The Trial: THA vs CIT (Part 2)
It’s over. This phase at least. Six days in the Courtroom, and now the attorneys on both sides have a scheduling order to give to the Court a number of submissions, the first due a week from now, 45 days from now, then another 30 days after that with the possibility one attorney or the other may request an extension.
This case isn’t like the City of Harrisburg’s Federal Municipal Bankruptcy hearing, which was one sitting of about 5 hours with a verdict at the end of the day.
Also, unlike the City’s bankruptcy hearings, hardly anyone attended this trial. The room wasn’t filled with a slew of attorneys although Andrew Giorgione’s attorney sat through the entire thing. An attorney from PA Department of Community & Economic Development popped in and out a couple of times. Sometimes there would be a random lawyer-looking person who’d come in on a random day. Sit. Observe. Take some notes and leave.
Unlike the City’s Chapter 9 hearing, the media didn’t swarm the Courtroom. There was no “overflow room for the press” necessary. No national media outlets. No reporters from the AP or any State publications. On behalf of Roxbury News, I tweeted the proceedings and James Roxbury sat there with me almost the entire time taking notes and making connections to videos and information he’s had for years in his tremendous archives. The Patriot News had reporter Matt Miller there except for the day he was sick then Eric Veronikis came in his stead, although neither seemed terribly interested in the proceedings. Mr. Miller even nodded off a few times as admittedly the days grew long, especially after lunch. Most significant and perplexing, though, is that Mr. Miller never did take advantage of the permission the Judge gave media to sit in the juror’s box so we could see the exhibits—the emails, contracts, and documents, which were projected on computer screens only visible to the participants in the case, not the audience. Being a bench trial, all the juror seats were empty alongside of the Court in between the Judge, the witness stand, and the attorneys at their tables. Some days I sat there all by myself in the juror’s box, an ignored sideline voyeur of the action taking place in front of me.
There were no citizens in the Courtrom, no citizens there for citizens’ sake. Familiar residents Bill Cluck member of the current The Harrisburg Authority (THA) Board and Shannon Williams, THA Executive Director attended at various points in time on various days, but it’s true they were there for professional reasons as well as being interested citizens. Myself is included in having a dual role there. A job to do, but an interested citizen nonetheless. However, it’s fair to say it is quite difficult to devote 9:00am to 4:30pm day after day. Tis not feasible for the typical citizen.
Yet this is a citizens’ story. For the first time, we the citizens of the City of Harrisburg are officially hearing parts of the real story about how the Incinerator mess got as messy as it is. The mess which the citizens of Harrisburg are increasingly feeling the pressure to clean up.
The Courtroom may not have been filled with citizens or media, but it was filled with details, information, names, timelines, emails, contracts, and accounts of what happened in 2005 and 2006 which resulted in this unusual $25 million financing deal.
What’s so unusual about it? Well, by the end of Day 6 after 10 witnesses, it’s unusualness became more evident. In 2005, the Barlow Projects, Inc. Incinerator retrofit was months behind and out of money. Barlow was in financial shambles, on the verge of bankruptcy. In the Fall of 2005, The Harrisburg Authority and Mayor Stephen Reed were well aware of the grave situation. Unpaid contractors were walking off the job, Barlow had threats of lawsuits, the Incinerator was only partially finished, and Barlow was out of the money THA had given it by way of the City and Dauphin County being guarantors on the 2003 retrofit bonds.
No money, no time, and the Incinerator still unfinished carrying approximately $200 million of debt at this juncture in 2005. Barlow needed $25 million more to finish the project. Barlow was broke and utterly unable to get financing. The Harrisburg Authority could not legally guarantee any borrowing of Barlow’s. The City of Harrisburg, that is, City Council, as well as Dauphin County had made it clear after the 2003 retrofit bonds, they would not be guaranteeing anymore debt on that Incinerator.
