CALDERWOOD & HARKNESS LLP Attorneys at Law
901 Fifth Avenue, Suite 3200 Seattle, Washington 98164
Telephone: (206) 448-7200 Facsimile: (206) 448-7210 www.calderwoodharkness.com
April 14, 2023
VIA OVERNIGHT COURIER AND EMAIL
Mr. Richard Prumvane Chief Executive Officer & Managing Member Pinnacle Water Solutions, LLC 720 SW Quelston Street, Suite 1500 Portland, OR 97205
Re: Notice of Default Under the Amended and Restated Limited Liability Company Agreement of Columbia Basin Water Treatment Partners, LLC, dated November 2, 2021 — Failure to Fund Second Tranche Capital Contribution
Dear Mr. Prumvane:
This firm represents Cascadia State Infrastructure Authority ("CSIA"), a Washington state governmental authority created pursuant to Chapter 43.155A RCW, in its capacity as a member of Columbia Basin Water Treatment Partners, LLC ("CBWTP" or the "Company"), a Washington limited liability company (EIN: 88-3421076; WA UBI Number: 604-892-315), formed on November 2, 2021 pursuant to the laws of the State of Washington. We write in connection with the Amended and Restated Limited Liability Company Agreement of CBWTP, dated as of November 2, 2021, by and between CSIA and Pinnacle Water Solutions, LLC ("Pinnacle"), a Delaware limited liability company (collectively, the "JV Agreement"). This letter constitutes formal notice of default by Pinnacle under the JV Agreement, as more fully described below. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the JV Agreement.
As you are aware, CSIA holds a fifty-five percent (55%) membership interest in CBWTP, and Pinnacle holds a forty-five percent (45%) membership interest in CBWTP. The Company was purpose-formed to design, construct, own, and operate the Thurston County Advanced Water Treatment Facility (the "Facility"), a twelve (12) million gallon-per-day advanced water treatment plant to be located at 2480 Capitol Boulevard SE, Tumwater, Thurston County, Washington 98501. The total project cost for the Facility is Forty-Five Million Dollars ($45,000,000). CSIA takes its obligations under the JV Agreement and its commitment to the successful completion of the Facility with the utmost seriousness, and it is in that spirit that this notice is delivered.
I. Background — Capital Contribution Structure and First Tranche Funding
The JV Agreement establishes total committed capital contributions of Eighteen Million Dollars ($18,000,000), which represents the equity component of the Forty-Five Million Dollar ($45,000,000) total project cost for the Facility. The remaining Twenty-Seven Million Dollars ($27,000,000) of the total project cost is to be funded through project finance debt committed by Pacific Cascade Bank, N.A. ("PCB") pursuant to that certain Project Finance Commitment Letter dated April 17, 2022 (reference PCB-PF-2022-0417).
In accordance with Article IV of the JV Agreement, the respective capital commitments of the members are as follows:
(a) CSIA's total capital commitment is Nine Million Nine Hundred Thousand Dollars ($9,900,000), representing fifty-five percent (55%) of the aggregate Eighteen Million Dollar ($18,000,000) equity commitment.
(b) Pinnacle's total capital commitment is Eight Million One Hundred Thousand Dollars ($8,100,000), representing forty-five percent (45%) of the aggregate Eighteen Million Dollar ($18,000,000) equity commitment.
As further set forth in Article IV, the capital contributions of each member are structured in two equal tranches per member. The First Tranche capital contributions were called and timely funded on November 15, 2021, contemporaneously with the formation of CBWTP and the execution of the JV Agreement. Specifically:
(a) CSIA contributed Four Million Nine Hundred Fifty Thousand Dollars ($4,950,000), representing fifty percent (50%) of CSIA's total capital commitment of $9,900,000.
(b) Pinnacle contributed Four Million Fifty Thousand Dollars ($4,050,000), representing fifty percent (50%) of Pinnacle's total capital commitment of $8,100,000.
The total funded First Tranche equity was therefore Nine Million Dollars ($9,000,000), comprised of the respective contributions of the two members as described above. These First Tranche contributions were duly received and deposited into the CBWTP operating account at Pacific Cascade Bank, N.A.
