Elizabethtown and Manheim left in dark by streetlight deal
BY TIM MEKEEL, Business Editor
At the time, it seemed like a bright idea.
That's what Elizabethtown and Manheim thought when they had a Lackawanna County company help them buy the streetlights in their towns.
If the boroughs bought the streetlights from PPL, PPL would give the boroughs a big discount on the electricity used by the streetlights.
And by hiring highly touted Municipal Energy Managers to handle the transaction for them, the boroughs figured all would go smoothly.
Now, four or five years later, Elizabethtown and Manheim boroughs still don't own their streetlights.
But they're out nearly $1 million in payments to MEM, court documents show.
"We were all snookered," said Chuck Mummert, mayor of Elizabethtown.
The two local boroughs are among nearly 30 Pennsylvania municipalities that worked with MEM to buy the streetlights in their communities from PPL.
For 11 of the municipalities, the strategy worked like a charm -- the municipalities bought the streetlights, making them privately owned, in PPL's parlance.
And because the electricity for those streetlights now was going into privately owned systems, it qualified for a cheaper rate.
Over time, those savings will offset the six-figure cost of buying the lights.
Thereafter, the lower bills will be welcome in an era of ever-tightening budgets.
But there's a very different group of 18 municipalities, including the two here. They likewise forwarded sizable payments to MEM to buy the streetlights on their behalf.
These municipalities, however, ended up with nothing.
No streetlights. No refund from MEM.
All 18 municipalities are left wondering if they'll ever see a dime of their money.
"It was a big hit," said Bonnie Martin, president of Manheim Borough Council.
The signs are not encouraging.
MEM entered bankruptcy in October, to be liquidated.
Its two owners have been convicted of felony theft for misusing the payment by one of their clients, Bethlehem Township.
Elizabethtown Borough signed its agreement with MEM in February 2009, borrowing $836,000 to fund the project, court records show.
The deal made sense for the borough because it anticipated saving $74,000 annually on the electric bill for the 624 streetlights.
The agreement called for MEM to be well compensated for facilitating the transaction with PPL.
Elizabethtown agreed to pay MEM a $42,000 fee and hire MEM to maintain the lights for $20,000 a year.
To get the process rolling, Elizabethtown Borough paid MEM a "commencement invoice" of $423,500.
But the sale never happened.
MEM blamed PPL, saying it would complain to the state Public Utility Commission. But MEM never filed a complaint with the PUC.
Finally, in January 2011, Elizabethtown filed a complaint against MEM in Lancaster County Court, eventually winning a $933,000 judgment.
The borough also filed a claim against MEM in the defunct company's bankruptcy case for that $423,500.
Mummert, who was a borough councilman four years ago and voted for the deal with MEM, said council thoroughly investigated MEM.
At that time, every one of the company's clients was pleased with the firm.
"We put in a great deal of due diligence, and they came out just glowing. Unfortunately, all that shines is not light," he said.
Mummert was skeptical that Elizabethtown will be able to recover its payment.
"I'm sure we'll see very little out of it in the long run," he said.
What this means for the borough's budget and its taxpayers is unclear.
Asked how losing $423,500 impacts the borough, Borough Manager Roni Ryan would only say:
"We are pursuing collection efforts through the court. I just can't comment any further."
Manheim Borough had the same experience.
It signed an agreement with MEM in March 2008, borrowing $561,600 to fund the project, court records show.
As was Elizabethtown Borough, Manheim Borough was enticed by the promise of hefty savings on its streetlight electric bill.
MEM again would be well-paid for facilitating this transaction.
For arranging the sale of the 473 streetlights, MEM would get a $28,000 fee upfront plus $15,000 a year for maintaining them.
But the purchase never happened. MEM blamed PPL, saying it would complain to the PUC, but never did.
Finally, in April 2011, Manheim Borough filed a complaint against MEM in Lancaster County Court, eventually winning a $668,000 judgment.
Manheim Borough also filed a claim against MEM in the bankruptcy case for $561,600.
Like Elizabethtown officials, Manheim Borough officials were surprised when the MEM deal fell apart.
They believed they had properly probed MEM.
"We did a lot of due diligence on that," said Rob Stoner, the borough's manager at the time. "My administrative assistant spent the best part of 40 hours on it."
Borough officials heard presentations from MEM, talked to MEM's clients and checked with PPL, said councilman John Eshelman.
"We all were pretty confident in the way we researched this," he said.
Eshelman echoed Mummert's view that the odds of recouping any money from MEM are "small."
"It's not going to have a super-detrimental impact on the borough," said Eshelman.
"We've had time to prepare for this. But any time you lose money, it's a serious issue."
Steve Gabriel, the borough's interim manager, said Manheim responded to the loss in two ways.
It rolled the streetlights loan into loans for other capital improvements and refinanced the package at a lower rate and for a longer term.
The borough also has "tried to get as close to the front of the line as possible" as a creditor in the MEM bankruptcy.
"You certainly don't need these types of situations to crop up," said Gabriel.
"It's challenging enough to balance a municipal budget, year after year, and provide the services people demand," he added.
"But we've been able to successfully manage it, as best possible."
A look at MEM's bankruptcy papers shows why the chances of Elizabethtown or Manheim boroughs squeezing any recovery out of MEM appear remote at best.
In its bankruptcy filing, MEM reports $8.0 million in debts (including the claims of Elizabethtown and Manheim boroughs) versus only $2.3 million in assets.
And those assets are less than rock solid.
They include $546,000 that MEM says it's owed by PPL (which PPL disputes), $450,000 MEM says it's owed by former MEM President John P. Kearney and $100,000 it loaned to MEM co-owner Robert J. Kearns.
MEM also lists as assets a 2008 Chevy Suburban with mechanical problems and 156,000 miles, valued at $5,000, and used office equipment, furniture and fixtures, valued at $2,000.
On the other side are the creditors.
Sprinkled amid typical creditors such as an office supply company, a tire store and a service station are those 18 jilted municipalities.
Elizabethtown and Manheim boroughs' claims as creditors total nearly $1 million -- $985,000, to be exact.
The other municipalities to file claims are:
Bethlehem Township ($832,000), Coaldale Borough ($133,000), Coplay Borough ($160,000), Cumru Township ($238,000), Hampden Township ($1.3 million), Jim Thorpe Borough ($297,000), Landsford Borough ($249,000), Mahanoy City Borough ($289,000), Nesquehoning Borough ($404,000), Richland Township ($188,000), South Williamsport Borough ($194,000), Stroudsburg Borough ($510,000), Tamaqua Borough ($532,000), Tremont Borough ($63,000), Walnutport Borough ($187,000) and West Pittston Borough ($348,000).
On top of its financial troubles, Moscow-based MEM is awash in legal troubles.
Its owners, Kearns, 49, of Scranton, and Patrick J. McLaine, 66, of Elmhurst, were convicted in Northampton County Court earlier this month of felony theft.
At issue was their handling of the $832,000 paid to MEM by Bethlehem Township for the purchase of streetlights from PPL. Prosecutors said the co-owners put the payment in their own pockets, rather than use it for its intended purpose.
Sentencing is set for March 15.
Kearns and McLaine also face charges in Cumberland County, where they are accused of a similar streetlight scam involving Hampden Township.
Elizabethtown and Manheim boroughs are not pursuing MEM, Kearns or McLaine criminally.