WENATCHEE — One thing’s for sure amid the uncertainty of default: it’s going to be expensive.

Bondholders who have not been repaid their $42 million investment in the Town Toyota Center could start filing lawsuits at any time. And they will likely cast a wide net over Wenatchee, surrounding communities and everyone who had a hand in the planning and building of the arena.

One law firm in Denver that represents about one-quarter of the bondholders has already announced that it intends to sue.

And while some investors appear to be waiting to see if a pay-back plan can still be worked out, “I don’t know how long the patience of the bondholders is going to last,” said Pete Fraley, attorney for the Greater Wenatchee Regional Events Center Public Facilities District, which owns the arena.

Municipal defaults are so rare that there is no way to predict how this one will play out in Wenatchee, said Jay Reich, a longtime municipal bond attorney hired by the state Treasurer’s Office to help draft a state bill that could have prevented the default on the arena’s loan. The bill essentially died in the Senate last week from lack of support.

The bonds went into default Dec. 1.

Reich told the Senate Ways and Means Committee last month, in making a case for the bill, that the bondholders are probably going to “sue every one of the cities (in the PFD) and all the professionals who were involved for a long period of time claiming that they were sold a bill of goods, the risks were not disclosed properly, that there was securities fraud. ... They will want their 42 million back and will not stop.”

In an interview with The Wenatchee World, Reich said the most certain scenario is that investors will sue the Public Facilities District. “But it doesn’t have any money and really no assets to speak of,” Reich said.

So they may also sue the nine jurisdictions that make up the district, as well as the bond attorneys who wrote the original bond sale and the bond underwriter. For the Town Toyota Center, K&L Gates and its former attorney, Nancy Naraas, served as bond counsel, which issued an opinion on the validity of the bond sales. Piper Jaffray was the underwriter, which originally bought the bonds, provided disclosure to potential investors on the legality and risks of the bonds and then sold them.

In addition to seeking repayment for their investments, the bondholders may also seek additional damages, claiming that they lost even more money because they could not reinvest their money right away.

They might allege, in their lawsuits, breach of contract, fraud and securities violations, Reich said.

In turn, the PFD may sue K&L Gates and Piper Jaffray for not thoroughly disclosing the pitfalls of the bond sale.

The federal Securities and Exchange Commission could also bring charges against parties involved in the case, alleging that the risks were not adequate disclosed to investors, he said. The federal agency has opened an investigation into the arena’s financing.

Once lawsuits are initiated, Reich said all the defendants will be pointing fingers at each other and lawyers will be trying to determine what percentage of the blame should be placed on whom and who should have to pay.

“There are a lot of things that could happen,” Reich said of the default fallout. “What we do know is that, A, it’s going to be very expensive; B, it could take some time to get through, perhaps three to five years; C, the uncertainty may make it difficult for jurisdictions in your area to borrow money; and D, folks in Wenatchee are not going to be in control of this thing.”

Reich said people don’t have to look farther than Spokane to see what could happen in a default.

The city of Spokane was mired in lawsuits for five years and spent about $20 million in legal fees over a parking garage deal that went bad. In 1998, the city gave a moral commitment to financially back $31.5 million in revenue bonds sold by a nonprofit corporation to build a parking garage at River Park Square Mall. While the agreement was thought to be non-binding, city leaders pledged to loan parking meter revenues for the garage if necessary.

When projected parking revenues at the new garage fell short, the nonprofit group asked the city for help. But the city declined and the bonds went into default. Bondholders filed suit and made a case that the city had to pay. The city argued that it could not honor its previous commitment because it was improbable that it would ever be repaid.

The default prompted rating agencies to downgrade the city’s bond rating. The parking garage bonds went into junk status. (Bond rating agencies have likewise given junk status to PFD bonds and lowered the city of Wenatchee’s bond ratings after the Town Toyota Center’s debt went into default earlier this month).

When the lawsuits started flying in the Spokane case, investors set their sights on the city, the developer of the garage and the bond underwriter. The city of Spokane then sued its bond counsel, Perkins Coie and its chairman Roy J. Koegen, and the bond underwriter, Prudential Securities. Koegen is now serving as bond counsel for the city of Wenatchee in its dealings with the Town Toyota Center debt.

Three years into the default, the city of Spokane sold $32.6 million in bonds (a million more than the original bond sale) to pay off investors and settle fraud claims in the parking garage case and took over ownership of the facility.

The city eventually collected more than $11 million in settlements from the companies it sued, including the consultant the provided revenue estimates for the garage.

In 2005 — four years after the default occurred — Standard & Poor’s restored the city’s bond rating to an A-grade status.

“A lot of people had to pay a lot of money in that case,” Reich said.

Reich, who has worked as a municipal bond attorney for more than 30 years, also served as deputy chief of staff at the U.S. Department of Commerce, serving as a senior adviser to Commerce Secretary Gary Locke.

He said that just as it’s difficult to predict how the post-default picture will unfold, it’s equally troublesome to predict how the investment community will respond to future financing projects. They will certainly be put off by the downgraded bond ratings for Wenatchee and the PFD. But they may also shy away from any of the two dozen public facilities districts in the state, Reich said, or they may not want to invest anywhere around Wenatchee or even in Washington state.

Some senators, in rejecting the bill that would have loaned money to pay off the Town Toyota Center debt, questioned whether the default would have any impact on any other jurisdiction except Wenatchee.

But one of the investment firms that manages some of the PFD bonds wrote in an e-mail to The World that the default would cause the company not to invest in the region anytime soon.

“We just wouldn’t want to increase our investments or commitment by buying more bonds in the area at the moment,” wrote J. Sebastian Cheng, senior fixed income trader for Churchill Management Corp.

Reich said, “We are now in a situation where the market seems to want to penalize failures. Bond investors have a lot of choices right now for their money.”

“I don’t want to say it is doom-and-gloom and the world is going to end,” he added. “But there is great risk for that. There is huge risk and uncertainty.”

Michelle McNiel: 664-7152

mcniel@wenatcheeworld.com