NORTHWEST ALLOYS, INC., AND MILLENNIUM BULK TERMINALS-LONGVIEW, LLC, Respondents/Cross-Appellants,
STATE OF WASHINGTON DEPARTMENT OF NATURAL RESOURCES, AND THE HONORABLE HILARY S. FRANZ, AND COLUMBIA RIVERKEEPER, WASHINGTON ENVIRONMENTAL COUNCIL, AND SIERRA CLUB, Appellants/Cross-Respondents.
Department of Natural Resources and the Commissioner of
Public Lands Hilary S. Franz (collectively DNR), and Columbia
Riverkeeper, Washington Environmental Council, and Sierra
Club (collectively Intervenors) appeal the superior
court's order concluding that DNR acted arbitrarily and
capriciously by denying Northwest Alloys, Inc.'s (NWA)
consent to sublease state-owned aquatic lands to Millennium
Bulk Terminals-Longview, LLC (Millennium). DNR and
Intervenors argue that DNR's decision to deny consent to
sublease was not arbitrary and capricious due to NWA's
refusal to provide requested financial information about
Millennium and DNR's legitimate concerns about
Millennium's financial condition and business reputation.
Millennium cross-appeal and argue that the superior court
applied the incorrect standard of review. NWA and Millennium
contend that under RCW 79.02.030, the superior court should
review de novo DNR's denial of consent to sublease by
applying the "reasonably prudent person" test.
agree with DNR and Intervenors, and reverse and vacate the
superior court's orders, and order the superior court to
issue a new order affirming DNR's denial.
History of the Site
Metals Company, which was owned by Alcoa Corporation, owned
property adjacent to the Columbia River navigation channel in
Longview. In 2004, Chinook Ventures, Inc. purchased a smelter
located on the property and entered into a long-term ground
lease with Reynolds. In 2005, Alcoa transferred the property
from Reynolds to another of its subsidiaries, NWA.
recently through NWA-leased the state-owned aquatic lands
adjacent to the property from DNR. NWA used the dock and
associated infrastructure on the aquatic lands for shipping
alumina to Alcoa's Wenatchee Works smelter in eastern
2008, DNR renewed its aquatic lands lease with NWA for an
additional 30-year term. Under the terms of the lease, NWA
could not sublease the property without the written consent
of DNR, which DNR could not unreasonably withhold. The lease
provided that in considering whether to consent to a
sublease, DNR could consider, among other items, "the
proposed transferee's financial condition, business
reputation and experience, the nature of the proposed
transferee's business, the then-current value of the
[p]roperty, and such other factors as may reasonably bear
upon the suitability of the transferee as a tenant of the
[p]roperty." Clerk's Papers (CP) 16890.
renewing its lease with DNR, NWA subleased the aquatic lands
to Chinook with DNR's consent. Chinook imported alumina
as an operator for NWA, and also used the property to store
petroleum coke and transfer it onto ships at the dock. During
its subtenancy, Chinook failed to obtain the required state
and local regulatory permits for its petroleum coke business
and failed to provide adequate environmental controls.
Chinook built improvements such as a remodeled ship loader
and overwater conveyor system without obtaining the required
permits or authorization under the lease. Chinook amassed a
significant number of environmental violations issued by the
Department of Ecology, received a stop work order from
Cowlitz County, received a notice of violation from the U.S.
Army Corps of Engineers, exacerbated environmental concerns
at the site, and put NWA in default of its lease with DNR.
fall of 2010, while still in default of the lease, NWA sought
DNR's consent to sublease the property to Millennium.
Millennium was a limited liability company organized in 2010
for the purpose of acquiring Chinook's assets, leasing
the smelter property, and subleasing the aquatic lands.
Millennium's purported plan was to continue the alumina
handling operations at the site using the existing equipment
and planned upgrades. Millennium's undisclosed long-term
objective, however, was to construct a large coal export
terminal on the site.
to the original permit application from Millennium's
corporate parent, a subsidiary of Ambre Energy Inc. (Ambre),
the terminal project would allow coal handling and
exportation of 5.2 million metric tons of coal per year. A
State Environmental Policy Act (SEPA)determination for the
original permit application resulted in a mitigated
determination of nonsignificance finding, meaning that a full
environmental impact study was not required. However,
internal Ambre documents later revealed that Millennium
intentionally concealed the extent of its plans for the coal
export facility in order to avoid full environmental review.
After Millennium's deception made national and local
news, Millennium withdrew its terminal proposal.
early 2012, Millennium filed a revised permit application,
this time disclosing the full scope of its plans for
facilities on the property. Millennium sought to build,
operate, and maintain the largest coal export terminal on the
west coast, exporting 44 million metric tons of coal per
year. Millennium planned to add two large docks to the
property. Operating the docks would have required significant
new dredging of the aquatic lands within and outside of the
geographical areas covered by the lease.
a severe coal market downturn in late 2014, Ambre sold its
North American assets-including a 62 percent ownership stake
in Millennium-to a creditor, Lighthouse Resources.
