Northwest Alloys, Inc. v. State Of Washington Department Of Natural Resources

Filed
Washington State
Court of Appeals
Division Two
August 20, 2019
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION II
NORTHWEST ALLOYS, INC., AND No. 51677-2-II
MILLENNIUM BULK TERMINALS-
LONGVIEW, LLC,
Respondents/Cross-Appellants,
v.
STATE OF WASHINGTON DEPARTMENT PUBLISHED OPINION
OF NATURAL RESOURCES, AND THE
HONORABLE HILARY S. FRANZ, AND
COLUMBIA RIVERKEEPER,
WASHINGTON ENVIRONMENTAL
COUNCIL, AND SIERRA CLUB,
Appellants/Cross-Respondents.
SUTTON, J. — The Department of Natural Resources and the Commissioner of Public
Lands Hilary S. Franz (collectively DNR), and Columbia Riverkeeper, Washington Environmental
Council, and Sierra Club (collectively Intervenors) appeal the superior court’s order concluding
that DNR acted arbitrarily and capriciously by denying Northwest Alloys, Inc.’s (NWA) consent
to sublease state-owned aquatic lands to Millennium Bulk Terminals-Longview, LLC
(Millennium). DNR and Intervenors argue that DNR’s decision to deny consent to sublease was
not arbitrary and capricious due to NWA’s refusal to provide requested financial information about
Millennium and DNR’s legitimate concerns about Millennium’s financial condition and business
reputation.
No. 51677-2-II
NWA and Millennium cross-appeal and argue that the superior court applied the incorrect
standard of review. NWA and Millennium contend that under RCW 79.02.030, the superior court
should review de novo DNR’s denial of consent to sublease by applying the “reasonably prudent
person” test.
We agree with DNR and Intervenors, and reverse and vacate the superior court’s orders,
and order the superior court to issue a new order affirming DNR’s denial.1
FACTS
I. HISTORY OF THE SITE
Reynolds Metals Company, which was owned by Alcoa Corporation, owned property
adjacent to the Columbia River navigation channel in Longview. In 2004, Chinook Ventures, Inc.
purchased a smelter located on the property and entered into a long-term ground lease with
Reynolds. In 2005, Alcoa transferred the property from Reynolds to another of its subsidiaries,
NWA.
Alcoa—most recently through NWA—leased the state-owned aquatic lands adjacent to the
property from DNR. NWA used the dock and associated infrastructure on the aquatic lands for
shipping alumina to Alcoa’s Wenatchee Works smelter in eastern Washington.
In 2008, DNR renewed its aquatic lands lease with NWA for an additional 30-year term.
Under the terms of the lease, NWA could not sublease the property without the written consent of
DNR, which DNR could not unreasonably withhold. The lease provided that in considering
1
NWA and Millennium also cross-appeal the superior court’s remedy order, which remanded the
sublease decision back to DNR for further consideration. Because we reverse the superior court’s
order on the merits, we do not address the superior court’s remedy order other than to vacate it.
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No. 51677-2-II
whether to consent to a sublease, DNR could consider, among other items, “the proposed
transferee’s financial condition, business reputation and experience, the nature of the proposed
transferee’s business, the then-current value of the [p]roperty, and such other factors as may
reasonably bear upon the suitability of the transferee as a tenant of the [p]roperty.” Clerk’s Papers
(CP) 16890.
After renewing its lease with DNR, NWA subleased the aquatic lands to Chinook with
DNR’s consent. Chinook imported alumina as an operator for NWA, and also used the property
to store petroleum coke and transfer it onto ships at the dock. During its subtenancy, Chinook
failed to obtain the required state and local regulatory permits for its petroleum coke business and
failed to provide adequate environmental controls. Chinook built improvements such as a
remodeled ship loader and overwater conveyor system without obtaining the required permits or
authorization under the lease. Chinook amassed a significant number of environmental violations
issued by the Department of Ecology, received a stop work order from Cowlitz County, received
a notice of violation from the U.S. Army Corps of Engineers, exacerbated environmental concerns
at the site, and put NWA in default of its lease with DNR.
II. MILLENNIUM
In the fall of 2010, while still in default of the lease, NWA sought DNR’s consent to
sublease the property to Millennium. Millennium was a limited liability company organized in
2010 for the purpose of acquiring Chinook’s assets, leasing the smelter property, and subleasing
the aquatic lands. Millennium’s purported plan was to continue the alumina handling operations
at the site using the existing equipment and planned upgrades. Millennium’s undisclosed long-
term objective, however, was to construct a large coal export terminal on the site.
