Opposition Brief — Chemical Bank v. Public Utility District No. 1

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o~ ; Court, 02.

No. 84-1258 |" mee =

APR § 1985

IN THE en | SEA

SUPREME COURT OF THE UNITED an...

OCTOBER TERM, 1984

CHEMICAL BANK AND WASHINGTON PUBLIC

POWER SUPPLY SYSTEM,

Petitioners,

PUBLIC UTILITY DISTRICT NO. 1

OF BENTON COUNTY, WASHINGTON, et ai.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT

OF THE STATE OF WASHINGTON

BRIEF OF THE RESPONDENT CITY OF ELLENSBURG,

WASHINGTON, IN OPPOSITION

Hugo E. Oswald, Jr.*

James A Miller

Margaret A. Pageler

April 5, 1985 JONES, GREY & BAYLEY, PS.

36th Floor

One Union Square

600 University

Seattle, Washington 98101

(206) 624-0900

Counsel for Respondent

City of Ellensburg,

Washington

*Counsel of Record

BEST AVAILABLE COPY (7

QUESTIONS PRESENTED

ie Were purchasers of municipal

bonds issued by the Washington Public

Power Supply System to finance construc-

tion of two electrical power plants

deprived of property without just compen-

sation as a result of the decision of the

Washington Supreme Court holding that

Washington municipalities and _ public

utility districts had no authority to

incur financial obligations with respect

to the plants and that the bondholders

could not require the project participants

to bear the loss of their investments

under equitable theories of raptitutien or

estoppel?

as Did the Supreme Court of the

State of Washington in two reasoned deci-

sions based upon a consistent application

of long-standing Washington state precedent

unconstitutionally deprive bondholders in

public electrical power projects of due

process by holding that Washington munici-

pal corporations and public utility

districts did not have authority to enter

into contracts to purchase electrical

power project capability?

1ii

PARTIES TO THE PROCEEDINGS

The parties to the proceedings set

forth at pages iii-v of the Petition for

Certiorari correctly identify the parties

to this litigation.

This Brief in Opposition to Petition

for Certiorari is submitted by the Respon-

dent City of Ellensburg, Washington, one

of 88 municipalities, public utility

districts, irrigation districts, and rural

electric cooperatives which are parties to

the Participants' Agreement which is the

subject of this litigation.

TABLE OF CONTENTS

QUESTIONS PRESENTED

PARTIES TO THE PROCEEDINGS

TABLE OF AUTHORITIES

OPINIONS BELOW

JURISDICTION

STATEMENT OF THE CASE

Introduction .

Summary of Proceedings

The Participants Did Not

"Repudiate" Their Project

Obligations —_

The Respondent City of

Ellensburg Did Not "Repudiate"

the Participants' Agreement

The Participants Did Not Cause

Termination of WNP 4 and 5

The Participants Have Not

Wrongfully Retained Bondholder

Funds or Assets Me ee

The Decision Below Has Had No

Substantial Effect on the

Municipal Bond Markets

Page

REASONS FOR DENYING THE WRIT .... 23

i The Washington Supreme Court's

Decision Is Based Solely Upon

2s ee ne ee er es ey ae

a. The Petitioners Have Not Raised

a Substantial Federal Question

Under the "Takings Clause" ... 30

3. The Petitioners' Assertions

That They Have Been Denied

Due Process Are Without

da a ee

A. The "Control" Issue .... 37

B. Availability of

_ Declaratory ore

ACEIGR -. » 2 i. + =», ee

es Recusal of Washington

Supreme Court Justices .. 41

CONCIAIOIGN wk ke A ee ae ee Se

TABLE OF AUTHORITIES

CASES: Page

Armstrong v. United States, 364

U.S. 40 (1960)............ 36

Board of Commissioners v. All

Taxpayers, Property Owners,

and Citizens, 360 So. 2d 863

(La. 1978) a a

Borgens v. Eliensburg,

Kittitas County Superior Court

Cause No. 23263 ......... . .11,15

Chehalis County v. Hutcheson, 21

Wash. 82, 57 Pac. 341 (1899) .... 34

Chemical Bank v. Washington

Public Power Supply System,

99 Wn.2d 772, 33 P.2d 329

(1983) ("Chemical Bank I") ... . . passim

Chemical Bank v. Washington Public

Power Supply System, 102 Wn.2d

874, 691 P.2d 524 (1984)

- ("Chemical Bank II") ...... . . passim

Chemical Bank and Washington Public

Power Supply System v. Asson, 670

P.2d 839 (Idaho 1983), cert. den.,

U.S. , 105 Ss. Ct. 219

2)” 5 rr ra a ee er eee * ey

vil

Columbia Rural Electric Assoc., Inc.

v. Washington Public Power Supply —

System, Lewis County, Washington,

Superior Court Cause No. 40202

(1982)

DeFazio v. Washington Public Power

Supp LY System, 296 Ore. 550, 679

Pia 2eae tameen « ss es ee lt

Frank v. Cody, 572 P.2d 1106 (Wyoming

1977) ye ee ee ee ee

Great Northern Railway Co. v.

