SANTA CLARITA ORGANIZATION FOR PLANNING AND THE ENVIRONMENT, Plaintiff and Appellant, v. CASTAIC LAKE WATER AGENCY et al., Defendants and Respondents.
No. B264284
Second Dist., Div. Two
July 28, 2016
248 Cal. App. 4th 1084
Advocates for the Environment and Dean Wallraff for Plaintiff and Appellant.
Ferguson Case Orr Paterson and Neal P. Maguire for Defendant and Respondent Valencia Water Company.
Best, Best & Krieger, Jeffrey V. Dunn, Russell G. Behrens; Greines, Martin, Stein & Richland and Timothy T. Coates for Defendant and Respondent Castaic Lake Water Agency.
OPINION
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 (
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 time line 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 of the California Constitution 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”
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. 1989, ch. 910, § 1, p. 3132, Deering’s Ann. Wat.—Uncod. Acts (2008 ed.) Act 130, § 15, p. 197.)1 Its territory encompasses most of the Santa Clarita Valley. (Stats. 1975, ch. 1252, § 3, p. 3232, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, § 2, p. 188.) Initially, the Agency sold its water wholesale to four retail “purveyors”—Santa Clarita Water Division, 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 Division and absorbed the division into its own operations. (Klajic v. Castaic Lake Water Agency (2001) 90 Cal.App.4th 987, 991–992 (Klajic I); Klajic v. Castaic Lake Water Agency (2004) 121 Cal.App.4th 5, 11 (Klajic II).) The California Legislature passed Assembly Bill No. 134 (2001–2002 Reg. Sess.) to allow the Agency itself to act as a retail purveyor of water in the territory where the Santa Clarita Water Division used to operate. (Stats. 2001, ch. 929, § 3, p. 7476, Deering’s Ann. Wat.—Uncod. Acts, supra, 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 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 Division]/[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
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 coordinat[e] groundwater management activities and enhanc[e] Valley wide conjunctive use of all [Valencia resources] of supply,” and to “provid[e] 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 Utilities 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 (Stevenson Ranch), a company affiliated with Newhall; and Keith Abercrombie (Abercrombie), Valencia’s general manager and a member of the Agency’s board during the negotiations
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 videotape 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 of the California Constitution 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 limitations as to form or composition.” The court rejected SCOPE’s argument that the phrase meant “mutual water company or mutual water corporation” because doing so “would render the word ‘corporation’ meaningless because, by definition, a mutual water company includes a corporation providing water to its members at cost.” The court found the legislative history of the provision unhelpful because it did “not answer the question of why the word[s] ‘or corporation’ [were] inserted into the actual amendment.”
The court also rejected SCOPE’s claim based on the improper use of taxpayer funds.
Thirty-eight days later, on May 21, 2015, SCOPE filed its notice of appeal.
DISCUSSION
SCOPE does not appeal the trial court’s rulings on its claims alleging taxpayer waste, conflict of interest or violations of CEQA. Instead, it contends that the court erred in denying its writ of mandate claim because the Agency’s acquisition of Valencia is unlawful no matter what: If Valencia is the Agency’s alter ego, the Agency is violating
Before reaching these issues, we confront a threshold procedural question raised by Newhall, Stevenson Ranch, Valencia and the Agency (collectively, respondents) in a motion to dismiss this appeal: Is this appeal timely?
