Bellevue has initiated an outside investigation of a failed deal between Council Member Kevin Wallace’s development firm and GNP Railway as a potential conflict of interest.

In a story that first surfaced in the Seattle Times, Wallace Properties reached a non-binding agreement with GNP Railway to invest $500,000 in the company and help raise as much as $30 million for expansion.

GNP bought an easement in 2006 to operate rail from  Snohomish to Redmond. According to a Memorandum of Understanding, Wallace Properties would form a limited liability corporation (LLC) to provide the investment, which would then own 10 percent of a new GNP-related LLC. With the raised funds and investment, GNP hoped to eventually buy up similar easements to stretch down the Eastside to as far south as Renton. As a partner, Wallace Properties would be involved with managing and developing stations that could include further development.

Wallace has supported the location of a light rail line – B7 – that would use land in the same general location as the GNP project.

City Attorney Lori Riordan said Wednesday that it’s not in her job description to conduct a public investigation of a council member, hence the need to hire outside help.

“In this kind of situation where I’m asked to analyze a conflict of interest question my priority is to work with my client, the city,” she said. “It isn’t my place to actually go out and say publicly what my conclusion is, because as the client, that’s their responsibility.

Wallace, who is one of four council members to favor the B7 route, said the GNP deal at the time was only for expansion between Redmond and Snohomish. If or when Bellevue became part of the discussion, Wallace said he would then have sought the opinion of the city’s legal staff to see if it was a conflict of interest.

“I am perplexed by the veiled accusations of a conflict of interest,” he said in an e-mail statement. “I didn’t see when we entered into the MOU, and I don’t see now, the nexus between the B7 alignment and the operations of the rail line in Redmond. The non-binding MOU was very clear that further review was required precisely to look at possible conflicts with my role as a City Council member.”

The MOU did state that anything other than the Redmond-Snohomish line would be contingent on Wallace obtaining an assurance that he was not setting himself up for a conflict of interest.

The B7 route is currently under further study by a Bellevue-hired consultant. Sound Transit favors an alignment down Bellevue Way and 112th Avenue because it has higher ridership projections and lower cost. Sound Transit declined to comment.

Three months prior to the non-binding agreement, Riordan made a presentation to City Council on conflicts of interest. Riordan’s presentation included four key restrictions for council members. It states that no council member may use his or her position to get special benefits; that they not be compensated by others in relation to their work as city council members; that they avoid employment or collaboration with organizations that may lead to them leaking confidential information; that they not release confidential information.

Riordan pointed out that conflict of interest laws do not prevent council members from attempting to influence the city toward a decision or organization they may favor.

“On the contrary, in a representative democracy, we elect our legislators precisely to carry out agendas and promote causes with full knowledge that ‘their own personal predilections and preconceptions’ will affect their decisions,” according to a ruling in the case of Evergreen School District v. Clark County she cited. “As long as these predilections do not lead them to line their pockets or otherwise abuse their offices, we leave the wisdom of their choices to the voters. If the voters do not like their representatives’ agendas or voting decisions, they are free to vote them out of office.”

The agreement between GNP and Wallace Properties, reached in December, has since fallen through due to financial troubles for GNP.

Had the deal come to fruition, it wouldn’t have caused a major impact on the B7 route, Bellevue Transportation Director Goran Sparrman said. With the purchase of some extra right-of-way, both freight rail and light-rail tracks could run through the area, he said.

Fellow council member Claudia Balducci approves of the city’s decision to seek outside counsel, saying that bringing in an impartial observer will help depoliticize an issue that his galvanized the emotion of Bellevue, and surrounding communities.

“It doesn’t look good to me,” she said. “But ultimately it’s important to have an objective person take a thorough look at it.”

Wallace has been at the center of light-rail debate since he came on council in 2008. A vocal supporter of keeping the rail line away from neighborhoods, Wallace has lobbied for lines that go across the Mercer Slough and parallel Interstate 405 heading into downtown. The B7 route would avoid the Surrey Downs neighborhood, but a new park and ride station could lead to the removal of homes in the Enatai area, as well as affect nearby residents living on the other side of the Mercer slough adjacent to the rail line through noise and construction issues.

He was a driving force behind a council decision in October to authorize spending of $670,000 on a study to further analyze the B7 route. The aim of the four council members who approved the study was to create a better comparison to Sound Transit’s preferred Bellevue Way/112th Avenue route, in attempt to convince the board to change its mind and opt for B7 through south Bellevue.