Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County Super. Ct. No. BC249168, Susan Bryant-Deason, Mel “Red” Recana and David Yaffe, Judges.
Dorsey & Whitney and Patrick McLaughlin (Minnesota); Dorsey & Whitney and Martha C. Luemers (California) for U.S. Bank National Association, as Trustee, Defendant and Respondent.
Kirkpatrick & Lockhart Preston Gates Ellis, Edward P. Sangster and Dylan B. Carp for Stone & Youngberg, Defendant and Respondent.
Lynne Plambeck, in pro. per., for Plaintiff and Appellant.
Joan Dunn, in pro. per., for Plaintiff and Appellant.
ALDRICH, J.
Horvitz & Levy, Barry R. Levy; McCormick, Kidman & Behrens, Russell Girard Behrens and David D. Boyer; Eisenberg and Hancock, William N. Hancock and Jon B. Eisenberg; R. Bruce Tepper; and Stradling Yocca Carlson & Rauth and Allison Burns for Castaic Lake Water Agency, Castaic Lake Water Agency Financing Corporation, Santa Clarita Water Company, William Cooper, Donald R. Froelich, Peter Kavounas, William Pecsi, Richard M. Green, Robert Sagehorn and Dan Masnada, Defendants and Respondents.
INTRODUCTION
In this reverse validation action (Code Civ. Proc., § 860 et seq.), we are asked to invalidate contracts entered into in 2001 by the Castaic Lake Water Agency (the Agency), the Castaic Lake Water Agency Financing Corporation (Financing Corporation), U.S. Bank Trust National Association, as Trustee (Trustee), and Stone & Youngberg, the underwriter (together defendants). In the challenged transaction created by these contracts, defendants issued certificates of participation (certificates) through which the Agency raised funds for various projects. Appellants, two local taxpayers, contend that the effect of this transaction was to sell all of the assets of the Agency’s wholly-owned subsidiary, the Santa Clarita Water Company (the Water Company), a nonprofit public benefit corporation, in violation of portions of the Nonprofit Public Benefit Corporation Law (Corp. Code, §§ 5110 et seq., 5410, 5913, & 6010). The trial court ruled that the contracts were valid and did not violate the Corporations Code provisions that appellants cited.
Appellants are Lynne Plambeck and Joan Dunn.
We conclude that the trial court properly declined to invalidate the contracts. Accordingly, we affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
We review the record according to the applicable rules. (Poway Royal Mobilehome Owners Assn. v. City of Poway (2007) 149 Cal.App.4th 1460, 1479.)
1. The parties
The predicate history is set forth in detail in two published opinions from this court, Klajic v. Castaic Lake Water Agency (2001) 90 Cal.App.4th 987 (Klajic I) and Klajic v. Castaic Lake Water Agency (2004) 121 Cal.App.4th 5 (Klajic II). We briefly recount that history here.
The Agency receives water from the State Water Project and sells it to four retail water purveyors in the Santa Clarita Valley of Southern California. The Agency was created by the Legislature to acquire water and water rights and to sell that water at wholesale. (72A West’s Ann. Wat. Appen., supra, § 103-1 et seq.) Its enabling act was amended as of 2002 to authorize the Agency to sell water at retail to the ultimate consumer within the geographical boundaries of the Water Company, subject to certain limitations not at issue here. (Klajic II, supra, 121 Cal.App.4th at p. 9.)
Section 103-4.8 of the Agency’s enabling act (72A West’s Ann. Wat. Appen. (1999 ed.) § 103-1 et seq., p. 487 et seq.) defines “purveyor” as “ ‘a retail water distributor which has facilities connected to the agency’s water transmission system on April 15, 1986, or is under contract with the agency for water on that date.’ ” (Klajic I, supra, 90 Cal.App.4th at p. 991, fn. 3.)
As primarily a wholesale water provider, the Agency does not have the same revenue streams as a retail water purveyor. A major part of its revenue is derived from development impact fees, considered an unstable revenue stream. Thus, the Agency established a “rate stabilization fund” to ensure adequate debt coverage, and seeks to maintain a minimum balance of approximately $50 million.
The Water Company was one of the four retail water purveyors within the Agency’s boundaries. In August 1999, the Agency commenced a transaction with the Water Company under which the latter executed an agreement to permit the Agency to sell water directly to consumers, and then the Agency condemned all outstanding capital stock of the Water Company (the 1999 transaction). (Klajic I, supra, 90 Cal.App.4th at pp. 991-992.) The aim of the 1999 transaction was to allow the Agency to sell water directly to consumers pursuant to Water Code section 12944.7, subdivision (b), which allowed a wholesale water agency to sell water at retail only pursuant to a “written contract with . . . a water corporation . . . subject to regulation by the Public Utilities Commission . . . .” The Agency originally planned to finance this transaction by issuing, through its Financing Corporation, $70 million in certificates of participation. (Klajic I, supra, at p. 992.) However, on September 1, 1999, the Agency executed a new purchase agreement to buy the Water Company’s stock for cash. (Id. at p. 993.) The judgment in condemnation approving the Agency’s acquisition of the Water Company for $63 million was entered on September 2, 1999. The following day, September 3, 1999, after the Agency made the $63 million payment in cash, the court entered a final order of condemnation.
