Found the answer
first remove "jtds" from the connect string, so the syntax will look like
sql = Sql.newInstance("jdbc:sqlserver://servername\\inst1/databaseName",
"username", "password", "com.microsoft.sqlserver.jdbc.SQLServerDriver")
Once this is fixed another error came up. I got a timeout error. Based on the original post there seems to be some weird conflict between Groovy sql and MS sql. to work around this remove the databaseName and the database reference in the sql statement. So the sql syntax will look like.
import groovy.sql.Sql
sql = Sql.newInstance("jdbc:sqlserver://servername\\inst1",
"username", "password", "com.microsoft.sqlserver.jdbc.SQLServerDriver")
def row = sql.firstRow("select te.tDisplayName from dbName.TableName te where te.Column2=5000006")
log.info(row.tDisplayName);
also if you have error stating that could not find com.microsoft.sqlserver.jdbc.SQLServerDriver
make sure you download sqljdbc.jar
from Microsoft site and place it in C:\Program Files\eviware\soapUI-3.6.1\lib
and restart SoapUI.