LMUD and Kinross Gold, Inc. (and its subsidiary, Lassen Gold Mining, Inc.) are currently involved in a lawsuit in United States District Court regarding LMUD’s purchase of the Hayden Hill transmission line for $65,000, effective December 2007.

Attorneys for LMUD allege Frank Cady, the publicly owned utility district’s former general manager, purchased the north county transmission line without the board of directors’ approval or ratification, and they ask the court for a summary judgment to set aside the sale, return the $65,000 purchase price and make Kinross Gold responsible for removing the transmission line.

The minutes of the LMUD board’s May 28, 2008 meeting report, “(Former) General Manager (Ray) Luhring and (former) General Counsel (Jaimee) Jones met with John Ketelsen, (former) CEO of Lassen County, regarding the Hayden Hill transmission line.

LMUD has a purchase agreement with the county and has taken possession of the line. LUMD is accepting liability for the line only. General Counsel Jones stated acquisition of the line requires mitigation, and if necessary, bond requirements.

Dan Silviera, general manager of Surprise Valley Electric, is interested in an operation and maintenance agreement with LMUD until the district is ready to take over the line.”

According to a declaration by General Manager Bill Stewart, “LMUD cannot use the Hayden Hill line to access low-cost power, making the purchase worthless to LMUD and its ratepayers. LMUD has also learned removal of the Hayden Hill line, as required by the county’s reclamation plan, will be extremely costly — upwards of several hundreds of thousands of dollars. The line is not even within LMUD’s jurisdiction.”

Fiduciary responsibility

Ewert said if LMUD loses the lawsuit and the ratepayers are responsible for paying hundreds of thousands of dollars to remove the transmission line, the LMUD board might have failed its fiduciary duty to protect the ratepayers.

“They have a fiduciary duty to the ratepayers,” Ewert said. “A fiduciary duty is a duty under the law where someone who is a trustee — in this case it would be the board of directors — is required to not waste or spoil the assets of the district. They’re supposed to maintain the assets of the district, act in a reasonable way so as to not relinquish them or let them flitter away. It sounds as if there may have been a breach of that fiduciary duty.”

Cady’s authority to purchase

According to Cady’s testimony reported in the court documents, “the board was fully advised of the Purchase and Sales Agreement (PSA), and the board gave Cady, during a closed session, authorization to enter into and execute the PSA on behalf of LUMD.”

Cady testified he was authorized to sign the final draft of the PSA once the conditions of the agreement were met. He said it was not reported out as an action taken during closed session because the final action, execution of a finalized contract, occurred well after the meeting in which authority was given.

Ewert agreed the board need not report that execution of the contract until the negotiations were completed, but he said according to Government Code Section 54968, the board “may hold a closed session with its negotiator prior to the purchase, sale or exchange of the property by or for the local agency to grant authority to its negotiator regarding the price and terms of payment, purchase, sale, exchange or lease. So that would have to be on the notice (agenda) of that meeting — that they were going into closed session to give him authority as the district’s negotiator.”

Since the alleged action to give Cady authority to purchase the transmission line was not listed on an agenda or memorialized or reported out of closed session, the date of that action cannot be determined.

Resolution 2009-17

The LMUD board passed Resolution 2009-17 in closed session Dec. 22, 2009. The resolution alleges the board “did not pass a resolution approving or otherwise ratifying the said agreement with Lassen Gold Mining, Inc.,” and the board is “contemplating an action against Lassen Gold Mining, Inc. to rescind the said agreement.”

The resolution also reports LMUD’s desire to “leave the existing Hayden Hill 69kV transmission line in place, unenergized, for possible future use and to prevent the economic waste of removal” and that “litigation could be avoided if the transmission line can be left in place.”

The resolution also reports the district, “shall acquire from Lassen Gold Mining, Inc. only the right, title and interest to the Hayden Hill transmission line without incurring any obligations, including but not limited to, removal of the transmission line as required by the Conditional Use Permit Reclamation Plan pertaining to the Hayden Hill Gold Mining operation, said acquisition to be under threat of condemnation through the district eminent domain powers.”

According to the agenda of that meeting, the board went into closed session for a conference with legal counsel regarding “significant exposure to litigation.” The agenda also identifies the Kinross Gold Hayden Hill mine site.

According to the minutes of the meeting, the board “voted unanimously to approve Resolution 2009-17 and authorize the general manager to sign a notice of exemption.”

According to the resolution, the vote was 4-0, but according to the minutes, the vote was not unanimous since Ward 1 Director Fred Nagel was absent.

The notice of exemption was sent to the Office of Planning and Research in Sacramento seeking a categorical exemption for the transmission line from California Title 14 regulations.

“The closed session exemption that allows them to go into closed session with their legal counsel doesn’t permit them to create resolutions,” Ewert said. “It permits them to have a full and frank discussion with counsel, make decisions about actions — whether to proceed in litigation, whether to not proceed in litigation, and make those (kinds of) decisions. It does not authorize them, however, to create, draft and act upon a resolution. That is something that should appropriately have been done in open session.

“If that was something that may have even been discussed (by the board in closed session) — even that may have exceeded the scope of the closed session exemption. What should have been done is adjournment from that closed session and then at the following meeting agendize that they were going to consider a resolution … ”

Eugene Chittock, LMUD’s legal counsel, said he couldn’t comment on issues involved in current litigation.