An attorney who acts as counsel in a bond issue cannot be held liable to the buyers of the bonds, the Arkansas Supreme Court ruled Thursday.
The case involves the sale of more than $4.4 million in bonds to seven Arkansas banks for improvements at a Fayetteville residential subdivision known as Belclaire. The banks lost all their money after First Federal Bank in Harrison, which had a first mortgage on the 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, who was bond counsel for the Belclaire Improvement District.
The Belclaire Improvement District had a $5.1 million first mortgage with First Federal Bank, 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.
Pulaski County Circuit Judge Wendell Griffen handed down a summary judgment 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.
Chief Justice Jim Hannah, writing the majority opinion,ruled that the Gill firm “had no attorney-client relationship” with First Arkansas Bank or the six other banks that filed the lawsuit.
Because there was no connection between the Gill firm or Travis and First Arkansas Bank, there was no basis for First Arkansas’ argument that there was malpractice in the case, Hannah said. There also was no liability under the Arkansas Securities Act because an attorney for the issuer of the bonds is not liable to buyers of the bonds, Hannah said.
All seven justices agreed that there was no malpractice by Travis.
Five of the justices, including Hannah, decided that there are still “issues of material fact to be litigated,” meaning some question of fraud, and sent that portion back to Griffen. But two justices - Karen Baker and Josephine Hart - dissented on that point, arguing that there was no actual fraud committed and therefore no reason to send part of the case back to Griffen.
Skip Henry, who represented the Gill firm and Travis, said his clients believe there are no facts supporting a need for part of the case to be returned to Griffen and will ask the Supreme Court to dismiss that issue.
“The court said that Chris Travis had no duty whatsoever to these people who bought the bonds,” Henry said.
Tom Thrash, who represented First Arkansas Bank and the six other banks who sued, said the Supreme Court “determined that bond counsel is not subject to the Arkansas Securities Act, even in situations where bond counsel may have made a material misrepresentation or omission in the offering documents.”
The Arkansas Securities Department, the Arkansas Development Finance Authority, the Arkansas Bank Department, the Arkansas Bankers Association and Stephens Inc. filed briefs in the case asking that Griffen’s ruling be rescinded.
The fear, according to the groups, was that if Griffen’s ruling was upheld, it could make it impossible to sell bonds in Arkansas.
If the Supreme Court affirmed 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 said in its brief.
But Henry said the Supreme Court’s ruling “is consistent with every other court in this country that has ruled on this issue.”
Stephens declined to comment about the Supreme Court’s decision, Frank Thomas, a spokesman for the firm, said Thursday.
Heath Abshure, commissioner of the Arkansas Securities Department, said, “I don’t feel that the court’s opinion signals that bond attorneys cannot be held liable under the Arkansas Securities Act.”
Rather, Abshure said, the court’s opinion held that the facts in this particular case did not support a finding of liability under the state’s Securities Act.
Business, Pages 25 on 04/19/2013