DRAFT — PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT Calderwood & Harkness LLP — Matter No. 47291.00001 Prepared by: Oliver Mackenzie, Responsible Partner; Tiffany Rosenthal, Lead Associate
Date: DRAFT — date to be inserted upon authorization to file
NOTE: This Demand for Binding Arbitration is held in draft status pending the client's strategic decision on path forward. This document has not been served on Respondent or filed with the Pacific Northwest Arbitration Association. Filing remains subject to completion of the mandatory mediation prerequisite under §12.1 of the JV Agreement and final authorization from CSIA. See Status Memorandum and Recommended Path Forward dated January 15, 2024.
PACIFIC NORTHWEST ARBITRATION ASSOCIATION SEATTLE, WASHINGTON
DEMAND FOR BINDING ARBITRATION
I. INTRODUCTION
1.  Cascadia State Infrastructure Authority ("CSIA"), 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, hereby submits this Demand for Binding Arbitration ("Demand") against Pinnacle Water Solutions, LLC ("Pinnacle"), a Delaware limited liability company with its principal place of business at 720 SW Quelston Street, Suite 1500, Portland, Oregon 97205, pursuant to Section 12.2 of the Amended and Restated Limited Liability Company Agreement of Columbia Basin Water Treatment Partners, LLC, dated November 2, 2021 (the "JV Agreement"), and the rules of the Pacific Northwest Arbitration Association ("PNAA").
2.  This arbitration arises out of and relates to Pinnacle's material breach of the JV Agreement, specifically Pinnacle's failure to fund its Second Tranche capital contribution in the amount of Four Million Fifty Thousand Dollars ($4,050,000) to Columbia Basin Water Treatment Partners, LLC ("CBWTP" or the "JV Entity"), a joint venture formed by CSIA and Pinnacle for the purpose of designing, constructing, owning, and operating the Thurston County Advanced Water Treatment Facility (the "Facility"), a critical public infrastructure project valued at Forty-Five Million Dollars ($45,000,000). Pinnacle failed to make its required capital contribution within the time frame specified by the JV Agreement and, further, failed to cure such default within the contractually stipulated sixty (60) day cure period set forth in Section 8.2 of the JV Agreement.
3.  CSIA seeks, through this arbitration, specific performance compelling Pinnacle to fund its outstanding Second Tranche capital contribution of $4,050,000, together with interest thereon from the date such payment was due. In the alternative, CSIA seeks damages in the amount of $4,050,000. CSIA further seeks consequential damages arising from the substantial project delay caused by Pinnacle's default, including but not limited to the lapse of a Twenty-Seven Million Dollar ($27,000,000) project finance credit facility committed by Pacific Cascade Bank, N.A. The loss of this credit facility has materially impaired the viability of the Facility and imposed significant costs on CSIA and the JV Entity. CSIA also seeks a declaration that Pinnacle is in material, uncured default under the JV Agreement, entitling CSIA to exercise all remedies available thereunder, as well as an award of costs, fees, and such other relief as the arbitral tribunal deems just and appropriate.
4.  The facts underlying this dispute, the applicable contractual provisions, and the legal basis for the relief requested are set forth in detail below.
II. THE PARTIES
A. Claimant — Cascadia State Infrastructure Authority
5.  CSIA is a Washington state governmental instrumentality established and operating under the authority of Chapter 43.155A of the Revised Code of Washington. CSIA is charged with financing, developing, and overseeing critical public infrastructure across the State of Washington, including water treatment facilities, transportation infrastructure, energy systems, and related capital projects that serve the public interest.
6.  CSIA maintains its principal offices at 1100 Jefferson Street SE, Suite 400, Olympia, Washington 98501. Its Executive Director is Margaret Ellsworth. Its General Counsel is David Tanaka, who serves as the primary contact for this proceeding on behalf of CSIA.
7.  CSIA administers an annual budget of approximately Three Hundred Eighty Million Dollars ($380,000,000) and manages a portfolio of over sixty (60) active infrastructure projects across the State of Washington. CSIA serves a vital public function in ensuring that critical infrastructure is developed, financed, and maintained for the benefit of Washington's citizens and communities.