II. The Capital Call and Pinnacle's Failure to Fund the Second Tranche
On March 1, 2023, the Governing Board of CBWTP duly issued a capital call notice (the "Capital Call Notice") to both members, calling the Second Tranche capital contributions in accordance with Article IV and Section 4.3 of the JV Agreement. A copy of the Capital Call Notice is enclosed herewith for reference. The Capital Call Notice was delivered to each member in writing, in accordance with the notice provisions set forth in Article XII of the JV Agreement.
The Capital Call Notice required the following Second Tranche capital contributions from the members:
(a) CSIA was required to contribute Four Million Nine Hundred Fifty Thousand Dollars ($4,950,000), representing the remaining fifty percent (50%) of CSIA's total capital commitment.
(b) Pinnacle was required to contribute Four Million Fifty Thousand Dollars ($4,050,000), representing the remaining fifty percent (50%) of Pinnacle's total capital commitment.
Pursuant to Section 4.3 of the JV Agreement, Second Tranche capital contributions are due and payable within thirty (30) calendar days following the delivery of a duly authorized capital call notice by the Governing Board. The Capital Call Notice having been delivered on March 1, 2023, the payment deadline for Second Tranche contributions was therefore March 31, 2023.
CSIA timely funded its Second Tranche capital contribution of Four Million Nine Hundred Fifty Thousand Dollars ($4,950,000) on March 28, 2023, by wire transfer to the CBWTP operating account at Pacific Cascade Bank, N.A. With this payment, CSIA's total funded capital now stands at Nine Million Nine Hundred Thousand Dollars ($9,900,000), which represents the entirety of CSIA's capital commitment under the JV Agreement. CSIA is now fully funded with respect to all of its capital obligations under the JV Agreement.
As of the date of this letter, April 14, 2023 — fourteen (14) days past the March 31, 2023 payment deadline — Pinnacle has failed to fund its Second Tranche capital contribution of Four Million Fifty Thousand Dollars ($4,050,000). CSIA has received no partial payment, no request for extension, and no communication from Pinnacle or its counsel indicating any intention to fund the required contribution. Pinnacle's total funded capital in CBWTP remains at Four Million Fifty Thousand Dollars ($4,050,000) — the First Tranche amount only. The outstanding unfunded amount of Pinnacle's capital commitment is Four Million Fifty Thousand Dollars ($4,050,000).
III. Declaration of Default Under the JV Agreement
Pinnacle's failure to fund the Second Tranche capital contribution of Four Million Fifty Thousand Dollars ($4,050,000) by the March 31, 2023 payment deadline constitutes a "Member Default" as defined under Article VIII of the JV Agreement. Specifically, Section 8.1 of the JV Agreement provides, in pertinent part:
"A 'Member Default' shall be deemed to have occurred when any Member fails to make a required capital contribution within thirty (30) calendar days following delivery of a duly authorized capital call notice issued by the Governing Board in accordance with the provisions of Section 4.3 hereof."
The elements of a Member Default under Section 8.1 are plainly and unambiguously satisfied here. The Governing Board duly authorized and delivered a capital call notice on March 1, 2023. Pinnacle was required to fund its Second Tranche capital contribution of $4,050,000 within thirty (30) calendar days of such notice — i.e., by March 31, 2023. Pinnacle has failed to make such contribution. A Member Default has therefore occurred.
Accordingly, pursuant to Section 8.2 of the JV Agreement, CSIA, as the non-defaulting member, hereby provides Pinnacle with formal written notice of this Member Default (this "Default Notice"). The delivery of this Default Notice triggers the rights, remedies, and cure provisions set forth in Section 8.2 of the JV Agreement, as described in greater detail below.
IV. Commencement of the Sixty-Day Cure Period Under Section 8.2
Pursuant to Section 8.2 of the JV Agreement, upon delivery of this Default Notice, Pinnacle is afforded a cure period of sixty (60) calendar days within which to cure the Member Default by funding its Second Tranche capital contribution of Four Million Fifty Thousand Dollars ($4,050,000) in full, together with any accrued default interest as may be applicable under the terms of the JV Agreement.