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No. 51677-2-II
According to the original permit application from Millennium’s corporate parent, a
subsidiary of Ambre Energy Inc. (Ambre), the terminal project would allow coal handling and
exportation of 5.2 million metric tons of coal per year. A State Environmental Policy Act (SEPA)2
determination for the original permit application resulted in a mitigated determination of
nonsignificance finding, meaning that a full environmental impact study was not required.
However, internal Ambre documents later revealed that Millennium intentionally concealed the
extent of its plans for the coal export facility in order to avoid full environmental review. After
Millennium’s deception made national and local news, Millennium withdrew its terminal proposal.
In early 2012, Millennium filed a revised permit application, this time disclosing the full
scope of its plans for facilities on the property. Millennium sought to build, operate, and maintain
the largest coal export terminal on the west coast, exporting 44 million metric tons of coal per year.
Millennium planned to add two large docks to the property. Operating the docks would have
required significant new dredging of the aquatic lands within and outside of the geographical areas
covered by the lease.
III. FINANCIAL CONCERNS
During a severe coal market downturn in late 2014, Ambre sold its North American
assets—including a 62 percent ownership stake in Millennium—to a creditor, Lighthouse
Resources.
2
Ch. 43.21C RCW.
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No. 51677-2-II
In late 2015, Alcoa announced it would curtail production at Wenatchee Works.
Wenatchee Works had used the Longview dock leased by NWA to import alumina. Following the
suspension of production at Wenatchee Works, the dock was not in use.
Due to continued poor coal market conditions, several United States coal producers filed
for bankruptcy in 2016. Arch Coal, Inc., which owned 38 percent of Millennium, declared
bankruptcy in early 2016. As part of its bankruptcy, Arch Coal sold its interest in Millennium to
Lighthouse Resources, Millennium’s only remaining corporate parent. In return for its interest in
Millennium, Arch Coal received only a release of its obligation to provide capital support of
Millennium’s projects. Arch Coal stated that the capital contributions Millennium needed from
Arch Coal to stay afloat were so significant that Arch Coal’s entire ownership share in Millennium,
which it valued at nearly $38 million, would have been completely drawn down in a matter of
weeks.
IV. NEGOTIATIONS & DNR’S REQUESTS FOR INFORMATION
On November 18, 2010, shortly after NWA sought DNR’s consent to sublease to
Millennium, DNR requested information about Millennium from NWA, including at a minimum:
1. The financial condition of Millennium Bulk Logistics, Inc., including the extent
of its assets, to help DNR determine whether it has the financial wherewithal to
comply with the terms of the lease—especially in terms of abiding by requirements
related to authorized improvements.
2. The business reputation and experience of Millennium Bulk Logistics, Inc., and
if this Incorporation has been formed just to operate this site, the business reputation
of any of its affiliates, owners, or partners. DNR would like to understand the
history of this company and any of its individual owners in terms of the conduct of
their business(es) and whether they have any history of causing environmental
damage or failing to comply with applicable law and regulatory requirements. As
a steward of state-owned aquatic lands and responsible for this site, DNR would
like to understand that the new proposed sublessee will be able to perform its
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No. 51677-2-II
obligations under the lease that relate to site stewardship and otherwise. Please
inform us of each of the owners of the Incorporation and their experience with site
uses such as the one proposed for the sublease.
3. Any information that you can provide that will inform us of site operating
protocols that will protect state-owned aquatic lands from the release of hazardous
substances and that will provide environmental protection. If Millennium or any
of its partners has experience with the types of systems that would be put in use at
the Longview site, please describe what controls are in place to prevent harm to the
aquatic environment in which the facility would exist, and how upland operations
may affect state-owned aquatic lands.
CP at 17023.
Four days later, Millennium responded to DNR and explained that Millennium was a LLC
organized for the sole purpose of the Longview site project and was a wholly owned subsidiary of
Ambre. Millennium directed DNR to Ambre’s website to review Ambre’s annual reports and
noted that, at closing, Millennium planned to post a $10 million irrevocable standby letter of credit
to NWA to provide security for Millennium’s lease commitments. Millennium also provided a
follow-up letter summarizing the assets devoted to the project.
On November 29, 2010, DNR clarified that the information Millennium had provided did
not fully satisfy DNR’s requests. Millennium resisted DNR’s requests, stating that “the thought
that Millennium has to demonstrate financial capability to DNR is misplaced. Certainly, DNR can
make reasonable inquiry into the sublease and its plans. However, the obligations of Millennium
flow to Northwest Alloys, Inc., the tenant.” CP at 337.