8.  Under the JV Agreement, CSIA holds a fifty-five percent (55%) membership interest in CBWTP, corresponding to a total equity commitment of Nine Million Nine Hundred Thousand Dollars ($9,900,000), which CSIA has funded in full.
B. Respondent — Pinnacle Water Solutions, LLC
9.  Pinnacle Water Solutions, LLC is a Delaware limited liability company (Delaware Division of Corporations File Number 5847231; Employer Identification Number 47-2918534) that is registered to do business in the States of Washington and Oregon. Pinnacle maintains its principal place of business at 720 SW Quelston Street, Suite 1500, Portland, Oregon 97205.
10.  Pinnacle specializes in water and wastewater treatment engineering, construction, and operations. The company was founded in 2014 by Richard Prumvane, who serves as its Chief Executive Officer and Managing Member, and Cynthia Voss, who serves as its Chief Operating Officer. Since its founding, Pinnacle has completed in excess of Six Hundred Million Dollars ($600,000,000) in water infrastructure projects across the Pacific Northwest and Northern California. According to Pinnacle's 2021 audited financial statements, the company reported revenue of approximately One Hundred Eighty-Seven Million Dollars ($187,000,000) and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately Twenty-Nine Million Dollars ($29,000,000).
11.  Sixty-two percent (62%) of the equity interest in Pinnacle is held by Ridgeline Capital Partners, LP, a Delaware limited partnership headquartered at 1120 NW Couch Street, Suite 700, Portland, Oregon 97209. Ridgeline Capital Partners, LP is managed by its Managing Partner, Jonathan Kreider. Ridgeline acquired its sixty-two percent (62%) stake in Pinnacle in 2019 for approximately Ninety-Five Million Dollars ($95,000,000).
12.  Under the JV Agreement, Pinnacle holds a forty-five percent (45%) membership interest in CBWTP, corresponding to a total equity commitment of Eight Million One Hundred Thousand Dollars ($8,100,000). Of that commitment, Pinnacle has funded only its First Tranche contribution of Four Million Fifty Thousand Dollars ($4,050,000), leaving the Second Tranche contribution of an equal amount unfunded.
13.  Pinnacle is represented in connection with the matters giving rise to this Demand by Whitfield, Aarons & Greer LLP, located at 1455 SW Broadway, Suite 2100, Portland, Oregon 97201. The lead partner on the matter is Elaine Prescott, and the senior associate is Marcus Delvecchio.
III. JURISDICTIONAL BASIS AND AUTHORITY TO ARBITRATE
A. Arbitration Agreement
14.  Section 12.2 of the JV Agreement provides that all disputes arising out of or relating to the JV Agreement, the formation, performance, breach, or termination thereof, or the rights and obligations of the parties thereunder, that are not resolved through the mandatory mediation process set forth in Section 12.1, shall be finally resolved by binding arbitration conducted under the rules of the Pacific Northwest Arbitration Association ("PNAA"), with the seat of arbitration in Seattle, Washington.
15.  The dispute that is the subject of this Demand — Pinnacle's failure to fund its Second Tranche capital contribution, its failure to cure such default, and the resulting damages to CSIA and CBWTP — arises squarely out of and relates to the JV Agreement. Accordingly, this dispute falls within the scope of the arbitration agreement set forth in Section 12.2 of the JV Agreement, and the PNAA has jurisdiction to hear and resolve this matter.
16.  The JV Agreement is governed by, and shall be construed and enforced in accordance with, the laws of the State of Washington, without regard to its conflict of laws principles.
B. Mandatory Mediation Prerequisite
17.  CSIA acknowledges that Section 12.1 of the JV Agreement requires that the parties engage in mandatory mediation of any dispute arising under the JV Agreement prior to the commencement of binding arbitration. Section 12.1 provides that either party may initiate mediation by written notice to the other party, and that the parties shall endeavor in good faith to resolve the dispute through mediation within forty-five (45) days of such notice.
18.  CSIA intends to initiate mediation in full compliance with Section 12.1 before or concurrently with the filing of this Demand. This Demand has been prepared in draft form and will be filed with the PNAA upon the completion of the mediation process, or concurrently therewith, as may be permitted under the applicable PNAA rules. In the event that Pinnacle refuses to participate in mediation or fails to participate in good faith within a reasonable time after receiving CSIA's mediation demand, CSIA reserves the right to file this Demand immediately and to request that the PNAA proceed directly to arbitration, as the mediation prerequisite shall be deemed satisfied or excused by Pinnacle's non-participation.
