Citibank N.A. v. City of Burlington

• Decision Date: 13 September 2013
• Docket Number: Case No. 2:11–CV–214.
• Citation: 971 F.Supp.2d 414
• Court: U.S. District Court — District of Vermont
• Parties: CITIBANK N.A., Plaintiff, v. CITY OF BURLINGTON and McNeil, Leddy & Sheahan, P.C., Defendants.

971 F.Supp.2d 414

CITIBANK N.A., Plaintiff,

v.CITY OF BURLINGTON and McNeil, Leddy & Sheahan, P.C., Defendants.

Case No. 2:11–CV–214.

United States District Court, D. Vermont.

Sept. 13, 2013.

Preempted

11A V.S.A. § 15.02.

Anthony J. Galdieri, Esq., Holly J. Kilibarda, Esq., Kevin Fitzgerald, Esq., W. Scott O'Connell, Esq., Nixon Peabody LLP, Manchester, NH, for Plaintiff.

Allan R. Keyes, Harry R. Ryan, III, Ryan Smith & Carbine, Ltd., Rutland, VT, for Defendants.

Opinion and Order

WILLIAM K. SESSIONS III, District Judge.

This action arises out of a Master State and Municipal Lease/Purchase Agreement (the “Master Lease Agreement” or “MLA”) under which the City of Burlington (“Burlington” or “the City”) secured funds for the lease-to-purchase of telecommunications equipment (the “Equipment”) and for the construction and operation of a city-wide fiber optic network. The City has used the network to provide voice, data, and cable television services through an entity known as Burlington Telecom (“BT”). After Burlington stopped appropriating funds to make payments under the Master Lease Agreement, Citibank N.A. (“Citibank”) filed a fifteen-count complaint raising a variety of claims against Burlington and McNeil, Leddy & Sheahan, P.C. (“McNeil”), which served as counsel to the City. After Citibank filed motions to dismiss and strike Burlington's original Answer, Burlington moved for leave to file an Amended Answer, ECF No. 56–2, which Citibank opposes in part.

For the reasons stated below, the Court denies Citibank's Motion to Strike, ECF No. 24; grants in part and denies in part Burlington's Motion to Amend, ECF No. 56; and grants in part and denies in part Citibank's Motion to Dismiss, ECF No. 25.

BACKGROUND¹

In 1996, Burlington amended its charter to allow it to engage in regulated cable or telecommunications business, providing it complied with Vermont's requirements for public utilities. SeeVt. Stat. Ann. tit 24A § 3–438(c)(1). The following year, Burlington's residents voted to approve the construction of a city-wide telecommunications network, which by 2003 was registered under the trade name Burlington Telecom. The construction of the network occurred in three phases: In Phase I, Burlington Telecom established a non-commercial network to provide telecommunications and data services to Burlington's municipal offices and schools. In Phase II, Burlington Telecom began providing commercial services to customers located within the reach of the Phase I network. Finally, in Phase III, Burlington Telecom began building out its commercial network with the goal of being able to provide service to every residence, business, and institution in the City of Burlington.

Burlington obtained approval for Burlington Telecom from Vermont's Public Service Board (“PSB”), which imposed a number of conditions on the enterprise to ensure that the City's construction and operation of the network would comply with Vermont law and serve the public interest. When the PSB approved the project in 2005, it issued a Certificate of Public Good (“CPG”) containing a number of conditions, among them the requirement that

In no event shall any losses or costs, in the event the enterprise is abandoned or curtailed, incurred by BT be borne by the City of Burlington taxpayers, the City of Burlington Electric Department (“BED”) ratepayers or the state of Vermont,nor shall the City of Burlington expend any funds received from the State of Vermont to cover any losses or costs, in the event the enterprise is abandoned or curtailed, incurred by BT, as provided in [Vt. Stat. Ann. tit. 24 App. § 3–438(c)(1) ].

ECF No. 14–7 § 56. The CPG also stated that while Burlington Telecom could participate in Burlington's pooled cash management system, Burlington Telecom had to “reimburse the City within two months of the City's expenditure for any expenses incurred or payments made by the City in support of services that BT provides to non-City entities.” Id. § 60.

Koch Financial initially provided financing for all three stages of the network's construction to the tune of more than $22 million; however, in June 2007, Burlington announced that it would seek additional funds to continue BT's Phase–III build out and to refinance its existing debt. A Vermont organization, Municipal Leasing Consultants (“MLC”), won the bidding process but acted as a middle man rather than providing the financing itself. Under this arrangement, MLC negotiated the terms of the Master Lease Agreement with the expectation that it would later assign its rights and obligations under the agreement with Burlington to CitiCapital Municipal Finance (“CitiCapital”).

