November 2006

$2 million settlement ends stalemate: Squabbles over Cortez’s new sewage plant prove costly

By David Grant Long

Years late and many dollars short, a new sewage system serving the greater Cortez area finally came on-line last fall, but costly legal wrangling continued for another year, finally creaking to a halt in August with an out-of-court settlement nestled cozily atop of a mountain of attorney's bills.

Under the agreement, the Cortez Sanitation District will make a lumpsum payment of $1.35 million to RMCI, the original general contractor that sued the district and walked off the project two years ago, and will make three additional payments to RMCI of about $220,000 over the next three years.

Jay Conner, who replaced former sanitation district manager Bill Smith in 2001 following a storm of controversy in the district, was not part of the new board's decisions to fight the construction company, nor to ultimately resolve the case.

However, he said he believes the settlement was in the best interests of the district.

“If a person sat down and put a pencil to it, you could probably figure the $2 million settlement, plus all the legal fees and stuff of that nature — I wouldn't be overly shy about saying about $3 million” will be paid out by the district under the agreement, said Conner, although part of that — $750,000 — is being paid by the insurance of the project engineer.

“The one thing I would like to stress is that the facts in this case are really, really important,” Conner said. “If the facts are just a little bit off it can make the sanitation district look really bad.

“The contractor, if you look at the claims in the court documents they filed, they were claiming $6.7 million in damages,” he said, “and the district settled it for $2 million, so in reality we saved a lot of money by settling it.

“It's my opinion that it could have been a whole lot worse.”

Still, residents of the Cortez Sanitation District may be facing a hefty mill-levy increase to pay the construction company the final installments of the settlement, although Harold Foster — appointed chair of the board of directors after former chairman Bob Diederich resigned in protest over the approval of the settlement — said he doesn't believe there will need to be a mill-levy increase to pay the first installment, at least.

“No, I don't,” he said. “We're going to cut corners [and] keep the mill levy down at all costs,” Foster said. “I know in the first year we won't have to [increase the property tax] — I can tell you that.”

Delays and squabbling

The Cortez Sanitation District in recent years has seen more controversy than most special districts ever do. In 2001, publicity over the district’s

policy of digging up and severing the sewer lines of deliquent customers — and charging them $500 to reconnect — triggered a contentious recall election that unseated three district board members.

Then-manager Smith was also widely criticized for what developers and others who worked with the district saw as arrogant and high-handed policies.

When the new board was sworn in, a honeymoon period resulted, but didn’t last long.

The project to expand and upgrade the aging sewage system got off to a positive enough start after sanitationdistrict voters handily approved a bond issue to pay for the $10 million plant in 2000. The design was developed by Richard Arber Associates and the construction contract successfully bid by RMCI, Inc. of Colorado, shortly thereafter.

But the actual construction, which got under way in January 2003, soon was plagued by delays and mired in squabbling and lawsuits that continued until last August.

RMCI sued the district and Richard P. Arber Associates, the engineering firm that designed the new plant, after excavations revealed what RMCI said were unexpected soil conditions. A “severe slope failure” occurred during excavation of the aereation basins, the complaint states, and the district refused to authorize change orders for the extra work and costs necessary to shore up the basins.

RMCI alleged it had been supplied a flawed soil study done for Arber and had based its $10 million bid on that data. Arber advised the board not to approve the change orders, and the impasse resulted in the initial claim being filed in district court and ultimately construction work being halted altogether. The district then rebid the remainder of the work and it was completed by Southwest Contracting.

After RMCI's initial lawsuits, filed in the summer of 2004, more complaints, claims, counter-claims, depositions, affidavits and motions sprouted like mushrooms on a cowpie, ultimately filling six files — each about two inches thick — in the district court clerks's office.

In turn, the district hired a Denver law firm to countersue RMCI for breach of contract; then, after RMCI dropped its c o m p l a i n t against Arber because of a state supreme court decision, the district also filed a countersuit against Arber to possibly recoup some of the damages in the event RMCI prevailed. Peripheral issues in the lawsuits went from accusations by RMCI of almost embarrassingly puerile behavior — such as an Arber engineer mocking Native American employees by doing rain dances, a charge denied by Arber — to petty quibbling over the matter of RMCI inspecting the progress of the work in completing the project, which had been rebid to Southwest Contracting.

