TCWW Memorandum

8/21/2019 TCWW Memorandum

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JONI J. JONES (7562)DAVID N. WOLF (6688)Assistant Utah Attorneys General

SEAN D. REYES (7969)Utah Attorney General160 East 300 South, Sixth FloorP.O. Box 140856Salt Lake City, Utah 84114-0856Telephone: (801) 366-0100Facsimile: (801) 366-0101E-mail: [email protected] E-mail: [email protected]

IN THE FIFTH JUDICIAL DISTRICT COURT – ST. GEORGE DISTRICT

IN AND FOR WASHINGTON COUNTY, STATE OF UTAH

The State of Utah, ex rel Sean D. Reyes, theAttorney General,

Plaintiff/Petitioner,

v.

Twin City Water Works, Inc. a Utah non-profitCorporation,

Defendant/Respondent.

MEMORANDUM IN SUPPORT OF

MOTION FOR APPOINTMENT OF

RECEIVER OVER TWIN CITY WATER

WORKS, INC.

(Expedited Briefing Schedule, Expedited

Hearing, and Expedited Ruling Requested)

Case No. 150500133

Judge: G. Michael Westfall

The State of Utah, by and through its Attorney General, Sean D. Reyes, and Assistant

Attorneys General Joni J. Jones and David N. Wolf, submits this memorandum in support of its

motion for the appointment of a receiver over Twin City Water Works, Inc. (“TCWW”), to take

possession of, operate, and preserve the assets of TCWW during the pendency of this action.

mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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INTRODUCTION

Defendant TCWW is a Utah, non-profit corporation, organized in 1972 for the purpose ofsupplying the residents of Colorado City, Arizona, and Hildale, Utah (the “Twin Cities”) with

water for a fee. TCWW’s Articles of Incorporation dictate that no profits may be used for the

benefit of any individual, or for the officers of TCWW. And any profits must be used only to

maintain, improve, and expand TCWW’s operation and services. But recent evidence shows that

TCWW has used its profits to make payments to its employees and to the Fundamentalist Church

of Jesus Christ of Latter-Day Saints (FLDS).

From January 2002 to October, 2009, TCWW earned over $4 million from the sale of

water, over half of which was funnelled to the FLDS or used to pay personal bills of those in

charge of the non-profit corporation. And, as the recent depositions of two officers of TCWW

show, TCWW has made no efforts to ensure these improper payments do not continue. In

addition to the officers’ testimony that they know TCWW has a history of improper payments

but have done nothing to stop it, evidence shows TCWW does not have any competent

accounting practices in place. According to testimony from TCWW officers and company

records obtained by the United States in a civil rights lawsuit against the Twin Cities, TCWW

does not have any accounting system to allow the company to identify fraudulent payments.

TCWW’s failure to use basic accounting practice not only allows improper payments to go

undetected, but also violates Utah laws governing non-profits. And even more evidence of

TCWW’s illegal conduct has become known in recent days: TCWW pleaded guilty on June 10,

2015 to tax evasion in a criminal proceeding in Arizona.

All of this evidence demonstrates that TCWW has operated contrary to Utah law

governing non-profits and corporations and continues to do so, either deliberately or because its

officers are incompetent. Pursuant to Utah law, immediate appointment of a receiver to oversee


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all of TCWW’s finances and to handle the basic operation of the non-profit is necessary to

prevent further unlawful and potentially criminal activity.STATEMENT OF FACTS

Deposition Testimony by TWCC Officers

1. TCWW is a non-profit corporation organized in 1972 under the laws of the State

of Utah. (Articles of Incorporation, a copy of which is attached as Exhibit A.)

2. On February 14, 1996, TCWW entered into written agreements for the Sale of

Certain Franchise Water System Assets and Supply of Bulk Water with Colorado City, Arizona,

and Hildale, Utah (“Agreements”).

3. Pursuant to its Articles of Incorporation, TCWW may not pay any profits to its

employees; such prof its must be used “for the operation, maintenance, development and

expansion in size and quality [of] the facilities, systems and services available for use as

designated by the Board of Trustees.” (Articles of Incorporation at 2.)

4. On December 3, 2014, the United Effort Plan Trust (“UEP” or “the Trust”) took

the depositions of two representatives of TCWW pursuant to Rule 30(b)(6) of the Utah Rules of

Civil Procedure, which required TCWW to identify officers knowledgeable on specified topics,

including the financial affairs of TCWW. (Notices of deposition, Exhibit B.)