Sunburst Oil & Refining € Co., 287

U.S. 358 (1932) —

Herb v. Pitcairn, 324 U.S. 117

(1954)

Hortonville Joint School District

No. 1 v. Hortonville Education

Association, 426 U.S. 482 (1976)

In re New Mexico Natural Gas Anti-

trust Litigation, 620 F.2d 794, 796

(10th Cir. 1980) . :

Johnson v. Piedmont Municipal

Power Agency, 287 S.E.2d 476

(S.C. 1982) eo ee %

Nelson, et al., v. Ellensburg,

Kittitas County Superior Court

Cause No. 23398 ‘ar

Penfold v. Fall River Rural Electric

Cooperative, Inc., Teton County,

Idaho, District Court Cause No. 1915

(1982) ees SG ae

Page

vili

Penn Central Transportation Co.

v. City of New York, 438 U.S. 104

(1978) er ay ay ee ee oe ee ee

State ex rel. Grimes, County

Taxpayers Association v. Texas

Municipal Power Agency, 565 S.W.2d

258 (Tex. Civ. App. 1978)

State ex rel. Mitchell v. Silkeston,

555 S.W.2d 281 (Mo. 1977)

State ex rel. O'Connell v. Engen,

60 Wn.2d 52, 371 P.2d 638 (1962

State v. O'Connell, 83 Wn.2d 797,

523 P.2d 872 (1974) area

Town of Othello v. Harder, 46 Wash.

747, 284 P.2d 1099 (Wash. 1955)

United States v. Will, 449 U.S. 200

(1980) Shee ee eee. Se ae

Webbs! Fabulous Pharmacies, Inc.

v. Beckwith, 449 U.S. 155 (1980)

CONSTITUTIONAL PROVISIONS

U.S. Const. Amend. V, cl. 4

Wash. Const. art. I, § 1, art. XI,

§ 10 . A et oe a ea

STATUTES

28 U.S.C. § 455

Page

-42,43

28 U.S.C. § 1257

Wash. Rev. Code § 7.24

Wash. Rev. Code § 7.25

Wash. Rev. Code § 35.92.050

RULES

Sup. Ct. R. 27.3

OTHER AUTHORITIES:

Trautman, Legislative Control of

Municipal Corporations in Washington,

38 Wash. L. Rev. 743 (1963)

"1983: The Year of Default: 'Barefoot

Among the Barracudas'," The Weekly

(Seattle, Washington), December 19,

fee. «ss ee ee ee ee ee ee

No. 84-1258

IN THE

SUPREME COURT OF THE UNITED STATES

October Term 1984

CHEMICAL BANK AND WASHINGTON PUBLIC

POWER SUPPLY SYSTEM,

Petitioners,

PUBLIC UTILITY DISTRICT NO. 1

OF BENTON COUNTY, WASHINGTON, et al.,

Respondents.

ON PETITION FOR A WRIT OF

CERTIORARI TO THE SUPREME COURT

OF THE STATE OF WASHINGTON

BRIEF OF THE RESPONDENT CITY OF

ELLENSBURG, WASHINGTON, IN OPPOSITION

Respondent City of Ellensburg, Wash-

ington, respectfully prays that this Court

deny the Petition for Certiorari submitted

by Chemical Bank and the Washington Public

Power Supply System seeking review of the

decision of the Supreme Court of the State

of Washington in Chemical Bank v. Washington

Public Power Supply System, 102 Wn.2d 874,

691 P.2d 524 (1984) ("Chemical Bank II"),

Appendix A to the Petition for Certiorari.

Respondent City of Ellensburg also

respectfully prays that this Court deny

the Petition for Certiorari submitted by

Petitioners Fredric Haberman, Claude

Purvis, Nerow Cheng, Ted R. Pape, Audrey L.

Moss, and John H. Biggs seeking review of

that portion of Chemical Bank II denying

their motion to intervene in Chemical

Bank 11.-

1 Although the Haberman petitioners have asked

the Court to consider their Petition for

Certiorari only if certiorari is granted in

the primary case, No. 84-1258, Respondent

City of Ellensburg respectfully prays that

this Court deny the Haberman Petition for

Certiorari, regardless of the disposition of

the present case, on the grounds that no

substantial federal question is presented by

Haberman. The City of Ellensburg adopts and

incorporates by reference the Brief of

Washington Public Utilities Group in Opposi-

tion to Petition for Certiorari filed in

No. 84-1414.

OPINIONS BELOW

The recitation at pages 1-2 of the

Petition for Certiorari is a generally

accurate summary of the proceedings below.

JURISDICTION

The Respondent City of Ellensburg

disagrees with the statement of jurisdiction

at page 2 of the Petition. Certiorari

will be granted to review the decision of

a state's highest court only where (1) the

state court decision does not rest on

state law grounds adequate to sustain the

decision; (2) the federal questions for

which review is sought have been duly

raised and adjudicated before the state

court and are substantial; and (3) there

are special and important reasons compel-

ling this Court's review of the case.

Herb v. Pitcairn, 324 U.S. 117 (1954); 28

U.S.C. § 1257; Sup. Ct. R. 17.1.

Despite the Petitioners' best efforts

to couch its Gissatisfaction with the

decision below in language resembling that

of federal constitutional issues properly

within this Court's jurisdiction to con-

Sider, no federal question of substance is

presented by this case. The decision

below is based squarely on an application

of Washington state law.

