Prosecutor asked to review legality of loan to Ozark Regional Airport (KBPK), Mountain Home, Arkansas

State auditors want a legal review of a $150,000 loan made in 2008 to the Baxter County Airport Commission for improvements at Ozark Regional Airport in Mountain Home.  The Arkansas Legislative Joint Auditing Committee asked for the review after receiving an audit report that says the airport commission used county-owned property as security for the loan with a term of more than 10 years. State law limits such loans to no more than five years.

Questions about the legality of a loan to Ozark Regional Airport and planned improvements at the airport in 2007 and 2008 have come under review by the Arkansas Legislative Joint Auditing Committee. The $150,000 loan to the Baxter County Airport Commission will be reviewed by 16th Judicial District Deputy Prosecutor Dwayne Plumlee at the request of 14th Judicial District Prosecutor Ron Kincade.

Kincade said he requested the review by a prosecutor from outside the 14th District after the Joint Auditing Committee referred the matter to his office for further judicial review. State Rep. Karen Hopper, R-Lakeview, and Rep. John Burris, R-Harrison, are committee members, according to the Legislature's website.

Kincade said he was legal counsel to Baxter County when the loan was executed March 14, 2008. He told The Bulletin Tuesday he believes it is improper to be the reviewer of his own counsel. The prosecutor said he is confident the review will find conclusions similar to those reached by Little Rock attorney Mike Rainwater for the Arkansas Association of Counties.

The committee agreed with an audit report that Baxter County ran afoul of state law governing lending to counties when its airport commission pledged county-owned property as security for the loan with a term in excess of 10 years. Loans cannot be made for more than five years under state law.

However, Kincade told The Bulletin he found nothing in loan documents showing county-owned property had been encumbered in the loan. He said he believes the committee review errs in the application of the law under Amendments 65 and 78 that governs how counties may borrow.

Kincade said rents from the proceeds of an airport hangar lease agreement were pledged as collateral for the loan used by the airport in 2008 as matching funds for airport improvements. "We pledged income from a lease much like the county pledged income from a lease with Baxter Regional Medical Center for the bond issue to build the new jail," Kincade said.

Kincade said wrangling over the Baxter County airport loan was the impetus for part of a legal paper by Rainwater on lending to counties.

"Amendment 78 is required where the collateral for the loan is either local tax revenue or assets purchased with local tax revenue. An Amendment 78 loan can only be for five years," Rainwater wrote. "An Amendment 65 loan is permitted any time the Arkansas General Assembly has said that a political subdivision can use its revenues for any lawful purpose and the collateral to secure a loan is neither local tax revenue nor assets purchased with local tax revenue."

Kincade said the airport loan is clearly authorized by provisions Amendment 65 because the loan was secured by rent proceeds only and did not encumber the real estate that was the subject of the rents. Kincade said any failure to satisfy the loan from proceeds would result in an unsecured debt.

Political issue

The prosecutor said public concerns about the collateralization of the airport loan became prominent in 2008 during the campaign for Baxter County judge. Innuendo regarding the loan escalated to a level that prompted a letter from Larry G. Nelson, then chief executive officer of First Security Bank, to Baxter County Judge Joe Bodenhamer, running against then-incumbent Dan Hall.

Pursuant to the Arkansas Freedom of Information Act, The Baxter Bulletin obtained a copy of the letter. According to the letter, Nelson wrote Bodenhamer:

"First Security Bank hereby confirms that our loan documents (including the Assignment of Rents and Lease and Commercial Security Agreement) for the loan made to the Baxter County Airport Commission dated March 14, 2008, in the principal amount of $150,000.00, do not purport to or create an obligation upon Baxter County, Arkansas, neither do they mortgage or encumber the airport.

"Our loan was made to the Baxter County Airport Commission, to whom we are solely looking for repayment from its own revenue sources, namely rents from the lease which was assigned as collateral. During your campaign for office, you and I discussed the details of this loan, and we reviewed the documents.

"I explained at the time that our loan did not obligate the county or mortgage airport property, and I honestly thought you understood that."

Bodenhamer testifies

A digital audio recording of Bodenhamer's testimony before the Joint Auditing Committee last week indicates Bodenhamer heard the allegations against Baxter County by the committee as printed in its special report.

"Yes. We are guilty on all charges," Bodenhamer told the committee.

The judge continued to explain that he was aware of no recourse for correcting what he and the committee believed to be an illegal loan because the county is in financial straits and may not have the ability to cover debt service on a loan with a legal term of five years or less.

Bodenhamer also testified the quorum court twice rejected resolutions authorizing Hall to obtain the loan. He said a doctor loaned the county money to finish the hangar project before the loan was executed.

"Three months later, he wanted his money back," Bodenhamer said.

The judge also was questioned about legal counsel available to the county at the time of the loan. He testified he believed Kincade "okayed" the loans.

Benedict intervenes

State Rep. Lori Benedict, R-Sturkie, asked a single question of Bodenhamer: "Was the prosecuting attorney the same attorney that worked for the bank?" she asked.

Bodenhamer said the bank's legal counsel was Kincade.

Kincade said he believes the committee is abjectly wrong in its understanding of the loan and clearly had not seen loan documents needed to discuss the loan. He said politics also were at play in the committee's order.

Benedict is the airport's former fixed-base operator who filed lawsuits against the airport commission beginning in 2006, including one to block construction of a commercial hangar. Benedict dropped her suits in January 2009, after Bodenhamer was elected county judge.

Kincade said he believed Plumlee already had received telephone calls from Benedict's representatives if not from Benedict herself. Such contact could be deemed an illegal effort to influence the court, he said.

Benedict expressed doubt in Plumlee's ability or will to review the case and to take action, if necessary, against a legal peer. Benedict confirmed Tuesday night that she had spoken to Plumlee by telephone Tuesday morning.

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