City of Missoula to pursue bad-faith lawsuit against former water owner Carlyle Group

The city of Missoula will pursue a bad-faith lawsuit against The Carlyle Group, claiming the former owner of Mountain Water Co. practiced deceit and “corporate bullying” during the years-long legal battle over the city's drinking water system.

Mayor John Engen, joined by the Missoula City Council and the legal team that helped the city wrest control of the water utility, announced their intention to file suit against the global investment firm on Wednesday.

“A reasonable fact finder, whether it's a judge or a jury or even an arbitrator, would have a hard time saying (Carlyle) negotiated with you in good faith,” said Harry Schneider, the city's lead attorney during the Mountain Water trial. “There was never any intention on the part of Carlyle to transfer ownership of Mountain Water Company on a stand-alone basis.”

The City Council authorized the lawsuit back in September 2015, though it opted to wait until the condemnation trial had closed before pursing its bad-faith claim against Carlyle.

With the drinking water system now in public hands, the city will resurrect that suit and pursue Carlyle for damages that could run as high as 3 percent of the firm's net worth, which is estimated in the billions of dollars.

“It would be a claim based on Carlyle's exercise of bad faith and breach of implied covenant of good faith to deal openly and fairly with a party in which it had some contractual relationship,” Schneider said, saying the city's on solid footing to make such a claim.

Schneider said the 2015 trial and other legal moves revealed a good deal about Carlyle's business practices which, until then, weren't known to the outside world. That included the firm's practice of passing profits off to stockholders while raising water rates and milking the local utility dry.

The expenses, the profiteers and money spent on repair and replacement of a crumbling utility with a high rate of leakage were unveiled during the multi-day trial.

In court, the managing director of Carlyle Infrastructure Partners, Robert Dove, said his firm intended to drive up legal costs, which currently total $9.1 million for the city. Schneider described Dove as the city's “best witness” in its pursuit for damages and deceitful practies.

“That was really their strategy, to make it so expensive that even if we prevailed on public necessity, we wouldn't be able to write the check,” Schneider said. “They had 88 professionals billing on an hourly basis. I've never had a case in all my life where there's been 88 timekeepers. I would guess 70-plus were from out of state.”

In contrast, he said, the the city had one out-of-state professional and one paralegal on the case.

“It's just one example of what I think are the many facts we learned during the condemnation that demonstrated the bad-faith nature of the negotiations and communications between the city and Carlyle,” Schneider said.

Given the facts that came out in trial and the depositions taken, the city's legal team believes the case has already gone through discovery and can be easily won. While the city was billed hourly during the trial, it will be charged a contingency fee as it pursues damages against Carlyle.

An estimated cost wasn't given on Wednesday.

“This is an action for damages for misconduct, not just bad faith, but fraud – the type of torts we see from bad corporate actors and what Montana has a proven track record of not allowing,” said Tasha Jones of Boone Karlberg. “This case, on a contingency basis, is an effort to recover the damages, the harms to our community based on Caryle's misconduct.”

While the city has little to lose in pursuing its bad-faith claim, it could be strapped with Carlyle's legal bills if it weren't successful, though the city's legal team and its experts believe the city's case is strong.

Former Montana Supreme Court Justice James Nelson wrote that he's never seen a “more flagrant, palpable and wanton fraud” than that perpetuated by Carlyle. Even Brad Johnson, the Republican chairman of the Montana Public Service Commission, said Carlyle should be subject to punishments as “swift and severe” as the law allows.

“We think the case is stronger now than it was then when you authorized it in September 2015,” Schneider said. “Not only do your outside lawyers think the case is stronger now than when you first authorized it, my personal view is that Carlyle does as well.”

Mayor Engen said the city was “sold a bill of goods” by Carlyle during pretrial negotiations back in 2014 and 2015, and its opportunity to seek regress was limited by time. Because of that, it drafted its bad-faith claims in 2015 to preserve its right to file suit in the future.

That time has now come, Engen said.

“We believe these folks acted poorly and that action has legal consequences, and we want to pursue those legal consequences,” Engen told the Missoula Current. “We had a director of an investment fund tell me he would sell us a water company, and everything they did in the background suggested that was never a possibly. I don't think the faith gets worse than that.”