39 million in bonds to pay off the bondholders and buy the parking garage outright -- kind of like paying off your house early. The city would then be free to legally pursue contributions from other defendants in the case. In fact, the city would be free then to ask the court to transfer the bondholders' claims over to them, turning the city from defendant to plaintiff.
"I believe the bond markets will look favorably upon the city's ability to do this," the city's special counsel Laurel Siddoway told the City Council on Monday night. "It also ensures that no other defendants can be settling around us, and it gives us flexibility as we proceed toward the trial on April 19."
In other words, West's plan allows the city to control its own destiny more effectively than it might as one of nine defendants (or 13, depending on how you count them).
So why the rush? Why couldn't a plan like this have been acted upon six months ago? It could have. Late last year, Councilman Steve Eugster floated a similar proposal, but nothing came of it.
One important reason that now might be the right time to try something like this is the fact that many cases wind up being settled just before they go to trial. By the time the trial is set to start, all the depositions have been taken, all the expert witnesses have been vetted and the outlines of everyone's arguments are fairly clear. By that time, defendants have a pretty good idea of how strong their case is, and, if they don't think it's very strong, they probably have a ballpark figure as to what degree they think they are financially exposed. With all these facts and figures at hand, defendants are finally in a position to know exactly how much of a cash contribution they can live with, if any. Settlements are popular because they allow defendants to control the outcome; once a case is in front of a jury, anything can happen.
If the city indeed issues $39 million in bonds, it would essentially be offering all defendants one last chance to settle before the trial begins. The city would ask individual defendants to contribute a cash amount to the overall settlement. In return for the money, those defendants would be absolved of any future claims from the city. So if all goes according to plan, the city's new bond issue could really be quite a bit less than $39 million.
This all depends on how strongly the various defendants -- the mall developers, the city, Prudential Securities, Walker Parking Consultants, and various law firms -- believe in their defense and the strength of the plaintiffs' case. It's going to be a long, complicated trial, but it may boil down to whether the jury believes enough of the facts about the deal were disclosed to the buyers of the bonds. The plaintiffs have a long list of anecdotal items they think will prove their case -- for example the fact that the garage went from a value of $14 million to $26 million overnight, to name just one. Defendants will argue that all risks were adequately outlined in the official statement -- the legal document used as a prospectus for bond buyers. Of course, with so many defendants, and with so many competing needs, it may be hard for the defendants to maintain a united front. If the various defendants wind up in a kind of every-man-for-himself mode, it could color the way the jury views the case and may bolster the plaintiffs' case.
Another reason the city may be seeking such a solution now is that Judge Edward Shea recently ruled that the city could not blame the developer for problems in the deal. That would seem to take a lot of the steam out of the city's legal strategy, perhaps shaking confidence in their position and prompting the action now underway. In fact, in raising the idea that the city may take on the plaintiffs' claims via the buyout, it would appear that they believe the bondholders are in a better legal position.
"I think it's a wise move by the city," says City Councilman Joe Shogan, choosing his words carefully so as not to betray the hours of behind-closed-doors legal briefings he has attended over the past week. "It will move us into a stronger position dealing with the defendants, and it increases our chances of getting a maximum settlement offer before going to trial."
"I think it's a strong, viable option, moving forward and bringing resolution to the debate," adds Councilman Brad Stark. "I'm looking forward to hearing from the public.
"The general consensus from folks I have talked to is that they are happy that something is happening," Stark continues, "but people are a little concerned about where the money would come from. But look at it this way: If this works, there will be no legal fees next year, and we'll have access to the parking meter revenue again."
West on a Limb
But without a doubt, it all adds up to a political risk for Mayor West. In the campaign, and up until recently, he had kept his distance from the issue. He has often referred to it as his "inherited problem." By proposing an exit strategy, he is embracing the issue that has been political kryptonite to all who have touched it over the past seven years.
Many River Park Square watchers were concerned that West would "roll over" and settle with the developer once in office without driving a hard bargain. It was a charge leveled at John Powers when he ran, too. Step one in this imagined roll-over process would have been to fire Siddoway. Instead, after having a retired judge from California look over the city's legal strategy, he endorsed the city council decision to retain Siddoway as the city's special counsel. With only a few months from his taking office to the trial date, switching counsel would have been difficult.
Some have remarked that as a legislator, West was often known to pull competing parties together on the eve of important votes to broker a deal. So perhaps this proposal is right out of his playbook, but it's unmistakably a political decision, meaning it holds both risks and benefits for him and the city he now leads.
Changing the rules of the game just before it starts really could be a bold stroke. But simply issuing new debt, taking the bondholders out of the picture and turning to focus on the defendants is no success by West's standards. Remember, he says he wants to stay out of court. For this to work, the planets need to come into alignment -- and fast. But in proposing such a solution, it would seem a public official with his background would have reason to believe he could succeed before he climbed out on the limb.
To understand why West is willing to take the risk, you first have to envision the outcome of the six-week federal trial set to start this month. In the city's best-case scenario, the jury sees the city as a victim and blames all the other defendants for the default on the bonds, the garage somehow gets turned back over to the developer and the city can start fixing the streets with all that parking meter money.
