April 21, 2005 in City

Jury selection starts today in RPS suit

By The Spokesman-Review
 

Almost four years to the day after investors sued the city of Spokane and nearly everyone else connected with River Park Square redevelopment, a trial is set to start over the mall’s financially troubled garage.

But the jury being selected this morning in Richland will be asked to decide a much different case than the original claims of fraud and conspiracy in the lawsuit filed on April 23, 2001.

It’s no longer a case of unhappy investors worried about potentially worthless bonds. The bondholders aren’t even in the case any more, having been bought out a year ago by the city.

Once viewed as a public airing of Spokane’s long-running scandal, the trial will take place some 145 miles away, moved to Richland when U.S. District Judge Edward Shea agreed with some defendants that an impartial jury might be hard to find in Spokane.

Many of the former co-defendants also are gone, having agreed to settlements that help chip away at the $32 million the city borrowed to buy up the garage bonds.

One co-defendant, bond underwriter Prudential Securities, was dismissed from the case last month, leaving the city suing its long-time bond counsel, Roy Koegen, and his former firm of Perkins Coie for malpractice. The Spokane City Council has a 4 p.m. hearing today to discuss “possible settlement offers,” but Mayor Jim West said Wednesday that session is merely scheduled “just in case” an agreement is reached.

“Both sides are talking back and forth,” West said, but a workable settlement has not yet been crafted.

Without a settlement, the city will try to recover its losses over the garage by demonstrating bad legal advice led city officials into the whole mess.

“Bond counsel in the state of Washington are held to very high standards,” attorneys for the city said in a recent court filing. “Perkins and Koegen held themselves out as specialists in municipal finance and securities matters.”

But the city’s going to have to bring in experts to prove Koegen acted negligently and caused the city its financial problems – not just other lawyers who say they may have handled everything differently, Perkins’ attorneys counter in their latest court briefs.

The jury could easily conclude that it wasn’t the legal advice at all, but instead the election of council members opposed to the project, and actions they took, that caused the problems that cost the city those millions, Perkins’ attorneys argue.

“The evidence will show that (the bondholders) sued the city for reasons that were not caused by any wrongful act by Koegen, including the city’s refusal to make loans” to the Spokane Parking Public Development Authority, they wrote.

The jury is likely to hear that Koegen told city officials to make that loan in 2000. He also agreed with some city officials that the price for the garage should not have been set higher than $18 million; the city eventually agreed to a price tag of $26.5 million, which determined the amount of bonds sold in 1997 and bought back in 2004.

Despite the focus on legal malpractice, many past city officials, business leaders and hired experts involved in the mall’s renovation since the mid-1990s are likely to take the stand to explain the deal and how it went wrong. Apportioning blame – something that has been primarily the province of voters in the last several city elections – will then fall to a six-person federal jury.

Settlement attempts can continue before a verdict is announced. But the Spokane City Council was told this week it will be asked to approve up to $500,000 in legal fees for a five-week trial.

City Attorney Mike Connelly told the council the outside attorneys hired by the city were ready for trial and would, in the words of Councilman Al French, “take this the distance.”

It’s already a long-running controversy. The mall renovation was proposed in the mid-1990s by its owners and supported by city officials as a way to shore up a declining retail sector in downtown. The mall is owned by the development subsidiaries of Cowles Publishing Co., which also owns The Spokesman-Review, KHQ-TV and other media outlets.

Over time, the city and officials with Cowles development companies agreed to several ways to pump money into the renovation and repay it with some of the mall’s proceeds. The city received a loan of $22.65 million guaranteed by the U.S. Housing and Urban Development Department and reloaned the money to the developers. A nonprofit group was set up to sell bonds, buy the garage at a price negotiated by the city and the developer, and use garage revenues to pay off the bonds and the other expenses.

To shore up the bonds, the City Council passed an ordinance in early 1997 to loan money from its parking meter fund if revenues didn’t cover some costs like operations, maintenance and rent. The developer promised to funnel some of the rent money from the garage and lease payments from the mall back to the city to pay off the loan.

The city had experts who predicted the expanded garage would make more than enough money to cover its costs, and the revenues from the renovated mall would be more than enough to repay the loan.

The experts were wrong. After the garage opened in the fall of 1999, revenues were well below the amount needed to cover expenses and in many months barely covered the cost of principal and interest on the bonds. The development authority, a city agency that oversees garage operations, asked for a loan to cover operations, maintenance and ground rent.

But local elections had given the city a council with a majority opposed to the mall agreements. It refused the loan, saying the garage’s financial outlook was so dim that the money might never be repaid.

In the spring of 2000, the mall developer sued for a court order directing city officials to obey the ordinance and make the loan. A city councilman sued to have the mall agreements voided as unconstitutional. The developer sued some council members for making damaging statements about the mall. At one point, a dozen different lawsuits had been filed involving the garage or the mall.

In April 2001, the bondholders sued for fraud, saying information about the garage’s shaky finances was deliberately left out of the statement they were given before buying the bonds. The city, the mall developer and the others colluded to set the price of the garage artificially high and knew things were wrong with the financial projections, but hid them from potential investors, the lawsuit claimed.

The city filed a counter claim the next day, drawing Koegen and Perkins Coie into the federal case.

Then-Mayor John Powers hailed the federal lawsuit as a major step toward a settlement. A federal mediator eventually was appointed, but settlement talks stalled and it wasn’t until April 2004 when the city struck a key deal with investors to buy back all the bonds and take over as lead plaintiff. City officials reached settlements with various consultants, the foundation that sold the bonds and its attorneys, the mall’s former manager, and, in December, the Cowles development companies.

The city got some $8 million in parking meter money set aside when courts ordered it to follow its own law and make the loan, and a guarantee from Cowles Publishing Co. to repay the HUD loan. The developer got the garage.

Koegen and Prudential have so far refused to settle. Judge Shea ruled recently the city can try to convince a jury that it should be reimbursed for all the costs it incurred from the River Park Square garage morass – the $32 million it spent on bonds and the $8 million it had to set aside in escrow when it refused to make the loan. But Perkins will try to convince the jury that responsibility, and the cost of the settlement, rests with the city.

To prove its case, Perkins attorneys contend, the city will have to prove Koegen is guilty of “scienter,” a legal term for false statements made deliberately to deceive. But that would mean Koegen knew things that city officials didn’t know, and “the evidence will show there are no such facts.”

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