After Millennium’s full plan for the coal terminal came to light in early 2011, DNR
informed Millennium and NWA that it would not make a decision on the request for consent to
sublease until the related shoreline permit and SEPA processes were resolved and until the
companies obtained the permits required for any and all planned improvements. DNR explained
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No. 51677-2-II
that NWA’s and Millennium’s inconsistencies regarding the scope of the proposed coal project
made evaluating the proposed sublease difficult.
By late 2015, DNR’s, NWA’s, and Millennium’s negotiations appeared to be in their final
stages. On December 14, 2015, DNR suggested two revisions to the consent to sublease, which
NWA and Millennium accepted. NWA and Millennium replied, “From our standpoint, we believe
these document[s] now to be final, and that all we need to do is ‘accept’ the changes in both and
route for signature.” CP at 1512.
However, after Arch Coal’s bankruptcy in January, DNR sent a letter dated February 3,
2016, to NWA explaining that DNR needed additional information to complete its review of the
request for consent to sublease. DNR emphasized its concern about Arch Coal’s bankruptcy and
the potential impact on Millennium’s financial capability.
The financial capability of Millennium to perform is critical. As the conditions on
the leased property and adjoining uplands resulting from the operations of [NWA’s]
previous subtenant Chinook Ventures demonstrate, when a subtenant in possession
of the property lacks the wherewithal to maintain the property and comply with
other lease requirements, it may cause significant damage to the property and
improvements that takes substantial amounts of time and resources to address.
CP at 1539.
DNR also questioned Alcoa’s recent decision to shutter the Wenatchee Works operation
and how that would impact NWA’s and Millennium’s plans for using the Longview property.
DNR requested that NWA provide audited financial statements from Millennium, all documents
related to Millennium filed in Arch Coal’s bankruptcy case, a statement indicating whether Arch
Coal would make any disclosures in its bankruptcy proceeding related to the sublease between
NWA and Millennium, and a statement from Millennium regarding its plans for using the existing
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No. 51677-2-II
dock on the property. Millennium responded that the financial statements DNR sought were
confidential.
After the bankruptcy court approved the sale of Arch Coal’s ownership interest in
Millennium in June 2016, DNR sent another letter to Alcoa, expressing concerns about
Millennium’s obligations to NWA. DNR noted that as a result of Arch Coal’s sale, Lighthouse
Resources had become the sole owner of Millennium. DNR explained, “Given the difficult market
conditions in the coal industry and the fact that [Lighthouse Resources] now has the sole financial
responsibility for Millennium, DNR seeks assurance that Millennium has the financial capability
to meet its significant ongoing financial obligations and comply with the requirements of [NWA’s]
lease with DNR.” CP at 1741.
To assist its evaluation of Millennium’s financial condition, DNR requested:
A balance sheet, income statement, and cash flow statement, prepared in
accordance with GAAP Accounting Standards[] that accurately states the current
assets, liabilities, and capital of [Millennium] and its income and cash flow for the
year ending June 30, 2016.
A copy of the January 1, 2011 Lease between [NWA] and [Millennium] for the
uplands adjacent to [NWA] leasehold under its lease with DNR and the June 5,
2104 amendment to the lease.
A copy of Millennium’s business plan for the existing dock on [NWA’s] leasehold
that identifies the income that Millennium expects to receive from operations on
the existing dock and the sources of income.
Any additional information which [NWA] can provide to shed light on the financial
condition of Millennium.
CP at 1742. NWA did not respond to this request.
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No. 51677-2-II
V. INVOLVEMENT OF ENVIRONMENTAL GROUPS
A group of environmental non-profit organizations contacted state and county regulatory
agencies including DNR in October 2010, expressing their concerns about the development of a
large coal terminal on the aquatic lands. The groups reiterated their concerns to DNR in November
2010, and requested a meeting with the Commissioner of Public Lands.
On March 16, 2011, the environmental groups sent a letter to the Commissioner regarding
Millennium’s business reputation based on Millennium’s strategy to conceal their long-term plans
for the property in an attempt to evade SEPA review. The groups attached several documents that
they had obtained regarding Millennium. The letter urged DNR to consider Millennium’s deceitful
practices when evaluating Millennium’s business reputation under the terms of the lease.
On January 25, 2016, as DNR, NWA, and Millennium were finalizing the documents for
DNR’s consent to sublease the aquatic lands, the environmental groups sent DNR a memo “to lay
out some of the facts and legal considerations attendant to DNR’s pending decision.” CP at 1532.
