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Borough lawsuit claims McNees lawyer admitted mistake was made related to Suez water, sewer lease

By Dan Miller

danmiller@pressandjournal.com

717-944-4628
Posted 6/13/18

On March 1, then-borough Solicitor Adam Santucci of McNees Wallace & Nurick made a stunning admission to a Middletown councilor, according to a lawsuit recently filed by the borough.

Santucci …

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Borough lawsuit claims McNees lawyer admitted mistake was made related to Suez water, sewer lease

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On March 1, then-borough Solicitor Adam Santucci of McNees Wallace & Nurick made a stunning admission to a Middletown councilor, according to a lawsuit recently filed by the borough.

Santucci said that a mistake might have been made in calculating the water sales shortfall in the agreement the borough made to lease its water and sewer systems to Suez for 50 years starting in 2015.

The alleged admission nearly four years after the deal was done is part of the drama found in the class-action lawsuit the borough filed June 4 in Dauphin County Court against McNees Wallace & Nurick and Susquehanna Group Advisors Inc., a Lower Paxton Township firm that was providing financial consulting services to the borough at the time the lease was approved in 2014.

The borough lawsuit alleges that due to the “negligence” of McNees and Susquehanna regarding the water sales shortfall provision, the borough in 2014 approved a deal it otherwise would not have. That approval led to an increase in water and sewer bills in 2018.

Neither McNees nor Susquehanna have filed court papers in response to the lawsuit.

It is policy not to comment publicly on pending litigation, McNees spokeswoman Toshiko Macaluso said in an email responding to a request for comment from the Press & Journal.

Susquehanna has not responded to requests for comment left by phone and email.

McNees no longer serves as borough solicitor. On March 14, council voted 3-0 with Council President Damon Suglia and councilor Ian Reddinger abstaining to approve a motion introduced by Jenny Miller to seek proposals from other law firms interested in becoming the borough solicitor.

McNees did not submit a proposal, and on April 17 council voted to select Eckert Seamans as the borough’s new solicitor from among seven firms that had responded to the offer.

Confidential information

The lawsuit further alleges that a person working for McNees during the lease negotiations in 2014 “revealed confidential information” to Suez — then United Water — regarding what the borough considered its “bottom line” as to what the borough would accept from the joint venture in financial compensation in return for the borough agreeing to the lease.

On Sept. 19, 2014 — 10 days before the public meeting when council and the authority voted to approve entering into the lease — United Water offered an up-front payment to the borough of $38 million, according to the lawsuit.

The borough rejected this offer, and after negotiations United Water came back with an upfront payment of $43 million and annual payments of $725,000 — figures that were “nearly identical” to the “bottom line” that the borough says in the lawsuit it provided to the attorneys of McNees in confidence.

The $43 million upfront payment and the annual payments of $725,000 were incorporated in the lease deal that council and the authority approved on Sept. 29, 2014.

As a result of this alleged breach of confidential information by McNees, “United Water was able to bid the precise bottom line number knowing that it did not have to increase its bid further,” the borough alleges in the lawsuit. “As a result, the borough was unable to maximize its financial benefit under the lease agreement.”

A mistake?

The shortfall provision Santucci referred to was put in place nearly four years ago, in the weeks before council and the former borough authority both voted Sept. 29, 2014, to approve entering into the lease with a joint venture that included Suez, then known as United Water.

“Had the borough been adequately advised of the effect of the water sales shortfall provision it would not have approved the lease agreement,” lawyers for the borough say in the complaint.

According to the new lawsuit, Santucci on March 1 told Ben Kapenstein, then a member of council, that the shortfall provision as written in the lease was “a mistake,” because the annual targeted amount of 639,340 gallons per day included both bulk and retail customers, whereas the formula to calculate whether a shortfall exists is based only upon retail customers.

Santucci told Kapenstein he was working with the McNees’ “internal legal department to decide what steps to take relating” to the shortfall provision, according to court papers.

The lawsuit goes on to allege that on or about March 6, Santucci phoned into a closed-door council executive session, again admitted that McNees had made a mistake “in not understanding that bulk sales were included in the” shortfall provision, and said that McNees would continue representing the borough — but only if the borough would sign a release of claims against the firm.

Instead, according to information borough Manager Ken Klinepeter provided to the Press & Journal, council during the same March 6 executive session voted to hire the law firm of Dilworth Paxson to represent the borough in the lawsuit regarding the surcharge now before federal court Chief Judge Christopher C. Conner.

Sides were in mediation

Santucci’s alleged admission in March came after the borough realized “for the first time” that the shortfall provision “was wrong” while the borough and the joint venture were in mediation regarding the shortfall, the suit states.

The borough reached that conclusion when it learned in late 2017 that the shortfall provision would lead to an increase in water and sewer bills in 2018, before “controlled increases” that under the lease were not to go into effect before 2019.

The initial mediation in January 2018 was prompted by “unaddressed deficiencies” that the borough had alleged regarding water meters that Suez was relying on to determine that a water sales shortfall existed in the first three years of the lease, from Jan. 1, 2015 through Dec. 31, 2017.

The joint venture first gave notice to the borough in late 2017 of its intent to increase the water and sewer rate for customers in 2018 through an 11.5 percent surcharge.

The surcharge would stay on customers’ bills for three years, in order to recoup an estimated $1.9 million in lost revenue to the joint venture due to the shortfall from 2015 through 2017, according to Suez.

The surcharge is the subject of a separate lawsuit that the borough filed against Suez and the joint venture in April, when Suez first added the 11.5 percent surcharge to the water and sewer bills of borough residents and businesses.

The borough has an injunction request pending before Conner, asking that Conner block Suez from imposing the surcharge.

The borough also seeks to change the formula used in the lease to calculate whether a water sales shortfall exist, contending that the formula is written makes a shortfall unavoidable and creates a financial “windfall” for the joint venture and Suez, at the expense of rising water and sewer bills for borough customers over the 50-year term of the lease.

Conner has not ruled on the injunction request, which is opposed by the joint venture and Suez.