Environmental Utilities v. Public Service

• Decision Date: 03 April 2007
• Docket Number: No. WD 66860.,WD 66860.
• Citation: 219 S.W.3d 256
• Parties: ENVIRONMENTAL UTILITIES, LLC., Appellant, v. PUBLIC SERVICE COMMISSION of the State of Missouri, Respondent.
• Court: Missouri Court of Appeals

219 S.W.3d 256

ENVIRONMENTAL UTILITIES, LLC., Appellant, v. PUBLIC SERVICE COMMISSION of the State of Missouri, Respondent.

No. WD 66860.

Missouri Court of Appeals, Western District.

April 3, 2007.

Gregory D. Williams, Sunrise Beach, MO, for appellant.

Robert S. Berlin, Jefferson City, MO, for respondent.

Before ULRICH, P.J., LOWENSTEIN and SMART, JJ.

HAROLD L. LOWENSTEIN, Judge.

I. FACTUAL BACKGROUND

The case at bar concerns the proposed sale of water utility assets memorialized in four separate, interdependent sales agreements. The sale involved the assets of three companies, Osage Water Company Environmental Utilities, LLC ("EU"), and the Hurricane Deck Holding Company, all owned in part or in whole by Greg Williams, as well as assets held personally by Williams and his wife Debra. The parties to the sale filed a joint application to the Public Service Commission ("the Commission") for approval of the sale pursuant to Section 393.190, RSMo. (2000). The Commission subsequently dismissed the application for sale as detrimental to the public interest. EU, one of the companies owned by Williams and a party to the application, filed a petition for review of the Commission's decision in the Circuit Court of Cole County. The trial court affirmed the Commission's decision. This appeal followed.

A. OSAGE WATER COMPANY

Osage Water Company ("Osage Water") is a state regulated water company providing water and sewer service to customers in Camden County. Osage Water had two shareholders, Greg Williams and Pat Mitchell, each holding fifty percent of the common stock. Williams, an attorney, and Mitchell were directors of the company while Williams's wife Debra acted as corporate secretary. Until 2001, Mitchell managed Osage Water under an operating agreement between the utility and Water Laboratory Company, a company owned by Mitchell.¹

Over time, Osage Water incurred substantial debt, the bulk of which was owed to the two shareholders, Williams and Mitchell, for services rendered. Williams had claims for over $500,000 in legal services. Mitchell had claims for services rendered to Osage Water through another of his companies, Jackson Engineering. Osage Water owed money to other entities, including the Missouri Clean Water Commission, for unpaid fees, licenses, and fines, and to vendors such as Hancock Construction, a judgment creditor of Osage Water.

In February 2001, Osage Water gave Williams a promissory note to cover its legal debt to Williams. The note was secured by a future advance deed of trust on all property Osage Water owned in Camden County. In July 2001, Mitchell left boxes of Osage Water records on the porch of Williams's law offices with a note that read, "I am tired and broke. You want all the assets you get all the headaches. . . . Good luck — you will need it."

Williams and his wife Debra then formed Environmental Utilities, LLC, to operate Osage Water. Debra took over the operations of the company. As the financial position of Osage Water further deteriorated, Williams tried to transfer the assets of Osage Water to EU by conveying the deed of trust he held on Osage Water's assets to EU. Debra Williams then commenced foreclosure proceedings on behalf of EU. EU applied to the Commission to be allowed to operate the utility prepatory to purchasing Osage Water's assets at a sheriff's sale. The staff of the Commission obtained a court order to block the foreclosure. The Williams withdrew as officers of Osage Water just prior to the Secretary of State administratively dissolved Osage Water in September 2002 for failure to file its annual report.

B. RECEIVERSHIP ACTION

In October 2002, the staff of the Commission filed a complaint seeking appointment of a receiver for Osage Water in that Osage Water was unable or unwilling to provide safe and adequate service to its customers. In December 2002, the Commission entered its report and order in Case No. WC-2003-0134, finding that "Osage Water is an orphaned corporation with no means of long-term survival." The report concluded:

The combination of systems in poor repair and the lack of money to pay for major, essential repairs to those systems indicates a very grave danger that Osage Water's customers could suddenly find themselves without water and sewer service, and with limited prospects for timely restoration of that service.

. . . .

