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Cedar River Water and Sewer Dist. v. King County

Supreme Court of Washington, En Banc

October 24, 2013

CEDAR RIVER WATER AND SEWER DISTRICT and Soos Creek Water and Sewer District, Appellants,
v.
KING COUNTY; Snohomish County; Alder Wood Water and Wastewater District; City of Algona; City of Auburn; City of Bellevue; City of Black Diamond; City of Bothell; City of Brier; City of Carnation; Coal Creek Utility District; Cross Valley Water District; Highlands Sewer District; City of Issaquah; City of Kent; City of Kirizland; City of Lake Forest Park; Lakehaven Utility District; City of Mercer Island; Northeast Sammamish Sewer District; Northshore Utility District; Olympic View Water and Sewer District; City of Pacific; City of Redmond; City of Renton; Ronald Wastewater District; Sammamish Plateau Water and Sewer District; City of Seattle; Skyway Water and Sewer District; City of Tukwila; Valley View Sewer District; Vashon Sewer District; Woodinville Water District; Shorewood Heights Apts., LLC, as successor in interest to Bayshore Shorewood G.P., Inc.; and the State of Washington, acting by and through the Washington State Parks and Recreation Commission, Respondents, and Muckleshoot Indian Tribe, Defendant.

Argued Jan. 24, 2013.

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Appeal from Pierce County Superior Court; Honorable Thomas J. Felnagle.

Robert Tad Seder, Hillary Evans Graber, Civil Div. Snohomish County Prosecutor's, Everett, WA, Andrew William Maron, Scott Michael Missall, Short Cressman & Burgess PLLC, Leslie C. Clark, Calfo Harrigan Leyh & Eakes LLP, Wayne Douglas Tanaka, Joseph Zachary Lell, Ogden Murphy Wallace, James Edward Haney, Ogden Murphy Wallace PLLC, Brian Edward Lawler, Socius Law Group PLLC, Gregory Colin Narver, Seattle City Attorney's Office, Seattle, WA, Shelley Marie Kerslake, Christopher D. Bacha, Bob C. Sterbank, Kenyon Disend PLLC, Issaquah, WA, Daniel Brian Heid, Auburn, WA, Rod Paul Kaseguma, John William Milne, Mark S. Leen, Eric Clayton Frimodt, Inslee, Best, Doezie & Ryder, P.S., Cheryl Ann Zakrzewski, Bellevue, WA, Joseph Patrick Bennett, Hendricks-Bennett PLLC, Allen Joseph Hendricks, Attorney at Law, Edmonds, WA, Thomas C. Brubaker, City of Kent Legal Department, Kent, WA, William Raymond Evans, Kirkland, WA, Michael Paul Ruark, Attorney at Law, Lake Forest Park, WA, Kathleen H. Knight, Mercer Island, WA, Kinnon William Williams, Williams & Williams, PSC, Bothell, WA, Albert Anthony Abuan, Albert A. Abuan PLLC, Bainbridge Island, WA, Lawrence J. Warren, Renton, WA, James R. Schwartz, Attorney General's Office, Olympia, WA,

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Shawn J. Aronow, Snohomish County Public Utility District, for Respondents.

David Florian Jurca, Helsell Fetterman LLP, Seattle, WA, for Appellant/Cross-Respondent.

William E. Blakney, King County Prosecutor, Verna P. Bromley, King County Pros. Attys Office, Arthur Washington Harrigan Jr., Timothy George Leyh, Randall Thor Thomsen, Katherine See Kennedy, Calfo Harrigan Leyh & Eakes LLP, Seattle, WA, for Respondent/Cross-Appellant.

Shelley E. Kneip, Kitsap County Prosecutors Office, Port Orchard, WA, amicus counsel for WA Assoc. of Prosecuting Attorneys.

Jean Marie Wilkinson, Attorney Generals Office, Olympia, WA, amicus counsel for Washington State Auditor.

GONZÁLEZ, J.

