Sierra Railroad Group, a Davis-based rail and energy company, won $39.6 million in damages in a counter lawsuit against a Florida rail group on Thursday.
In 2009, the Patriot Rail Corp. filed suit against the Sierra Railroad Group for breach of contract. Both sides alleged bad faith after a deal fell through to sell Sierra, which runs freight and tourism trains throughout Northern California.
Sierra eventually filed a countersuit, stating that Patriot had used company secrets acquired during the negotiation process to “steal” a contract from McClellan Business Park in North Highlands, resulting in loss of revenue and more than 8 miles of track.
“In the end, they basically tried to bankrupt us,” said Mike Hart, Sierra’s CEO.
Complicating the suit, SteelRiver Infrastructure Partners acquired Patriot Rail Corp. in 2012 with full knowledge of the suit and changed its name to Patriot Rail Co., confirmed the current CEO and company president, John Fenton.
“The current management team is completely different. We were not part of the original suit,” he said.
Because of this, he said he was surprised at the high dollar amount of the damages, which included the $22.2 million Patriot must pay to Sierra for loss in profits and company value plus $17.4 million in punitive damages. There are still outstanding claims that may raise that dollar value that should be resolved within the month, Hart said.
Patriot plans to appeal the punitive damages.
“We always respect what the jury’s decisions are, but we think there are many appealable points in the case,” Fenton said, although he refused to name specifics before Patriot’s lawyers file official documents with the court this week.
Sierra Railroad Group initially was interested in selling its railroad division to fund a working demonstration of the energy technology pioneered by its Sierra Energy subdivision. Hart hoped to win a $50 million grant from the Department of Defense to help research, design and implement biogasification technology that turns trash into clean fuel.
But Sierra Energy didn’t have the capital to build a demo that would prove its technology worked, and Hart said banks and venture capitalists wouldn’t lend the money because the technology was “too risky.” Sierra decided to sell the railroad to bankroll the project, and Patriot came forward as a potential buyer in 2007.
After Patriot acquired the McClellan contract in 2008, Sierra’s railroad values plummeted. Patriot tried to obtain a court order in 2009 forcing Sierra to sell after prolonged negotiations, though it later changed its stance and requested only reimbursement for monetary damages.
Time was ticking for Sierra and the energy contract.
“You try raising money as a defendant in a federal fraud case,” Hart said. “It’s been devastating in our prospects.”
Sierra Energy eventually won $3 million in funding from the Defense Department and another $5 million from the California Energy Commission, but Hart said the biogasification technology still lags behind its competitors in trash-eating capacity because Sierra missed out on the initial $50 million.
However, Hart no longer needs to sell the railroad. He hopes to tie in his rail business with the clean energy provided by rolling in trash and shipping out fuel. Sierra Energy’s 10-ton biogasifier is expected to begin producing electricity at U.S. Army Garrison Fort Hunter Liggett in Monterey at the end of this year.
— Reach Elizabeth Case at [email protected] or 530-747-8052.