Thus, traditional lending was off the table. When CIT was called upon to help, they decided that very quickly. In no uncertain terms, CIT told Barlow and THA it would not lend anyone any money to complete the Incinerator. No loan.
So based on the desperation of Barlow, THA, and Mayor Reed, a plan was developed. CIT determined for the deal to happen, Barlow’s patented technology license would be sold to CIT for $25 million. THA would then pay CIT $25 million to be able to use that technology at the Incinerator.
It’s called a Technology Sub-Licensing Agreement, and quite suddenly with reinstatement and amendment, this one became worth $25 million, the exact amount Barlow said it needed to finish the Incinerator retrofit project.
Barlow and THA had previously signed a Technology Sub-Licensing Agreement, which stated that THA would pay Barlow $0.50/ton of trash burned at the facility for a duration of 20 years. It’s estimated that the Harrisburg Incinerator burns 800 tons a day at maximum capacity, which comes out to be around $2.9 million.
At one point during Barlow and THA’s relationship, THA was credited with $2.7 million towards this original technology sub-licensing agreement. In many people’s eyes, including then-THA Executive Director Tom Mealy, this meant that THA had already paid in full for the right to use the Barlow-patented technology at the Incinerator.
But as witness after witness articulated in one form or another, desperate times call for desperate measures. Barlow needed $25 million to complete the project THA had already paid the company to do. THA needed the Incinerator finished and had no more money to give. Willing to collaborate, CIT had $25 million, yet would only do a deal on their terms. In a swift move, the conditions were stipulated:
- The deal would not be considered a loan. It would be an asset sale, and the asset would be the technology license.
- CIT would not deal with Barlow but rather only with THA.
- THA would pay the $25 million licensing fee in quarterly payments of $500,000 at 7% interest.
- Come “hell or high water,” THA would make the payments. No matter if the Incinerator project ever got complete or even got complete within Barlow’s assurance of 4 months from the deal, THA owed the money and would not miss payments for any reason. CIT would take no construction risk in this deal.
- THA’s payments would be qualified as “operating expenses,” thereby obligating those payments to CIT before all and any Incinerator debt. First money in, last money out, a common phrase in the Courtroom.
Daniel Lispi, who was a former Reed Administration Director of Special Projects and then hired as a special consultant to THA on the retrofit project, said on the stand, “I don’t think the terms of the loan were particularly attractive.” Later he said, “Our position as a team was we weren’t happy with everything with the transaction, but there was the overarching need to finish the Incinerator.”
“Did Mayor Reed direct you to close this transaction?” Lispi was asked.
“I believe the direction was to proceed to go forward to close this transaction, yes.”
Looking perturbed and inconvenienced for being so questioned, Lispi is considered one of the major promoters of this unusual financing deal. In fact, there are email exchanges between Lispi and THA solicitor Bruce Foreman in which Foreman is expressing his concern about the terms of the CIT deal. Lispi placates him by saying even if Barlow fails, THA will just refinance and take CIT out, and “eliminate any potential claims by bondholders that they were subordinated in contravention of their rights.”
Basically Lispi told Foreman, don’t worry. There’s a plan. A perfectly precise plan.
The perfect plan was that a) THA would get the $25 million and treat it as a “bridge loan;” b) Barlow would finish the project by March of 2006, the Incinerator would start operating and generating revenue; c) THA could then get traditional financing, bury the $25 million in a refinancing, end all ties with CIT, and this whole thing would be like a bad dream.
As insurance to this perfect plan, THA entered into a side agreement with Barlow specifying that Barlow would make the CIT payments, not THA. The first CIT payment would be due March 31, 2006, and Barlow contractually vowed to make that payment and all others thereafter with the implication this would occur until THA’s refinancing could take place.
As a matter fact, the ultimate plan was that Barlow was going to purchase the Incinerator from THA once the retrofit was complete. The purchase price on paper was $260 million. CIT would be the arranger and underwriter of the purchase deal for a fee of $4 million or thereabouts. In Court, CIT’s presentation packet of the deal was put on display, much to the chagrin of ex-CIT Senior Managing Director Dan Morash who was on the stand at the time.
