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Suez says Middletown’s argument on water, sewer usage surcharge is ‘baseless’

By Dan Miller


Posted 5/16/18

Three and a half years after getting $43 million for approving a 50-year lease of its water and sewer systems, it is “baseless” for Middletown to now say it did not understand water sales …

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Suez says Middletown’s argument on water, sewer usage surcharge is ‘baseless’


Three and a half years after getting $43 million for approving a 50-year lease of its water and sewer systems, it is “baseless” for Middletown to now say it did not understand water sales shortfall provisions in the lease, according to lawyers for Suez and Middletown Water Joint Venture LLC.

Contrary to borough lawyers saying Suez and the joint venture sought “eleventh hour” changes in the provisions, Suez — then known as United Water — requested the changes on Sept. 3, 2014 — nearly four weeks before borough council and the former borough authority on Sept. 29, 2014 both approved entering into the lease with the joint venture, according to papers filed in federal court May 8 by lawyers for the joint venture.

The borough on April 16 sued the joint venture, which includes Suez, in Dauphin County Court, seeking to block Suez from imposing an 11.5 percent surcharge being added to water and sewer bills.

The suit has been transferred to federal court, where a hearing on the borough’s request to block the surcharge is scheduled for May 22.

The surcharge, added to customers’ bills with the April billing cycle, is to stay on bills for three years to make up for lost revenue from water sales falling below a target during the first three years of the lease, according to Suez.

Besides blocking the surcharge, the borough seeks to change or “reform” the formula in the lease used to determine a water sales shortfall, saying that the formula as written provides a “financial windfall” to the joint venture over the 50-year lease at the expense of rising water and sewer bills to residents and businesses.

But lawyers for Suez say that on Sept. 3, 2014, lawyers with McNees Wallace & Nurick — then-Middletown solicitor and the firm that served as legal counsel for the borough in the lease deal — reviewed the water shortfall formula changes sought by Suez, and agreed to accept and incorporate them into the proposed lease agreement.

McNees distributed a final draft of the proposed lease agreement to United Water and two other prospective bidders. According to lawyers for Suez and the joint venture, McNees also sent the bidders a memorandum saying that the borough “fully understood the changes to the water sales shortfall provision that the borough had adopted.”

However, “it is unclear whether the McNees firm sent the McNees Memorandum to the borough council,” according to a deposition from Donald Correll that is included in the May 8 filing on behalf of the joint venture.

Correll, now principal and CEO of Water Capital Partners LLC — the entity representing private equity investors financing most of the Middletown lease deal — was CEO of United Water from 1991 to 2001. In his role with Water Capital Partners, Correll was heavily involved in crafting United Water’s bid for the Middletown lease, according to his deposition.

Relying on Correll’s deposition, lawyers for the joint venture and Suez say that the joint venture “would not have bid” on the Middletown lease without these changes being made to the water sales shortfall formula.

Suez ended up the lone bidder for the deal, as the two other bidders dropped out. Lawyers for the joint venture refer to minutes from council’s Sept. 29, 2014 meeting, where then-borough Solicitor Adam Santucci with McNees is quoted saying they “dropped out because there were too many restrictions and controls in the process that they did not think they would make any money.”

According to lawyers for the joint venture opposing the borough’s move to block the surcharge and change the formula, “the borough’s submission evidences that, while its attorneys at McNees understood what the provisions meant, the borough itself failed to understand them…the borough’s real complaint appears to be that the borough believes that it was not properly advised by its own advisers on the deal. In that event, the borough should raise those claims against its advisors, not bring a baseless claim walking away from its unambiguous agreement.”

Lawyers for the joint venture say that the borough “never stated that it believed that there was a mistake” in the water sales shortfall provisions until April 2, 2018, when new lawyers working for the borough — not McNees — first raised this as an issue in an email to lawyers for the joint venture.

According to lawyers for the joint venture, it should have been evident to the borough in early 2015 that a water sales shortfall was occurring, and that the shortfall was based on the agreed-upon provisions in the lease.

Correll in his deposition says that starting in March 2015 the joint venture submitted monthly reports to the borough that “consistently reflected that there were shortfalls in water sales that would require” a surcharge.

Representatives of the joint venture and the borough also held frequent face to face meetings during which the water sales shortfall data was discussed, including a Nov. 12, 2015 meeting attended by then-borough Manager Tim Konek and public works director Lester Lanman, according to Correll, who said he regularly attended the meetings.

“At this stage the toothpaste cannot be put back in the tube,” lawyers for the joint venture say regarding the borough now seeking to “rewrite” the shortfall provisions. “Substantial investments and business decisions have been made on the basis of the agreement, and the borough cannot now have the court tear up that contract merely because the borough now claims that it supposedly failed to grasp the terms of the agreement that it signed three and a half years ago while represented by sophisticated legal and financial advisors.”