I. Appellate Jurisdiction
Respondents contend that SCOPE’s appeal is untimely. SCOPE filed its notice of appeal 38 days after it was served with notice of the judgment. Although this is timely under the general, 60-day window for filing notices of appeal (Cal. Rules of Court, rule 8.104(a)(1)(A)), respondents assert that the 30-day window applicable to validation proceedings governs (
Validation proceedings are a procedural “vehicle” for obtaining an expedited but definitive ruling regarding the validity or invalidity of certain actions taken by public agencies. (
Validation proceedings can be initiated by the public agency itself (
Of course, “not all actions of a public agency are subject to validation.” (Kaatz, supra, 143 Cal.App.4th at p. 19.) The statutes defining validation proceedings do not specify the types of public agency action to which they apply; instead, they “establish[] a uniform system that other statutory schemes must activate by reference.” (Bonander, supra, 46 Cal.4th at p. 656; see
Under most of the statutes declaring certain acts of public agencies subject to validation proceedings, what matters is the “nature of the governmental action being challenged.” (Hills for Everyone, supra, 105 Cal.App.3d at p. 468; see McLeod v. Vista Unified School Dist. (2008) 158 Cal.App.4th 1156, 1165 (McLeod) [looking to “‘[t]he gravamen of a complaint’”]). The applicability of validation proceedings does not turn on the type of relief demanded. (McLeod, at p. 1165.) Nor does it turn on the “‘form of the action.’” (Ibid.) Thus, where a certain type of action is subject to validation proceedings, a third party cannot sidestep those proceedings by purporting to invoke a different procedural vehicle, such as a writ of mandate (
In this case, SCOPE’s operative complaint alleged that three statutes made the Agency’s acquisition of Valencia subject to validation proceedings: (1) section 19 of the Agency’s enabling act (Stats. 1988, ch. 1181, § 8, p. 3791, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, § 19, p. 203); (2) section 16.1 of the Agency’s enabling act (Stats. 2001, ch. 929, § 4, p. 7479, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, § 16.1, p. 203); and (3)
Section 19 of the Agency’s enabling act applies to “[a]n action to determine the validity of any bonds, warrants, promissory notes, contracts, or other evidences of indebtedness of the kinds authorized by subdivision (h), (i), (o), (p), (r), or (s) of Section 15.” (Stats. 1988, ch. 1181, § 8, p. 3791, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, § 19.) The Agency’s acts here rest upon its power to sue and to exercise the power of eminent domain, as well as its power to enter into contracts to acquire “a waterworks system, water rights, waters, [and] lands” (Stats. 1989, ch. 910, § 1, p. 3132, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, § 15, subd. (e), p. 197); these powers are authorized by subdivisions (b), (g), and (e) of section 15, respectively. The subdivisions of section 15 covered by section 19 deal with issuing bonds and borrowing money (Stats. 1989, ch. 910, § 1, p. 3132, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, § 15, subd. (h), p. 197); issuing promissory notes (Stats. 1989, ch. 910, § 1, p. 3132, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, subd. (i), p. 197); joining with other public agencies or private corporations “for the purpose of financing . . . acquisitions, constructions, and operations” (Stats. 1989, ch. 910, § 1, p. 3132, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, subd. (o), p. 198); issuing bonds for payments to the state (Stats. 1989, ch. 910, § 1, p. 3132, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, subd. (p), p. 199); “construct[ing], operat[ing] or maintain[ing] works to develop hydroelectric energy” (Stats. 1989, ch. 910, § 1, p. 3132, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, subd. (r), p. 199); and “contract[ing] . . . for the sale of the right to use falling water for electric energy purposes” (Stats. 1989, ch. 910, § 1, p. 3132, Deering’s Ann. Wat.—Uncod. Acts, supra, Act 130, subd. (s), p. 199). The Agency’s acts in this case do not deal with these subdivisions, and thus fall outside of section’s 19 reference to validation proceedings.
SCOPE’s action was therefore not subject to validation proceedings.
Respondents assert that it is too late for SCOPE to disavow that the validation proceedings’ deadlines apply here because (1) collateral attacks on validation proceedings are not permitted, and (2) the doctrine of judicial estoppel applies.3 We are unpersuaded.
1. Is this appeal a collateral attack?
Although, as noted above, a final validation judgment cannot be collaterally attacked (Colonies Partners, supra, 239 Cal.App.4th at p. 694), the propriety of validation proceedings may be challenged on direct appeal (Fontana, supra, 153 Cal.App.4th at pp. 908–909). Newhall suggests that the applicability of the validation statutes can only be contested on direct appeal if the appeal challenging them was filed in accordance with the validation statutes, but that precise argument was rejected in Kaatz, supra, 143 Cal.App.4th at page 26.
2. Does judicial estoppel apply?
The doctrine of judicial estoppel prevents a party from taking inconsistent positions during litigation. (AP-Colton LLC v. Ohaeri (2015) 240 Cal.App.4th 500, 507; Law Offices of Ian Herzog v. Law Offices of Joseph M. Fredrics (1998) 61 Cal.App.4th 672, 678–679.) A party’s prior position cannot preclude it from contesting a trial court’s subject matter jurisdiction, but can preclude a party from arguing that the court is acting “ ‘in excess of [its] jurisdiction.’ ” (Simmons v. Ghaderi (2008) 44 Cal.4th 570, 584; see Sullivan v. Delta Air Lines, Inc. (1997) 15 Cal.4th 288, 307, fn. 9.) Because SCOPE indisputably invoked the validation statutes by pleading them in its complaint, by seeking the trial court’s permission to publish the requisite constructive notice required by those statutes, and by informing the court that it gave that notice, whether SCOPE is estopped from contesting the applicability of the validation statutes comes down to whether that contest amounts to a dispute over the court’s subject matter jurisdiction.
