Citibank Sues Burlington, Seeks Repossession of Burlington Telecom

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Citibank filed a long-anticipated lawsuit in federal court Friday, seeking tens of millions of dollars in damages and the repossession of Burlington Telecom's equipment.

The lawsuit was filed as a result of the city of Burlington failing to make payments on a $33.5 million lease-financing agreement.

Talks between Citibank and the city broke down in late 2010. The final payments made to Citi by Burlington were in May 2010, when Citi had money released from an escrow account.

"Unfortunately, the city has not made direct payments on this financing since November 2009," said Mark Rodgers, director of public affairs for Citi. "We have tried to allow additional time to arrive at a mutually satisfactory solution by granting extensions in the past. At this point, however, we have had to proceed with litigation due to the city's failure to honor their contractual obligations, including the return of equipment we financed."

Citibank wants Burlington to deinstall the BT network and hand over the equipment and vehicles to Citibank; and pay $33.5 million owed under the lease as well as punitive damages for breach of contract. Citibank is also seeking an additional $3.5 million in fees accrued through August 17 ($235,000 per month) for Burlington's use of the BT network. Citibank wants all customer payments to BT to be placed in an escrow account or trust with the court.

Download Citi Complaint with Exhibits

In a statement issued by Joe Reinert, assistant to Mayor Bob Kiss, the city said it was reviewing the complaint and "will vigorously defend the city’s interests in court. CitiCapital’s filing has no impact on Burlington Telecom’s provision of services to its business and residential customers."

Also named as a defendant in the lawsuit is McNeil, Leddy and Sheehan, the Burlington law firm that represents Burlington Telecom and negotiated the lease agreement with CitiCapital.

In its lawsuit, Citibank notes that a letter written by attorney Joe McNeil on behalf of Burlington "expressly warranted to Citibank that at least 40 percent of Burlington's revenues were derived from sources other than taxpayers' funds and would be available to fund payments to Citibank, and further, that Burlington had the financial resources and ability to make all payments to Citibank for the full term of the agreement."

In its lawsuit, Citibank points to McNeil's letter as making a false and fraudulent claim and rendering the entire agreement null and void.

Citibank contrasts McNeil's assertion with what happened in mid-2010 when the city council and administration of Mayor Bob Kiss decided not to appropriate any money toward the lease payments in the FY 2011 budget.

The reason?

"Burlington claimed, for the first time, that all of Burlington's funds, regardless of their source, were deemed to be 'taxpayer revenues,'" the lawsuit alleges. "Burlington further indicated to Citibank that the only funds legally available for payments under the agreement were BT revenues, which Burlington contended were insufficient. Burlington's contention is particularly curious, because Burlington itself has been one of BT's most significant customers."

Citibank argues that the city of Burlington had the "ability and the obligation" under the lease-finance deal to "charge itself sufficient rates to make the payments required under the agreement, but it failed to do so."

On that point, Citibank says the city's "responsible financial officer" failed to do things "lawfully within his power to obtain rental payment funds."

Citibank notes that Burlington's intransigence has been nearly a year in the offing.

On October 21, 2010, Citibank issued a letter to the city that "demanded de-installation and the return" of BT's equipment secured by the lease. If it continued to use the equipment, Citibank noted in its letter, BT would have to pay a rental fee. To this date, the city has neither returned the equipment nor paid a rental fee.

Recently, city officials and the McNeil, Leddy and Sheehan law firm have dodged state and federal criminal prosecution connected to BT's overspending and violations of its state certificate of public good. As well, a state court judge refused to find BT and city officials in contempt of a court order barring the city from spending taxpayer dollars on sorting out the BT financial mess.

 

Comments

[Alice]

The grim reaper cometh. Hey bob, it's going to a long 7 months playing out the side of your failed administration.

[Buster]

Maybe the city should sign over our ailing and rotting parking garages, and have Citi install new credit card based parking meters in town that will automatically transfer the funds to Citi financial.

Sorrel and Donovan, have ensured that taxpayer funds ie the illegal, and unsecured"loan" from the cash pool and stuffed into BT is precedent for taxpayer funds to be spent on BT.

Citi will argue that the state has condoned such taxpayer spending when they allowed the violation of the CPG and the PSB to stand with out prosecution.

