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City sues BVU for purported $6.5M share of OptiNet sale proceeds

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BRISTOL, Va. — The city of Bristol Virginia is suing BVU Authority, claiming it is owed $6.5 million from the 2018 sale of BVU’s former OptiNet division.

The civil action was filed Friday in Bristol Virginia Circuit Court by Washington, D.C.-based attorney Adrien C. Pickard of the Blank Rome firm, on behalf of the city.

This is the latest step in a long-simmering disagreement between leaders of the cash-strapped city and its utilities provider over what, if anything, the city is owed since BVU was a division of the city for the first nine years the OptiNet telecommunications division was in operation.

BVU Authority completed the $50 million sale on Aug. 2, 2018.

The complaint claims BVU “owes the city millions of dollars in proceeds” from the sale “but has refused to pay a dime.” It claims breach of contract, unjust enrichment and reformation of contract. It seeks a jury trial, $6.5 million in compensatory damages plus other relief and costs.

A city-requested April 2019 report by a BVU-retained audit firm claimed BVU sustained a $2.9 million net loss from the deal, once all expenses were paid. At that time, City Manager Randy Eads said the report — which was not a comprehensive audit of the transaction — represented “the beginning” of discussions between the city and authority.

Contacted Friday afternoon, BVU President and CEO Don Bowman said they just received a copy of the complaint, and the authority’s attorney was reviewing it.

The complaint hinges on a transition agreement approved by both the City Council and BVU board in November 2009 and then reapproved in 2016 — because BVU became an independent public authority in July 2010, after the original approval. The votes closely followed its announcement of the proposed sale of the cable TV, telephone and Internet division on Feb. 5, 2016.

The transition agreement reads in part, “In the event that the OptiNet division is sold to a third party, the net proceeds after repayment of OptiNet debt and the equity investment shall be split evenly between the city and the authority.”

“Years after the parties executed that agreement, and after the BVU had entered into an agreement to sell the OptiNet division, the BVU retroactively reinstated millions of dollars of internal OptiNet debt supposedly owed to the BVU’s own electric division,” according to the complaint. “The reinstituted debt had been extinguished more than a decade earlier and before the parties made their agreement.”

That action amounted to BVU “essentially keeping all the proceeds for itself” which “deprived the city and its taxpayers of millions of bargained-for dollars,” according to the complaint.

“When the city and BVU made their agreement, they understood there was no internal debt owed from the OptiNet division to the electric division; they made their agreement on that basis,” according to the complaint.

At the center of the dispute is the $13.7 million of OptiNet sale proceeds BVU used to repay internal loans its electric division made to the OptiNet division prior to 2006. Questions about the loan activity surfaced in 2016, when the Virginia Auditor of Public Accounts reviewed the authority’s books in the wake of a three-year federal corruption investigation.

The state audit claimed the debt had not been repaid but was incorrectly written off when state law governing cross subsidization was changed. Recommendation No. 13 in the state report was for BVU to “re-establish an interfund receivable/payable, including foregone interest, between the electric and OptiNet divisions” for the $13.7 million.

However, the complaint claims BVU used the “recommendation to zero out its anticipated liability to the city and keeps 100% of the net proceeds for itself.” It further claims BVU approved a promissory note for $13.7 million in June 2017, but subsequently “made no effort to pay down or reduce the debt.”

It claims the net proceeds were “approximately $12 million” and that BVU’s actions reduced the city’s share from “$6 million to zero.”

An April 2019 report by BVU’s audit firm, Blackburn, Childers & Steagall, claimed the sale generated a $2.9 million net loss for BVU once all obligations were met.

The report claimed at that time BVU was still obligated to pay $1.76 million in legal and accounting service fees and $1.34 million to repay internal debt for pole attachment fees.

The 2019 report showed BVU initially received $48 million after a negotiated amendment allowed the buyer to retain $2 million cash. Beyond that it shows:

» $22.58 million was used to pay off OptiNet bond debt.

» $13.7 million plus $794,000 for interest was used to repay an internal electric division loan.

» $5 million was a promissory note to the Virginia Tobacco Region Revitalization Commission.

» $3.76 million was repaid to the Tobacco Commission — part of which went to the Cumberland Plateau Planning District Commission.

» $1.23 million was repaid to the federal Economic Development Administration.

» $1 million was placed in escrow for potential future claims. | 276-645-2532 | Twitter: @DMcGeeBHC 


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Related to this story

The Virginia Auditor of Public Accounts first flagged BVU’s erroneous handling of an internal loan in a June 2016 letter. Bristol, Virginia is now suing BVU for lost revenue as a result.

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