State’s high court hears arguments in Mountain Water appeal on wide-ranging issues

The Montana Supreme Court on Friday heard oral arguments from attorneys representing the city of Missoula and Mountain Water Co. regarding the power of eminent domain and the necessity of public ownership.

The hearing, which unfolded on the University of Montana campus, follows a lower court ruling issued last year by Missoula District Court Judge Karen Townsend, which found that public ownership of the city's drinking water system was more necessary than private, for-profit ownership.

Mountain Water and its former owner, The Carlyle Group, appealed that decision to the state's high court. The justices are expected to render a decision sometime this summer in a case that carries far-reaching implications regarding the power of local governments.

Addressing the court, attorney's representing Mountain Water and its 39 local employees argued that District Court erred on three primary fronts by limiting financial evidence during last year's trial, and by adopting a general preference for municipal ownership over private ownership.

Bradley Luck, an insurance defense litigator and partner at Garlington, Lohn and Robinson in Missoula, said the lower court also erred by finding that the city had met the burden of proof required by constitutional safeguards protecting the taking of private property.

“It's stunning the city of Missoula, in its findings and conclusions – and the District Court in its proposed order – didn't even cite to this bedrock right,” said Luck. “It's just as revealing that the city of Missoula and District Court didn't cite to the many decisions of this (Supreme) court, which make clear that eminent domain statutes would be strictly construed favoring fundamental rights.”

Justice Beth Baker agreed the court must be mindful of the Constitution and its clause protecting private property. However, she said, the Constitution gives equal consideration to the good of the whole.

Baker asked if the court should favor one clause over the other.

“I don't think it can,” Luck replied. “But what we need to do is apply it to the context of this case, with the legislative direction in this court's wisdom, and input and balance those considerations.”

Luck also contended that District Court initially said matters of value, assets, debt ceiling, rate structure and bonding capacity would play a central role during the trial. However, he said, the court reversed itself at the request of the city and limited financial evidence.

He called the city's financial arguments a litigation strategy rather than a solid management plan.

“This record has no competent evidence upon which any of the critical financial findings could have been made,” said Luck. “We have no idea on this record what the city can afford, what the rates will be, or whether they can put any money into capitalization.”

Luck added that the profits allowed by the Montana Public Service Commission for Mountain Water would be dwarfed by the interest and principal paid by the city to out-of-state bankers and investors on its future bond.

The water system was valued by a three-panel water commission last November at $88.6 million.

“It's imperative to keep in mind that if Mountain Water makes a financial mistake, the PSC is there to protect the consumers, but if the city makes a financial mistake, nobody is there to protect the consumer,” Luck said. “The bond covenants will require they (the city) raise rates to take care of any financial obligations in the mismanagement, error or acquisition of this system.”

Luck also believes the lower court took a philosophical position on whether the water system should be publicly or privately owned. He suggested the court's decision was swayed in part by city witnesses who offered opinions on the advantages of public ownership.

If the ruling by District Court stands, he said, an aggressive municipality could take advantage of its powers of eminent domain.

“Their position and the case of the city of Missoula in relation to the preference is totally philosophical and totally political,” Luck said. “There is no basis in the Constitution or laws in the state to create a preference for (public ownership).”

Harry Schneider, the city's lead attorney with Perkins Coie, countered Luck's arguments, saying Mountain Water would like the justices to believe that the lower court applied philosophy over proven fact.

He said the 11-day trial saw experts presented by both sides. The lower court weighed the evidence and followed the law when making its decision.

“This trial was a model of marshaling the evident,” Schneider said. “The evidence led Judge Townsend to the conclusion that she reached, not the other way around. Today is the last step in a very important process.”

Questions of preference continued to surface throughout the hearing, with Justice Jim Rice raising concern over statements made by the lower court in its ruling. He cited several of them, stating that private companies aren't well suited to the promotion of public interests, and that private ownership was unlikely to provide stable ownership or local management.

Such statements, he said, would make condemnation necessary in any case.

“How can we deal with those very broad statements?” Rice asked. “They're clearly not the law. Can we excise them, or are they harmless error? Are they so riddled throughout the opinion that it creates reversible error?”

Schneider said the statements included in the lower court's ruling should be evaluated against the record of evidence. He said the statements are based upon facts pertaining to the larger case.

“Sure, those observations were made but in context, when you read the findings – all 67 pages – you'll see they were based on the evidence before Judge Townsend,” Schneider said. “The observations are based on evidence, the fact and the careful sifting and weighing of evidence presented in court every day for 11 days.”

Schneider also countered Luck's claim that the court limited financial evidence in reaching its decision. He said Mountain Water and Carlyle had attempted to bamboozle the court by presenting a broad range of appraisal values in an attempt to show the city couldn't afford to purchase the utility.

“I believe the court made that distinction properly, appropriately and consistent with the sequential nature of the statute, which says you'll have a public necessity hearing first and a valuation hearing later with a different trier of fact,” Schneider said. “That's appropriate information for a District Court in a public necessity trial.”