Further, there are no special and

important reasons compelling this Court's

review. Contrary to the assertions of

Petitioners and the amici, this case has

had no significant effect on the national

municipal bond markets or on the ability

of municipalities in the Pacific Northwest

to raise funds through municipal bond

offerings.

STATEMENT OF THE CASE

Introduction

The Statement of the Case contained

in the Petition for Certiorari does not

accurately characterize either the proceed-

ings below or the facts of this case.

For example, contrary to Petitioners'

very first assertion in their Statement of

the Case, this case does not arise from a

municipal bond default. The default by

the Petitioner Washington Public Power

Supply System (the "Supply System") on

municipal bonds it issued to construct two

nuclear power plants, WNP 4 and 5, occurred

as a consequence of the holdings in this

case. The default occurred during the

pendency of this case and as a result of

decisions in this case and in related

cases which hold that the Participants'

Agreement between the Supply System and

the 88 participants who had contracted to

purchase portions of the electrical power

capability of WNP 4 and 5 were not enforce-

able.

Similar mischaracterizations of

pertinent facts occur in other parts of

the Petition. These inaccurate statements

are the result of the Petitioners' attempt

to cast this case, decided solely on state

law grounds, as one involving substantial

issues of federal law.

Summary of Procedings

Construction of WNP 4 and 5 was

commenced by the Supply System in 1977

after it sold varying portions of the

electrical power capability of the projects

to each of 88 consumer-owned utilities

pursuant to the terms of the Participants'

Agreement dated July 14, 1976. Under the

Participants' Agreement, the 88 partici-

pants each agreed to pay the Supply System

for a specified portion of the project

capability of WNP 4 and 5 without regard

for whether the plants ever produced any

power (the "hell or high water" or "dry

hole" provisions of the Participants'

Agreement).

Construction of WNP 4 and 5 was

funded by the Supply System's sale of 14

issues of municipal bonds between March,

1977, and April, 1981. Because of delays,

cost increases, and escalating interest

rates--factors which plagued the whole

nuclear industry in the late 1970's--it

became increasingly difficult to finance

the projects. Further, as projected costs

escalated, it became clear that the regional

market for power would not materialize.

See Petition at 7.

On January 22, 1982, with the concur-

rence of the participants, the Supply

System terminated WNP 4 and 5. In May,

1982, Petitioner Chemical Bank, the bond-

holders' trustee, commenced this suit in

the Superior Court for King County, Wash-

ington, seeking to determine the WNP 4 and

5 participants' obligations of the 88

participants to make payments to the

Supply System pursuant to the terms of the

Participants' Agreement.

On June 15, 1983, the Washington

Supreme Court issued its first decision in

this suit, Chemical Bank v. Washington

Public Power Supply System, 99 Wn.2d 772,

666 P.2d 329 (1983) ("Chemical Bank I"),

Appendix B to the Petition for Certiorari.

The Washington court ruled in Chemical

Bank I that the Participants' Agreement

was ultra vires and therefore unenforceable

with respect to the Washington municipali-

ties and PUDs and remanded the case to the

trial court for further proceedings. On

July 22, 1983, the Supply System defaulted

on the bonds it had issued to finance

construction of WNP 4 and 5.

On remand following the decision in

Chemical Bank I, the trial court ruled

that the Participants' Agreement was also

unenforceable with respect to the Oregon

and Idaho participants and Washington

cooperatives based upon a frustration of

purpose theory and denied Chemical Bank's

claims that the Participants' Agreement

should be enforced against the partici-

pants on equitable grounds. The Washing-

ton Supreme Court affirmed these rulings

in Chemical Bank II, in which it also

confirmed its ruling in Chemical Bank I

that the Participants' Agreement was ultra

vires with respect to the Washington

municipal participants.

The Participants Did Not

"Repudiate" Their Project

Obligations.

Petitioners' repeated assertions that

the participants repudiated their obliga-

tions to the Supply System under the

Participants' Agreement, Petition at 3, 4,

and 8, are incorrect.

The participants are a widely diverse

group of consumer-owned utilities. The 88

participants include 9 Washington cities

(one of which is the Respondent City of

Ellensburg), 19 Washington Public Utility

Districts ("PUDs"), 1 Washington irrigation

district, 7 Oregon cities, 4 Oregon PUDs,

5 Idaho cities, and 43 rural electric

cooperatives.

The responses of the participants to

the termination of WNP 4 and 5 were the

result of independent judgments made by

the elected officers and managers of each

participant. These judgments were based

upon each participant's analysis of its

obligations under the Participants' Agree-

ment and its constitutional and statutory

obligations to its constituents and rate-

payers.

Upon the termination of WNP 4 and 5

in January, 1982, many participants raised

their electrical rates to enable them to

pay their obligations to the Supply System

under the Participants' Agreement. A nunm-

ber of participants were taken to court by

groups of ratepayers who challenged the

validity of the Participants' Agreement

and sought to enjoin any rate increases

implemented to pay for the terminated

projects.

The participants are all required by

law to manage their electric utilities in

the interests of their ratepayers. The

specific powers and authority of the 88

participants vary widely. Some partici-

pants sought judicial determination of

their obligations under the Participants'

Agreement;~ others supported the Agreement

against challenge by the ratepayers.