The validation statutes confer in rem jurisdiction upon a court. (
Newhall and Valencia counter that allowing SCOPE to retreat from its initial position will empower it to do an “end run” around the validation statutes. We disagree. To be sure, SCOPE is still able to challenge the Agency’s actions in this case through a writ of mandate. But this does not offend the validation statutes because (1) the validation statutes by their terms do not apply, and (2) a writ of mandate relies upon the court’s in personam jurisdiction (Hills for Everyone, supra, 105 Cal.App.3d at p. 467), not its in rem jurisdiction (see Kearney, supra, 72 Cal. at p. 594), and thus any judgment from the in personam writ of mandate binds only the parties to the litigation, not the world.
Consequently, we conclude that the validation statutes’ shorter deadline to file a notice of appeal does not apply, and that SCOPE’s notice of appeal is timely.
A. Is the Agency violating Water Code section 12944.7 and its enabling act?
Under
1. Did the trial court properly refuse to consider extra-record evidence?
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. We conclude that the court’s refusal to consider this evidence was appropriate for two reasons.
First, the trial court properly refused to consider this evidence because it is outside the administrative record. Agency actions can fall into one of two broad categories: (1) “quasi-judicial” actions, where the agency settles the rights of the parties before it as to past transactions; and (2) “quasi-legislative” actions, where the agency exercises its “discretion governed by considerations of the public welfare” as to prospective events or actions. (Wilson v. Hidden Valley Municipal Water Dist. (1967) 256 Cal.App.2d 271, 279–280.) A public agency’s decision to initiate eminent domain proceedings and to settle those proceedings in a settlement agreement are quasi-legislative because they require the agency to consider and balance policy concerns. (See Redevelopment Agency v. Rados Bros. (2001) 95
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,
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. We review a trial court‘s decision to exclude evidence for an abuse of discretion. (People v. Alvarez (1996) 14 Cal.4th 155, 207 [58 Cal.Rptr.2d 385, 926 P.2d 365].) In deciding whether a party has laid an adequate foundation for a recording, a court is to look to whether the recording is “accurate and complete.” (E.g., People v. Patton (1976) 63 Cal.App.3d 211, 220 [133 Cal.Rptr. 533]; see
SCOPE argues that the Agency did not comply with its discovery obligations before the trial court, did not properly respond to a California Public Records Act request (
2. Does substantial evidence support the trial court‘s finding that Valencia is not the Agency‘s alter ego?
“It is fundamental that a corporation is a legal entity that is distinct from its shareholders.” (Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108 [72 Cal.Rptr.3d 129, 175 P.3d 1184].) Part and parcel of this general principle is that “a parent corporation (so-called because of control through ownership of another corporation‘s stock) is not liable for the acts of its subsidiaries.” (United States v. Bestfoods (1998) 524 U.S. 51, 61 [141 L.Ed.2d 43, 118 S.Ct. 1876].) However, where a parent corporation (or, for that matter, anyone) that owns all of a subsidiary‘s stock operates that subsidiary in a manner that renders the subsidiary merely an alter ego of its parent (and a
In assessing whether to treat a subsidiary as the alter ego of its parent corporation (or its individual owner(s)), courts must assess whether (1) there is “‘such unity of interest and ownership that the separate personalities of the [subsidiary] corporation and [its parent corporation or individual owner] no longer exist‘” and (2) “‘if the acts are treated as those of the [subsidiary] alone, an inequitable result will follow.‘” (Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300 [216 Cal.Rptr. 443, 702 P.2d 601]; see CADC/RADC Venture 2011-1 LLC v. Bradley (2015) 235 Cal.App.4th 775, 788-789 [185 Cal.Rptr.3d 684] (CADC/RADC).) An inequitable result follows when the corporate form is used “to perpetrate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose.” (Sonora Diamond, supra, 83 Cal.App.4th at p. 538.) “To put it in other terms, the plaintiff must show ‘specific manipulative conduct’ by the parent toward the subsidiary which ‘relegate[s] the latter to the status of merely an instrumentality, agency, conduit or adjunct of the former . . . .‘” (Laird v. Capital Cities/ABC, Inc. (1998) 68 Cal.App.4th 727, 742 [80 Cal.Rptr.2d 454], quoting Institute of Veterinary Pathology, Inc. v. California Health Laboratories, Inc. (1981) 116 Cal.App.3d 111, 119-120 [172 Cal.Rptr. 74]; see Las Palmas Associates, supra, 235 Cal.App.3d at p. 1249.) As these definitions indicate, treating one corporation as the alter ego of another is “‘an extreme remedy, [to be] sparingly used‘” (Hasso v. Hapke (2014) 227 Cal.App.4th 107, 155 [173 Cal.Rptr.3d 356] (Hasso)) and is to be “approached with caution” (Las Palmas Associates, at p. 1249). This heavy burden rests on the shoulders of the party seeking to pierce the corporate veil. (Mid-Century Ins. Co. v. Gardner (1992) 9 Cal.App.4th 1205, 1212-1213 [11 Cal.Rptr.2d 918].)