Appellants are two taxpayers in the Agency’s territory.
2. The Klajic litigation
In August 1999, before the final order of condemnation was entered, appellants, along with two others, filed a petition for writ of mandate to prohibit the Agency from acquiring the Water Company. (Klajic I, supra, 90 Cal.App.4th at pp. 990, 992.) They sought to compel the Agency to divest itself of ownership of all of the Water Company stock and to comply with its enabling act’s grant as a wholesale water distributor only. (Id. at p. 990.) The trial court denied the writ petition. On appeal, petitioners argued “that the effect of the [1999] transaction was to merge the Water Company with the Agency so that the two organizations would ‘be[] operated as a unified entity,’ one becoming the alter ego of the other.” (Id. at p. 994, italics added.) The result of that merger, petitioners argued, was that the Agency’s contract did not comply with Water Code section 12944.7 and the Agency could not sell water at retail. (Klajic I, supra, at p. 994.) In Klajic I, we reversed the judgment of the trial court. We held that section 12944.7, subdivision (b) permitted the Agency to contract with a water company to provide water to retail users only if the water company remained a separate and distinct entity from the Agency that was subject to Public Utilities Commission regulation during the life of the contract. (Klajic I, supra, at p. 990.) If the consequence of the condemnation was a merger of the Agency and the Water Company, we explained, then the Agency effectively entered into a contract under section 12944.7 with itself, a legal impossibility. Yet, because the trial court had not determined whether, at the close of the 1999 transaction, the Water Company remained separate from the Agency for purposes of section 12944.7, we reversed the judgment to enable the trial court to make that determination. (Klajic I, supra, at pp. 1000-1001.)
Petitioners in 1999 were Jill Klajic, Jackie Bettencourt, Lynne Plambeck, and Joan Dunn, who were alleged to be water users and taxpayers in the Santa Clarita Valley area. (Klajic I, supra, 90 Cal.App.4th at pp. 990-991, fn. 1.)
Back in the trial court on remand, petitioners renewed their contention that the Agency’s 1999 transaction “brought about a de facto merger of the two entities.” (Klajic II, supra, 121 Cal.App.4th at p. 10.)
While Klajic I was pending, however, the Agency sponsored Assembly Bill No. 134 (2001-2002 Reg. Sess.) to permit it to sell water at wholesale within a certain geographic area, including the Water Company’s boundaries, “notwithstanding” Water Code section 12944.7. (Klajic II, supra, 121 Cal.App.4th at p. 9.)
The trial court in Klajic II ruled that Assembly Bill No. 134 (2001-2002 Reg. Sess.) was a further limitation upon the right granted by Water Code section 12944.7, subdivision (b). Effectively, the court found as a factual matter that, as the result of the 1999 transaction, the Agency and the Water Company had merged into one single entity. The court ordered the issuance of a writ of mandate prohibiting the Agency and the Water Company, as an alter ego of the Agency, from selling water at retail, until such time as the Agency entered into a contract with a bona fide separate entity in compliance with section 12944.7. (Klajic II, supra, 121 Cal.App.4th at p. 11.)
We reversed the judgment in Klajic II without ever reaching the question of merger as it was not relevant to our disposition. Instead, we held that Assembly Bill No. 134 (2001-2002 Reg. Sess.) was an independent grant of retail water authority to the Agency, despite any prerequisites to such authority contained in subdivision (b) of section 12944.7 of the Water Code. (Klajic II, supra, 121 Cal.App.4th at p. 15.) Our opinions in Klajic I and Klajic II were issued in 2001 and 2004, respectively. No challenge was made to the facts or conclusions of law contained therein and those opinions are final.
On September 15, 1999, 13 days after the judgment of condemnation was entered, the Agency changed the corporate status of the Water Company to a nonprofit public benefit corporation with the Agency as its sole member.
3. The transaction at issue in this appeal – the 2001 certificate transaction
Since 1990, the Agency and its Financing Corporation have raised funds to carry out the Agency’s functions by executing and delivering certificates of participation. For example, in 1990, the Financing Corporation issued $132 million in certificates to acquire and construct a second water treatment plant and related facilities. In 1994, the Financing Corporation issued $124 million in certificates to repay the 1990 certificates in advance. In 1999, the Financing Corporation issued $75,813,498.40 in certificates to provide funds to reimburse the Agency for the acquisition of 41,000 acre feet of supplemental water from the Department of Water Resources (DWR) and to acquire capital improvements to the Agency’s wholesale system. As of February 1, 2001, the outstanding principal amount of the 1999 certificates was $77,862,180.70.
In early February 2001, the Agency’s General Manager described the Agency’s need for $110 million for capital improvement projects. He proposed issuing certificates in 2001 to: (1) “refund the monies spent on the [] Water Company purchase” in 1999; (2) make capital improvements; (3) create the $50 million reserve fund; and (4) pay for water delivery costs.
