Opinion
G062762
11-30-2023
CITY OF RIVERSIDE, Plaintiff and Respondent, v. RUBIDOUX COMMUNITY SERVICES DISTRICT, Defendant and Appellant.
Harper & Burns, John R. Harper; Ring Bender, Patrick K. Bobko, Norman A. Dupont; Klapach & Klapach and Joseph S. Klapach for Defendant and Appellant. Office of the City Attorney City of Riverside, Phaedra A. Norton, City Attorney, Anthony L. Beaumon, Deputy City Attorney; Burke Williams &Sorenson, David Darroch, David Hyndman; Greines Martin Stein &Richland, Timothy T. Coates, Alana H. Rotter, and Jeffrey Gurrola for Plaintiff and Respondent.
NOT TO BE PUBLISHED
Appeal from a judgment of the Superior Court of San Bernardino County No. CIVDS1310520, Donald R. Alvarez, Judge. Reversed and remanded with directions.
Harper & Burns, John R. Harper; Ring Bender, Patrick K. Bobko, Norman A. Dupont; Klapach & Klapach and Joseph S. Klapach for Defendant and Appellant.
Office of the City Attorney City of Riverside, Phaedra A. Norton, City Attorney, Anthony L. Beaumon, Deputy City Attorney; Burke Williams &Sorenson, David Darroch, David Hyndman; Greines Martin Stein &Richland, Timothy T. Coates, Alana H. Rotter, and Jeffrey Gurrola for Plaintiff and Respondent.
OPINION
SANCHEZ, ACTING P. J.
This is an appeal from a judgment following a court trial. Plaintiff City of Riverside (Riverside) sued Rubidoux Community Services District (Rubidoux) for breach of contract. The contract relates to the treatment of wastewater. Riverside owns and operates a wastewater treatment plant, and Rubidoux has contracted with Riverside to send its wastewater to Riverside's plant for treatment. As part of that contract, Rubidoux agreed to contribute to certain capital improvements at the plant; specifically: improvements "constructed . . . as a direct result of new or revised Federal, State or NPDES permit requirements; provided, however, that such assessments must be directly related to, non-discretionary, and necessitated by new or revised requirements which become effective following the execution date of this Agreement."
NPDES stands for National Pollutant Discharge Elimination System. The NPDES permit is issued by the California Regional Water Quality Control Board (Regional Board). NPDES permits are revised and reissued every five years or so. In Riverside's case, NPDES permits were reissued in 1992, 1995, 2001, 2006, and 2013.
In 2006, Riverside began a major overhaul of the wastewater treatment plant to the tune of $230 million. The justification for the upgrade was that future regulatory requirements are likely to result in more stringent environmental restrictions, which these upgrades could theoretically accommodate. Riverside assessed Rubidoux a proportionate share of the upgrade cost (approximately $15 million). Rubidoux refused to pay on the ground that the upgrades were not in response to new regulations. The present lawsuit followed. After a bench trial, the trial court found in Riverside's favor, reasoning that anticipating future regulatory changes is the prudent course, and that it would be unreasonable to expect Riverside to hold off on upgrades until a new requirement is actually passed.
We reverse. The plain language of the contract only requires Rubidoux to contribute to upgrades that are nondiscretionary and necessitated by new regulatory requirements that have "become effective." The trial court did not tie the plant upgrades to any particular regulatory change, but instead reasoned that because the upgrades were, in some general sense, driven by regulatory compliance, Rubidoux was on the hook. But that is not what the contract says.
However, we will not direct judgment, but instead will remand for further proceedings. There was evidence in the record that at least some of the upgrades were driven by the need to maintain compliance with post-1990 regulatory requirements. On remand, the court should determine the specific regulatory requirements that necessitated some or all of the upgrades, if any.
FACTS
Rubidoux is a community services district, which means it is a municipal entity empowered to do specific tasks; in this case, it provides potable water, irrigation water, wastewater collection and disposal, trash services, fire protection, emergency services, streetlights, and weed abatement.
