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City of Westlake v. City of Cleveland

Court of Appeals of Ohio, Eighth District, Cuyahoga

June 1, 2017

CITY OF WESTLAKE, PLAINTIFF-APPELLEE
v.
CITY OF CLEVELAND, DEFENDANT-APPELLANT

         Civil Appeal from the Cuyahoga County Court of Common Pleas Case No. CV-12-782910.

          ATTORNEYS FOR APPELLANT Robert J. Hanna Susan M. Audey Karl A. Bekeny Tucker Ellis L.L.P., Barbara A. Langhenry Director of Law City of Cleveland Law Department

          ATTORNEYS FOR APPELLEE Dennis M. O'Toole Frank S. Carlson Matthew A. Dooley Ashleigh B. Kerr O'Toole, McLaughlin, Dooley & Pecora, John D. Wheeler Director of Law City of Westlake

          BEFORE: Stewart, P.J., S. Gallagher, J., and Celebrezze, J.

          JOURNAL ENTRY AND OPINION

          MELODY J. STEWART, PRESIDING JUDGE

         {¶1} In 1990, defendant-appellant city of Cleveland and plaintiff-appellee city of Westlake entered into a water service agreement ("agreement") in which the Cleveland Water Department would be the "sole and exclusive supplier" of water to Westlake for a period of ten years, with automatic annual renewals unless either side gave notice, five years in advance, of intent to terminate. Years later, after becoming dissatisfied with Cleveland's water service and pricing, Westlake began exploring the possibility of establishing its own water department and purchasing water from the Avon Lake Water Department. As part of that effort, Westlake filed this action seeking a declaration of its rights and responsibilities under the agreement. It asked the court to declare that the agreement terminated after a period of 25 years and that Cleveland could not recover "stranded" or other additional costs.

         {¶2} While the declaratory judgment action was pending, Cleveland invoked a clause of the agreement that allowed it to enact rate increases for customers "who have taken steps towards leaving the Cleveland water system." Ostensibly intended to recoup $51 million in "stranded" costs relating to capital improvements of water lines within Westlake, the rate increases would result in additional costs of approximately $5, 000 per homeowner and just over $100, 000 for large commercial establishments for the remainder of the five-year notice period.

         {¶3} Westlake asked the court to enjoin Cleveland's imposition of the rate increases. After the court granted a preliminary injunction to stay Cleveland's rate increases, the parties filed cross-motions for summary judgment. Westlake cited the terms of a memorandum of understanding signed by both parties at the same time they signed the agreement in which they acknowledged that Westlake was not granting Cleveland an exclusive franchise to furnish water. Westlake argued that the memorandum of understanding amended the terms of the agreement to grant Cleveland a non-exclusive franchise to furnish water. Additionally, Westlake argued that its charter prohibited a franchise charter in excess of 25 years, a fact memorialized by its city council in enabling legislation to approve the water contract with Cleveland. That legislation granted Cleveland a non-exclusive franchise to provide water "for a period of twenty-five (25) years." Westlake maintained that the agreement expired on March 19, 2015, at which point Cleveland's subsequent attempts to increase water rates would be a nullity.

         {¶4} Cleveland argued that Westlake did not grant it the property right of a "franchise" to furnish water, but merely a contractual right to be the sole supplier of water. It further argued that the agreement did not expire by its own terms after 25 years because Westlake granted Cleveland the property right to enter Westlake for 10 years, with subsequent annual terms. Cleveland rejected Westlake's assertion that the memorandum of understanding amended the terms of the agreement: it argued that an integration clause of the contract foreclosed reference to the memorandum of understanding and, in any event, the memorandum of understanding merely memorialized the parties' understanding that the agreement was not intended to grant an exclusive franchise. It further rejected reliance on the terms of the Westlake enabling ordinance, pointing out that legislation was one-sided because Cleveland was not a party to the ordinance and the ordinance could not be construed as manifesting Cleveland's capitulation to amending the agreement.