5. During the depositions, neither representative designated by TCWW as most

knowledgeable about these subjects could answer the most basic questions about TCWW’s

operations. (Deposition of Sylmar Barlow, 12-3-14, relevant portions of which are attached as

Exhibit C [referred to as 12-3-14 Barlow Depo]; Deposition of Scott Jessup, relevant portions of

which are attached as Exhibit D.)

6. Barlow was at the time of the deposition and is currently the president of TCWW

and the chairman of its board of directors. (12-3-14 Barlow Depo at 12-13.)


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7. During his deposition, Barlow could not explain why TCWW funds were paid to

the FLDS church and used for the personal expenses of those who managed the company. ( Id. at58-60.)

8. Barlow confirmed that, despite his title, he really doesn’t do anything. ( Id. at 14-

17.)

9. Barlow confirmed that he really doesn’t know anything about TCWW. ( Id. at 15-

16, 23-24.)

10. Barlow confirmed that he has no qualifications for the job. ( Id. at 29-33.)

11. Barlow does not know anything about finances. ( Id. at 31-33.)

12. Barlow has never reviewed financial reports for TCWW, although he assumes he

is the person responsible for them. ( Id.)

13. Barlow has no idea what profits or losses TCWW has made historically or is

making in 2014. ( Id.)

14. Other than the meeting where he was appointed, (either in June 2012 or June

2013), Barlow has never held or attended another board meeting of TCWW. ( Id. at 38.)

15. Despite being aware of allegations of theft from TCWW by Joseph Allred,

Barlow has done nothing to investigate those allegations. ( Id. at 50-52.)

16. Barlow has never read the Articles of Incorporation of TCWW. ( Id. at 41.)

17. Barlow admitted that others “are bleeding this company dry by using the money

for illegal and unauthorized purposes” but he has done nothing about it because he is in a

“sensitive position.” ( Id. at 59.)

18. Barlow has no idea what the assets of TCWW are. ( Id. at 61.)

19. Barlow has no idea what the value of the company is. ( Id. at 60-61.)

20. Barlow testified that TCWW had no records on whether or not taxes or social

security are withheld from its employees’ paychecks. ( Id. at 25.)


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21. Barlow testified that TCWW had no records of filing any tax returns for the years

of 2008-2014. ( Id. at 78-79.)22. TCWW’s second 30(b)(6) witness, Scott Jessop, the manager of TCWW, could

not name the employees of TCWW. (Jessop Depo. at 24.)

23. Jessop does not know whether it is legal for a nonprofit corporation to use its

assets to pay for the home expenses of an officer. ( Id. at 29-30.)

24. Despite being designated to testify on the gross income of TCWW, Jessop was

unable to provide any such testimony. ( Id. at 37.)

25. Despite being designated to testify on the net income of TCWW, Jessop was

unable to provide any such testimony. ( Id. at 38.)

26. Despite being designated to testify on the salaries of TCWW’s employees, Jessop

was unable to provide any such testimony. ( Id. at 38-39.)

Bank Records for 2002 through 2009 Subpoenaed from TCWW

27. Pursuant to the Trust’s investigative and subpoena powers, it obtained certain

bank records for TCWW. Attached hereto as Exhibit E is a summary of disbursements made by

TCWW over a period of seven (7) years (January 2002 to October 2009).

28. In that seven year period, TCWW received virtually all of its income from the

Cities and TCWW disbursed $4,308,811.00.

29. A large number of payments from TCWW and a significant amount of money

paid to TCWW by the Twin Cities has been used to pay personal expenses of those persons who

have access to the money and other unauthorized uses.

30. For example, according to bank records, TCWW has issued to the Bishop’s

Storehouse, an FLDS entity, twenty-seven (27) checks in the amount of $145,103.82. Attached

hereto as Exhibit F is a copy of those twenty-seven (27) checks.


