PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees identified herein and should not be disclosed, distributed, or reproduced without the prior written consent of Calderwood & Harkness LLP. Inadvertent disclosure does not constitute a waiver of any privilege or protection.
MEMORANDUM
TO: David Tanaka, General Counsel, Cascadia State Infrastructure Authority Margaret Ellsworth, Executive Director, Cascadia State Infrastructure Authority
FROM: Tiffany Rosenthal, Lead Associate, Calderwood & Harkness LLP Andrew Fitzpatrick, Working Associate, Calderwood & Harkness LLP
REVIEWED BY: Oliver Mackenzie, Responsible Partner, Calderwood & Harkness LLP
DATE: June 20, 2023
RE: Assessment of Available Default Remedies Under §8.2 of the Amended and Restated Limited Liability Company Agreement of Columbia Basin Water Treatment Partners, LLC — Pinnacle Water Solutions, LLC Funding Default
MATTER NO.: 47291.00001
OFFICE: Calderwood & Harkness LLP, 901 Fifth Avenue, Suite 3200, Seattle, WA 98164
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I. Executive Summary
This memorandum has been prepared at the request of the Cascadia State Infrastructure Authority ("CSIA") following the expiration on June 13, 2023, of the sixty (60)-day cure period afforded to Pinnacle Water Solutions, LLC ("Pinnacle") under Section 8.2 of the Amended and Restated Limited Liability Company Agreement of Columbia Basin Water Treatment Partners, LLC, dated as of November 2, 2021 (the "JV Agreement"). The purpose of this memorandum is to provide CSIA with a comprehensive analysis of the three default remedies now available under §8.2, together with a preliminary strategic recommendation as to the course of action that best serves CSIA's interests in light of the current circumstances.
Summary of Default. Pinnacle failed to fund its Second Tranche capital contribution of Four Million Fifty Thousand Dollars ($4,050,000) by the March 31, 2023 deadline established by the JV Agreement. On April 14, 2023, Calderwood & Harkness LLP, acting on behalf of CSIA, delivered a formal default notice to Pinnacle in accordance with §8.2. The sixty (60)-day cure period commenced upon delivery of that notice and expired on June 13, 2023. As of the date of this memorandum, Pinnacle has neither funded its Second Tranche capital contribution nor otherwise cured the default. Pinnacle's sole substantive response was a letter dated April 28, 2023, from its outside counsel, Whitfield, Aarons & Greer LLP, asserting a force majeure defense under §11.4 of the JV Agreement—a defense that Calderwood & Harkness LLP rejected in its May 12, 2023 response letter, and which we believe lacks merit for the reasons set forth therein and in our separate research memorandum dated May 8, 2023.
Available Remedies. With the cure period having expired without cure, CSIA is now entitled to elect one of three remedies under §8.2:
(i) Pro Rata Dilution. Dilute Pinnacle's forty-five percent (45%) membership interest on a pro rata basis to reflect the unfunded capital contribution, thereby increasing CSIA's percentage interest from fifty-five percent (55%) to approximately seventy and ninety-seven hundredths percent (70.97%).
(ii) Purchase at 75% of Fair Market Value. Purchase Pinnacle's entire membership interest in Columbia Basin Water Treatment Partners, LLC ("CBWTP") at a price equal to seventy-five percent (75%) of the fair market value of such interest, enabling CSIA to become the sole member of CBWTP.
(iii) Dissolution Election. Elect to dissolve CBWTP, triggering a wind-down process including liquidation of assets, payment of liabilities, and distribution of remaining proceeds to the members.
Preliminary Recommendation. After careful review of the contractual provisions, the current financial and operational status of CBWTP, and the broader strategic considerations affecting CSIA's infrastructure mandate, we recommend the following preliminary course of action:
• CSIA should defer exercising the dissolution remedy at this time. Dissolution is irreversible and should be reserved as a measure of last resort pending full evaluation of the alternatives.
• CSIA should evaluate remedies (i) and (ii) in conjunction with the §9.1 buy-sell (shotgun) provision of the JV Agreement, which becomes exercisable on November 2, 2023—the second anniversary of CBWTP's formation. The interplay between the §8.2 default buyout (at a 25% discount to fair market value) and the §9.1 shotgun mechanism presents a significant strategic opportunity that merits detailed analysis prior to any remedy election.
• CSIA should take immediate steps to preserve its position, including (a) sending a formal letter to Pinnacle confirming the expiration of the cure period and reserving all rights under §8.2, (b) engaging Pacific Cascade Bank, N.A. ("PCB") regarding the potential extension or reissuance of its $27,000,000 project finance commitment letter (Ref. PCB-PF-2022-0417), which expires on August 15, 2023, and (c) requesting updated interim financial statements from Hargrove & Tillman, CPAs.
• CSIA should monitor and assess the status of the Phase II Environmental Impact Determination at the Thurston County Department of Environmental Health, which has been stalled since July 8, 2022, and which continues to affect the viability and timeline of the Thurston County Advanced Water Treatment Facility.
The balance of this memorandum sets forth the factual background, applicable contractual provisions, detailed analysis of each remedy, and our recommended course of action. We note that this memorandum does not constitute a comprehensive analysis of the §9.1 buy-sell provision; a separate memorandum addressing that provision is planned for preparation in advance of the November 2, 2023 exercisability date.