The memo urged DNR to deny consent to sublease based on Millennium’s weak financial
condition, the international coal market’s dismal economics, and Millennium and its parent
company’s poor business reputation and lack of experience managing a coal terminal.
VI. DNR DENIES CONSENT TO SUBLEASE
On January 5, 2017, the Commissioner of Public Lands issued a letter denying DNR’s
consent to sublease the aquatic lands to Millennium. The letter explained, “DNR’s decision is
based on Northwest Alloys’ failure to provide requested information regarding the financial
condition and business of Millennium as well as other factors that bear on the suitability of
Millennium as a subtenant.” CP at 16855. The denial letter highlighted DNR’s concern about
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No. 51677-2-II
Millennium’s financial condition given the bankruptcy of Arch Coal, Wenatchee Works’ indefinite
closure, coal’s historically poor market conditions, and Millennium’s commitments to NWA under
the ground lease.
The denial letter noted, “As the steward of Washington’s state-owned aquatic lands, the
financial capacity of a subtenant to perform is important to DNR.” CP at 16856. Referencing
Chinook’s damage to the property during its subtenancy, the letter explained, “The recent history
under the lease supports the need for careful examination of the capacity of subtenants at the site
to comply with lease obligations.” CP at 16856.
The denial letter also referenced Millennium’s “significant error” in failing to disclose in
its original permit application its plans to significantly increase the amount of coal shipped from
the facility. CP at 16857. “That Millennium does not have a lengthy track record on which to
judge performance and in its short history has made a significant error with respect to its planned
activities on the leased property supports the need for a thorough review of Millennium’s potential
suitability as a subtenant, including its financial condition.” CP at 16857.
The denial letter concluded:
[NWA] has failed to provide information reasonably requested by DNR as
permitted under the lease for review of [NWA’s] request for consent to sublease.
As detailed above, DNR’s requests for information are supported by the bankruptcy
of Arch Coal; Millennium’s commitments to [NWA]; market conditions facing
Millennium’s sole remaining owner, [Lighthouse Resources]; the history of
subleasing under the lease; and the absence of a significant track record supporting
Millennium. Accordingly, [NWA’s] request for consent to sublease has been
denied.
CP at 16857.
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VII. SUPERIOR COURT PROCEEDINGS
NWA and Millennium appealed the Commissioner’s letter denying DNR’s consent to
sublease to the superior court under RCW 79.02.030. The superior court granted Columbia
Riverkeeper, Washington Environmental Council, and Sierra Club’s motion to intervene.
After extensive briefing and argument, the superior court entered an order on the merits of
whether DNR’s decision to deny consent to sublease was unreasonable. The superior court
concluded that in considering the request to sublease, DNR was performing an administrative
proprietary function, not a quasi-judicial function. Accordingly, the superior court concluded that
the proper standard of review in the matter was whether DNR’s actions were arbitrary, capricious,
or contrary to law.
Addressing the reasonableness of DNR’s decision, the superior court concluded that it must
consider the unique statutory mandates that apply to DNR and evaluate DNR’s denial from the
standpoint of a reasonable landlord in DNR’s position. The superior court concluded that DNR’s
reasons for denying consent to sublease were not supported by facts and that DNR’s denial was
arbitrary and capricious. As a remedy, the superior court ordered DNR to “undertake further
consideration” of NWA’s request for consent to sublease to Millennium. CP at 17815.
DNR and Intervenors appeal and NWA and Millennium cross-appeal the superior court’s
orders.
ANALYSIS
I. STANDARD OF REVIEW
The parties disagree as to our standard of review. DNR and Intervenors contend that we
sit in the same position as the trial court and conduct a de novo review of the agency record to
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determine whether DNR’s consent to sublease was unreasonable. NWA and Millennium argue
that we should review the superior court’s findings for substantial evidence and determine de novo
whether the superior court’s conclusions flow from those findings. We agree with DNR and
Intervenors.
RCW 79.02.030 states:
Any applicant to purchase, or lease, any public lands of the state . . . and
any person whose property rights or interests will be affected by such sale or lease,
feeling aggrieved by any order or decision of the . . . commissioner, concerning the
same, may appeal therefrom to the superior court of the county in which such lands
or materials are situated . . . . The hearing and trial of said appeal in the superior
court shall be de novo before the court, without a jury, upon the pleadings and
papers so certified . . . . Any party feeling aggrieved by the judgment of the superior
court may seek appellate review as in other civil cases.
