City of Missoula reaches $4.13M settlement agreement with Carlyle over water fight

The Missoula City Council on Wednesday authorized the mayor to sign a global settlement agreement with Carlyle Infrastructure Partners, ending nearly eight years of legal battles over Mountain Water Co. and the public's right to own its own drinking water system.

The agreement will cost the city roughly $4.13 million, but if the proceedings had continued, the city could have been liable for more. The city will bond the debt and pay $318,000 annually over 20 years without raising taxes or utility rates.

“All of that debt service will be paid through the water utility. There will not be a rate increase to support that debt service, nor will there be any effect on general fund taxes,” Mayor John Engen said. “The system can absorb this cost with minor impacts on our capital improvement efforts.”

Carlyle purchased Mountain Water in 2011 and took deep profits from the utility while neglecting required maintenance. At one point, given the system's disrepair and leakage, the city claimed that Carlyle promised to sell the utility to the city, though it later changed its mind.

That led the city to pursue the utility through its power of eminent domain. It won and purchased the system with the approval of District Court for around $88 million. It also claimed that Carlyle had been deceitful throughout the process and eventually filed a bad faith claim.

“We believe Carlyle had acted in bad faith, which is actionable under Montana law,” Engen said. “We also believed we had the opportunity to recover damages as a function of their behavior.”

A judge ruled that the question of bad faith should be arbitrated before a panel. While the city made its case for damages, the arbitration panel last December ruled on behalf of Carlyle, saying the city didn't have proof of Carlyle's behavior in writing.

But the claim of bad faith was just one of several ongoing disputes still being litigated. Given the bitterness and financial uncertainty for both parties, Engen said Carlyle reached out with an offer to end the proceedings through a global settlement agreement.

“Those questions that are still in front of District Court have financial consequences for both parties. It all depends on how those court rulings were go, whether financial liability would fall to the city or fall to Carlyle. There is risk involved in that,” Engen said.

Rather than incur additional risk and keep the legal fight going, the city and Carlyle reached a final settlement of $4.13 million – Carlyle sought $5 million initially.

But attorneys representing the city throughout they proceedings believe Missoula could have been on the hook for as much as $15 million. Harry Schneider, the city's lead attorney with Perkins Coie, believes Carlyle would have likely recovered a “substantial portion” of that if the battle continued.

“The ($4.13 million) settlement figure was well lower than what I would have expected,” Schneider said. “I believe some of that was based upon (Carlyle's) lack of enthusiasm for a public proceeding in which their conduct would be discussed while also recognizing they had exposure as well if it went forward in court with the remaining claims.”

Members of the City Council on Wednesday gave their unanimous approval to the global settlement agreement, each saying it was time to bring the case to a close and move on. They did so after seeking clarity from city officials on the impacts to taxpayers, utility rates and the city's bottom line.

In summary, the settlement will have no impact, other than a slight reduction in capital improvements planned annually to the water system. Since acquiring the system, the city already has made millions of dollars in improvements.

“We still today operate at rates that are lower than when the city initiated condemnation in 2014,” said city CAO Dale Bickell. “Not only did we acquire the system, we've done that at a rate that was lower than what it was when Mountain Water was under private ownership.”

Engen also reiterated the minimal impacts of the settlement.

“One more time, this settlement is absolutely neutral to the rate payer, and while $4.13 million is absolutely real money, in the scope and perspective of what we do, it's minimal to our capital improvement program,” he said. “Second, we will not be raising property taxes to support this settlement.”