Scott Paper Co. v. City of Anacortes, 43754
| Decision Date | 04 May 1978 |
| Docket Number | No. 43754,43754 |
| Citation | 90 Wn.2d 19,578 P.2d 1292 |
| Parties | SCOTT PAPER COMPANY, Respondent, v. CITY OF ANACORTES and State of Washington, Appellants. |
| Court | Washington Supreme Court |
Slade Gorton, Atty. Gen., Robert F. Hauth, Asst. Atty. Gen., Olympia, Donald Foss, Jr., Roberts, Shefelman, Lawrence, Gay & Moch, William N. Appel, Seattle, Stephen E. Mansfield, Anacortes, for appellants.
Anderson, Hunter, Dewell, Baker & Collins, P. S., J. P. Hunter, Everett, for respondent.
This is a declaratory judgment action brought by the Scott Paper Company to determine the validity and effect of two contracts between the Coos Bay Pulp Corporation, the paper company's predecessor in interest, and the City of Anacortes. The principal question raised is one of statutory construction, that is, the power of the City to bind itself by contract for the sale of its water, where the contracts act as security for the issuance of municipal water revenue bonds. The court below upheld the contract terms as valid and binding, rejecting the City's attempt to impose a higher water rate than the one set by the contracts. We affirm. 1
The 1955 and 1957 contracts between the City of Anacortes and the Coos Bay Pulp Corporation which are in question here were entered into at a time when the City was executing a plan for improvements and extensions to its municipal water supply and distribution system. A series of ordinances passed between 1952 and the date of the first contract with Coos Bay in 1955 expressed the City's intention to make the improvements, authorized the issuance of up to.$1.6 million in water revenue bonds to fund the improvement scheme, and provided for the issuance of one-half million dollars in bonds, Series A-1, for that purpose in 1955. The City also imposed fixed charges on consumers not on the existing pipeline to cover some portion of the cost of extending the pipeline, distinguishing payment of water rates from these capital contributions. The Coos Bay Pulp Corporation, predecessor in interest of respondent Scott Paper Company, was to benefit from the scheme by installation of a water pipe to its property line.
In January 1955 the City and Coos Bay entered into the first of the two contracts. In this first contract the City agreed to furnish Coos Bay up to 170 million gallons of water per month. In exchange Coos Bay agreed to pay a minimum monthly sum of $3000 for the water it received, plus 3.9 cents per 1000 gallons for the excess over 60,000 gallons delivered per month. In the event it defaulted or unilaterally terminated the agreement, Coos Bay promised to pay a fixed sum up to $376,000, which was the estimated cost of installing the facilities necessary to provide it with water. The water rate could be renegotiated at Coos Bay's request should the rate stipulated provide the City with more than a fair and adequate return. Coos Bay also promised to pay for any water filtration and treatment facilities the City was required to build in order to continue furnishing it with the quality water it needed. The initial term of the contract was 25 years.
This contract was an essential and integral part of the City's plan for improving its water system. The assured proceeds from the monthly payment and liquidated damages provisions of this contract, along with those from another large industrial user contract, were necessary security for the issuance of a second series of city water revenue bonds, Series A-2, in 1955. It is reasonable to conclude from the evidence that both parties knew the bonds could not be issued without this agreement. It is also reasonable to conclude that both parties knew the proceeds of the contract would be allocated in part to special funds for retiring the bonds, in view of the short period of time elapsing before enactment of the bond ordinance. Two months after the Coos Bay contract was signed (as contemplated it appears, by the parties), the City passed Ordinance No. 1158, providing for the issuance of the Series A-2 bonds. Section three of that ordinance created a special sinking fund for the sole purpose of retiring Series A bonds. Under the terms of section three, annual contributions from the income from the Coos Bay contract were to be paid into this fund. Likewise, any liquidated damages paid by Coos Bay upon default or termination, a liability up to $376,000, were to be paid into the fund. In that same year Coos Bay Pulp Corporation, relying on its water supply contract, increased production and made capital expenditures of approximately $675,000. At the time the contract was entered into, water rates applicable to regular users were set by ordinance.
