San Diego, City of v. MM San Diego LLC et al

Filing 55

ORDER: The Motion for Declaratory Judgment filed by the City is denied. (Dkt # 42 ). Signed by Judge William Q. Hayes on 9/12/2017. (mdc)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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CITY OF SAN DIEGO,

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v.
MM SAN DIEGO, LLC,

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CASE NO. 16cv964-WQH-BGS
Plaintiff,

ORDER

Defendant.

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MM SAN DIEGO, LLC; NEO SAN
DIEGO LLC,

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v.

Counterclaimants,

CITY OF SAN DIEGO,
Counterdefendant.

20 HAYES, Judge:
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The matter before the Court is the Motion for Declaratory Judgment filed by
22 Plaintiff and Counterdefendant the City of San Diego. (ECF No. 42).
23 I. Background
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On March 1, 2016, the City of San Diego (“the City”) filed the Complaint in the
25 Superior Court of the County of San Diego alleging breach of contract causes of action
26 against MM San Diego, requesting declaratory relief, and demanding that MM San
27 Diego account for transactions for a certain period pursuant to two contracts between
28 the parties. (ECF No. 1). On April 21, 2016, MM San Diego removed the matter to this
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1 Court. Id.
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The allegations of the Complaint generally arise from a dispute related to

3 contracts between the parties governing MM San Diego’s sale of electricity to the City
4 for use at the North City Water Reclamation Plant and the Metropolitan Biosolids
5 Center.1 The City’s fifth cause of action for declaratory relief states in part: “Plaintiff
6 desires a judicial determination of its rights and duties and a declaration that plaintiff
7 is entitled to receive the benefits of the contract which include standby service from the
8 Utility Company for demand of 3500kW and is not required to reduce it[s] power
9 consumption from SDG&E when defendant’s power production has ceased.” Id. ¶ 84.
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On December 16, 2016, the Magistrate Judge issued an order bifurcating

11 discovery and setting a briefing schedule. (ECF No. 37). The Order states, “The parties
12 may continue to purse only discovery related to whether the City of San Diego was or
13 was not contractually obligated to reduce power usage at certain times under the
14 relevant contracts. The City will file its motion addressing this issue on or before
15 January 13, 2017.” Id. at 1.
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On January 12, 2017, the City filed a combined Motion for Declaratory Judgment

17 and Motion for Partial Summary Judgment. (ECF No. 42). On January 26, 2017, the
18 City filed a Notice of Withdrawal of City’s Motion for Partial Summary Judgment
19 pursuant to a joint stipulation between the parties but stated that the Motion for
20 Declaratory Judgment remains pending before the Court. (ECF No. 45). The City
21 moves for summary judgment2 on its fifth cause of action for declaratory relief and
22 seeks adjudication of three clauses in one of the contracts between the City and MM
23 San Diego. (ECF No. 42-1). The City contends that the language of the contract is
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Only the contract associated with the Metropolitan Biosolids Center is at issue
25 in this motion.
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The Court construes this motion for declaratory relief as a motion for partial
summary judgment on the fifth cause of action in the City’s complaint. See Kam-Ko
27 Bio-Pharm Trading Co. Ltd-Australasia v. Mayne Pharma (USA) Inc., 560 F.3d 935,
943 (9th Cir. 2009) (“The district court thus properly construed [the] ‘motion’ for
28 declaratory judgment as a motion for summary judgment on [the] ‘action’ for
declaratory judgment.”).
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1 unambiguous and entitles it to an order of this Court declaring that the contract does not
2 obligate the City to “reduce its power consumption from SDG&E when defendant’s
3 power production has ceased.” (ECF No. 1-2 at ¶ 84). MM San Diego contends that
4 the language of the contract is reasonably susceptible to an interpretation requiring the
5 the City to reduce electrical load when MM San Diego’s power consumption has ceased
6 and it is commercially reasonable for the City to reduce its electrical load. (ECF No.
7 48).
8 II. Legal Standard
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“A party may move for summary judgment, identifying each claim or defense–or