In evaluating the two requirements of the alter ego doctrine, courts look to the totality of the circumstances bearing on the relationship between the parent and its subsidiary. (Hasso, supra, 227 Cal.App.4th at p. 155; Greenspan v. LADT LLC (2010) 191 Cal.App.4th 486, 513 [121 Cal.Rptr.3d 118]; Sonora Diamond, supra, 83 Cal.App.4th at p. 539.) Those circumstances include, but are not limited to (1) whether the parent and subsidiary commingle funds and other assets, (2) whether the parent has represented to third parties that it is liable for the subsidiary‘s debts, (3) whether the parent owns 100 percent of the subsidiary‘s stock, (4) whether the parent and subsidiary use the same offices and same employees, (5) whether the subsidiary is used as the “‘mere shell or conduit‘” for the affairs of the parent, (6) whether the subsidiary is inadequately capitalized, (7) whether the parent or subsidiary disregards corporate formalities such as holding board meetings, keeping corporate records, and acting through votes of the corporate board, (8) whether the parent and subsidiary commingle their corporate records, (9)
The trial court found that the Agency was not operating Valencia as its alter ego because the Agency‘s ownership of all of Valencia‘s stock and its appointment of three Agency employees to Valencia‘s five-member board of directors was insufficient to prove that the Agency was treating Valencia as a mere conduit or instrumentality. Substantial evidence supports this finding. In evaluating whether evidence is substantial, we ask whether a “‘rational trier of fact could find [the evidence] to be reasonable, credible, and of solid value‘” and do so while “‘view[ing] the evidence in the light most favorable to the [decision].‘” (San Diegans for Open Government v. City of San Diego (2016) 245 Cal.App.4th 736, 740 [199 Cal.Rptr.3d 782].) The Agency‘s ownership of Valencia‘s stock is of no moment. That is because, under California law, a parent corporation or an individual‘s ownership of a subsidiary is necessary for application of the alter ego doctrine (CADC/RADC, supra, 235 Cal.App.4th at p. 789), but it is not sufficient (Leek v. Cooper (2011) 194 Cal.App.4th 399, 415 [125 Cal.Rptr.3d 56]; Meadows v. Emett & Chandler (1950) 99 Cal.App.2d 496, 499 [222 P.2d 145]; Hollywood Cleaning & Pressing Co. v. Hollywood Laundry Service, Inc. (1932) 217 Cal. 124, 129 [17 P.2d 709]; Erkenbrecher v. Grant (1921) 187 Cal. 7, 11 [200 P. 641]). And although three of Valencia‘s five directors are Agency employees, this falls far short of showing the two corporations have “identical directors and officers.” At most, it shows “some common personnel,” which is not enough. (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1269, 1285 [31 Cal.Rptr.2d 433]; cf. Borun Bros. v. Department of Alcohol Beverage Control (1963) 215 Cal.App.2d 503, 508-509 [30 Cal.Rptr. 175] [alter ego applies where two corporations have “interlocking directorships“]; Thomson v. L. C. Roney & Co. (1952) 112 Cal.App.2d 420, 428-429 [246 P.2d 1017] [same].) None of the other factors is present.5
SCOPE levels three attacks at the trial court‘s analysis. First, SCOPE argues that the settlement agreement contemplates a future merger between the Agency and Valencia, which in SCOPE‘s view indicates a wrongful intent. We disagree. The agreement places a 75-day moratorium on implementing any resolution to absorb Valencia into the Agency “should” the Agency‘s board authorize such a merger. Although the agreement does not forever declare any and all mergers to be impossible, it also does not dictate a