II. Background and Procedural History
A. Formation of the Joint Venture
Columbia Basin Water Treatment Partners, LLC ("CBWTP") was organized on November 2, 2021, as a Washington limited liability company, duly registered with the Office of the Washington Secretary of State under UBI Number 604-892-315 and assigned Employer Identification Number 88-3421076 by the Internal Revenue Service. CBWTP was formed pursuant to the Amended and Restated Limited Liability Company Agreement dated as of November 2, 2021 (the "JV Agreement"), entered into by and between CSIA and Pinnacle as the sole members.
The stated purpose of CBWTP, as set forth in §2.4 of the JV Agreement, is the design, construction, ownership, and operation of the Thurston County Advanced Water Treatment Facility (the "Facility"), an advanced water treatment plant with a designed capacity of twelve million gallons per day (12 MGD). The Facility is to be constructed on a 14.7-acre parcel located at 2480 Capitol Boulevard SE, Tumwater, Thurston County, Washington 98501. The total estimated project cost, inclusive of both equity and debt components, is Forty-Five Million Dollars ($45,000,000).
The ownership interests in CBWTP are divided between the two members as follows:
• CSIA: Fifty-five percent (55%) membership interest.
• Pinnacle: Forty-five percent (45%) membership interest.
CSIA is a Washington state governmental authority created pursuant to Chapter 43.155A of the Revised Code of Washington, with its principal offices located at 1100 Jefferson Street SE, Suite 400, Olympia, Washington 98501. CSIA's statutory mandate encompasses the development, financing, and management of critical public infrastructure throughout the State of Washington.
Pinnacle Water Solutions, LLC is a Delaware limited liability company (Delaware Division of Corporations File No. 5847231; EIN 47-2918534), with its principal offices located at 720 SW Quelston Street, Suite 1500, Portland, Oregon 97205. Pinnacle specializes in the design, engineering, and operation of municipal and industrial water treatment facilities and was selected as CSIA's private-sector partner through a competitive procurement process conducted in 2020–2021. Pinnacle's equity is held in significant part by Ridgeline Capital Partners, LP, a Delaware limited partnership private equity fund managed by its Managing Partner, Jonathan Kreider. Ridgeline Capital Partners acquired approximately sixty-two percent (62%) of Pinnacle's equity interests in 2019 in a transaction valued at approximately Ninety-Five Million Dollars ($95,000,000). Ridgeline's investment in Pinnacle is relevant to the strategic analysis in this memorandum because it suggests that Pinnacle's failure to fund its capital contribution is more likely a strategic decision than a reflection of financial incapacity.
B. Capital Structure
The total capital structure for the Facility, as contemplated by the JV Agreement and the associated financing arrangements, consists of the following sources:
The equity component of Eighteen Million Dollars ($18,000,000) is allocated between the members in proportion to their respective percentage interests:
The debt component of Twenty-Seven Million Dollars ($27,000,000) is to be provided by Pacific Cascade Bank, N.A. ("PCB"), pursuant to a commitment letter dated February 15, 2022 (Reference No. PCB-PF-2022-0417), which contemplates an eighteen (18)-month project finance credit facility. The lead banker responsible for the CBWTP relationship at PCB is Thomas Rennick, Senior Vice President, Public Finance Division. PCB is headquartered at 600 University Street, Suite 800, Seattle, Washington 98101. As discussed in greater detail below, the PCB commitment letter expires on August 15, 2023, and no drawdowns have been made to date.
The JV Agreement provides for a two-tranche equity funding structure under which each member is required to contribute fifty percent (50%) of its total equity commitment in each tranche. The timing and mechanics of the capital call process are governed by §8.1 of the JV Agreement.
C. Capital Contributions and Funding History
The capital contributions made (and required) by each member are summarized as follows:
First Tranche (Funded November 15, 2021):
Both members timely funded their First Tranche capital contributions on November 15, 2021, the date specified by the Governing Board in the initial capital call notice.
Second Tranche (Capital Call Issued March 1, 2023):
On March 1, 2023, the Governing Board of CBWTP issued a capital call for the Second Tranche of equity funding, requiring each member to contribute the remaining fifty percent (50%) of its total equity commitment within thirty (30) calendar days of the notice, consistent with the requirements of §8.1 of the JV Agreement. The deadline for funding was therefore March 31, 2023.
CSIA timely funded its Second Tranche contribution of Four Million Nine Hundred Fifty Thousand Dollars ($4,950,000) on March 28, 2023, three days ahead of the deadline. CSIA is now fully funded at its total equity commitment of Nine Million Nine Hundred Thousand Dollars ($9,900,000).
Pinnacle did not fund its Second Tranche contribution of Four Million Fifty Thousand Dollars ($4,050,000) by the March 31, 2023 deadline. As of the date of this memorandum, Pinnacle has funded only its First Tranche contribution of Four Million Fifty Thousand Dollars ($4,050,000) of its total commitment of Eight Million One Hundred Thousand Dollars ($8,100,000). The outstanding default amount is Four Million Fifty Thousand Dollars ($4,050,000).
D. Default Notice and Cure Period
Following Pinnacle's failure to fund its Second Tranche capital contribution by the March 31, 2023 deadline, Calderwood & Harkness LLP, acting on behalf of CSIA, delivered a formal default notice (the "Default Notice") to Pinnacle on April 14, 2023. The Default Notice was addressed to Richard Prumvane, Chief Executive Officer of Pinnacle, at Pinnacle's principal office address, with copies transmitted simultaneously to Elaine Prescott, Lead Partner, Whitfield, Aarons & Greer LLP, at 1455 SW Broadway, Suite 2100, Portland, Oregon 97201, as Pinnacle's designated outside counsel for purposes of the JV Agreement.
