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Northwest Alloys, Inc. v. State of Washington Department of Natural Resources

Court of Appeals of Washington, Division 2

August 20, 2019

NORTHWEST ALLOYS, INC., AND MILLENNIUM BULK TERMINALS-LONGVIEW, LLC, Respondents/Cross-Appellants,
v.
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.

          SUTTON, J.

         The 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.

         NWA and 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.

         We 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.[1]

         FACTS

         I. History of the Site

         Reynolds 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.

         Alcoa-most 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 Washington.

         In 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.

         After 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.

         II. Millennium

         In the 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.

         According 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)[2]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.

         In 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.

         III. Financial Concerns

         During 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.

         In late 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.

         Due to 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.

         IV. Negotiations & DNR's Requests for Information

         On 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.

         Four 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 project.

         On 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.

         After 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.

         By late 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 1512.

         However, 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 ...

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