In the worst-case scenario, the city gets the lion's share of the blame, perhaps even getting dinged for damages (to be argued at a later date), it has to pay the plaintiffs' legal fees and winds up owning the bankrupt garage (which is currently owned by neither the city nor the developer, but by the Downtown Spokane Foundation). The actual outcome is probably somewhere between those two extremes. Yet another fact to consider is that no matter what happens, appeals are likely to follow for years to come.
In his campaign for the mayor's office, West said the city needed to get past the parking garage problem. It appears that the federal trial could begin to untie the knot but not untangle it completely. In trying to bring about real closure, a settlement like this one makes more sense. West says such a settlement could also eliminate the cases pending in state court, although the responsibility for the HUD loan may remain an open question. Additionally, the city needs to repair its image in the bond markets at some point; waiting for all appeals to be exhausted may not be a practical approach. West says the city is in a Catch-22 when it comes to the federal case: If the city wins, the bond markets may take it as a kind of "see, we can beat you" message; if they lose, it may be taken as if the city had to be dragged kicking and screaming to deliver on its promise. Either way, it could hurt the city's bond rating for years to come, West says.
Here's the scenario under which West hits a home run. The city announces its plan to pay off the bondholders and assume ownership of the garage -- supported by the council, signed by the mayor and endorsed by a prominent underwriting firm. Then the city makes a legal motion to take the place of the bondholders, including the claims they hold. The city would even be free to hire their former adversary, attorney Gary Ceriani, to argue their case if necessary. But this move may be more about creating pressure on the other defendants than it is about actually wanting to switch chairs in Richland (remember again that West says he wants to stay out of court).
Next the city would approach each defendant and offer to settle for cash. The defendants write checks to the city, and the city absolves them of liability. One by one, they all agree. Finally, you are likely left with one or two defendants, the developer and perhaps Prudential. If they are isolated, the only ones forcing a long, costly trial, they may also come to the table. In the case of the developer, they may figure out a way to contribute in ways other than cash -- perhaps by giving the land under the garage to the city. But that appears to be a pretty big maybe.
Once the contributions are factored in, the city may be able to reduce the amount it needs to issue in new bonds. If the bond price tag comes down far enough, the garage's income could suddenly cover its debt service the way it was supposed to in the first place.
In fact, West even goes so far as to say that if structured properly, the garage could ultimately contribute to the city's general fund and help close the shortfall the city faces between its tax revenues and its obligations.
On Monday night at the City Council meeting, Siddoway outlined the settlement plan, pointing out that the first step is the city's to make -- otherwise, it's off to court. "We do not have a settlement proposal with any defendants at this time," she said. "The upcoming trial would remain unchanged."
But the trial could be aborted by a global settlement involving all parties. Of course, ending the trial before it starts saves a lot of money in legal fees that could be assigned to the defendants if they lose. (West says the city's own fees related to Siddoway's work are capped at $500,000 for the first half of 2004.)
It's a bold vision, but it's also fraught with peril. If the city announces its intentions to pay off the bondholders, and then the rest of the defendants choose court over settling, the city will be stuck with a garage that can't pay its way, a huge amount of debt service sucking away at the general fund and the task of chasing down the remaining defendants in court, either in Richland or in another venue. Some might call that throwing good money after bad. And politically speaking, all those citizens who have looked forward to the city's day in court on the matter would be left unsatisfied.
Keep in mind that over the past year, all the defendants have been engaged in closed-doors meetings to settle the issue. It's likely that in those meetings, it became clear who was willing to write a check to make it all go away and who was not. If quick negotiations are needed, all those hours of mediation may pay off after all.
Those most interested in making it all go away would appear to be those who have the most to lose, like Walker, a relatively small firm that could be bankrupted by a large judgment. And there are those who have deep pockets and potential legal exposure, like Prudential, the underwriter of the bond issue, who may prefer to contribute a dollar figure of their own choosing rather than wait for a judge or jury to impose one. Again, it all comes down to how confident these defendants are in their cases -- and how many more dollars in legal fees they are willing to part with in order to fight on.
West believes $18 million has been spent already by all parties on legal fees -- "that's more than the garage was worth in the first place," he commented on Monday.
And even though getting all parties to contribute would be the best chance at closure, it's not the only possibility. A partial solution could include any number of defendants, so the city could end up with some claims remaining -- most likely, it appears, against the developer, the one entity the city is most bound to via the contracts entered into seven years ago. Only a global solution, with all parties contributing, would be enough to derail the federal case.
Although the developer and the city have been in discussions for many years now about possible solutions, it doesn't appear as if any of those entreaties have reawakened the partners' original spirit of cooperation -- even though many of the project's harshest critics have left City Hall.
"We've approached [the developer] numerous times," West said. "We're not close at all."
For background on the River Park Square parking garage saga, you can find our archive of stories at www.inlander.com. Just click on the "River Park Square" link on the right of the page. Pia K. Hansen contributed to this report.
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Publication date: 04/01/04