The Default Notice identified Pinnacle's failure to fund the Second Tranche capital call as a default under §8.2 of the JV Agreement and notified Pinnacle that, pursuant to §8.2, Pinnacle had sixty (60) days from the date of the Default Notice—i.e., until June 13, 2023—to cure the default by funding the full amount of the Second Tranche capital contribution.
On April 28, 2023, Whitfield, Aarons & Greer LLP, on behalf of Pinnacle, transmitted a response letter to Calderwood & Harkness LLP (the "Pinnacle Force Majeure Letter"). In that letter, Pinnacle asserted a defense under §11.4 of the JV Agreement (Force Majeure), contending that the stalled Phase II Environmental Impact Determination at the Thurston County Department of Environmental Health constituted a Force Majeure Event that excused Pinnacle's obligation to fund the Second Tranche capital call. Pinnacle further asserted that CSIA bore responsibility for securing the necessary governmental approvals and that the capital call was premature given the dormant status of the project.
Calderwood & Harkness LLP responded on May 12, 2023, on behalf of CSIA, rejecting Pinnacle's force majeure defense in its entirety. Our response made the following principal points:
(a) Section 11.4 of the JV Agreement expressly excludes "delays in obtaining governmental approvals" from the definition of Force Majeure Events. The stalled Phase II Environmental Impact Determination is precisely the type of regulatory delay that the parties agreed would not constitute force majeure.
(b) Pinnacle, as the designated Manager of CBWTP under §4.2 of the JV Agreement, bore day-to-day operational responsibility for advancing the permitting process under §4.3. To the extent there was a failure to diligently pursue governmental approvals, that failure is attributable to Pinnacle itself.
(c) Pinnacle's obligation to fund capital calls under §8.1 is independent and unconditional. The capital call was properly issued by the Governing Board in accordance with the JV Agreement, and the obligation to fund is not conditioned upon the status of any particular project milestone, permit, or governmental approval.
These arguments are supported by the detailed analysis set forth in a separate research memorandum prepared by Tiffany Rosenthal and Andrew Fitzpatrick, dated May 8, 2023, which examined Washington law on force majeure provisions in LLC operating agreements and concluded that Pinnacle's defense is without merit.
The sixty (60)-day cure period expired on June 13, 2023. As of the date of this memorandum, Pinnacle has not funded its Second Tranche capital contribution of $4,050,000 and has not otherwise cured the default. The three remedies under §8.2 of the JV Agreement are now available for CSIA's exercise.
E. Current Status of the Project and JV Entity
The Thurston County Advanced Water Treatment Facility project has been effectively dormant since mid-2022. The principal factors contributing to this dormancy are as follows:
(a) Stalled Phase II Environmental Impact Determination. The Phase II Environmental Impact Determination process at the Thurston County Department of Environmental Health has been paused since July 8, 2022. The Environmental Review Division Manager responsible for the determination is Karen Lindstrom. Despite the completion of a Phase I Environmental Site Assessment on April 22, 2022, which identified no recognized environmental conditions, the Phase II review process was suspended due to questions raised regarding the interaction of the proposed facility's discharge with existing stormwater management infrastructure in the Capitol Boulevard SE corridor. No formal timeline for resumption has been communicated by Thurston County.
(b) Pinnacle's Deferral of Project Expenditures. On September 14, 2022, Pinnacle transmitted a notice to CBWTP's Governing Board stating that it would "defer further project expenditures" pending resolution of the permitting issues. This unilateral decision by Pinnacle, in its capacity as Manager, effectively halted all pre-construction activities, including engineering design work, contractor procurement, and community engagement.
(c) Failed Governing Board Meeting. A Governing Board meeting scheduled for November 30, 2022, failed to achieve a quorum because both Pinnacle-appointed members (Richard Prumvane and Cynthia Voss) declined to attend. The meeting had been called by CSIA-appointed members to discuss the project timeline and the status of the environmental permitting process. The failure to achieve a quorum has persisted, as no subsequent Board meeting has been convened as of the date of this memorandum.
(d) Unfunded Capital Call. As described above, Pinnacle's failure to fund its Second Tranche capital contribution of $4,050,000 has left CBWTP without the equity capital necessary to satisfy conditions precedent to drawdown under the PCB credit facility.
PCB Commitment Letter. The $27,000,000 commitment letter from Pacific Cascade Bank, N.A. (Ref. PCB-PF-2022-0417) expires on August 15, 2023. No drawdowns have been made under the commitment. The commitment letter contains standard conditions precedent to initial funding, including full equity funding by both members, evidence of all required governmental approvals, and delivery of an environmental compliance certificate. None of these conditions have been satisfied. The impending expiration of this commitment letter is a material consideration in CSIA's strategic planning.
Ground Lease. CBWTP occupies the Facility site at 2480 Capitol Boulevard SE, Tumwater, pursuant to a ninety-nine (99)-year ground lease from CSIA to CBWTP (the "Ground Lease"), recorded with the Thurston County Auditor as Recording No. 2021-1102-004788. The Ground Lease provides for nominal annual rent of One Dollar ($1.00) and contains a reversion clause under which the leasehold interest reverts to CSIA upon dissolution or termination of CBWTP. This reversion provision is a significant asset protection feature that benefits CSIA in any dissolution scenario.
