Legal Meltdown 05/04/00

by Ted S. McGregor Jr.


In the aftermath of last Wednesday night's special City Council meeting, many are wondering when the lawsuits surrounding the River Park Square parking garage will start to fly. And while it's safe to say that the City Council's decision not to loan the garage any money puts the project closer to legal meltdown than before, negotiations are ongoing. In fact, such dire circumstances are seen by some as the best way to set the table for a settlement.


But that doesn't mean its not nerve-wracking for those who worry that if the partnership dissolves into lawsuits it will hamper the city's ability to create progress. A legal fight could result in the city losing its good bond rating and poison the political landscape against public-private partnerships, public expenditures in general and downtown issues in particular -- not to mention cost a lot of money in legal fees. Meanwhile, a negotiated settlement between the two parties at least offers the hope of being able to solve the problem and, in the city's case, allow public officials to move on to other pressing matters.


The developer, Spokane's Cowles family, is willing to continue discussing a settlement but they say they are frustrated that city officials have not made a concrete proposal yet and have not even answered a potential solution they offered a few weeks ago. The developer has set a deadline of May 5 as a time when they hope to at least have some promising discussions underway, says their attorney Duane Swinton. Otherwise, legal action to compel the city to live up to the agreement it entered into in 1997 appears to be the developer's last resort to get out from under funding the garage operation, which was to have been turned over to the Public Parking and Development Authority (PDA) last month.


City and PDA officials, however, plan to offer a firm proposal before the Friday deadline. The city's bond counsel Roy Koegen says he has been working with Lehman Brothers on a refinancing plan that incorporates the numbers arrived at by Keyser Marston, a consultant that studied the garage's financial prospects. "I hope to have a solution by the end of the week, " says Koegen.





War of words


The April 26 special meeting to decide whether to loan the garage money to fund its operation was notable for things that didn't happen as much as those that did.


One thing that didn't happen that some expected was that the council majority that voted to not fund the garage did not articulate either a proposal for settlement or strict parameters of what a settlement could look like. Perhaps they were waiting for Koegen's work to be finished, but they could have articulated the plan in general terms to the large gathering and television audience. Mayor John Talbott, who is working on reelection, seems to have missed an opportunity to take the political high ground with an action plan, and the new majority did little to dispel the nagging notion that it knows what it is against but not what it is for.


One reason the council may have been reluctant to articulate the refinancing plan is that they may not support it. This is the possibility that worries Swinton, who says he doesn't know who he is supposed to negotiate with: "It's difficult for us to say that we'll agree to do something if they haven't agreed to it, " he says. "The city doesn't seem to know what it wants -- they have no action plan. Some want a resolution, some don't. "


Such underlying chaos also appeared in the timing of a letter from the city's new attorney, Seattle's Harry H. Schneider, Jr., whose letter hit Swinton's desk the morning of the April 26 meeting. In the letter, Schneider argues that until the city receives assurances that the loan would be repaid, it would not negotiate. The letter goes on to say the city "may not " make the payment to the PDA, apparently a disclaimer against anticipated charges that the letter proves some council members' minds were made up prior to the Wednesday night meeting. While council members have said their minds were not made up ahead of time, the appearance is hard to shake and raises questions of hypocrisy for a council majority that has criticized the 1997 council for failing to consider public testimony when making the garage decision in the first place.


Furthermore, as this issue has consumed the council's attention, Councilman Steve Eugster has chosen this time to renew his efforts to remove City Attorney James Sloane from his post. Eugster's methods, however, have revived the just dormant questions about whether new City Manager Henry Miggins is an independent, professional city manager or a pawn of the majority that installed him in a surprise move back in February. The question of Miggins' independence becomes more important as the city manager's office will run the garage investigation -- an investigation that could lose any pretense of impartiality if the manager is seen as doing the bidding of individual council members.