The perfect plan.
While there was worry in the air, everything was figured and aligned as it should go with risks addressed as inconceivable. THA solicitor and Executive Director both testified they each told Lispi and THA special counsel Andrew Giorgione they were skeptical about Barlow’s ability to perform. “We were overruled on that,” Foreman maintained.
In order to alleviate CIT’s concern about any possible bond defaults that would tip bondholders off to the CIT insistence of first money in, last money out, Giorgione wrote to CIT’s attorney on January 3, 2006, ”I think the risk of default on the bonds and hence, operating expenses is so remote given the City and County’s unlimited power of taxation, that CIT’s risk is negligible.”
If there was one name that came up over and over by witness after witness, it was Andy Giorgione. Both THA witnesses and CIT witnesses named him as the point person. He was who everyone dealt with. He was the one who assured THA the CIT’s terms were manageable. He was the one who gave CIT the representations and warranties the finance company needed for the comfort to go forth in the transaction. He was the one who convinced Dauphin County the arrangement could be done. He was the one who asserted that involving City Council or the bondholders would hinder the expediency of the deal. He was the one who declared the public would “crucify” them if the media found out.
Yet Giorgione wasn’t alone in pushing the deal through. In an email dated December 28, 2005, Dan Lispi writes, “The advantage [to the CIT deal] is we get the money quickly to complete the plant without having to go through the governmental approvals which will take months of bloody war.”
CIT did its part in pushing by coming up with the creative financing deal in the first place and nodding satisfaction each time Giorgione said all was taken care of on his end. CIT didn’t necessarily double-check or hire outside PA counsel to verify the legalities of the situation.
Mayor Reed manipulated the City’s Consent by presenting the authority of himself, the City Solicitor, and the City Controller as sufficient, which it seems it wasn’t. Not only that, but Reed allegedly pushed the deal through by telling everyone what to do to get it done by any means necessary. THA Solicitor Bruce Foreman testified he attended a meeting in the Mayor’s Office, which included all three members of The Harrisburg Authority at the time—John Keller, Fred Clark, and Leonard House. A breach of the PA Sunshine Act perhaps.
The THA Board did its part by passing the Resolution to approve the CIT deal. Solicitor Bruce Foreman did his part by presenting the formal legal opinion CIT required for its pre-closing records. THA Executive Director Tom Mealy signed when and where he was asked to sign, and Dauphin County pretty much turned a blind eye despite witness testimony that County Commissioners were aware of some if not all of what was going on. While on the stand Dauphin County special counsel during the CIT/THA financing, Mette, Evans, and Woodside attorney Tom Smida stated, “I did look down the wrong path.” He then defended himself by saying more than once, “I was told repeatedly that, ‘We are going to do this project.’”
On the stand, Dan Lispi said, “No one stood up at a meeting to say, ‘I don’t think you should do this.”
To be sure, this particular case will not pass judgment on those who never stood up to say, “stop.” There will be no judgment of the individuals who perpetuated the CIT financing, nor were there questions directed as to fees or personal gain. That’s not what Federal Judge John E. Jones III is being asked to form an opinion on. He’s merely asked to either void the contract or at least put CIT’s $25 million in line with all the other debt the Harrisburg Incinerator owes.
As Judge Jones said on the last day right before we all left the Courtroom, “It’s a tough case.”
While that’s certain, it’s an even tougher story for the citizens of Harrisburg. The Judge’s verdict will only reach so far, and the people of the City will still be left to seek answers, justice, and reparations for the deals done in their name. The solace right now, though, is that the truth is just only starting to come out.
See Part I: The Trial: THA vs CIT (Part 1)
See the Ruling: The Judge Rules on the The Trial: THA vs CIT