Santa Clarita Organization for Planning and Environment v. Castaic Lake Water Agency

          Order Filed Date: 8/16/2016.

         APPEAL from judgments of the Superior Court of Los Angeles County. No. BS141673 Luis A. Lavin, Judge. Robert H. O’Brien, Judge.

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

          Kronick, Moskovitz, Tiedemann & Girard, Eric N. Robinson and Hanspeter Walter; Morrison & Foerster, Miriam A. Vogel, 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; Greines, Martin, Stein & Richland, Timothy T. Coates, for Defendant and Respondent Castaic Lake Water Agency.

         ORDER MODIFYING OPINION AND DENYING REHEARING

         THE COURT:^[*]

         It is ordered that the opinion filed herein on July 28, 2016, be modified as follows:

         1. On page 15, footnote 4 is deleted, which will require renumbering of all subsequent footnotes.

         2. On page 15, the first full paragraph, line 3, the word “audiotape” is changed to “videotapes” so the sentence reads:

         Before undertaking substantial evidence review, we first address SCOPE’s argument that our analysis should include four items of evidence that the trial court refused to consider-namely, the raw videotapes and uncertified transcripts, prepared by SCOPE members, from the Agency’s board’s December 12 and December 19 meetings.

         3. The paragraph beginning at the bottom of page 16 with “SCOPE contends” and ending on page 17 with “(Outfitter Properties, at p. 251.)” is modified to read as follows:

         SCOPE offers three reasons why, in its view, the general rule against the consideration of extra-record evidence does not apply here. SCOPE argues that the general rule does not apply when a party is challenging an agency’s action as ultra vires (that is, beyond its statutory authority), but the law is to the contrary because courts will limit themselves to record evidence even when confronted with challenges that an agency “acting in its quasi-legislative capacity has exceeded its authority.” (Shapell, supra, 1 Cal.App.4th at p. 233.) SCOPE next argues that Outfitter Properties, supra, 207 Cal.App.4th 237 supports its position, but the exceptions detailed above in Outfitter Properties do not make “extra- record evidence... admissible to contradict evidence upon which the administrative agency relied in making its quasi-legislative decision.” (Id. at p. 251.) SCOPE lastly asserts for the first time at oral argument on appeal that it is attacking not only the Agency’s initial acquisition of Valencia, but also its ongoing operation of Valencia as its alter ego. SCOPE urges that the latter challenge is not subject to the general rule against resort to extra-record evidence. Even if we assume SCOPE is correct, ignore that SCOPE has forfeited this argument by waiting until oral argument on appeal to raise it (Santa Clara County Local Transportation Authority v. Guardino (1995) 11 Cal.4th 220, 232, fn. 6), and overlook that SCOPE’s operative complaint primarily attacks the Agency’s acquisition of Valencia, SCOPE’s newly minted argument does it little good because the trial court had an independent basis for excluding the extra- record evidence, as we discuss next.

         4. On page 17, after the newly-inserted text described in modification number 3 above, footnote 4 should be inserted after the final line “as we discuss next.” The text of footnote 4 should read:

         To the extent that SCOPE at oral argument on appeal requested a reversal and remand so that it can propound discovery and obtain new extra-record evidence to prove that the Agency is now operating Valencia as its alter ego, we deny that request as untimely and as wholly inconsistent with an earlier stipulation not to “propound any further request for discovery in this matter.” SCOPE asserts that it had tactical reasons for entering into this stipulation, but its motives do not negate the effect of its acts.

         5. On page 17, first full paragraph, line 2, the words “audio tapes” are changed to “videotapes” so the sentence reads:

         Second, even if the trial court could have considered this extra-record evidence, the court acted within its discretion in deciding not to admit the incomplete videotapes and their uncertified transcripts.

         6. On page 17, first full paragraph, line 10, the words “audio tapes” are changed to “videotapes” so the sentence reads:

         In this case, the court had evidence that at least one of the videotapes was incomplete, and that both transcripts were uncertified.

         7. On page 17, second full paragraph, line 4, the word “audio” is changed to “video” so the sentence reads:

         SCOPE argues that the Agency did not comply with its discovery obligations before the trial court, did not properly respond to a Public Records Act request (Gov. Code, § 6250 et seq.), and did not inform SCOPE that its board’s secretary regularly video taped meetings to use in preparing official minutes.

         There is no change in the judgment.

         Appellant’s petition for rehearing is denied.

          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 (Klajic I); Klajic Lake Water Agency (2004) 121 Cal.App.4th 5, 11 (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.)

         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 ...