“Where the record at trial consists entirely of written documents and the trial court therefore
was not required to ‘assess the credibility or competency of witnesses, and to weigh the evidence,
nor reconcile conflicting evidence,’ the appellate court reviews de novo.” Dolan v. King County,
172 Wash. 2d 299, 310, 258 P.3d 20 (2011) (internal quotation marks omitted) (quoting Progressive
Animal Welfare Soc’y v. Univ. of Wash., 125 Wash. 2d 243, 252, 884 P.2d 592 (1994)). “Appellate
courts give deference to trial courts on a sliding scale based on how much assessment of credibility
is required; the less the outcome depends on credibility, the less deference is given to the trial
court.” Dolan, 172 Wash. 2d at 311. But substantial evidence may be the more appropriate standard
in cases where the superior court reviewed “an enormous amount of documentary evidence,
weighed that evidence, resolved inevitable evidentiary conflicts and discrepancies, and issued
statutorily mandated written findings.” Dolan, 172 Wash. 2d at 311.
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Here, although the superior court reviewed a large agency record, it did not weigh evidence
or resolve evidentiary conflicts. Nor was the superior court statutorily required to enter written
findings of fact. Under RCW 79.02.030, the superior court defers to the factual findings of the
commissioner and limits its review to the application of law to the admitted facts. Polson Logging
Co. v. Martin, 195 Wash. 179, 184-85, 80 P.2d 767 (1938); see also State v. Forrest, 13 Wash.
268, 270-71, 43 P. 51 (1895).3 Given that the superior court made no factual findings, leaving
only its conclusions of law for our review, we hold that we review DNR’s decision to deny consent
to sublease de novo.4
3
These cases rely on an early statute—Rem. Rev. Stat. §§ 7797-1 to 7797-201—which later
became RCW 79.02. This does not change our analysis.
4
NWA and Millennium argue that we should interpret RCW 79.02.030’s use of the phrase “as in
other civil cases” to mean that we review the superior court’s findings for substantial evidence.
NWA and Millennium argue that RCW 79.02.030’s use of the phrase “as in other civil cases”
should have the same meaning as in RCW 51.52.140, which has been interpreted as providing for
substantial evidence review. See Hendrickson v. Dep’t of Labor & Indus., 2 Wash. App. 2d 343,
351, 409 P.3d 1162, review denied, 190 Wash. 2d 1030 (2018). However, NWA and Millennium
overstress the similarity of that particular phrase while ignoring key differences in the statutory
schemes.
In industrial insurance appeals, the superior court or a jury may substitute its own findings
and decision for the Board of Industrial Insurance Appeals if, after weighing the evidence, it finds
by a preponderance of the evidence that the Board’s findings and decision are incorrect. Harrison
Mem’l Hosp. v. Gagnon, 110 Wash. App. 475, 482, 40 P.3d 1221 (2002). Accordingly, in industrial
insurance appeals, we review the superior court’s decision for substantial evidence. Rogers v.
Dep’t of Labor & Indus., 151 Wash. App. 174, 180, 210 P.3d 355 (2009). In contrast, in appeals
arising pursuant to RCW 79.02.030, as here, the superior court is not entitled to weigh evidence
and must defer to the commissioner’s factual findings. We disagree that RCW 79.02.030 is
analogous to RCW 51.52.140.
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II. DNR’S DENIAL OF CONSENT
A. ADMINISTRATIVE DECISION
The parties also disagree as to the degree of deference owed to DNR’s decision denying
consent to sublease. DNR argues that its decision was administrative and should be reviewed
under an arbitrary and capricious standard. NWA and Millennium argue that DNR was not acting
in an administrative capacity but instead made a quasi-judicial determination, and therefore, its
decision should be reviewed de novo applying a “reasonably prudent person” test. We agree with
DNR.
Although RCW 79.02.030 uses the language “de novo” review, such a review of an
administrative agency’s decision “is only permissible when the agency acts in a quasi-judicial
manner.” Yaw v. Walla Walla School Dist. No. 140, 106 Wash. 2d 408, 413, 722 P.2d 803 (1986).
In cases in which the agency acted in its administrative function, review is limited to whether the
agency acted arbitrarily, capriciously, or contrary to law. Yaw, 106 Wash. 2d at 413. “Allowing only
limited appellate review over administrative decisions, rather than original or appellate jurisdiction
as a matter of right, ‘serves an important policy purpose in protecting the integrity of administrative
decision-making.’” Residents Opposed to Kittitas Turbines v. State Energy Facility Site
Evaluation Council, 165 Wash. 2d 275, 295, 197 P.3d 1153 (2008) (quoting King County v. Wash.
State Boundary Review Bd. for King County, 122 Wash. 2d 648, 668, 860 P.2d 1024 (1993).