Governing Board Composition and Governance. The Governing Board of CBWTP consists of five (5) members, allocated between the two JV members as follows:
• CSIA-appointed members (3): Margaret Ellsworth (Executive Director, CSIA), David Tanaka (General Counsel, CSIA), and Patricia Huang (Deputy Director, Capital Programs, CSIA).
• Pinnacle-appointed members (2): Richard Prumvane (CEO, Pinnacle) and Cynthia Voss (VP, Project Development, Pinnacle).
Under §5.3 of the JV Agreement, major decisions—including, without limitation, commencement of construction, incurrence of indebtedness, admission of new members, dissolution, and sale of all or substantially all of CBWTP's assets—require a supermajority vote of four (4) of five (5) Governing Board members. This supermajority requirement effectively gives Pinnacle blocking power over all major decisions, because at least one Pinnacle-appointed member must concur for any such action to be approved.
Manager. Pinnacle serves as the Manager of CBWTP under §4.2 of the JV Agreement, with responsibility for day-to-day operations, including management of the design and construction process, engagement of contractors and consultants, and advancement of permitting activities. Under §4.2(c), Pinnacle is entitled to a management fee equal to three percent (3%) of total construction costs, calculated as $45,000,000 × 3% = $1,350,000. This fee has not yet been earned or paid, as construction has not commenced.
Environmental Consultant. Westmark Environmental Consulting, Inc. (principal: Dr. Anita Farooq, PhD, PE) was retained by CBWTP on January 10, 2022, to provide environmental assessment and permitting support for the Facility. Westmark completed a Phase I Environmental Site Assessment on April 22, 2022, which identified no recognized environmental conditions on the project site. Westmark's engagement remains active, and prepaid fees of approximately $385,000 are reflected on CBWTP's balance sheet as of June 30, 2023.
Accountants. Hargrove & Tillman, CPAs, serves as CBWTP's independent accountants. The engagement partner is Laura Svensson, CPA. Hargrove & Tillman prepared CBWTP's financial statements for the fiscal year ending December 31, 2022, and is expected to prepare interim financial statements as needed for valuation and other purposes.
F. CBWTP Financial Position (as of June 30, 2023)
Based on preliminary financial data available from Hargrove & Tillman, CPAs, the financial position of CBWTP as of June 30, 2023, is summarized as follows:
Assets:
Liabilities:
Members' Equity:
Reconciliation:
Total Assets ($9,847,000) minus Total Liabilities ($214,000) equals Net Members' Equity ($9,633,000).
The cumulative expenses of approximately $4,317,000 represent organizational costs, legal fees, environmental consulting fees, management and administrative costs, and other pre-development expenditures incurred since CBWTP's formation. These expenses have been allocated between the members' capital accounts in accordance with the provisions of the JV Agreement governing allocation of losses and expenses.
We note that the cash balance of $8,412,000 represents the substantial majority of CBWTP's assets and reflects the fact that the project has not progressed to the construction phase where significant expenditures would be expected. The preservation of this cash balance is advantageous to CSIA in any dissolution or buyout scenario, as it ensures that the JV entity's value is readily liquid.
III. Applicable Contractual Provisions
This section identifies and discusses the key provisions of the JV Agreement relevant to CSIA's remedy election. The full text of the cited provisions is reproduced in Appendices B and E.
A. Section 8.2 — Default Remedies
Section 8.2 of the JV Agreement establishes the framework for remedying a member's failure to fund a capital call. The key elements of §8.2 are as follows:
Triggering Event. A default under §8.2 is triggered when a member fails to fund a capital contribution within thirty (30) calendar days of the date on which notice of the capital call is delivered in accordance with §8.1. Here, the Second Tranche capital call was issued on March 1, 2023, and Pinnacle's obligation to fund matured on March 31, 2023. Pinnacle failed to fund by that date, thereby triggering §8.2.
Cure Period. Upon the occurrence of a funding default, the non-defaulting member may deliver a written default notice to the defaulting member. The defaulting member then has sixty (60) days from the date of such notice to cure the default by funding the full amount of the delinquent capital contribution. Here, Calderwood & Harkness LLP delivered the Default Notice on April 14, 2023. The sixty-day cure period expired on June 13, 2023, without cure.
Available Remedies. Upon expiration of the cure period without cure, the non-defaulting member is entitled to elect one of the following three remedies:
(i) Pro Rata Dilution. The non-defaulting member may dilute the defaulting member's percentage interest on a pro rata basis calculated by reference to the unfunded capital contribution amount relative to total funded capital. The practical effect is that the defaulting member's percentage interest is reduced to reflect its actual proportionate capital contribution, while the non-defaulting member's interest is correspondingly increased.
(ii) Purchase at 75% of Fair Market Value. The non-defaulting member may elect to purchase the defaulting member's entire interest in the JV entity at a price equal to seventy-five percent (75%) of the fair market value of such interest as of the date of the remedy election. This provision functions as a penalty buyout, discounting the purchase price by twenty-five percent (25%) to compensate the non-defaulting member for the consequences of the default.
(iii) Dissolution Election. The non-defaulting member may elect to dissolve the JV entity. This remedy is available as a unilateral election—i.e., it does not require Governing Board approval or the consent of the defaulting member—and overrides the supermajority voting requirement that would otherwise apply to a voluntary dissolution under §10.1.
