Wisconsin City Defaults on $24M Bond

LAFAYETTE, Ind. (CN) - Menasha, Wisc., claimed it had a business plan for a steam utility plant, but the city "had no plan and never intended to make good on its promises," and cheated bondholders of $24 million, an insurer and bank say in a federal class action. Local press reports say it's the first municipal bond default in Wisconsin history.

Lafayette Life Insurance, American Bank and others claims that Menasha Utilities proposed turning an old power plant into a steam plant for local paper mills, but allowed construction funds to be wasted and failed to secure revenue as promised.

"These notes are past due and in default," the complaint states.

The class, which includes Mercy Ridge Inc. and numerous investors, retirement funds, unions, church groups and nonprofit organizations, say they bought "bond anticipated notes" from Menasha in 2005 and 2006 for the plant makeover.

They claim the 2005 bond notes were sold under the pretense that the project would cost $12.5 million and would be supported by Menasha's paper mills, "which are vital to Menasha's survival," and were the "largest employers and taxpayers" in the city at the time.

The investors say Menasha promised to form a redemption fund to assure that the bonds would be repaid with interest. Menasha claimed to have four customers for the Steam Utility plant, which would place it at maximum output, according to the complaint.

The 2005 bondholders were told they would have "first pledge" on repayment and that the city would leverage taxes from other utilities to pay on the bonds if it did not see the expected profits, the complaint states.

But the class claims that Menasha spent the first $12.5 million quickly on unnecessary work, and later issued $11 million in general obligation notes, which it unlawfully repaid first.

The class claims that by March of 2006 Menasha had "issued almost $40 million in securities obligations," and had not even completed the steam distribution system to its largest customer, SCA Tissue.

Investors say Menasha failed to mention in its 2006 business plan that it had been in litigation with PCI Management over the mismanagement of construction funds. Menasha offered to settle a $7.6 million counterclaim for a mere $860,000, the complaint states.

The class claims that Menasha never put money into the redemption fund, as promised, and spent $1 million elsewhere and to pay interest on the general obligation notes.

Menasha also misrepresented its agreement with customers, the class claims. The plaintiffs say they were not aware that the companies were not exclusively tied to the contracts and were allowed use other steam sources. The class claims it was told that Menasha Steam Utility customers would be required to purchase coal, when in fact they did not pay for any materials. The class says it was "virtually impossible for the Steam Utility to operate at cost, let alone a profit."

Menasha promised not to sell, lease or close the plant, though it shut the plant down in July this year, the complaint states.

The class adds that Menasha claimed that no additional environmental permits would be needed, but the EPA and Wisconsin Department of Natural Resources cited the city for not getting authorization for the "technical upgrades."

Menasha has paid less than $2 million toward the $24 million default, according to press reports. Wisconsin media have called it the first municipal default in Wisconsin history, which has caused the city's credit rating to drop significantly.

The class seeks compensatory damages for federal securities fraud and state violations, breach of contract and fiduciary duties, common law fraud, negligent misrepresentation, unjust enrichment and business theft.

Lead counsel is Michael Wukmer with Ice Miller in Indianapolis.

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