City of E. Liverpool v. Buckeye Water Dist.

• Decision Date: 21 June 2012
• Docket Number: 11 CO 42.,Nos. 11 CO 41,s. 11 CO 41
• Citation: 2012 -Ohio- 2821,972 N.E.2d 1090
• Parties: The City of EAST LIVERPOOL, Plaintiff–Appellee v. BUCKEYE WATER DISTRICT, et al., Defendants–Appellants.
• Court: Ohio Court of Appeals

972 N.E.2d 1090

2012 -Ohio- 2821

The City of EAST LIVERPOOL, Plaintiff–Appellee

v.BUCKEYE WATER DISTRICT, et al., Defendants–Appellants.

Nos. 11 CO 41, 11 CO 42.

Court of Appeals of Ohio, Seventh District, Columbiana County.

June 21, 2012.

Atty. Charles L. Payne, Law Director—City of East Liverpool, East Liverpool, OH, Atty. Thomas W. Connors, Atty. James M. Wherley, Jr., Black, McCuskey, Souers & Arbaugh, Canton, OH, for City of East Liverpool.

Atty. Dennis M. O'Toole, Stumphauzer, O'Toole, McLaughlin, McGlamery & Loughman Co., LPA, Sheffield Village, OH, Atty. Frederick C. Emmerling, East Liverpool, OH, for Buckeye Water District.

Atty. Michael DeWine, Attorney General of Ohio, Atty. William J. Cole, Atty. Keith A. McCarthy, Assistant Attorneys General, Columbus, OH, for Ohio Public Works Commission.

Atty. Shannon K. Benton, Squire, Sanders, Columbus, OH, for Ohio Water Development Authority.

Before: CHERYL L. WAITE, J., GENE DONOFRIO, J., and MARY DeGENARO, J.

WAITE, P.J.

{¶ 1} This is an expedited appeal in a garnishment action. There are two Appellants in this matter: the judgment debtor Buckeye Water District (“BWD”); and the Ohio Public Works Commission (“OPWC”), which claims to have an interest in amounts deposited in one or more of the accounts being garnished. BWD is a water district organized under the authority of R.C. Chapter 6119. Appellee is the City of East Liverpool (“East Liverpool”). The garnishee is CFBank (formerly known as Central Federal Savings & Loan) in Wellsville, Ohio.

{¶ 2} In 1995, East Liverpool entered into a long-term contract to provide water to Columbiana County, Ohio, and the performance of this contract was assigned to BWD shortly thereafter. The contract required BWD to purchase a certain minimum amount of water for the life of the contract, which was to expire in 2025. In 2005, East Liverpool filed a breach of contract action in the Columbiana County Court of Common Pleas against BWD due to its failure to continue purchasing the minimum amounts of water required by the water contract. In February 2008, East Liverpool won a $9.7 million judgment against BWD. The judgment was reduced to $4.8 million on appeal to this Court. E. Liverpool v. Buckeye Water Dist., 7th Dist. No. 08 CO 19, 2010-Ohio-3170, 2010 WL 2676900, appeal not accepted for review 127 Ohio St.3d 1461, 2010-Ohio-6008, 938 N.E.2d 363 (December 15, 2010).

{¶ 3} East Liverpool then initiated garnishment proceedings against various banks in which BWD was thought to have accounts in order to collect on the judgment. One of those was CFBank. Seven accounts at CFBank were identified as garnishable. The accounts contained over $4.5 million. After the garnishment order was served, all of the accounts were frozen by the court except for a general operating account so that BWD could carry on its day to day operations. OPWC intervened in the garnishment action to protect its interests in loans that it had made to BWD. OPWC moved to vacate the garnishment proceedings. This motion was dismissed. The trial court eventually overruled all objections to the garnishment action, leading to this expedited appeal.

{¶ 4} There are two basic issues on appeal. BWD first argues that sovereign immunity bars East Liverpool's garnishment action, but we find no support for that conclusion in either Ohio caselaw or statutory law. R.C. Chapter 6119, which governs water and sewer districts such as BWD, allows a water district to be sued on its contracts. R.C. Chapter 2744, which provides for some types of statutorily based governmental immunity, does not grant immunity from contract disputes. In addition, the record reflects that BWD, as a water district, is performing a proprietary rather than a purely governmental function, and the assets associated with this proprietary function may be attached in garnishment.