2 E.g., Borgens v. City of Ellensburg, Kittitas

County, Washington Superior Court Cause

No. 23263 (filed May 26, 1982); Asson v. Cit

of Burley, 105 Idaho 432, 670 P.2d 839 (1983),

cert. den., 105 S. Ct. 219 (1984) (filed

August 11, 1982); Penfold v. Fall River Rural

Electric Cooperative, Inc., Teton County,

Idaho District Court Cause No. 1915 (filed

April 7, 1982); DeFazio v. Washington Public

Power Supply System, 296 Ore. 55°, 679 P.2d

1316 (19 filed February 22, 1982).

3 E.g., Columbia Rural Electric Assoc., Inc. v.

Washington Public Power Supply System, Lewis

County, Washington, Superior Court Cause

No. 40202 (filed April 23, 1982). The inde-

pendence of the participants' actions is

further illustrated by the varying responses

of the participants to the Petition for

Certiorari herein. The participants are not

a single united group in this case.

When Chemical Bank brought this

action in Washington state court to enforce

the Participants' Agreement, many parti-

cipants chose to require Chemical Bank to

prove that the Participents' Agreement was

enforceable in order to avoid challenges

by ratepayers that payments made by parti-

cipants to finance WNP 4 and 5 were ultra

vires or otherwise improper. The decision

of many of the participants to require

Chemical Bank to satisfy its burden of

proof in the litigation it commenced was

not compelled by improper motives. Most

participants are obligated to spend funds

only as authorized by existing law. The

participants, like Chemical Bank, were

anxious to obtain a judicial declaration

of their obligations under the Participants'

Agreement.

The Respondent City of

Ellensburg Did Not "Repudiate"

the Participants' Agreement.

The City of Ellensburg, Washington,

is a third-class city with a population of

approximately 12,000. Like all Washington

cities, its municipal authcrity is limited

to that granted by the Washington state

constitution and by the Washington legis-

lature. Ellensburg operates municipally-

owned natural gas and electrical utilities

distribution systems. It does not own any

electrical generating facilities and is

dependent upon the Bonneville Power Admin-

istration for its supply of electricity.

As a municipal entity, Ellensburg is

charged by Washington state law with

management of its electrical utility in

the best interests of its ratepayers.

Payment of funds by Ellensburg to satisfy

unenforceable, invalid, or ultra vires

obligations would not only breach the

city's duty to its constituents, but also

could subjeci its officials to personal

liability for the wrongful expenditure of

municipal or ratepayers' funds. See State

ex rel. O'Connell v. Engen, 60 Wn.2d 52,

371 P.2d 638 (1962).

Termination of WNP 4 and 5 in January,

1982, meant that Ellensburg's obligations

to the Supply System under the Participants'

Agreement could not be funded from the

sale of electrical power produced by the

projects. On February 24, 1982, Ellens-

burg began consideration of a 37% increase

in its electrical rates primarily to pay

Ellensburg's share of the costs of WNP 4

and 5. This increase was adopted on

April 19, 1982, as City Ordinance No. 3351.

On May 26, 1982, certain Ellensburg

electrical power ratepayers brought suit

in the Superior Court for Kittitas County,

Washington, to enjoin the collection of

the rate increase on the ground that

Ellensburg's obligations under the Parti-

Cipants' Agreement was invalid and unen-

forceable. Borgens v. Ellensburg, Kittitas

County Superior Court Cause No. 23263.

Ellensburg moved for dismissal of the

ratepayers' suit on the grounds that the

same issues were pending before the King

County Superior Court in the suit commenced

by Chemical Bank on May 18, 1982. The

ratepayers' lawsuit was dismissed to

permit the King County Superior Court to

decide all issues related to enforcement

of the Participants' Agreement, .ncluding

those related to Ellensburg.

During the pendency of Chemical

Bank's suit before the Washington state

trial and appellate courts, Ellensburg

continued to collect the electrical utility

surcharge implemented to pay its share of

the WNP 4 and 5 costs pursuant to the

Participants' Agreements despite continued

ratepayer opposition. + Ellensburg placed

the funds collected from its rate increase

in a special account and later transferred

them to an escrow established by the King

County Superior Court judge.

Ellensburg acted to assure that it

could satisfy its obligations under its

Participant's Agreement if they were

adjudicated to be proper. At the same

time, Ellensburg required Chemical Bank to

prove that the city's obligations under

the Participants' Agreement were enforceable

to protect the city from allegations by

its ratepayers that the Participants'

Agreement was ultra vires or otherwise

unenforceable.

4 Ellensburg's imposition of the 37% rate

surcharge and the purpose for which the

surcharge was imposed were a matter of record

in Chemical Bank's lawsuit as early as

September, 1982. Indeed, in September, 1982,

the Supply System intervened on the side of

Ellensburg to help defend against a second

ratepayer suit seeking to enjoin Ellensburg's

collection of the surcharge. Nelson v.

Ellensburg, Kittitas County Superior Court

Cause No. 23398.

Ellensburg and the other WNP 4 and 5

participants have not acted out of selfish-

ness or obstinancy in seeking to obtain

judicial determination of their obligations

under the Participants' Agreement. Peti-

tioners have wrongly characterized the

actions of the various participants as an

improper "repudiation" of lawful obligations

in an attempt to portray the participants

as having “unclean hands" and to conceal

from this Court the extensive efforts the

participants took to resolve the serious

legal problems they confronted upon termin-

ation of WNP 4 and 5.

