Lawsuit could cost Flathead Electric millions

Flathead Electric Cooperative is facing the possibility of a multimillion-dollar damage award, following an unfavorable ruling in a two-year-old lawsuit.

The lawsuit, which was filed in August 2003, charged the co-op with breach of contract, negligence, breach of good faith, deceptive practices and constructive fraud.

District Court Judge Stewart Stadler issued summary judgment in favor of the plaintiff, American Capital Group, on July 12.

Barring an appeal or settlement, the case will now proceed to a trial for damages. That will determine the amount for which the co-op is liable.

American Capital is the California firm that owns Gateway West Mall in Kalispell. Its founder, Jim Taylor, is a part-time resident of Bigfork.

In January 2002, the company entered into a joint venture with Flathead Electric to string fiber-optic cable in a 15-mile loop around Kalispell.

American Capital would put up all the money for the project; Flathead Electric would contribute its right of way.

The deal gave the joint venture the exclusive use of the co-op's right of way for "hanging" fiber, as well as first right of refusal to extend the fiber-optic network outside Kalispell throughout the co-op's right of way.

It was anticipated that this local network would eventually stretch all the way to Libby, and that it would tap into a regional fiber-optic system that follows the Bonneville Power Administration transmission lines, providing access to West Coast and national telecommunications networks.

In exchange for putting up an estimated $1 million to purchase the fiber-optic cable and pay for the installation, American Capital would get its money back, plus a 10 percent return.

After that, American Capital and Flathead Electric would split any profits 50-50.

However, shortly after the joint venture was formed, American Capital learned that there were already some pre-existing fiber-optic cables on about a third of the 15-mile loop.

Around that same time, the co-op board fired General Manager Warren McConkey - and a month later, two-thirds of the board trustees were replaced by co-op members incensed about rising power rates.

Due to concerns about the value of exclusivity and about whether this was even an appropriate endeavor for the co-op, the new board quickly voted not to proceed with the joint venture or to provide first right of refusal.

In June 2002, following the board's decision, Taylor wrote a letter to his attorney saying he was dissatisfied with Flathead Electric's performance as a partner. He said he was looking for an "exit strategy" that would allow American Capital to recoup the money it had spent up to that point.

Since then, the lawsuit has been filed - along with more than 168 separate answers, counter-claims, motions, responses and depositions.

The case file is now about two feet thick and fills two boxes.

American Capital and Flathead Electric disagree on a number of issues, including when the presence of the pre-existing fiber was first discovered, whether that fiber actually violated the joint venture agreement, and what impact it would have had on the project's prospective sales.

Moreover, the co-op maintains that final approval of the joint venture was contingent upon American Capital providing a suitable business plan.

"Neither American Capital or Flathead Electric had any experience in the telecommunications industry," Linda Hewitt, the utility's in-house legal counsel, said on Tuesday.

Consequently, "the board of trustees wanted a business plan prepared by an outside expert" to tell them whether this project was even feasible, she said.

Although some rough drafts were presented in spring 2002, a final business plan wasn't completed until November that year - long after the joint venture had died.

Flathead Electric filed a counter-claim charging American Capital with breach of contract, based in part on its failure to provide a business plan.

Judge Stadler, however, didn't buy that argument.

"Flathead Electric's assertion … is without merit, in light of the unrefuted facts that it had earlier breached the contract through its actions," Stadler wrote in his July 12 opinion.

Furthermore, he noted, "the newly elected board of trustees unilaterally chose to renege on the exclusivity provision and right of first refusal," thereby committing a breach of good faith.

A summary judgment is typically only offered in cases where both sides agree on the facts.

Given the number of material facts in dispute here, Hewitt said she was "shocked" when Stadler issued his ruling.

Co-op officials are still evaluating whether to ask Stadler to reconsider the decision or to appeal it.

Flathead Electric and American Capital also will have to hold a settlement conference to discuss settling this case.

That conference is scheduled for September.

Should the case proceed to trial, a jury will be asked to determine damages - another area where the two sides disagree substantially.

Given the promise of exclusivity and lack of competition, the November 2002 business plan indicated that the joint venture could have earned profits of about $18.5 million over the first five years of operation.

That business plan, though, was paid for by American Capital, at a time when it may have been considering litigation.

An earlier draft plan, prepared in April 2002, painted a much different picture, suggesting that the five-year profit potential was closer to $1.3 million.

Ken Sugden, the co-op's current general manager, said even that amount is questionable. He's aware of utilities in Washington that developed similar fiber-optic networks. They're now subsidizing those systems with electric rates, wondering if they'll ever even cover the annual operating costs, much less earn a return on investment.

"The whole telecommunications industry tanked," said Sugden, who joined Flathead Electric about 18 months ago. "My first reaction when I heard about this case was, 'They're suing us? They [American Capital] ought to be thanking us for saving them a million dollars.'"

In the event of a settlement or damage award, he said, Flathead Electric has insurance that would cover at least a portion of any payout.

However, a multimillion dollar award could exceed the insurance cap, leaving the utility liable for the remainder.

Hewitt declined to say where the cap was set.

She also noted that the co-op could appeal either the summary judgment or damage award, should that be necessary.

Reporter Bill Spence may be reached at 758-4459 or by e-mail at bspence@dailyinterlake.com