Justices hear sides argue in bond case

Lawyers who provide legal opinions on bonds should be held liable for omitting material facts from their offering documents, Tom Thrash, who represents several Arkansas banks, told the Arkansas Supreme Court on Thursday.

The Supreme Court heard oral arguments on the appeal of a summary judgment handed down by Pulaski County Circuit Judge Wendell Griffen in the case, First Arkansas Bank & Trust vs. Gill Elrod Ragon Owen & Sherman, et al.

Griffen ruled last year that the civil section of the Arkansas Securities Act doesn’t apply to bond lawyers, who provide a legal opinion on the validity of bonds, as well as perform other duties related to a bond sale.

The Supreme Court normally makes a ruling in cases a few weeks after the oral arguments, a spokesman for the court said.

The case involves the selling of more than $4.4 million in bonds to seven Arkansas banks for improvements at a Northwest Arkansas residential subdivision known as Belclaire. The banks lost all their money after First Federal Bank, which had a first mortgage onthe property, foreclosed on it.

In 2008, First Arkansas Bank & Trust of Jacksonville and six other banks filed a lawsuit against developers Brandon Barber and Seth Kaffka and the Little Rock law firm of Gill Elrod Ragon Owen & Sherman and its attorney, Christopher Travis.

Travis was bond counsel for the Belclaire Improvement District.

The Belclaire Improvement District had a $5.1 million first mortgage with First Federal Bank in Harrison, the lawsuit said. The Gill firm and Travis failed to disclose to the bond investors that First Federal held a mortgage on the development, the lawsuit said.

“Our position is that the Arkansas Securities Act provides accountability to a lawyer whomakes material misrepresentations and critical omissions in an offering document used to market municipal bonds,” Thrash said in an interview after the oral arguments. “The municipal bond industry depends on that. In this case, there was a $5.1 million first lien at First Federal that wasn’t disclosed in a $4 million bond issue.”

If the banks had been aware that there was a first mortgage on the property, they wouldn’t have invested in the bond issue, Thrash said.

“The benefit of municipal bond transactions where there will be a whole bunch of people buy the bonds, everybody doesn’t have to go out and do the title work,” Thrash said. “Everything they need to know is in that bond offering.”

Skip Henry, a Little Rock attorney who represents the Gill firm and Travis, argued that Griffen’s summary judgmentwas appropriate.

The bonds were sold by American Municipal Securities to the Arkansas Bankers Bank, which in turn sold them to the banks that sued the Gill firm and Travis. Neither Travis nor the Gill firm had any role in the selling of the bonds, Henry said.

The only legal duty the Gill firm and Travis had was to the Belclaire Improvement District, which had hired the firm, Henry said.

So under the Arkansas securities law, the Gill firm and Travis have no liability to the buyers of the bonds, Henry said in an interview after the oral arguments.

“All they did was represent the [improvement] district in preparing documents,” Henry said.

The only claim the buyers of the bonds could make would be against the entities that actually sold the bonds, Arkansas Bankers Bank and American Municipal Securities, Henry said.

“Their claim for legal malpractice doesn’t exist becausethe Gill firm never was [the lawyer] for the bondholders,” Henry said. “And Arkansas law says you cannot sue someone that you don’t have an actual contract with.”

Some following the case believe if the Supreme Court upholds Griffen’s decision, the bond business in Arkansas will be severely handicapped.

“Both investors and developers depend on bond counsel to safeguard the integrity of the transaction, and [Griffen’s] order sends a clear signal that any such reliance is misplaced,” said a brief filed by the Arkansas State Chamber of Commerce and the Arkansas School Boards Association. “If [the Supreme Court] echoes that stunning announcement, the citizens of this state will pay the price asresources for public projects financed by municipal bonds cease to exist.”

Also filing briefs asking that Griffen’s ruling be rescinded were the Arkansas Securities Department, the Arkansas Development Finance Authority, the ArkansasBank Department, the Arkansas Bankers Association and Stephens Inc.

If the Supreme Court affirms Griffen’s ruling, “Arkansas will stand alone in permitting attorneys to defraud investors in securities offerings without fear of any liability to those investors,” Stephens Inc. said in its brief.

Consequently, investors will be hesitant to invest in securities issued by Arkansas companies and governmental entities, which will impair the ability of issuers to raise capital through securities offerings, Stephens said.

Business, Pages 25 on 03/15/2013

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