10 the part of each claim or defense–on which summary judgment is sought. The court
11 shall grant summary judgment if the movant shows that there is no genuine dispute as
12 to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R.
13 Civ. P. 56(a). A material fact is one that is relevant to an element of a claim or defense
14 and whose existence might affect the outcome of the suit. See Matsushita Elec. Indus.
15 Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). The materiality of a fact
16 is determined by the substantive law governing the claim or defense. See Anderson v.
17 Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Celotex Corp. v. Catrett, 477 U.S. 317,
18 322-24 (1986).
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The moving party has the initial burden of demonstrating that summary

20 judgment is proper. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 153 (1970).
21 “When the party moving for summary judgment would bear the burden of proof at trial,
22 ‘it must come forward with evidence which would entitle it to a directed verdict if the
23 evidence went uncontroverted at trial.’” C.A.R. Transp. Brokerage Co., Inc. v. Darden
24 Rests., Inc., 213 F.3d 474, 480 (9th Cir. 2000) (citing Houghton v. South, 965 F.2d
25 1532, 1536 (9th Cir.1992)). “In such a case, the moving party has the initial burden of
26 establishing the absence of a genuine issue of fact on each issue material to its case.”
27 Id. (citing Houghton, 965 F.2d at 1537). The burden then shifts to the opposing party
28 to provide admissible evidence beyond the pleadings to show that summary judgment
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1 is not appropriate. See Anderson, 477 U.S. at 256; Celotex, 477 U.S. at 322, 324. The
2 opposing party’s evidence is to be believed, and all justifiable inferences are to be
3 drawn in its favor. See Anderson, 477 U.S. at 255.
4 III. Facts
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MM San Diego operates facilities that provide electricity to the City for use at

