A request by Citibank to look over two years of Burlington Telecom financial records has led to the latest legal standoff with the City of Burlington.
On Aug. 9, Citibank filed a motion for contempt in U.S. District Court after requesting the documents, ostensibly in order to assess whether the city is complying with payment calculations outlined in a court order signed by both parties in March. Burlington’s response, submitted by attorney Michael Burak on Aug. 27, calls the contempt motion a “frivolous” attempt to conduct a complete audit rather than stick to “the limited purposes contemplated in the Stipulated Order.”
The March 27 “joint stipulation and order” was an interim deal in which Burlington agreed to make monthly payments on $33.5 million owed by BT on a 2007 lease-to-purchase agreement. It stated that payments will be forwarded into a court escrow account, with the amount based on 60 percent of net cash flow and calculations surrounding a $16.9 million debt to Burlington’s cash pool.
The order also gives Citibank “the right, upon reasonable notice, to review” BT’s financial records and “monitor” the calculation of net cash flow.
Citibank still wants its money back, preferably on an accelerated basis, plus punitive damages. It also wants the equipment and charges that Burlington has continued to use it to generate revenue. Currently, Citi is seeking two years of financial information, plus specifics about big customers and vendors.
Since March Burlington has paid at least $33,000 monthly, for a total of $136,389 by the end of August. But negotiations over how much information the city ought to provide broke down in July. Citi claims that Burlington refused to provide all the documents it requested and meanwhile demanded a separate confidentiality agreement.
Burlington says that it did offer to provide the documents, although initially covering only a three-month period, in time for a late July meeting. It also expressed a willingness to show more – if that is necessary to understand how the payments are being calculated.
“Burlington worked diligently to assemble and produce – on an expedited basis – those financial records,” its response claims. But Citi cancelled the meeting on July 27, deciding “unilaterally not to even look at the documents,” and instead filed the contempt motion.
Both sides argue that the other should cover the resulting costs. For Citibank that means the expense of the “cancelled audit.” For Burlington it includes attorney fees and “flying a senior financial accountant back to Burlington from an assignment in Seattle to supervise the document production” for a meeting that did not happen.
The list of items requested includes BT’s monthly ledgers, credit and cash receipt journals, financial statements, and supporting documents for invoices going back two years. It also wants details about BT’s 10 largest customers and vendors, asset and liability schedules, and reports to the Public Service Board, plus bank statements and cancelled checks for the last three months.
Burlington’s response argues that the March stipulation did not give Citibank the right to “a complete audit including two years of an extensive list of financial documents – outside the normal discovery process – for the purposes stated in Citibank’s demands.”
How the deal went bad
The Public Service Board approved Burlington Telecom’s license to provide cable television in 2005. The city-owned utility subsequently brought its own TV, telephone and high-speed Internet service to much of the city.
On Aug. 9, 2007, Burlington signed a municipal lease/purchase agreement with Citibank. By the end of that year, however, the administration of Mayor Bob Kiss had also borrowed $16.9 million from the city treasury and failed to pay it back within the required two months. The PSB subsequently called Burlington’s actions a “wanton” violation of its certificate of public good.
In 2010, BT was challenged by the Department of Public Service on behalf of consumers, and by Comcast, the city’s main competitor. The Public Service Board found BT to be in violation of four conditions of its license. Burlington meanwhile began to miss payments to Citibank in February and May. The City Council voted to appropriate no further funds as of July 2010. The city terminated its lease-to-purchase agreement in June.
At that point the quarterly payments due to Citibank were roughly $750,000. Citi offered a new monthly fee of $311,000. The administration countered with an offer of $40,000, which Citi rejected.
Negotiations ultimately broke down in November 2011. A few weeks later, Citibank asked for a preliminary injunction against the City of Burlington and its law firm, McNeil, Leddy and Sheahan.
The motion claimed that the city was in default and said that continued use of telecom equipment was causing “irreparable harms to Citibank.” The equipment in question includes 186 miles of fiberoptic cable, set top boxes, remote controls, the brains of the system and other installed equipment.
The scrap value of the equipment is about $300,000 to $600,000, but it could cost $6 million or more to replace.
Risks and consequences
Citibank charges fraud and breach of contract in its motion for an injunction, asking the court to make Burlington de-install and return all the equipment, appoint a receiver to handle BT’s accounts, and “pay into this Court all BT revenues collected on or after its default.”
In a Dec. 22, 2011, response, Burlington’s attorneys pointed to a “nonappropriation” clause in the municipal finance agreement with Citibank. The clause says that if the municipality does not appropriate funds the agreement is terminated. City government exercised that option effective July 1, 2010.
However, Citibank also alleged that it was misinformed by the city’s lawyers, erroneously led to believe some funds remained available to make rental payments. According to the motion, Citi thought “approximately 40% of general fund revenues are derived from other sources than through taxation,” and were therefore still available. That proved to be incorrect.
Burlington does not deny that its attorneys issued a legal opinion that turned out to be wrong. But it argues that this did not constitute professional negligence, since in the view of the Vermont Supreme Court, “a lawyer owes no duty to the client’s represented adversary with respect to the closing of a transaction.” Claims of malpractice by nonclients have been repeatedly rejected in state court.
The defense argument is that the City of Burlington had a right to terminate the lease “without recourse and without obligation,” and that nonappropriation was “a risk expressly assumed by Citibank.”
The alleged misrepresentation had nothing to do with the city’s decision not to appropriate further funds, claims Burlington’s original motion for dismissal. “Citibank merely alleged the cause of its entering into a transaction in which it lost money, ‘but not the cause of the transaction’s turning out to be a losing one’.”
In 2011, an attorney for the Public Service Department said that the city must find a way to repay the borrowed local money and “cure” other violations within a “reasonable” time. If not, “the PSB may have no alternative but to revoke BT’s Certificate of Public Good,” attorney Geoff Commons warned.
On June 20, 2012, Moody’s Investors Service downgraded the City of Burlington’s general obligation debt rating from A3 to Baa3, just above junk band status, with a negative outlook. In response to the announcement, Mayor Miro Weinberger said that Moody’s recognized what most people already knew, that “the financial management of the City by the past administration was problematic in numerous ways, particularly with respect to the $17 million cash pool loan to Burlington Telecom.”
The downgrade was a reminder, Weinberger added, that “while the past administration is gone, the damage done by its past actions is lasting and will take time and serious work to repair.”
Moody’s warned last year that BT’s $16.9 million cash pool debt could be a reason for lowering the credit ratings not only of the city, but also of municipal enterprises such as Burlington International Airport and the Burlington Electric Department.