[178 Wn.2d 769] ¶ 1 Ten years ago, King County urgently needed a new facility to treat sewage because existing treatment plants were near capacity. Procuring a location for a new sewage treatment plant was very difficult. After many years of negotiation and seven separate lawsuits, Snohomish County agreed to let King County build the Brightwater sewage treatment plant in south Snohomish County. As part of the settlement, King County agreed to provide a substantial mitigation package for the local Snohomish County community near Brightwater. The cost of the mitigation was included in the capital cost of the [178 Wn.2d 770] plant. Capital funding for the plant came mostly from the sale of bonds that were primarily secured by sewage treatment fees and capacity charges imposed on new sewage hookups. Two local utility districts that contract with King County for sewage treatment filed this suit arguing that the mitigation package was excessive, among many other claims. The trial judge largely rejected the districts' claims. We largely affirm.

FACTS

¶ 2 In 1957, the Washington legislature authorized " cities and counties to act jointly" to meet certain " common problems in order that the proper growth and development of the metropolitan areas of the state may be assured." LAWS OF 1957, ch. 213, § 1, currently codified in ch. 35.58 RCW. Among other things, the legislature was concerned that population growth " created problems of sewage and ... water supply," especially relating to Lake Washington. Id. The next year, King County voters in the areas surrounding Lake Washington approved the creation of the metropolitan municipal corporation known as " Metro." Mun. of Metro. Seattle v. City of Seattle, 57 Wash.2d 446, 449, 357 P.2d 863 (1960) (Metro). Metro was established " for the stated purpose of ‘ metropolitan sewage disposal’ ... to address local pollution issues and to enhance water quality in the area's fresh and salt water bodies." Clerk's Papers (CP) at 18663. By April 1959, Metro had adopted a comprehensive regional sewage disposal plan under which the existing municipalities would continue to collect sewage to be processed and disposed of by Metro for a fee. Metro, 57 Wash.2d at 449, 357 P.2d 863. Almost from the beginning, the proper scope and cost of sewage treatment has been the subject of conflict and litigation. See id. at 450, 453, 357 P.2d 863.

¶ 3 In 1974, the legislature amended and expanded chapter 35.58 RCW. LAWS OF 1974, Ex. Sess., ch. 70. Among other things, statutory references to " sewage disposal" were frequently [178 Wn.2d 771] changed to the more general " water pollution abatement." Id. Even before that, Metro had performed many different water quality improvement projects, some not directly related to sewage disposal. These programs were not without controversy, and in 1988, " Metro formed a special task force, the ‘ Water Quality Program Review Committee,’ to review Metro's responsibilities, authority, programs and funding relating to water quality." CP at 18663. A.J. Culver, then the mayor of the city of Issaquah, chaired the committee, and the task force's report is commonly referred to as the " ‘ Culver Report.’ " Id. " The Culver Report noted that Metro historically had spent about 3.5 percent of its operating funds in areas which arguably were ‘ not absolutely required in order to achieve a regulatory requirement and/or fulfill component agency agreements' " but that " these expenditures directly

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benefited Metro." CP at 18663-64. It " recommended that Metro continue to fund water quality programs including those not directly related to sewage treatment," subject to a budget cap. CP at 18664. " This funding source for such expenditures became known as ‘ the Culver Fund’ " and, with some modification, exists today. CP at 18664-65.

¶ 4 In 1992, King County absorbed Metro. Now, King County has the power to dispose of sewage, abate water pollution, remove storm water, and improve water quality. RCW 35.58.200. King County executes these activities through its Wastewater Treatment Division, which, the trial court found, is operated as a proprietary utility. CP at 18662.

¶ 5 The plaintiffs, Cedar River Water and Sewer District and Soos Creek Water and Sewer District, are two of 34 entities that contract with King County for sewage treatment in return for an annual fee. These sewage treatment fees are paid into a " Water Quality Fund," though it appears [178 Wn.2d 772] these fees are not the fund's only source of revenue.[1] CP at 18668. Up to 1.5% of this fund is transferred annually to King County's Water and Land Resources Division for Culver Fund projects. The division and the county council decide which specific projects will be funded by the Culver Funds. Projects have ranged from an education program aimed at preventing people from flushing pharmaceuticals down their toilets to daylighting the Ravenna Creek and removing its waters from the treatment stream.

