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Judge orders Front Range Internet into receivership

FORT COLLINS — A Larimer County District Court judge Wednesday approved placing Fort Collins-based Front Range Internet Inc. into immediate receivership.

The 27-year-old internet service provider was among the first to get Northern Colorado connected but has faced a flurry of legal challenges after its announcement in September that it would shut down, including from companies concerned about disruption to their operations.

Woodward Inc. (Nasdaq: WWD), a Fort Collins-based manufacturer of energy-control systems, and Katmai Energy LLC, which is a common shareholder in FRII and owns the building at 3350 Eastbrook Drive in Fort Collins in which FRII operates under a long-term lease, on Sept. 30 filed for a temporary restraining order, alleging that “erratic behavior” by FRII’s owners had the potential to create costly disruptions in service for Woodward customers.

That temporary restraining order was granted. Then, on Oct. 7, Boulder-based Zayo Group LLC filed a motion to intervene and sought its own temporary restraining order, expressing similar concerns.

But the legal battle escalated on Monday, when Woodward and Katmai sought dissolution of FRII, appointment of a receiver and expansion of the temporary restraining order that Judge Stephen Jouard had issued Sept. 30 against FRII, its chairman Halton Peters, and his brother, attorney Howard Peters.

Acting on those motions, Judge Gregory Lammons on Wednesday appointed Englewood-based Cordes and Co. as receiver for FRII.

“Plaintiff has demonstrated a reasonable probability of success on the merits, there is no plain, speedy and adequate remedy at law, the appointment of a receiver will not disserve the public interest, the balance of the equities favors the appointment of a receiver and the appointment of a receiver will protect the assets of FRII,” Lammons said in his order.

Lammons’ order prohibited the Peters brothers and FRII employees from “removing, or allowing to be removed, any equipment or property at the FRII facility which is not the subject of a perfected security interest or creditor claims by third parties, that would cause any cessation or interference in FRII’s hosting of Woodward’s virtual servers or providing data storage in the FRII datacenter,” and from “removing any of Woodward’s property, including its virtual servers and computer data until this matter can be set for a preliminary injunction or other appropriate relief is entered.”

In its filing, Katmai said the court had relayed details of the restraining order to Halton Peters by telephone on Sept. 30 “because Halton and Howard were attempting to remove, using a crane and flatbed truck, an industrial generator that is necessary to facilitate the supply of electrical power to FRII. The fire marshal also intervened because Halton and Howard lacked permits to remove the generator. Had defendants succeeded in removing the generator, FRII would have gone ‘dark’ and Woodward would not have been the only FRII customer harmed.”

Acting on the initial Woodward and Katmai complaints, Jouard had set a hearing for Oct. 19 in Larimer County District Court on a preliminary injunction against FRII, and the temporary restraining order was extended until that date.

But in the complaint filed Monday, the plaintiffs warned the court that Oct. 19 could be “too late” because the Peters brothers’ alleged actions, “including draining FRII’s bank accounts so the company cannot pay delinquent bills for key services, terminating key employees without advance notice, interfering with datacenter equipment to sabotage pending company deals,  attempting to remove FRII’s generators without permits or advance warning, (and) directing employees to transfer FRII’s customer lists and equipment outside the company threaten irreparable harm to all of FRII’s customers, creditors and shareholders. This is because defendants’ actions threaten to cause the company to go ‘dark’ prematurely, thereby destroying FRII’s residual value and creating extensive legal liability for the company.”

If the court were to decide on Oct. 19 that a receivership was necessary, the new complaint stated, “it may be too late” because “Halton and Howard Peters have not ceased their efforts to dissipate company assets” since the Sept. 30 restraining order was issued.

“By the time the court rules,” the complaint said, “FRII may have no remaining value to preserve unless an expanded TRO is entered.”

Lammons’ ruling Wednesday appointed the receiver effective immediately and specified that assistance by the Larimer County Sheriff’s Department in enforcing the terms of receivership would be approved if needed.