In 1976, Riverside and Rubidoux operated separate wastewater treatment plants. In order to comply with tightening environmental regulations, to achieve economic scale, and to take advantage of certain grant funds, Riverside and Rubidoux (along with another community services district, Jurupa Community Services District (Jurupa)) decided to convert Riverside's plant into a regional wastewater disposal plant to handle wastewater from all three. Pursuant to an agreement for regional advanced wastewater treatment (the 1976 Agreement), Rubidoux agreed to pay for 5.77 percent of the capital costs of construction and agreed to pay its proportionate share of operation and maintenance costs based on the amount of influent delivered to the plant.
Influent is untreated wastewater. Effluent is treated wastewater that is discharged from the plant.
In 1978, the same parties entered into a further agreement to expand the Riverside plant to accommodate the additional influent from Jurupa and Rubidoux (1978 Agreement). The capital costs for constructing the expansion were allocated among the parties (utilizing a complex formula that required Rubidoux to pay between zero and 39.5 percent of various aspects of the construction).
Neither the 1976 nor the 1978 Agreements explicitly address how to allocate future capital improvement costs.
In 1990, Riverside and Rubidoux entered into an agreement "Regarding Purchase of Additional Wastewater Treatment Capacity and Payment of Wastewater Treatment Plant Upgrade Costs" (the 1990 Agreement). This is the agreement at the heart of the present dispute. The 1990 Agreement had two basic functions. First, it expanded the amount of influent Rubidoux was entitled to send to the regional plant. Second, it dealt with contributions to capital improvements.
Capital contributions were handled in two different ways. Regarding past capital improvements and any future upgrades that may become necessary due to regulations in effect as of the time of the agreement, Rubidoux agreed to pay $537,000.
The subject of future upgrades related to future regulatory changes was handled in section 7 of the 1990 agreement (Section 7). As Section 7 is at the heart of the lawsuit, we set forth the full text: "7. CHANGE IN REQUIREMENTS. This Agreement shall not prevent Riverside from assessing Rubidoux its proportionate share of the costs of any facilities which are constructed at the Plant as a direct result of new or revised Federal, State or NPDES permit requirements; provided, however, that such assessments must be directly related to, non-discretionary, and necessitated by new or revised requirements which become effective following the execution date of this Agreement."
In 1995, these obligations were applied in the form of a promissory note whereby Rubidoux agreed to pay Riverside $338,898.50. The promissory note recites that Rubidoux had the obligation "to pay a proportionate share of capital upgrades and replacement projects necessary to ensure that the wastewater treatment plant complies with federal, state and [NPDES] Permit requirements." The note went on to list various capital projects Riverside had implemented in the 1991-1994 timeframe.
At all relevant times, Riverside successfully met all its regulatory obligations in operating the plant.
With that background, we begin to arrive at the events that gave rise to this lawsuit.
In July 2006, Riverside kicked off what it dubbed the "master plan" to renovate the wastewater treatment plant. The idea was to future proof the plant through the year 2025. Early in the process, and without input from Rubidoux, Riverside decided to switch to a different treatment method. The treatment plant had been built using a method called conventionally activated sludge. Riverside decided to switch to a membrane bioreactor. The technical details of that switch are irrelevant. The reason for the switch was that, though a membrane bioreactor was more expensive, it produced higher quality effluent, which was thought to be more future proof for regulatory changes likely to be implemented over the ensuing 10 to 15 years. Moreover, the membrane bioreactor could offset costs that would make the overall costs between the systems comparable.
Shortly after the kickoff, in September 2006, Riverside held a meeting with representatives of the community services districts, including Rubidoux. The minutes of that meeting reflect that David Lopez, Rubidoux's representative, raised concerns: "David Lopez raised the issue of the agreements between [Riverside] and the [community services districts] and suggested they be reviewed to determine what applies to the respective agencies in terms of capital participation. He explained that the agreements delineate what triggers [community services districts'] participation in the . . . capital improvement projects."
About two years later, after Riverside had finished the planning phase of the master plan, Riverside held another meeting with the community services districts. David Lopez was once again in attendance for Rubidoux, and the minutes reflect the following: "Dave Lopez - What capital improvement projects will the [community services districts] participate in and at what level? Dave believes that there are some issues here because per the 1990 Agreement with [Riverside], it limits the participation of the [community services districts] in capital improvement projects. The Question for [Riverside] is what is driving the capital upgrades? If the capital upgrades are regulatory compliance driven, Dave would like to see a letter from the [United States Environmental Protection Agency] or Regional Board stating the new requirement that the plant has to comply with. If the capital upgrades are not due to regulatory compliance issues, the [community services districts] do not have to participate in those projects." Further down the minutes state, "Dave Lopez suggested that we meet up at City Hall with [Riverside] representatives to discuss this issue and then if we have to get attorneys involved, we will." These questions were never resolved.
