Fred Osier and Eugene H. Shaver
Burlington Telecom, City of Burlington and Jonathan Leopold
On Appeal from Superior Court, Chittenden Unit, Civil Division, Helen M. Toor, J.
Norman Williams, Robert B. Hemley and David A. Boyd of Gravel & Shea PC, Burlington, for Plaintiffs-Appellants/Cross-Appellees.
Marc B. Heath and Jennifer E. McDonald of Downs Rachlin Martin PLLC, Burlington, for Defendant-Appellee City of Burlington.
Robin Ober Cooley, Ryan B. Gardner and Richard H. Wadhams, Jr. of Pierson Wadhams Quinn Yates & Coffrin, LLP, Burlington, for Defendant-Appellee/Cross-Appellant Leopold.
PRESENT: Reiber, C.J., Dooley, Skoglund, Robinson and Eaton, JJ.
¶ 1. Plaintiff-taxpayers Fred Osier and Eugene H. Shaver sued defendants to recover and restore to the City of Burlington's general fund $16.9 million in cost overruns incurred by the City in connection with the operation of Burlington Telecom (BT). BT is a City-owned enterprise that provides an optical fiber-to-the-home network to Burlington residents and businesses. The trial court granted judgment to defendants City of Burlington and the City's former Chief Administrative Officer (CAO) Jonathan Leopold. Taxpayers appeal, challenging the court's denial of their request for an accounting from the City and its denial of their request to hold Leopold personally liable for the $16.9 million in City funds used for BT. Leopold cross-appeals, offering additional reasons why he should not be held liable.
¶ 2. As set forth below, we conclude that the trial court acted within its discretion in denying taxpayers' request for an accounting. We also agree that Leopold is not personally liable for the $16.9 million in cost overruns. In reaching this conclusion, we adopt the standard identified by the court in its pretrial ruling and hold that any claim against Leopold must include an element of bad faith. That critical element is lacking here. We thus affirm the trial court's decision as to Leopold's liability on this basis.
¶ 3. We begin with an overview of the BT controversy, relying on undisputed facts identified by the trial court in response to a pretrial motion. The Burlington City Charter allows the City to own, operate, and use "cable television, fiber optic cable and other telecommunications within the corporate limits of the city." 1995, No. M-17 (Adj. Sess.), § 23 (codified as amended at 24 V.S.A. App. Ch. 3 § 431(4) (City of Burlington)). The charter requires that any City-owned utility obtain a certificate of public good from the Public Service Board (PSB).
¶ 4. The charter also addresses funding for such projects, stating that:
If the city [elects to build a cable system], 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.
24 V.S.A. App. Ch. 3 § 438(c)(1).
¶ 5. In September 2005, the PSB issued a certificate of public good (CPG). Condition 60 of the CPG prohibited the use of public money to pay for BT's "build-out" or construction costs. Condition 60 specifically states:
The City shall make payments on behalf of [BT's build-out] only when and to the extent that BT 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 [build-out] activities.
¶ 6. Since 2007, BT has been unable to meet its construction costs and other expenses from operating revenues. Beginning in January 2007, it withdrew more money from the City's pooled cash account than it paid in. The pooled cash account is the equivalent of a common checking account maintained for the use of all City departments. By March 2007, BT had run a deficit in the account for more than sixty days in violation of Condition 60. According to defendants, BT repaid its initial overdraft in August 2007 when it obtained financing from CitiCapital. By November 2007, however, BT was again drawing more money out of the pooled cash account than it put in. By January 2008, BT was again in violation of Condition 60 because the deficit had lasted more than sixty days. The deficit continued and as of September 2012, it was approximately $16.9 million.
¶ 7. Defendant Jonathan Leopold was the City's CAO from April 2006 until July 1, 2011. As CAO, Leopold had direct supervisory authority over BT's finances and the use of the pooled cash account. In his deposition, Leopold stated that he was unaware of Condition 60 and the restriction on the account's use until November 2008, when an attorney for the City informed him about the condition. Leopold characterized his decision to allow BT to run a large deficit in violation of the charter amendments and the CPG as a pragmatic decision to borrow money in the short-term until refinancing was in place. He stated that refinancing became unavailable in 2008 when credit markets entered a state of crisis.
¶ 8. The trial court found no evidence that any funds withdrawn from the pooled cash account were used for any purpose other than BT's construction costs and other normal business expenses. There was no evidence-and no allegation whatsoever-of corruption or personal benefit to Leopold or any other City employee. Taxpayers alleged only that the use of the City funds was unauthorized and occurred in obvious violation of the charter and the CPG.
II. Pre-Trial Rulings
¶ 9. Plaintiff-taxpayers sued defendants in December 2009. In their fourth amended complaint, taxpayers raised a claim against the City and Leopold seeking "recovery of taxpayer funds paid to [BT] in violation of law." Taxpayers also raised claims of fraud and deceit, and breach of duty of faithful performance, against Leopold. In addition to equitable relief with respect to their first claim, taxpayers sought a declaratory judgment that Leopold breached his duty of faithful performance and his fiduciary duty; an accounting concerning, among other things, payments made to BT and the amount that BT owed to the City; and an order permanently enjoining the City from ...