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31. Pursuant to the Trust’s subpoena and investigative process, it discovered a copy

of a letter dated April 23, 2006, which Joseph Allred, while president and chairman of the boardof TCWW, sent to Prophet Warren Jeffs of the FLDS Church, while Jeffs was a fugitive from

state and federal charges, seeking counsel on how to spend the TCWW funds:

April 23, 2006 My Dear Holy Prophet Uncle Warren . . . In relation to the familyexpenses, the home utility bills and the cell phone bills for the mothers have been paid by Twin City Water Works. I will digress a little and tell you about thecompany. Twin City Water Works, Inc. was started as a non-profit corporation in1972 to be the community culinary water system. It operated as a communitywater system until 1996 when it sold the distribution system to the Cities, but

maintained the ownership of the wells and the water rights. It now sells bulkwater to the towns (Hildale and Colorado City) and maintains the wells. TheTowns operate and maintain the water system through individual customerrevenues and buy bulk water from Twin City Water Works. The revenue to thiscompany has been about $400,000 per year. Upon seeking counsel from UncleLyle, he directed me to continue the water company record keeping which Fatherwas doing. In looking back over the expenses, about half of them have been forRJA home expenses. Af ter counseli ng with Uncle Lyle, I have continued to paysome home expenses from the Twin City Water Wor ks account such as home

uti li ties (almost $4000 per month for the few months I have been here),

mother’s cell phones (about $200-300/month), car insurance (one policy

contains about half home and half company vehicles, about $500 per monthtotal ), and a new van payment of $900 per month . Several home vehi cles are

owned and were paid for by the company. Father had told me, and Uncle Lyle

had conf irmed it, that F ather did the payments from company funds with Uncle

Fred’s approval, and he had also checked with Uncle William. There were a lotof other pur chases before which were made by the company, especial ly home

improvements on the old RJA home. If we choose to not pay home expenseswith company funds, the company has enough income through bulk water salesthat we would need to f ind a way to somehow get the extr a revenue fundsforwarded to the storehouse. In addition, the Storehouse would need to help thehousehold here at least on the Utilities portion. The company has never been

audited. Up to this time, especial ly with the company cover ing some expenses ,the family needs have been met financially, and I have been able to occasionallyturn in to the storehouse a surplus from the income made by the working familymembers. I am seeking counsel on whether or not to continue paying some home bills from the company funds. . . . Ever seeking to be an instr ument in the Lord’shands through you. Joseph Allred

(Joseph Allred Letter, Exhibit G.)


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32. In early 2014, while he was the sitting mayor of Colorado City, Joseph

Allred appeared as a witness in the trial of Cooke, et al. v. Colorado City, et al. , Case

NO. 3:10-CV-08105-JAT (D. Ariz.), where Trust beneficiaries Ron and Jinjer Cooke

alleged that they were being denied a water hookup on the basis of their religion (non-

FLDS).

33. Allred was questioned (among other things) about his letter to Warren Jeffs, the

contents of that letter, and the fact that TCWW was using funds from its ratepayers to fund the

FLDS. He pled the Fifth. (See Transcript of J. Allred Testimony, Cooke v. Colorado City,

attached as Exhibit H, at 3285-3294.) In the course of his testimony, Allred invoked the 5 th

Amendment of the U.S. Constitution over 90 times. (See generally Allred Testimony, Exhibit H

(invoking Fifth on virtually every page of testimony.)

Bank Records from TCWW for 2004 to 2013

34. In its civil rights lawsuit pending against the Twin Cities in federal district court

in Arizona, United States v. Colorado City, et. al., 3:12cv8123, the United States obtained bank

records for TCWW from 2004 to 2013. (See LoManto Report, a copy of which is attached as

Exhibit I, at 1 & appendix I.)

35. The United States’ expert, Mark LoManto, reviewed those records and determined that

from 2004 to 2013, TCWW diverted $1,729,987.29 to “individuals and service providers for

activities unrelated to TCWW’s operational and business purposes.” (LoManto Report at 6.)

36. In addition, LoManto determined that TCWW did not follow basic accounting

principles that would enable the non-profit to track and determine the validity of outgoing

payments. Specifically, TCWW was not able to provide any “source documents.” (LoManto

Report at 3 and Exhibit A.)


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37. “Source documents” include customer and vendor agreements, which show that

expenses are “valid, complete and accurate” and in accordance with the customer and vendoragreements. ( LoManto Report at 3.)

38. Without source documents, “entities cannot substantiate the validity of their financial

statements.” (LoManto Report at 3.)

39. When deposed in the United States v. Colorado City case on June 10, 2014, Barlow

testified that he had no idea whether TCWW kept source documents or other basic financial

documents. (LoManto Report at 3; Deposition of Sylmar Barlow, 6-10-14, at 77-78, attached as

Exhibit J [referred to as 6-10-14 Barlow Depo].)

40. Barlow also testified that he was the person responsible for maintaining financial

records for TCWW, but had not been doing so. (LoManto Report at 3; 6-10-14 Barlow Depo at

77-78.)

