CHICAGO - A proposed settlement between Monticello, Minn., and investors holding its defaulted $26.4 million of telecommunication revenue bonds is advancing with the filing of a new class action bondholder lawsuit that is considered part of the settlement process.
Shiff Hardin LLP and Oppenheimer Wolff & Donnelly LLP filed the class action lawsuit in the U.S. District Court for the District of Minnesota earlier this month. It accuses the city of state and federal securities violations by allegedly making fraudulent material misrepresentations and omissions regarding the feasibility of the project - a high speed fiber optics broadband network.
The lawsuit takes the city to task for failing to disclose ahead of the sale in 2008 the likelihood that ongoing litigation filed by a telephone company could negatively impact construction of the system and cut into project revenues needed to repay the debt.
The complaint was expected as part of a proposed settlement struck last year that would provide $7.75 million in the form of a $5.75 million cash payment from the city and a distribution of $2 million in trust funds currently held under an indenture. The terms were struck last fall.
Bondholders now must approve the settlement. It could be void if holders with more than 10 % reject participation in the class so holders with 90 % of the principal must sign off.
"The settlement will resolve all claims related to the offering and sale of the Bonds issued by the city. If approved, the settlement will conclude the class action," a statement from the bondholders' lawyer read.
The city has not made debt service payments on the bonds since June 2012. Bondholders threatened litigation last year if no settlement were be reached. Though the city denied the claims, the parties entered negotiations with both sides seeking to avoid potentially expensive and lengthy litigation.
The city's fiber optic broadband communications network for cable television, internet access, and telephone services was once envisioned as a model for other local governments. However, the system failed to generate enough revenue to service the tax-exempt revenue bonds issued in 2008 and the city last year stopped subsidizing debt service, leading to a default.
The settlement would free the system of its debt and allow it to better compete with other providers. Private companies lowered their prices in response to the new competition, hurting the city's ability to lure and keep customers.
With the system's revenues falling short, the trustee had previously drawn from various bond reserves to cover debt service payments. Between July 2011 and June 2012, the city supplemented debt service by loaning the project money generated by its liquor sales operations.
The bonds are special, limited obligations of the city with principal and interest payable solely from the system's operating revenues after operational and maintenance expenses.