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 ...