Monticello council approves $5.75 million proposed FiberNet bondholder settlement

Monticello council members have approved a $5.75 million proposed settlement to keep a possible lawsuit with FiberNet bondholders from financial escalation.
The legal process associated with the proposed settlement would involve the simultaneous filing of a federal class action lawsuit on behalf of bondholders and a tentative agreement on the proposed settlement.
Wells Fargo Bank N.A. notified FiberNet bondholders in October 2012  it had commenced trust proceedings in Hennepin County District Court because the city had stopped its supplemental debt service payments on $26.4 million in FiberNet bonds.
According to City Attorney Joel Jamink, the city’s League of Minnesota Cities Insurance Trust coverage will pay a portion of the defense costs incurred by the city, but none of the settlement amount of $5.75 million.
That amount will become a general city obligation, payable from existing funds or funds generated by issuing a new bond. A trust instruction proceeding, a class action settlement and an opt out rebate will be worked out in subsequent agreements and proceedings, Jamink stated Monday in an email.
A special Monticello council meeting Thursday, June 13, to present details of the proposed FiberNet settlement and litigation was preceded by a half-hour long closed meeting.
Throughout the past four months, the city has conducted a series of such meetings, citing attorney-client privilege because a specific threat of litigation existed regarding the FiberNet revenue bond default.
Prior to the start of the council’s June 10 meeting, a prior closed meeting was canceled and a related agenda item placed in recess until Thursday, June 13.
In addition, a regularly scheduled FiberNet Advisory Board meeting scheduled for Tuesday, June 11, was also canceled and a written notice posted at city hall.
Cliff Greene and Megan Walsh from the Minneapolis-based law firm of Greene Espel were present to discuss the FiberNet revenue bond situation with city leaders last Thursday.
Mayor Clint Herbst opened the 10-minute special meeting and quickly handed the floor to Green, who provided a basic legal summary. Three FiberNet bondholders also attended Thursday night’s meeting, and listened as Green explained how his firm handled its end of the negotiations process.
“We looked at the claims, which included securities fraud and misrepresentation, and evaluated them,” Green said. “We came up with a couple of conclusions.”
According to Green, the city had a meritorious defense against the claims, and if claims would reach a courtroom as part of a lawsuit, the city would win.
“On the other hand, we recognized that this type of securities litigation is very expensive,” he said. “It’s very demanding on staff, and whenever you are in litigation, you have to recognize the possibility that you might not win.” Green said overtures were made by the city to try and engage in a settlement process.
“The city wanted to find a way to resolve this matter short of a lawsuit being filed,” he said. “The city council authorized us to explore negotiations with the trustee [Wells Fargo N.A.] and the bondholders.” Proposed settlement presented to the council last Thursday appeared on a term sheet that listed the basic elements of any final settlement of the FiberNet bond default. “It’s a road map to the ultimate settlement,” Green said. “There are many steps along the way.”
According to Green, the city’s elimination of liability exposure to securities fraud claims was a key element in the proposed settlement presented on June 13.
“The city will own FiberNet Monticello free and clear of any trustee or bondholder claims,” Green said.
In exchange for these concessions, the city will pay the bondholders the $5.75 million once the appropriate court orders have been received. “We as lawyers believe this is a fair and appropriate settlement for both the city and the bondholders.” Green added a committee of the bondholders has advised Wells Fargo N.A. that the proposed settlement amount was acceptable.
Green said the city will not make any payment to the bondholders until the settlement agreement is approved by the courts. In closing, Green said the city council had not conducted a straw vote on a motion to approve the proposed settlement prior to last Thursday’s special meeting. Herbst then asked council members for discussion. After a long pause without discussion, Councilmember Glenn Posusta motioned to accept the term sheet and proposed settlement.
Councilmember Tom Perrault seconded Posusta’s motion, and there was no additional discussion. The resolution was unanimously approved Thursday night.
Jamnik said Monday notices of special closed meetings such as those associated with the FiberNet revenue bond default situation are posted similar to notices of special meetings of the council that are open to the public.  Except in the case of emergencies, the open meeting law specifies three-day posted notice.
“There’s only one type of closed meeting that requires a summary – the closure of a meeting to evaluate the performance of an employee.” said Mark Anfinson, an attorney for the Minnesota Newspaper Association. “The city website is irrelevant in terms of proper meeting notice.” Anfinson said the council isn’t required to use a regular meeting agenda. Special meetings, however, must provide a basic description of the item discussed. “The attorney-client privilege gives [a journalist] the least traction when you are trying to figure out what the hell they are up to. A threat of litigation is not enough. A court of appeals has said that.”
Christopher Mitchell is a national expert who runs MuniNetworks.org, a comprehensive online clearinghouse that provides information about broadband networks such as FiberNet Monticello.
Mitchell is director of the Washington, D.C.-based Telecommunications as Commons Initiative with the Institute for Local Self-Reliance.
Mitchell was asked to Monday morning to provide comment about the FiberNet term sheet and the proposed $5.75 million settlement moved forward by council.
“FiberNet represents a really a unique situation,” he said. “There are very few city-owned networks that are operated by a third party. Most cities that bond for such infrastructure improvements have established municipal utilities that offer the bonds. “Then if there’s difficulty similar to what Monticello has encountered, they’ve typically refinanced, changed their business plan and moved forward. I can’t think of any other city that’s gone back to the bondholders to negotiate.”
According to Mitchell, there are two issues as FiberNet Monticello moves forward.
“The first is the issue money and the city, and where the money is coming from, and how the network is being paid for. The other issue is what happens to the network. If anything happens to FiberNet, you’ll immediately see all of those great deals from Charter and TDS disappear. Customers would go back to paying the same inflated prices that everyone else does.”
Mitchell added it’s not unheard for a competitor to buy out a network even if they don’t plan to use it. “They’d do that just to get the competitor network out of the way,” he said.

