ATLANTA - A Mississippi circuit court judge has ordered the state to drop its three-year-old demand that Gerald Blessey, the former mayor of Biloxi, repay $3.1 million for allegedly misusing bond proceeds.

Judge James E. Thomas of the Circuit Court of the Second Judicial District of Harrison County last month found that Mr. Blessey had not misapplied bond funds from a 1986 Biloxi general obligation bond issue.

"The ultimate use of the [bonds] was for the intended purpose of the bonds," Judge Thomas ruled. "The demand for payment is hereby held to be null and void and of no force and effect now or hereafter."

Judge Thomas's ruling followed a finding by state Auditor Steve Patterson that Mr. Blessey had not acted improperly.

Pete Johnson, Mr. Patterson's predecessor as auditor, had originally filed the demand for payment in February 1989. Mr. Patterson took over the auditorship in January.

Mr. Johnson had alleged that Mr. Blessey improperly used funds from the $6 million bond issue to repay other bond issues and for general operating expenses rather than for construction projects as planned Mississippi stale law requires that bond proceeds only be use for the originality stated purpose.

At the time, Mr. Blessey argued that any such use of the bond proceeds was a temporary loan between city funds and that all the proceeds would eventually be used for their intended purposes.

After reviewing Mr. Johnson's demand, Mr. Patterson concluded in a June 19 letter to Mississippi's attorney, Mike Moore, that Biloxi officials had legitimately used the bond proceeds to cover city expenses given "the city of Biloxi's serious financial problems."

"I'm very pleased that this is the end of it," Mr.Blessey said yesterday. "This has been an ordeal that never should have begun."

Mr. Blessey noted that he had filed a lawsuit in November asking the court to void the order.

Neither Mr. Patterson nor Mr. Johnson was available for comment. Mr. Johnson, an unsuccessful candidate for governor in 1991, is now state director in Mississippi of the Farmers' Home Administration, a division of the U.S. Department of Agriculture.

Judge Thomas's action also vindicates former Chief Administrative Officer Harry Evers and Former city Treasurer Charles R. Smith, who had both been ordered to join Mr. Blessey in repaying the money.

The judge's action bring to a close five years of legal proceedings against Mr. Blessey.

In 1987, the U.S. attorney in Biloxi charged Mr. Blessey with extorting $134,000 in bond fees from the city's attorney, Page, Mannino & Peresich. According to the indictment, Mr. Blessey had forced the law firm to give his associate Michael Cavanaugh 25% of the fees it collected on Biloxi bond issues sold between 1982 and 1987.

The federal prosecutor also charged Mr. Blessey in 1989 with conspiracy in an alleged scheme to defraud the government out of $160,000 in U.S. Department of Health Education and Welfare funds used in a hotel project at Point Cadet.

Mr. Blessey was acquitted on the extortion charge in 1990. In 1991, a federal judge dismissed the conspiracy charges on the grounds that Mr. Blessey had been denied his constitutional right to a speedy trial. In May 1992, the charges against Mr. Cavanaugh were dismissed.

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