The sixty-day cure period shall be calculated as follows:
• Commencement Date: April 14, 2023 (the date of delivery of this Default Notice).
• Expiration Date: June 13, 2023 (the date that is sixty (60) calendar days following April 14, 2023).
To effect a timely cure, payment of the full Four Million Fifty Thousand Dollars ($4,050,000) must be made by wire transfer of immediately available funds to the CBWTP operating account at Pacific Cascade Bank, N.A., in accordance with the wire transfer instructions previously provided to Pinnacle in connection with the Capital Call Notice and the initial funding of First Tranche contributions. Should Pinnacle require reconfirmation of the wire transfer instructions, such instructions are available upon request from the undersigned or from the Company's administrative office.
Partial payments will not constitute a cure of the Member Default under the terms of Section 8.2 of the JV Agreement. The full amount of Four Million Fifty Thousand Dollars ($4,050,000) must be received and cleared in the CBWTP operating account on or before 5:00 p.m. Pacific Time on June 13, 2023.
If Pinnacle fails to cure the Member Default by funding the full Four Million Fifty Thousand Dollars ($4,050,000) on or before June 13, 2023, the cure period shall expire without cure, and CSIA shall thereupon be entitled to exercise any and all remedies available to it as the non-defaulting member under the JV Agreement, at law, and in equity, without further notice to Pinnacle.
V. Reservation of Rights and Available Remedies
CSIA expressly reserves all of its rights, remedies, and elections under the JV Agreement, at law, and in equity, arising from or related to Pinnacle's Member Default, including without limitation the following remedies available to CSIA as the non-defaulting member upon expiration of the sixty-day cure period without cure, as set forth in Section 8.2 of the JV Agreement:
(i) Pro Rata Dilution. CSIA reserves the right, pursuant to Section 8.2(i) of the JV Agreement, to dilute Pinnacle's forty-five percent (45%) membership interest in CBWTP on a pro rata basis, calculated with reference to the Four Million Fifty Thousand Dollar ($4,050,000) unfunded capital contribution relative to the total funded capital of the Company. Such dilution would be calculated in accordance with the formula set forth in Section 8.2(i), and would result in a proportional reduction of Pinnacle's membership interest and a corresponding increase in CSIA's membership interest, reflecting the respective funded capital contributions of each member.
(ii) Purchase at discounted Fair Market Value. CSIA reserves the right, pursuant to Section 8.2(ii) of the JV Agreement, to purchase Pinnacle's entire membership interest in CBWTP at a price equal to seventy-five percent (75%) of the fair market value of such interest, as determined by an independent appraiser selected in accordance with the valuation procedures set forth in Section 8.2(ii). This purchase right, if exercised, would result in CSIA's acquisition of Pinnacle's membership interest at a twenty-five percent (25%) discount to fair market value, consistent with the agreed-upon consequences of a Member Default.
(iii) Election to Dissolve. CSIA reserves the right, pursuant to Section 8.2(iii) of the JV Agreement, to elect the dissolution of CBWTP in accordance with the dissolution and winding-up provisions of the JV Agreement and applicable Washington law, including Chapter 25.15 of the Revised Code of Washington. While dissolution is not CSIA's preferred outcome, and CSIA remains committed to the successful development and completion of the Facility, CSIA must preserve all available remedies.
In addition to the foregoing remedies under Section 8.2, CSIA further reserves all rights under the buy-sell provision set forth in Section 9.1 of the JV Agreement, which becomes exercisable after November 2, 2023 — the second anniversary of the formation of the Company. CSIA's reservation of rights under Section 9.1 is without prejudice to its rights under Section 8.2, and the existence of the buy-sell provision does not limit or modify the remedies available to CSIA as the non-defaulting member upon the occurrence of a Member Default.
CSIA also reserves any and all rights to seek damages, specific performance, or other equitable or legal relief in connection with Pinnacle's breach of the JV Agreement, including through mandatory mediation and binding arbitration under the rules of the Pacific Northwest Arbitration Association, seated in Seattle, Washington, as provided in the dispute resolution provisions set forth in Article XI of the JV Agreement.