In February 2001, while the Klajic I appeal was pending, the Agency issued the 2001 certificates at issue here. The mechanism of the 2001 certificate transaction works as follows:
a. The Installment Agreement and Official Statement
First, the Financing Corporation entered into a contract with the Agency (the Installment Agreement) wherein the Financing Corporation agreed to acquire various projects and sell them to the Agency. In exchange, the Agency agreed to make semi-annual installment payments of principal and interest. The Agency’s obligation to make the payments under the Installment Agreement was “absolute and unconditional” and did not depend on whether the Agency used the funds for any of the intended purposes described in the Installment Agreement. The Agency’s payment obligation was secured by all of its water system revenues and by the money held in its rate stabilization fund.
The projects were “additions, betterments, extensions or improvements to the Agency’s facilities designated by the Board of Directors of the Agency as a Project, the acquisition and construction of which is to be paid for by the proceeds of any Contracts or Bonds.” The Installment Agreement identified two such projects, “2001 Project A,” which was the stock of the Water Company and “2001 Project B,” which were the capital improvements described in exhibit A to the Installment Agreement, including, inter alia, extension of storage in the Lost Cyn Pump Station; recycled water; and lateral extension to the Pitchess Pipeline. Together, these projects were defined as the 2001 Project.
b. The Trust Agreement
The Financing Corporation then assigned its right to the payments under the Installment Agreement to the Trustee in a Trust Agreement. This agreement authorized the Trustee to execute certificates in the amount of $80 million, sell them, and distribute the proceeds to the Agency. The Agency agreed to make its payments under the Installment Agreement directly to the Trustee, who in turn agreed to distribute those payments to buyers of the 2001 certificates in accordance with their percentage shares of ownership. The 2001 certificates functioned as evidence of ownership of undivided interest in the installment payments. The 2001 certificates were offered in an Official Statement, akin to a prospectus.
c. The Underwriter
Stone & Youngberg, as underwriter, entered into an agreement to purchase the 2001 certificates at a discount from par and sell them to investors at par.
The effect of these documents was to create a transaction that allowed the Agency to borrow $80 million from investors through the 2001 certificates so it could fund various projects. The Installment Agreement included provisions affording the Agency flexibility in how it could use the $80 million. Thereunder, the Agency had the option of using $63 million to reimburse its reserves for cost of the 1999 transaction (2001 Project A) and using the remainder to fund some of the capital improvements its General Manager had identified (2001 Project B). (See fn. 4, supra.) The Installment Agreement also contained a contingency provision that allowed the Agency to use $63 million for other capital projects in the event a court determined that the Agency could not use that money to reimburse the cash it paid under the 1999 transaction to acquire the Water Company. Hence, the Installment Agreement allowed the Agency, alternatively, to spend the funds raised with the 2001 certificates for other capital improvement projects involving its wholesale water obligations. While those improvements were listed in the Installment Agreement, that Agreement also permitted the Agency to change the list of capital improvement projects, provided any substituted projects cost at least as much as the originally-listed projects.
Notwithstanding this flexibility, the Agency and the Financing Corporation entered into the First Supplement to the Installment Agreement on June 13, 2001. In reaction to the instant proceeding, this First Supplement amended the Installment Agreement by allowing the Agency to use the funds obtained from the 2001 certificates for wholesale water capital improvement projects only.
4. This reverse validation action
On April 24, 2001, all four petitioners filed this validation action pursuant to Code of Civil Procedure section 863. Petitioners sought to invalidate the 2001 certificate transaction on the ground the Agency’s acquisition and operation of the Water Company along with that Company’s assets and retail water business and affairs was unlawful under Water Code section 12944.7. Petitioners also sought a writ of mandate commanding the Agency to set aside the contracts and associated documents, including all resolutions passed by the Agency and others, and alleged that Stone & Youngberg and others had engaged in unfair business practices. (Bus. & Prof. Code, § 17200.)
After we issued our opinion in Klajic I, and following demurrers and court orders, petitioners amended their complaint. The operative complaint sought to invalidate all of the documents and resolutions that made up the 2001 certificate transaction and an injunction restraining defendants from performing under the Installment Agreement.
On July 29, 2004, we issued our decision in Klajic II. Acknowledging that Klajic I mooted their claim that the Agency did not lawfully own the Water Company, petitioners limited their relief in this action to (1) invalidation of the transfer and pledge of Water Company assets as a violation of three sections of the Nonprofit Public Benefit Corporation Law (Corp. Code, § 5110 et seq.) and (2) injunction against pledging the Water Company assets in the 2001 certificate transaction. At oral argument, petitioners announced that they were relying on three sections of the Nonprofit Public Benefit Corporation Law as the only grounds for invalidating the documents, namely, sections 5410, 5913, and 6010. By the time of trial, Klajic had dismissed her claims, leaving three remaining petitioners.
At the close of the invalidation trial, the court issued a 21-page statement of decision. Therein, the court found that the 2001 certificate transaction did not violate any of the three provisions of the Corporations Code petitioners cited. The court also ruled that (1) petitioners’ challenge to the Agency’s acquisition of the Water Company and to its use and operation of Water Company assets was barred by the statute of limitations contained in Code of Civil Procedure sections 860, 863, and 869; (2) petitioners lacked standing; (3) our previous opinions in Klajic I and Klajic II barred any challenge to the legality of the acquisition of the Water Company and the transfer of its assets, and to the ability of the Agency or the Water Company to provide retail water services under the doctrine of res judicata; and (4) Stone & Youngberg, the Trustee, and the individual Agency board members and staff members were not proper defendants in a reverse validation action.