Front Range Internet sign
Shutdown of Front Range Internet Inc. in Fort Collins has spurred legal action by several local companies. Ken Amundson/BizWest

Under the terms of the original restraining order, FRII was told not to remove or allow to be moved any Woodward equipment or property that would cause any cessation or interference with FRII’s hosting of Woodward’s virtual servers or its databases. The order required plaintiffs to post a bond or surety in this matter in the amount of $50,000 not later than Oct. 4.

Then on Oct. 7, attorneys for Boulder-based bandwidth provider Zayo Group filed a motion to intervene in the case against FRII and Halton and Howard Peters. Zayo also sought and was granted a similar temporary restraining order, which would be effective through Oct. 21, and was also advised to attend the Oct. 19 preliminary-injunction hearing.

Calls for comment from Woodward, its attorneys, and those of Katmai Energy and Zayo Group were not returned by the end of the business day today.

In the court filing, attorneys for Woodward wanted FRII and the Peters brothers to be blocked from removing any equipment or property from its internet data center facility “that would cause any cessation or interference in the defendants’ hosting of plaintiff’s virtual servers or data storage.” The plaintiffs’ attorneys alleged “erratic” behavior” by Halton Peters and claimed that Woodward “will suffer irreparable injury, loss or damage unless defendants are enjoined and restrained by the court.”

The filing said Woodward entered into a service agreement with FRII on Jan. 13, 2017, and entrusted it with its databases, file servers and testing equipment. It alleged that Halton Peters on Sept. 21-22 “began a campaign of erratic and harmful behavior toward his coworkers at FRII, wherein he removed FRII company assets from bank accounts without a legitimate corporate purpose, terminated several FRII employees and/or blocked their access to FRII resources, and took offline certain wireless internet equipment in the FRII data center.”

Woodward also claimed that its representatives had learned that Halton Peters had made “overt threats to remove certain property that, upon information and belief, is the property of FRII, including FRII’s backup industrial power generator, a claim supported by an affidavit submitted by Chad Kopp, managing member of Katmai Energy. 

In its portion of the original filing, Katmai Energy said it sent a cease-and-desist letter to Halton Peters demanding return of FRII property “and a cessation of indiscriminate termination of FRII employees.”

It claimed the impact on FRII customers would directly harm Katmai, and further demanded that FRII and Halton Peters surrender the premises. It claimed, supported by an affidavit from Kopp, that Halton Peters was “thought to be conspiring with his brother, Howard Peters, to remove without authorization other property owned by FRII, including additional industrial generators and critical internal hardware” such as uninterruptible power supply units, and that Halton Peters “is believed to be targeting assets of value not owned by FRII to be taken and resold, including Woodward equipment. In such regard, Howard Peters was recently overheard to request a FRII technician employee to ‘mark’ assets the employee deemed valuable.”

Reached by BizWest on Tuesday, Howard Peters said Woodward “completely moved out” on Monday, removing its equipment from FRII’s facility. He said he had spoken with Woodward attorney C. Dean Herms of Fort Collins-based Herms & Herrera LLC, and Herms had indicated that Woodward would withdraw its petition.

“The judge told us in the last status meeting that if Woodward was able to kill their issue by removing their equipment, they’d remove their $50,000 surety bond and withdraw their request for attorney’s fees,” Howard Peters said.

“As far as Woodward is concerned, this is over,” he said. “Zayo and Katmai have to show their own irreparable harm instead of Woodward’s.”

A check of court records on Wednesday showed no official motions by Woodward to take those actions.

Noting that the judge “narrowly tailored” the temporary restraining order and limited it “to only Woodward and Woodward’s property,” Howard Peters said, “we’re completely comfortable with the court’s order.”

He added that “my brother is an honorable man.”

Howard Peters said Katmai removed its equipment between 8 a.m. and noon last Friday, “and we helped them do it.”

