Wastewater Lawsuit

Emerald Bay Service District, South Coast Water District, City of Laguna Beach Lawsuit Against Moulton Niguel Water District

Fact Sheet
Background

The South Orange County Wastewater Authority treats wastewater for 500,000 customers. A joint powers authority, SOCWA is governed by ten local government agencies, and holds its treatment plants and related facilities in trust for their benefit.

SOCWA’s governance structure is organized under project committees that are intended to allocate the costs of capital projects, maintenance and operations to the ratepayers that receive the beneficial use of the facilities. Moulton Niguel Water District along with Emerald Bay Service District, South Coast Water District and the City of Laguna Beach are members of one such project committee, commonly known as Project Committee No. 15 (“PC 15”), which oversees the construction, operations and maintenance of a wastewater treatment facility. Budgets are separated between capital improvement projects for rehabilitations, modifications, and improvements, and operations & maintenance for ongoing repair and upkeep.

Moulton Niguel Water District, which owns approximately 30% of the wastewater treatment plant’s capacity, has continued to fund 100% of its obligation of the facility’s operations and maintenance budget, which ensures the safe treatment of wastewater in South Orange County. Moulton Niguel Water District has not consented to fund capital improvements that extend the service life of the facility beyond the existing agreement, which has a 50-year term. The project agreement was originally executed in 1976. Moulton Niguel does not require the facility and does not intend to build new capital facilities or rebuild legacy facilities that are not necessary to its ratepayers.

The applicable agreement is clear: all capital improvement expenditures shall only be obligations of the agencies consenting to the project. Emerald Bay, South Coast and Laguna Beach voted in favor of this capital improvement budget, which aims to rebuild and rehabilitate the facility for another 50-year service life. MNWD did not.

Moulton Niguel has tried to find an amicable solution. On August 29, 2016, after discussing the subject in open session on August 22, 2016, Moulton Niguel presented a written offer to pre-pay its proportional share of the operations and maintenance and capital costs through the term of the agreement in order to be released from the plant. Two months later, Emerald Bay Service District replied with a letter, refusing to even discuss the offer until Moulton Niguel contributed to the proposed capital investments. The other project partners have repeatedly refused to discuss Moulton Niguel’s offer until Moulton Niguel Water District has paid for the capital projects in dispute.

On April 25, 2017, the City councils of Mission Viejo and Laguna Hills unanimously adopted resolutions in support of open and public discussions regarding the long-term financing of the Coastal Treatment Plant. The City councils of Laguna Niguel and Aliso Viejo also adopted resolutions of support.

On May 12, 2017, Moulton Niguel presented a check in the amount of $755,870 as a payment under protest. The check was accompanied by a letter explaining our reasoning regarding the capital projects, and requesting that the other parties hold open discussions regarding the matter, and that the contribution be accounted for in a divestment model. The other project members voted to reject the payment, accusing MNWD of attaching “conditions” to the payment.

Assemblymember Bill Brough and Senator Pat Bates also requested discussions on this issue, but were promptly rebuffed by Chairman Dunbar.

On May 30, 2017, Emerald Bay, South Coast and Laguna Beach filed a lawsuit, asking a court to force Moulton Niguel ratepayers to pay the unlawfully-approved invoices.

 

Financial Irregularities

Concurrent to the lawsuit, state auditors are conducting an independent audit and investigation of SOCWA’s financial reports, governance, and management.

In recent years, SOCWA management – by its own admission — has engaged in questionable financial practices, sloppy accounting, fiscal improprieties and poor retention of financial records. SOCWA management has not maintained accurate financial records and, on multiple occasions, has failed to file timely audit reports with the State, the County, and its member agencies. Further eroding public trust, SOCWA management blamed its failure to file timely audits “on the departure under embezzlement allegations of the Finance Officer in 2012.”

Moulton Niguel Water District pays for 43% of SOCWA’s budget, the largest share among the ten member agencies. Moulton Niguel has repeatedly questioned SOCWA’s invoices, financial statements, accounting procedures, and management practices. Moulton Niguel staff uncovered a $78,667 discrepancy in invoices approved under the 2017-18 SOCWA budget. In response, SOCWA management has attempted to conceal the “budget manipulation,” rather than obtain the requisite board approval.

After the SOCWA Board of Directors publicly considered its budget, there was an attempt to insert accounting definitions into the FY 2017-18 SOCWA budget document — to support the legal theory underpinning Emerald Bay, South Coast and Laguna Beach’s lawsuit. On a 7-to-3 vote on August 3, 2017, the SOCWA Board of Directors directed SOCWA staff to remove the manipulated budget definitions. The three dissenting votes were cast by Emerald Bay, South Coast and Laguna Beach. Despite that Board action, SOCWA management continues to refuse to remove these pages from the published budget.