After modifying its statement of decision in response to petitioners’ objections, the trial court entered judgment in favor of defendants adjudging the certificates, the Installment Agreement, the Trust Agreement, and any and all other agreements executed in connection with the 2001 certificate transaction challenged in the first amended complaint to be legal and valid in all respects. The court awarded defendants costs according to proof. Appellants, two of the original four petitioners, filed their timely appeal.
CONTENTIONS
It appears that appellants contend that the trial court erred as a matter of law in declining to invalidate the 2001 certificate transaction because all of the contracts and resolutions by which the 2001 certificates were created and issued were invalid where (1) the Agency did not own the Water Company’s revenue and hence was not able to pledge it as security for the certificates; and (2) the documents violated Corporations Code sections 5410, 5913, and 6010 and constituted a fraudulent transfer.
DISCUSSION
A state agency may bring an in rem validation proceeding (Code Civ. Proc., § 860 et seq.) “to determine the validity of [the agency’s] ‘. . . contracts. . . .’ ” (Planning & Conservation League v. Department of Water Resources (2000) 83 Cal.App.4th 892, 921, fn. 8 (Planning & Conservation League), citing Wat. Code, § 35855.) As an in rem proceeding, “a validation action operates against property, as distinct from an injunction that operates against persons. [Citation.]” (Friedland v. City of Long Beach (1998) 62 Cal.App.4th 835, 843.) And unlike a traditional action challenging a public agency decision, “its effect binds the agency and all other persons. [Citation.]” (Ibid.)
Water Code section 35855 reads: “An action to determine the validity of any contract may be brought pursuant to Chapter 9 (commencing with Section 860) of Title 10 of Part 2 of the Code of Civil Procedure.”
“The procedures applicable to validation actions are set forth at Code of Civil Procedure section 860 et seq. [¶] Code of Civil Procedure section 860 enables a public agency to bring a validation action ‘upon the existence of any matter which under any other law is authorized to be determined pursuant to this chapter, and for 60 days thereafter . . . .’ [Citation.]” (California Commerce Casino, Inc. v. Schwarzenegger (2007) 146 Cal.App.4th 1406, 1419-1420 (California Commerce).) “Under the statutory scheme, ‘an agency may indirectly but effectively “validate” its action by doing nothing to validate it; unless an “interested person” brings an action of his own under section 863 within the 60-day period, the agency’s action will become immune from attack whether it is legally valid or not.’ [Citations.]” (Id. at p. 1420.)
“ ‘If no proceedings have been brought by the public agency pursuant to this chapter, any interested person may bring an action within the time and in the court specified by Section 860 to determine the validity of such matter.’ (Code Civ. Proc., § 863, italics added.)” (California Commerce, supra, 146 Cal.App.4th at p. 1420, fn. omitted.) “The initiation of a validation proceeding by an interested person is referred to as a ‘ “reverse validation action.” ’ [Citation.]” (Id. at p. 1420, fn. 12.)
“ ‘Generally speaking, statutory validation actions are designed to provide expedient, uniform procedures by which public agencies can obtain binding judgments as to the validity of public financing commitments such as “bonds, warrants, contracts, obligations or evidence of indebtedness . . . .” ’ [Citations.] . . . [¶] ‘The scope of judicial review of a legislative type activity is limited to an examination of the record before the authorized decision makers to test for sufficiency with legal requirements. Citation. A substantial evidence review is limited to the record before . . . and . . . is an examination of the proceedings before the entity to determine if its actions were arbitrary, capricious, or entirely lacking in evidentiary support. The trial court reviews the decision-making process of the administrative agency and does not conduct its own evidentiary hearing . . . .’ [Citation.]” (Poway Royal Mobilehome Owners Assn. v. City of Poway, supra, 149 Cal.App.4th at pp. 1478-1479.)
“On appeal, we apply the same standard of review. We examine the administrative record to determine whether substantial evidence supports the trial court’s findings. [Citation.]” (Poway Royal Mobilehome Owners Assn. v. City of Poway, supra, 149 Cal.App.4th at p. 1479.) We review de novo “issues involving the interpretation and application of statutes [citation] . . . .” (Blue v. City of Los Angeles (2006) 137 Cal.App.4th 1131, 1140.)
1. Procedural matters
a. Petitioners below and appellants on appeal had standing
The Trustee contends, and the trial court found, that petitioners did not have standing to bring this invalidation action because the only confirmed water-user in the Water Company’s area, Jackie Bettencourt, is not an appellant in this action. The Trustee argues that where appellants do not allege they are consumers of the Agency’s water, they cannot show that they are “interested persons” under Code of Civil Procedure section 863, who may bring a reverse invalidation action. We disagree.
