Lawsuit Filed Against MN City Over Troubled Telecom Project

After selling $26 million in bonds to finance a broadband network, the City of Monticello has been unable to repay investors; a new lawsuit has now been filed, as expected, and will be resolved if bondholders approve a settlement.

A class-action lawsuit was filed against the City of Monticello this week, and it may represent a step toward resolving claims by investors who lost money from the city’s troubled telecommunications project.

Two law firms filed the suit, which accuses the municipality of violating securities laws when it issued more than $26 million in bonds to finance a broadband communications network.

The lawsuit seeks damages for bondholders—but the claims will be resolved if investors approve a previously proposed $7.75 million settlement. In fact, the terms of the settlement indicated that the lawsuit would be filed.

The Bond Sale

Minneapolis-based Oppenheimer Wolff & Donnelly, LLP, and national firm Schiff Hardin, LLP, filed the suit on behalf of Bloomington resident William Dean and “all similarly-situated persons and entities” who bought certain bonds from the city between 2008 and 2012. Dean bought $50,000 in such bonds, according to the lawsuit.

The city issued the bonds to finance the development of a “fiber to the premises” broadband network to provide cable TV, Internet, and telephone services, and the city owns the infrastructure. The lawsuit alleges that the city “failed to disclose material facts” that indicated the project would be unable to generate enough revenue to make it feasible.

For one thing, the lawsuit states, a telecom company sued the city less than a month before the bonds were issued, and the city did not properly convey to potential investors the fact that litigation might delay the project.

The City of Monticello originally built the network because it was unable to convince the existing communications provider, TDS, to upgrade to faster Internet, according to a 2013 story by Minnesota Public Radio. TDS reportedly sued the city, delaying and nearly derailing the city’s plan. And while the city spent more than a year dealing with that legal issue, TDS installed the upgrades that residents had requested after all, MPR reported.

The city has since struggled to compete with private providers, and the class-action suit alleges that the city program has failed to obtain benchmarks outlined in earlier forecasts. In all, the city has allegedly lost more than $4 million on the project. And in 2012, the city defaulted on its debt payment.

The Proposed Settlement

Last fall, the City of Monticello approved a settlement agreement, the terms of which would require the city to pay $5.75 million to bondholders.

The settlement would ensure that bondholders recoup at least a fraction of their investments, although it would still constitute a big loss for investors.

The agreement indicated that the class-action suit would be filed, and it says that all class-action claims will be resolved if bondholders approve the deal. The agreement would be nullified, however, if bondholders that together own more than 10 percent worth of the bonds opted out of the class action. That essentially means that 90 percent of bondholders must approve the deal.

In the settlement agreement, the city denies all liability and says the claims “lack merit,” but the city believes the deal is in the interest of all parties, given the cost of litigation.

Monticello City Administrator Jeff O'Neill told Twin Cities Business by email that the lawsuit “is consistent with the previously approved proposed settlement agreement.”

“The City has not been sued by any other bondholders, and this class-action proceeding and the settlement agreement have been structured to minimize that possibility—as detailed in the settlement agreement,” he added.