Burlington alleges that prior to entering the Master Lease Agreement, the City expressed concern that the Master Lease Agreement might prevent it from seeking financing from other lenders in the event that it required additional funds for Burlington Telecom's expansion within the City and to surrounding areas. According to Burlington, MLC provided assurances that CitiCapital would provide such financing in the event it was required after CitiCapital assumed the MLA. The City also claims that it then entered into a separate agreement with CitiCapital for additional financing (the “Additional Financing Agreement” or “AFA”). “Under the agreement, Burlington would approach Citibank rather than issuing an RFB as it had done with the initial financing.” Am. Answer (Counterclaims) ¶ 17. According to Burlington, “[CitiCapital] in effect promised to proceed in good faith and work together with Burlington when the additional financing became necessary.” Id. ¶ 18.

On August 9, 2007, Burlington and MLC signed the Master Lease Agreement. Six days later, on August 15, MLC assigned its duties, obligations, rights, title, and interests to CitiCapital. The Master Lease Agreement included two schedules: Schedule No. 001 provided approximately $11.5 million for the purchase of new equipment as part of Burlington Telecom's Phase III built-out; Schedule No. 002 involved approximately $22 million that Burlington used to buy out Koch Financial and to re-lease the existing equipment from MLC (and, after August 15, CitiCapital). The total financing commitment was $33.5 million.

The Master Lease Agreement contains multiple provisions governing Burlington's rental payments for use of the equipment, default, termination, and potential remedies for the parties. The MLA goes into particular detail about the nature of the property rights held by the parties. Paragraph 11, entitled “Title: Security Agreement,” provides that title to the equipment will vest with the Lessee upon acceptance of it. The same paragraph further provides that the “Lessee shall immediately surrender possession of that Equipment to Lessor” in the event that the Lease terminates for either of two reasons: (1) the expiration of the lease term (initial or renewal) and the nonrenewal of the lease due to nonappropriation by the City; or (2) the occurrence of an Event of Default, including, among other things, the failure of the Lessee to make a rental payment with respect to that Lease. See MLA ¶¶ 4, 11, 20. In the event of default, the MLA gives the Lessor the right to retake or demand return of the equipment from the Lessee five days after delivering written notice to the Lessee. Id. ¶ 21. For the purpose of the instant motions, the Master Lease Agreement's merger clause is also of particular relevance. It states:

ENTIRE AGREEMENT. This Master Lease, together with the exhibits attached hereto and other attachments hereto, and other documents or instruments executed by Lessee and Lessor in connection herewith, constitute the entire agreement between the parties with respect to the lease of the Equipment, and this Master Lease shall not be modified, amended, altered or changed except with the written consent of Lessee and Lessor.

MLA § 29.

On August 9, Burlington also entered into an Escrow Trust Agreement with CitiCapital Municipal Finance (the “Escrow Agreement”). The Escrow Agreement created two separate funds: an acquisition fund with approximately $10.5 million for the purchase of new equipment and a reserve fund of $1 million that CitiCapital could access to prevent a default in the event that Burlington failed to make a payment.

As part of the negotiation process, CitiCapital sought assurances that Burlington had sufficient revenue from non-taxpayer services to make the required payments to CitiCapital. In a letter dated August 17, 2007, Burlington's counsel, McNeil, Leddy & Sheahan P.C. (“McNeil”) provided Burlington and Citibank with an “Opinion Letter” stating,

There is no prohibition of utilizing general fund revenues of the City for telecommunications activities. However, there is a specification that losses from telecommunications are not to be borne by the City's taxpayers, the State of Vermont or recovered in rates from electric ratepayers. The same restriction applies to costs incurred in the event of any abandonment or curtailment of the telecommunication systems by the City. We are advised that approximately 40% of general fund revenues are derived from other sources than through taxation of the City's taxpayers.

Compl. Ex. B.

In February 2008, Burlington sought additional funding from CitiCapital pursuant to what Burlington claims was a prior understanding that either MLC or CitiCapital would supplement the funding provided in the Master Lease Agreement. At around the same time, though, Citibank entered negotiations to sell CitiCapital's municipal leasing portfolio. In advance of the prospective sale, CitiCapital instituted a moratorium on new business and, according to Burlington, simply refused to negotiate new financing terms. Burlington did not obtain additional funds from CitiCapital, and after the credit market collapsed in the fall of 2008, no other financing options materialized. Between 2008 and February 2010, Burlington used approximately $17 million...