¶ 6 Many entities oversee and advise King County on how to manage its water and sewage problems and resources. Most relevantly, King County sewage utilities, including the plaintiffs, " are members of the Metropolitan Water Pollution Abatement Advisory Committee ... an advisory body created under RCW 35.58.210.[Its] function is to ‘ advise the metropolitan council in matters relating to the performance of water pollution abatement function.’ " CP at 18664. This advisory council has recommended eliminating the Culver Fund several times, which King County has " categorically rejected." CP at 18664-65.

¶ 7 Meanwhile, by the 1990s, King County was operating two regional and several smaller sewage treatment plants. The county projected that its treatment plants would be at maximum capacity by about 2010. The county spent eight years developing a Regional Wastewater Services Plan in collaboration with " a wide range of stakeholders" and concluded a new plant should be built in either north King County or south Snohomish County. CP at 5407. By 2001, the State Department of Ecology had approved King County's wastewater service plan, including the construction of a new plant, now called Brightwater.

¶ 8 In 2003, after " literally hundreds of meetings in Snohomish County and King County," King County selected [178 Wn.2d 773] 114 acres in South Snohomish County for the treatment plant and issued an Environmental Impact Statement. CP at 5412, 1935. In apparent response, Snohomish County passed an ordinance that required any entity seeking to build an essential public facility, which includes sewage treatment plants, to obtain a conditional use permit that showed the plant would be compatible with surrounding land uses.[2] King County challenged this ordinance under the Growth Management Act, chapter 36. 70A RCW, beginning a series of

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seven lawsuits between the counties relating to Brightwater.

¶ 9 At around the same time, from 2002-2004, King County was negotiating with StockPot Soups, a subsidiary of the Campbell Soup Company, which operated a manufacturing facility located in the original footprint of the Brightwater site. Ultimately, Brightwater did not include the StockPot site, but StockPot was very concerned that proximity to a sewage treatment plant " would cause significant adverse impacts to its business." CP at 18672. Among other things, StockPot appealed the county's final environmental impact statement, contending it paid insufficient attention to the adverse effects the plant would have on its business. As part of the settlement of that suit, King County agreed to pay StockPot relocation costs, re-establishment expenses, and an additional $2 million for local job retention if StockPot stayed in the area and met listed conditions.

¶ 10 By 2005, Ecology had become " very concerned that if Brightwater is not constructed and brought into operation [178 Wn.2d 774] in a timely manner, the existing regional wastewater facilities will be overburdened. The likely result will be permit violations and degraded water quality in Puget Sound." CP at 5442. Ecology threatened to impose a moratorium on new sewer connections and construction in King and Snohomish Counties if one were not built. Previous delays in expanding treatment capacity had led to $1,000 per-day fines from Ecology.

¶ 11 King and Snohomish Counties began negotiating at the highest levels. These negotiations resulted in a global settlement agreement that settled the remaining lawsuits and in a development agreement for the Brightwater plant. The settlement specifically provided that King County would pay Snohomish County $70 million for recreational facilities and improvements, build a community resource center, make public safety improvements, and provide for habitat mitigation, collectively referred to as " community mitigation." CP at 5735. Among other things, King County agreed to build a community center to replace the Bear Creek Grange Hall that would be demolished to make way for Brightwater. The grange hall had been used by the local community for meetings, weddings, dances, and other events, and King County pledged that the new community center would be available as a substitute. King County also agreed to fund four habitat mitigation projects in the Little Bear Creek basin, improve roads in the area, and build a park. Little Bear Creek is a salmon bearing stream that crosses the Brightwater site. No payments would be made if the Brightwater permits were not approved. The settlement agreement also specifically stated that " the parties intend to enter into a development agreement governing the processing of permits for the construction of the Brightwater wastewater treatment plant" under RCW 36.70B.170, a statute that specifically authorizes local governments to enter into development agreements with developers. CP at 5735. The counties agreed that any appeals from the hearing examiner's decision would go directly to court instead of the Snohomish County Council.