19.  CSIA has been ready and willing to mediate at all relevant times and remains so.
C. Governing Law
20.  As set forth above, the substantive issues in this arbitration are governed by the laws of the State of Washington. The procedural aspects of the arbitration shall be governed by the rules of the PNAA, as supplemented by any procedural orders issued by the arbitral tribunal.
IV. STATEMENT OF FACTS
A. Formation of the Joint Venture
21.  On November 2, 2021, CSIA and Pinnacle executed the Amended and Restated Limited Liability Company Agreement of Columbia Basin Water Treatment Partners, LLC (the "JV Agreement"), thereby forming CBWTP as a Washington limited liability company. CBWTP was assigned Washington Unified Business Identifier Number 604-892-315 and Employer Identification Number 88-3421076 upon its formation.
22.  The JV Agreement was filed with the Washington Secretary of State on November 2, 2021. CBWTP maintains its registered office at 1100 Jefferson Street SE, Suite 400, Olympia, Washington 98501, in care of CSIA.
23.  The stated purpose of CBWTP, as set forth in Article II of the JV Agreement, is the design, construction, ownership, and operation of the Thurston County Advanced Water Treatment Facility (the "Facility"). The Facility is designed to be a twelve million gallon-per-day (12 MGD) advanced water treatment plant to be constructed on a 14.7-acre parcel located at 2480 Capitol Boulevard SE, Tumwater, Thurston County, Washington 98501.
24.  The total estimated project cost for the design, engineering, permitting, construction, and commissioning of the Facility is Forty-Five Million Dollars ($45,000,000). The Facility, when completed, would serve a critical public need by providing advanced water treatment capacity to Thurston County and surrounding communities in the southern Puget Sound region.
B. Capital Structure and Contributions
25.  The JV Agreement established a capital structure consisting of Eighteen Million Dollars ($18,000,000) in total equity commitments from the two members, supplemented by Twenty-Seven Million Dollars ($27,000,000) in project finance debt, for a total of Forty-Five Million Dollars ($45,000,000) in project funding sources.
26.  Under Sections 3.1 and 3.2 of the JV Agreement, the total equity commitments were allocated as follows:
(a) CSIA: Nine Million Nine Hundred Thousand Dollars ($9,900,000), representing a fifty-five percent (55%) membership interest in CBWTP.
(b) Pinnacle: Eight Million One Hundred Thousand Dollars ($8,100,000), representing a forty-five percent (45%) membership interest in CBWTP.
27.  The equity was to be funded in two tranches, as specified in Section 3.3 of the JV Agreement:
(a) First Tranche: Due on November 15, 2021. CSIA's First Tranche contribution was Four Million Nine Hundred Fifty Thousand Dollars ($4,950,000), and Pinnacle's First Tranche contribution was Four Million Fifty Thousand Dollars ($4,050,000), for a total first tranche of Nine Million Dollars ($9,000,000).
(b) Second Tranche: Due upon issuance of a formal capital call notice by the Governing Board of CBWTP, payable within thirty (30) calendar days of such notice. CSIA's Second Tranche contribution was Four Million Nine Hundred Fifty Thousand Dollars ($4,950,000), and Pinnacle's Second Tranche contribution was Four Million Fifty Thousand Dollars ($4,050,000), for a total second tranche of Nine Million Dollars ($9,000,000).
28.  Both CSIA and Pinnacle timely funded their respective First Tranche contributions on November 15, 2021. The total equity initially deployed to CBWTP was therefore Nine Million Dollars ($9,000,000).
29.  The project finance debt component was to be provided by Pacific Cascade Bank, N.A. ("PCB"), a national banking association. On February 15, 2022, PCB issued a commitment letter (Reference Number PCB-PF-2022-0417) committing to provide a Twenty-Seven Million Dollar ($27,000,000) senior secured project finance credit facility to CBWTP, with an eighteen (18) month tenor from the date of the commitment letter. The availability of this credit facility was conditioned upon, among other things, the full funding of the members' equity contributions and the commencement of construction within the commitment period.
