The city of Missoula is resurrecting a 2015 “bad faith” claim against the global equity firm The Carlyle Group, alleging its officers and attorneys committed “legal thuggery,” ran up costs in other lawsuits and raided the Mountain Water Co.’s coffers while failing to maintain the business’ infrastructure.
Harry Schneider, a Seattle-based lawyer representing the city of Missoula in its lawsuits involving Carlyle and Mountain Water, told the City Council on Wednesday that in September 2015 the council agreed to file the bad faith lawsuit, but put the case on hold as their attorneys pursued other litigation with the company including a condemnation lawsuit.
Now that those cases are winding down — surprisingly in the city’s favor, Schneider said — he believes they’ve already built the bad faith claim and can move forward with it needing little additional legal work. The city is seeking both actual and punitive damages in the bad faith case.
“A light was shed on the activities of the owners of the water company that the citizens of Missoula never had the opportunity to see before the condemnation case,” Schneider said. “The evidence we acquired opened a lot of eyes who was profiting, what the money was or was not being spent on for maintenance and improvement of the system — information we never had access to.
“We also learned information making the foundation of the bad faith case even stronger than we thought, like actions taken during the condemnation case to ‘run up the city’s costs,’ in the words of Carlyle.”
He noted the company admitted trying to get the city to spend as much as possible so when it came time for the city to purchase the water supply system, it wouldn’t have the money. At last count, the city of Missoula has spent more than $9.1 million litigating the condemnation and subsequent purchase for $90 million for the water utility.
The city finally acquired the company in June 2017 and renamed it Missoula Water.
Schneider said through the legal discovery process and testimony in the cases, they now know that Carlyle and its officials “deliberately betrayed the city of Missoula” in numerous ways. One was called Project X as in “exit,” which was a secret plan to sell Mountain Water to another investor-owned company, despite promising the sale to the city.
Another alleged betrayal included Carlyle infrastructure executives getting incentives to maximize the water company’s short-term profit at the expense of the city of Missoula, and to extract $11 million for shareholders by maximizing rates and minimizing maintenance.
In all, Schneider laid out a laundry list of facts produced in two trials that showed bad faith including false promises, unjust enrichment, deceit, corporate raiding and what he termed legal thuggery.
He added that retired Supreme Court Justice James Nelson will testify as an expert witness opinion in the case, who Schneider quoted as stating in part, “I have not seen in my professional experience a more flagrant, palpably and wanton fraud than that perpetuated by the defendants …”
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“These facts were produced in the trials and depositions. That’s all we need,” Schneider said. “We could try this case tomorrow if we needed.”
While some City Council members urged Schneider to move forward, others were wary of incurring additional costs. Schneider said the attorneys’ fees are contingent upon winning the case, but the city still would need to pay for expert witness testimony and clerical costs.
Council member Julie Merritt also wondered aloud what additional costs might be incurred, since Carlyle has fought back at every turn, with a legal team comprising 88 attorneys, most from outside Montana.
“Knowing how Carlyle acted in the past, I know this is a question needed to be asked — what is the worst-case scenario?” Merritt asked Schneider.
Losing the case, he replied, and the subsequent attorneys’ fees the city would have to pay to Carlyle if that happened. The company also could file a counterclaim.
Yet he added that not only does he suspect that the case they have against the company is stronger than when the lawsuit was first filed, Carlyle does, too.
“Their first reaction was, ‘Can we try to reach a settlement?’” Schneider said. “I can’t go into the back and forth of what was discussed, but it’s pretty unusual when you haven’t really started litigation and they say, ‘Can we try to resolve it?'
“Our recommendation is that you proceed with the litigation.”
After hearing the presentation, council member Jordan Hess voiced support for moving forward.
“It has been an incredible ride, and Harry, you stated this has gone incredibly well for the city,” Hess said. “I’m more resolved than ever to pursue this action — so go get ‘em.”