Alternative, Not Cumulative. The three remedies under §8.2 are stated as alternatives. The non-defaulting member must elect one remedy; the remedies are not cumulative. However, as discussed in Section VII below, we believe that the §8.2 remedies and the §9.1 buy-sell provision operate on separate contractual tracks, and the exercise of one does not necessarily foreclose the other.
No Time Limitation. Importantly, §8.2 does not impose a deadline by which the non-defaulting member must elect its chosen remedy. Once the cure period has expired without cure, the remedies remain available for exercise at any time thereafter, unless the defaulting member subsequently cures the default or the parties otherwise reach a resolution. This flexibility is a significant strategic advantage for CSIA, as it allows CSIA to defer its election while evaluating the full range of options, including the §9.1 buy-sell provision that becomes exercisable on November 2, 2023.
B. Section 4.3 — Permitting Responsibilities
Section 4.3 of the JV Agreement allocates permitting responsibility for the Facility to the JV entity itself—i.e., to CBWTP—rather than to either member individually. However, §4.3 must be read in conjunction with §4.2, which designates Pinnacle as the Manager of CBWTP and charges the Manager with day-to-day operational responsibility for advancing the project, including the pursuit of governmental approvals and permits.
This allocation of responsibility is directly relevant to Pinnacle's assertion, made in its April 28, 2023 letter, that CSIA bore responsibility for securing the Phase II Environmental Impact Determination and that the failure to obtain this approval is attributable to CSIA. We disagree with that characterization. While CBWTP as an entity bears the formal permitting obligation, Pinnacle, as Manager, was responsible for managing and advancing the permitting process on CBWTP's behalf. To the extent that the Phase II review process has stalled, Pinnacle's own decision to "defer further project expenditures" as of September 14, 2022 is a contributing factor. Pinnacle cannot rely on its own failure to fulfill its managerial duties as a basis for excusing its separate and independent obligation to fund capital calls.
C. Section 9.1 — Buy-Sell (Shotgun) Provision
Section 9.1 of the JV Agreement contains a buy-sell provision commonly referred to as a "shotgun" or "Russian roulette" clause. Under §9.1, either member may, at any time after the second anniversary of the date of formation of CBWTP (i.e., after November 2, 2023), trigger the shotgun mechanism by delivering a written notice to the other member specifying a price at which the initiating member offers to purchase the other member's interest or, alternatively, to sell its own interest to the other member at the same price.
The shotgun provision is designed to provide a market-based exit mechanism. The receiving member must elect either to sell its interest at the stated price or to purchase the initiating member's interest at the same price. This "put-up-or-shut-up" mechanism incentivizes fair pricing, because the initiating member cannot set an artificially low price without risking that the other member will elect to purchase the initiating member's interest at that price.
We provide only a brief summary of §9.1 in this memorandum. A detailed analysis of the shotgun buy-sell provision—including its mechanics, pricing dynamics, strategic considerations, and interplay with the §8.2 default remedies—will be prepared in a separate memorandum in advance of the November 2, 2023 exercisability date. The interplay between §8.2 and §9.1, however, is a key strategic consideration that is addressed in Section VII below.
D. Section 11.4 — Force Majeure
Section 11.4 of the JV Agreement defines Force Majeure Events and provides for the suspension of certain performance obligations during the pendency of such events. However, the definition of Force Majeure Events in §11.4 expressly excludes the following:
"delays in obtaining governmental approvals, permits, licenses, or authorizations of any kind"
This exclusion is fatal to Pinnacle's force majeure defense. The stalled Phase II Environmental Impact Determination at the Thurston County Department of Environmental Health is precisely the type of governmental approval delay that the parties specifically agreed would not constitute a Force Majeure Event. Moreover, even if the regulatory delay were otherwise qualifying, §11.4 provides only for the suspension of performance obligations directly affected by the force majeure event; it does not excuse the obligation to fund capital contributions, which is an independent financial commitment unrelated to any particular project milestone or governmental action.
Calderwood & Harkness LLP's May 12, 2023 response letter to Whitfield, Aarons & Greer LLP set forth these arguments in detail. The separate research memorandum prepared by Tiffany Rosenthal and Andrew Fitzpatrick on May 8, 2023, which analyzed Washington case law and secondary authority on the interpretation of force majeure provisions in limited liability company operating agreements, confirms that Pinnacle's defense is without merit. We are confident in CSIA's position on this issue in the event of any future mediation or arbitration proceeding.
E. Section 10.1 — Dissolution Events
Section 10.1 of the JV Agreement enumerates the events that may trigger the dissolution of CBWTP. Under normal circumstances, a voluntary dissolution requires the affirmative vote of a supermajority of the Governing Board—specifically, four (4) of five (5) members. Given the current composition of the Governing Board (three CSIA-appointed members and two Pinnacle-appointed members), a voluntary dissolution under §10.1 could not be achieved without the concurrence of at least one Pinnacle-appointed member.
However, §8.2(iii) provides an alternative dissolution pathway. A non-defaulting member may elect dissolution as a default remedy under §8.2(iii) without the need for a supermajority Governing Board vote. This unilateral dissolution right is specifically carved out as an exception to the supermajority requirement in §10.1 and represents a significant enforcement mechanism available to CSIA. It ensures that CSIA is not held hostage by Pinnacle's blocking power on the Governing Board in the event of a funding default.
