WASHINGTON -- The Housing Authority of Clearfield City, Utah, is trying to convince a panel of judges not to consolidate its lawsuit over a $6.8 million black box housing bond deal with seven bond cases now pending against Matthews & Wright and other firms before a federal judge in Pennsylvania.
Attorneys for Matthews & Wright Inc. are trying to have the suit over the Heather Estates housing project moved from a federal court in Salt Lake City to the U.S. District Court for the Eastern District of Pennsylvania.
Lawyers for the authority and its developer, Residential Mortgage Inc., told the judicial panel last week they oppose the shift because they want to make the Internal Revenue Service a party to the suit.
In documents filed with the Judicial Panel on Multidistrict Litigation -- a group of judges in Washington who decide whether to consolidate cases that have similar facts and issues -- the authority's lawyers did not specify what role the IRS would play in the suit.
But Harold Stephens, a lawyer for the authority, said in an interview he hopes to bring the IRS into the case as a willing or unwilling coplaintiff.
"It seems logical to us that the IRS ought to be involved in this. They want Clearfield to pay them $638,064," and the lawsuit is seeking monetary damages from the participants in the deal who violated federal laws, he said.
The suit, which was filed earlier this year, alleges that Matthews & Wright and others involved in the Heather Estates bond deal violated securites and tax laws, committed fraud, breached fiduciary duty, and were guilty of racketeering.
Mr. Stephens told the panel the suit is significantly different from the seven others pending before Judge Daniel H. Huyett 3d in Pennsylvania because the IRS is not a participant in any of them and because they were all brought by investors and not the issuer or developer.
The Clearfield authority sold the Heather Estates bonds on Dec. 31, 1985, and Residential Mortgage was supposed to have developed the apartment complex. But the project was never built because the proceeds were used to purchase a guaranteed investment contract. The firms involved reaped millions of dollars in fees and profits.
The IRS notified Clearfield in June that the Heather Estates bonds had violated tax laws and that the bonds were no longer tax-exempt. The agency said it would not tax the interest earnings of bondholders if the city would enter into a closing agreement and pay the government $638,064 to compensate for the tax losses. But city officials rejected the offer, saying other parties to the deal were responsible for the tax law violations and any such payments.
The bid to get the Heather Estates suit transferred to the federal court in Pennsylvania was made by David Aufhauser, a lawyer with Williams & Connolly. That firm represents Matthews & Wright, which is no longer in the bond business.
In a May 10 letter, Mr. Aufhauser told the panel of judges that "consolidation is appropriate" because the Heather Estates suit "challenges the manner in which the- ... bonds were issued" and alleges they "were issued in the same manner as" bonds sold for Chester, Pa.; East St. Louis, Ill.; and St. Louis County, Mo., which are the focus of the other pending lawsuits.
Patricia D. Howard, the clerk for the panel, said the judges would not decide whether to transfer the Heather Estates case to the court in Pennsylvania until a hearing is scheduled to consider the opposing views of Clearfield and Residential Mortgage.
Earlier this week, the panel of judges transferred to Judge Huyett a lawsuit that had been brought against Matthews & Wright by a bond fund, Eaton Vance National Municipals, and the trustee for a bond fund, United States Trust Company of New York, that had purchased $4.5 million of Marsh Oaks multifamily housing bonds sold for the Duval County, Fla., Housing Finance Authority on Dec. 31, 1985.
The suit charges that parties to the Marsh Oaks deal violated securities laws, committed fraud, and breached their fiduciary duties. It alleges that "the bonds have plummeted in value and have become unmarketable" since the IRS began investigating the issue late last year.
Lawyers representing the bond funds, however, said recently that Eaton Vance has withdrawn from the case because it was able to sell its Marsh Oaks bonds. The panel of judges was unaware of the withdrawal, Ms. Howard said.
Other bond cases against Matthews & Wright pending before the court in Pennsylvania are:
* Four class action suits brought in 1987 and 1988 by lawyers with the firm of Greenfield & Chimicles on behalf of investors of bonds issued for projects in Chester, East St. Louis, and Guam.
* A class action suit brought in 1987 by Barry Wolfson on behalf of investors in East St. Louis bonds sold to finance a port in 1986. Mr. Wolfson is still facing civil charges in a suit filed by the Arizona attorney general over his role as bond counsel in three deals done for industrial development authorities in Arizona that the IRS determined violated tax laws. That suit is pending in the State Superior Court in Maricopa County.
* Another class action suit brought in 1987 by lawyers with the Stolar Partnership in St. Louis on behalf of investors who purchased Apple Creek IV bonds sold for the Industrial Development Authority of St. Louis County in 1985. That suit was filed against Mark Twain Bank, the trustee bank for the issue, as well as Matthews & Wright and other parties.
These lawsuits all charge Matthews & Wright and other participants in the bond deals with securities law violations, fraud, and racketeering. They all claim that material facts about the bond issues were misrepresented or omitted and that, had they been known, investors might not have bought the bonds.
Judge Huyett put the cases on hold until the IRS takes any action that would adversely affect the investors. The IRS has declared the Chester and East St. Louis bonds taxable, but there are no reports yet of bondholders being taxed. Lawyers with Greenfield & Chimicles have asked the judge to lift the stay on cases involving these bonds.
