Ruling may end city’s quest for RPS money

One of the last claims the city of Spokane had in the long legal battle over the River Park Square garage fiasco appears to be dead.

A federal appeals court has ruled that the city cannot try to wring money out of the Seattle firm that served as underwriter for about $31.5 million in bonds that were supposed to be – but ultimately couldn’t be – paid off with garage revenues.

In a ruling filed this month, a three-judge panel for the 9th U.S. Circuit Court of Appeals rejected all city arguments that it should be able to get money from Prudential Securities Inc. to help cover the cost of buying the bonds to settle a securities fraud lawsuit against the city, the mall’s owners and other groups involved in the redevelopment of River Park Square Mall. The case shouldn’t be sent back to U.S. District Judge Edward Shea, the trial judge, or sent over to the state court system, the appeals court said.

Appealing that ruling will be difficult, city officials said this week.

“I think we’re done,” Mayor Mary Verner, an attorney, said. “It would be foolhardy to pursue any further appeal.”

City Council President Joe Shogan, who is also an attorney, said he also suspects that the appeals court ruling is the last word on the case unless City Attorney Jim Craven recommends otherwise. Shogan said he’s disappointed Prudential is “off the hook” for any contribution to the settlement.

“It boggles the mind. They were the sellers of the bonds,” Shogan said.

Craven said the council hasn’t yet asked for his opinion, but if they do, he’ll likely tell them this is the end of the road. “I don’t believe we’re going to go any further.”

The city and the mall’s owner – the development companies for Cowles Co., which also owns The Spokesman-Review – set up a complicated public-private partnership in the mid-1990s to help finance renovation of the downtown mall. Part of that arrangement involved Cowles Co. development firms selling the expanded garage for its “investment value,” or an estimate of its ability to make money over 20 years, to a private foundation. Although investment values are legal, critics of the project say that type of appraisal vastly inflated the purchase price of the garage.

The foundation sold bonds that were to be paid off with garage revenues, with a backup pledge of loans from the city’s parking meter money if the garage revenue fell short. The city would own the garage when the bonds were paid off in 2019.

An estimate that projected the garage would make more than enough money to cover its cost proved grossly inaccurate. After it reopened in late 1999, the city was asked for parking meter fund loans almost immediately. The council refused, saying the garage was such a financial mess that loans might never be repaid, which would make them illegal gifts of taxpayer money.

A cascade of litigation followed, including a federal securities fraud lawsuit that pitted some of the original bond buyers against the city, Cowles development companies and many of their legal advisers and consultants. Before that lawsuit went to trial, however, the city bought up all the bonds and tried to settle with other defendants by getting them to kick in a share of the bond costs.

Although many defendants did, Prudential refused and said it would go to trial. But before that happened, Shea, the trial judge, said the city had already collected all the money it was entitled to get from its former co-defendants. Even though the city had bought up all the bonds, the judge said, not all of the investors had sued.

One reason that some bondholders didn’t sue was that they had bought the bonds at a discount from the original purchasers after the bonds went into default and Wall Street downgraded the investments. Those investors couldn’t claim that they didn’t know about the garage’s financial problems.

The city was only entitled to recover an amount equal to the bonds held by investors who had sued, Shea said. The city reached that level – about $11.2 million – while Prudential was still in the case.

The appeals court agreed. Washington law doesn’t allow Prudential to be held liable for the money paid to bondholders who weren’t involved in the lawsuit, the panel said. “The approach used by the court to adjust the bond value was supported by the city’s own expert,” the panel said. “The city failed to establish that the district court’s factual findings … were clearly erroneous.”

The city had also argued that Shea was wrong in allowing testimony from a financial expert who said it was reasonable for Prudential to assume there would be enough money to pay off the bonds with loans from the city’s parking meter funds.

The appeals court, however, said Shea was right: Washington courts had said the city had an obligation to make those loans, so the financial expert’s assumption “was based on the reasonable expectation that the city would comply with the state court orders.”