By Marty Bachman
The Ely City Council, acting in the capacity of the Nevada Northern Railway Association (NNRA) board of trustees, met with the NNRA management board to discuss the terms of their development agreement as they attempt to reform the foundation..
The meeting to consider the nine page agreement began at 5:15 p.m. and it was 8:30 p.m. when the two boards were finally able to agree on the terms of page one before they were able to begin discussion on page two of the document.
Attorney Chris Stanko of the Reno law firm of Maupin, Cox, Legoy, said that while the language of the documents (bylaws, articles of incorporation and development agreement) might give the impression that a separate entity was being created, he insisted no third party was being spawned.
The discussion then centered on what the purpose of the corporation was going to be and what assets would be included, specifically the mile markers, the northern lines and the historic southern lines. Foundation attorney Chuck Odgers said that if the mile markers were not going to be in the bylaws or articles of incorporation, then the development agreement was the appropriate place for them to be listed.
NNRA Executive Director Mark Bassett said that the agreement was only for the historic portion of the railway, not the lines to the north.
At this point a clamorous debate ensued between Odgers and Stanko with Odgers accusing Stanko and his firm of representing the management board, not the trustees or the foundation.
“I am the attorney for the city, the foundation and the management board,” Odgers told Stanko.
Stanko, in turn, charged that Odgers had a conflict of interest in his claim to represent all sides. Stanko said that he and his law partner, Gus Rossi, who was on the phone participating in the meeting, were engaged by the corporation.
“You were not retained by the foundation,” Odgers said. “You were retained by the management board.”
“The client is the corporation,” Stanko said. “Sir, you are sitting on both sides of this issue. You have a conflict.”
Odgers said, “Report me to the Bar Association.”
The dispute intensified just short of fisticuffs before finally settling down after Chairman Sam Hanson demanded order be returned.
Odgers’ then told the board that there was no obligation for management or the trustees to change the corporate structure; that it was up to them to choose what to do.
Council member Kurt Carson said that he didn’t want to continue on the path that the two entities had been on and that he felt it was best to continue to follow the path Kennecott had intended when they willed the railroad to the city and the foundation. He suggested that their intent was for neither the city nor the foundation to have total control of the railroad but that there was always going to be that one person trying to get an edge over the other.
“I’m not sure what the right answer is,” he said.
Hanson said that at the very least, there were problems with the bylaws as they exist now. He said they met the needs at the time when they were originally set up but that the two groups couldn’t continue with the way things had been going. He said that information was being withheld from the board and that they were being treated by management as if they had no business asking for documents or information.
Odgers explained that the board was charged with protecting the assets of the corporation while the management board was to run the day-to-day operations.
Odgers and Stanko argued again about the north line/south line assets with Odgers reiterating to Stanko that the board had not retained him and with Stanko again, denouncing Odgers for working both sides of the transaction.
“It’s not right you also represent the city,” Stanko said.
Management board chairman John Gianoli stepped in, saying, “It’s difficult attending multiple meetings where we take one step forward and two steps back. Everyone agreed the status quo was dysfunctional; then we go back again and we regurgitate. Again I ask, are we for this or not?”
Gianoli said that the two groups needed to simplify the process and that the transfer of ownership was going to be a lengthy process replete with legal problems. He said that both boards have a responsibility to the corporation. He suggested that the issue of the assets was a problem to be negotiated down the road and would take some time but that they needed to sit down now in a business like manner and determine if they are interested in moving forward with the new plan to change the corporate structure.
“If everyone thinks things are jolly the way they are now, as I said at the last meeting, we’re wasting our time,” he said.
The board then took a poll of whether they would stick with the current 1.0 structure, continue to move forward with the 1.5 changes; or even continue on to the 2.0 proposal that would completely divest the city of its railroad assets. All agreed to continue to organize under the 1.5 model.
Board member Pat Robison said that there definitely has to be a change, calling the situation “crazy.”
“I think the railroad should run the railroad and that the city should run the city,” she said. “We don’t have time for this.”