6 two locations, the Metro Biosolids Center (“MBC”) and the North City Water
7 Reclamation Plant (“NCWRP”). Two separate agreements (the “Cogeneration
8 Agreements”) govern the supply of electrical services to each location. In this motion,
9 the City requests adjudication of only certain provisions of the Metropolitan Biosolids
10 Center Contract (the “MBC Contract”). The relevant section of the MBC Contract,
11 Section 9.3 provides:
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SECTION 9.3 SALE AND PURCHASE OF COGENERATION
FACILITY PRODUCTS AFTER BIOSOLIDS TREATMENT FACILITY
COMPLETION DATE. (A) Electricity. Commencing on the earlier to
occur of (i) the Biosolids Treatment Facility Completion Date or (ii)
October 1, 1998 (the “Take Date”), the Cogenerator shall supply to the
City electricity from the Facility, and the City shall purchase and receive
delivery of, electricity for use in the Biosolids Treatment Facility in an
amount equal to the Biosolids Treatment Facility Requirements. For
purposes of this Agreement, “Biosolids Treatment Facility Requirements”
means the Biosolids Treatment Facility demand for electricity in kilowatts
at any given time. The City shall meet the Biosolids Treatment Facility
Requirements first from any electricity made available from the
Cogeneration Facility, and shall use alternative sources of electricity only
to the extent that the Cogeneration Facility does not supply all of the
Biosolids Treatment Facility Requirements. After the Take Date until the
first anniversary of the Biosolids Treatment Facility Completion Date,
regardless of the actual level of such requirements, however, the City shall
take and pay for a minimum of 8,760,000 kWh per Contract Year. After
the first anniversary of the Take Date and through the term of this
Agreement, regardless of the actual level of such requirements, however
the City shall take and pay for a minimum of 24,000,000 kWh per
Contract Year; provided, however, the City shall not be required to pay for
such minimum amount to the extent such minimum amount is not
available for delivery by the Cogenerator. (In the event that the minimum
amount must be calculated for any period less than a full Contract Year,
the minimum amount specified in the preceding sentence shall be prorated
to the number of days in such period.) If the Cogenerator sells and
receives payment for electricity generated by the Cogeneration Facility to
the Utility Company or any other electricity purchaser during any Contract
Year as to which the City purchases less kilowatt hours of electricity than
such minimum so required to be purchased by the City, then the City shall
remain responsible to the Cogenerator for the electricity required to be
purchased by the City in an amount equal to the difference, if any,
between the price for such electricity actually received by the Cogenerator
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and such higher amount which the Cogenerator would have been entitled
to receive from the City under the terms of this Agreement.
(B) Obligation of Cogenerator to Pay Shortfall Damages in Certain
Circumstances.
Subject to the occurrence of Uncontrollable
Circumstances, if the Cogenerator fails to provide the Biosolids Treatment
Facility Requirements at any time, the City shall obtain electricity from
other sources (“Alternative Suppliers”) in an amount equal to the shortfall
in provision by the Cogenerator of the Biosolids Treatment Facility
Requirements (a “Shortfall Amount”). (Failure to deliver the Biosolids
Treatment Facility Requirements shall not constitute a breach hereunder
as long as the Cogenerator pays the amounts specified below.) The City
shall use commercially reasonable efforts to obtain any Shortfall Amount
from Alternative Suppliers at the lowest available total cost, and in a
manner which minimizes any demand or service charges (to the extent
practicable). If the Cogenerator fails to provide the Biosolids Treatment
Facility Requirements due to Uncontrollable Circumstances, then the
Cogenerator shall not be obligated to reimburse the City for the cost of
supplying any Shortfall Amount. If the Cogenerator fails to provide such
electricity for any reason other than Uncontrollable Circumstances, then
the City’s costs of supplying Shortfall Amounts from Alternative
Suppliers in any Contract Year which are in excess of the amount that the
City would have paid the Cogenerator for such electricity had such
electricity been supplied by the Cogenerator shall be reimbursed to the
City by the Cogenerator; provided, however, that the Cogenerator shall not
be responsible for reimbursement of any excess costs of the City to the
extent such costs are attributable to the Biosolids Treatment Facility
Requirements exceeding 3600 kilowatts at any time. The obligations of
the Cogenerator pursuant to this Section shall be in addition to, and not in
substitution for the Cogenerator’s obligations to supply emergency power
upon Utility Company unavailability as specified in Section 9.3(B).
(C) Standby Service. Subject to Section 11.2 hereof, the Cogenerator shall
obtain from the Utility Company and pay for standby electrical service for
demand of 3500 kW for the benefit of the City. If for any period during
the term of this Agreement the City is obligated to pay a supplemental
demand charge to the Utility Company by reason of an unexcused failure
of the Cogenerator to supply electric power pursuant to the terms hereof,
the Cogenerator shall pay to the City or shall deduct from any invoice or
invoices payable by the City, an amount equal to the aggregate of such
demand charges up to 3500 kW. In the event that the practices or tariffs
of the Utility Company require the City to be the contract party in any
arrangements for standby electrical service pursuant to this Section, the
Cogenerator shall reimburse the City for any costs of such standby
electrical service for which the Cogenerator would otherwise be
responsible pursuant to this Section. The City, or its contractor designated
to operate the City’s facilities, shall at its expense maintain standby Hot
Water and Chilled Water service with a minimum capacity to meet its
needs during periods when the Cogeneration Facility is partially or
entirely shut down.3

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On February 1, 2011, the parties agreed to the Amendments to the Cogeneration
28 Agreements. (ECF No. 48-3 at 7). MM San Diego contends that the sections of the
agreements relevant to this matter were “not amended in any manner whatsoever in
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1 (ECF Nos. 42-9 at 2-4; 48-2 at 6-8).
2 III. Contentions of the Parties
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The City contends the plain language of Sections 9.3(A), 9.3(B), and 9.3(C) of