The public testimony at the meeting, however, did reveal a shift in thinking even among the project's supporters. Only rarely was the "blank check " approach advocated -- that the city simply pay however much money is required to keep the garage afloat for as long as it takes. More popular was the notion that a negotiated settlement was needed, which seems to reflect a growing understanding that the original deal is not tenable. Even Avista CEO Tom Matthews called for the two parties to come to an agreement outside of court, (going so far as to volunteer his own services as a mediator in the negotiations).


Another development at the meeting was the offering of more evidence that supports the notion that the city could damage its good credit rating if it walks away from its obligation and causes a default of the bonds. Two bond experts testified that walking away from the parking meter pledge would hurt the city's standing with lending institutions and thereby make future public projects more expensive as interest rates would be higher. And just this week, the bonds' underwriter, Prudential Securities, wrote the city a letter that could finally put to rest the question of whether the city's credit would be affected by default.


"The municipal investment community views the City's failure to honor its commitment to the Authority (a City instrument) as a direct failure of the City to meet its financial obligations, " wrote Stanley E. Grayson, Prudential's New York-based managing director of its public finance department. "It is our belief that this action will have severe repercussions to the City's financial standing and ability to borrow in the capital markets. "


Others at the April 26 meeting testified that other private investment -- including companies relocating to Spokane and homegrown firms choosing between relocation and expansion -- would become more difficult with the stigma of a failed public-private partnership attached to the city's name.


While many in attendance thought the council's final decision not to loan the money to the garage brought the whole affair one step closer to the courts, Eugster says, "the problem is being solved. We're still working on a way to settle this case, but it may go into litigation. Negotiations usually continue into litigation; most cases continue on two tracks. "





Loggerheads


While all sides are still talking about negotiations, there appear to be fundamental differences that may prevent the case from being solved. The developers believe the problem is best solved with a short-term solution that leaves the existing agreement alone; the city, on the other hand, believes that the only real solution can come from a long-term answer, which could include renegotiating the bonds and revisiting some of the contracts.


"If they want to try to restructure the bonds, we'd listen, " says Swinton. "But we're not interested in buying bonds or changing the essence of the transaction. "


Swinton refers to a previous concept, in which the refinancing plan would rest upon the developer agreeing to purchase a new set of bonds.


As for the short-term proposal offered by the developer and never answered by the city, Eugster says: "If it had been acceptable, they would have heard back. "


The developer had proposed, generally, to relieve the pressure on the parking meter fund by reorganizing the garage's validation system. While Koegen called the proposal "just moving money around, " Swinton says it includes "real money out of the developer's pocket -- a significant amount of money. " Swinton argues that the project is too new to judge and that a short-term answer may be enough to keep things going until the garage becomes successful enough through strategic changes to the parking system and continued retail development to pay its own way.


Koegen's latest plan again involves refinancing the deal to make the payments easier to live with, but this time he doesn't need to ask the developer's to buy the bonds. "We can find a buyer for these bonds, " he says. He won't say whether his new proposal includes a reassessment of some of the onerous contracts between the developer and the PDA. Refinancing brings its own costs, however, as the issuing of bonds carries hefty fees and a higher interest rate than the one that was locked in with the first deal.


So would negotiations try to find a piece of common ground somewhere in between the short-term and long-term proposals? And how can these personalities put aside whatever animosities they have developed over four years of fighting over the garage to find a solution? Many at the April 26 meeting were intrigued by the idea of mediation, an idea that has apparently already been discussed and met with some support by the various players.


But how about binding arbitration, as in pro baseball, where both sides submit to the finding of an independent board or individual? While the idea would seem to promise a solution of some kind, there is no provision for such an approach in the contracts between the city and the developer.





If lawyers take over


While negotiations still appear to be a real possibility, the shape of the legal fight that could ensue if those negotiations fail is coming into clearer focus.


On the developer's side, it's a pretty simple issue. If they choose to sue their partner, it would be to simply force the city to live up to its pledge. And it now seems clear that the bondholders would line up behind this one (if they weren't first in line themselves). As Grayson of Prudential put it in his letter to the city: "If the City does not meet its contractual pledge, our recommendation to the Bond investors will be to promptly undertake any and all legal action that is appropriate to ensure that the City does so. "


Enforcing the contracts appears to be the stronger case legally, as many of the issues that could be used against the partnership have already been argued unsuccessfully by Eugster at the state Supreme Court.