Robison said that she thought the railroad had been unable to move forward because of all the fighting and that they were losing grants as a result.
“This is a precious gift to Ely and if we lose this, we’ve lost a big deal,” she said.
She said that they needed to entice the people of Ely to become involved with the train and that there was plenty of donation money to be tapped from the folks in White Pine County.
“We really need to value this train and quit this fighting and try to move forward,” she said.
Council member Bruce Setterstrom then engaged Robison in debate, questioning how the council was interfering with the railroad.
Robison responded that council members, as an example, had attacked Bassett over engine fixes that were his forte and not that of any of the council members.
“He’s been doing this a long time,” Robison said.
“As a trustee, we’re supposed to ask questions,” Setterstrom said. “That’s our job.”
“It sounds like you knew more than him,” Robison said. “I think he knows what he’s doing. He’s got nothing but a slap in the face for managing the railroad.”
Robison then accused Setterstrom and other board members of breaking into the railroad depot and keeping things from moving forward because of their egos.
“What’s not moving forward?” Setterstrom asked.
“There was no break in,” said Odgers.
Discussion then went back to which assets were going to be included in the development agreement with management board member Randy Larson stating that all physical assets should be included within the joint agreement. Management board member Carl Marsh said that there seemed to be enough working room within the board to transfer assets out of the corporation and into the city if that has to be done. He said that with two council members serving on the board, as dictated in the bylaws that were approved last week, there was a direct line back and forth between the council and the board but that the new bylaws free the corporation to do the work they need to undertake.
Gianoli said that he didn’t have a problem specifying the mileposts in the document.
“Anything beyond that is for another day,” he said.
Hanson asked Odger to define the corporation and Odger said that from his perspective, it was the city council sitting as the board of trustees.
“The board of trustees is the board of directors today,” he said.
Gianoli said that this was part of the convoluted nature of where the situation is today and asked whose signatures were on file with the secretary of state’s office, which handles incorporations.
Bassett said that since 2000, the signers have been the management board and the director.
Gianoli said that there was no way to equate the original incorporation in 1984 to where the board is today.
“We are, in 2016, miles and miles — railroad miles away,” he said. “We need to reflect how we are currently.”
Odger said that if the 1.5 model was adopted, the new board of directors would be the corporation . He said that the concerns of city officials in adopting the new plan within the development agreement, would be to protect the assets of the corporation by defining the ability to buy and sell assets and limit the board’s indebtedness.
“I don’t think any board should be able to sell any assets without both board’s approval,” Odgers said. “I don’t care if it’s a penny, you can’t sell anything without both board’s approval.”
Odgers said his only charge was to protect the assets the best way he could. He said that Bassett would provide the financials to the city.
Bassett said that it was his understanding that if the 1.5 model was approved, the city of Ely will still be partners but that there would no longer be a board of trustees — but that he was OK with reporting to the council.
Marsh said that the council will have two seats on the board and that they could provide the reports to the rest of the council.
Gianoli said that how the board deals with the lines to the north was a discussion for another day and that both groups were there to protect the museum. He said he was open to sitting down and discussing shifting assets but that both sides had to protect the organization.
“You’re as much responsible for the foundation assets as you are for the city assets,” he said.
While the board’s discussed entering the deeds of the numerous properties owned by the foundation into the development agreement, Odgers suggested a written description, seeing as many assets of the foundation, including a depot in Cherry Creek that had been traded by the board without any actual deed transfers.
Stanko said that the city wanted to have notification rights and that those rights needed to be defined in the agreement.
At this point, Odgers said he needed to have a litigation session. The meeting broke and Odgers went outside with council members for a discussion. When he returned he reported that there had been no discussion about what was happening at the meeting.
Setterstrom then asked if the board of trustees were dissolved, would they be able to continue with a lawsuit the board had with S&S Shortline Leasing, which the city filed in June 2015. The lawsuit seeks relief from “damages” caused by “breach of written agreement, accounting and trespass” from the city’s rail-car storage agreement, which joined the city and S&S into a business relationship back in 2009.