Interested persons under Code of Civil Procedure section 863 are those “ ‘having a direct, and not a merely consequential, interest in the litigation.’ ” (Torres v. City of Yorba Linda (1993) 13 Cal.App.4th 1035, 1042, quoting Associated Boat Industries v. Marshall (1951) 104 Cal.App.2d 21, 22.) In Regus v. City of Baldwin Park (1977) 70 Cal.App.3d 968, 972, for example, the plaintiffs were taxpayers and had standing under section 863 where they showed they had a financial interest in the outcome of the proceeding. There, tax increment financing of the challenged redevelopment project would divert tax revenues from taxing agencies to which plaintiffs pay taxes to the redevelopment agency’s coffers.
Here, of the four original petitioners, three remained in the trial of the validation action, and two are parties to the appeal. The three petitioners alleged in the trial court that they had standing to pursue this action as taxpayers in the Agency’s territory. Among the “revenues” pledged as security for the certificates are “all property taxes . . . received by the Agency . . . .” As taxpayers in the Agency’s territory, plaintiffs demonstrated a financial interest in the outcome of the proceeding where their tax money has been pledged as security for certificates which might be deemed an invalid use of assets. The court’s reliance on Cornelius v. Los Angeles County Etc. Authority (1996) 49 Cal.App.4th 1761 is misplaced. That case involves the standing to raise a constitutional challenge to an affirmative action program not standing under the validation statutes.
b. Appellants’ challenge to the 1999 transaction is untimely under Code of Civil Procedure section 860; their challenge to the nature of the Agency’s acquisition of the Water Company is barred by the doctrine of res judicata; and they are judicially estopped to deny that the Agency has the right to use and pledge the Water Company’s assets and revenue
Validation and reverse validation actions are barred if not brought within 60 days of the transaction challenged. (Code Civ. Proc., § 860 [“A public agency may upon the existence of any matter . . . and for 60 days thereafter, bring an action”], § 863 [“any interested person may bring an action within the time and in the court specified by Section 860”], § 869 [“No contest except by the public agency or its officer or agent of any thing or matter under this chapter shall be made other than within the time and the manner herein specified”].)
The transaction by which the Agency acquired the Water Company closed on September 2, 1999, the date of the judgment in condemnation. (Klajic I, supra, 90 Cal.App.4th at p. 993.) This validation action was not brought until April 24, 2001, 19 months later. Therefore, the trial court and the Agency are correct that to the extent that appellants challenge the transaction under which the Agency acquired the Water Company, their challengeis untimely.
Furthermore, the doctrine of res judicata bars appellants’ challenge to consequences of the 1999 transaction, i.e., whether the Agency acquired the Water Company’s shares only, or whether as the result of the merger, the Water Company is a subsidiary of the Agency, a shell, or merely an asset of the Agency, and whether the Agency has the right to use and operate what were formerly Water Company assets. Appellants repeatedly insist that the Agency never acquired more than the actual stock of the Water Company. They also argue that “[N]either the Non-Profit Corporation Law, nor the Agency[‘s enabling] Act in its original form or as amended by A.B. 134, or A.B. 134 itself authorize such a defacto merger.”
“ ‘The doctrine of res judicata rests upon the ground that the party to be affected, or some other with whom he is in privity, has litigated, or had an opportunity to litigate the same matter in a former action in a court of competent jurisdiction, and should [be estopped] to litigate it again to the harassment and vexation of his opponent.’ [Citation.] The doctrine of res judicata – or claim preclusion – adheres when (1) the issues decided in the prior adjudication are identical with those presented in the later action; (2) there was a final judgment on the merits in the prior action; and (3) the party against whom the plea is raised was a party or was in privity with a party to the prior adjudication. [Citation.]” (Pollock v. University of Southern California (2003) 112 Cal.App.4th 1416, 1427.)
Manifestly, the question of the type of merger as the result of the 1999 transaction is the very same issue decided in the earlier litigation. The 1999 judgment in condemnation specified that the Agency acquired more than simply shares of Water Company stock. That judgment specifically decreed that the payment of the amounts set forth was “full payment for the taking of the Shares and any other compensable interests, including, without limitation, other tangible or intangible assets of the Santa Clarita Water Company, now or in the future.” (Italics added.) We observed in Klajic I, among other things, that after the condemnation and “in connection with the stock purchase, the Water Company issued a number of resolutions designed to wind up the Water Company’s business, dissolve the corporation, distribute its remaining assets to the Agency, and accept the resignation of three of the Water Company’s directors and its secretary.” (Klajic I, supra, 90 Cal.App.4th at p. 994, italics added, fn. omitted.) On remand after Klajic I for the express purpose of determining the nature of the relationship between the Agency and the Water Company, the trial court found that a merger had occurred and that the Water Company was an alter ego of the Agency. (Klajic II, supra, 121 Cal.App.4th at p. 11.) We did not address that question in Klajic II. Both Klajic I and Klajic II are final judgments on the merits. Both appellants were petitioners in the prior two actions, as were the Agency and the Water Company. The remaining defendants are in privity with the Agency for purposes of the res judicata analysis here. Therefore, the doctrine of res judicata bars appellants’ arguments about the Agency’s rights to use and operate any of what were the Water Company’s assets.