B. Is the Agency violating article XVI, section 17 of the California Constitution by owning Valencia‘s stock?
SCOPE argues that this provision prohibits the Agency from acquiring and owning Valencia‘s stock because Valencia is not a “mutual water company or corporation.” This argument requires us to answer two questions: (1) does section 17‘s general prohibition apply when the public agency‘s ownership of stock does not amount to an extension of credit? and (2) because it is undisputed that Valencia is a corporation but not a “mutual water company,” does section 17‘s exception for ownership of stock in any “mutual water company or corporation” apply only to a corporation that is a “mutual water company” or instead to any “corporation“?
These questions require us to construe section 17. In doing so, “‘our fundamental task is ‘to ascertain the intent of the lawmakers so as to effectuate the purpose of the statute.‘‘” (Lee v. Hanley (2015) 61 Cal.4th 1225, 1232 [191 Cal.Rptr.3d 536, 354 P.3d 334]; see Riverside County Sheriff‘s Dept. v. Stiglitz (2014) 60 Cal.4th 624, 630 [181 Cal.Rptr.3d 1, 339 P.3d 295] [“[i]n answering this question of statutory interpretation, our goal is to effectuate the Legislature‘s intent“].) Our starting place is the provision‘s text because it is “generally . . . the most reliable indicator of legislative intent” (Lee, at p. 1232), although “‘we may reject a literal construction‘” if it is “‘contrary to the legislative intent apparent in the statute‘” (Stiglitz, at p. 630; see Provigo Corp. v. Alcoholic Beverage Control Appeals Bd. (1994) 7 Cal.4th 561, 566-567 [28 Cal.Rptr.2d 638, 869 P.2d 1163] [“‘the “plain meaning” rule does not prohibit a court from determining whether the literal meaning of a statute comports with its purpose‘“]; Santa Ana Unified School Dist. v. Orange County Development Agency (2001) 90 Cal.App.4th 404, 410 [108 Cal.Rptr.2d 770] (Santa Ana Unified School Dist.) [“‘[t]he legislative purpose will not be sacrificed to a literal construction of any part of the statute‘“].) If the text is unambiguous and comports with the statute‘s purpose, we stop there. (Lee, at pp. 1232-1233.) However, if the statute‘s text “permits more than one interpretation . . . , we ‘may consider other aids, such as the statute‘s purpose, legislative history, and public policy‘” (Ardon v. City of Los Angeles (2016) 62 Cal.4th 1176, 1184 [199 Cal.Rptr.3d 743, 366 P.3d 996], quoting Coalition of Concerned Communities, Inc. v. City of Los Angeles (2004) 34 Cal.4th 733, 737 [21 Cal.Rptr.3d 676, 101 P.3d 563]) as well as the general canons of statutory construction (Stiglitz, at p. 630). These rules of construction apply to provisions of our Constitution as well as statutes (e.g., Provigo, at p. 567), and in that context, we may look to ballot pamphlets underlying adoption of
At the outset, Valencia asserts that we need not determine whether section 17 prohibits the Agency from owning stock in a retail water purveyor because that question was already resolved in Klajic I, supra, 90 Cal.App.4th 987. Although the Court of Appeal in Klajic I noted that it did “not disagree with the Agency that it was lawfully empowered to acquire the [Santa Clarita] Water Company (
1. Does section 17‘s general prohibition apply?
Section 17 prohibits “[t]he State . . . in any manner [from] loan[ing] its credit” or “subscrib[ing] to, or be[ing] interested in the stock of any company, association, or corporation.” (
For support, Valencia cites Engineering etc. Co. v. East Bay M. U. Dist. (1932) 126 Cal.App. 349 [14 P.2d 828] (General Engineering). There, a utility district bought all of a water company‘s stock and then levied a tax to recoup the cost of doing so. (Id. at pp. 352-357.) Several unhappy taxpayers challenged the tax, in part on the ground that acquisition was unconstitutional under section 17‘s predecessor, which provided in pertinent part that “[t]he
General Engineering appears to be directly on point. Although, as we discuss below, section 17 has evolved over the decades, its prohibition of stock ownership has always been—and continues to be—married to its prohibition against the lending of credit. Where, as here, the state (or its agency) has acquired all of the stock in a company, association or corporation, it is not lending its credit to the corporation or the corporation‘s other owners; the state owns it. In such instances, section 17‘s prohibition does not apply.