2015, Alcoa announced it would curtail production at
Wenatchee Works. Wenatchee Works had used the Longview dock
leased by NWA to import alumina. Following the suspension of
production at Wenatchee Works, the dock was not in use.
continued poor coal market conditions, several United States
coal producers filed for bankruptcy in 2016. Arch Coal, Inc.,
which owned 38 percent of Millennium, declared bankruptcy in
early 2016. As part of its bankruptcy, Arch Coal sold its
interest in Millennium to Lighthouse Resources,
Millennium's only remaining corporate parent. In return
for its interest in Millennium, Arch Coal received only a
release of its obligation to provide capital support of
Millennium's projects. Arch Coal stated that the capital
contributions Millennium needed from Arch Coal to stay afloat
were so significant that Arch Coal's entire ownership
share in Millennium, which it valued at nearly $38 million,
would have been completely drawn down in a matter of weeks.
Negotiations & DNR's Requests for Information
November 18, 2010, shortly after NWA sought DNR's consent
to sublease to Millennium, DNR requested information about
Millennium from NWA, including at a minimum:
1. The financial condition of Millennium Bulk Logistics,
Inc., including the extent of its assets, to help DNR
determine whether it has the financial wherewithal to comply
with the terms of the lease-especially in terms of abiding by
requirements related to authorized improvements.
2. The business reputation and experience of Millennium Bulk
Logistics, Inc., and if this Incorporation has been formed
just to operate this site, the business reputation of any of
its affiliates, owners, or partners. DNR would like to
understand the history of this company and any of its
individual owners in terms of the conduct of their
business(es) and whether they have any history of causing
environmental damage or failing to comply with applicable law
and regulatory requirements. As a steward of state-owned
aquatic lands and responsible for this site, DNR would like
to understand that the new proposed sublessee will be able to
perform its obligations under the lease that relate to site
stewardship and otherwise. Please inform us of each of the
owners of the Incorporation and their experience with site
uses such as the one proposed for the sublease.
3. Any information that you can provide that will inform us
of site operating protocols that will protect state-owned
aquatic lands from the release of hazardous substances and
that will provide environmental protection. If Millennium or
any of its partners has experience with the types of systems
that would be put in use at the Longview site, please
describe what controls are in place to prevent harm to the
aquatic environment in which the facility would exist, and
how upland operations may affect state-owned aquatic lands.
CP at 17023.
days later, Millennium responded to DNR and explained that
Millennium was a LLC organized for the sole purpose of the
Longview site project and was a wholly owned subsidiary of
Ambre. Millennium directed DNR to Ambre's website to
review Ambre's annual reports and noted that, at closing,
Millennium planned to post a $10 million irrevocable standby
letter of credit to NWA to provide security for
Millennium's lease commitments. Millennium also provided
a follow-up letter summarizing the assets devoted to the
November 29, 2010, DNR clarified that the information
Millennium had provided did not fully satisfy DNR's
requests. Millennium resisted DNR's requests, stating
that "the thought that Millennium has to demonstrate
financial capability to DNR is misplaced. Certainly, DNR can
make reasonable inquiry into the sublease and its plans.
However, the obligations of Millennium flow to Northwest
Alloys, Inc., the tenant." CP at 337.
Millennium's full plan for the coal terminal came to
light in early 2011, DNR informed Millennium and NWA that it
would not make a decision on the request for consent to
sublease until the related shoreline permit and SEPA
processes were resolved and until the companies obtained the
permits required for any and all planned improvements. DNR
explained that NWA's and Millennium's inconsistencies
regarding the scope of the proposed coal project made
evaluating the proposed sublease difficult.
2015, DNR's, NWA's, and Millennium's negotiations
appeared to be in their final stages. On December 14, 2015,
DNR suggested two revisions to the consent to sublease, which
NWA and Millennium accepted. NWA and Millennium replied,
"From our standpoint, we believe these document[s] now
to be final, and that all we need to do is 'accept'
the changes in both and route for signature." CP at
after Arch Coal's bankruptcy in January, DNR sent a
letter dated February 3, 2016, to NWA explaining that DNR
needed additional information to complete its review of the
request for consent to sublease. DNR emphasized its concern
about Arch Coal's bankruptcy and the potential impact on
Millennium's financial capability.
The financial capability of Millennium to perform is
critical. As the conditions on the leased property and
adjoining uplands resulting from the operations of
[NWA's] previous subtenant Chinook Ventures demonstrate,
when a subtenant in possession of the property lacks the
wherewithal to maintain the property and comply with other
lease requirements, it may cause significant damage to ...