Contact Managing Editor Tim Hennagir at tim.hennagir@ecm-inc.com

  • Monticello Resident

    The city has yet to be totally honest with Monticello residents and present the open books for the real costs associated with Fibernet and all of its expenses. $4.5 Million dollars was transferred from city funds to cover costs directly related to Fibernet. This was approved by city council at the end of the year AFTER the funds were already spent. The city finance director said (quote) “The funds have already been spent.” when council person Perrault asked about it. Who authorized those transfers? It was not by council approval. Then who? What is preventing a repeat of this again and again? Dear Council Members…why are you allowing city staff to spoon feed your decision making and WHY have you not requested an audit of the books to figure out who authorized spending $4.5 million dollars for Fibernet without your approval? During the last election Posusta said he would not allow Fibernet to continue losing money on his watch if re-elected. Shame on the voters who have elected the current council who put them in this financial hole with Fibernet. The city residents get what they deserve until they fight back, demand answers and publicly ask for accountability.

  • Kevin Boynton

    This is a bad deal for the citizens that are going to wind up on the hook for future liabilities. Remember that fibernet is not covering operating expenses. Therefore there is nothing that can foretell a future of anything but continued loss from this very badly conceived plan. I have spent my life dealing with credit, mostly as a banker. This should be stopped before another $5.75MM is committed to a dead horse. I wonder if people are going to protect themselves. The council was misled by the city administration. Isn’t it time for the decision makers on the council and particularly the mayor to realize that they need to check their egos at the door and maybe hire a new city administrator with vision and the will to do the right thing? These people are stuck in the mud until they acknowledge the truth.

  • Andy

    Let’s see $5.75 million to buy out the bondholders, another $4.5 million over the past two years to keep FiberNet afloat. A total of $10.25 million taxpayer dollars used in this venture so far. Oh, that’s right according to the Mayor and City Administrator no tax payer dollars will be used for Fibernet, sorry I forgot.

  • Robb

    Look up your mayor’s letter to the editor in September 2007. It’s rather interesting. (Where’s your bioscience or technology park, Clint? Talk about shooting for the stars!) Lucky for you guys, you have a local newspaper that mostly catered to your needs. I implored them to dig deeper into this whole thing. Lucky for you guys, they were more interested in being lapdogs for the project. Otherwise, they might have asked some hard questions like… hrm… I don’t know… maybe they would’ve asked about the real reasons behind why the city declined a $15,000 grant from the Blandin Foundation earlier that same year.

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