Osage Water has been effectively been abandoned by its owners and . . . is unable or unwilling to provide safe and adequate service. The Commission found that Osage Water is in dire financial condition and that its owners no long wish to be in business with each other. There is no credible evidence in the record to suggest that those conditions would improve if the utility were returned to the owners after being in the hands of a receiver. Therefore, liquidation of Osage Water's assets is the best available option.

(Emphasis added.) Osage Water did not file objections to the Commission's findings and conclusions. Shortly after a receivership action was filed and a preliminary hearing held, Osage Water filed for Chapter 7 bankruptcy. The receivership action was stayed until the bankruptcy court dismissed the case at the end of April 2004. In June 2004, the trial court held a hearing on the receivership action; the court found a receivership was appropriate. The court stayed its order, however, pending a proposed sale of Osage Water's assets.

C. PROPOSED SALE OF ASSETS

Missouri-American Water Company ("MAWC") is a regulated utility providing water to 445,000 customers in a number of Missouri counties and sewer service to about 100 customers near Parkville. After eighteen months of negotiations, Williams and MAWC reached agreement for the sale of assets held by entities owned or controlled by Williams. The contract for sale was memorialized in four contracts styled Agreements A-D.

Agreement A proposed the sale of a portion of the assets of Osage Water. Agreement B proposed the sale of all EU's assets. The sale of certain assets held personally by Greg Williams and Debra Williams were the subject of Agreement C. Under Agreement D, MAWC proposed to buy the assets of the Hurricane Deck Holding Company, another entity owned by Williams. All four agreements were interrelated in that each was contingent on the execution and closing of the other three agreements. If any contingency in any one of the four contracts failed to be satisfied, MAWC would not acquire any of the assets that were the subject of the four agreements. Although the Commission has no authority to approve or reject the sale of assets set forth in the Agreements C and D, those sales were contingent upon the Commission's approval of the Agreements A and B.

The agreements were rife with conditions precedent, most of which were subject to the sole approval of MAWC. One of the most significant conditions precedent was the requirement that, as part of the approval of the sale of the assets of Osage Water and EU, the Commission would then approve an asset rate base increase sufficient to cover the rate base resulting from this transaction. The sketchy condition of Osage Water's record keeping precluded it from defending a rate increase before the Commission. MAWC was already under a rate increase moratorium and could not bring a rate case before the Commission even after acquiring the assets. By bootstrapping the rate increase into the asset sale application, MAWC could avoid its rate increase moratorium and pass along the cost of acquiring Osage Water to all the utility's customers. Under the sale agreements, MAWC had the sole discretion to accept or reject any rate base or rate increase as a condition precedent to closing the sale of the assets.²

Whether the Commission even had the authority to bootstrap a rate increase into the sale application process is unclear at best. However, the rate increase provision was of prime importance to the purchaser, MAWC, so important, in fact, that MAWC considered the failure to secure a rate increase a "stopping point." Counsel for MAWC told the Commission that:

[I]f the Commission believes it does not have the authority to address any sort of rate increase in this proceeding because . . . it just does not have the lawful authority to do so, I would greatly encourage [the Commission] to issue that order now before we have a four-day hearing that will expend many resources . . . because . . . that really for Missouri-American is a stopping point.

Thus, the Commission was faced not only with an application for the sale of assets of a distressed utility, but also the question of whether, and how, it could take up a rate increase in conjunction with the joint application.

Moreover, Agreement A did not dispose of all of Osage Water assets. The assets of the seller which provided sewer service to the Cedar Glen Condominiums (the "Cedar Glen assets") were excluded from the sale. The Cedar Glen assets served the bulk of Osage Water's customers, accounting for 208 of its total 345 sewer customers.³ The title of the Cedar Glen assets was clouded, with as many as five different individuals or entities claiming some title to the assets. The agreements required that Osage Water provide clear title to the assets. Osage Water could not provide clear title to the Cedar Glen assets and these assets were, therefore, excluded from the sale.

The exclusion of the sale of the Cedar Glen assets raised a number of concerns for the Commission. The Cedar Glen customers constituted the bulk of Osage Water's sewer customers and their exclusion would mean that any rate increase to cover any proposed rate base would be spread across a much smaller pool of customers. The staff of the Commission noted that the remaining customers could see their rates at least double in order to provide recovery of the overall cost of sewer service.

As noted above, Osage Water had been previously adjudged a distressed utility in a prior action before the...