F. Governing Law and Dispute Resolution
The JV Agreement is governed by the laws of the State of Washington, without regard to conflicts-of-law principles. Section 12.3 of the JV Agreement provides for a two-stage dispute resolution process:
(a) Mandatory Mediation. Any dispute arising out of or relating to the JV Agreement must first be submitted to non-binding mediation conducted in Seattle, Washington, in accordance with the Commercial Mediation Rules of the Pacific Northwest Arbitration Association ("PNAA").
(b) Binding Arbitration. If the parties are unable to resolve the dispute through mediation within sixty (60) days, either party may initiate binding arbitration under the rules of the PNAA, seated in Seattle, Washington. The arbitration panel shall consist of three (3) arbitrators selected in accordance with PNAA rules, and the award of the panel shall be final, binding, and enforceable in any court of competent jurisdiction.
This dispute resolution framework is relevant to CSIA's strategic planning because any exercise of §8.2 remedies may trigger Pinnacle's initiation of the mediation and arbitration process. CSIA should be prepared for this contingency, as discussed further in Section VIII below.
IV. Analysis of Remedy (i): Pro Rata Dilution
A. Mechanics of Dilution
Under §8.2(i), CSIA may elect to dilute Pinnacle's percentage interest in CBWTP on a pro rata basis to reflect the unfunded capital contribution. The dilution is calculated by reference to each member's actual funded capital contributions relative to total funded capital, effectively resetting the percentage interests to align with the members' respective financial commitments to the venture.
The calculation proceeds as follows:
Total Funded Capital: CSIA: $9,900,000 + Pinnacle: $4,050,000 = $13,950,000
Post-Dilution Percentage Interests: CSIA: $9,900,000 ÷ $13,950,000 = 70.97% (rounded) Pinnacle: $4,050,000 ÷ $13,950,000 = 29.03% (rounded)
Thus, upon election of this remedy, Pinnacle's membership interest would be reduced from forty-five percent (45%) to approximately twenty-nine and three-hundredths percent (29.03%), while CSIA's membership interest would increase from fifty-five percent (55%) to approximately seventy and ninety-seven hundredths percent (70.97%).
The net effect is a transfer of approximately 15.97 percentage points of economic interest from Pinnacle to CSIA, without any cash payment by CSIA. This transfer serves both as a consequence of Pinnacle's default and as a mechanism to realign economic entitlements with actual capital contributions.
We note that the precise calculation methodology may be subject to interpretation depending on whether §8.2(i) references total funded capital (as we have assumed) or total committed capital. A textual review of §8.2(i) supports the funded-capital interpretation, as the provision refers to dilution "based on the unfunded capital contribution amount," which logically requires reference to actual contributions rather than committed amounts. However, Pinnacle may contest this interpretation, and we recommend that CSIA be prepared to defend the funded-capital methodology in any arbitration proceeding.
B. Governance Implications
The governance implications of the pro rata dilution remedy are a critical consideration. While dilution increases CSIA's economic interest, the impact on CSIA's governance position is limited under the current JV Agreement structure.
Governing Board Composition. CSIA currently holds three (3) of five (5) seats on the Governing Board. A threshold question is whether the JV Agreement ties Governing Board composition to percentage interests. Our review of §5.2, which governs Board composition, indicates that the allocation of Board seats is fixed at three (3) for CSIA and two (2) for Pinnacle, without reference to the members' respective percentage interests. Accordingly, dilution of Pinnacle's interest from 45% to 29.03% would not, by itself, alter the Board composition. Pinnacle would retain its two Board seats.
Supermajority Requirement. Major decisions under the JV Agreement continue to require a supermajority vote of four (4) of five (5) Governing Board members. Even after dilution, Pinnacle would retain two Board seats and therefore maintain its blocking power over all major decisions, including construction commencement, incurrence of indebtedness, admission of new members, dissolution, and asset sales. This is a significant limitation of the dilution remedy from a governance perspective: CSIA cannot unilaterally advance the project or restructure the JV without Pinnacle's cooperation on major decisions, regardless of CSIA's enhanced economic interest.
Manager Status. Pinnacle would remain as Manager of CBWTP unless removed by a supermajority vote of the Governing Board. Removal of the Manager is itself classified as a major decision requiring four (4) of five (5) votes. Because at least one Pinnacle-appointed Board member would need to vote in favor of Pinnacle's own removal, this threshold is effectively insurmountable absent a negotiated agreement. Pinnacle would therefore retain day-to-day operational control of CBWTP and its entitlement to the management fee, notwithstanding the dilution of its economic interest.
C. Financial Implications
From a financial standpoint, the dilution remedy would increase CSIA's economic entitlement to distributions, profits, and residual value upon any future liquidation or dissolution of CBWTP.
Current Economic Entitlements. At the pre-dilution percentage interests (CSIA: 55%; Pinnacle: 45%), CSIA's share of CBWTP's net equity of approximately $9,633,000 is approximately $5,298,150 (55% × $9,633,000), and Pinnacle's share is approximately $4,334,850 (45% × $9,633,000).
Post-Dilution Economic Entitlements. At the post-dilution percentage interests (CSIA: 70.97%; Pinnacle: 29.03%), CSIA's share of CBWTP's net equity would increase to approximately $6,836,000 (70.97% × $9,633,000), and Pinnacle's share would decrease to approximately $2,797,000 (29.03% × $9,633,000).
The dilution would therefore shift approximately $1,538,000 of economic value from Pinnacle to CSIA. However, we note the following caveats:
(a) The JV remains dormant and no distributions are expected in the near term. The increased economic entitlement is therefore largely theoretical until the project is reactivated or CBWTP is dissolved.