Odgers said that in choosing the 1.5 model, the board needed to find a way to allow the litigation to go forward.
Setterstrom again asked if dissolving the board was going to affect the lawsuit and Odgers told him, “yes.” Odgers said that the management board wanted out of the lawsuit and the new board would probably withdraw from the lawsuit.
Setterstrom said that the last time they talked about the lawsuit, all the trustees were on board but if the lawsuit falls into the hands of a new board, it could be different.
“A new board of directors would have to approve the new lawsuit,” Odgers said.
“We don’t want the lawsuit dropped,” Setterstrom said. “If the trustees are not willing to give this up, then there’s no sense in going on.”
Bassett approached the podium and was going to speak but Odgers and Stanko decided to hold a second litigation session outdoors with Bassett, Gianoli and Hanson. Hanson returned a few minutes later and requested the rest of the management board meet outside with the attorneys.
When they returned, Gianoli said that he had had an informative session with Odgers during the litigation session and that he was now willing to throw the 1.5 model away for the sake of the S&S issue. He said he trusted that what Odgers had told him was factual, that S&S was required to make quarterly reports to the city as part of their contractural obligation and that they had not complied. He said that under the current circumstances, he would not be in favor of removing the board.
Randy Larson said that there was too much at stake with the foundation.
“I would let it go forward to its fruition,” Randy Larson said. “I believe the ultimate goal of that is to benefit the community. This is the best way to make that happen.”
Marsh said the discussion was eye opening and that he wouldn’t recommend dropping the lawsuit.
Odger said he was not sure there was a legal way to bind a new board of directors or there was a way to the issue into the agreement but management board members said that they promised not to pull the suit.
Gianoli reminded the board that they would have their two members on the board to monitor what was going on and that the city still owned half the railroad.
Setterstrom said that what scared him was Gianoli’s statement at the previous meeting where he said we’ll close this railroad by July 1.
Trustee Jolene Gardner said that she didn’t like being threatened because one person didn’t like what was going on.
“I’m not ready to take the chance,” Setterstrom said.
Gianoli apologized and said it was not a threat but rather his personal opinion. He said that if the two boards did not get their issues resolved and the management board did not gain its autonomy, a lot of people are just going to say this has been too much of a fight for too long and they’re going to say, “I love this railroad but I have other things to do.”
Setterstrom suggested that they come to an agreement where they could revisit the agreement in three years and if things weren’t working out, they could change it.
Stanko said that that wouldn’t be a legal option, that once you amend the bylaws, you can’t renegotiate the rights.
Odgers disagreed and said that bylaws can be changed based on consensus of the board.
Setterstrom acknowledged that he and other board members were rightfully concerned in that they were giving up the city’s right to the railroad and that they were seeking some sort of guarantee that if it’s failing, they can take it back over.
Kurt Carson said he trusted Bassett, but if the CEO changes, he wanted to safeguard the city’s assets in some way.
Odgers suggested performance standards similar to employment standards.
You can jointly develop performance standards,” Odgers told the board. “If these targets are not met, we will revisit to see if the configuration is the correct configuration. If these targets are met, we assume it’s working the way we wanted it to work.”
Stanko said that there’s no legal option to have contingencies on bylaws and articles.
“Once you amend the articles in a corporation, there’s no contingencies where we go back and there’s different directors,” Stanko said.
Bassett said that he understood Gardner’s need for “some comfort” should their agreement fall apart and pointed out a paragraph on conflict resolution incorporated into the agreement where any disagreements can be resolved without going to court.
“The changes are for the betterment of the railroad that we all profess to care about,” he said.
Odgers encouraged the board to come up with performance factors and to determine them in case of disagreement, stating that there were ways to mediate them.
Stanko disagreed and asked Rossi, who was on the phone, his thoughts on the matter.
“I don’t trust Gus, either,” said Setterstrom.
