The city of Missoula is pursuing a "bad faith" claim against global equity firm The Carlyle Group and a couple of its top officers – along with Mountain Water Co. president John Kappes – alleging fraud and deceit that caused financial harm to the city.
"Defendants secretly took affirmative steps to prevent the city from acquiring Missoula's water system, thereby forcing the city to resort to a costly and time-consuming process of acquiring the property at issue by means of condemnation pursuant to the city's power of eminent domain," reads the complaint.
The city has spent more than $6 million to date on the eminent domain case it won last year in Missoula County District Court, as well as a couple of other proceedings related to the water company.
Last fall, the Missoula City Council approved a financial agreement for Mayor John Engen to work with law firms Boone Karlberg of Missoula and Perkins Coie of Seattle in pursuing the bad faith case. Shortly after in October, the city quietly filed the complaint but never served it. The matter arose in Missoula County District Court earlier this week.
The topic in court was attorneys' fees from the condemnation case.
Earlier, the city of Missoula won the right to use its power of eminent domain to buy the local water system from Carlyle, and an appeal is pending at the Montana Supreme Court.
In the meantime, Judge Karen Townsend heard arguments this week and last week on how much of Carlyle's and Mountain's legal fees – of more than $7 million – the city should pay.
In the bad faith complaint, which discusses a future amended filing, the city argues that Carlyle's and Mountain Water's officers misled city officials to believe the global equity firm planned to sell the water utility to the city. Behind the scenes, though, defendants simultaneously made different plans, the complaint alleges.
"As a result ... the city was damaged," the complaint said. "It was forced to pursue acquisition by condemnation, with the attendant expense and difficulty that defendants threatened to exact, all of which have further damaged the city and its citizens and residents."
Through a spokesman, The Carlyle Group declined comment on the case or whether it will file a counter claim; Mountain Water president Kappes did not respond to a voicemail on Friday.
The bad faith complaint names as defendants Robert Dove, managing director of Carlyle Infrastructure Partners; Bryan Lin, a Carlyle officer; Kappes, Leigh Jordan, Christopher Schilling, and Douglas Martinet, of Mountain Water, and yet-to-be-named "John Does 1-10 and XZY Corporations 1-10."
In the complaint, the city alleges fraud, negligent misrepresentation, deceit, breach of fiduciary duty, deceptive and unfair acts and practices, civil conspiracy, bad faith, breach of contract, actual fraud and malice, among other charges.
When Carlyle first announced plans to buy the Missoula utility, along with two water companies in California, Mayor Engen pledged his political support to help the controversial deal get approved by the Montana Public Service Commission. In exchange, he secured the chance to buy the water utility from Carlyle later on, an opportunity memorialized in a letter of agreement signed by the mayor, Dove, and water watchdog The Clark Fork Coalition.
The complaint offers examples of how executives from Carlyle and Mountain Water led the city to pursue a negotiated purchase of the water company – but privately, made statements about not dealing with the city.
For instance, the day after the council authorized acquisition of the water system in October 2013, Dove sent the mayor an email about the vote: "Have Roger (investment banker Roger Wood on the city's team) call me and we will honor the commitment we made."
In subsequent months, though, "Dove and Carlyle flatly rejected" a $65 million offer from the city, and also declined the city's invitation to provide a counteroffer, the complaint said.
Then, in January 2014, Kappes sent an email to Dove with "talking points" for a meeting with Mountain employees. The first point, according to the court filing: "Carlyle is not negotiating with the mayor and the system is not for sale."
Since at least January 2014, though, Carlyle planned privately to sell the water company, but not to the city of Missoula, the complaint said. Rather, the firm was planning to sell the water utility as part of a package deal that included its two other water systems in California.
"Under Montana law, there is an implied covenant of good faith and fair dealing that accompanies any written or oral contract," the complaint said. "That covenant imposed on defendants a duty to deal with the city honestly and reasonably in order to facilitate its ultimate acquisition of the Missoula water system."
Carlyle spokesman Christopher Ullman declined to comment. However, Dove said on the witness stand in the eminent domain trial that his only obligation to the city, noted in the letter of agreement, was to consider its offers; he did so and rejected them as too low.
The city had offered $65 million, and then $50 million; Carlyle suggested $120 million as a more reasonable starting point. In a court proceeding following the verdict in the city's favor, water commissioners set the value of Mountain at $88.6 million.
The complaint noted the letter of agreement Dove signed bound him to treat the city fairly: "'Good faith' was also an express provision that Carlyle was contractually obligated to honor in its dealings with the city."
The city wants damages for having to pursue the water company through eminent domain, punitive damages, and attorneys' fees, among other costs.
Carlyle has since sold the water company and two California utilities to Liberty Utilities, the subsidiary of a Canadian company, for $327 million.
Harry Schneider, a lawyer representing the city of Missoula in both the eminent domain case and bad faith pursuit, said the latter complaint will be amended to reflect information that's arisen since Oct. 1 about conduct by defendants.
"I think the city's acquisition of its water supply system is critical," said Schneider, with Perkins Coie. "I think the city got a bad deal from Carlyle, and if there's anything I can do to try to make the city whole, I'm interested to do it."
He said the city felt it was important to file the complaint back in the fall, even if it didn't serve it, in order to ensure it met statutes of limitations. He said the team also didn't want the matter to stall.
"We wanted to make sure that years didn't go by before we undertook the first step," Schneider said.
He did not disclose a filing deadline for the amended complaint.
The outcome in the Montana Supreme Court will determine details in the bad faith case, but a reversal will not stop the city from suing Carlyle and other defendants, he said.
"If the supreme court reverses, theoretically, the city's damages would include the value of the water system it has been unable to acquire by condemnation if the city is able to prove Carlyle breached its duty, breached its promises," Schneider said.