Appellants argue that the final order of condemnation did not refer to all of the Water Company’s assets, and where it is entitled “final,” its description of the scope of the taking trumps the trial court’s judgment in condemnation filed the previous day. As a result, they argue, the Agency only took the Water Company’s shares, not its tangible assets. Appellants are wrong. The “Judgment in Condemnation” described the taking as including the stock and all tangible and intangible assets of the Water Company, and stipulated that once the Agency paid the just compensation, it was entitled to obtain a final order of condemnation. On September 3, 1999, after the Agency made the payment, the court entered a final order of condemnation. That final order confirms that the full payment in compensation as set forth in the judgment in condemnation was made. But it also specifically “decreed, that all rights, title and interest in, to or against the Shares be and the same are condemned to [the Agency] for public use, as more particularly specified in the Judgment in Condemnation.” (Italics added.) Thus, the Final Order of Condemnation incorporates the earlier Judgment in Condemnation’s more expansive description of the compensable interests, including all of the Water Company’s assets. The evidence supports the trial court’s finding that as the result of the condemnation in 1999, the Agency owns the Water Company along with the right to use, operate, and transfer its assets.
In any event, appellants are judicially estopped to argue that the Water Company exists as a separate corporate entity with income-producing assets that the Agency may not lawfully reach. “ ‘The doctrine [of judicial estoppel] serves a clear purpose: to protect the integrity of the judicial process.’ [Citation.]” (Jackson v. County of Los Angeles (1997) 60 Cal.App.4th 171, 181.) “ ‘The party invoking judicial estoppel must show that (1) the party against whom the estoppel is asserted took an inconsistent position in a prior proceeding and (2) that the position was adopted by the first tribunal in some manner such as by rendering a favorable judgment. [Citation.]’ [Citation.]” (Koo v. Rubio’s Restaurants, Inc. (2003) 109 Cal.App.4th 719, 735.) Appellants’ contention throughout Klajic I and Klajic II was that the effect of the Agency’s condemnation of the Water Company’s shares was to merge the two entities into one. (Klajic I, supra, 90 Cal.App.4th at p. 994.) On remand to determine whether the 1999 condemnation transaction had brought about a merger (id. at pp. 1000-1001), petitioners raised the same merger contention. (Klajic II, supra, 121 Cal.App.4th at p. 10.) The trial court agreed. (Id. at p. 11.) We did not address the merger question in Klajic II and the Klajic opinions are final. Thus, appellants obtained a favorable result in their contention that the Water Company merged into the Agency. They are therefore judicially estopped from arguing, as they do now, that “[a]fter the Agency’s 1999 condemnation, [the Water Company] still operated as a separate California non-profit corporation, with substantial assets owned and operated by it.” (Italics added.) The Agency acquired not only the stock of the Water Company but also its assets -- including “wells, storage reservoirs, booster stations, and pipelines to deliver groundwater and treated surface water supplies to [its] service area” -- along with the right to operate the Water Company and to its revenue stream. In short, appellants are estopped to deny, even if the Water Company had assets and revenues, that the Agency maintains the right to use and pledge them.
c. Private parties, such as the Trustee and the individual board and staff members, are not defendants but are interested parties under Code of Civil Procedure sections 860 and 863
Citing Code of Civil Procedure section 863, which reads “The public agency shall be a defendant,” the trial court held that the private defendants, such as Stone & Youngberg, the Trustee, and the individually named board members were not proper defendants in a reverse validation action.
The only necessary or indispensable party in a validation action is the Agency. (Planning & Conservation League, supra, 83 Cal.App.4th at pp. 921-923.) Planning & Conservation League held, in a reverse validation action challenging the conduct of the Department of Water Resources (DWR) in transferring title to an element of subsurface reservoir and certain contracts with local water contractors, that the only necessary or indispensable party was the DWR and not other parties who may be interested in the action’s outcome. (Ibid.) The court explained that “The term ‘public agency’ refers to the agency seeking a determination of the validity of its action. It does not refer to other parties that may be interested in the outcome of the action. Code of Civil Procedure section 861 encompasses these interested parties. It provides that ‘[j]urisdiction of all interested parties may be had by publication of summons . . . in the county where the action is pending,’ to wit, all interested parties whether public or private, other than, of course, the public agency that brings the action. (Ibid.) The use of the term ‘jurisdiction’ in this context is deceptive. Since jurisdiction is necessary over the res, not over persons, in a validation proceeding, section 861 of the Code of Civil Procedure is in essence a notice provision. Interested persons must have notice by publication of summons before the court can obtain in rem jurisdiction of the validation action.” (Planning & Conservation League, supra, at pp. 921-922, italics added.)
Planning & Conservation League also addressed reverse condemnation proceedings brought by nonagency parties under Code of Civil Procedure section 863. (83 Cal.App.4th at p. 922.) Section 863 reads, “If no proceedings have been brought by the public agency pursuant to this chapter, any interested person may bring an action . . . to determine the validity of such matter.” “Read in context, the ‘public agency’ referred to in section 863 is necessarily the same public agency referred to in section 860 or, in other words, the agency whose action is to be tested or validated. And it is only that public agency that, pursuant to section 863, ‘shall be a defendant and shall be served with the summons and complaint in the action . . . .’ ” (Planning & Conservation League, supra, at p. 922, italics added, fn. omitted.) All of the other parties were deemed “ ‘interested parties.’ ” (Ibid.) Here, therefore, the trial court was correct that the Agency and to the degree the Financing Corporation is an arm of the Agency, are the only proper defendants under sections 860 and 863. Where validation and reverse validation actions are in rem, private parties, such as Stone & Youngberg, the Trustee, and the individually named board member defendants are merely “interested parties entitled to notice.”
