Taxpayers may foot bill on defaulted airline loan
Tulsa World, 6/26/2008
Tulsa property taxpayers may end up paying $7.1 million to the Bank of Oklahoma to settle a lawsuit connected to a loan default by the defunct Great Plains Airline.The City Council is set to vote on the settlement Thursday.
If it is approved, the $7.1 million will be paid in full out of the city's sinking fund and then be recouped with a three-year increase in property taxes, said city Finance Director Mike Kier.
The sinking fund is derived from property taxes and is used to pay legal judgments against the city.
This is the second administration to push for payment of the defaulted loan. The Great Plains financial deal was made in 2000 under then-Mayor Susan Savage and approved by seven of the then-seated city councilors.
"This has been pending out there a long time," said Mayor Kathy Taylor. "I didn't create it, but it's important to put a closure to it," she said.
Taylor said that because of her former position on the Bank of Oklahoma's board of directors, she relied on advice on this case from City Attorney Deirdre Dexter and outside lawyer Robert Sartin. The two attorneys recommended the settlement.
Dexter previously worked for the law firm that represents the bank in the case.
Taylor said the airport has spent more than $450,00 in legal fees since the lawsuit was filed in 2004 and that estimates of the cost of going through a jury trial are at least that much again.
The last few court rulings in the case have not been in the city's favor, she said.
"The gamble is that it could cost us substantially more. It's painful, but it's time for Tulsa to move forward," Taylor said.
One of the issues that prevented a former council from approving the settlement was whether the city and its airport trust were liable for the defaulted loan.
The city was not named in the original lawsuit. But on Wednesday, the lawsuit was amended to name the city on the grounds of "unjust enrichment," meaning it unjustly benefited at the expense of another entity and that it had an obligation to make restitution, regardless of liability for wrongdoing.
The lawsuit, filed by the Tulsa Industrial Authority, revolves around an obligation by the Tulsa Airports Improvement Trust to guarantee a $30 million loan from the Bank of Oklahoma for Great Plains.
The bank actually made the loan to the Tulsa Industrial Authority, which then loaned the money to Great Plains. The airline attempted to launch nonstop air service to the East and West coasts but ultimately failed, reportedly leaving $7.5 million of the original loan unpaid.
The trust guarantee involved the city's Air Force Plant No. 3 site, which was mortgaged to support the $30 million loan. In case of a default, the trust was to purchase the plant site for the amount of indebtedness, but the Federal Aviation Administration prevented the sale.
The lawsuit came about five months after the Inspector General's Office of the U.S. Department of Transportation described the loan as "convoluted" and a way to get around the federal ban against direct subsidies to airlines from airports.
Former Mayor Bill LaFortune pushed for the payment of the settlement during his term, but he later reversed his stance after then-City Attorney Alan Jackere warned that until a court ruled on the validity of the trust's obligation, the legal risks including criminal charges or ouster proceedings were high for the mayor and councilors if they spent funds without a "public purpose."
Council Chairman John Eagleton, an attorney, said Wednesday that the settlement resolves the dispute on terms the city can afford to pay "and allows us to get on with other business."
Councilor Bill Martinson said Great Plains is "a deal that should have never happened, and that's not hindsight. It's one of those deals that if they had done adequate due diligence going into it I don't think it ever would have happened."
Martinson said the settlement may be "a relatively inexpensive way to put this disaster behind us."
Councilor Rick Westcott, an attorney, said he doesn't think the claims against the trust have merit. If the city is willing to pay the full amount of the loan default, he asked, "why not take the matter to jury trial, because that is not a settlement."
The original loan default was reported in 2004 as $7.5 million, but interest over the years had increased that amount to $11.6 million as of March 31.