(b) Dilution does not address the $4,050,000 funding gap. CBWTP's total equity would remain at $13,950,000 (versus the $18,000,000 originally contemplated), leaving a shortfall of $4,050,000 that must be funded from other sources if the project is to proceed.
(c) The lapsing PCB commitment letter compounds the funding gap. Even if the equity shortfall were addressed, the $27,000,000 debt commitment expires on August 15, 2023, and a new or extended commitment would need to be secured.
D. Strategic Assessment
Advantages:
• Increases CSIA's economic interest from 55% to approximately 70.97% without requiring any cash outlay by CSIA.
• Preserves the JV structure, allowing CBWTP to be reactivated with Pinnacle or restructured with a replacement partner.
• Sends a clear signal to Pinnacle that its default has tangible consequences, which may incentivize Pinnacle to negotiate a resolution.
• Does not preclude subsequent exercise of other remedies if the situation deteriorates or if the §9.1 buy-sell provision becomes the preferred path.
Disadvantages:
• Does not resolve the governance deadlock. Pinnacle retains two Board seats and blocking power over all major decisions.
• Does not bring additional capital into the JV. The $4,050,000 funding gap persists, and the project cannot proceed without additional equity (and a renewed or extended debt commitment).
• Does not address Pinnacle's continued role as Manager. The management fee of $1,350,000 remains potentially payable to Pinnacle, and Pinnacle retains day-to-day operational control.
• May provoke a dispute. Pinnacle may challenge the dilution calculation or argue that the underlying default was invalid (notwithstanding the rejected force majeure and permitting arguments), potentially initiating the mandatory mediation/arbitration process under §12.3.
Overall Assessment. The pro rata dilution remedy is a useful intermediate measure that enhances CSIA's economic position without requiring an immediate cash outlay or the irreversible step of dissolution. However, standing alone, it does not resolve the fundamental problems facing the JV—governance deadlock, funding shortfall, dormant project status, and Pinnacle's role as Manager. Dilution is most effective as part of a broader strategy that may include subsequent exercise of the §8.2(ii) buyout or §9.1 buy-sell provision.
V. Analysis of Remedy (ii): Purchase at 75% of Fair Market Value
A. Mechanics of Purchase
Under §8.2(ii), CSIA may elect to purchase Pinnacle's entire membership interest in CBWTP at a price equal to seventy-five percent (75%) of the fair market value ("FMV") of such interest. Exercise of this remedy would result in CSIA becoming the sole member of CBWTP, with full economic ownership and governance control.
The operative mechanics of the purchase are governed by the specific language of §8.2(ii), which we have reviewed in detail. The provision contemplates the following process:
(a) CSIA delivers a written notice to Pinnacle electing to purchase Pinnacle's interest under §8.2(ii).
(b) The fair market value of Pinnacle's interest is determined in accordance with the valuation methodology specified in the JV Agreement. Our review of §8.2(ii) indicates that the parties are to attempt to agree on FMV within thirty (30) days of the election notice. If the parties cannot agree, each party selects an independent appraiser, and the two appraisers select a third; the median of the three appraisals establishes FMV. This three-appraiser process is standard in partnership and LLC agreements and provides a mechanism for resolving valuation disputes.
(c) The purchase price is calculated as 75% of the determined FMV.
(d) Closing occurs within sixty (60) days of the final determination of FMV, at which point CSIA pays the purchase price and Pinnacle transfers its membership interest.
The twenty-five percent (25%) discount to FMV functions as a contractual penalty for the funding default. This penalty is a negotiated risk allocation mechanism—agreed to by both parties at the time of formation—that compensates the non-defaulting member for the disruption, delay, and harm caused by the default. We believe this penalty would be enforced under Washington law as a reasonable and negotiated remedy, though Pinnacle may attempt to characterize it as an unenforceable liquidated damages provision or a punitive forfeiture. This argument is addressed briefly in Section VIII below.
B. Valuation Considerations
The central challenge in implementing the §8.2(ii) buyout is the determination of FMV of Pinnacle's interest. Several methodological and conceptual issues arise.
Book Value Analysis. As of June 30, 2023, CBWTP's net equity is approximately $9,633,000. Pinnacle's share of this net equity can be calculated under two alternative approaches:
Percentage Interest Approach: If Pinnacle's 45% percentage interest governs distributions and FMV, Pinnacle's share of net equity would be:
45% × $9,633,000 = $4,334,850
Capital Account Approach: If distributions and FMV are calculated by reference to actual capital account balances, Pinnacle's proportionate share would be:
$4,050,000 ÷ $13,950,000 × $9,633,000 = $2,795,742 (approximately $2,796,000)
There is a meaningful tension between these two approaches. Pinnacle's percentage interest (45%) implies a larger share of net equity than its actual funded capital (approximately 29.03% of total funded capital). The JV Agreement's distribution waterfall provisions in §10.2 will determine which approach governs. If distributions are made first in accordance with positive capital account balances and then pro rata by percentage interests, a hybrid calculation may be required. We recommend careful review of §10.2 in connection with any buyout analysis.
Application of the 75% discount. The purchase price under §8.2(ii) is 75% of FMV. Under each of the book value approaches:
CSIA's estimated cash outlay would therefore fall in the range of approximately $2,097,000 to $3,251,000, depending on the valuation methodology applied.
