Can the city win the legal battle over Burlington Telecom?
Burlington, Vermont - September 16, 2011
The lawsuits are stacking up for Burlington Telecom. First city taxpayers sued, now the utility's creditor has launched its own complaint. But does CitiCapital have a strong case?
On Sept. 2 CitiCapital's parent company, CitiBank, filed suit against Burlington and its legal advisors. In 2007 the financial institution agreed to advance the city $33.5 million as part of a lease-purchase agreement on behalf of BT. The city stopped paying and now CitiCapital wants its money back, plus interest and damages.
"This is not a slam dunk case for CitiCapital," said Jennifer Taub, a Vermont Law School professor.
Taub calls the financial giant's legal theories in the Burlington Telecom case "creative."
"CitiBank has brought this lawsuit in an attempt to get back their $33.5 million, even though the agreement did not entitle them to that money. It simply entitled them to rental payments," Taub said.
The apparent loophole in the lease agreement-- Burlington could terminate the deal if it couldn't afford to make the payments. And that's exactly what happened in the spring of 2010. So how does CitiCapital have a case? The bank's lawsuit goes after the city's legal counsel, alleging the firm and city officials knew from the outset Burlington didn't have the money to repay and entered into the lease agreement anyway.
Taub explained, "CitiBank is saying OK this is fraud and is asking the court to rescind the agreement and require Burlington to give back the $33.5 million."
Plus punitive damages-- but if the court determines the city's inability to pay was simply a mistake, CitiCapital still wants the judge to force Burlington to repay anyway, arguing it was a miscalculation that compromises a key component of their agreement.
The law firm named in the suit is firing back. McNeil, Leddy and Sheahan wouldn't comment on camera, but issued WCAX News this statement: "The claims against this firm are entirely without merit and are nothing more than an attempt by CitiBank to shift responsibility for the business decisions it made. We are confident we will prevail in court."
"No matter who wins here this will be extremely costly and that alone would worry me," Taub said.
"We'll vigorously defend the position of the city in terms of going forward," said Mayor Bob Kiss, P-Burlington.
Kiss remains optimistic that the city's fiber-to-the-home telecommunications company will remain an asset to Burlington.
"We're actually cash flow positive in terms of those operations, separate from debt and interest," Kiss said.
"Well if every homeowner could do that, we'd all be cash flow positive," said Karen Paul, I-Burlington City Council.
Paul is a city councilor and a member of the Blue Ribbon Committee, a panel convened to assess the financial viability of BT. She says it's more important than ever to secure a financial partner. And despite litigation, it's looking promising.
"There are two of them, one perhaps a little bit more serious than the other," Paul said.
"What's most concerning to me is the effect on the city's financial liability," said Bill Keogh, D-Burlington City Council.
Keogh, the president of the City Council, calls Burlington Telecom a good but mismanaged investment for the city. He's hoping for an out-of-court settlement, but says this suit could force cuts to city services and create lasting financial consequences.
"This affects our bond rating. It affects people who want to do business with the city. This is serious stuff and it's going to take us a long time to get out of this mess," Keogh said.
Even though Burlington stopped paying CitiBank, it continues to use the fiber optic cable and telecommunications equipment for its BT operations. That property belongs to CitiBank and the creditor wants it back, even asking the court to order Burlington to stop using it. Since that would mean a service interruption for paying customers, legal analysts say it's unlikely a judge would grant that request. Burlington has 60 days to file its response.
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