In Francisco v. Bd. of Directors, our Supreme Court identified four steps to determine if
an agency’s action was administrative or quasi-judicial. 85 Wash. 2d 575, 579, 537 P.2d 789 (1975).
They are whether (1) the court could have been charged in the first instance with the responsibility
of making the decision; (2) the function of the agency is one that courts have historically
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performed; (3) the agency performs functions of inquiry, investigation, declaration and
enforcement of liabilities as they stand on present or past facts under existing laws; and (4) the
agency’s action is comparable to the ordinary business of courts. Francisco, 85 Wash. 2d at 579.
Here, DNR acted in its administrative capacity when it decided whether to grant or deny
consent to sublease. DNR holds state-owned aquatic lands in trust for the public by virtue of the
Washington Constitution. Pope Res. v. Dep’t of Natural Res., 190 Wash. 2d 744, 754, 418 P.3d 90
(2018). The public trust doctrine is rooted in article XVII, section 1 of the Washington
Constitution5 and protects “‘public ownership interests in certain uses of navigable waters and
underlying lands, including navigation, commerce, fisheries, recreation, and environmental
quality.’” Weden v. San Juan County, 135 Wash. 2d 678, 698, 958 P.2d 273 (1998 (quoting Ralph
W. Johnson et al., The Public Trust Doctrine and Coastal Zone Management in Washington State,
67 Wash. L. Rev. 521, 524 (1992).
Through the aquatic lands statutes, the State granted sovereign powers to DNR for
protection of the State’s interest in the trust. Pope, 190 Wash. 2d at 755. As such, DNR is vested
with the discretionary, administrative responsibility to reject a bid to lease state lands as the
interests of the State or affected trust require. See RCW 79.105.020; RCW 79.02.280.
5
Article XVII, section 1 states “The state of Washington asserts its ownership to the beds and
shores of all navigable waters in the state up to and including the line of ordinary high tide, in
waters where the tide ebbs and flows, and up to and including the line of ordinary high water within
the banks of all navigable rivers and lakes.”
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NWA and Millennium argue that “[w]hen acting pursuant to a contract, an agency is
exercising an essentially judicial function.”6 Response to Appellants’ Opening Br. (Response Br.)
at 43. NWA and Millennium contend this is so because “[c]ontracts fix the parties’ obligations to
one another and eliminate the discretion inherent when an agency is exercising its regulatory
authority.” Response Br. at 44. It is undisputed that DNR is beholden to the terms of its lease
with NWA and that, pursuant to the lease, DNR could not unreasonably withhold its consent.
However, DNR cannot contract itself out of its statutorily mandated duty to exercise discretion in
furtherance of the public trust.
Nothing in the lease purports to extinguish DNR’s statutory authority to exercise its
discretion to approve a sublease, so long as it does not unreasonably withhold consent. Indeed,
RCW 79.105.210(4) states, “The power to lease state-owned aquatic lands is vested in the
department, which has the authority to make leases upon terms, conditions, and length of time in
conformance with the state Constitution and chapters 79.105 through 79.140 RCW.” (Emphasis
added).
It follows that the courts could not constitutionally make a sublease determination in the
first instance. Nor have courts historically managed aquatic lands held in public trust because that
is a function DNR performs. Here, DNR carefully reviewed NWA’s request for consent to
sublease and Millennium’s suitability as a potential sublessee for the sensitive property.
Determining whether Millennium had the financial soundness, environmental awareness, and
6
NWA cites Yaw, 106 Wash. 2d 408 in support of its argument. However, NWA overstates the
holding in Yaw. The Yaw opinion did not hold that all agency decisions involving a contract are
necessarily judicial actions. Yaw specifically dealt with a school board’s hiring decision in light
of a collective bargaining agreement.
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business reputation to meet the obligations of the lease of state-owned aquatic lands held in public
trust was a uniquely administrative decision left to DNR by virtue of the Washington State
Constitution and the aquatic lands statutes. See Malmo v. Case, 28 Wash. 2d 828, 836, 184 P.2d 40
(1947) (holding that the Commissioner of Public Land’s decision refusing to grant extensions for
contracts involving timber cutting was not arbitrary or capricious); see also State ex rel. Thompson
v. Babcock, 147 Mont. 46, 51, 409 P.2d 808 (1966) (noting, under similar Montana law, that
“[t]here is no doubt that the State Board of Land Commissioners has considerable discretionary
power when dealing with the disposition of an interest in land they hold in trust for the people of
this state”).