         {¶5} The court ruled that the agreement had been amended by both the memorandum of understanding and the Westlake ordinance granting Cleveland a non-exclusive franchise to operate a public utility for a period of 25 years. The court ruled that the agreement terminated on March 19, 2015, and was no longer enforceable, and that the provision requiring five-years notice of intent to terminate was no longer applicable. The court ruled that Westlake could obtain water from a secondary source without violating the agreement. Finally, the court ruled that Cleveland was not entitled to recover stranded costs.

         {¶6} Cleveland's sole assignment of error complains that the court erred by granting summary judgment and permanently enjoining it from enforcing its rate increases to recover stranded costs. It maintains that the memorandum of understanding did not amend the agreement, but merely memorialized the parties' understanding that the agreement did not violate Westlake's city charter by granting the Cleveland Water Department an exclusive franchise to provide water service for more than 25 years.

         {¶7} A Civ.R. 56 motion for summary judgment rests on the assertion that there are no genuine issues of material fact and that the moving party is entitled to judgment as matter of law. To the extent the nonmoving party maintains there are genuine issues of material fact, the court is required to construe the facts most favorably to the nonmoving party. See Civ.R. 56(C). However, when there are cross-motions for summary judgment, both parties represent that there are no genuine of issues of material fact. Sesko v. Hutchins Caw, Inc., 8th Dist. Cuyahoga No. 87359, 2006-Ohio-5434, ¶ 2; Cincinnati v. Ohio Council 8, Am. Fedn. of State, Cty. & Mun. Emps., 93 Ohio App.3d 162, 164, 638 N.E.2d 94 (1st Dist.1994). We thus take the underlying facts as established for purposes of this appeal.[1]

         {¶8} The water service agreement was written on a master form that Cleveland drafted and used with all of its political subdivision water customers. Article 5 of the agreement states:

5.01. In consideration of the agreement of PURVEYOR and provided that Purveyor conforms all water rate increases strictly to the provisions of Article 4 of this AGREEMENT, and in consideration of the agreement of PURVEYOR to finance and construct the capital improvements provided for in Article 20 of this AGREEMENT, MUNICIPALITY agrees that it will not directly or indirectly, alone or together with others, by court proceedings or in any other way attempt to obstruct, enjoin, hinder or disable PURVEYOR from setting, charging, and collecting rates that PURVEYOR in its sole discretion deems necessary to enable PURVEYOR to fulfill its obligations hereunder. In addition, MUNICIPALITY agrees that PURVEYOR shall be the sole and exclusive supplier of water to MUNICIPALITY and its inhabitants for the term of this AGREEMENT.

         {¶9} Article 23 of the agreement, titled "TERM OF AGREEMENT, " states:

23.01. The term of this AGREEMENT shall be for a minimum period of ten (10) years commencing on the first day after execution of this AGREEMENT by PURVEYOR, and shall automatically continue in effect from year to year thereafter. This AGREEMENT may be cancelled by either party hereto by giving written notice to the other party at least five (5) years prior to the effective date of termination, provided that no such notice may be given until five (5) years after the date upon which this AGREEMENT is executed by PURVEYOR.

         {¶10} Before signing the agreement, Westlake had concerns about both the duration of the agreement and making Cleveland the "sole" provider of water to Westlake. Westlake's charter does not provide for exclusive franchises. The charter does allow the city to grant non-exclusive franchises, but Article XI, Section 5 of the Westlake City Charter states: "the Council may by ordinance grant a non-exclusive franchise to a person, firm or corporation to construct or operate a public utility on, across, under, over or above any public street or real estate within the Municipality for a period not in excess of twenty-five (25) years." Westlake told Cleveland that the "sole and exclusive supplier" language of the agreement ran afoul of its charter.

