CORBIN — By Jeff Noble, Staff Writer

The City of Corbin is being sued in federal court by the company who originally managed The Arena.

SMG, based in suburban Philadelphia, Pa., filed the lawsuit last Thursday, Aug. 29 in U.S. District Court in London. Citing a breach of contract, SMG is asking the City of Corbin pay $127,641.66, plus punitive damages.

Corbin Mayor Willard McBurney said Wednesday the city has hired Steve Crawford with the law firm of Frost, Brown and Todd in Louisville, Lexington and Indianapolis, as the lead attorney in a lawsuit they intend to file this month.

“This was no surprise, because we were going to file. … We plan to file suit soon,” noted McBurney.

“They (SMG) just beat us to it. We haven’t been served with the lawsuit yet. We’ll put our documents together and get ready,” added Corbin City Attorney Bob Hammons on Wednesday.

Calls to Bruce Hanson, an attorney with SMG at their headquarters in West Conshohocken, Pa., were not returned Wednesday.

The city, which owns The Arena, signed a contract with SMG in May 2008. Court documents say the city agreed that SMG was to have the exclusive right to operate and manage the facility, which opened in March of 2009.

According to the complaint, SMG stated the City of Corbin did not comply with the agreement, saying the city interfered and criticized details of Arena expenditures in attempts to cut or control costs, and fell short of their financial obligations in respect to adequately funding Arena operations.

In addition, court documents state that SMG claims the city prevented them from maximizing Arena profits, by retaining and refusing to pay SMG funds due them before and following termination of the agreement, wrongfully interfering with contract relationships between SMG and some of their employees, and secretly collecting information about the company’s operation of The Arena. SMG cited those actions by the city as breaches of agreement, and wants to recover compensatory damages from the city in the amount of at least $127,641.66.

The agreement between SMG and the city ended in October 2010. In March of this year, mediation between the city and SMG did occur, but was not successful, according to court documents.

“We gave them six months’ notice, but they opted out. … We went to mediation earlier, and we knew it would come to this. We placed a lot of faith and trust in SMG, but we weren’t satisfied with them.

Court documents also state an escrow account was established by SMG in Corbin, which was earmarked for Arena expenses. Approximately $72,995.96 was held in the account. SMG claims the city refused to make payment of the funds, instead wanting to withdraw or keep the money in the account. SMG claimed that conflicts with the agreement terms, which stated agreement’s expiration would be paid to SMG using funds on deposit in the account. If the funds were not sufficient, the city would pay all operating expenses.

According to the complaint, the city was allowed reasonable access to the Arena records and allowed to perform an yearly audit on the Arena’s expenses and revenues. Also in the agreement, a detailed compensation arrangement was provided where SMG personnel were compensated on an hourly basis during the Arena’s construction. After the building’s opening in 2009, SMG was to collect all revenues generated and pay the Arena’s expenses, be compensated with a fixed management fee, an incentive fee if the Arena turned a profit, and a fee for food and beverages.

The complaint further notes the city was to make funds available to SMG to pay all operating expenses each fiscal year, and make quarterly payments to the company for projected cash flow shortfalls each quarter, upon receiving the invoices from SMG. The arrangement would allow SMG to pay expenses anticipated in the following quarter.

“When they did the audit, there were some questions about the Arena’s management. You expect them to help you on different things, and we were disappointed. It’s up to the courts to decide,” said McBurney.

According to court records, the City of Corbin’s relationship with SMG goes back to 2005, when SMG was managing a facility similar to The Arena, the East Kentucky Expo Center in Pikeville. Before a contract was written with the city, SMG provided advice and consulting to the city in construction of The Arena, and in December of that year, the city obtained a report from Economic Research Associates. ERA stated in the report that The Arena could be expected to operate at a loss of $295,000 to $336,000 a year during the first five years. When the city began construction of the structure in 2007, it approached SMG about managing The Arena, then known as the Expo Center.

The court document states C. Thomas Ezzell and Richard Getty with the Getty Law Group in Lexington will represent SMG in the federal lawsuit. The case will be assigned to Federal Judge Gregory F. VanTatenhove.

Claims made in a lawsuit state only one side of a dispute. Under the law, defendants have 20 days from the date they are served to respond to the plaintiff’s allegations.