Accordingly, we hold that DNR’s decision to deny consent to sublease was an
administrative decision. We apply a de novo review of the agency record to determine if DNR’s
decision to deny consent to sublease was arbitrary and capricious.
B. DENIAL NOT ARBITRARY AND CAPRICIOUS
Applying a de novo review of the agency record, we hold that DNR’s decision to deny
consent to sublease was not arbitrary and capricious.
Agency action is arbitrary and capricious if it is willful, unreasoned, and taken without
regard to the attending facts or circumstances. Where there is room for two opinions, agency
action taken after due consideration is not arbitrary and capricious even if a reviewing court may
believe it to be erroneous. Hillis v. Dep’t of Ecology, 131 Wash. 2d 373, 383, 932 P.2d 139 (1997).
Deference will be given to the specialized knowledge and expertise of the administrative agency.
Schuh v. Dep’t of Ecology, 100 Wash. 2d 180, 187, 667 P.2d 64 (1983). The party who challenges
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an agency action under this standard carries a heavy burden. Pierce County Sheriff v. Civil Serv.
Comm’n, 98 Wash. 2d 690, 695, 658 P.2d 648 (1983).
Section 9 of the lease conditions NWA’s subletting of the aquatic lands on DNR’s written
approval. That approval cannot be unreasonably withheld. The lease expressly authorizes DNR
to consider, among other things, “the proposed transferee’s financial condition, business reputation
and experience, the nature of the proposed transferee’s business, the then-current value of the
[p]roperty, and such other factors as may reasonably bear upon the suitability of the transferee as
a tenant of the [p]roperty.” CP at 16890. Because DNR reasonably considered the factors
identified in the lease in light of attending facts and circumstances, its decision was not arbitrary
and capricious.
DNR’s careful consideration of Millennium’s financial condition and business reputation
was especially reasonable given the circumstances surrounding the potential sublease. At the time
DNR made its decision, coal market conditions were not promising, with U.S. coal production
dropping. DNR had concerns because of the recent shuttering of Wenatchee Works, the primary
importer of the alumina unloaded at the dock leased by NWA. Finally, additional financial
concerns existed after Millennium’s corporate parent, Ambre Energy, sold its interest in
Millennium, and Millennium’s other corporate parent, Arch Coal, filed bankruptcy.
DNR was also acutely aware of the damage a negligent subtenant could inflict on the
sensitive aquatic lands, given its recent negative experience with NWA’s prior subtenant, Chinook.
Millennium had intentionally misrepresented the scope of its plans for the property in 2011.
Millennium sought to build, operate, and maintain the largest coal export terminal on the west
coast. Such a project posed significant financial demands and high environmental risks if
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Millennium followed in the previous subtenant’s footsteps with lax oversight from NWA.
Accordingly, DNR had significant, well founded reasons for carefully considering the financial
condition and business reputation of Millennium before consenting to sublease.7
NWA and Millennium do not dispute that a landlord has an interest in a subtenant’s
financial condition. However, NWA and Millennium make several arguments in support of their
position that DNR’s denial of consent was unreasonable. First, they argue that because NWA
would remain liable under the lease for any default by Millennium, DNR was necessarily
unreasonable in denying consent. We reject this argument.
Section 9.1 of the lease expressly authorizes DNR to consider a potential subtenant’s
financial consideration in determining whether to grant consent. Accepting NWA’s argument
would mean rendering section 9.1 meaningless. And we must construe contract language in a
manner that gives effect to the words used and does not render the chosen language meaningless.
MacLean Townhomes, LLC v. Am. 1st Roofing & Builders, Inc., 133 Wash. App. 828, 831, 138 P.3d
155 (2006). Under NWA’s argument, DNR’s right to grant or deny consent to sublease would be
reduced to mere ritual because under section 9.1(c) of the lease NWA would always remain liable
under the lease in the event of a default by a subtenant.
7
Even if we applied the “reasonably prudent person” test, we would conclude that DNR’s decision
to deny consent to sublease was not unreasonable. In Washington, a lease term that prohibits a
landlord from “unreasonably” withholding consent requires a reviewing court to determine
“whether a reasonably prudent person in the landlord’s position would have refused consent.”
Ernst Home Ctr., Inc. v. Sato, 80 Wash. App. 473, 486, 910 P.2d 486 (1996); see also 224 Westlake,
LLC v. Engstrom Props., LLC, 169 Wash. App. 700, 721, 281 P.3d 693 (2012). Our analysis above
also would apply under this test. It was not unreasonable for DNR to withhold consent when NWA
refused to provide requested financial information, especially in light of DNR’s legal
responsibilities as manager of state-owned aquatic lands held in public trust.
