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Citibank N.A. v. City of Burlington

United States District Court, Second Circuit

December 10, 2013

Citibank N.A., Plaintiff,
City of Burlington and McNeil, Leddy & Sheahan, P.C., Defendants.



This action arises out of a Master State and Municipal Lease/Purchase Agreement ("Master Lease Agreement" or "MLA") between the City of Burlington and Citibank as the purported assignee of CitiCapital Municipal Finance. The MLA is a non-appropriation lease-purchase agreement regarding fiber optic telecommunications equipment ("the Equipment") that was executed in 2007. Burlington declined to appropriate funds to pay its obligations under the MLA in June 2010. In response, Citibank filed a fifteen-count Complaint, ECF No. 1, against Burlington and McNeil, Leddy & Sheahan ("McNeil Leddy"), the law firm that served as counsel to the city in the negotiation of the MLA. There is only one surviving count against McNeil Leddy: Count XIV claims that McNeil Leddy is liable for negligent misrepresentation for providing an Opinion Letter to Citibank on behalf of Burlington giving assurances as to the City's ability to make scheduled lease payments.

There are several motions currently before the Court. McNeil Leddy has filed two motions for summary judgment asking the Court to dismiss Count XIV. In its Opposition to the motions for summary judgment, Citibank filed supplemental statements of undisputed facts, which McNeil Leddy has moved to strike. Citibank has also filed a motion for leave to amend its complaint against McNeil Leddy in which it seeks to bring three new claims for gross negligent misrepresentation, fraudulent inducement, and fraudulent nondisclosure, and requests punitive damages. Finally, McNeil Leddy has filed a motion in limine to exclude the testimony of Citibank's expert witness, Leonard S. Rice, Esq. For the reasons stated below, the Court hereby DENIES McNeil Leddy's motions for summary judgment as to Count XIV, ECF Nos. 232 and 233; GRANTS McNeil Leddy's motion to strike, ECF No. 254; DENIES Citibank's motion for leave to amend the complaint, ECF No. 238; and DENIES McNeil Leddy's motion in limine to exclude expert testimony, ECF No. 231.


I. Master Lease Agreement

Burlington voters approved the construction of a city-wide telecommunications network, which eventually became known as Burlington Telecom ("BT"), in 1997. BT's construction was planned to occur in three phases. Phase I would establish a non-commercial network to provide telecommunications services to municipal offices and schools, Phase II would extend BT services to private customers already within the reach of the Phase I network, and Phase III would build out the commercial network to every residence and business in the City. BT was initially funded through two lease agreements with Koch Financial, which provided approximately $22.6 million for the project.

Burlington sought funds to continue Phase III of the build-out plan in 2007. A Vermont organization, Municipal Leasing Consultants ("MLC") won the bid and assigned its rights and obligations under the future agreement to CitiCapital Municipal Finance ("CMF") to actually provide the funds. On August 9, 2007, Burlington and MLC executed the Master Lease Agreement. The Master Lease Agreement provided approximately $11.5 million for the purchase of new equipment as part of BT's Phase III build-out as well as an additional $22 million that Burlington used to buy out Koch Financial and re-lease the existing equipment. The total financing commitment under the MLA was $33.5 million.

Burlington Telecom is subject to numerous state and local laws, including restrictions placed on the City by Vermont legislation, Burlington's City Charter, and Burlington Telecom's Certificate of Public Good ("CPG"). Municipalities are authorized to enter into municipal lease-purchase agreements by Vt. Stat. Ann. tit. 24, § 1789(a), which provides:

A municipality... may acquire personal property, fixtures, technology and intellectual property by means of leases, lease-purchase agreements... wherein payment and performance on the part of the municipality is conditioned expressly upon the annual approval by the municipality of an appropriation sufficient to pay when next due rents, charges, and other payments accruing under such leases and agreements.

Vt. Stat. Ann. tit. 24, § 1789(a). The MLA provided that the City could decline to appropriate (thereby terminating the Lease Agreement) for any reason. MLA ¶ 7, ECF No. 1-3.

Burlington's City Charter authorizes the City to provide telecommunications services, provided that it obtains regulatory approval from the Public Service Board ("PSB").[1] See Vt. Stat. Ann. tit. 24A, § 3-449. The City must obtain a Certificate of Public Good ("CPG") from the PSB before selling telecommunications or cable television services. Vt. Stat. Ann. tit. 24A, § 3-431(4). If the City exercises such authority, the Public Service Board,

in considering any application for a certificate of public good, shall ensure that any and all losses from these businesses, and, in the event these businesses are abandoned or curtailed, any and all costs associated with investment in cable television, fiber optic, and telecommunications network and telecommunications business-related facilities, are borne by the investors in such business, and in no event are borne by the city's taxpayers, the state of Vermont, or are recovered in rates from electric ratepayers.

Vt. Stat. Ann. tit. 24A, § 3-438(c)(1) (emphasis added).

Pursuant to the City Charter, Burlington sought and was granted a CPG from the PSB for BT on September 13, 2005. Notably, the CPG included a condition which read:

The City shall make payments on behalf of Phase III only when and to the extent that Phase III has cash reserves, revenues receivable, or other payments receivable that, collectively, equal or exceed the sum of the payments to be made by the City plus the balance of any other current payments owed to the City. BT may participate in the City's pooled cash management system provided, however, that BT shall 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. The City shall obtain Board approval prior to appropriating any funds other than as described above in the support of BT's Phase III activities.

CPG, ¶ 60, ECF No. 14-7.

II. August 17 Opinion Letter

McNeil Leddy served as legal counsel to the City of Burlington during the negotiation of the MLA. Because of the legal constraints on City funds introduced above, Citibank requested that Burlington's counsel provide an Opinion Letter regarding the City's ability to pay its obligations under the lease agreement. Citibank specifically sought these assurances because of the Burlington City Charter provision disallowing the use of taxpayer revenues to cover Burlington Telecom losses. See Vt. Stat. Ann. tit. 24A, § 3-438(c)(1). McNeil Leddy issued the requested Opinion Letter on August 17, 2007. The Opinion Letter was based on "opinions, documents and matters of law" that McNeil Leddy deemed necessary for review. August 17 Opinion Letter, ECF No. 238-3. The Opinion Letter stated in relevant part:

Lessee has the requisite power and authority to lease the Equipment with an option to purchase and to execute and deliver the Agreement and the Schedule and to perform its obligations under the Agreement and the Schedule. As required by the City charter and the Telecommunications Authority Act above referenced the City has received a Certificate of Public Good from the Vermont Public Service Board ("PSB") to provide telecommunications services. The order of the PSB is consistent with the City's enabling authority (charter Section 438(c)(1). 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 telecommunications system 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.

Id. ¶ 3. The Opinion Letter does not address Condition 60 of the CPG.

In answers to Interrogatory questions filed December 20, 2012, McNeil Leddy stated that the "opinions, documents, and matters of law" reviewed in preparation for the Opinion Letter included the Burlington City Charter, Vermont Telecommunications Authority legislation, Vermont municipal lease financing legislation, and the Lease documents; the list did not include the CPG. ECF No. 244-1. McNeil Leddy also affirmatively indicated that it had not reviewed the CPG in preparing the Opinion Letter in the following Interrogatory response:

If You contend that You informed Citibank of the requirements of the CPG, and in particular Condition 60 of the CPG, before the Agreement was executed, please state all facts which support that contention, and ...

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