DALLAS -- Fort Worth officials yesterday authorized lawyers to investigate the potential liability of the underwriters and others involved with a 1985 bond sale that the Internal Revenue Service says is no longer tax-exempt.

Judson Bailiff, the Fort Worth's director of finance, said the city council next week will formally hire the law firm of Kelly, Hart & Hallman to determine whether lawsuits should be filed against Matthews & Wright and others involved in the $27 million Overton Ridge Square multifamily housing deal.

Any funds recovered would be used to settle an arbitrage claim -- estimated at $1.548 million -- the IRS says the city's Trinity Housing Finance Corp. owes the federal government.

"We will tell the IRS that we'd like to reach an agreement and go ahead and proceed with any possibile litigation," Mr. Bailiff said yesterday. "We will pursue any parties that might have liability."

In an August letter,the IRS notified that housing agency investigations by the Securities and Exchange Commission and the Justice Department found that the issue was one of 22 underwritten by Matthews & Wright that was closed in a "sham" manner.

Because the deal was closed without cash on Dec. 15, 1985, the IRS says the bonds were not validly issued until March 1986, when they were remarketed to public investors. Because of that, the service said the bonds are subject to arbitrage rebate requirements for multifamily bonds that took effect Dec. 31, 1985.

Mr. Bailiff said the settlement could stipulate that the IRS would accept any funds recovered from litigation after legal expenses are paid. In exchange, the IRS would agree not to pursue bondholders for payment.

An IRS official in Houston could not be reached for comment late yesterday.

Mr. Bailiff said the lawyers would recommend which firms involved with the December 1985 bond sale could be targeted because the non-profit housing corporation has no funds for a settlement.

The bond counsel for the deal was Berkman Ruslander Pohl Lieber & Engel in Pittsburgh. The special tax counsel was Jacobs & Koegler in Jacksonville, Fla. Underwriter's counsel was Camp, Carmouche, Barsh, Hunter, Gray, Hoffman & Gill, now called the Carmouche Law Firm in Lake Charles, La., and the trustee bank was the First National Bank of Shreveport, now called Premier Bank, in Shreveport, La.

The $27 million bond issue was sold to finance the Overton Ridge Square apartments in southwest Fort Worth. The project was never built and the bond issue was collapsed in 1988 when the bonds were called and investors were paid in full.

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