Any suggestions by appellants that the Underwriter may have liability under the Securities and Exchange Acts for nondisclosure constitute wholly new issues and are thus improperly raised in this appeal.
2. The invalidation contentions
a. The Corporations Code
Turning to their substantive contentions, appellants argue that the Agency’s transfer of the Water Company’s revenues under the 2001 certificate transaction violates the Corporations Code because it was not done for the benefit of the public or the Water Company. They limited the grounds for invalidating the transaction to three provisions of the Nonprofit Public Benefit Corporation Law. Specifically, they urge that the transaction violates Corporations Code sections 5410, 5913, and 6010.
(i) The 2001 certificate transaction did not violate Corporations Code section 5410
First, appellants argue that any collection by, or transfer of, the Water Company’s revenues to the Financing Corporation or Trustee under the documents implementing the 2001 certificate transaction is an unlawful distribution under Corporations Code section 5410. Section 5410 reads in part, “No corporation shall make any distribution.” A distribution is defined in section 5049 as “the distribution of any gains, profits or dividends to any member as such. As used in this section, ‘member’ means any person who is a member as defined in Section 5056 and any person who is referred to as a member as authorized by subdivision (a) of Sections 5332, 7333 and 9332.” The Agency is the sole member of the Water Company.
The trial court ruled that the use of Water Company revenues to repay publicly necessary capital improvements is a public benefit, not a distribution under Corporations Code section 5410. The court cited People ex rel. Groman v. Sinai Temple (1971) 20 Cal.App.3d 614. There, the Attorney General as plaintiff argued that the defendant, a nonprofit religious corporation, was making improper distributions to its members by offering them discounts on the price of cemetery land, and to the extent that cemetery profits were used for religious purposes, they constituted a distribution to members. (Id. at pp. 621-622.) The plaintiff relied on Corporations Code section 9200 (a precursor to the current Nonprofit Public Benefit Corporation Law and section 5049), which contained similar language as section 5049 prohibiting nonprofit corporations from “distribut[ing] any gains, profits, or dividends to any of its members . . . .” (People ex rel. Groman v. Sinai Temple, supra, at p. 620.) The Sinai Temple court explained that “In interpreting the statute it is necessary to distinguish between the inurement of benefits and the distribution of profits. [Citations.]” (Id. at p. 622, italics added.) That is, “Many corporations organized under section 9200 . . . benefit their members, even though the corporations are strictly nonprofit in nature. It is common knowledge that such corporations often receive endowments, bequests and substantial gifts from members and interested nonmembers which make it possible for the organization to provide benefits costing more than the recipients pay by way of dues or contributions. We do not understand plaintiff to argue that a corporation organized under section 9200 may not lawfully benefit its members except upon a strict quid pro quo basis. The furnishing of benefits to members, without charge or without receiving full cash value in return, is not per se the payment of a dividend, gain or profit by a corporation organized under section 9200.” (Ibid.)
Likewise here, the pledge of revenues as security for the 2001 certificate transaction is not “per se the payment of a dividend, gain or profit . . . .” to the Agency as member. (People ex rel. Groman v. Sinai Temple, supra, 20 Cal.App.3d at p. 622.) Indeed, the trial court found that the Agency did not use any proceeds from the 2001 certificate transaction to reimburse itself for its purchase of the Water Company, a finding appellants do not appeal. (Schuster v. Gardner (2005) 127 Cal.App.4th 305, 318, fn. 1 [“appellant . . . abandons an issue by failing to raise it in his or her opening brief.”].) Rather, the pledge of Water Company revenues enabled the Agency as the Water Company’s member, to make improvements to its infrastructure through which it distributes water to all of its retailers, including the Water Company. Hence, the pledge of Water Company revenues inured to the benefit of the Agency -- a public agency that the Legislature created for the public benefit (Stats. 1962, ch. 28, § 1, p. 208, 72A West’s Ann. Wat. -- Appen., supra, § 103-15, p. 500) and was not per se a prohibited distribution of any gain, profit, or dividend as contemplated by Corporations Code section 5410.
In any event, the 2001 certificate transaction did not effectuate a “transfer” of Water Company revenues to the Agency, appellants’ contention to the contrary notwithstanding. The Agency and the Water Company merged in 1999. As part of that 1999 transaction, the Agency acquired the interest in and right to use and operate, and hence pledge, the Water Company’s assets, including its revenues. Indeed, we have already explained that appellants are estopped under the doctrines of res judicata and judicial estoppel to argue that the Water Company exists as a separate corporate entity with income-producing assets that the Agency may not lawfully reach.
In that the Agency pledged the Water Company’s assets, namely, its revenues, as security for the 2001 certificates, it was a valid pledge. Corporations Code section 5910 permits a nonprofit public benefit corporation to pledge its assets to secure an obligation. This section reads in pertinent part, “Any mortgage, deed of trust, pledge or other hypothecation of all or any part of the corporation’s property, real or personal, for the purpose of securing the payment or performance of any contract or obligation may be approved by the board.” (Italics added.) Thus, the Corporations Code allows a pledge of Water Company revenues “for the purpose of security the payment . . . of any . . . obligation,” including the obligation created by the 2001 certificates.