Fair Market Value vs. Book Value. Fair market value is not necessarily equivalent to book value. FMV should reflect the value that a willing buyer would pay a willing seller in an arm's-length transaction, considering all relevant circumstances. Factors that may cause FMV to deviate from book value include:
Factors suggesting FMV may be lower than book value:
• The project is dormant and has not progressed to construction.
• The Phase II Environmental Impact Determination is stalled with no clear resolution timeline.
• The PCB $27,000,000 commitment letter expires on August 15, 2023, and the project cannot proceed without debt financing.
• Significant uncertainty exists regarding the ultimate completion and viability of the Facility.
• The capitalized organizational and legal costs ($1,050,000) may have limited realizable value in a liquidation scenario.
• A minority interest in a dormant JV entity would typically be subject to a marketability discount and, in some contexts, a minority interest discount, although these considerations may be partially subsumed by the contractual 25% default penalty.
Factors suggesting FMV may be higher than book value:
• The underlying project site at 2480 Capitol Boulevard SE, Tumwater, has value as a development site.
• The 99-year ground lease from CSIA, while nominal in rent, has significant value to CBWTP as the vehicle for the Facility.
• The Phase I ESA (no recognized environmental conditions) and the pre-development work already completed add value to the project's development rights.
• If the Facility were completed, it would be a $45,000,000 asset serving a critical public infrastructure need, suggesting substantial upside potential.
On balance, given the dormant status of the project, the stalled permitting, the lapsing debt commitment, and the uncertainty surrounding project completion, we believe that FMV is likely at or below book value. An independent appraisal would provide a definitive determination.
Ground Lease Reversion. A significant valuation consideration is the Ground Lease reversion clause. The Ground Lease reverts to CSIA upon dissolution or termination of CBWTP. While the Ground Lease itself is an asset of CBWTP that contributes to the entity's FMV, its reversion to CSIA upon termination means that the value attributable to the Ground Lease may effectively return to CSIA regardless of whether CSIA purchases Pinnacle's interest. This dynamic may limit the value that a hypothetical third-party buyer would assign to CBWTP as a going concern, particularly if termination of the JV is perceived as likely.
C. Cash Outlay for CSIA
CSIA would be required to fund the purchase price from its own resources. Based on the valuation analysis above, the estimated cash outlay ranges from approximately $2,097,000 to $3,251,000.
CSIA is a governmental authority with an annual operating budget of approximately $380,000,000. The purchase price, at either end of the estimated range, represents less than one percent (1%) of CSIA's annual budget and is well within CSIA's financial capacity. However, as a governmental entity, CSIA must ensure that the expenditure is authorized under its enabling statute and any applicable appropriations or procurement requirements.
We recommend that David Tanaka, as General Counsel, confirm that CSIA's statutory authority under Chapter 43.155A RCW encompasses the acquisition of a private partner's interest in a joint venture entity, and that any required approvals from CSIA's board of directors or other governing body are obtained in advance of any election to exercise the §8.2(ii) remedy. We are available to assist with this analysis as needed.
D. Governance and Operational Implications
Exercise of the §8.2(ii) buyout would result in CSIA becoming the sole member of CBWTP. The governance and operational implications of this outcome are substantial:
Full Governance Control. CSIA would appoint all five Governing Board members (or reconstitute the Board as it sees fit), eliminating the supermajority voting constraint and the governance deadlock that has impeded the project. CSIA would have unilateral authority to make all major decisions, including construction commencement, incurrence of indebtedness, admission of new members, and asset dispositions.
Replacement of Pinnacle as Manager. Pinnacle's status as Manager would terminate upon the transfer of its membership interest. CSIA would need to either assume operational responsibilities directly or engage a new private-sector partner to serve as construction manager and facility operator. Given CSIA's nature as a governmental infrastructure authority rather than an operating company, the engagement of a replacement private partner is likely necessary to advance the Facility through construction and into operation.
Termination of Management Fee. Pinnacle's management fee entitlement of $1,350,000 (3% of total construction costs) would terminate upon Pinnacle's departure from the JV. Any successor manager would presumably negotiate its own fee arrangement with CSIA.
Non-Compete. Under §7.4 of the JV Agreement, Pinnacle is subject to a non-competition covenant within a seventy-five (75)-mile radius of the Facility site for a period of five (5) years from the date of the JV Agreement (November 2, 2021, expiring November 2, 2026). This non-compete should survive the buyout and Pinnacle's departure from the JV, though we recommend confirming the specific survival language in the JV Agreement. The non-compete protects CSIA by preventing Pinnacle from competing with the Facility during its development and initial operating period.
E. Strategic Assessment
Advantages:
• Gives CSIA full ownership and governance control of CBWTP, eliminating the deadlock and enabling CSIA to chart the project's future independently.
• Eliminates Pinnacle as Manager and terminates the associated management fee.
• The 25% discount to FMV compensates CSIA for Pinnacle's default and results in a below-market purchase price.
• Positions CSIA to bring in a replacement private partner on potentially more favorable terms.
• Preserves the JV entity, the Ground Lease, the pre-development work, and the project development rights.
Disadvantages:
• Requires an immediate cash outlay by CSIA in the range of approximately $2.1 million to $3.3 million.
• CSIA assumes full project risk, including the stalled Phase II Environmental Impact Determination and the need to secure new or extended debt financing following the expiration of the PCB commitment letter.
• CSIA must identify and engage a replacement private-sector partner to serve as operator and construction manager. This process may take considerable time and may delay the project further.