The Participants Did Not Cause

Termination of WNP 4 and 5.

Petitioners assert that termination

of WNP 4 and 5 was "an eventuality that

participants could control," Petition

at 6, and that "their disapprovals of

project financing plans in i981 spelled

the projects' certain demise," Petition

at 7. Yet Petitioners acknowledge that

the projects were planned to avert a

projected power shortfall in the region

and that by mid-1981 "the projected energy

demand had not materialized." Petition

at 7.

Reduced electrical demand in the

Pacific Northwest was an occurrence the

participants could not control. By 1981,

revised projections of the region's elec-

trical demand made further construction of

WNP 4 and 5 no longer feasible, as Peti-

tioners acknowledge. The participants’

concurrence in the Supply System's decision

to terminate WNP 4 and 5 in 1982 was a

responsible effort to limit the impact of

the decision made in the mid-1970's to

construct the two plants.

The Participants Have Not

Wrongfully Retained Bondholder

Funds or Assets.

Petitioners repeatedly assert that

the participants have "refused to return

any portion of the bondholders' funds."

Petition at 4, 8. This allegation is

unfounded and seriously misleading.

No portion of the bondholders' funds

has gone to any participant. All the

proceeds of sales of the WNP 4 and 5 bonds

issued by the Supply System were paid to

the Supply System which is a Washington

municipal corporation separate from the

participants, formed under Washington

statute, RCW 43.52.

The cash assets remaining in the

Supply System's possession at the time of

default (approximately $25 million), as

well as the physical assets of WNP 4 and

5, have been delivered by the Supply

System to Chemical Bank, as trustee for

the bondholders. If those funds and

assets have not been returned to the

bondholders, it is because Chemical Bank

has retained them, not because the parti-

cipants have them.

The Decision Below Has Had

No Substantial Effect on the

Municipal Bond Markets.

In an apparent attempt to cloak this

case with the "special and important

reasons" this Court requires of cases it

will review by writ of certiorari, peti-

tioners and the amici have presented the

court with an extremely exaggerated picture

of the effect of the decision below on the

national municipal bond market. However,

despite widespread initial predictions

that the Supply System's default would

seriously disrupt the municipal bond

market and cause bond offerings by Pacific

Northwest municipalities to be shunned or

marketable only with burdensome interest

"pnenalties," the default has had no such

effects.

Shortly after the default in July,

1983, the Port of Tacoma, Washington, sold

$26 million in municipal bonds to finance

port improvements; Pierce County, Washing-

ton, the State of Oregon, and the Lake

Washington, Washington School District

also successfully sold relatively small

municipal bond issues. It has been esti-

mated that these entities may have paid

0.25 to 0.50 percent in interest above

what would have been required in the

absence of the default. In August, 1983,

the State of Washington successfully made

a general obligation bond offering in

which it was estimated its interest

"penalty" was 0.46 to 0.50 percent. Ina

later bond sale by the state, the esti-

mated "penalty" dropped to 0.25 percent.

In November, 1983, the Snohomish County

PUD, the utility which had the largest

participant's share of WNP 4 and 5, 13.051

percent, successfully made a $200 million

bond offering for which it was estimated

it paid an interest "penalty" resulting

from the Supply System's default of about

0.6 percent.>

Those who purchased WNP 4 and 5 bonds

sought an attractive tax-free investment.

These investors incurred investment risks

in purchasing these bonds, one of which

was that the WNP 4 and 5 participants had

exceeded their lawful authority in enter-

ing into the Participants' Agreement.

Unfortunately, the risks inherent in that

investment were realized and the bondholders

have incurred financial losses as a result

of the Supply System's default. This

5 The statistical data in this paragraph are

taken from: "1983: The Year of Default:

‘Barefoot Among the Barracudas'," The Weekly

(Seattle, Washington), December 19, 1984.

alone, however, does not render this case

one suitable for this court's review.

Further, the minimal and diminishing

effect on the municipal bond markets, even

for WNP 4 and 5 participants, belies the

claims by Petitioners and amici that the

Supply System's default has seriously

disrupted the municipal bond markets.

Petitioners' assertions notwithstanding,

there are no special and important reasons

justifying this Court's review of this

case.

REASONS FOR DENYING THE WRIT

The Writ should be denied for the

reason that the decision below is based

solely on issues of state law. Despite

petitioners' best efforts to weave a

federal constitutional argument from a

unique combination of the Takings and Due

Process Clauses of the federal constitu-

tion, the essence of their Petition simply

is that they believe that the Washington

Supreme Court wrongly decided this case

and that this Court should exercise its

discretionary jurisdiction to reverse the

decision of the Washington court based on

Washington law.

The policies embodied in the concept

of federalism, the statutes governing this

Court's jurisdiction, and this court's own

rules wisely preclude this Court's review

of this case because it was decided solely

upon state law grounds and does not violate

any federal constitutional rights of the

Petitioners.

io The Washington Supreme Court's

Decision is Based Solely Upon

State Law.

The Washington Supreme Court decision

declaring the Participants' Agreement to

be unenforceable is based solely upon

state law. The determinative element of

the decisions in both Chemical Bank I and

Chemical Bank II is the court's careful

analysis of the statutory authority of

Washington state municipalities and PUDs

to enter into the Participants' Agreement.

