LAKEPORT, Calif. — The city of Clearlake and Highlands Mutual Water Co. went before a judge on Tuesday to argue their sides in a lawsuit the city filed earlier this year seeking to throw out the results of an April water district shareholder election.

The short cause trial, held before Judge J. David Markham, originally was scheduled for July 26 but was rescheduled to Tuesday afternoon.

Both sides have filed extensive briefs in the matter, and the trial itself before Markham consisted of only about 15 minutes of argument and brief discussion.

On April 10, the water district board held Highlands Mutuals’ annual shareholders meeting, during which the results of the board election were tallied.

The city of Clearlake, which said it is the largest shareholder in the district, went to the meeting with a total of 177 proxy votes that staff had collected from shareholders in an effort to elect city council members as the new board.

However, the district found that the sitting board members — Mark Coats, Robert Kraft, Jessica Chernoh, Kathryn Davis and Rachelle Sapeta — were reelected with 217 votes.

In June, the city filed suit to get district records and have the election overturned, alleging that Highlands Mutual had obstructed attempts to get more information about its operations, which the city said it has a legal right to obtain under state corporation law.

The district called the lawsuit frivolous, said the city’s efforts to put in a new board in April was a hostile takeover and stated that nearly half of the proxy votes presented at that shareholder meeting were unauthorized ballots from owners of vacant lots not eligible to vote.

Highlands Mutual also filed its own lawsuit at the start of July alleging that the four Clearlake City Council members who attended the annual shareholders meeting on April 10 were participating in an illegal meeting under the Brown Act.

However, on Aug. 1, Highlands Mutual requested that case be dismissed.

City, district present arguments

In their appearance before Judge Markham on Tuesday afternoon, the attorneys for the city and the district — Brian Hamilton and Damian Moos, respectively — provided succinct arguments on the crux of the case.

Hamilton said the city is a landowner, with a number of parcels in the district, which has possibly as many as 3,000 property parcels within the city limits.

He said Highlands Mutual was founded in 1925 by landowners to provide water for their own needs. Its shareholders and landowners’ rights are the basis of the district’s existence.

Markham asked if Highlands Mutual being a mutual water company mattered. Hamilton said it did.

Hamilton said that in the lead up to the April election, the city was learning “troubling things” about how Highlands Mutual is being managed, noting city officials also were being excluded from board meetings. That was a reference to City Manager Alan Flora being escorted out and then locked out of the March 27 meeting.

He said city officials were told on April 10 that because certain shareholders were not “customers” — specifically, that they didn’t have hookups to the system — that they were not entitled to vote.

Hamilton said the district’s articles of incorporation do not say that. The district’s bylaws say a person shall be entitled to membership based on land ownership.

City representatives went to the April shareholders meeting with proxy ballots and information about people not getting notice of the election. The fact that the company has been undertaking elections without providing notice to shareholders for so long is an issue, Hamilton said.

He said the city is asking the court to require Highlands Mutual to send a notice of election to all shareholders and have a new election.

Moos told the court that he wanted to make sure they focused on what’s important, and addressed “red herrings” that he said the city had introduced into the matter.

Those included whether the district is a mutual water company, which he said was immaterial. Also not relevant, said Moos, is whether a mailing on the election went out properly, as he said there is no evidence of shareholders not receiving notice.

What the case is really all about, said Moos, is who is a shareholder in Highlands Mutual.

He said corporations code provides that a shareholder is one who is a holder of shares. The articles of incorporation don’t define who is a shareholder.

The city has been a shareholder for over 40 years and hasn’t contested that definition until now, Moos said.

In the articles of incorporation, Moos said the water company’s purpose is to sell and distribute water to shareholders.

“There is also a common sense reason to interpret it this way,” said Moos, explaining that Highlands Mutual is not a standard corporation.

Moos said the only transaction that occurs is when someone requests water service. Until then, the company has no knowledge of who owns the parcels.

He said that provides a fundamental problem with the city’s position. If they get their way, Moos argued, Highlands Mutual will have to send notices to landowners they don’t know exist.

The district’s bylaws refer to assessments. Moos said the company assesses members certain dues, as water systems don’t come for free. Without a water connection, Highlands Mutual has no knowledge of who the property owners in its boundaries are.

Those property owners without a connection have never been considered shareholders in the company’s history, and Moos argued that the city never had a problem with that until it lost the April election.

In response, Hamilton said the county recorder’s office purpose is to give notice of property conveyances. While it might create some administrative burden to have to make those notifications to property owners, he argued that Moos’ claim about the district not knowing the property owners within its bounds was itself a red herring.

Moos said the language about having a water connection has historically been a qualifier for being a shareholder in Highlands Mutual’s district.

He said if Highlands Mutual starts sending out assessments to people with no connections, it will open up new problems.

“It’s never been consistent with the interpretation of the articles of the way the parties have conducted themselves,” Moos said, adding that those being assessed in that way would start another lawsuit.

“The company can address those issues in due course,” Hamilton replied.

He added, “These hypothetical problems don't exempt the company from having to follow the law.”

Once the matter was submitted, Markham said he expected to have a ruling by the end of this week.

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