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MGPI of Indiana, LLC v. South Dearborn Regional Sewer District

Court of Appeals of Indiana

January 9, 2020

MGPI of Indiana, LLC, Appellant-Plaintiff,
v.
South Dearborn Regional Sewer District, Appellee-Defendant.

          Appeal from the Dearborn Circuit Court The Honorable James D. Humphrey, Judge Trial Court Cause No. 15C01-1805-PL-44

          ATTORNEYS FOR APPELLANT Mark J. Crandley Lester Parvin Price Barnes & Thornburg LLP Indianapolis, Indiana

          ATTORNEYS FOR APPELLEE Gregory A. Neibarger Margaret M. Christensen Bingham Greenebaum Doll LLP Indianapolis, Indiana David T. McGimpsey Bingham Greenebaum Doll LLP Jasper, Indiana

          KIRSCH, JUDGE.

         [¶1] MGPI of Indiana, LLC ("MGPI") challenged a rate setting ordinance ("the Ordinance") adopted by the South Dearborn Regional Sewer District ("the District") and upheld by the District Authority of Dearborn County ("The District Authority"). The Dearborn Circuit Court issued an order upholding the District Authority's ruling.

         [¶2] On appeal, MGPI raises four issues, which we restate as:

I. Whether approval of the Ordinance by the Indiana Department of Environmental Management ("IDEM") was required;
II. Whether the District failed to consider MGPI's interests when it enacted the Ordinance;
III. Whether the Ordinance violated MGPI's vested interest; and
IV. Whether the Ordinance is arbitrary and capricious.

         [¶3] We affirm.[1]

         Facts and Procedural History

         The South Dearborn Regional Sewer District is Created

         [¶4] In 1971, the Board of Trustees of the District filed a plan of operation with the Dearborn Circuit Court for a proposed regional sewer district. Following a hearing, the court issued an order ("the 1972 order") and found "that the proposed District is necessary, and that it and the plan of operation of the District is conducive to the public health, safety, convenience and welfare, and that the plan for the operation of the District is economical, feasible, fair and reasonable." Appellant's App. Vol. II at 33. The court also found that "the only users of the sewage system of said District having an intermittent flow of at least one million (1, 000, 000) gallons per day are the Joseph E. Seagram & Sons, Inc. plant [("Seagram")] and the Schenley Distillers, Inc. plant [("Schenley")]." Id. The court accepted the proposed plan and created the District as a political subdivision for the area within the boundaries of the City of Lawrenceburg ("Lawrenceburg"), the Town of Greendale ("Greendale"), and the City of Aurora ("Aurora"). Both Seagram and Schenley had an intermittent daily sewage flow of at least one million gallons, and each was designated as a member of the District. The District was to be governed by a board of trustees consisting of, among others, 1) the mayors of Aurora, Greendale, and Lawrenceburg, and 2) a representative from Seagram and a representative from Schenley. The court stated that each trustee "shall hold office so long as he meets the criteria or until the qualification of his successor." Id.

         The 1972 Contract Creates Vested Interest for Seagram

         [¶5] In May of 1972, Seagram, Schenley, and the other members of the District signed a contract that described how the District would operate ("the 1972 Contract"). The 1972 Contract required Seagram to pay "an amount equal to 22.8% of the fixed operations and maintenance costs plus such proportional amount of the variable operational costs as the metered influent from Seagram bears to the total influent, and also such charges as may be assigned for the maintenance of Industrial Interceptors Nos. l and 2." Id. at 73. The 1972 Contract also gave Seagram a vested interest in the District's design capacity: "Seagram . . . shall have a vested interest in the respective allocation of design capacity as set forth in Item 9.2 of this agreement of which it may not be divested of said interest without its consent." Id. at 78 (emphasis added). Item 9.2 of the 1972 Contract set Seagram's design capacity at 22.8%. Id. at 72.

         Subsequent Sales of the Distillery

         [¶6] Pernod Ricard USA ("Pernod") bought Seagram's interest in the distillery, and in October of 2002, Pernod entered a contract with the other members of the District ("the 2002 Contract"). The 2002 Contract continued the right to a vested interest, stating that Pernod "shall have a vested interest in the respective allocation of design capacity as set forth in section 2.2 of this contract and may not be divested of said interest without its consent." Id. at 99. Section 2.2 of the 2002 Contract stated that Pernod's portion of the vested interest was 28%. Id. The 2002 Contract also gave Pernod the right to assign its rights to a purchaser of the distillery: "If Pernod sells its Lawrenceburg plant, Pernod may assign its interest in this contract to the purchaser in which event the purchaser shall be substituted for Pernod as a party to this contract and Pernod shall be released and discharged from its obligations hereunder." Id. at 110. After it bought the distillery, Pernod signed a new contract with the District in which Pernod disclaimed its vested ownership interest in the distillery and became a retail customer of the District's sewer services. Appellant's App. Vol. III at 68.