Nothing contained in this letter, and no delay or forbearance by CSIA in exercising any right, remedy, or election hereunder or under the JV Agreement, shall operate as or be construed to constitute a waiver of any of CSIA's rights, remedies, or elections under the JV Agreement, at law, or in equity. All such rights, remedies, and elections are cumulative and not alternative, and CSIA's exercise of any one right or remedy shall not preclude the exercise of any other.
VI. Demand for Immediate Action
CSIA hereby demands that Pinnacle immediately take all steps necessary to fund its Second Tranche capital contribution of Four Million Fifty Thousand Dollars ($4,050,000) within the sixty-day cure period established by this Default Notice — that is, no later than June 13, 2023. Time is of the essence with respect to the cure of this Member Default.
CSIA further requests that Pinnacle, through its counsel Whitfield, Aarons & Greer LLP or otherwise, confirm in writing its intentions regarding the cure of this Member Default within ten (10) business days of receipt of this Default Notice. Such confirmation should be directed to the undersigned at the address set forth below.
CSIA wishes to impress upon Pinnacle the urgency of this matter. The continued dormancy of CBWTP caused by Pinnacle's failure to fund the Second Tranche capital contribution is having material adverse consequences on the viability and timeline of the Facility project, including but not limited to the following:
(a) The Phase II Environmental Impact Determination currently pending before the Thurston County Department of Environmental Health has stalled due to the inability of the Company to advance the required engineering and environmental study work in the absence of fully funded equity.
(b) The Pacific Cascade Bank, N.A. project finance commitment letter (reference PCB-PF-2022-0417) for the Twenty-Seven Million Dollar ($27,000,000) debt component of the total project cost carries a tenor expiring on August 15, 2023. If CBWTP is unable to achieve financial close and satisfy the conditions precedent to the initial drawdown under the commitment letter prior to that date, the commitment may lapse, jeopardizing the availability of project finance debt on the terms currently committed and potentially requiring renegotiation of terms at higher prevailing interest rates.
The foregoing consequences underscore that Pinnacle's failure to fund its capital commitment is not merely a contractual default — it threatens to undermine the entire Facility project, to the detriment of both members and the communities in Thurston County that the Facility is intended to serve. CSIA strongly urges Pinnacle to act promptly and in good faith to cure this default.
VII. Governing Law
This Default Notice is delivered pursuant to, and shall be governed by and construed in accordance with, the laws of the State of Washington, without regard to its conflict of laws principles, consistent with the governing law provision set forth in Section 12.8 of the JV Agreement.
VIII. Direction of Communications
All communications regarding this matter should be directed to the undersigned at the following address:
Oliver Mackenzie, Partner Calderwood & Harkness LLP 901 Fifth Avenue, Suite 3200 Seattle, WA 98164 Telephone: (206) 448-7200
Email: omackenzie@calderwoodharkness.com
CSIA's General Counsel, David Tanaka, should be copied on all correspondence directed to or concerning CSIA, at the following address:
David Tanaka, General Counsel Cascadia State Infrastructure Authority 1100 Jefferson Street SE, Suite 400 Olympia, WA 98501 Telephone: (360) 902-3100
Email: dtanaka@csia.wa.gov
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Oliver Mackenzie Partner
On behalf of Cascadia State Infrastructure Authority
cc:
Elaine Prescott, Esq. Whitfield, Aarons & Greer LLP 1455 SW Broadway, Suite 2100 Portland, OR 97201
Cynthia Voss, Chief Operating Officer Pinnacle Water Solutions, LLC 720 SW Quelston Street, Suite 1500 Portland, OR 97205
David Tanaka, General Counsel Cascadia State Infrastructure Authority 1100 Jefferson Street SE, Suite 400 Olympia, WA 98501
Margaret Ellsworth, Executive Director Cascadia State Infrastructure Authority 1100 Jefferson Street SE, Suite 400 Olympia, WA 98501
Harrison Wexford, Calderwood & Harkness LLP (internal)
Tiffany Rosenthal, Calderwood & Harkness LLP (internal)
Enclosure: Copy of Capital Call Notice dated March 1, 2023
C&H Matter No. 47291.00001