Concerned McCloud Citizens v. McCloud Community Services District et al.  (Filed January 2, 2007; certified for publication January 31, 2007, C050811) __ Cal.App.4th__

By Lori Wider

Introduction and Background

The California Court of Appeal, Third Appellate District, reversed the decision of the trial court  granting a petition for writ of mandate brought to challenge approval of an agreement between the McCloud Community Facilities District ("District") and Nestle Waters North America, Inc. ("Nestle") for the sale and purchase of spring water.  The lower court determined that the District had violated CEQA by failing to conduct environmental review prior to approving the agreement.  The appellate court disagreed, finding that approval of the agreement did not trigger the requirement for environmental review prior to District approval because (a) the agreement was expressly conditioned on future CEQA compliance; and (b) it did not commit the District to a course of action or commit it to issuance of any permits or other entitlements to Nestle.

Terms of Agreement

In this case, the District approved an agreement with Nestle for the purchase and sale of up to 1,600 acre?feet of water per year from springs to which the District held water rights.  A public meeting was held by the District to consider the tentative agreement, which had been previously negotiated.  The District Board of Directors approved the agreement, which was subsequently executed by the parties.  While the agreement specified a term of 50 years with a right of renewal, it also contained a five?year contingency period during which Nestle would conduct feasibility studies to evaluate the development and use of the spring water as a water source, and the siting, design and construction of a bottling facility.  No specific site was identified, with selection to be made by Nestle if use of the water was determined feasible.  The agreement provided that Nestle would attempt to locate the facility within the District’s service area or, if outside the existing service area, the District would attempt to annex the facility location.  The District was charged with designing a collection system, delivery system and ancillary facilities as necessary, with the design not final until approved in writing by both parties.  The parties agreed to jointly develop a water supply contingency plan, and to develop a road use plan to identify primary truck routes.  Under the agreement, Nestle’s right to purchase and take delivery of the water would commence at the close of the contingency period.

Under the agreement, Nestle was entitled to the exclusive right to the spring water and the District agreed not to enter into discussions or negotiations with other parties for the purchase or use any spring water or develop the District’s springs.  Nestle agreed to make contingency fee  payments to the District and exclusivity fee payments after the bottling facility became operational.  The agreement set the price for the water to be supplied by the District.  However, the obligations of the parties were expressly conditioned upon completion, during the contingency period, of "proceedings under CEQA" and the expiration of applicable statutes of limitation to challenge the adequacy of the CEQA compliance (with no action being filed).   The agreement stated that neither party was bound until the District complied with CEQA and there was no possibility of a CEQA challenge.

Court’s Discussion and Conclusion

The trial court found that the agreement constituted an initial and integral stage of a project under CEQA.  It created an entitlement for Nestle and committed the District to a definite course of action.  The District’s failure to conduct environmental review, therefore, violated CEQA and constituted an abuse of discretion.  In reversing the trial court, the appellate court determined that approval of the agreement did not require prior CEQA review.

The appellate court acknowledged that the ultimate purchase and sale to Nestle, which would involve a significant amount of water being taken from the District’s springs, the trucking and/or piping of the water to Nestle’s facilities, the construction of a bottling facility and other related activities, constitutes a "project" under CEQA which must be subject to environmental review.  The court concluded, however, that the agreement was conditional and did not commit the District to a course of action or commit it to issuance of any permits or other entitlements to Nestle.  Rather, the agreement committed the District to sell water to Nestle only if described terms under the agreement were successfully completed.  The court determined that even though the District would be "favorably disposed" to the success of the project, the agreement did not limit the District’s future discretion in reviewing the project and examining a full range of options under CEQA (including the "no project" alternative).  The court viewed the agreement as "temporarily holding in place a set of pre?agreed financial terms…, while conceptually outlining a proposal for a project to be subjected to and conditioned upon full environmental review."  It did not legally bind the District to the water bottling facility and the partnership with Nestle.

Ancillary Standing Claim

The appellate court also considered and rejected a claim by the District and Nestle, first raised in their reply briefs on appeal, that Concerned McCloud Citizens, an unincorporated association, lacked standing to maintain the action because it failed to object orally or in writing as required by CEQA under Section 21177 (b) of the Public Resources Code.  The court found that Section 21177 by its terms did not apply since it requires objection "during the public comment period provided by this division or prior to the close of the public hearing on the project before the issuance of the notice of determination." (emphasis added by the court.)  Since the District did not conduct any environmental review, there was no CEQA public comment period and the District did not file a notice of determination.  For these reasons, the court determined that Section 21177 did not apply.

For more information please contact Lori Wider.  Lori Wider is special counsel in the Real Estate, Land Use and Environmental Practice Group in the firm’s San Francisco Office.