[178 Wn.2d 775] ¶ 12 King County issued a bond to pay the capital costs of the plant, secured primarily by sewage revenues and new capacity charges. It appears that bond revenues were paid into King County's Wastewater Capital Fund. According to King County, the settlement mitigation was paid " almost exclusively" from bond proceeds rather than directly from sewage treatment fees charged to the districts. CP at 5437. King County submitted evidence that " the bonds will be repaid almost entirely from ‘ capacity charges' and sewage disposal charges paid by new ratepayers." Id. The plant began treating wastewater in fall 2011 and was substantially finished a year later.

¶ 13 In 2008, plaintiffs Cedar River Water and Sewer District and Soos Creek Water and Sewer District brought this suit against King County, Snohomish County, and the other 32 entities that act as sewage utilities in King County. The districts are municipal corporations formed under Title 57 RCW, and both have long term contracts with King County for sewage disposal. The plaintiffs argued that the community mitigation outlined in the settlement was excessive; that there was too tenuous a connection between

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impacts caused by the treatment plant and some of the mitigation projects; that King County improperly used sewage treatment revenue for nonsewage related costs, including overhead expenses, the Culver Fund projects, and excessive payments to StockPot Soups; that King County was impermissibly disposing of reclaimed water by selling it; that the county had violated trust and fiduciary obligations to the districts; and that the county violated its contractual and statutory duties to the districts. Later, the districts alleged that the county was not properly calculating a credit enhancement fee it charges the water districts for backing their bonds.

¶ 14 Many of the districts' claims were dismissed in a series of summary judgment rulings. In July 2009, Judge Felnagle found that the strict time limits of the Land Use Petition Act (LUPA), ch. 36.70C, applied to " any claims by [178 Wn.2d 776] plaintiffs challenging the validity, legality or enforceability of the Settlement Agreement, including any land use aspects of that Agreement," and dismissed those claims at summary judgment. CP at 18710. He allowed the districts to proceed on their claims that " the so-called ‘ community mitigation’ projects set forth in the Settlement Agreement lack a sufficient nexus to sewage disposal to be paid for with money from King County's Water Quality Fund." CP at 18710. That December, he found that each of the challenged projects were " in some way, mitigating against the negative impacts of siting a sewage treatment plant ... in your neighborhood[,]" and dismissed the challenges to the projects on their merits. 4 Verbatim Report of Proceedings (VRP) (Dec. 11, 2009) at 60-61 (oral ruling); CP at 18713-17, 18719-23 (summary judgment orders). That October, the judge dismissed the districts' breach of fiduciary duty and trust claims, finding that the county had no such obligations to the sewage districts.

¶ 15 In February 2010, Judge Felnagle dismissed the districts' claims relating to the county's authority to sell and distribute reclaimed water. Later that year, he dismissed some affirmative defenses King County wished to present. 10 VRP (June 4, 2010) at 44.

¶ 16 The remaining claims went to a six-week bench trial. Judge Felnagle rejected most of the districts' remaining claims in an extensive written ruling. However, Judge Felnagle agreed with the plaintiffs that a $2 million " job retention" payment to StockPot was not properly part of the capital costs of Brightwater, but instead " primarily benefited the general public and thus should have come from a funding source other than the Water Quality Fund." CP at 18682. Judge Felnagle also awarded " 12% prejudgment and postjudgment interest" and deferred the question of attorney fees until the case was resolved on appeal. Id. [3] We accepted direct review. The Washington Association of Prosecuting [178 Wn.2d 777] Attorneys submitted an amicus brief in support of King and Snohomish Counties. Washington State Auditor Brian Sonntag submitted a brief that was explicitly not in favor of either party but urges a narrow interpretation of RCW 43.09.210, among other things.