This issue directly involved 28 of the 88

participants in WNP 4 and 5: 9 Washington

cities, including the City of Ellensburg,

and 19 Washington PUD's (collectively the

"Washington municipal participants").

Following its analysis of the author-

ity of the Washington municipalities

and PUD's, the court concluded that the

Washington municipal participants did not

have authority to incur the obligations

imposed by the Participants' Agreement.

Consequently, the Participants' Agreement

was declared to be void and unenforceable

against the Washington municipal partici-

pants under the ultra vires doctrine

applicable to Washington municipal corpo-

rations. °®

Under Washington state law, the rule

that express statutory authority must be

found for municipal action arises from the

fact that Washington municipal corporations

are creatures of the sovereign state.

Wash. Const. art. I, § 1, art. XI, § 10.

"A [Washington state] municipal corpora-

tion, being but a creature of che state,

derives its existence, powers, and duties,

from the legislative body of the state."

Town of Othello v. Harder, 46 Wash. 747,

284 P.2d 1099 (Wash. 1955). This rule is

one of long standing in Washington State.

See generally Trautman, Legislative Control

6 Although the court continued its analysis in

Chemical Bank II] to determine the effect on

the other participants of its decision regard-

ing the Washington municipal participants,

that part of the court's decision does not

affect the instant Respondent City of Ellens-

burg and will not be addressed here.

of Municipal Corporations in Washington,

38 Wash. L. Rev. 743 (1963).

The enforceability of municipal

contracts containing "hell or high water"

or “dry hole" provisions similar to those

in the Participants' Agreement, in which

the extent of a municipality's obligation

is not dependent upon the success of a

project, has been considered by a number

of state ccurts. In each such case, the

applicable state statutory and constitu-

tional principles have been analyzed to

determine the powers and authorities of

local municipalities in the respective

state.

Contracts containing "hell or high

water" or “dry hole" provisions have been

held te be enforceable in Board of Commis-

sioners v. All Taxpayers, Property Owners,

and Citizens, 360 So. 2d 863 (La. 1978);

State ex rel. Mitchell v. Silkeston, 555

S.W.2d 281 (Mo. 1977); Johnson v. Piecmont

Municipal Power Agency, 287 S.E.2d 476

(S.C. 1982); State ex rel. Grimes, County

Taxpayers Association v. Texas Municipal

Power Agency, 565 S.W.2d 258 (Tex. Civ.

App. 1976); and Frank v. Cody, 572 P.2d

1106 (Wyoming 1977). Similar contracts

have been held to be unenforceable in

Chemical Bank and Washington Public Power

Supply System vv. Asson, 670 P.2d 839

(Idaho 1983), cert. den., U.S.

__, - 105 &. Ct. 219 (1964), as well as

in Chemical Bank I and II.

This Court has consistently held that

it will not review state court decisions

which rest on independent and adequate

state law grounds and that it will accept

the interpretation of state law by a

state's highest court. E.g., Hortonville

Joint School District No. 1 v. Hortonville

Education Association, 426 U.S. 482 (1976).

Principles of federalism and comity pre-

clude this court's reviewing decisions

grounded in state law, even if this court

might have reached different results on

the state law issues. Great Northern

Railway Co. v. Sunburst Oil & Refining

Co., 287 U.S. 358 (1932).

If the Court should grant certiorari

in this case, it would open its doors to

certiorari petitions in every decision by

state courts of last resort in which the

enforceability under state law of municipal

obligations is at issue. To do this would

radically change the roie of this Court in

matters of local financial control.

The validity of the Participants’

Agreement, like that of other municipal

obligations, is properly an issue to be

determined by the respective state courts

and not by this Court. This Court should

not grant certiorari in this case and

thereby intrude into matters of local

government traditionally reserved for

local control.

2. The Petitioners Have Not

Raised a Substantial Federal

Question Under the "Takings

Clause."

The Petitioners argue that the Takings

Clause (U.S. Const. amend. V, cl. 4) has

been violated by the Washington court's

decision. First, no unconstitutional

taking of private property has occurred in

this case. This case simply involves a

state court's determination of the validity

and enforceability of certain municipal

contracts. Further, the participants have

not effected an unconstitutional taking of

the bondholders' property. This is demon-

strated by the fact that no participant

has ever received any property of the

bondholders or assets purchased from

proceeds of the bonds as a consequence of

the Participants' Agreement or the sale ‘of

bonds by the Supply System. /

Toe constitute a compensable taking,

there must be an invasion of existing

private property rights by a governmental

entity which causes a diminution in those

rights. See Webbs' Fabulous Pharmacies,

Inc. v. Beckwith, 449 U.S. 155 (1980);

Penn Central Transportation Co. v. City of

New York, 438 U.S. 104 (1978).