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The fact that the tenant remains liable under the lease is less significant where, as here, a
subtenant’s actions have the potential to significantly impact sensitive public lands. As seen in the
situation with Chinook, the fact that NWA would remain liable for Millennium’s default under the
lease does not remove the risk of long-term damage to a sensitive public resource, which DNR has
been charged with managing in the public trust. NWA’s liability under the lease would not prevent
such damage.
Second, NWA and Millennium argue that DNR’s denial of consent was unreasonable
because the financial documents DNR requested were irrelevant. NWA and Millennium explain
that Millennium’s financial statements would “only have shown what DNR already knew,” namely
that Millennium had no positive revenues to cover its operating expenses and that it relied on
regular infusions of cash from its parent company. Response Br. at 28, 31. NWA and Millennium
further argue that the ground lease between NWA and Millennium had no relevancy to DNR
because DNR was not a party to that lease and Millennium’s obligations to NWA were otherwise
secured by a $10 million letter of credit.
But as noted above, the lease expressly stated that in considering whether to grant consent
to sublease, DNR could consider “the proposed transferee’s financial condition” as well as “such
other factors as may reasonably bear upon the suitability of the transferee as a tenant of the
[p]roperty.” CP at 16890. Therefore, the lease language supported DNR’s requests for
information.
In addition, the fact that Millennium’s financial statements would have confirmed DNR’s
suspicions that Millennium’s financial condition remained precarious does not render the financial
statements irrelevant. Millennium’s financial statements would have shown Millennium’s assets,
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liabilities, income, and cash flow, all of which were relevant, critical considerations in assessing
Millennium’s financial condition. Even if Millennium relied entirely on its parent company for
operating income, the financial statements would have shown DNR how much the parent company
was regularly investing and how Millennium used those investments. This information was
especially relevant given the disclosures in Arch Coal’s bankruptcy proceedings that its entire
ownership share in Millennium, which it valued at nearly $38 million at the time of bankruptcy,
would be eliminated within a matter of weeks.
Third, NWA and Millennium argue that, given what DNR already knew about Millennium,
DNR should have requested information on Millennium’s parent company’s financial condition.
But because Millennium’s parent company would have no legal obligation to DNR, its financial
condition was of little value in alleviating DNR’s concerns about Millennium’s ability to manage
its obligations, particularly in light of the recent restructuring of its corporate ownership following
Arch Coal’s bankruptcy and Ambre Energy’s sale of its ownership stake. And DNR’s requests for
information from Millennium were not so narrow as to preclude Millennium from providing
financial information it believed would be helpful to DNR in understanding Millennium’s financial
condition. Millennium knew what DNR’s concerns were; Millennium could have provided its
parent company’s information if it believed it would be helpful in answering DNR’s inquiry.
Instead, NWA refused to respond at all.
Fourth, NWA and Millennium suggest that DNR acted arbitrarily and capriciously by
considering Millennium’s earlier failure to disclose its long-term plans for the coal terminal in
determining whether to consent to sublease. They argue that DNR’s willingness to negotiate a
nearly-finalized sublease agreement with Millennium in 2015 undercuts DNR’s contention that
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No. 51677-2-II
Millennium’s failure to fully disclose its plans for the property was a contributing factor to its
ultimate decision to deny consent. But the lease expressly authorized DNR to consider
Millennium’s business reputation in considering whether to grant consent to sublease.
Further, DNR’s decision to not reject all consideration of a sublease agreement with
Millennium after Millennium’s deception came to light in 2011 did not prohibit DNR from
weighing that deception as it evaluated Millennium’s business reputation. Millennium’s history
remained part of the context in which DNR ultimately determined whether Millennium would be
a suitable subtenant for the aquatic lands. Thus, considering Millennium’s business reputation, as
expressly permitted by the lease, was not arbitrary and capricious.
In conclusion, DNR’s consideration of Millennium’s financial condition and business
reputation was expressly authorized under the lease. And the additional information DNR sought
from Millennium, which Millennium failed to provide, was relevant to DNR’s inquiry.
Accordingly, we conclude that DNR’s denial of consent to sublease was not arbitrary and
capricious.
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CONCLUSION
We reverse the superior court’s order concluding that DNR acted arbitrarily and
capriciously by denying NWA consent to sublease state-owned aquatic lands to Millennium, and
we vacate the superior court’s remedy order, and order the superior court to issue a new order
affirming DNR’s denial.
SUTTON, J.
We concur:
MAXA, C.J.
MELNICK, J.
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