ANALYSIS

¶ 17 We review questions of law de novo. Udall v. T.D. Escrow Servs., Inc., 159 Wash.2d 903, 908, 154 P.3d 882 (2007) (citing Berrocal v. Fernandez, 155 Wash.2d 585, 590, 121 P.3d 82 (2005)). We review verdicts for substantial evidence, taking all inferences in favor of the verdict. See Indus. Indem. Co. of Nw., Inc. v. Kallevig, 114 Wash.2d 907, 916, 792 P.2d 520 (1990) (citing Boeing Co. v. Sierracin Corp., 108 Wash.2d 38, 67, 738 P.2d 665 (1987)).

¶ 18 Initially, we consider two overarching issues that bear on many of the issues before us. First, the districts contend that King County has " trust or fiduciary obligations as to how it used the sewage utility fund" on the grounds that the Water Quality Fund is a restricted fund, and " [i]t has long been held in Washington that a restricted fund is in the nature of a trust, and equity should treat it accordingly." Br. of

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Appellants at 35-36 (citing City of Longview v. Longview Co., 21 Wash.2d 248, 254, 150 P.2d 395 (1944)); 15 EUGENE MCQUILLIN, MUNICIPAL CORPORATIONS § 39.56, at 181-82 (3d ed.2005). Judge Felnagle dismissed the districts' arguments at summary judgment. We affirm.

¶ 19 Under modern law, holding funds for a purpose does not, by itself, establish a trust or fiduciary relationship. See, e.g., Thompson v. Atl. Richfield Co., 673 F.Supp. 1026, 1028 (W.D.Wash.1987). Generally, " the ‘ key element’ is whether the parties intended a trust relationship rather than a contractual relationship." Id. (quoting In re Thornton, 544 F.2d 1005, 1006 (9th Cir.1976)). Judge Felnagle examined the evidence presented and found that no trust had been created, and none needed to be implied by law.

[178 Wn.2d 778] ¶ 20 We recently rejected an attempt to cast a government agency as a fiduciary when it collected funds based on theories rooted in " mid-twentieth century cases that have referred to retirement boards as trustees." Retired Pub. Employees Council v. Charles, 148 Wash.2d 602, 621, 62 P.3d 470 (2003). In Charles, this court surveyed the relevant law and found that the mere collection of funds for a purpose did not create a trust absent specific intent to do so. Id. at 622-23, 62 P.3d 470; see also Thompson, 673 F.Supp. at 1028. Instead, a trust would be implied only if there was evidence of intent to create one. Charles, 148 Wash.2d at 622-23, 62 P.3d 470. No such evidence appears here.

¶ 21 The districts draw our attention to several cases where the court observed that particular funds were held in trust, whether or not a formal trust had been established. E.g., Longview Co., 21 Wash.2d at 254, 150 P.2d 395; Keyes v. City of Tacoma, 12 Wash.2d 54, 57, 120 P.2d 533 (1941). But in those cases, local improvement districts held funds in trust because they were raised by the sale of bonds for a very particular purpose. Nothing in those cases suggests that fees paid for a proprietary government service are necessarily held in trust. Instead, there must be strong evidence of an intent to create a trust, such as specific direction from the legislature, before we impose trust or fiduciary duties on an agency. See, e.g., Charles, 148 Wash.2d at 622-23, 62 P.3d 470.[4] We find no such evidence here. We affirm the trial court's ruling that King County is not a fiduciary of the districts.

¶ 22 Based on their trust and fiduciary duty theories, the districts argue that King County should have [178 Wn.2d 779] borne the burden of proof on whether it used sewage funds properly. Generally, plaintiffs bear the burden of proof on all elements of their claims. E.g., Young v. Key Pharm., Inc., 112 Wash.2d 216, 225, 770 P.2d 182 (1989). The districts also contend that we should reverse the burden because, they argue, King County had peculiar or exclusive knowledge relating the Water Quality Fund and to the claims. When information necessary to proof " is exclusively within the knowledge of one or the other of the parties, the burden would be upon the party possessed of that knowledge to make the proof." Jolliffe v. N. P. Ry., 52 Wash. 433, 436, 100 P. 977 (1909). But the districts have not shown that any information is exclusively in the hands of King County, or any other reason why we should reverse the usual burden of proof. We decline to do so.