{¶ 5} In BWD's second line of argument it asserts that the funds in the CFBank accounts are subject to revenue liens that have priority over East Liverpool's judgment lien. BWD argues that operation of R.C. 6119.12 created a lien on its revenues arising from over $15 million in bonds issued by BWD to the United States Department of Agriculture (“USDA”) in 2002 and 2008. Although we agree that such a lien on net revenues exists, our review of the record shows that the terms of the lien do not prevent East Liverpool from garnishing the CFBank accounts. The 2008 pledge agreement established a litigation reserve fund of $1.2 million that is not subject to the lien. The pledge agreements also allow for BWD's operational expenses to be paid first out of revenues, and the East Liverpool water contract is an operational expense. In addition, BWD has failed to trace any funds in the CFBank accounts to exempt sources, providingyet another reason to affirm the trial court's ruling. BWD has not established any other exemption or defense from garnishment that would prohibit the bank accounts from being garnished. OPWC argues that its debt is protected by a revenue lien, but there is no pledge agreement in the record establishing or defining this lien. Therefore, OPWC has no superior claim to the funds in the CFBank accounts. We find no merit in any of the assignments of error, and the judgment of the trial court is affirmed except for a modification to clarify the amount that is permitted to be garnished at this time. This matter must also be remanded to the trial court to effectuate the orderly disposition of the garnishment order.

Background to the Garnishment Action

{¶ 6} On December 15, 1995, East Liverpool entered into a 30–year water service contract with the Board of Commissioners of Columbiana County. In 1996 the Board of Commissioners assigned the performance of the contract to BWD. The contract called for BWD to purchase at least 235,000 gallons of water per day. Starting in 2002, BWD gradually stopped purchasing the minimum amount of water under the contract, leading East Liverpool to file a breach of contract action on May 15, 2005. At the same time that BWD was reducing its usage of East Liverpool water, it also began planning, financing and building a new water treatment plant along with other major capital improvements.

{¶ 7} In May of 2002, BWD entered into a loan agreement with the United States Department of Agriculture (“USDA”) for $1,498,000 to finance Phase I of a water line extension project, which included funding for the initial stages of their new water treatment plant. The loan agreement was in the form of bonds which were issued to the USDA on May 9, 2002. These were designated as “Water Resource Revenue Bonds, Series 2002.” The bonds were issued in two series: “Series A” was for $500,000, and “Series B” was for $998,000. The interest and principal on these bonds was payable in annual installments through the year 2042. The bonds were issued under the authority of Resolution 27–2002 of the Board of Trustees of BWD, adopted on May 6, 2002, which stated:

The Issuer hereby grants to the owners of the Bonds from time to time a first lien on the Revenues and the moneys and investments in the Revenue Fund, the Bond Payment Fund, the Reserve Fund and the Surplus Fund upon the terms set forth herein. (9/6/11 Tr., Pltf. Exh. B, Section 10(f), p. 7.)

{¶ 8} One of the terms of Resolution 27–2002 was that the principal and interest on the bonds would be paid from funds remaining after operating costs were paid:

WHEREAS, the Issuer [BWD] has established water rates and charges to be charged to and collected from all persons whose premises are served by a connection to the System (such rates and charges, as amended from time to time, and any other moneys received by or for the account of the System are collectively referred to herein as the “Revenues”) which Revenues are designed and intended to provide a surplus, after the payment of costs of operating and maintaining the System, for the payment of the principal and interest on obligations incurred and to be incurred in connection with the System (including the water resource revenue bonds representing the Government Loan) and the provision of adequate reserves; (9/6/11 Tr., Pltf. Exh. B, p. 2.)

{¶ 9} The 2002 resolution established a four-tiered list of priorities for paying expensesfrom the Revenue Fund. The first priority payment was for “all reasonable and proper expenses of operating and maintaining the System”. (9/6/11 Tr., Pltf. Exh. B, Section 7(i), p. 5.) The second priority for revenues was to establish a bond payment fund from which the interest and principal on the bonds would be paid. One-twelfth of the annual payment due on the bonds was to be deposited in the bond payment fund each month. The third priority was the creation of a reserve fund to be used for system repairs and to pay interest and principal if the bond payment fund was insufficient. The minimum reserve allowed was $81,504. The remaining revenues were then designated as surplus and could be used for any purpose.

{¶ 10} In 2006 and 2007, BWD borrowed $13.8 million in the form of bond anticipation notes to create funding to build a new water tower, a raw water pump station, a new water treatment plant, and to add to its water distribution system. On October 10, 2008, BWD entered into another loan agreement with the USDA to convert the $13.8 million of temporary funding into a permanent bond debt to the USDA. Once again, the loan was to be in the form of water resource revenue bonds, designated as “Water Resource Revenue Bonds, Series 2008.” The bonds were issued in four series. “Series A” was for $4.2 million. “Series B” was for $3.8 million. “Series C” was for $4.5 million. “Series D” was for $1.3 million. The interest and principal on these bonds was payable in annual installments through the year 2048. BWD approved the bonds in Resolution 22–2208. The definition of “revenues” in the 2008 bond resolution was different from that definition in 2002:

WHEREAS, the Issuer [BWD] has or will...