All because the two pin heads have connections to the McNeil law firm.

Kiss should step down immediately and Leopold's consulting contract terminated.

The city has been delusional in their actions and has no ground to stand on. If Bt were say a taxi cab service and had leased cars, having terminated the car lease they continued to use the cars to run the business a judge and prosecutor would put them in jail with out hesitation.

Bob Kiss the emperor has no clothes, we can all see you are a tiny weenie with a dirty behind.

[Dan]

Burlington Telecom is a amazing business, I use it and love it. Despite that, the City of Burlington should sell it and make it a private company to insure growth. The connection speeds are the future of the internet. Comcast is clueless.

[Eric Benson]

The irony here is that Burlington Telecom was created in part to provide an alternative Comcast. However, it's Comcast that will likely purchase BT's infrastructure from CitiBank for pennies on the dollar, with Burlington tax payers covering the losses.

[Buster]

In Response to Dan and Eric,
Dan time to buy a clue Burlington Telecom is broke no amount of cheerleading about how great your service is is going to change the fact that the CAO bankrupt the company.

Wheter the future of the internet is or isn't a fiber optic cable to the home is not the issue it is about honoring contracts. The Mc Neil law firm assured Citi that Burlington had 40 % of their cash income outside of taxpayer monies.
Now that Leopold and Kiss have defaulted on the loan it is apparent that all money int the cash pool and all income is in fact taxpayer income.

The City Leaders the CAO the lawyers etc decided to default on the loan and hire their friends as "experts" to in fact run a business with "stolen" equipment no w clean the bong water out of your ears Dan and take another look at the problem dude.

Eric, Comcast is not interested in a weird little piece of fiber optic cable in tiny little town on the shores of lake Champlain. It doesn't fit their business model they would have to rebuild their entire network which ain't gonna happen. Wake up and vote the idiots out of office. We are going to lose big that's all that is going to happen, and the people responsible are getting off Scott free with a pension you will also be paying, Thank TJ.

[Jimmy]

But... but... Shay, didn't you tell us, repeatedly and without qualification, that Burlington had simply "terminated the lease"?

I can't see any path out of bankruptcy for Burlington at this point. This seems like an open and shut case for Citi, and Burlington can't just write a check for $60m without an enormous special assessment that would require taxpayer approval. Essentially, they'd have to ask homeowners to write checks in amounts that most of them simply don't have lying around.

BTV's last hope for avoiding financial ruin was Citi ignoring the precedent they'd be setting and taking a huge haircut for no apparent reason. That hope is now out the window. Thanks Progs!

[Greg]

The answer will be bankruptcy which will require vt legislative approval which will set off a firestorm among the other vt towns.

[Stanley]

BT is a giant sh*tstorm for bob, the progs and every member of the council who was seated during the early days of this scandal. Kurt is about to run for mayor, but no one should forget that he was on the board of finance during the early days of BT. He will spin it like he didn't know anything, but that is far from the truth. Let's choose the next mayor wisely.

[Jim]

People have suggested that the City "sell" BT for awhile now. I fail to see what the City owns that they can "sell". In the best case scenario, they have Defaulted, which is an unequivocal fact.

I think the State and the Feds have stepped aside in their roles, and determined that the best way to finish this was for Citi to reclaim what they can. Probably a good idea. I'll bet Citi can get some restitution from the law firm, since their E&O carrier has likely been advised of this potential some time ago.

Burlington taxpayers will be out the $17 million plus for sure, and BT will end up wherever Citi can take it. Producing fraudulent information, labeling their forecasts "conservative", then asking Citi to eat it is not something honorable people do.

[Ward 2 Resident]

Indeed, "sell" is a loose term. Obviously selling means appeasing any outstanding debts to creditors. Think Fairpoint.

[Ward 2 Resident]

I thought the city was paying Dorman and Fawcett the big bucks to manage BT and negotiate with CitiFinancial? What happened? Somebody call Terry Dorman.

[Buster]

ummm ah what about Oh Oh Obama?

[Jimmy]

"Indeed, "sell" is a loose term."

For BT, it's an irrelevant term. BT has nothing to sell but their building and vans, and even those may be considered Citi property. That's the point. They don't even claim to own the equipment that their business runs on at this point, which includes the cable in the ground.

