The seven-story garage in Harrisburg University’s downtown building, at the corner of 4th and Market streets, was the basis of a $3.6 million payment to a Kansas City bank in 2013.
The state coordinator overseeing Harrisburg’s recovery served a summons last month on the downtown offices of a national law firm, marking the first effort to seek damages from professionals who worked on the capital city’s borrowings.
The summons names Fred Reddig, the state-appointed coordinator of the city’s financial recovery plan, as a plaintiff acting “on behalf of the city of Harrisburg” in a claim against the law firm Buchanan Ingersoll & Rooney.
The summons was filed in late March in Dauphin County court and served on the law firm on April 16, according to court records.
The one-page summons reveals little about the scope and basis of the claim against the firm, aside from the parties involved, the attorney for Reddig and the fact that the state will seek money damages in excess of $50,000.
Reddig’s office, at the state Department of Community Economic Development, did not respond to several requests over the past week for a comment on the claim. Peter Kreher, listed on the summons as Reddig’s attorney, said he currently had no comment on it.
But sources familiar with the action say it likely stems from legal work attorneys at Buchanan performed on a bond deal in 2006 and early 2007, when the city sought to build a new facility for the year-old Harrisburg University at 4th and Market streets downtown.
That deal planted the seeds of a $3.6 million payment to holders of university-related debt in 2013, as state-appointed officials worked to pull the capital city back from the brink of bankruptcy.
The payment, which came out of the $267 million paid for a 40-year lease of the city’s parking system, was effectively the price for freeing up a garage on university premises so that it could be included in the lease.
“We needed to get the garage in the lease deal,” said Richard Kotz, executive director of the Harrisburg Parking Authority. “We actually had to pay Harrisburg University some money to get the title released.”
In fact, the payment ultimately went not to the university but to UMB Bank of Kansas City, Mo., the trustee for holders of the university bonds. In 2012 and 2013, the university missed two interest payments totaling a little more than $3.6 million—the amount UMB recouped in the garage payment.
“That’s the math I’m sure the bondholders used,” said Harrisburg University President Eric Darr, adding that the price “wasn’t the university’s call.”
Harrisburg doesn’t stand to receive money from any successful suit over the payment, if one is pursued. A 2013 settlement between the city and its creditors stipulates that any awards stemming from the UMB payment will go to bond insurer Assured Guaranty Municipal and Dauphin County.
But it provides a glimpse, however brief, into the state’s strategy for pursuing claims against professionals involved in Harrisburg’s borrowings.
It comes a year and a half after William Lynch, the state-appointed receiver for Harrisburg whom Reddig succeeded, cautiously acknowledged that lawsuits could be a “means to obtain redress” for the decisions that led to the city’s debt crisis.
A small but critical role
It’s not clear how the UMB payment might form the basis of a civil claim. The summons is a minimal, preliminary action and may serve no greater purpose than to extend the state’s timeline for deciding whether to file a complaint in the future.
Nonetheless, the December 2013 settlement agreement between Dauphin County, the city, the Harrisburg Authority and Assured Guaranty Municipal explicitly mentions potential civil claims over the payment to UMB.
Additionally, other publicly available documents, including bond statements, property records and closing documents from the parking lease, chart the story of the small but critical role the Kansas City bank came to play in the city’s debt deal.
The story begins in 2006, when the city sought to build a new downtown home for Harrisburg University, a non-profit school with a focus on science, mathematics and technology that had opened its doors to students in August 2005.
A key piece of the project was the construction of a seven-story, 390-space garage in the 16-story university tower. The Harrisburg Parking Authority agreed to pay $14 million for the garage, providing essential funds for the project, and the university in turn pledged to lease garage spaces back from the authority.
The university never formally transferred the garage, however. In 2010, the parking authority sued the university, claiming it had paid fully for the property. But the university contested the authority had not paid for construction cost overruns and held onto the title.
“The lawsuit just lingered for years,” Darr said.
As a result, university bondholders retained a claim on the garage in 2013, when the city sought to lease its parking system to help pay off its staggering debt load.
UMB Bank, as trustee for the bondholders, didn’t relinquish that claim until December 2013, after negotiating the $3.6 million payment from the parking proceeds.
The bank, through a spokesperson, declined to comment, but did refer to publicly available bond disclosures. Those disclosures say the bank “agreed to release its lien on the Parking Unit upon payment” of the $3.6 million.
Buchanan is linked to the garage because the firm served as bond counsel on the 2007 borrowings for the university project. The firm’s general counsel said Wednesday he had no comment.
Darr, for his part, wonders why the parking authority and the university couldn’t come to an earlier settlement, before the payout from parking lease proceeds was even part of the equation.
“I always labeled it under ‘attorneys,’” Darr said. “Attorneys do things for reasons you’re not always clear about.”