A set of presentation slides from July 2008 shows a total price tag for the upgrades to the treatment plant at $250 million, of which Riverside sought to assess Rubidoux a little over $12 million.
The court ultimately found that the price tag for the master plan upgrades was $230 million.
In 2010, Riverside commissioned a value engineering review of the master plan, which was "a structured methodology to analyze the functional requirements of a project for the purposes of ensuring the essential capabilities at the lowest overall cost." The engineering team ultimately recommended that Riverside abandon its intention to adopt a membrane bioreactor and instead continue to use the existing conventionally activated sludge process. The engineering team identified several advantages to this approach: "Save considerable capital [$65 million]," "Less moving parts to maintain,"
"Less energy consumption," "Reduces schedule as complex, sequenced conversion eliminated," and "Increased hydraulic robustness of system operationally." Riverside provided a brief response to this recommendation: "No. [Riverside's] goal is to provide high quality water for its reuse customers."
The $65 million figure of savings was a rough estimate, and the court found that the ultimate cost of a membrane reactor would be comparable to a conventionally activated sludge system.
Throughout the course of 2011 and 2012, Riverside and Rubidoux held meetings to address the issue of cost sharing, but never came to any agreement. In one of those meetings, Riverside's representative acknowledged that it "did not address regulatory requirements post 1990 when conducting the Master Plan; [Riverside] looked only at future regulatory requirements." On the other hand, there was testimony in the record that at least some of the upgrades were necessary to maintain compliance with limits on the amount of total inorganic nitrogen (TIN) in the effluent. Riverside had been using nearby wetlands to filter out TIN, but there were practical limitations on the use of wetlands (e.g., rainstorms would wash out the channel used to transfer the water to the wetlands, requiring it to be rebuilt after every storm), and the plant was running at 8.2 milligrams per liter, which was approaching the limit of 10.
Riverside filed the present lawsuit in August 2012, asserting two causes of action: breach of contract and declaratory relief. Riverside sought to have Rubidoux pay 7.64 percent of the upgrade costs. A two-phase bench trial was held in San Bernardino Superior Court. In the first phase, the court determined that Rubidoux was obligated to contribute to the capital costs of the master plan. The second phase concerned damages. After the first phase, the court explained its reasoning in a lengthy statement of decision. The court's reasoning broadly fell into two categories: course of conduct and the nature of the regulatory process.
With regard to course of conduct, the court relied heavily on past statements Rubidoux had made, as well as instances in which Rubidoux had contributed to capital upgrades. The court focused primarily on the 1995 Promissory Note and the preceding upgrades that the promissory note paid for. In 1990, after the execution of the 1990 Agreement, the Regional Board set strict limits on the discharge of TIN into the Santa Ana River. The Regional Board set a deadline of May 1995 to comply with the new requirement. In 1990, the plant had no ability to remove TIN, which required capital upgrades to accomplish. Similarly, in 1993 the United States Environmental Protection Agency issued new compliance rules for the use and disposal of biosolids, which was enforced in a 2001 NPDES permit. Starting in 1990, Riverside undertook capital improvements to the plant to meet the new requirements. Rubidoux agreed to pay its proportionate share of these upgrades, acknowledging they were necessary to meet the more stringent regulatory requirements. The 1995 promissory note affirmed that Rubidoux was "required to pay a proportionate share of capital upgrades and replacement projects necessary to ensure that the wastewater treatment plant complies with the federal, state and [NPDES] Permit requirements." The court not only concluded this established a course of conduct from which to interpret the agreement but went on to find that "[t]his contractual affirmation constitutes estoppel by contract, precluding [Rubidoux] from offering a contrary interpretation of the agreements."