[Ward 2 Resident]

Well, a business is worth more than just its property and its employees, especially the tech ones with their inflated valuations (insert stock price of Google, Apple and Facebook).

But yeah, Burlington residents should offer to bond the thing, like the airport and the electric department, and ask the legislature if it's ok to market fiber services to outlying towns in the metropolitan area. Otherwise, the city's 17 million is potentially gone. Unfortunately, political expediency (non-leadership) is against it.

[Jimmy]

W2R, given that you're able to spell and put together a sentence, I'm just going to assume you're playing dumb.

"a business is worth more than just its property and its employees"

The companies you name have intellectual property. BT has nothing like that. Their only value is in the connection they make between upstream data providers and homes. They do that through equipment and cables that are in the process of being repossessed. There is nothing else to sell, and there is nothing to bond against - which is a moot point, as bonding is expressly forbidden by every level of regulations governing BT.

It's over, and I can't fathom why anyone would continue to pretend otherwise. The only focus now should be avoiding bankruptcy.

[Reserved]

Clearly Jimmy has the foresight to make a definitive call. And apparently the authority to decide when a matter is settled or not. This authority also seems to include demeaning others in a meager attempt to make himself appear more powerful.

Hey Jimmy, you realize most readers check out after belittling sentences like your first one above, right? You don't happen to own a Corvette too, do you? Just askin'.... BTW, how'd that criminal investigation you prognosticated on turn out?

[Jimmy]

If you're saying that you think W2R's post reflected his/her honest thoughts on the matter, then you just insulted him/her far worse than I did.

"Clearly Jimmy has the foresight to make a definitive call."

If you'd like to describe the chain of events that could lead to BT's survival at this point, I'm all ears. A tiny local telecom outfit that's seven figures in debt and is having all of their equipment repossessed doesn't really make a super attractive takeover target.

Since you've appointed yourself my official archivist, you can feel free to post a link proving otherwise, but I'm pretty sure I never said the the criminal investigation would definitely bear fruit. I'm sure I said I hoped it would, because I did.

[Ward 2 Resident]

Yes, tech companies have intellectual property, but that's not all. They also have an income stream or at least market position. BT obviously has a customer base and an infrastructure that is worth more than simply the sum of its parts. Liquidating BT's goods at a fire sale to CitiFinancial's satisfaction won't make enough to cover the debts. Underlying a lawsuit like this by a bank is probably the suggestion that the parties negotiate the enterprises's total worth.

[Jimmy]

"BT obviously has a customer base and an infrastructure that is worth more than simply the sum of its parts."

BT does not own an infrastructure. Citi owns everything, and they are currently moving to repossess it. Neither side disputes this.

"Counsel for Burlington admitted that Burlington has defaulted under the Agreement and is required to return the Equipment. Nonetheless, Burlington has refused to return the Equipment." - p. 18 of the complaint.

Believe me, I hoped that some turn of events would result in a competent third party taking BT over and somehow making their debts to Citi and the taxpayers whole, but after reading the complaint, I honestly don't see how that can happen.

[Buster]

Jimmy,
You are wasting your pixels arguing with W2R and their ilk.
I agree how stupid are these comments? the problem is obvious for those of us who live in the real world. The only asset BT can claim is a customer base. Which by my reckoning is worth about zero now, you can buy the list from the city tax roll for free. According to the consultants hired they lost an additional 25% or 1000 of those customers. Bonding the hot mess will just produce a bond that will be defaulted on.. even that statement by W2R is inane there just isn't the capital generated by BT to make it a going concern.

The fact is BT is Tit's up. The Failure of our prosecutors to prosecute the bad actors Mc Neil and co, Jonathan Leopold Kiss Burns Thiabult et al will come back and bite us all.

The fact is this thing is a derriere eclair no one wants to eat it.

We are operating BT with "stolen equipment. Time to pass all of the cost of its operation to Citi and turn over the key's and force them to shoulder the cost of keeping the thing afloat under the PSB's orders until all consumers are transitioned. My advice consumers cease all payments to BT immediately.

Jimmy why are you afraid of bankruptcy? Muni Bond markets have very short memories. It is time to use bankruptcy to force some much needed change in town.