A judge in Third District Court last week heard arguments from opposing attorneys, in the lawsuit filed by Summit Water against the company’s original founders and managers.
In the end, Judge Kent Holmberg turned down a Motion to Dismiss the suit, though he noted that at this stage of the case, he isn’t ruling on the merits of the claims made by either side.
Judge Holmberg said in his decision that under legal doctrine, the plaintiffs at this stage just have to show that they have made “sufficient claims” for their suit to continue
The company’s $18 million lawsuit was filed last year. It is suing the Estate of Hy Saunders, who was founder, President and Board Member with the company; along with Stuart Knowles and his company, Trilogy Limited.
The suit has alleged the defendants misappropriated funds meant for Summer Water in two instances—when shares were sold to the Weber Basin Water District in 2010, and when Summit’s water treatment plant was sold to Weber Basin in 2013.
Attorneys for the defense have argued, first of all, that the claims are barred by the statute of limitations—that the company can’t protest transactions that occurred nine years ago and six years ago.
At Monday’s court hearing, attorney Shawn Draney, representing Knowles and Trilogy, argued the transactions were known at the time by those governing the company or approved by them.
“In the 2010 transaction that shares of stock in the Weber and Davis canal companies were sold and that money was distributed to Saunders and Knowles to the tune of almost $5,000,000,” Draney said. “If you look at the allegations of the complaint, they were asked about that back then and said well we’ll substitute water rights. No follow up from the company as alleged. No reasonable actions on their behalf as alleged. In the second transaction, 2013, it was the sale of a treatment plant and certain capacity in pipeline. Sale of capacity in the treatment plan 50% capacity. Their own documents show, the document itself that the board voted on, the contract itself that was voted on by both the directors and the shareholders said exactly where $13,000,000 were gonna go.”
He noted the proceeds from the water treatment plant were divided, with $7.5 million each going to Saunders and Knowles.
Draney said while the company now alleges it was defrauded, it didn’t monitor or conduct due diligence at the time, although it certainly had the resources.
“Now counsel gets up here and says, ‘oh we couldn’t have known.’ You don't have an accountant that has a balance sheet? you don't have an auditor? You don’t have financial controls in place? You don't have principles and policies and procedures that delegate exact authority to the president? What he can and can't do, what kind of transactions have to come back to the board? It didn't have any of that? None of that's alleged. No care is alleged and it's not good enough your honor. It’s not good enough.”
Representing Summit Water, attorney Robert Mansfield alleged at the time of the frauds, the company was dominated by Saunders and Knowles, the two largest holders of Class A shares. Out of a six0member board, he claimed, four members were Saunders, Knowles and two cohorts.
He said it was only when new management took over in 2014-15, and conducted a study of their water supply, that they discovered fraudulent transactions.
He said the sale of water shares in 2010 wasn’t approved by the board or shareholders.
“Because it was never disclosed. Mr. Draney said well you should have just been able to Look in the books and records of the company and you'd see that that wasn't there. Well if you don't know that something should or shouldn't be there and it's not there how is that going to give notice to a reasonable party that something is amiss? That something is wrong. It just wasn't, it was never reflected anywhere in the corporate documents and that's the problem. It was done on the side.”
Mansfield also alleged the checks for the sale went to Saunders and Trilogy through the company’s attorney, John Flitton, who is also named as a defendant.
He also claimed misrepresentations were made about the sale of the water treatment plant.
“Representations were made that only the excess capacity was being sold. That that was owned by Knowles and Saunders and so they therefore were entitled to receive the proceeds. That just isn't correct. They did not own the excess capacity in that. In addition, more than the excess capacity was sold in fact the entire physical facilities were sold not just excess capacity. That's also what was represented or misrepresented to the shareholders during the shareholder meeting by Mister Flinton who got up and gave a PowerPoint presentation regarding that.”
In his ruling, Judge Holmberg said that in dealing with a Motion to Dismiss, he has to accept the facts and inferences, as being favorable to the plaintiff.
After the hearing, we asked attorney Mansfield for his reaction.
“I think it was an appropriate ruling. The court recognized the allegations and the complaint as true as he must. We’ll now proceed into the discovery stage and then we'll go from there, but we think the evidence will support the allegations and the complaint.”
Meanwhile, attorney Shawn Draney told KPCW in an email that, even at this stage when the legal standard favored Summit Water, he thought the company had failed to allege sufficient facts. He wrote, “We were disappointed in the ruling, but respect it.”
One sub-issue at the hearing was whether Brody Saunders should still be kept as a defendant, which was the Judge’s ruling. The water company alleges that Brody had knowledge of or made misrepresentations about the alleged frauds.
Defense attorney said Brody wasn’t even on Summit’s board until 2015.
