Empty Chairs 06/06/02

by Ted S. McGregor Jr.


Mediation, not litigation! It might as well be a battle cry in the legal fight over the River Park Square parking garage. In recent weeks, more have joined the chorus in calling for all parties to sit down and work something out before it gets worked out for them by a jury. Steve Eugster has come onboard, as has the Spokane Area Chamber of Commerce. Public opinion polls have shown that the citizens see it as a good way out, too. And both the city and the mall's developer, Spokane's Cowles family, have long said they would like to talk. The planets seem to be coming into alignment, but still mediation remains talk -- and talk is cheap.


Talking about it seems to be a lot easier than taking a seat at the table. Joining in the negotiations isn't comfortable, because to most parties that means you'll have to pony up cash toward a solution. For the developer, the stakes are even higher. The city regards itself as disadvantaged, so any change in the deal looks like a benefit. But the developer holds a superior position in that deal (if they can get it enforced), so any change would be unwelcome. But then, sitting on your hands isn't much of an option; like it or not, the big mutual fund managers who bought the garage bonds will be seeing both parties in court 18 months from now.


Meanwhile, as the litigation grinds ahead with discovery and depositions, the city and the developer have been debating who wants to enter mediation more.


"We would love to have a negotiated solution," says Les Weatherhead, one of the attorneys representing the developer, "and we have proven that by putting three proposals on the table.


"At this point," he adds, "it's the sound of one hand clapping."


In the past, the developer has made overtures to the city. In one, it agreed to split the garage's shortfalls for at least five years; in another, it pledged to cut the amount of ground rent the garage would have to pay.


Neither concession has been enough, says Laurel Siddoway, the mayor's special counsel. Also, those ideas didn't take into consideration all the other parties who should be involved in a solution, from the consultants who said the garage would make enough money to the underwriters who may have underplayed the risk in the deal to the buyers.


Mayor John Powers thinks the pieces are falling into place. Of course, it's at least the third time he's said so in his tenure.


"Recent developments renew my hope that we are turning a corner," says Powers. "For the first time, we have the Chamber [of Commerce] calling for all parties -- all -- to enter into mediation."


A big part of the reason mediation hasn't happened yet is that the former partners don't much like each other. While the litigation chugs along in the background, the two sides have appeared to be locked in a struggle to win public opinion more than anything else.


At least that's how the mayor described the behavior of the developer at a surprising press conference last month. Using recently released documents, he claimed that the developer is spending more on PR than on lawyers -- something he felt the community should be aware of. "Imagine how much closer we could be to a final solution," he said, "if the developer would knock off this PR nonsense and come to the table with all parties."


Pouring salt on an open wound would be an accurate way to describe how many viewed his critique. How it was supposed to move the developer toward mediation was unclear, but it was probably borne of frustration over the fact that he hadn't, after 18 months, brought his campaign pledge of mediation any closer to fruition.


Rockey West, the developer's local PR firm sent out a letter saying it was "unfairly maligned" by the mayor. Weatherhead shrugged it off, saying: "We tell our side of the story -- after all, so many other sides have been out there."


Whether you call it PR or just self-defense, it appears that some of the pillars of the developer's message to the public are eroding. The developer's mantra has long been that "a deal's a deal." In other words, if the city had just lived up to its promise to fund the garage's shortfalls with parking meter money, everything would be just fine. Recent analysis of the garage conducted by the Parking Development Authority, however, seems to indicate that even that extra money wouldn't keep the garage afloat for much longer. Gavin Cooley, the mayor-appointed chairman of the PDA (and a CPA), says that even if the city council hadn't halted payments to the garage, the default on the bonds would have come within the next couple years anyway.


"You would have had a big blow-up in any event," says Cooley.


Weatherhead hasn't seen the numbers and didn't comment on them.


More quietly, the developer has said that the city may have goaded the bondholders into filing a lawsuit.


"That's nonsense," says Gary Ceriani, the bondholders' lead attorney.


But beyond the PR, the mayor's press conference appeared to be aimed at the Spokesman-Review, which is also owned by the Cowles family. The mayor questioned how the newspaper was going to cover the story as it unfolds. As Siddoway puts it: "Are they just going to wait for their corporate affiliate to issue a press release to cover it?"


The newspaper's ombudsman, Doug Floyd, investigated and admitted the paper missed some federal rulings. But Floyd didn't outline how the newspaper would cover the story as it moves forward. It's almost as if the S-R is back in 1996, when it downplayed critiques of the deal its parent company was pushing for. There's bound to be lots of information released in the coming months that may or may not be flattering to their owners; Powers seemed to be trying to ask, somewhat ham-handedly, how the newspaper planned to handle the conundrum of covering its owners.





While the city (the mayor and council members) and the developer have played out their dysfunctional partnership in the headlines, the project's most persistent critic has undergone a change of heart. While he once accused the deal of being the product of a civil conspiracy and even hinted that criminal misconduct might be part of the picture, City Councilman Steve Eugster has now endorsed mediation as the solution to the bondholders claims.


"We're going to go into a lot of discovery and litigation," says Eugster, "and if there's a way to get things settled, we ought to do it now."


