A lawsuit the city of Memphis filed Monday adds a new coda to the story of Memphis Networx, a failed telecommunications spin-off of Memphis Light, Gas and Water Division into which about $28 million of public money was invested.
The city has filed a breach of contract suit in Shelby County Chancery Court against Zayo Bandwidth, according to The Daily News Online, www.memphisdailynews.com. Zayo’s holding company, Colorado-based Communications Infrastructure Investments, bought Memphis Networx in 2007 for $11.5 million.
The sale price was so much lower than the total investment into the firm over about eight years that it caused members of the Memphis City Council in 2007 to look into the possibility of blocking the sale. The council determined it did not have the power to keep the sale from happening, though the body did demand details of the venture to figure out what happened to the public investment.
Now, more than a year after the sale was announced, another wrinkle in the story has emerged via the city’s lawsuit.
Wrinkle in time
A franchise agreement between Memphis Networx and the city in early 2001 allowed the telecom venture to use city streets and rights of way to build, operate and maintain a sprawling fiber optics system. In exchange, Memphis Networx was supposed to pay the city a regular franchise fee for using the rights of way, the city argues.
Memphis Networx built an 80-mile telecom system within the city’s rights of way after the franchise agreement was completed. But the new suit claims Memphis Networx “has been in continuous default since 2002 of the franchise agreement” and did not fix the problem after being given the opportunity to do so.
“Memphis Networx refused to honor its agreement with the city and failed to pay franchise agreement compensation owed under the franchise agreement for any year since the inception of the franchise agreement,” the suit reads.
City Council attorney Allan Wade, one of the attorneys representing the city in the lawsuit, said how much Memphis Networx should have paid is not yet known.
Zayo’s chief financial officer, Ken desGarennes, told The Daily News he was aware of the complaint but declined to comment on it.
One local businessman formerly involved with Memphis Networx told The Daily News that if the buyers who scooped up the venture in 2007 had known or agreed with the franchise fee issue, the sale price probably would have been lower.
The timing of Memphis Networx’s sale, meanwhile, occurred against a backdrop of negative news about the company in 2007, some of which council members – who oversaw the infusion of public money into the venture – were not even aware of at the time.
A consultant’s valuation of Memphis Networx in 2005, for example, found the telecom venture had overvalued itself and was aggressively over-budgeting. The lawsuit filed this week claims the company also inappropriately used the city’s telecommunications system for its own gain.
“The city has constructed at its sole expense over 20 miles of a telecommunications system,” the suit reads. “The city’s system is connected to Networx’s system because Networx had not extended its system into underserved areas of the city where the city had deployed fire and police services ...
“Based on information and belief, Memphis Networx has, without consent or authorization from the city, spliced into the city’s system to provide services to its customers and without just compensation to the city for such unauthorized use.”
The lawsuit also claims the city is entitled to buy Memphis Networx’s telecommunications system as a result of the company’s alleged defaults of its franchise agreement.
Memphis Networx began in 1999 with backing from MLGW and a group of prominent Memphis businessmen.