4 the MBC Contract provides that the City is not obligated to reduce its electrical demand
5 at times when MM San Diego does not produce sufficient energy and the City obtains
6 the Shortfall Amount from alternative suppliers. (ECF No. 42-1 at 12). The City
7 contends that at the time of contract, the “mutual understanding” between the parties
8 was that the MBC Contract required the City to obtain any Shortfall Amount “at the
9 lowest total cost (including commodity and demand charges)” but did not require the
10 City to reduce any electrical demand in order to reduce the total cost. Id. at 21; see also
11 ECF No. 49 at 5. The City contends that its interpretation of the MBC Contract is
12 consistent with contract principles involving the sale of goods on a requirements
13 contract. (ECF No. 42-1 at 14-16). The City contends that the MBC Contract is an
14 integrated contract unambiguous in its terms and that extrinsic evidence is
15 impermissible to interpret the meaning of the contract. (ECF No. 49 at 6-7). Further,
16 the City contends that MM San Diego’s interpretation is inconsistent with the plain
17 meaning of the MBC Contract as a whole. The City contends that MM San Diego’s
18 interpretation impermissibly “redefine[s] the meaning of ‘Biosolids Treatment Facility
19 Requirements’ to mean something else at times when Defendant’s generators are not
20 meeting the actual Biosolids Treatment Facility’s demand for electricity in kilowatts
21 at any given time.” (ECF No. 42 at 14-13).
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MM San Diego contends that the language “commercially reasonable efforts” and

23 “in a manner which minimizes demand and other charges” in Section 9.3(B) can be
24 reasonably interpreted to include an obligation to reduce electrical load during MM San
25 Diego outages at times when the reduction is commercially reasonable. (ECF No. 48
26 at 12-13). MM San Diego contends that extrinsic evidence is admissible to aid in the
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28 2011.” (ECF No. 48 at 7-8). The City “agrees that the 2011 Amendments did not
modify Section 9.3.” (ECF No. 49 at 9).
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1 interpretation of the MBC Contract and raises questions of fact improper for resolution
2 on summary judgment.

Id.

MM San Diego contends that extrinsic evidence

3 demonstrates that “‘commercially reasonable efforts’ to ‘minimize’ demand and other
4 charges can be interpreted to include reducing electrical load during MMSD outages,
5 and summary judgment is therefore improper.” Id. at 13. MM San Diego contends that
6 reducing electrical load during MM San Diego outages is a commercially reasonable
7 manner to minimize demand charges. Id. at 20. MM San Diego contends that a
8 determination of what constitutes “commercially reasonable efforts” is a factual
9 question improper for resolution on summary judgment. Id. at 13.
10 IV. Applicable Law
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“Under California law, ‘[t]he fundamental goal of contract interpretation is to

12 give effect to the mutual intent of the parties as it existed at the time of contracting.’”
13 Skilstaf, Inc., v. CVS Caremark Corp., 669 F.3d 1005, 1014-15 (9th Cir. 2012) (citing
14 Miller v. Glenn Miller Prods., 454 F.3d 975, 989 (9th Cir. 2006) (per curiam)).
15 “Under California law, ‘[t]he language of a contract is to govern its interpretation, if the
16 language is clear and explicit, and does not involve an absurdity.’” F.B.T. Prods., LLC
17 v. Aftermath Records, 621 F.3d 958, 963 (9th Cir. 2010) (citing Cal. Civ. Code § 1638).
18 “When a contract is reduced to writing, the parties’ intention is determined from the
19 writing alone, if possible.” Cedars-Sinai Med. Ctr. v. Shewry, 41 Cal. Rptr. 3d 48, 60
20 (Ct. App. 2006) (citing Founding Members of the Newport Beach Country Club v.
21 Newport Beach Country Club, Inc., 135 Cal. Rptr. 2d 505 (Ct. App. 2003)).
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“Because California law recognizes that the words of a written instrument often

23 lack a clear meaning apart from the context in which the words were written, courts
24 may preliminarily consider any extrinsic evidence offered by the parties.” Miller, 454
25 F.3d at 989-90. To interpret a contract, courts follow a two-step analysis:
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First, the court provisionally receives (without actually admitting) all
credible evidence concerning the parties’ intentions to determine
“ambiguity,” i.e., whether the language is “reasonably susceptible” to the
interpretation urged by a party. If in light of the extrinsic evidence, the
court decides the language is “reasonably susceptible” to the interpretation
urged, the extrinsic evidence is then admitted to aid in the second step –
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interpreting the contract.
F.B.T., 621 F.3d at 963 (quoting Winet v. Price, 6 Cal. Rptr. 2d 554, 557 (Ct. App.