Stanko said that he did not disagree substantively, but that they were corporation lawyers and that they work with corporations on a daily basis.
Rossi said that the city was still joint owners of the assets and that if the board was uncomfortable with the agreement, both boards had leverage to some extent. He said that termination provisions cannot specify that the board will revert to the situation where it is now.
Rossi said that he hoped they could get together and make things work if they have enough consensus. He urged both sides to come up with an agreement that was agreeable to both of them, noting that when two parties end up in court, the court’s solution is usually distasteful to both.
“There’s no doubt everyone wants this museum and railroad to continue on,” Rossi said. “There’s going to be disagreements but hopefully everyone can agree.”
Rossi said that the city was giving up substantial control of the railroad but he thought that there is a consensus among both sides that this would benefit the railroad.
Setterstrom said that the board was giving up complete control but that he felt moving forward was the best option.
Odgers said that the board was giving up “a modicum of control” and that was basically, who was going to be on the board. He said the council would still have control over spending and that was one way to keep control. He also noted that the new board would have to come to the city in order to buy or sell any assets. He said that trust between the two sides was the biggest issue they were facing.
“Do we trust the management board and the new directors to manage this?” Odgers asked the board.
He said that you can contract just about everything about how anything is going to operate.
“The only real control that your losing today is the ability to appoint the five board members,” Odgers said.
Hanson said it reminded him of the conclusions former president Ronald Reagan and Soviet president Mikhail Gorbachev had in their nuclear arms negotiations: Trust but verify.
Rossi said that if the members are not happy with the way the directors are operating the corporation, they have the ability to remove those directors.
Stanko said that there are checks and balances built in and that there will always be two city council members on the board.
Marsh agreed that trust was the major issue between the two boards but also what’s the most practical way to keep the railroad running most efficiently and getting donors to support the foundation again. He said that without support and money, it doesn’t matter what they do at the meeting, though he felt they were on the right track.
Odgers said that everyone’s interest was the same and that they just needed to figure out how to contract that.
“What you are doing here is building this trust, and the fact that neither side is throwing daggers at each other is progress,” he said. “We’re trusting the foundation to do what’s in the best interest of the city and the foundation.”
Gianoli said that he pushed for the 1.5 model due to it’s having two boards overseeing and monitoring the railroad’s progress and that you’ve got to trust the future generations who care about the railroad and nurture them.
The conversation then began on the indebtedness that the new board of directors would be allowed to accumulate, whether it would be short or long term debt, and the sale of assets.
With the railroad already saddled with $400,000 worth of debt, Setterstrom, saying they needed more leeway, and he suggested they allow up to $450,000.
Bassett said that they rarely sell anything but that he would like to start selling spikes in the gift shop, which everyone seemed to think was a good idea.
The board chose to give the new board a $500,000 debt limit before they would have to ask the city council for permission to seek other loans; $100,000 of that amount would be a revolving loan — and the sale of any assets would require the council’s approval.
The boards then talked about access to records, with Hanson seeking 24/7 access to the records rather than the 15 days called for in the contract. Bassett suggested that with two city council members serving on the board as directors, they would have access to the organization’s financials and could report back to the rest of the city council.
Setterstrom said that he would be good with two days and Stanko said if two days was possible, then he would put that in the contract. On the subject of insolvency, Odgers said that the assets of the railroad would revert back to the city, but then the subject turned to the possibility of the city’s disincorporation.
Gianoli mused that the county would take over the assets, while Bassett offered a similar scenario where the entity that supersedes the city decides where the assets go.
The final dialogue touched on conflict resolution, mediation, arbitration and binding arbitration. Odgers asked that Stanko and his partners rewrite the draft version of conflict resolution into something more standard and less cumbersome and said that, from a purely logical standpoint, the attempt to resolve conflicts through mediation and arbitration was the better way to go.
Setterstrom brought up the costs of arbitration and it was agreed by both sides that the arbitration costs would be paid for by the losing side and if it should be a split decision, the costs would be split.
The board then set June 27 for their next meeting.