In this case, the value of the bond-

holders' investments was affected by a

reasoned judicial determination, based

This case involves only the enforceability of

the Participants’ Agreement. As is briefly refer-

enced by Petitioners, Petition at 13-14, extensive

litigation independent from this case related to

the Supply System's default on the WNP 4 and 5

bonds presently is pending in both federal and

State courts. Claims brought on behalf of the

bondholders based on securities fraud, misrepre-

sentation, negligence and other grounds against

the Supply System, the participants, bond counsel,

underwriters, attorneys for the Supply System and

participants, contractors and others remain to be

determined. The Washington Supreme Court's deci-

sions in Chemical Bank I and II have not left the

bondholders without avenues of redress for their

investments in the Supply System.

upon a consistent application of Washington

state law, that the Washington municipal

participants had no authority to enter

into the Participants' Agreement. The

Washington court's decision was that the

Participants' Agreement was invalid ab

initio with respect to the Washington

municipal participants. To accept Peti-

tioners' Takings Clause arguments would

require this Court to abolish the long-

standing doctrine in Washington State that

acts of political subdivisions of the

state are limited by the authority granted

to the subdivisions by the state.

The Petitioners' contentions notwith-

standing, the Washington Supreme Court has

not “engaged in... . retroactive munipu-

lations of state law to 'transform private

property into public property without

compensation'." Petition at 18. Although

the validity of municipal obligations

precisely like those created by the Parti-

Cipants' Agreement had not previously been

adjudicated by the Washington Supreme

Court, the court applied existing Washing-

ton state law in a reasoned manner to

determine whether the Washington parti-

Cipants had authority to enter the Parti-

Cipants' Agreement. The decision of the

Washington court as to the municipal

authority of the Washington participants

did not overrule a single prior decision.

The Washington court's denial of

restitution to the bond holders does not

constitute an unconstitutional "taking."

The participants, including Respondent

City of Ellensburg, have not themselves

received any benefits from the bondholders'

investments. The Supply System sold the

WNP 4 and 5 bonds, and the proceeds there-

from were paid directly to the Supply

System which is a separate municipal

corporation formed pursuant to Washington

statute. None of the proceeds from the

bond sales have been paid to any partici-

pant. See Chemical Bank II, Appendix A

at 38.

Because the participants have received

no bond proceeds or assets, there is no

meaningful or practical way to require

restitution of the bondholders' funds by

the participants without indirectly requir-

ing performance of obligations which the

Washington municipal participants were

without authority to undertake. It has

long been the law in Washington that ultra

vires municipal contracts cannot be

enforced indirectly on equitable theories

where a municipality had no legal power or

authority to make the contract. Chehalis

County v. Hutcheson, 21 Wash. 82, 57 Pac.

341 (1899).

Under Washington law, when a govern-

mental entity acts beyond its power and

enters into an unenforceable contract, the

courts will not require the costs of that

contract to be passed on to the citizens

unless the citizens have derived a tangible

benefit from the contract. State v.

O'Connell, 83 Wn.2d 797, 523 P.2da 872

(1974). Denial of restitutionary relief

is a direct consequence of application of

the ultra vires doctrine, the very purpose

of which is to protect the public or other

municipal constituents from unauthorized

actions by municipal officials. State v.

O'Connell, supra.

In summary, any losses which have

been incurred by the WNP 4 and 5 bondholders

were not a result of any governmental

taking, but were an incidental consequence

of the Washington Supreme Court's determin-

ation of the ultra vires character of the

Participants' Agreement. A loss in value

to property which occurs as a mere consequen-

tial incidence of valid governmental

action undertaken in the pursuit of sub-

stantial and important public ends is not

a taking. See Armstrong v. United States,

364 U.S. 40 (1960).

3. The Petitioners' Assertions

That They Have Been Denied

Due Process Are Without

Substance.

Petitioners attempt to meet this

Court's strict standards for certiorari

review by asserting that the decision

below denied them due process or fair

procedure in violation of the United

States Constitution. Petitioners point to

the three aspects of the decision which

they claim violated their federal due

process rights: (1) the lack of a full

evidentiary hearing on the issue of whether

the participants "controlled" the Supply

System; (2) the reference by the Washington

court to the Petitioners' opportunity to

seek a judicial declaration of the validity

of the Participants' Agreement prior to

sale of bonds for WNP 4 and 5 by the

Supply System; and (3) the fact that

certain justices of the Washington Supreme

Court whom Petitioners claim had indirect

interests in this litigation participated

in the decision in this case. None of the

Petitioners' contentions raises a substan-

tial federal due process issue reviewable

by this Court.

A. The "Control" Issue.

The Petitioners make much of their

claim that their due process rights were

violated because they were denied a factual

hearing on the issue of the participants’

"control" of WNP 4 and 5. This claim is

without merit.

In Chemical Bank I, the Washington

Supreme Court properly held as a matter of

law that RCW 35.92.0050 requires Washington

municipalities to have an ownership interest

in electrical generation facilities with

respect to which the municipalities incur

financial obligations. "[T]his court has

never found authority for a project in

which the participants did not have an

ownership interest." Appendix B at 12.

It is undisputed that the partici-

pants did not have an ownership interest

in WNP 4 and 5. However, rather than

simply concluding that the absence of an

ownership interest precluded enforcement

of the Participants' Agreement as to the

Washington municipal participants, as

would have been required by existing

Washington law, the court in Chemical

Bank I examined the extent of the partici-

pants' control of the projects to determine

whether it was sufficient "to constitute

the equivalent of an ownership interest,"

such that the "ownership" requirement of

RCW 35.92.050 might be satisfied. Appen-

dix B at 14. After examining the Partici-

pants' Agreement and the record in detail,

the court concluded that the participants

did not have sufficient control of the

projects to constitute the equivalent of

ownership and, therefore, that the lack of

an ownership interest by the participants

in WNP 4 and 5 could not be remedied by

resort to the "control" analysis.

