City Responds to Water Rate Lawsuit

John Crawford gathers signatures protesting a water rate increase at last year's 4th of July parade

The City of Sierra Madre has responded to the lawsuit filed by John Crawford on May 6, 2011 (which we wrote about here and here) by filing a Notice of Demurrer and Demurrer to the Verified Petition and Complaint on June 20th, 2011. A hearing is scheduled for July 25th at 9:30am in Department 85 of Los Angeles Superior Court in which the city “will and hereby does demur to the Verified Petition for Writ of Mandate and Complaint for Declaratory Relief (“Petition”) filed by Petitioner John Crawford (“Petitioner”).

The City demurs generally on the ground that the Petition fails to state facts sufficient to constitute a cause of action pursuant to Code 0f Civil Procedure section 430.10, subdivision (e), because each purported cause of action is time-barred. Because the Petition challenges an Ordinance adopted pursuant to the rate covenant in the City’s bond issuance, Petitioner’s challenge was required to be brought as a reverse validation action within 60 days from the date the Ordinance was enacted, (Code Civ. Proc, § 860 et seq.; Gov’t Code, §§ 53511, subd. (a), 6599.3.)”

According to the City’s response, Crawford has asserted “two causes of action: (1) a writ of mandate invalidating the ordinance based on purported violations of Proposition 218 (Cal. Const., art. XIII D); and (2) a declaratory judgement that the Ordinance is invalid and unlawful on similar grounds (Ibid.). (PET ¶¶68-75.)”

The City’s demurrer (Wikipedia – A demurrer is a pleading in a lawsuit that objects to or challenges a pleading filed by an opposing party. The word demur means “to object”; a demurrer is the document that makes the objection.) to the First Cause of Action states that “The First Cause of Action fails to state a claim sufficient to constitute a cause of action because it shows on its face that the action is barred by the 60-day statute of limitations applicable pursuant to Code of Civil Procedure sections 860 and 863. (Code Civ. Proc., § 430.10, subd. (e).)”

The city’s demurrer to the Second Cause of Action states that “The Second Cause of Action fails to state a claim sufficient to constitute a cause of action because it shows on its face that the action is barred by the 60-day statute of limitations applicable pursuant to Code of Civil Procedure sections 860 and 863. (Code Civ. Proc., § 430.10, subd. (e).)”

From the “Memorandum of Points and Authorities”

1.    Introduction and Summary of Argument

Petitioner John Crawford (“Petitioner”) seeks to invalidate a duly-authorized ordinance of the City Council of Respondent City of Sierra Madre (the “City”) increasing water rates to fund the operation of the City’s water system and payment on its bond debt. Petitioner, however, delayed too long in filing his lawsuit. Under California Code of Civil Procedure section 860 et seq., Petitioner had 60 days from the passage of the Ordinance to file a reverse validation proceeding. Instead, he waited nearly four months to file his Verified Petition for Writ of Mandate and Complaint for Declaratory Relief (the “Petition”). His Petition is accordingly time-barred.

The Petition challenges the validity of the City’s Ordinance No. 1312 (the “Ordinance”), adopted on January 11, 2011 amending the City’s water rates to fund costs associated with providing water services to City residents and keep revenues at levels sufficient to cover the City’s bond payments. Under the City’s 2003 issuance of water revenue bonds, the City promised bondholders it would levy water rates at levels sufficient to (i) cover its principal and interest payments on the bonds, and (ii) ensure that its net revenues from operating the water system were at least 120% of the amount payable in principal and interest per fiscal year. The bonds are still in existence and the City is bound to comply with these covenants. The Petition, therefore, challenges not only the Ordinance, but the City’s ability to adhere to its promises to bondholders to increase its water rates to cover its debt and maintain an adequate revenue stream.

Under the statutes authorizing the City to finance its water operations through issuing bonds (Gov’t. Code, § 6584 et seq.), any challenge to the validity of such bonds must be brought as a reverse validation proceeding under the validation statute, Code of Civil Procedure section 860 et seq. This validation statute provides the procedure to challenge the validity of certain local governmental decisions or acts, especially where third parties such as bondholders depend on the certainty and financial stability of the government’s actions. The validation statute requires notice by publication and, because it is in the nature of an in rem proceeding, applies to bind all interested parties, not simply those who are parties to the proceeding. The validation statute is intended to limit the extent to which delay due to litigation may impair a public agency’s ability to operate financially, or a third party’s ability to rely upon actions taken by a public agency in connection with financial instruments, by providing for prompt resolution of claims that a public agency’s decision or act is invalid. Accordingly, a validation proceeding must be brought either by the public agency or any interested party (a so-called “reverse validation action”) within 60 days of the challenged decision or act.

Here, Petitioner failed to bring his lawsuit as a validation proceeding, failed to provide the requisite notice and – most importantly – failed to timely file the Petition. Yet, by seeking to invalidate the Ordinance, the Petition threatens the City’s ability to raise revenues to service its debt i obligations in compliance with its covenants to bondholders and therefore threatens the validity of the bonds themselves. The Petition not only seeks to limit the City’s revenue stream – the only source of revenue to meet its covenants to bondholders – it also threatens the City’s ability to abide by its promises and the bondholders’ ability to rely upon the bonds. The remedy Petitioner seeks could therefore have a chilling effect on potential third party lenders, result in higher interest rates, reduced availability of credit and even default or invalidation of the bonds.

Accordingly, the Ordinance is inextricably bound to the City’s financial obligations and Petitioner’s challenge to it should have been brought as a reverse validation action. A validation proceeding would have alleviated the hindrance to the City’s financial operation caused by the uncertainty of litigation and would have allowed those interested parties, like the bondholders, to I appear and be heard where, as here, their interests are at stake. However, because the Petition was brought outside the applicable 60-day limitations period, it is time-barred on its face. The City’s demurrer should accordingly be sustained without leave to amend.”

Thereafter follows another ten pages plus of pleadings, before the City’s conclusion: “Although ratepayers are entitled to challenge a City’s actions taken to comply with bond covenants, the law requires that they do so within a short, specified time frame in order to provide financial stability for local governments and certainty for third-party bondholders. Here, the challenge was filed too late. For the foregoing reasons, Respondent City of Sierra Madre requests the Court sustain its demurrer to all causes of action alleged in the Petition without leave to amend.”

So it appears in essence that the City, at this early stage in the suit, has chosen to make a tactical move of neither denying nor refuting Crawford’s charges, but instead saying he made them too late, so the case should be dismissed.  You can view the entire 21-page response by the City by clicking here.  In addition to this Notice of Demurrer, a 283-page declaration of Karen Schnaider in support of the City’s demurrer was filed on the same day.