Citing “fraud and malice,” city of Missoula files amended complaint against Carlyle

The city of Missoula has filed an amended complaint against The Carlyle Group, laying the foundation for what attorneys contend was a practice of “fraud and malice” by the water system’s prior owners.

The complaint, at 82 pages, gives a detailed account of the city’s failed negotiations and promises the city believes it was given. It also names 12 separate causes for legal action ranging from constructive fraud to unjust enrichment.

The amended complaint names The Carlyle Group, Carlyle Infrastructure Partners and its managing director, Robert Dove, as defendants, among others.

“The defendants made representations to the city with the intent to mislead the city, and to induce the city into assuming obligations and taking certain actions that otherwise would not have been taken,” the complaint reads. “The defendants’ representations to the city were false.”

The defendants in the case approached the city in 2011, asking it for help in acquiring Missoula’s drinking water system. Carlyle said it needed the city’s support to win approval for the system’s purchase from the Montana Public Service Commission.

While the city favored public ownership and was against Calyle’s purchase, Dove “made an offer the city could not refuse.” Among other things, the complaint suggests, he promised to sell the water system to the city in short order, so long as the city withdrew its opposition to Carlyle’s purchase.

“The city accepted Carlyle’s offer and agreed to help Carlyle win PSC approval for its purchase of Mountain Water,” the complaint states. “In return, Carlyle promised it would sell the Water System to the city two years later, on a standalone basis, at fair market value, and at a price that would be determined by good faith negotiation.”

That verbal agreement played a central role in the condemnation proceedings that played out in court in 2014, leading one attorney representing the city to describe Dove as the city’s best witness.

It’s also something Missoula Mayor John Engen hasn’t forgotten. While that promise was made more than seven years ago and the trial is now four years in the past, it remains key to the city’s current bad-faith lawsuit.

“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 earlier this month. “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 possibility. I don’t think the faith gets worse than that.”

Two years after that agreement was made, the complaint contends, “Dove and Carlyle reneged on their promise.” Rather, they worked to prevent the city from acquiring the drinking water system. Carlyle declined the city’s $65 million purchase offer, setting the stage for a lengthy – and costly – legal battle.

The city filed began its condemnation action in April 2014.

“In response, defendants continued to act in bad faith,” the complaint states. “They publicly stated that they would cause the condemnation process to be so expensive that the city could never afford to pay the price set by the court.”

The amended complaint, filed Monday in Missoula District Court, comes two weeks after the city announced its plans to pursue a bad-faith lawsuit against Carlyle.

The complaint cites 12 causes for action, including fraud and malice, constructive fraud, negligent misrepresentation and unjust enrichment. It also names Carlyle’s breach of a verbal agreement, breach of good faith and fair dealing, and civil conspiracy.

“In meetings and other communications, defendants and others conspired and agreed to attempt to defeat the city’s condemnation of the water system,” the complaint argues. “Defendants agreed to impede the city’s lawful condemnation action by increasing the cost and duration of litigation, manipulating public opinion, and inflating the fair market value of the water system.”

The city believes Carlyle’s actions inflated the system’s fair market value by more than $23 million. Carlyle’s efforts to delay the acquisition also cost the city $8 million, and it forced the city to incur a $12 million legal bill, the complaint states.

The city is seeking damages associated with eminent domain, costs incurred during condemnation, and the difference in costs between the original $65 million offer and the final purchase price. It also seeks to recover lost revenue, damages in the amount of Carlyle’s “unjust enrichment,” and other punitive damages.

The city’s legal team has said those damages should total 3 percent of Carlyle’s net worth, amounting to more than $360 million.

“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, who’s representing the city in the case.