3 1992)). “The initial question whether a contract is ambiguous is . . . one of law.”
4 Niederer v. Ferreira, 234 Cal. Rptr. 779, 787 (Ct. App. 1987). “If, after considering the
5 language of the contract and any admissible extrinsic evidence, the meaning of the
6 contract is unambiguous a court may properly interpret it on a motion for summary
7 judgment.” Miller, 454 F.3d at 990.
8 V. Discussion
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In order for the City to prevail on summary judgment, the City must show that

10 no reasonable interpretation of the MBC Contract obligates the City to “reduce it[s]
11 power consumption from SDG&E when defendant’s power production has ceased.”
12 (ECF No. 1 ¶ 84).
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Section 9.3(A) of the MBC Contract provides in part that

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the Cogenerator shall supply to the City electricity from the Facility, and
the City shall purchase and receive delivery of, electricity for use in the
Biosolids Treatment Facility in an amount equal to the Biosolids
Treatment Facility Requirements. For purposes of this Agreement,
“Biosolids Treatment Facility Requirements” means the Biosolids
Treatment Facility demand for electricity in kilowatts at any given time.

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(ECF No 42-9 at 3; ECF No. 48-2 at 7). Section 9.3(B) defines the term “Shortfall
Amount” as the “amount equal to the shortfall in provision by the Cogenerator of the
Biosolids Treatment Facility Requirements.” (ECF No 42-9 at 3; ECF No. 48-2 at 7).
Section 9.3(B) of the MBC Contract further provides, “The City shall use commercially
reasonable efforts to obtain any Shortfall Amount from Alternative Suppliers at the
lowest available total cost, and in a manner which minimizes any demand or service
charges (to the extent practicable).” (ECF No 42-9 at 3; ECF No. 48-2 at 7).
The language in Section 9.3(B) requires the City to use “commercially reasonable
efforts” to obtain the Shortfall Amount at the lowest total available cost and in a manner
which minimizes demand charges. Demand charges can be minimized through a

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1 reduction in electrical load.4 The Court concludes that this language in Section 9.3(B)
2 of the MBC Contract is reasonably susceptible to MM San Diego’s interpretation that
3 the MBC Contract obligates the City to reduce power consumption at times when the
4 City obtains the Shortfall Amount from an alternative supplier and a reduction in power
5 consumption is commercially reasonable. See Cedars-Sinai Med. Ctr., 41 Cal. Rptr. 3d
6 at 60 (“Whether the contract is reasonably susceptible to a party’s interpretation can be
7 determined from the language of the contract itself or from extrinsic evidence of the
8 parties’ intent.”). Accordingly, the Court cannot conclude as a matter of law that the
9 language of the MBC Contract provides that the City “is not required to reduce it[s]
10 power consumption from SDG&E when defendant’s power production has ceased.”
11 (ECF No. 1 ¶ 84). Viewed in the light most favorable to the nonmoving party, the City
12 has not satisfied its burden of establishing that partial summary judgment on its fifth
13 cause of action for declaratory relief is proper.
14 VI. Conclusion
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IT IS HEREBY ORDERED that the Motion for Declaratory Judgment filed by

16 the City is DENIED. (ECF No. 42).
17 DATED: September 12, 2017
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WILLIAM Q. HAYES
United States District Judge

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At oral argument, the City agreed that one way to minimize demand charges is
to reduce electrical demand.
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