41. During the period of 2004 to 2013, TCWW’s financial records produced in response to

subpoena did not include any documents demonstrating that TCWW was exempt from paying

taxes and did not include records of having paid taxes. (LoManto Report at 5.)

42. When asked during his deposition whether he knew if TCWW was exempt from

federal or state taxes, Barlow testified he did not know. (LoManto Report at 5.)

Guilty Plea To Knowing Tax Evasion

43. On June 10, 2015, TCWW pleaded guilty to knowingly attempting to evade payment

of taxes, from April 2010 to April 2011. (A copy of the plea agreement is attached as Exhibit

K.)


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LEGAL ARGUMENT

I.

PURSUANT TO SECTION 16-6A-1415, A RECEIVER SHOULD BEIMMEDIATELY APPOINTED TO MANAGE THE AFFAIRS OF TCWW

Because testimony from TCWW’s officers, its financial records for the past 9 years, and

TCWW’s pleading guilty to knowing tax evasion demonstrate that TCWW’s officers are not

competent to manage TCWW, a receiver should be immediately appointed.

Section 16-6a-1415 authorizes this Court to appoint a receiver “pendente lite with all

powers and duties the court directs.” Utah Code § 16-61-1415(3)(b). Such an appointment may

be made “until a full hearing can be held.” Id. at § 16-6a-1415(c). The facts in this case justify

appointing a receiver immediately, before a full hearing is held on the State’s claim for

dissolution of TCWW, because TCWW’s officers have demonstrated they have no ability to

manage the finances of the company and cannot demonstrate that they are complying with basic

laws.

For example, TCWW cannot demonstrate the non-profit is tax-exempt or that it has paid

Federal or State taxes in the last 9 years. (LoManto Report at 4-5, citing to 80-82 of 6-10-14

Barlow deposition; 12-3-14 Barlow Depo at 25, 78-79 (stating he did not know if the company

had paid taxes). Indeed, TCWW pleaded guilty on June 10th to knowing failure to pay taxes in

Arizona. (Plea Agreement, Exhibit I.)

Moreover, TCWW has no basic accounting measures in place, so that the officers cannot

determine whether illegal payments continue. (LoManto Report at 6, citing to 77-78 of 6-10-14

Barlow Depo.) In addition, TCWW’s failure to maintain proper accounting of its finances is in


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violation of Utah law. See Utah Code Ann. § 16-6a-1601(2) (“nonprofit shall maintain

appropriate accounting records”).

Testimony from TCWW’s president and manager mak e it plain that they do not have the

training, experience, knowledge, or skill to operate TCWW so as to ensure the company does not

continue to make illegal payments, does not continue to violate tax laws, and does not continue

to violate Utah law governing non-profits. As set out in detail in the fact section, above, the

President testified that he really doesn’t know anything about TCWW (12-3-14 Barlow Depo at

15-16; 31-33; 60-61); doesn’t know anything about finances (id. at 31-33); has no idea what the

assets of the company are or what its value is, (id. at 60-61), and is aware of but has done

nothing about allegations of theft from TCWW by Joseph Allred. ( Id. at 43, 50.)

Barlow’s sworn testimony, Jessop’s sworn testimony, TCWW’s bank records, and its

recent guilty plea all show that TCWW is not being managed in even a remotely competent

fashion. A receiver should be appointed immediately to ensure that TCWW complies with laws

governing non-profits; that TCWW maintains proper financial records, and that TCWW

complies with State and Federal tax requirements. A receiver is warranted immediately,

pendente lite, while the litigation continues, and the State pursues its remedy of dissolving

TCWW.

The immediate duties and responsibilities that the court-appointed receiver should

assume are set out below. Pursuant to Section 16-6a-1416, the powers and duties of the receiver

may be amended as the litigation progresses. § 16-6a-1416(2). The State anticipates requesting

the Court to modify the powers and duties of the receiver so that the receiver may “wind up and

liquidate the affairs of the nonprofit corporation.” § 16-6a-1416(1)(a)(i).