1. LUPA

¶ 23 After protracted litigation, King and Snohomish Counties settled their Brightwater disputes in late 2005. As part of the settlement, the counties agreed " to enter into a development agreement governing the processing of permits for the construction of the

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Brightwater wastewater treatment plant and related facilities," and King County agreed to pay an additional $70 million in community mitigation.[5] CP at 5735. The settlement agreement was contingent on the Snohomish County Council approving the development agreement, which was attached to the settlement agreement as an exhibit. Among many other things, the development agreement set forth " the permitting standards and conditions, certain mitigation measures, and permit process governing the review and [178 Wn.2d 780] construction of King County's Wastewater Treatment plant." CP at 5743. The Snohomish County Council approved the settlement agreement after one public hearing in October 2005 and the development agreement after another hearing that December.

¶ 24 The counties submitted the development and settlement agreement to a Snohomish County hearing examiner. The Sno-King Environmental Alliance and the city of Woodinville both opposed approval. After a public hearing over two days in April, the hearing examiner approved the project on May 5, 2006, with some conditions that are not before us.[6] More than two years later, the districts filed this case. Two years after that, King County moved for summary judgment in the case before us on " all claims that challenge the Development and Settlement Agreements between King and Snohomish Counties, including the scope of mitigation required by Snohomish County and agreed to by King County" on the grounds that the two agreements " constitute a single land use decision" and the districts' challenge was time barred under LUPA. CP at 90-91. On the same day, Snohomish County also filed for summary judgment. It agreed with King County that the districts' action was time barred under LUPA. It also argued that the districts had no standing to challenge the contract between the counties and, to the extent the districts were bringing a tort claim, that they had failed to file a required damage claim before filing suit.

¶ 25 The counties were initially only partially successful on their summary judgment motions. Judge Felnagle found that the " Settlement Agreement ... read in conjunction with the ... Development Agreement between the two counties constitutes at least in part a ‘ land use decision’ within the meaning of the Land Use Petition Act." CP at 18710, Based on that finding, he dismissed the districts' [178 Wn.2d 781] challenges to the " validity, legality or enforceability of the Settlement Agreement, including any land use aspects of that Agreement," as time barred under LUPA. Id. [7] However, Judge Felnagle allowed the districts to pursue their claims that the specific community mitigation projects agreed to in the settlement agreement lacked sufficient nexus to sewage disposal to be funded out of King County's Water Quality Fund. Those claims were dismissed in a subsequent summary judgment order that will be reviewed below.

¶ 26 Our legislature enacted LUPA to establish " uniform, expedited appeal procedures and uniform criteria for reviewing [land use decisions made by local jurisdictions], in order to provide consistent, predictable, and timely judicial review." RCW 36.70C.010. " LUPA embodies the same idea expressed by this court in pre-LUPA decisions— that even illegal decisions must be challenged in a timely, appropriate manner." Habitat Watch v. Skagit County, 155 Wash.2d 397, 407, 120 P.3d 56 (2005) (citing Pierce v. King County, 62 Wash.2d 324, 334, 382 P.2d 628 (1963)). Washington courts have rejected the argument that the LUPA

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time limit runs only against entities that had notice, standing, or were aggrieved under the statute. See, e.g., Samuel's Furniture, Inc. v. Dep't of Ecology, 147 Wash.2d 440, 462, 54 P.3d 1194 (2002) (no requirement of individualized notice for time limit to apply); Chelan County v. Nykreim, 146 Wash.2d 904, 935, 52 P.3d 1 (2002) (neighbor lacked standing and had not shown he was aggrieved).

¶ 27 This court has not had much opportunity to consider development agreements under chapter 36.70B RCW, perhaps because parties to the agreements rarely challenge them. Development agreements are also a fairly new instrument to resolve land use disputes. Former Governor [178 Wn.2d 782] Lowry's task force on regulatory reform proposed them in 1994 as part of an effort to simplify and harmonize land use regulation and review. GOVERNOR'S TASK FORCE ON REGULATORY REFORM, FINAL REPORT 1, 51 (1994). The legislature specifically approved of development agreements in 1995 as part of a fairly comprehensive overhaul of land use ...


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