Santa Clarita Org. for Planning & the Env't v. Castaic Lake Water Agency

• Decision Date: 28 July 2016
• Docket Number: B264284
• Citation: 206 Cal.Rptr.3d 33,1 Cal.App.5th 1084
• Court: California Court of Appeals Court of Appeals
• Parties: SANTA CLARITA ORGANIZATION FOR PLANNING AND THE ENVIRONMENT, Plaintiff and Appellant, v. CASTAIC LAKE WATER AGENCY et al., Defendants and Respondents.

1 Cal.App.5th 1084

206 Cal.Rptr.3d 33

SANTA CLARITA ORGANIZATION FOR PLANNING AND THE ENVIRONMENT, Plaintiff and Appellant

v.CASTAIC LAKE WATER AGENCY et al., Defendants and Respondents.

B264284

Court of Appeal, Second District, Division 2, California.

Filed July 28, 2016

As Modified on Denial of Rehearing August 16, 2016

Advocates for the Environment, Dean Wallraff, for Petitioner and Appellant.

Kronick, Moskovitz, Tiedemann & Girard, Eric N. Robinson and Hanspeter Walter, Sacramento; Morrison & Foerster, Miriam A. Vogel, Los Angeles, for Defendants and Respondents Newhall Land and

Farming Company and Stevenson Ranch Venture, LLC.

Ferguson Case Orr Paterson, Neal P. Maguire, for Defendant and Respondent Valencia Water Company.

Best, Best & Krieger, Jeffrey V. Dunn and Russell G. Behrens, Irvine; Greines, Martin, Stein & Richland, Timothy T. Coates, Los Angeles, for Defendant and Respondent Castaic Lake Water Agency.

HOFFSTADT, J.

This is a lawsuit to unwind a public water agency's acquisition of all of the stock of a retail water purveyor within its territory. On appeal of the trial court's order refusing to unwind the transaction, we confront three questions: (1) must we dismiss the appeal as untimely under the streamlined procedures available for validating certain acts of public agencies (Code Civ. Proc., § 860 et seq. ) when those procedures were invoked below, but invoked improperly because the underlying acts fall outside the reach of the validation statutes?; (2) has the purveyor become the agency's alter ego by virtue of the agency's ownership of all of its stock and its appointment of a majority of the purveyor's directors, such that the agency is now engaged in the retail sale of water in violation of Water Code section 12944.7 ?; and (3) does the agency's ownership of the purveyor's stock violate article XVI, section 17 of the California Constitution, which precludes a public agency from “loan[ing] its credit,” and from “subscrib[ing] to, or be [ing] interested in the stock of any company, association, or corporation” except the “shares of ... a mutual water company or corporation” acquired to “furnish[ ] a supply of water for public, municipal or governmental purposes?”

We conclude that the answer to all three questions is no. The validation procedures invoke a court's in rem jurisdiction, and that subject matter jurisdiction attaches only if there is a statutory basis for invoking those procedures and proper notice; because that basis is absent here and because estoppel does not apply to subject matter jurisdiction, the validation procedures' accelerated timeline for appeal is inapplicable. There is substantial evidence to support the trial court's factual finding that the purveyor did not become the agency's alter ego in this case. The agency did not violate article XVI, section 17 for two reasons—namely, the provision reaches only stock acquisitions that extend credit and the provision's exception for stock ownership applies to any “mutual water company” and any other “corporation” (whether or not it is a mutual water company). Thus, the fact that the corporate purveyor in this case was not a mutual water company is of no significance.

We accordingly affirm.

FACTS AND PROCEDURAL BACKGROUND

I. Facts

Respondent Castaic Lake Water Agency (Agency) is charged with “acquir[ing] water and water rights” in order to “provide, sell and deliver that water at wholesale, for municipal, industrial, domestic, and other purposes” within its territory. (Stats. 1986, ch. 832, § 5, p. 2843, Deering's Ann. Wat.—Uncod. Acts (2008 ed.) Act 130, § 15.)¹ Its territory encompasses most of the Santa Clarita Valley. (Id. , § 2.) Initially, the Agency sold its water wholesale to four retail “purveyors”—Santa Clarita Water District, respondent Valencia Water Company (Valencia), Newhall County Water District, and Los Angeles County Waterworks District No. 36. In 1999, the Agency acquired the stock of the Santa Clarita Water District and absorbed the district into its own operations. (Klajic v. Castaic Lake Water Agency (2001) 90 Cal.App.4th 987, 991–992, 109 Cal.Rptr.2d 454 (Klajic I ); Klajic v. Castaic Lake Water Agency (2004) 121 Cal.App.4th 5, 11, 16 Cal.Rptr.3d 746 (Klajic II ).) The California Legislature passed Assembly Bill 134 to allow the Agency itself to act as a retail purveyor of water in the territory where the Santa Clarita Water District used to operate. (Act 130, § 15.1; Klajic II , at pp. 9–13, 16 Cal.Rptr.3d 746.)