With regard to the nature of the regulatory process, the court reasoned, "According to [Rubidoux], its obligation to contribute to capital improvements at the Plant can only be triggered by some new regulatory directive, order, notice of violation or cease and desist order. In the court's view such a proposed interpretation is not practical, feasible, reasonable or responsible in light of [Riverside's] ongoing primary obligation to maintain Plant operations in compliance with ever evolving and more restrictive regulatory requirements. This obligation by [Riverside] to ensure regulatory compliance at all times must contemplate some degree of anticipatory action to ensure compliance not only with present regulations, but also those reasonably certain to develop in the future. In short, [Riverside] has an ongoing obligation to stay ahead of the regulatory curve and reasonably forecast developing regulatory changes. [¶] To suggest otherwise, that [Riverside] just wait until the effective enactment of some new regulatory requirement before taking action to redress would, in the court's view, be irresponsible and ignore practical reality. From the court's perspective, based on trial evidence, it appears that once an engineering solution is or may be needed for the Plant to maintain current and reasonably certain future regulatory compliance due to evolving and developing restrictions, it can take years to design and build necessary infrastructure or modifications to meet those requirements. So what happens in the meantime? The Plant goes out of compliance, receives a notice of violation or cease and desist order among other negative consequences. All of which scenarios are completely unacceptable and would not only violate [Riverside's] Agreements with the users of the Plant, including [Rubidoux], but also potentially endanger public health and safety which raises additional public policy considerations." Accordingly, the court concluded that Rubidoux was obligated to pay its 7.64 percent share of the master plan upgrades.
In phase 2 of the trial, the court determined that Rubidoux owed $21,099,675 in damages, which was comprised of $15,382,404 in design and construction costs, and $5,717,271 in interest related to bonds that Riverside issued to finance the project. Because we conclude below that the court erred in its phase 1 findings, we do not address any damages issues in this opinion.
DISCUSSION
We begin with some fundamental premises. The relationship between Rubidoux and Riverside, so far as this appeal is concerned, is purely contractual. The plant is owned by Riverside, and Riverside is the permittee authorized to operate the plant. Thus, the obligation to operate the plant in compliance with all applicable rules and regulations falls wholly on Riverside. To the extent the plant must be upgraded to maintain compliance with such rules and regulations, that obligation falls primarily on Riverside. Rubidoux's only obligation to contribute to plant upgrades is found in Section 7. Our sole task in this appeal, therefore, is to interpret Section 7.
"The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. [Citation.] If contractual language is clear and explicit, it governs." (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264.) "When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible." (Civ. Code, § 1639.)
"Extrinsic evidence is . . . admissible to interpret the language of a written instrument, as long as such evidence is not used to give the instrument a meaning to which it is not reasonably susceptible." (Morey v. Vannucci (1998) 64 Cal.App.4th 904, 912.) "Even if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible." (Ibid.) "An appellate court is not bound by a trial court's construction of a contract where (a) the trial court's contractual interpretation is based solely upon the terms of the written instrument without the aid of extrinsic evidence; (b) there is no conflict in the properly admitted extrinsic evidence; or (c) the trial court's determination was made on the basis of improperly admitted incompetent evidence. [Citation.] By the same token, however, where the interpretation of the contract turns upon the credibility of conflicting extrinsic evidence which was properly admitted at trial, an appellate court will uphold any reasonable construction of the contract by the trial court." (Id. at p. 913, italics omitted.)
Here, the relevant contract language says that Riverside may assess Rubidoux for "its proportionate share of the costs of any facilities which are constructed at the Plant as a direct result of new or revised Federal, State or NPDES permit requirements; provided, however, that such assessments must be directly related to, non-discretionary, and necessitated by new or revised requirements which become effective following the execution date of this Agreement." The trial court interpreted this language to mean that Rubidoux was obligated to pay its proportionate share of the costs of upgrades "to ensure that the Plant remains in compliance with [its] post-1990 regulatory limits, both now and in the future." (Italics added.) The court found that Rubidoux was required to pay for upgrades that relate to "anticipatory action" based on a "forecast [of] developing regulatory changes."
