Friday, December 28, 2012

Cordial business relationship goes sour

School District and McKinstry battle over $26 million

Express Staff Writer

Robert Elgee Photo by Mountain Express

What was once a seemingly cordial business relationship took on a bitter tone in 2012 as the Blaine County School District and Seattle-based McKinstry Essention battled in court over money, and lots of it—up to $26 million.

Though the case is mainly about money, the School District has accused its energy contractor of fraud, racketeering and padding the books to increase its profits. In one of its latest court filings, the district alleges conduct on the part of McKinstry that was “outrageous, malicious, oppressive and unconscionable.”

McKinstry officials have stated that the district is sensationalizing the case by making outrageous and false accusations. In one of its latest court filings, McKinstry is claiming that there never was a valid contract between the parties, but only an “agreement to agree.”

The so-called “agreement to agree” is titled “Energy Services/Performance Contract Agreement.” It was signed by both parties in 2010. The document provided for geothermal energy resource development, heating, ventilating and air conditioning retrofits and other improvements at eight district schools and facilities.

Valid or not, the document established a guaranteed maximum price of $15.1 million for the work. The School District later approved an additional $3.5 million in change orders for additional work at some of the facilities. Last summer, the discrict paid an additional $451,000 to local companies that had been subcontracted for the McKinstry work and had gone unpaid for several months.

In one of its latest court filings, McKinstry stated that as of Nov. 19, the company had been paid more than $19 million, either directly or through joint checks also issued to subcontractors. However, McKinstry is claiming that it performed work at the direction of the school district worth about $26 million, and that it is still owed about $6 million.

The district claims that it only authorized $18.6 million for the McKinstry work. In addition, it’s claiming damages of at least the amount it has paid to McKinstry and is seeking punitive damages.

The district knew as early as fall 2011 that there were problems with the amount McKinstry was claiming, but did not acknowledge the fact publicly until it filed a lawsuit against the company in May. McKinstry, ironically, filed a lawsuit against the district on the same day. The cases have now been consolidated with McKinstry listed as the plaintiff and the School District as the defendant and counterclaimant.

Funding for the McKinstry work comes mainly from a 10-year $59.8 million plant facilities levy approved by Blaine County voters in 2009. The U.S. Department of Energy also contributed a $5 million grant to the work as a demonstration project to show the viability of using heat from groundwater for energy purposes.


Jury trial

A jury trial, with Judge Robert Elgee presiding, is expected to last about 25 days and isn’t scheduled to begin until Oct. 15, 2013.

However, legal maneuvering is already underway between the parties to determine what evidence can and cannot be presented to the jury.

In a late July court hearing, attorneys for McKinstry convinced Elgee to remove the racketeering allegation from the district’s claims, arguing that it lacked evidence to support the claim.

At the same hearing, however, McKinstry’s attorneys were unsuccessful in removing the fraud allegation. Elgee ruled that there was sufficient evidence for a jury to consider the claim and make a determination.

As yet unresolved is a motion by McKinstry to have Elgee rule the contract or agreement between the parties as unenforceable because of its lack of specificity. A hearing on that motion is scheduled for Jan. 28, 2013. If successful, the motion would remove the district’s contract-based claims from being heard by the jury.

A School District motion on punitive damages is scheduled to be considered by Elgee on Feb. 25, 2013. In the motion, the district is seeking to amend its counterclaim to include the possible award of punitive damages because of McKinstry’s alleged deceitful behavior.

Terry Smith:

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