In the telephone conversation with BizWest, Howard Peters said that, “over the last several weeks. I came here with the preferred shareholders because we were here to investigate some irregularities that were inconsistent with what we were seeing.”

‘Enormous economic repercussions’

The filing by Zayo states that it entered into a “master services agreement” with FRII on or about Aug. 16, 2012, as well as other subsequent agreements, that FRII agreed to secure Zayo’s property in its Fort Collins facility, and that it agreed to “provide Zayo with uninterrupted electrical power supply and network connectivity.”

Zayo said the agreement requires that FRII provide Zayo 30 days’ notice before termination of its operations at the FRII facility so that “customers like Zayo have time to find new locations for equipment and negotiate new contracts with different service providers. In accordance with those terms, on Sept. 6, 2022, FRII notified Zayo that it would be shutting down all operations by the end of 2022 and that it would continue operations at the FRII facility until Nov. 30, 2022.

“Since this notice, Zayo has learned that principals of FRII have taken certain wireless internet equipment offline, threatened to remove critical infrastructure from the FRII facility, and indiscriminately fired employees who assist in operating the FRII facility. Zayo has also learned that FRII may terminate all operations at the FRII facility immediately and without adequate notice.”

Zayo’s filing said it intervened in the Woodward and Katmai cases because it “colocates fiber optic cables, network and telecommunications equipment in the FRII facility. These services support Zayo’s operations, which require constant electrical power supply, physical security and uninterrupted network connectivity. Were defendants to shut down operations at the FRII facility without adequate notice, it would disable Zayo’s operations and its ability to continue providing services to customers. Such an interruption would have enormous economic repercussions for Zayo and its customers.”

Howard Peters said Zayo is a different kind of customer. “They resell internet connectivity. They have some equipment in our building and they’re asking for us to secure that equipment. They want the judge to force us to continue the service that we provide, but we can’t do it. We have a bill to our vendors that we cannot pay. We don’t have the money to pay it, and that’s why we’re going out of business. As a result of that, we have to stop serving our customers and are giving them notice that they have to get their equipment. That’s the nature of winding down a business.”

Indeed, the Sept. 30 application for the temporary restraining order states that “defendant FRII presently owes Katmai more than $429,000 in unpaid rent under the lease agreement for the premises, and has defaulted on corporate loans held by Katmai amounting to more than $2,000,000.”

FRII cites ‘headwinds’ as cause for closure

“In recent years the business as a whole has suffered from a number of headwinds,” FRII said in a September website post announcing its closure, “including declining retail broadband rates, increased competition, escalating employee costs and drastically increased fiber rates we pay in order to provide service to end customers. We regret to inform you that Front Range Internet will be shutting down all operations by the end of 2022.”

FRII at the time said it was working with municipal broadband services Fort Collins Connexion and Loveland Pulse to transition its customers to them. It also recently sold its fixed wireless business to Vistabeam Internet, which is based in Gering, Nebraska. FRII said that transition will take place through November.

A CBRE commercial real estate website lists Katmai’s two-story, 21,249-square-foot Eastbrook Drive building, which was built in 1984 and has housed FRII, for sale for $2.4 million.

FRII was founded in 1995 by father and son Bill and Brad Ward and was sold in 2016 to an investment group headed by Halton Peters. A graduate of Stanford University with a law degree and a Ph.D. in biology, Halton Peters’ LinkedIn profile also lists him as co-founder and president of Hardee Fresh Vertical Farms in Florida, a partner in New York-based Natural Resources Capital Management, and a board member at Rhode Island-based VoltServer Inc. He’s also listed as a senior adviser on the website of Houston-based VC Fuel LLC, a venture-capital and infrastructure firm “focused exclusively on backing companies involved in energy transition.” Also listed as a senior adviser at VC Fuel is Neil Bush, son of President George H.W. Bush and brother of President George W. Bush.

Source: BizWest

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