Was rail deal conflict of interest for Bellevue official?

While prodding the Bellevue City Council last fall to study possible use of an abandoned rail corridor for a Sound Transit light-rail line, Councilmember Kevin Wallace was negotiating an extensive business relationship with a short-line railroad that wants to run trains on the same route.

He and his father, Bob Wallace, signed a nonbinding agreement in December to invest in GNP Railway and help raise $30 million for expansion.

Wallace Properties Development, a Bellevue-based developer of commercial properties, also agreed in a "memorandum of understanding" with GNP that the councilmember would hire brokers to sell preferred stock, invest $500,000 of its money and manage land acquisition and development of passenger stations, possibly with shops, offices, industrial space and homes. Kevin Wallace is president of the development company.

The Wallaces' agreement with GNP — which has envisioned running freight and passenger trains from Snohomish to Renton — became public last month after creditors went to court in an attempt to force the railroad into bankruptcy reorganization.

The Wallaces signed the GNP agreement the same week Kevin Wallace explained in a Seattle Times guest-opinion column why it made sense for the City Council to spend $670,000 to study whether Sound Transit should put its light-rail trains on the old freight corridor.

Bellevue Mayor Don Davidson and the city attorney both said they had not seen the Wallace-GNP agreement and couldn't say whether a conflict of interest existed. "It's something that somebody should look at," Davidson said.

Councilmember Grant Degginger said the GNP-Wallace agreement envisioned "real-estate development up and down the corridor that runs through the heart of the city," and therefore Kevin Wallace should have disclosed the GNP deal to the city attorney.

"I think it's troubling," Degginger said. "I think the council and the community probably deserve an explanation about this."

Wallace has strongly advocated in City Council deliberations for Sound Transit to run light-rail trains along a segment of the Eastside Rail Corridor between Interstate 90 and downtown Bellevue, arguing that route would do less damage to neighborhoods than Sound Transit's preferred alignment along Bellevue Way and 112th Avenue Southeast.

A divided City Council voted in October to study a light-rail route across Mercer Slough near I-90, up the old rail corridor to 118th Avenue Southeast and into downtown Bellevue.

Wallace's explanation

Wallace said he didn't seek a legal opinion on the arrangement with GNP because the railway company hasn't tried to buy real estate in Bellevue or run trains into the city. The nonbinding agreement was subject to Wallace obtaining a legal analysis concluding the pact wouldn't conflict with his City Council responsibilities.

"We were at that point of exploring the connection between Redmond and Snohomish with a nonbinding agreement," Wallace said. "... If anything happened in Bellevue, we were going to have to explore that further with our legal counsel."

Wallace said he doesn't expect to move forward with the deal because of the railroad bankruptcy case.

"From our perspective, it's fair to say it's water under the bridge," he said. "... We think their endeavor is very interesting, but the bankruptcy filing really made our nonbinding agreement sort of meaningless, so we sort of walked away."

Debate over the light-rail route in Bellevue has been punctuated by allegations of conflicts of interest. At a study session in late September, a citizen suggested Degginger refrain from voting because he and his law firm have represented Sound Transit in other matters.

That led to a confrontation in which Wallace said Councilmember Claudia Balducci, who is on the Sound Transit board, "put Sound Transit's interests ahead of the interests of the constituents of Bellevue." Balducci responded that Wallace, whose family owns downtown property along a light-rail route he once supported, "put your personal financial interests before the best interests of the citizens of Bellevue."

"Don't ever have four lawyers on your council," Davidson quipped this week. "They've tended to be at each other's throat."

GNP has run freight trains between Woodinville and Snohomish since the Port of Seattle bought the 42-mile Eastside Rail Corridor from BNSF Railway in December 2009 for $81 million, and has tried to expand its freight operations and add excursion trains and commuter rail. The corridor connects Snohomish, Woodinville, Kirkland, Bellevue and Renton, with a spur between Woodinville and Redmond.

But the company was struggling to raise capital even as it sought approval from the federal Surface Transportation Board to extend freight service south to Redmond. The Port, which owns most of the corridor, opposes GNP's attempt to put trains on the old tracks, as does King County, which has a trail easement and wants to buy most of the land, and Redmond, which owns part of the corridor.

The railroad's efforts to obtain millions of dollars in loans from the Federal Railroad Administration have been unsuccessful, and Ballard Terminal Railroad claims GNP owes it $110,800 for operating the Woodinville-to-Snohomish freight trains.

Hoping a restructuring of GNP management could help make the railway solvent, "we intend to soldier on, and continue to operate the freight service," Ballard Terminal's General Manager Byron Cole said in a U.S. Bankruptcy Court filing.

GNP had $122,000 in revenue in 2010 and $706,000 in expenses, according to creditors.

The railway's financial difficulties came to a head in January, when Chief Financial Officer Doug Engle warned of impending bankruptcy and asked President and Chairman Tom Payne to step aside and let Engle restructure the company. Payne responded by firing Engle.

In court declarations, Payne accused Engle of erratic behavior and Engle accused Payne of financial misconduct. Both men worked on the deal with Wallace, which Engle in an interview last week called "the best opportunity we had come up with in three years."

"Attempted takeover"

Wallace Properties Development didn't carry out its promises to make a $500,000 investment in GNP or initiate a $30 million private offering. Payne and his lawyers said Wallace didn't follow through because of Engle's "attempted takeover" of GNP and the bankruptcy petition.

While negotiating the deal, GNP consultant Tom Jones told the bankruptcy court, the business partners dropped plans for commuter trains and projected initial losses on freight and excursion trains followed by "net income of several million by 2020."

Those cash projections assumed approval by the Surface Transportation Board of the company's expansion plans.

When GNP first asked the board in August to allow it to extend freight service to Redmond, Bob Wallace wrote in support, saying it would serve a Wallace-operated industrial park, and he endorsed freight and passenger trains on "the entire rail corridor along the I-405 corridor."

Engle said last week that, while the railroad wasn't ready to go to Bellevue yet, that was in its long-term plans.

Keith Ervin: 206-464-2105 or kervin@seattletimes.com