         {¶11} The Cleveland assistant law director assigned to the matter was aware that Westlake believed that it could not sign the agreement as drafted: "I believe that the issue [the Westlake law director] presented to me was that Westlake had a charter provision [sic] prohibited Westlake from signing this agreement and, and [sic] that was the subject of our discussion." The parties agreed to sign a memorandum of understanding in which they stated that "in consideration of the execution of the [agreement]" they "mutually agree" that:

Article 5 of the Contract provides that Cleveland will be the sole supplier of water to Westlake. Cleveland and Westlake agree that the language of Article 5 of the Contract is not intended to grant an exclusive franchise to provide water service to Westlake and its inhabitants in violation of Westlake's Charter which prohibits the granting of an exclusive franchise for utility service to any utility company.
Westlake acknowledges that, as of the date of the Contract, Cleveland has been and will continue to be the sole supplier of water to Westlake and its inhabitants during the term of the Contract because there are no alternative sources of water to supply the community.
However, in the event that the second sentence of Article 5 of the Contract is construed to be invalid, illegal or unenforceable, pursuant to paragraph 26.03 of the Contract, such invalidity shall not effect any other term or provision of the Contract, and the Contract shall be interpreted and construed as if the sentence had never been contained therein.

         {¶12} After reciting other agreements unrelated to this litigation, the memorandum of understanding concluded with the parties agreeing that "the foregoing represents their understanding of the provisions of the [agreement] and agree that this Memorandum of Understanding shall remain on file with said [agreement]."

         {¶13} Section 3 of the enabling legislation enacted by the Westlake City Council authorizing its mayor to enter into the agreement states: "That this Council grants to the City of Cleveland, pursuant to Article XI, Section 5, a non-exclusive franchise to construct and operate a public utility for the furnishing to the City of Westlake and its inhabitants potable water for a period of twenty-five (25) years." See Westlake Ordinances No. 1989-7.

         {¶14} Both the memorandum of understanding and the enabling legislation enacted by the Westlake City Council were forwarded to Cleveland. Cleveland signed the agreement and returned it along with the memorandum of understanding and a copy of the Westlake enabling legislation. The parties do not dispute that March 19, 1990, was the effective date of the agreement.

         {¶15} There are two points to be made about the interaction between the agreement and the Westlake charter. First, the Westlake charter only prohibits the city from (1) entering into an exclusive franchise and (2) entering into a non-exclusive franchise in excess of 25 years. Second, the agreement provided for a term of ten years, after which it would "automatically continue in effect from year to year thereafter" unless cancelled by written notice.

         {¶16} With respect to the first point, the court found that Westlake could not enter into the agreement as written because the "sole provider" language would grant Cleveland an exclusive franchise to provide water to Westlake. The Westlake charter makes no provision for the granting of exclusive franchises. Cleveland argues that the "sole provider" language did not grant a franchise, but a contractual right to be the sole supplier of water to Westlake. Cleveland argues that a "franchise" is a property right to enter the streets of Westlake to construct and operate a utility, but does not prohibit a utility from being a sole supplier.

         {¶17} Cleveland's argument fails to account for Article 7 of the agreement, which separately addresses the "property right" granted to it. That section states that Cleveland has the right to use Westlake's streets, easements, and other public ways for the "purpose of laying, extending, maintaining and repairing water mains and doing such other acts" necessary for the delivery of water to Westlake. This part of the agreement would embody Cleveland's understanding of the property right granted to it.

         {¶18} Because Article 7 specifically addresses what Cleveland claims is the property right encompassed by a franchise, we give independent meaning to Article 5 of the agreement, titled in part as "EXCLUSIVE FRANCHISE." While it is true that section headings in a contract are not binding provisions, Jordan v. Marion Technical College, 3d Dist. Marion No. 9-90-36, 1991 Ohio App. LEXIS 3966, at 5 (Aug. 15, 1991), there is no doubt that Article 5 addresses Cleveland's desire to be the sole provider of water for Westlake in a manner inconsistent with Cleveland's assertion that it dealt only with property rights. Cleveland drafted the agreement, so the court correctly viewed the use of the words "exclusive franchise" used in Article ...


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