         [¶7] In June of 2007, Pernod sold the distillery to Lawrenceburg Distillers Indiana, LLC ("LDI") by special warranty deed. The sale to LDI was subject to the 2002 Contract. Exhibit C listed "Recorded Exceptions - Dearborn County." Id. at 126. The final exception referred to the 2002 Contract: "Contract between the City of Lawrenceburg, the City of Aurora, the City of Greendale, [Pernod], and [the District], recorded December 22, 2002 in Official Record Book 56, Page 1392 of the Dearborn County, Indiana." Id. at 127.

LDI Sells Distillery to MGPI

         [¶8] On December 21, 2011, LDI sold the distillery to MGPI by special warranty deed. Appellant's App. Vol. II at 147. The deed made the transaction subject to the 2002 Contract. Id. at 157.

         [¶9] Bill Neyer ("Neyer"), the plant manager for the District's sewer facility, testified:

During the change of ownership between the predecessor of LDI to MGPI, there were several changes. Instead of being an owner which had a shared interest in all capital projects, they became a retail customer. They also gave up their seat on the board, as well, as part of that change. So, they no longer had a voting interest, they no longer had capital responsibility and they paid up on all the outstanding debt that they had. So, that was a pretty significant change to the way operations occurred.

Appellant's App. Vol. III at 68.

         [¶10] Neyer also testified that, at some point after MGPI bought the distillery, it gave up all ownership interest in the distillery:

So initially the District had, as has been stated, five members. When Schenley ceased to operate, they ceded their ownership to the District. There was no compensation provided to them for that ownership. It became jointly owned by the remaining four members. There was a disbursement of that membership of percentages, and then later the distillery, MGPI, not at that time, it was very early when they took ownership, they did not want to own a wastewater plant or have part ownership and liability for it, so they fulfilled all their obligations to the facility for any debt that they were a party to and ceded their ownership, which was then uniformly split between the remaining three members.

Id. at 58. Neyer then testified that, after MGPI surrendered its ownership interest in the District, it signed a contract with the District in 2011, which expired at some point in 2013. Id. at 58-59.

         [¶11] On September 18, 2017, the District's attorney sent a letter to Ken Carrier of MGPI, stating that MGPI had surrendered its ownership interest in the District: "Just as MGPI at one time decided it no longer wanted to be a co-owner of [the District], so the [District] Board has decided that they would no longer have any "customers" other than [Lawrenceburg, Greendale, and Aurora]." Id. at 147 (emphasis added). The District agreed to extend the current sewage rates until a cost of service study of the District was completed. Id. at 147-48.

         Cost of Service Study

         [¶12] The District hired Crowe Horwath LLP ("Crowe") to conduct a cost of service study ("the Cost of Service Study"); Crowe began the study in February of 2016 and completed it in October of 2017. Id. at 155.

The purpose of this [Cost of Service Study] is to estimate the [District's] cash flow and financial capacity to meet its on-going revenue requirements for operation and maintenance expenses and to make capital improvements to the [District's] system. In addition, this [Cost of Service Study] also identifies the costs associated with serving various customers of the [District].

Id. at 167. During the study, Crowe participated in several meetings with the District's Board of Directors, and representatives of MGPI attended many of those meetings. Id. at 155.

         [¶13] After Crowe completed the Cost of Service Study, the attorney for the District wrote the aforementioned September 18, 2017 letter to MGPI, stating that the District could no longer afford to negotiate directly with MGPI to establish MGPI's sewer rates and that MGPI would now be a customer of Lawrenceburg and have to negotiate its rights with Lawrenceburg, which would, in turn, negotiate its rates with the District:

At the time the March letter was sent, the [District] Board did believe we would be entering into a new agreement with MGPI; however, as information from the Cost of Service (COS) study being conducted by Crowe Horwath LLP (Crowe) started to become available to the [District] Board, it became evident that keeping MGPI as a customer was not economically feasible to [the District]. As such, discussions at our monthly meetings ultimately shifted to having MGPI become a customer of either the City of Greendale or the City of Lawrenceburg. Representatives from MGPI were present at all of these meetings and were well aware that the [District] Board was looking to move in a different direction. Just as MGPI at one time decided it no longer wanted to be a co-owner of [the District], the [District] Board has decided that they would no longer have any customers other than the three (3) cities.
. . . .
Extending your current rates until the [Cost of Service Study] is completed was a courtesy that [the District] extended to MGPI because of the long relationship that we shared. However, as there is no agreement in place, we are under no obligation to continue servicing MGPI as a customer and can turn MGPI over to Lawrenceburg at any time. We have chosen not to do that because, the [District] Board believes, the completion of the [Cost of Service Study] must occur before any drastic changes are made.
[The District] is happy to continue to service MGPI until such time, but MGPI will ultimately become a customer of the City of Lawrenceburg as the [District] Board has no desire to continue servicing MGPI as a customer of [the District] once the [Cost of Service Study] has been completed.
The [District] Board came to this conclusion after many months of discussions. I cannot stress enough that representatives from MGPI were present at all of these meetings and the ultimate decision of the [District] Board should not be a surprise.

Id. at 147-48.

         The District Board Enacts the Ordinance

         [¶14] Based on the information gained from the Cost of Service Study, on February 13, 2018, the District Board enacted an Ordinance that set new sewage rates for Lawrenceburg, Greendale, and Aurora. It did not set rates for MGPI or recognize MGPI as a direct customer of the District.

         [¶15] The Ordinance provided:

WHEREAS, pursuant to Indiana Code § 13-26-5-2(7), the [South Dearborn Regional Sewer District] may "[f]ix, alter, charge, and collect reasonable rates and other charges in the area served by the [D]istrict's facilities to every person whose premises are, whether directly or indirectly, supplied with water or provided with sewage or solid waste services by the facilities . . .";
WHEREAS, Indiana Code § 13-26-11-8 requires that the boards of regional water sewage, and solid waste districts establish, by ordinance, "just and equitable rates or charges for the use of and the service provided by a works";
WHEREAS, the current amounts paid by the Cities of Aurora, Greendale, and Lawrenceburg were established by a Sewer User Agreement dated August 8, 2007 and which was effective as of July 1, 2007;
WHEREAS, the South Dearborn Regional Sewer District believes it to be in the best interests of the South Dearborn Regional Sewer District and the Cities of Aurora, Greendale, and Lawrenceburg to establish nondiscriminatory, just, and equitable sewage treatment rates rather than continuing to use the billing structure established by the Sewer User Agreement;
WHEREAS, in an effort to establish nondiscriminatory, just, and equitable sewage treatment rates, the South Dearborn Regional Sewer District engaged the services of Crowe Horwath LLP on February 9, 2016 to perform a Rate Review and a Cost of Service Study which would allow the South Dearborn Regional Sewer District to establish sewage treatment rates;
WHEREAS, the Crowe Horwath LLP Rate Review and Cost of Service Study was completed on October 27, 2017 and it recommends that the sewage treatment rates for South Dearborn Regional Sewer District customers be established as follows:
. . . .
1. Pursuant to the authority granted by Indiana Code § 13-25-5-2(7) and the procedure outlined in Indiana Code § 13-26-11 et seq., the South Dearborn Regional Sewer District may establish sewage treatment rates that are nondiscriminatory, just, and equitable.
2. The recommendations of the Crowe Horwath LLP Rate Review and Cost of Service Study are hereby approved and accepted. Pursuant to said Cost of Service Study, the sewage treatment rates shall be established as follows:
. . . .
5. The South Dearborn Regional Sewer District finds that the requirements for the adoption of initial rates as found in Indiana Code § 13-20-11 et seq., most notably the notice requirement found in Indiana Code § 13-26-11-12 and the Public Hearing requirement found in Indiana Code § 13-26-11-11, were adhered to prior to the adoption of this Ordinance.
6. Additionally, the South Dearborn Regional Sewer District finds that the factors outlined in Indiana Code § 13-26-11-2(a) have been considered before the passage of this Ordinance and that the rates established by this Ordinance are nondiscriminatory, just, and equitable pursuant to Indiana Code § 13-26-1l-9.
7. The sewage treatment rates as established by this Ordinance shall not take effect until the 1st day of January 2019, unless an earlier date is agreed to by the Cities of Aurora, Greendale, and Lawrenceburg by amendment to this Ordinance.

Id. at 18-23. The District did not seek approval of the Ordinance from IDEM.

         MGPI Appeals Ordinance to the District Authority

         [¶16] On March 13, 2018, MGPI appealed the Ordinance to the District Authority. Id. at 7-10. In its petition, MGPI alleged the following:

9. The rates and charges established by the Ordinance are not just and equitable in at least ...

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