Klajic v. Castaic Lake Water Agency

• Decision Date: 20 July 2001
• Citation: 109 Cal.Rptr.2d 454,90 Cal.App.4th 987
• Court: California Court of Appeals Court of Appeals
• Parties: (Cal.App. 2 Dist. 2001) JILL KLAJIC, et al., Petitioners and Appellants, v. CASTAIC LAKE WATER AGENCY, Respondent. B137258 SECOND APPELLATE DISTRICT, DIVISION THREE Filed

109 Cal.Rptr.2d 454 (Cal.App. 2 Dist. 2001)

JILL KLAJIC, et al., Petitioners and Appellants, v. CASTAIC LAKE WATER AGENCY, Respondent.

B137258

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT, DIVISION THREE

Filed 7/20/01

(Super. Ct. Nos. BS058871 and BC215578)

APPEAL from a judgment of the Superior Court of Los Angeles County, Dzintra I. Janavs, Judge. Reversed with directions. Jennifer Kilpatrick for Petitioners and Appellants. Robert H. Clark, General Counsel, and Kane, Ballmer & Berkman, R. Bruce Tepper, Jr. for Respondent.

INTRODUCTION

ALDRICH, J.

Petitioners,¹ water users in the Santa Clarita Valley area, appeal from the judgment of the trial court denying their petition for writ of mandate. Petitioners sought to compel respondent Castaic Lake Water Agency (the Agency) to divest itself of its ownership of all of the stock of respondent Santa Clarita Water Company (the Water Company), and to comply with its own enabling statute, which limits the Agency to the wholesale distribution of water. At issue in this appeal is the interpretation and application of Water Code² section 12944.7. That section allows a wholesale water agency to sell water at retail "only pursuant to written contract with . . . a water corporation . . . subject to regulation by the Public Utilities Commission. . . ." The Agency contends that the retail sales contract it executed in connection with its purchase of the Water Company complies with section 12944.7.

Petitioners contend, as the result of the Agency's purchase of the Water Company, that the latter has become the alter ego of the Agency. Thus, they argue, the contract does not satisfy the requirements of the statute and so the Agency remains limited to selling water at wholesale. We hold, as a matter of law, that the contract contemplated in section 12944.7 is one between the Agency and a separate entity, for the Agency's use of that entity's facilities.

We further conclude that the entity must remain both separate and subject to regulation by the Public Utilities Commission during the life of the contract. In denying the writ petition here, the trial court failed to determine whether, at the close of the stock purchase transaction, the Water Company remained separate from the Agency so that the section 12944.7 contract could endure. Accordingly, we reverse the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

1. The parties. The Agency was created by the Legislature in the Castaic Lake Water Agency Law. (West's Ann. Wat. Code Appen., 103-1 et seq., hereinafter, the Agency Act.) Section 103-15 of the Agency Act describes the Agency's purpose: to "acquire water and water rights . . . and provide, sell, and deliver that water at wholesale only . . . through a transmission system to be acquired or constructed by the agency." (Agency Act, 103-15, italics added.) Operating in the Santa Clarita Valley area of Los Angeles County (id. 103-2), the Agency provides water to four local water utilities, the largest of which was the Water Company. Until the transaction here at issue, the Water Company was a for-profit California corporation and a public utility subject to regulation by the Public Utilities Commission (the PUC). As a water "purveyor,³" its purpose was to distribute and sell water to its 21,000 domestic, industrial, and commercial accounts within the Agency's boundaries.

In addition to its purchases of water from the Agency, the Water Company owned 15 water wells and had access to two fresh-water acquifers in the eastern groundwater basin of the Santa Clara River with the ability to extract 15,000 acre/feet of water yearly. Petitioners are property owners, residents, and taxpayers in the area covered by the Agency who claim to be beneficially interested in the issuance of a writ because, if the Agency suffers adverse financial consequences from its purchase of the Water Company, petitioners' water rates will increase; and if water must be rationed, they will suffer greater adverse consequences than they would if the Water Company remained a separate purveyor.

