Mountain Water case: Carlyle Group threatens bad-faith lawsuit will cost city millions

Judge Karen Townsend issued the final order of condemnation that will turn ownership of Mountain Water Co. over to the City of Missoula on June 22, 2017. (Katy Spence/Missoula Current)

The city of Missoula intends to sue the former owners of its water system for bad faith and “corporate bullying,” but spokesmen for The Carlyle Group said Friday the issue belongs in arbitration, not court.

After learning that the Missoula City Council is moving ahead with its 2015 lawsuit against their global investment firm, Carlyle representatives told Missoula Current that a 2011 letter of agreement between the city and the company says all “disputes, controversies and claims” must go through arbitration, not the courtroom.

In the lawsuit, Missoula’s attorneys filed 11 counts against The Carlyle Group, including fraud, conspiracy and bad faith, for its behavior as the city attempted to purchase Mountain Water Co., which provided Missoula’s municipal water.

But Carlyle Group spokesman Christopher Ulman contended Friday that the “case is meritless. The city’s claims are at odds with the evidence and the mayor’s prior testimony. The city’s decision to launch yet another lawsuit will embroil it in years of additional legal proceedings, benefitting lawyers and hurting taxpayers.”

There are three alternatives for arbitration: All 11 counts in the city’s lawsuit could go through arbitration. Some counts could be put on hold while others go through arbitration. Or the city could shepherd its case through both arbitration and the courts.

Ulman said arguing over the procedure alone will take several months.

Attorney Harry Schneider of Perkins Coie, one of the private attorneys representing the city throughout the water system fight, said any of the options are possible.

Missoula District Judge Karen Townsend will decide the outcome.

Schneider expects Carlyle to try to push all the counts into arbitration, although he thought they would have tried that tactic before now.

“As far as preventing the case from getting into court, they’re almost three years late. It’s already there. We’re confident and hopeful that it will remain in court,” Schneider said.

Ulman offered two reasons why The Carlyle Group believes it is not guilty of bad faith.

In the 2011 letter, Carlyle agreed to consider any good-faith offer from the city to purchase Mountain Water Company and Missoula’s water system. Ulman said the agreement did not require Carlyle to sell to the city, only to consider the offer, which he said the company did.

He also pointed to testimony by Mayor John Engen, who said the agreement gave Carlyle the right to reject Missoula’s offers.

Ulman said it was actually the city that didn’t negotiate in good faith, because it made a low-ball offer of $65 million.

Later, a court-ordered water commission found the company was worth $88.2 million.

“The city is going into this with blinders on about the process, about the merits, about the likely fees they’re going to pay their lawyers and about the potential of paying our fees,” said a Carlyle attorney who refused to have his name used. (The attorney is with the law firm Williams and Connolly in Washington, D.C.)

In response, Schneider said it wasn’t Carlyle’s rejection of Missoula’s bid that constituted bad faith. It was Carlyle’s lack of due diligence, brought to light during the legal discovery process, that showed the company had no intention of accepting a bid for Mountain Water Co.

Carlyle also owned two California water companies, Apple Valley Ranchos Water and Central Basin Water, in addition to Mountain Water, and Schneider said company documents showed that while Missoula was trying to buy Mountain Water, Carlyle was preparing to sell all three companies to anyone who would buy them as a package, which was more lucrative than selling each individually.

The Carlyle Group is an asset manager that offers investment funds, so it is obligated to optimize its income for the benefit of investors.

Missoula had no interest in owning three water companies.

Schneider said Carlyle also never tried to determine the value of Mountain Water Co. by itself, indicating it didn’t intend to sell just the one company. The price of the Mountain Water wasn’t determined until the judge ordered a commission to assess the value as part of Missoula’s condemnation case.

“Our claims are not solely some assertion that there’s a breach of a written agreement. Our claims are that they breached their duty to act in good faith to consider an offer from the city,” Schneider said. “They could have countered at $88 (million). The city would have accepted that, in my view.”

Both sides accuse the other of hyperbole-laden statements and scare tactics.

As far as Carlyle’s warning that another lawsuit and arbitration will cost the city more money, Schneider called it a tired refrain.

So far, the city is responsible for $9.1 million in legal fees related to the condemnation, and Ulman said some of that could have been avoided if Carlyle and its many high-priced lawyers hadn’t been required to remain in the lawsuit.

Ulman said it should have been a matter between Missoula and Mountain Water Co.

“Carlyle and its entire legal team tried to withdraw – the case would have been the same with or without Carlyle,” Carlyle’s legal spokesman said.

Schneider said it was Judge Townsend, not Engen nor himself, who ruled that Carlyle needed to remain part of the case. Mountain Water managers bore little responsibility because

Carlyle kept them in the dark, even about being sold.

“Carlyle made all the decisions,” Schneider said. “The city is more than happy to let a Montana judge and a Montana jury make a decision on whether they were in good faith.”