What changed his mind? To begin with, he says he has been an advocate of mediation for at least two years. More recently he has realized that this is a poker game that is rapidly getting too rich for the city of Spokane. The attorneys will be the only winners, he says. Several people contacted for this story point out that if the bondholders prevail, their legal fees will be covered by the defendants. So if the bondholders are as confident as their attorney makes them sound, their pockets are essentially bottomless, as they'll never be on the hook for the fees. One attorney involved estimated that if the case goes full term, the total fees would top out at more than $10 million.


Another surprising statement from Eugster is that more discovery isn't really going to get the city anywhere. "We already have a pretty good idea of what happened and how it happened," he says.


Siddoway says she has only made it through a third of the documents the developer recently turned over to the city.


Previously, Eugster led a city council faction that sought to pursue the case as far as necessary, until all facts were known. Eugster says his resignation to these realities only applies to the federal suit; after getting the bondholders off the city's back, he plans to continue to pursue claims against the developer in state court.


Since Eugster the citizen is not a party to the federal suit, he's kind of on the outside looking in. To remedy that, he wants the city council to assert itself.


"The problem the city has is that the council has yet to take control of the litigation," he says "The council will have to decide on any solution, so it must give the mayor parameters."


As a member of what appears to be a minority on the council relating to the garage issue, Eugster realizes he'll need to work with the council to establish those parameters. Without them, however, the city will remain stuck in neutral on the mediation issue, he says.


Siddoway says establishing parameters is "a bad idea," as the negotiating team of Powers, Dennis Hession and Al French will need to be flexible. Still, any solution adopted in negotiations must be approved by the city council.





While all the false starts and dashed hopes of the past few years might make the idea of mediation seem like a fairy tale, perhaps things really are different this time. In fact, Siddoway says in the past week she has contacted lawyers for every party to the federal lawsuit, and she says every one of them at least verbally agreed to work toward mediation. It might not happen right away, but she's hopeful it could be soon.


"You can't just stop this train on a dime, " she says, "but most parties feel that there are terms out there that everyone can live with. We would like to get it started this summer, and it's looking as if it will start."


Siddoway also points out that the litigation goes forward with mediation or without it; and, she says, it's no magic bullet, and successful negotiations on an issue this complex could take a long, long time.


But without the two big players, perhaps the judgment of 12 everyday folks is where this is all going. Both the city and the developer keep saying they would be open to mediation. Now it's time to see if they're willing to put their money where their mouths are.





On The Legal Front -- Slowly but surely, the legal battles over the struggling River Park Square parking garage are moving toward judgment day. With a trial date set for November 2003 in the federal case, lawyers involved in the dispute expect a long and winding road ahead -- which may or may not include efforts at mediation.


What has begun in the past several weeks is the process of taking depositions. Parties from across the case's spectrum are being questioned by attorneys for all sides. So far, the city has deposed Steve Eugster about his cases pending in state court. (Shortly after his deposition, he dropped some of those claims.) Gonzaga University professors who looked over the consultants' work were questioned, as was the appraiser of the garage. And officials for AMC Theaters were deposed at their offices in Kansas City.


Meanwhile, attorneys are reviewing documents from the various defendants. The case has generated an enormous amount of paperwork; the developer's law firm, Witherspoon Kelley, recently turned over 13 file boxes to the city and others for preliminary review.


There have been binding legal decisions, too. In state court, the developer -- businesses owned by Spokane's Cowles family -- won a victory when Judge James Murphy agreed with the assertion that the city has an obligation to live up to and that it should start using the parking meter fund to cover the garage's shortfalls. The city has appealed that decision, and in the meantime, the $3 million parking meter fund remains untouched. Also in state court are the developer's suits against former and current council members for allegedly defaming the project. Those individuals have counter-claimed back against the developer. Finally, Eugster's claim that the whole deal is invalid because it was hatched in illegal secret meetings is still alive.


Activity in the state court should slow down as the federal case picks up steam. In the federal case, the mutual fund managers who purchased the bonds are trying to force everyone involved in the garage deal to pay them off. Although the city and the developer are on the same side in the case, a judge made three rulings recently that seemed to favor the city's position over the developer's. Judge Edward Shea disagreed with the developer's efforts to keep much of the documentation surrounding the case shrouded in secrecy. "More sunshine, rather than less, should be the order of the day," he wrote in his decision. He also ruled against all but one of the developer's attempts to dismiss the city's claims.


The developer also made a motion opposing the city's attempt to amend its defense by stating that a fraudulent transfer of funds took place. Shea rejected the motion and allowed the city to add that legal point to the city's case.


One more development worth noting is a possible change of counsel for the developer. Up until now, the Spokane firm of Witherspoon Kelley has handled the case, as it has handled the Cowles' family's affairs since the early 1900s. But when AMC was deposed, the Seattle firm of Davis Wright handled the deposition. Les Weatherhead of Witherspoon Kelley says Davis Wright has been involved in the case since early on -- it's not that his firm is bowing out.


Down the road, Witherspoon Kelley could have a problem defending the developer as two of its attorneys, Duane Swinton and Stan Schwartz, will likely be deposed and called as witnesses at trial. Swinton was involved on the developer's negotiating team when the garage deal was being hammered out. And prior to taking a job at Witherspoon Kelley, Schwartz was an assistant city attorney involved in preparing the deal.


The Davis Wright firm specializes in securities issues. It also counts two prominent Spokane attorneys among its alums: Betsy Cowles and Steve Eugster.