PHASE 1 RULING

At the request of plaintiffs/defendants South Orange County Wastewater Authority [a California Joint Powers Authority], City of Laguna Beach, South Coast Water District, and Emerald Bay Service District (collectively “SOCWA”) and defendant/cross-complainant Moulton Niguel Water District (“MNWD”) the Court bifurcated the trial of this action into two phases.  Phase 1 was to be tried to the Court and concerned the interpretation, explanation, or supplementation of the contracts at issue in this action, the:  Joint Exercise of Powers Agreement Creating South Orange County Wastewater Authority (“JPA”); Agreement for Design, Construction, Use, Operation, Maintenance, Repair, and Replacement of Coastal Treatment Plant for and on Behalf of Project Committee No. 15, Aliso Water Management Agency (the “PC 15 Agreement”); and, amendments to the PC 15 Agreement.  Phase 2 was to be tried to a jury and address alleged breaches of the contracts and resulting damages.

The court trial of phase 1 spanned four full weeks.  During the initial days of the trial, the parties disagreed on what testimony and evidence, if any, the Court should permit to interpret the JPA, PC 15 Agreement, and amendments to the PC 15 Agreement or explain or supplement the agreements.  MNWD successfully argued Code of Civil Procedure section 1856(c) course of dealing/performance evidence was necessary.  Section 1856(c) provides, “[t]he terms set forth in a writing described in subdivision (a) may be explained or supplemented by course of dealing or usage of trade or by course of performance.”  Section 1856(a) provides, “[t]erms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement.”

Thereafter, witnesses testified, testimony from several depositions was read and viewed, and exhibits were entered into evidence.  Based upon the testimony and exhibits, the Court rules as set below.

On November 9, 1976, a subcommittee (the “Project Committee 15”) consisting of some of the member agencies of previous joint powers authorities, entered into the PC 15 Agreement to study the feasibility of constructing the subject project, the Coastal Treatment Plant, and design of it.  The PC 15 Agreement did not contain any provision stating the term of the agreement.  The Project Committee 15 subsequently entered into amendments to allow for the actual construction and operation of the Coastal Treatment Plant.  On February 19, 1980, Amendment #2 was entered into.  Page 6 of Amendment #2 provides that the scope and purpose of Project Committee 15 was modified to include the construction, operation, maintenance, repair, and replacement of the Coastal Treatment Plant.  Section 10 of Amendment #2 provides, “The term hereof shall be for a period fifty (50) years and may be extended for a like period ….”  (Emphasis added.)  The Court rules that the fifty (50) year term of Amendment #2, for the construction, operation, maintenance, repair, and replacement of the Coastal Treatment Plant, began on February 19, 1980, and ends on February 19, 2030.

The JPA was entered on July 1, 2001.  Section 3.5 of the JPA provides that SOCWA is the successor-in-interest to the previous JPA’s for all purposes and that SOCWA assumed all assets, obligations, agreements and liabilities of the JPA’s.

On June 28, 2016, MNWD voted “no” on the adoption of SOCWA’s budget for Fiscal Year 2016 – 2017 at a meeting of the Board of Directors of SOCWA.  It was the lone “no” vote.  The evidence shows that at the meeting, the other SOCWA member agencies were not receptive to an MNWD proposal that SOCWA transition from a “one agency, one vote” system to a weighted voting system which would have allowed a member agency’s vote to reflect its financial obligations for services (i.e., equity based governance).  The evidence further shows that MNWD wished to extricate itself from the PC 15 Agreement, amendments to the agreement, and the financial obligations associated with the Coastal Treatment Plant.  Finally, the evidence shows that MNWD believed that the other member agencies of PC 15 were placing their interests above that of MNWD in making decisions about the repair and replacement of components of the Coastal Treatment Plant.  The Court rules that for course of dealing/performance purposes, the subject dispute arose on June 28, 2016.

The operating and maintenance budget (“O&M budget”) to maintain the Coastal Treatment Plant includes a “capital” component or portion.  Member agencies of PC 15 actively participated in the preparation of the annual O&M budgets, including capital portions of the budget.  They were afforded multiple participation and input opportunities via budget workshops, engineering committee meetings, and individual telephone calls and meetings to address a member agency’s concerns, if any.

Pursuant to Section 6.3 of the JPA, an annual O&M budget, including the capital portion of the budget, must be approved by two-thirds of the directors of SOCWA.  Capital items do not require a unanimous vote.  The capital component of annual O&M budgets has been separated at times.  This permits capital costs to be allocated to member agencies according to Section 6.3.1 (costs related to project use and costs not directly related to project use).

All parties agree Section 8.2 of the JPA addresses two distinct situations and that, during drafting, it should have been broken up into two sections.  The first part of Section 8.2 applies to the acquisition or construction of new projects.  Unanimous consent is required for the acquisition or construction of new projects.  The Coastal Treatment Plant is not a new project.

The second part of Section 8.2 provides that less than all member agencies which are participating in an existing project, such as the Coastal Treatment Plant, may modify, rehabilitate, or improve an existing project 1) upon a simple majority vote of all of the participating member agencies; and, 2) so long as the member agencies who desire the modification, rehabilitation, or improvement pay all costs and fees associated with the modification, rehabilitation, or improvement.  It further provides that no participating member agency may unreasonably withhold or condition its approval of a project modification, rehabilitation, or improvement proposed to be wholly funded by other participating member agencies.

The labels and terms rehabilitation, replacement, modification, repair, refurbishment, improvement, etc., have historically been used interchangeably by the member agencies of PC 15, including SOCWA and MNWD, to described capital items.  They are synonymous terms.  A member agency of PC 15 is obligated to pay its proportional share of the capital items necessary to operate and maintain the Coastal Treatment Plant regardless of the label placed upon them and regardless of whether the capital items may last beyond the fifty-year term of Amendment #2.  Whether one label or another is used does not trigger Section 8.2 of the JPA.

The decision as to what capital items are necessary to operate and maintain the Coastal Treatment Plant is made by the member agencies of PC 15.  Again, the member agencies actively participated in the preparation of the annual O&M budgets, including capital portions of the budget, and were afforded multiple opportunities to do so.

The evidence shows that MNWD obtained its interest in the Coastal Treatment Plant subject to all of the rights, duties and obligations applicable to PC 15 members.  MNWD is legally obligated to pay its proportional share of all costs, including capital costs and items, necessary to operate and maintain the Coastal Treatment Plant until February 19, 2030, or until the fifty-year term is rescinded or modified.  (Amendment #2, Section 10.)  As stated above, the decision as to what capital costs and items are necessary, to operate and maintain the Coastal Treatment Plant is made by the member agencies of PC 15.  The Court does not rule upon whether MNWD breached that obligation or upon the amount of that obligation.  Those are Phase 2 issues to be tried to the jury.

The Court will not issue an advisory opinion concerning the later part of Section 10 of Amendment #2.  It addresses the satisfaction or disposal of the assets, obligations, and liabilities of PC 15 upon the termination of the PC 15 Agreement.

Finally, the Court notes that in reaching the above decisions, the Court did not depend on evidence of alleged spoliation of evidence associated with MNWD’s destruction of years of its stored files (“free the files day”) or the alleged destruction by MNWD of audio recordings of MNWD meetings.  The Court renders no decision regarding the alleged spoliation of evidence by MNWD.  That issue may be tried to the jury in Phase 2.