The specific question presented by the facts of this case is whether Section 7 permits Riverside to assess Rubidoux for upgrades that are not tied to any specific regulatory requirement, but instead are undertaken for the more general purpose of complying with anticipated, but unknown, future requirements. The answer is clear: No. Section 7 says upgrades must be a "direct result" and "directly related to" "new or revised requirements" "which become effective" following the execution of the agreement. A speculative future regulatory requirement has not, by definition, become effective. Similarly, Section 7 requires that the upgrade be "necessitated by" a new or revised requirement. An upgrade cannot be necessitated by a requirement that does not yet exist and is not yet known. Finally, Section 7 requires that any upgrades be "non-discretionary." An upgrade in response to unknown future regulatory requirements is plainly discretionary.
It may be a wise exercise of discretion. But it is still discretion.
Section 7 strikes a sensible balance. Rubidoux does not own the plant and thus, understandably, does not want to pay for discretionary upgrades. On the other hand, it does rely on the plant for all of its wastewater processing and utilizes the regional plant in lieu of any local plants, and thus it is willing to contribute to upgrades that, because they are truly required, Rubidoux would have had to pay for if it were still operating its own plant.
The trial court raised certain concerns about this interpretation, but we conclude that those concerns do not warrant a departure from the plain language of the contract.
First, the court placed particular emphasis on the fact that Rubidoux had voluntarily complied with past assessments for capital upgrades. However, there has never been any dispute that under some circumstances Rubidoux is required to pay for capital upgrades; specifically, the circumstances described in Section 7. The mere fact that Rubidoux, in the past, paid for different upgrades under different circumstances has little to no bearing on whether they are obligated to pay for these upgrades. Certainly, paying for a few upgrades in the past does not commit Rubidoux to a blank check to pay for any upgrades Riverside may decide to make in the future. Section 7 still controls. And the statements Rubidoux made in connection with the 1995 Promissory Note, for example, are entirely consistent with Section 7. The 1995 Promissory Note recites that Rubidoux had the obligation "to pay a proportionate share of capital upgrades and replacement projects necessary to ensure that the wastewater treatment plant complies with federal, state and [NPDES] Permit requirements." (Italics added.) That is essentially shorthand for what Section 7 actually says.
The court went a step further and held that Rubidoux was contractually estopped from denying this assertion. But Rubidoux never denied it. It agrees that it is obligated to contribute to necessary upgrades, as described in Section 7 of the 1990 Agreement. However, the relevant question here is whether the master plan upgrades are truly necessary, as defined in the 1990 Agreement. The supposed estoppel does no work in answering that question.
Next, the court felt that a plain reading of the contract would contravene an important public policy: it would undercut Riverside's ability to "stay ahead of the regulatory curve." There are a number of problems with this reasoning. First, nothing about Section 7 stops Riverside from staying ahead of the regulatory curve. The plant belongs to Riverside and it is free to upgrade the plant as much as it sees fit. Section 7 simply dictates whether Rubidoux must contribute a small percentage to the payment of those upgrades. Second, the evidence does not bear out the premise that Section 7 presents an obstacle to prudent planning. As the trial court's recitation of the regulatory history makes clear, Riverside has been given a reasonable timeframe in which to implement newly enacted regulatory requirements. For example, "In 1993, the [United States Environmental Protection Agency] issued new compliance rules for the use and disposal of biosolids, and the 2001 NPDES Permit first imposed these new requirements ...." Riverside had eight years to comply with that requirement. As early as 1990 Riverside was aware of an impending requirement to begin removing TIN from the effluent, but the requirement was not enforced until 1995, providing five years to achieve compliance. In both instances, Riverside achieved compliance within those timeframes. Thus, the notion that regulatory authorities require Riverside to achieve compliance "on a dime," as the court stated, is not borne out by the evidence. Finally, Riverside may anticipate regulatory changes, construct improvements, and then assess Rubidoux once those regulatory changes become effective. Nothing in the contract requires that the improvements be constructed after the regulatory change becomes effective. Rather, Riverside cannot assess Rubidoux until the regulatory change becomes effective.
Additionally, we reject Riverside's argument that our interpretation would require a regulatory violation as a prerequisite to assessing Rubidoux, and thus be an illegal contract. For the reasons stated in this paragraph, Rubidoux may be compelled to contribute to a capital upgrade without the existence of a regulatory violation, as long as the upgrade was required in order to comply with an applicable regulation.