SCOPE resists the force of this analysis with three arguments. First, it contends that General Engineering is factually distinguishable because the public agency in that case acquired not only the water company‘s stock, but also its assets and debts. This is true (General Engineering, supra, 126 Cal.App. at p. 357), but was not germane to the court‘s reasoning or result, which turn on the public agency‘s purchase and ownership of the water company‘s stock (id. at p. 358). Second, SCOPE asserts that General Engineering is legally distinguishable (a) because it interprets
2. Does section 17‘s exception allowing for ownership of stock in a “mutual water company or corporation” apply?
Even if section 17‘s bar on stock ownership applied, section 17 excepts stock ownership in “any mutual water company or corporation when the stock is so acquired or held for the purpose of furnishing a supply of water for public, municipal or governmental purposes.” (
a. Text
The text of section 17‘s exception points to the conclusion that a state may own stock in “any corporation” as long as it is doing so, as the section mandates, “for the purpose of furnishing a supply of water for public, municipal or governmental purposes.” (
SCOPE offers five arguments against this construction of section 17‘s text. First, SCOPE contends that the drafters used the words “company or corporation” to ensure that the exception reached unincorporated associations. This contention overlooks that the word “company” already includes unincorporated associations. (E.g., Law v. Crist (1940) 41 Cal.App.2d 862, 865 [107 P.2d 953] [“‘[t]he term [association] is often used as synonymous with “company” or “society“‘“];
Second, SCOPE argues that if we construe “corporation” in section 17 to mean “any corporation,” then we would render the phrase “mutual water company” unnecessary surplusage because some “corporations” are “mutual water companies.” This argument ignores that the phrase “mutual water company” also includes unincorporated associations; the phrase “mutual water company” is accordingly not surplusage because it assures that stock ownership in mutual water associations is exempt.
Third, SCOPE contends that we must construe the terms “company” and “corporation” as being synonymous because section 17‘s general prohibition uses the two terms synonymously when it prohibits a public agency from having an “interest[] in the stock of any company, association, or corporation” (
Fourth, SCOPE asserts that the phrase “company or corporation” is just a generic catch-all phrase used in a variety of different statutes to mean
Lastly, SCOPE argues that we must construe the phrase “company or corporation” in section 17 in pari materia with
b. Legislative history
Section 17 traces its lineage back to the 1880 version of our Constitution. At that time, the bar against state ownership of stock was lodged in two different provisions:
c. Purpose
The reason for section 17‘s exception appears both in its text and its legislative history. The text permits public agencies to own stock in a “mutual water company or corporation,” but only if that ownership “is . . . for the purpose of furnishing a supply of water for public, municipal or governmental purposes.” (
Although it is a close question, we conclude that section 17 permits a public agency to acquire stock in any corporation for the purpose of furnishing a supply of water. We so conclude for two reasons. First, this interpretation better furthers the purpose of section 17‘s exception—namely, to provide a ready means for public agencies to secure water for the public they serve. (Santa Ana Unified School Dist., supra, 90 Cal.App.4th at p. 410 [“[w]here a statute is reasonably susceptible to two interpretations, we must embrace the one that best effectuates the legislative purpose“].) If we limited public agencies to acquiring the stock of mutual water companies, we would be cutting off a viable supply of water. Although a public agency would, under the narrower construction, still be able to buy water from a corporation that was not a mutual water company, being a customer is not an adequate substitute for being a stockholder given the economies of scale and potential for control and coordination that come with acquisition but not with purchase.
Second, because section 17‘s exception is limited by its plain terms to corporations that supply water, our conclusion that section 17 permits stock ownership in “any” corporation means only that the exception reaches nonmutual water corporations as well as “mutual water companies.” This is
SCOPE argues that our conclusion has been rejected by the Attorney General and by the Public Utilities Commission. In a 1960 opinion, the Attorney General opined that municipal water districts could own stock in a mutual water company. (
The judgment is affirmed. Respondents are entitled to their costs on appeal.
Ashmann-Gerst, Acting P. J., and Chavez, J., concurred.
A petition for a rehearing was denied August 16, 2016, and the opinion was modified to read as printed above. Appellant‘s petition for review by the Supreme Court was denied November 16, 2016, S237031.