The irony of the developer suing the city is that it may be the best way for the city to preserve its bond rating. If the city's walking away from the pledge (which it hasn't made a final decision on yet, having placed the funds in escrow) triggers a hit on the bond rating, perhaps the developer prevailing is the best way to preserve the bond rating. And everyone knows that if the city loses the case, the courts could compel it to live by the original agreement -- which Keyser Marston estimates to be a parking meter subsidy of about $1.5 million a year for the foreseeable future. That amount is likely much higher than the city would have to pay under some kind of negotiated settlement. As with most legal proceedings, it's a winner-take-all game.


From the city's perspective, the best defense may be a good offense. City officials plan to go on the offensive to learn how the purchase price of the garage jumped so high in such a short period of time. They also want to better understand the role of the somewhat mysterious Downtown Spokane Foundation, which issued the bonds in the first place. But the easiest target -- and the one with perhaps the best chance of paying out -- may be Walker Parking Consultants.


The Walker Study has long been viewed as the central problem with the project. Projections made by Walker were used to value the garage, set the ground rent figure and project the financial feasibility of the garage. Not only were Walker's findings called into question by a variety of consultants prior to the opening of the garage, but Keyser Marston's recent report also underlines how far off Walker really was in its analysis.


Consultants like Walker make mistakes all the time -- although perhaps not on this scale -- which is why they routinely carry liability insurance against lawsuits claiming damages arising from their mistakes. Proving such cases, however, can be tricky. And in Spokane's case, past behavior makes such a case even harder to prove than it would be under normal circumstances. Although Walker is named in the official statement of the bonds, creating a higher level of reliance on its work, its report is filled with the kinds of disclaimers you'd expect to find. Compounding that fact is the past city council's failure to act on red flags that were waved -- some by its own paid consultants, others by so-called naysayers -- about the validity of Walker. Having been warned repeatedly about Walker's shortcomings but ignoring the information makes it appear that the past city council understood and was still willing to accept the risks associated with such a complex project.


But the city's investigation seems geared toward proving malfeasance, an even loftier goal but one that could get the city off the hook if proven. So the question becomes whether Walker's report was somehow manipulated by those who stood to gain from its findings? Swinton says it's an unfounded allegation and doesn't object to the city investigating Walker.


Another defense is the turtle defense, where a tough shell protects a passive creature. In the case of the apparently bankrupt PDA, that could mean simply filing for bankruptcy the way an individual or business would. Public entities are able to file under Chapter Nine, but it is rarely done (Orange County, Calif., being perhaps the most infamous case). While a judge would determine which protections apply, the move could not only protect the PDA from lawsuits filed by creditors but might also allow it to get out of unfavorable contracts it has entered into. This wouldn't affect any potential lawsuit the developer could file against the city, but it could give the PDA the kind of flexibility it needs to get out of the mess it finds itself in.


While the various parties (at last count, at least seven different entities could become embroiled in lawsuits resulting from the garage's problems) continue to discuss the possibility of a settlement, their actions are speaking a different language. The city's letter to Swinton describes the possibility of some kind of official inquiry, where "the City Council may compel the attendance of witnesses and the production of documents pursuant to its subpoena power... " The partnership appears to have crumbled in every way except contractually.


Meanwhile, Koegen has resigned as the bond counsel of the PDA. Now he only represents the city -- yet another sign that legal stormclouds are gathering. And Koegen's loyalties and actions in the creation of the partnership may come under increased scrutiny, but apparently not through the city's investigation. Koegen's own firm of Perkins Coie also employs Schneider, who has been retained by the city to conduct some kind of investigation. This has led some to wonder how Koegen's own role will ever be investigated fairly if his own firm is doing the work.


So the PDA, led by its volunteer Chairman Terry Novak, is left to find new counsel. And you can bet that any prospective firm will have one demand of its new client: Cash up front.