In 2011, respondent Newhall Land and Farming Company (Newhall) owned 100 percent of the stock in Valencia, and offered to sell that stock to the Agency. At that time, Valencia was a private corporation regulated by the California Public Utilities Commission. The Agency was interested in Newhall's offer because acquiring Valencia would give the Agency control over 84 percent of the retail connections within its territory, which was consistent with the Agency's “One Valley One Water” mission statement and would enable the Agency to “realize economies of scale and synergies associated with [an] integrated [Santa Clarita Water District]/[Valencia] retail entity.” Agency staff began negotiating with Newhall on a strictly confidential basis. On December 10, 2012, Agency staff informed the Agency's board of directors board) that the Agency and Newhall had reached a proposed agreement for the Agency to acquire Valencia's stock for $73.8 million.

On December 12, 2012, the Agency held a special meeting at which its board adopted two resolutions. Resolution No. 2890 was a resolution of necessity declaring that “[t]he public interest and necessity require the acquisition of all issued and outstanding shares of [Valencia].” This acquisition, the resolution stated, would enable the Agency to “maintain[ ] and enhanc[e] the reliability of retail and wholesale water service within the Agency's boundaries,” to “develop[ ] more uniform water service policies within the Santa Clarita Valley,” to “better coordinate groundwater management and enhance Valley wide conjunctive use of all [Valley resources] of supply,” and to “provide potential future opportunities for operational efficiencies and capital improvement economies of scale.” The resolution specifically ratified the prior negotiations of Agency staff with Newhall concerning Valencia and authorized the Agency to file an eminent domain lawsuit to acquire the stock. Resolution No. 2893, adopted in closed session, authorized Agency staff to enter into a settlement agreement of $73.8 million.

The next day, the Agency filed its eminent domain lawsuit. Five days later, it filed its settlement agreement with Newhall. Under that agreement, the Agency was to purchase all outstanding shares of Valencia's stock for $73.8 million. Except that all of Valencia's directors were required to resign, the Agency was to continue operating Valencia under Public Utility Commission supervision and without altering Valencia's water rights or its personnel for the later of 75 days or the conclusion of any litigation challenging the acquisition. The Agency also agreed that should it or Valencia decide to merge Valencia into the Agency, the Agency would forestall implementation for 75 days after any board resolution authorizing such an action.

The trial court approved the settlement and entered judgment on the eminent domain action on December 18, 2012. The next day, on December 19, 2012, the Agency held another meeting. At that meeting, the Agency's staff recommended five persons to be appointed to Valencia's five-member board; three of them were Agency employees.

II. Procedural History

The Santa Clarita Organization for Planning and the Environment (SCOPE) sued the Agency and its board; Valencia and its board of directors; Newhall; Stevenson Ranch Venture LLC, a company affiliated with Newhall; and Keith Abercrombie (Abercrombie), Valencia's general manager and a member of the Agency's board during the negotiations between Agency Staff and Newhall. In the operative first amended petition, SCOPE brought claims: (1) for inverse validation (Code Civ. Proc., § 863); (2) for writ of mandate (id. , § 1085); (3) for violations of the California Environmental Quality Act (CEQA) (Pub. Resources Code, § 21000 et seq.); (4) for illegal expenditure of taxpayer funds (Code Civ. Proc., § 526a); and (5) for conflict of interest (Gov. Code, §§ 1090 & 87100). To perfect its invocation of the validation procedures underlying the first count, SCOPE sought and obtained court permission to give constructive notice in one of the local newspapers, and thereafter filed proof of serving that notice.

The trial court subsequently sustained a demurrer with leave to amend on SCOPE's CEQA claim due to untimeliness, and granted judgment on the pleadings to Abercrombie on the sole claim against him for conflict of interest.²

In March 2015, the trial court issued a written ruling on SCOPE's remaining claims.

The trial court denied SCOPE's claims for invalidation and for a writ of mandate. In so doing, the court rejected SCOPE's argument that Valencia had become the Agency's alter ego, finding that the Agency's ownership of all of Valencia's stock and its appointment of a majority of its directors did not constitute sufficient evidence of merger or fraud. In reaching this conclusion, the court refused to consider a video tape and uncertified transcript, prepared by SCOPE, of the December 12 and December 19 Agency board meetings because they had a “very weak foundation.” The court further concluded that the Agency did not violate article XVI, section 17 in acquiring Valencia's stock. The court reasoned that the provision's exception for owning stock in a “mutual water company or corporation” for the purpose of furnishing water for the public “indicates that there is more than one category of entities in which the state can obtain capital stock. One category is a mutual water company. The other is a corporation, without any...