RPS ruling pits city vs. its ex-bond attorney

The federal lawsuit over the River Park Square parking garage started more than three years ago as a many-sided legal brawl. Wednesday it was reduced to a head-to-head fight between the city of Spokane and its former bond counsel.

A federal judge ruled the city already has collected all the money it is entitled to get from most of its former co-defendants under any claims that they contributed to the problem and should help pay the costs of solving it.

Although the city paid some $32 million last April to buy up the bonds for the financially troubled garage, it can’t recover that full amount from everyone else involved in the dispute, U.S. District Court Judge Edward Shea said. Instead, it’s limited to a portion of the bonds involved in the lawsuit, and a formula that considers the market value of those bonds – an amount that totals $18.3 million.

The value of out-of-court settlements the city has negotiated with other defendants already tops that amount, he said.

To get any more money, the city will have to convince a jury that its former bond attorney, Roy Koegen, and his former firm, Perkins Coie, were guilty of legal malpractice for the advice surrounding the sale of the bonds and the purchase of the garage.

Laurel Siddoway, the city’s special attorney for River Park Square issues, said the city will be seeking to recover “everything paid out that we haven’t collected” – from the total cost of the bonds to loans for garage expenses that haven’t been repaid to attorneys fees – from the law firm.

“We’ll be going after Perkins for all of our damages,” she said. “It’s pretty clear we’re going to trial April 21.”

The law firm, however, seems ready to argue that the city shouldn’t get anything else. Ralph Cromwell, an attorney for Perkins Coie, told Shea the judge’s ruling “took a big chunk” out of the malpractice claim.

“They have no damages. They are whole,” Cromwell argued.

Shea’s ruling means Prudential Securities Inc., the bond underwriter and the only other defendant who had refused to settle with the city, will be dropped from the trial and pay nothing to the city.

The garage is part of a $110 million renovation of River Park Square, which was proposed in the mid-1990s as a way to revitalize downtown Spokane’s declining retail shopping district. The city agreed to a complicated public-private partnership with the mall’s owners, the development companies affiliated with Cowles Publishing Co.

Cowles Publishing also owns The Spokesman-Review and other news media outlets.

The purchase price of the garage was negotiated based on revenue projections that proved wildly optimistic, and when the garage opened it could not cover all of its expenses. When the city’s parking agency asked for a loan to cover some of those expenses, the City Council refused to follow an ordinance that required such a loan, saying it might never be repaid.

As the legal battles mounted, the value of the bonds dropped and investors eventually sued the city, the mall developer, their lawyers, financial advisers and consultants for securities fraud.

Although the city paid full price for the bonds when buying them up last year, Shea said the market value was only 67 cents on the dollar. That value was affected by two things, he said. One was the garage’s inability to generate the projected revenues.

The other was “a change in city government and the unrelenting effort to avoid its obligation” to make the loan, he said.

“When the city said, ‘We’re not loaning the money, we don’t have to,’ that made (the bond’s value) completely uncertain,” Shea said.

The city may have had good reasons for buying up all the bonds last April, not just the ones held by the investors who were plaintiffs in the federal securities fraud lawsuit, Shea said. It was facing mounting legal costs, its bond ratings had been lowered, it had nearly $8 million in escrow that it couldn’t use, and its federal block grants were being siphoned off to repay a federally guaranteed loan.

“It’s a very complex situation,” he said. “It may be that the best and most prudent settlement was a global resolution (of investor’s claims) by buying the bonds.”

Shea’s ruling means that if the city can’t convince a jury Koegen and Perkins Coie committed legal malpractice, city taxpayers will be stuck with the lion’s share of the cost of buying up the bonds. For example, although the city’s settlement with the mall’s developer totals about $8 million, only about $2 million is applied to the bonds, with the remainder set aside to help pay off the federally guaranteed loan. The $500,000 settlement with the mall’s former manager, RWR Management Co., is contingent on that company’s insurance carrier paying the claim.

And while the city received title to the garage after it bought up the bonds, it gave the garage to the mall’s owner as part of the settlement with the development companies.