Riverside argues that we ought to defer to the trial court's interpretation because it was based on conflicting extrinsic evidence. But none of the evidence Riverside relies on creates a conflict that uncovers a latent ambiguity on the question of whether Rubidoux can be assessed for upgrades related to regulations that have not yet become effective. The principal conflict that Riverside points to has to do with the negotiation of the 1990 Agreement. Rubidoux presented evidence that Section 7 was an important deal point for Rubidoux and Jurupa (who has an identical contractual provision) due to a history in the 1980s of Riverside assessing them for construction of new facilities to cure compliance failures that had resulted in a cease and desist order. Rubidoux and Jurupa were contemplating leaving the plant at that time. That context culminated in the 1990 Agreement, which kept Rubidoux in the plant. Riverside presented testimony that, in the early 1990s, no one from Rubidoux ever said that they would not pay for capital costs associated with new anticipated regulations. We fail to see any conflict here. What Rubidoux did not say cannot change what it did say in the contract. Moreover, none of this evidence reveals any latent ambiguity in Section 7, and thus there is no reason for us to defer to an interpretation that contradicts the plain language of the agreement. It is really quite simple: a regulation that does not exist has not "become effective" and thus cannot justify a capital assessment against Rubidoux.
We recognize that ambiguity could arise in other factual circumstances. Riverside points out that "become effective" is stated in a somewhat ambiguous present tense in Section 7, which could raise questions about when a regulatory change actually becomes effective for purposes of the contract. However, under no reasonable construction could an unknown, future regulation have become effective, and thus there is no ambiguity relevant to the present appeal.
Ultimately, this case involves a contract between two sophisticated parties that was the result of arm's length negotiations. Under these circumstances, we must give strong deference to the words the parties chose and interpret them according to their literal meaning. While we must take context into account in divining the literal meaning, we have seen nothing in the record that would cause us to depart from an ordinary understanding of the words the parties chose. Here, the parties made the decision to restrict Rubidoux's obligation to capital improvements that were "nondiscretionary" and "necessitated by" new regulatory requirements that had "become effective." The court did not apply the literal contractual language, and thus it erred.
With all of that said, we recognize that there was evidence at trial that at least some of the upgrades in the master plan arguably satisfied Section 7, and thus we will remand for additional findings by the trial court. That evidence centered in significant part around the TIN limits. In 2013, the plant was limited to 10 milligrams of TIN per liter of effluent. To achieve that goal, Riverside relied on sending effluent to nearby wetlands, which allowed the effluent to percolate into the ground water, thereby filtering out the inorganic nitrogen. However, there was testimony that this method was unreliable because the dirt causeway used to transfer effluent to the wetlands would get washed out during rainstorms, requiring it to be repeatedly rebuilt. Moreover, though the plant was in compliance with the 10 milligrams per liter requirement at all times, the actual effluent was as high as 8.2 milligrams per liter in 2011, which was approaching a "trigger" point of 8.5 milligrams per liter, at which point existing procedures required Riverside to begin the process of upgrading the plant to lower the TIN levels. The court seems to have relied on the 2013 TIN requirement to some extent; the problem is, we cannot determine to what extent. And there is no question that its judgment was largely influenced by its erroneous interpretation of Section 7. Accordingly, we will remand for additional findings.
On the other hand, there was testimony that the master plan was prepared in anticipation of potential regulations lowering the upper limit of TIN to 8 milligrams per liter, which, so far as the record reveals, has not become a requirement. Moreover, as Rubidoux argues vociferously, the fact that the plant was always in compliance with TIN limits puts into question whether the master plan, or any portion thereof, was truly necessitated by a regulatory requirement. We leave that question to the trial court in the first instance.
DISPOSITION
The judgment is reversed. On remand, the court is instructed to make findings that identify specific post-1990 regulatory changes that had become effective and determine whether the master plan upgrades, or any portion thereof, were necessitated by and directly related to the upgrades such that the upgrades were nondiscretionary. In making these findings, the court may rely on evidence from the existing trial record, and it may, in its discretion, hold additional evidentiary hearings. Rubidoux shall recover its costs incurred on appeal.
WE CONCUR: MOTOIKE, J. DELANEY, J.