The 1955 contract expressly provided for construction of water filtration and treatment facilities should Coos Bay require treated water. Coos Bay agreed to pay its pro rata share of construction costs of such a plant, based on the capacity of the facilities and the portion of treated water consumed by Coos Bay, or the entire cost if the plant served only Coos Bay. It also agreed to pay its pro rata share of filtration and treatment costs. Its liquidated damages liability in the event of default or termination was increased to cover its share of plant construction costs, the amount of which was not then known.
Construction of this significant addition to the municipal water system did become necessary. In 1957 the City undertook a new funding scheme to provide a plant which apparently was to serve the entire municipal water system. A new series of water revenue bonds, Series B, was to be issued to pay for constructing and equipping the plant. As part of the security for these new bonds, a supplemental water contract between the City and Coos Bay was negotiated which ensured a greater water supply to Coos Bay and a higher minimum monthly payment to the City. A small fraction of this payment was set aside as a fixed expense to defray costs and debt service, a provision which was also a feature of the first contract. Coos Bay's liquidated damages obligation was increased to a maximum of $475,000. The option to request renegotiation of rates was made available to both parties, to ensure that the City earned a fair and adequate return. The first renegotiation period was to occur in 1960.
On May 21, 1957, the City Council voted to execute the proposed supplemental contract. At the same meeting the Council voted to accept an offer from a named underwriter to purchase the proposed bonds. That offer was conditioned in part on execution of the supplemental contract with Coos Bay, along with contracts with two other large users, "substantially as presented." These contracts were necessary for retirement of the bonds; therefore, the bonds could not have been sold without the firm promise of Coos Bay to fulfill its obligations under the contract.
Shortly thereafter, as contemplated by the parties, City Ordinance No. 1218 was passed, providing for issuance of the Series B water revenue bonds. The ordinance created a bond redemption fund. Proceeds from the supplemental contract with Coos Bay were to be paid into this fund to defray both capital costs and debt service in connection with the new plant. Certain of the funds from the original contract were also to be paid into a new sinking fund. Ordinance 1218 referred specifically to the contracts with Coos Bay as "important and valuable security" for the revenue bonds.
In 1957 respondent Scott Paper Company, hereinafter referred to as the Paper Company, became successor in interest to the rights of the Coos Bay Pulp Corporation under the contracts. The 1960, '65, and '70 negotiation times provided in the supplemental contract all passed without action by either party. City water rates applicable to regular water users, but never applied to Coos Bay or the Paper Company, were changed by ordinance in 1958 and 1971. In 1973, approximately 20 months before the 1975 renegotiation period was to commence (as the contract with the Paper Company provided) the City took several actions which are the basis of this suit. City Ordinance No. 1603 amended city water rates once again. Ordinance No. 1607 imposed a water utility tax on the gross income of the city water system at the rate of 7 percent. Beginning December 1973, the City billed the Paper Company in accordance with the rates set by ordinance, that is Ordinance No. 1603 and its predecessors, retroactively through October 1970. Never before had the Paper Company been billed according to the rate set by ordinance. The City thus claimed an amount due, in arrears, of approximately $474,000. Subsequent billings also showed a surcharge covering the 7 percent utility tax, a new charge to the Paper Company not contemplated by the terms of its contract with the City. The City had apparently taken the position it could alter the price term of its contracts unilaterally without disturbing the Paper Company's obligations with regard to minimum monthly payments and liquidated damages.
The Paper Company thereafter instituted this action for declaratory judgment against the City and the State, alleging that application to it of the rate and utility tax ordinances unconstitutionally impaired its contracts with the City. The Paper Company further alleged that RCW 35.92.010, amended in 1959 to require that no water rate be charged which is less than the cost of the water and service, could not constitutionally be applied to its contract with the City. The City and State counterclaimed to recover the amount allegedly due under the ordinances. They contended that the contract rate was less than cost, in violation of RCW 35.92.010, and, therefore, some of the water furnished at that rate was a gift by the City in violation of Const. art. 8, § 7, which prohibits the giving of gifts by a municipality.
At trial the Paper Company's motion for summary judgment was granted. The court held that the City rate and tax ordinances could not...
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