(ii) The 2001 certificate transaction did not violate Corporations Code sections 5913 or 6010
Corporations Code section 5913 requires a nonprofit public benefit corporation to give the Attorney General 20 days’ notice before selling, leasing, conveying, exchanging, transferring or otherwise disposing of all or substantially all of its assets, unless such transaction is in the usual and regular course of the corporation’s activities. Appellants contend that the transfer of the Water Company’s revenues “as part of an overall defacto merger of the Water Company into the Agency is violative of Corporations Code section 5913.” That section is inapplicable. The Agency purchased the Water Company’s assets and merged with it on September 2, 1999, whereas the Water Company did not become a nonprofit public benefit corporation subject to section 5913 until September 15, 1999, 13 days after the close of the 1999 transaction. Therefore, section 5913 did not apply to require notice of the merger be given to the Attorney General at the time of the 1999 transaction. Moreover, appellants have not demonstrated how the pledge of Water Company revenues constitutes “all or substantially all” of the Water Company’s assets.
Section 5913 of the Corporations Code reads in relevant part, “a corporation shall give written notice to the Attorney General 20 days before it sells, leases, conveys, exchanges, transfers or otherwise disposes of all or substantially all of its assets unless the transaction is in the usual and regular course of its activities or unless the Attorney General has given the corporation a written waiver of this section as to the proposed transaction.”
The same analysis applies with respect to Corporations Code section 6010. That section governs mergers involving a public benefit corporation. Because the merger between the Agency and the Water Company occurred on September 2, 1999, 13 days before the Water Company became a nonprofit public benefit corporation, section 6010 does not apply and cannot serve as a tool for invalidating the 2001 certificate transaction.
Corporations Code section 6010 reads in full: “A public benefit corporation may merge with any domestic corporation, foreign corporation [citation], or other business entity [citation]. However, without the prior written consent of the Attorney General, a public benefit corporation may only merge with another public benefit corporation or a religious corporation or a foreign nonprofit corporation the articles of which provide that its assets are irrevocably dedicated to charitable, religious, or public purposes.
b. Appellants may not raise fraudulent transfer as grounds for invalidating the 2001 certificate transaction
Appellants contend that the transfer of Water Company revenues to the Agency and Financing Corporation is made without consideration and is thus a fraudulent transfer under Civil Code sections 1227 and 3439 to 3439.12. The trial court ruled, even assuming that the 2001 certificate transaction was a fraudulent transfer, invalidating the transaction is not a proper remedy. We agree.
A fraudulent conveyance is valid except as to creditors. (Jeffery v. Volberg (1958) 159 Cal.App.2d 815, 818-819.) That is, only creditors may set aside a conveyance on the grounds it was fraudulent. “[I]n order that one may attack a conveyance as being fraudulent as to creditors, it must appear that he or she occupies the status of a creditor. [¶] . . . One in whose favor an obligation exists by reason of which he or she is or may become entitled to the payment of money is a creditor.” (16A Cal. Jur.3d (2003) Creditors’ Rights and Remedies, § 401, fns. omitted, citing Civ. Code, § 3430.) “Unless a person seeking to avoid a conveyance on the ground that it is fraudulent falls within one of the classes designated by the statutes, he or she has no standing in court to complain of the transaction, however fraudulent. Indeed, the right to attack the conveyance does not exist in favor of every creditor, and with few exceptions a transaction cannot be avoided by the parties or their heirs or by strangers.” (16A Cal. Jur.3d, supra, § 400, italics added, fns. omitted; see also Civ. Code, § 3439.07 [listing relief available to creditors against fraudulent transfers].) Appellants are not creditors of the Agency. Hence, they have no standing to set aside the 2001 certificate transaction on the ground it was a fraudulent transfer.
c. Breach of fiduciary duty
Finally, appellants argue, as they did before the trial court, that defendants breached their fiduciary duties to their water customers when they entered into the invalid 2001 certificate transaction. (Hansen v. City of San Buenaventura (1986) 42 Cal.3d 1172.) While we do not dispute that “[a] city which acquires the water system of another community incurs an obligation to deal fairly with its customers in that community and to provide them with service at reasonable rates[]” (id. at p. 1180), the amount of appellants’ water rates has not been an issue in this case. More important, because we hold that the transaction is not invalid, there was no cognizable breach of a fiduciary duty in entering into the challenged resolutions and agreements.
DISPOSITION
The judgment is affirmed. Each party to bear its own costs on appeal.
We concur: KLEIN, P. J., CROSKEY, J.
“(b) At least 20 days prior to consummation of any merger allowed by subdivision (a), the Attorney General must be provided with a copy of the proposed agreement of merger.
“(c) Without the prior written consent of the Attorney General, when a merger occurs pursuant to subdivision (a), each member of a constituent corporation may only receive or keep a membership in the surviving corporation for or as a result of the member’s membership in the constituent corporation.”