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II. THE PROPOSED SCOPE OF THE RECEIVER’S DUTIES

The duties and responsibilities of the Receiver will initially be limited as follows:

A. Operational Duties.

Upon order of the Court, the Receiver will assume responsibility for the operation of the

groundwater wells that are used to supply water to the Twin Cities. In addition to pumping

water, the Receiver shall operate all facilities associated with the delivery of such water from the

groundwater wells to the Twin Cities, including but not limited to any storage facilities, water

lines, booster pumps, electrical boxes and other equipment necessary for the supply and delivery

of water to the treatment plant operated by the Twin Cities (“the Delivery Point”) (the

groundwater wells and related facilities and equipment, which terminate at the Delivery Point,

collectively referred to as “the Water System”).

1. Maintenance and Repair of the Water System. The Receiver shall be

responsible for the periodic inspection of the Water System and its components to ensure that

they are in good working order. The Receiver shall also be responsible for any needed routine

maintenance and repair work on the Water System and its components. This maintenance and

repair work shall be consistent with industry standards. No capital expenditures exceeding Ten

Thousand and 00/100 Dollars ($10,000.00) shall be made for repair work without the Court’s

approval (“the Capital Expense Limitation”).

2. Employees and Contractors. The Receiver may select and pay contractors

or employees to perform the operation, maintenance and repair work associated with the Water

System.

3.

Designated Water Service Representative. All communications with the

Twin Cities specifically concerning water supply and delivery shall be with the Receiver, which

shall serve as the Twin Cities’ designated water service representative.


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4. Reporting. The Receiver shall provide reports to the Court, the UEP Trust

and TCWW regarding the operation, maintenance and repair of the Water System and regardingits communications with the Twin Cities.

5. Limitations. The Water System terminates at the Delivery Point. The

Receiver shall assume all responsibilities associated with the delivery of water pumped from the

groundwater wells to the Delivery Point but shall not be responsible or liable for the quality of

such water or how such water is delivered and served to residents of the Twin Cities. The Twin

Cities shall continue to be responsible for the treatment of the water that they receive from the

Water System and shall continue to be responsible for supplying potable water to their respective

customers in accordance with all local, state and federal laws.

B. Financial Matters Associated with the Water System and Water Delivery.

The Receiver shall administer all revenue and operating costs associated with the Water

System and delivery of water to the Twin Cities in a manner that is consistent with industry

standards. Upon order of the Court, the Receiver shall take possession of all of the TCWW bank

accounts and all existing paper and digital versions of books, records, invoices, receipts, tax

statements, reports and any other data associated with the financial activities of TCWW. Subject

to the terms of the Court’s order, the Receiver shall have the authority to sign and issue checks

from TCWW’s bank accounts.

1. Revenue. The Receiver shall collect from the Twin Cities the water

service and other fees due and payable under the February 14, 1996 Agreements for the Sale of

Certain Franchise Water System Assets and Supply of Bulk Water with the Twin Cities and any

amendments thereto as described in the Complaint.

2. Operating Costs. Subject to the Capital Expense Limitation, the Receiver

may disburse revenues to cover its operating costs associated with the Water System and water

deliveries. These operating costs shall include (a) contractor or employee fees; (b) electrical


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service fees for the operation of the groundwater pumps and other components of the Water

System; (c) maintenance and repair costs, including replacement of equipment as necessary; (d)insurance costs; (e) tax and regulatory fees such as payroll taxes specifically associated with the

Water System and its operation; and (f) such other operating costs as are reasonable and

customary for the operation of a water supplier service.

3. Books and Records. The Receiver shall be responsible for the financial

accounting of revenue and operating costs associated with the Water System and water -

supplying. Books and records shall be maintained at the Receiver ’s office.

4. Financial Reporting. On a regular basis, the Receiver shall submit

accounting statements and financial reports about the Water System and its operations to the

Court.

CONCLUSION

For all of the foregoing reasons, the State respectfully requests that the Court appoint a

receiver over TCWW, to ensure that TCWW does not continue to operate in violation of the law,

for the duration of this litigation and to ensure that TCWW continues to provide water to the

Twin Cities.

DATED this 18th day of June 2015.

SEAN D. REYESUtah Attorney General

/s/ Joni J. Jones

JONI J. JONESDAVID N. WOLFAssistant Utah Attorneys General


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CERTIFICATE OF SERVICE

I hereby certify that on this 18th day of, 2015, a true and correct copy of the foregoing

MEMORANDUM IN SUPPORT OF MOTION FOR APPOINTMENT OF RECEIVER

OVER TWIN CITY WATER WORKS, INC. was served via the Court’s electronic filing

notification system to e-filers as indicated on the Court Service List Report.

.

/s/ Cecilia Lesmes

Documents

TCWW Memorandum