The Parties

SOCWA
South Orange County Wastewater Authority – Joint powers authority that is currently under state audit for potential financial improprieties and mismanagement. The majority (43%) of SOCWA’s budget is paid by MNWD, but each agency receives one vote on the board of directors.

PC 15
Project Committee 15 – SOCWA project committee of four local agencies: City of Laguna Beach, Emerald Bay Service District, Moulton Niguel Water District & South Coast Water District, which owns, operates and manages a wastewater treatment plant in Aliso & Woods Canyon.

MNWD
Moulton Niguel Water District – Member of SOCWA and PC 15. Moulton Niguel provides high-quality water at low rates to 170,000 customers in Laguna Niguel, Aliso Viejo, Laguna Hills, Mission Viejo, Dana Point and San Juan Capistrano. As the largest contributor to SOCWA’s budget, Moulton Niguel funds approximately 43% of SOCWA expenditures, or $17 million annually.

Emerald Bay
Emerald Bay Service District – Member of SOCWA and PC 15. Emerald Bay pays less than 1% of SOCWA’s expenditures, but has equal voting power as the other 9 members. A water agency that serves 500 homes in the Emerald Bay gated community in unincorporated North Laguna Beach, which has failed to file timely compensation reports with the state’s public compensation watchdog.

South Coast
South Coast Water District – Member of SOCWA and PC 15. South Coast pays roughly 20% of SOCWA’s expenditures. It provides water and wastewater services to approximately 35,000 residents.

Laguna Beach
City of Laguna Beach – Member of SOCWA and PC 15. Laguna Beach pays roughly 13% of SOCWA’s expenditures.

Causes of Action and Affirmative Defenses

Cause 1:       Breach of Contract (Material Breach)

The Law: The SOCWA JPA agreement is a legally-binding contract. Under the agreement, capital improvement costs require unanimous consent.

Violation: Emerald Bay, South Coast and Laguna Beach along with SOCWA management attempted to force Moulton Niguel to pay for unlawful capital improvement costs in violation of the SOCWA joint powers agreement.

Excerpt: Cross-defendants’ attempt to force Moulton Niguel to pay for unlawfully capital improvement costs constitutes a material breach of the Joint Powers Agreement and PC 15 Agreement.”

Remedy: Damages; Termination of the PC 15 Agreement; and/or Moulton Niguel exit from PC 15 Agreement

 

Cause 2:       Breach of Contract (Frustration of Purpose)

The Law: Parties enter into a contract for a clear reason, or shared purpose. Consequently, events occur or circumstances can change so that the contract is no longer valid, fair or legally enforceable.

Violation: Emerald Bay, South Coast and Laguna Beach along with SOCWA management “frustrated the principal purpose of the applicable contract,” when they violated Moulton Niguel’s rights under the SOCWA joint powers agreement.

Excerpt: “Pursuant to the Joint Powers Agreement, operating and maintenance (“O&M”) budgets and project budgets must be approved by a two-thirds and a unanimous vote, respectively. This voting standard is so important to the legitimate management of the facilities that Section 8.2 of the Joint Powers Agreement even allows Project Committee members to make capital improvements when a member has voted against a capital improvement, so long as the member who does not want the improvement is not required to pay for the improvement. That member also does not receive the benefit of the improvement.”

Remedy: Damages; Termination of the PC 15 Agreement; and/or Moulton Niguel exit from PC 15 Agreement

 

Cause 3:       Breach of Contract (Anticipatory Breach)

The Law: Parties to the contract are expected to continue to fulfill the terms of the agreement. An anticipatory breach of contract reflects an ongoing problem when a party shows that it does not intend to live up to its obligations under the contract and has shown that it will violate the agreement.

Violation: Emerald Bay, South Coast and Laguna Beach have made clear that they will continue to manipulate the budget by bundling both operational and capital improvement expenses and send Moulton Niguel incorrect invoices.

Excerpt:“Cross-defendants continue to incorrectly allege that project budgets only require a two-thirds majority vote to justify their past incorrect invoices and their proposed current invoice. Cross-defendants have not provided any assurances that they will not charge Moulton Niguel for unapproved capital improvement project budgets.”

Remedy: Damages; Termination of the PC 15 Agreement; and/or Moulton Niguel exit from PC 15 Agreement

Case Details

Case Name            SOCWA, City of Laguna Beach, South Coast Water District and Emerald Bay Service District v. Moulton Niguel Water District

Case #                     30-2017-00923143 CU-BC-CJC

Judge                       Hon. Ronald L. Bauer

Court                        Orange County Superior Court

Description            Court case to review illegal invoicing and breach of contract

Trial Date:               To Be Determined