Petitioners' federal due _ process

rights were not violated by the fact that

the Court went beyond its initial determin-

ation, unchallenged by Petitioners, that

as a matter of law the participants’

interests in WNP 4 and 5 lack several

important indicia of ownership to analyze

the "ownership" requirement of RCW 35.92.050.

This aspect of the court's decision was an

attempt to find some basis, albeit not

supported by Washington precedent, to

uphold the Participants' Agreement.

Further, assuming that "control" alone

could substitute for the statutory require-

ment of ownership, the court's interpreta-

tion of the legal effect of the participants’

control of WNP 4 and 5 under the Parti-

cipants' Agreement was a valid exercise of

the court's power to determine questions

of law raised by Petitioners' suit to

enforce the agreement.

B. Availability of Declaratory

Judgment Action.

Petitioners' contention that they

were denied due process as a result of the

Washington court's reference in Chemical

Bank II, Appendix A at 32, to the avail-

ability of a declaratory judgment proceed-

ing to test the enforceability of the

Participants' Agreements prior to the

Supply System's sale of bonds is without

merit. The Washington court's analysis of

the ultra vires nature of the Participants'

Agreements does not depend upon or require

the availability of a declaratory judgment

action prior to the sale of the bonds.

The reference, in dictum, by the

Washington court to the possibility that

Petitioners could have sought a declara-

tory judgment does not raise a substantial

federal constitutional issue. ®

C. Recusal of Washington

Supreme Court Justices.

Petitioners' third basis for their

claim that they were denied due process is

8 In addition to a special declaratory procedure

whereby validity of bonds issued by any

municipal corporation may be tested by a

taxpayer lawsuit, RCW Chapter 7.25, Washington

law provides under its general declaratory

judgments statute, RCW Chapter 7.24, that a

person whose rights or legal relations are

atfected by a municipal ordinance or contract

may have the construction or validity of the

ordinance determined. RCW 7.24.020, 7.24.110.

The "justiciable controversy" requirement of

the declaratory judgment statute would almost

certainly have been met if the "test case"

had been brought in 1976 or 1977 in one of

the several districts where environmentalist

groups had already challenged the participation

of local utilities on environmental grounds.

their allegation that Washington Supreme

Court justices who were ratepayers of

participants took part in the Washington

court's decisions, thereby denying Peti-

tioners an impartial tribunal. This claim

also fails to raise a substantial federal

constitutional issue.

Petitioners claim that two of the

judges sitting on Chemical Bank I and one

sitting on Chemical Bank II were ratepayers

of WNP 4 and 5 participants who should

have disqualified themselves from this

case. Any interests in this case held by

these justices were remote and indirect,

arising from their status as ratepayers of

the participants. Such remote, indirect

interests do not require a judge to dis-

qualify himself or herself from a case.

In ruling that a federal district

court judge was not required by 28 U.S.C.

§ 455 to disqualify himself from a case

having a potential effect on natural gas

POs A

rates in his community, the Tenth Circuit

Court of Appeals noted that "[A] remote,

contingent benefit, such as a possible

beneficial effect on future utility bills,

is not a ‘financial interest' within the

meaning of [28 U.S.C. § 455]" requiring

disqualification from a case. In re New

Mexico Natural Gas Antitrust Litigation,

620 F.2d 794, 796 (10th Cir. 1980). In

reversing the district court's decision

disqualifying himself, the court noted

that no disqualification is required where

a judge's potential interest in a case is

that shared by the judge in common with

the general public.

The interests in this case of the

Washington justices who may have been

ratepayers of participants was that of

members of the general public served by

the participants. Such an indirect interest

does not require disqualification of a

judge.

Petitioners' reference to the dis-

qualification of all the federal district

judges in the Western District of Washing-

ton from litigation in the federal courts

related to the Supply System's default on

the WNP 4 and 5 bonds is irrelevant to

their assertions in this case. District

court judges from states other than Wash-

ington were available to hear the cases

involved; only Washington state judges

could hear the appeal in this case.

This Court has acknowledged that the

disqualification of even those judges

having direct pecuniary interests in a

case is not required where such disquali-

fication would interfere with a court's

ability to decide a case. In United

States v. Will, 449 U.S. 200 (1980).

Rule of Necessity, consistently applied in

both state and federal courts, required

the Court to decide the case despite the

direct financial interests of its Justices,

where the case otherwise could not be

heard.

Petitioners were not denied an impar-

tial tribunal in this case.

CONCLUSION

This case does not involve any sub-

stantial federal questions. The Petition

for Certiorari should be denied for the

reasons set forth above.”

RESPECTFULLY SUBMITTED this 5th day

of April, 1985.

Hugo E. Oswald, Jr.*

James A. Miller

Margaret A. Pageler

Jones, Grey & Bayley, P.S.

3600 One Union Square

600 Universit

Seattle, Washington 98101

Counsel for Respondent City

of Ellensburg, Washington

*Counsel of Record

9 Additionally, the Petition for Certiorari

submitted herein by Haberman, et al. should

be denied for the reason that the question

presented there also fails to raise any

substantial federal questions. See footnote 1,

Supra.

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