March 11, 2005 in City

City seeks to reduce RPS losses

By The Spokesman-Review
 

The city of Spokane’s legal team went back to federal court Thursday seeking to reduce losses to taxpayers in the failed 1997 River Park Square parking garage deal.

Attorney Michael P. Cillo argued that two firms responsible for setting up the intricate garage deal should be held liable for a share of losses, or at least that a jury should decide the question of how much they owe.

A six-week trial is scheduled to start April 22 in U.S. District Court in Richland.

The city is seeking millions of dollars in compensation from the Perkins Coie law firm, which acted as the city’s legal counsel in conjunction with a $31.5 million garage bond sale in 1998, and Prudential Securities, the underwriter of the bonds.

“Perkins and Prudential are very substantially at fault,” Cillo said in court. He placed the value of the losses at as much as $30 million.

Both Perkins and Prudential are facing contributory damages related to the failed bond deal. Perkins also faces a malpractice claim by the city.

Karl Oles, an attorney for Perkins Coie, said the city is responsible for causing its own losses and should not be entitled to recover additional money beyond what it already has recovered through earlier settlements.

Oles said securities law limits the amount of money that can be collected from Perkins Coie and Prudential. If the law is applied correctly, he said, then the defendant’s liability should be zero because the city already has obtained at least $11 million in settlements from other previous defendants.

Judge Edward Shea ordered the sides to appear March 23 in Richland for a pretrial conference. He said, “It has come down to a trial where a jury is going to have to sort out” who is at fault and how much should be paid in damages.

During Thursday’s hearing, Shea said he was valuing a December settlement between the city and the owner of the mall at $5 million for purposes of calculating damages at trial.

The mall is owned by real estate companies affiliated with Cowles Publishing Co., which owns The Spokesman-Review, KHQ-TV and other media.

In the mid-1990s, the city joined RPS in setting up an intricate deal in which RPS sold an expanded mall parking garage for $26 million to a nonprofit foundation. The foundation in turn leased the garage to a city-sponsored parking authority. Parking collections from the garage were supposed to pay all of the costs, but insufficient parking receipts covered only about half of the expenses, which included debt service on the $31.5 million bond issue.

As part of the deal, the city had agreed to loan money from its parking meter collections to make up for losses at the garage, but political support for the project shifted during elections in 1997 and 1999. Council members subsequently refused to loan money to the project. Three of those council members – Steve Eugster, Steve Corker and Cherie Rodgers – were in court Thursday watching the hearing. Only Rodgers remains on the council.

Oles pointed to the denial of the loan as a major reason for the bonds losing market value and triggering the federal securities lawsuit. He said the city should not be rewarded for its capriciousness in refusing the loan.

The election of Mayor Jim West and four new council members in 2003 put new life into efforts to settle the RPS cases. Last April, the city bought out bond holders for about $32 million, which allowed the city to become the plaintiff in the current federal case, which was originally filed by institutional bond holders.

The city subsequently reached settlements with RPS owners; a parking consultant; the foundation that issued the bonds; the mall’s manager, and two other law firms. The city’s share of the debt has been whittled to about $25 million.

In its deal with RPS, the city obtained a guarantee from Cowles Publishing to make payments on a separate $22.65 million construction loan made to RPS through the city and the U.S. Department of Housing and Urban Development. The loan had been backed by the city’s annual community development block grants, which were being siphoned beginning in 2003 to make loan payments.

When the city moved to buy out bond holders and reach settlements, it was facing the possibility of loaning up to $40 million from its parking meter fund over the remaining life of the bonds, plus much of the balance on the HUD loan. City officials said they were seeking to protect taxpayers from those losses.

Parking meter money, which was ordered to be held in escrow by a state court, went partly to pay off the HUD loan shortages. The city was left with about $2 million in cash from its $8 million parking meter escrow. RPS took ownership of the garage.

In conversations prior to Thursday’s hearing, Rodgers pointed out the city is still liable to pay as much as $1.4 million in back property taxes on the garage.

Eugster criticized the city’s settlement with the developer by saying, “This deal is better than the first one.”

Les Weatherhed, attorney for the mall developer, said the council members caused the city its own problems by refusing to make loans on garage shortfalls as required by the council’s own ordinance.


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