2. The challenged transaction. The challenged transaction between the Agency and the Water Company involved two inextricably connected parts. In the contract portion, the Water Company and Agency executed an agreement to permit the Agency to sell water directly to consumers (hereinafter, the Retail Service Agreement). In the condemnation proceeding, the Agency concurrently took by eminent domain all of the outstanding stock of the Water Company in order to give the Agency complete control of the Water Company. Specifically, on August 11, 1999, the Agency approved the Retail Service Agreement. That Agreement recites that it was made on August 31, 1999, and that "[a]s a part of a possible settlement of the Agency Condemnation Action, [the Water Company] agreed to contract with the Agency to grant to the Agency the right to sell water directly to consumers within the area in which [the Water Company] operates." (Italics added.) The Agreement further recites that "The Agency and [Water Company] intend that this grant to the Agency shall satisfy the requirements of Section 12944.7 . . . and [shall] be liberally construed to effect the purposes of Section 12944.7. . . ." Simultaneously, the Agency's directors passed Resolution No. 2065 to effectuate the condemnation portion of the transaction. Resolution 2065 authorized the condemnation of all of the issued and outstanding capital stock of the Water Company. (Agency Act, 103-15, subd. (g).) The resolution declared that public interest and necessity require the acquisition of the Water Company's capital stock "to advance the business and statutory purposes of the Agency, including, but not limited to, providing, delivering and selling wholesale water within the Agency's jurisdiction as well as providing retail service pursuant to Water Code section 12944.7 . . . ." (Italics added.) The Agency planned to finance this two-part transaction by issuing up to $70 million in retail system revenue certificates of participation through an installment purchase agreement with its own financing corporation. On August 12, 1999, the Agency filed its complaint to condemn and acquire all of the issued and outstanding capital stock of the Water Company.⁴ (Castaic Lake Water Agency v. Santa Clarita Water Co., Case number BC 215065.)

3. The writ petition. On August 23, 1999, after the above resolutions were passed and the Retail Sales Agreement was signed, but before the final judgment was issued in the condemnation action and before the transaction was closed, petitioners filed their petition "for peremptory writ of mandate or prohibition." (Code Civ. Proc., 1085, 1086, 1102, 1103.) The amended petition⁵ alleged that the Agency's condemnation of the Water Company stock and retail sale of water violates the Agency Act. (Agency Act, 103-15.) Petitioners also challenged as ultra vires the terms and conditions of the financing arrangement. Petitioners requested that the trial court issue a writ of mandate or prohibition to require the Agency and the Water Company to cease violating the language of the Agency Act, which limits the Agency to selling water "at wholesale only," and to cease its attempt to acquire the Water Company.⁶

4. The challenged transaction closes. A week after the petition was filed, on September 1, 1999, the Agency executed a new stock purchase agreement to purchase the Water Company's stock for $63 million in cash, averting the financing arrangement challenged in the petition. The next day, on September 2, 1999, a stipulation for judgment for $63 million was entered in the eminent domain action. The judgment stated that the Agency was authorized by the provisions of section 12944.7 to enter and did enter into written contracts with retail water purveyors to sell water to any ultimate water consumer within the Agency's jurisdiction. The judgment also recited that the Agency was empowered by Article 16, section 17 of the California Constitution to acquire shares of a water company for the purpose of furnishing water for public purposes. On September 3, 1999, the consideration of $63 million in cash was transmitted to the shareholders of the Water Company, the Retail Service Agreement was delivered, and the court executed a final order condemning in favor of the Agency all rights, title, and interest in the Water Company's outstanding shares. Thereafter, in connection with the stock purchase, the Water Company issued a number of resolutions designed to wind up the Water Company's business, dissolve the corporation, distribute its remaining assets to the Agency, and accept the resignation of three of the Water Company's directors and its secretary.⁷

5. The ruling on the petition. At the hearing, originally scheduled to consider petitioners' motion for a stay of the transaction, petitioners cited the legislative history of section 12944.7 to argue that the effect of the transaction was to merge the Water Company with the Agency so that the two organizations would "be[] operated as a unified entity," one becoming the alter ego of the other. Additionally, petitioners argued, whatever company existed after the merger would no longer be regulated by the PUC. The net result of the transaction, petitioners claimed, is that the Retail Sales Agreement does not comply with section 12944.7 and the Agency may not sell water at retail. In its defense, the Agency argued that the language of the statute is clear, precluding resort to its legislative history, and that the Retail Sales Agreement is a contract that complies with the letter of section 12944.7. The Agency never addressed the effect of the transaction on the Water Company, i.e., after the transaction closed, what form the Water Company took and whether the Water Company even continues to exist as an ongoing concern, separate from the Agency. Although the Agency asserted that "[t]he water company...