For instance, RMCI complained in one filing to the court that the sanitation district had used “disingenous and noncommittal” language in a lengthy written agreement intended to grant RMCI access during daylight hours to the work site. RMCI objected to the district's language that it would make “every effort to allow inspection during daylight hours.”

A related issue was whether Conner could accompany the RMCI inspectors and, if so, who would pay for his time. The district claimed it was essential that Conner be present and that RMCI compensate him, since this would be outside the normal functions of his duties.

RMCI argued that Conner would get in the way and they didn't want him underfoot.

Such issues only added to the time and expense it took to reach resolution, however, since they were not addressed in the final outcome.

A divided board

The various legal actions were finally coming to a head, with the trial set for last summer, when a second attempt to negotiate an agreement among the three warring parties by a professional arbiter (an earlier negotiation had been unsuccessful) was conducted in August, and the district's board approved an out-of-court settlement in a divided 3-2 vote that led Diederich to resign.

Diederich said he'd very much wanted to pursue the countersuit the district had filed in response to RMCI's legal action and was confident it would have prevailed.

“The contractor had the responsibility of familiarizing themselves with the soils and everything before they bid the contract,” he said. “The responsibility was theirs and apparently it [the soil condition] was a surprise to them.” He said the soil study supplied by an Arber subcontractor, Western Technologies, was only “advisory.”

“It was still the contractor's responsibility to build the project as presented,” he said. “If they questioned the soils, they should have done further tests before they bid.”

As far as refusing the change orders on the aereation basins, Diederich said RMCI “had other options on the shoring and all that — they just didn't pursue them.”

Diederich said “probably nothing” could have been done differently to prevent the imbroglio.

Conner declined to comment on whether the conflict could have been handled better in the early stages to head off the protracted legal battle. He said he believed the settlement was a good move.

Conner said so far the district has paid more than $300,000 to the Denver law firm that represented the district in the legal morass along with local attorney Kent Williamson.

“My personal feeling is that it was a good thing to go ahead and settle it, because the cost of litigation and the cost of continued fighting was just going to get astronomical,” Conner said.

‘Hard-fought, acrimonious’

Mark Gruskin, the district's Denverbased attorney handling the lawsuits, agreed.

“[The district] gained the certainty of a settlement and it eliminated the risk of a judgment that would have been far greater — RMCI's claims were for millions of dollars more than what the district ended up paying,” Gruskin said. “Likewise, the district received a substantial amount of money from [the engineer's] insurance company.

“What you have to understand is that it was a $1 million policy, but under its terms every dollar spent to defend Arber was a dollar less available to provide coverage,” he said. Under the agreement Arber's insurer will pay $750,000, which would indicate its attorneys charged fees of about $250,000.

After RMCI dropped its separate suit against Arber, the district filed its own claim against Arber, to recover some of the costs from the engineering firm if RMCI's claim prevailed.

“We could have gone through a fiveor six-week trial and prevailed against Arber, but there would have been far less available to the district to recover from,” Gruskin said.

Gruskin said a trial would have cost the district not only for legal fees, but for expert witnesses and other expenses. Beyond that, he said, whatever the outcome, there likely would have been an expensive and time-consuming appeal.

As is common with out-of-court settlements, none of the parties admit any liability in the matter, and a “non-disparagement” clause prohibits any of the parties from fingerpointing at one another.

“The disputes leading up to the settlement agreement have been hard-fought, acrimonious at times, and hotly contested,” the agreement states, adding that the agreement is simply a compromise under which no one “prevailed” or was found at fault.

‘Go back to living’

Foster, a retired contractor who used to build sewage-treatment plants, was reluctant to criticize the way the board had handled the issues with the contractor, which began before he was appointed to the board.

“If I would have been chairman at the time I think there would have been some differences, but I don't want to bat anybody down,” he said. “I felt like it should have been negotiated a year and a half ago, personally.

“I don't know if there could have been a settlement, but it should have been tried then, not 18 months later.”

Foster said the delays in the project cost the district in other ways.

“Timewise it hurt us — we lost a lot of revenue because the project was a year and a half behind,” he said.

When the court granted RMCI the right to have inspectors sent to watch the replacement contractor fiinish the work, Foster said, this cost over $200,000 over the final year of the project.

But he expressed hope that the controversy- plagued district could finally get back to business.

"We figured it would be a whole lot easier to settle it now and get it over with and let everybody go back to living the way they were.”