C. Governance and Management
30.  Article V of the JV Agreement established a five-member Governing Board to oversee the affairs of CBWTP. The Board composition was as follows:
(a) Three (3) members appointed by CSIA: Margaret Ellsworth (Executive Director of CSIA), David Tanaka (General Counsel of CSIA), and Patricia Huang.
(b) Two (2) members appointed by Pinnacle: Richard Prumvane (CEO of Pinnacle) and Cynthia Voss (COO of Pinnacle).
31.  Section 5.4 of the JV Agreement established a supermajority voting requirement, mandating the affirmative vote of at least four (4) of the five (5) Governing Board members for the authorization of certain major decisions, including but not limited to:
(i) Commencement of construction of the Facility;
(ii) Incurrence of indebtedness (other than trade payables incurred in the ordinary course);
(iii) Admission of new members to CBWTP;
(iv) Dissolution or winding up of CBWTP; and
(v) Sale of all or substantially all of the assets of CBWTP.
32.  Pursuant to Section 6.1 of the JV Agreement, Pinnacle was designated as the Manager of CBWTP and was charged with the day-to-day management and operations of the JV Entity, subject to the oversight and direction of the Governing Board. The Manager's responsibilities included, without limitation, advancing the design, permitting, and construction of the Facility, managing contractor and consultant relationships, maintaining the books and records of CBWTP, and reporting to the Governing Board on a regular basis.
33.  In consideration of its services as Manager, Section 6.3 of the JV Agreement entitled Pinnacle to a management fee equal to three percent (3%) of total construction costs, amounting to One Million Three Hundred Fifty Thousand Dollars ($1,350,000) based on the projected total construction budget.
D. Ground Lease
34.  Concurrently with the execution of the JV Agreement, on November 2, 2021, CSIA, as landlord, and CBWTP, as tenant, entered into a ninety-nine (99) year ground lease (the "Ground Lease") for the 14.7-acre parcel located at 2480 Capitol Boulevard SE, Tumwater, Thurston County, Washington 98501 (the "Facility Site"), upon which the Facility was to be constructed.
35.  The Ground Lease provides for annual rent of One Dollar ($1.00). The Ground Lease was duly recorded with the Thurston County Auditor as Recording Number 2021-1102-004788. Upon termination of the JV Entity for any reason, the Facility Site and all improvements thereon revert to CSIA as the fee owner of the underlying land.
E. Environmental Permitting and Project Stall
36.  Following the formation of CBWTP and the initial equity funding in November 2021, the project proceeded into its pre-development phase. On January 10, 2022, CBWTP retained Westmark Environmental Consulting, Inc. ("Westmark"), an environmental consulting firm based in Tacoma, Washington, to conduct Phase I and Phase II environmental assessments of the Facility Site. The principal consultant assigned to the engagement was Dr. Anita Farooq.
37.  On April 22, 2022, Westmark completed its Phase I Environmental Site Assessment of the Facility Site. The Phase I assessment identified no recognized environmental conditions, and the site was deemed suitable for the intended use as an advanced water treatment facility.
38.  Following the completion of the Phase I assessment, the project proceeded to the Phase II Environmental Impact Determination ("EID") review stage, conducted under the auspices of the Thurston County Department of Environmental Health. On July 8, 2022, the Thurston County Department of Environmental Health, through its Environmental Review Division Manager, Karen Lindstrom, issued a request for supplemental environmental data. As a result, the Phase II EID review was paused pending the submission of the requested supplemental information.
39.  On September 14, 2022, Pinnacle notified CSIA that it would "defer further project expenditures" pending resolution of the permitting issues. This notification was made unilaterally by Pinnacle in its capacity as Manager, without the prior authorization or approval of the Governing Board. The notification did not identify any specific impediment to the submission of the supplemental environmental data requested by Thurston County, nor did it propose any alternative course of action to advance the permitting process. CSIA viewed Pinnacle's unilateral deferral as an abdication of its managerial responsibilities and raised its objections promptly.
40.  On November 30, 2022, a regularly scheduled meeting of the CBWTP Governing Board was convened by notice from the CSIA-appointed Board members. However, the meeting failed for lack of a quorum because neither of the Pinnacle-appointed Governing Board members — Richard Prumvane and Cynthia Voss — attended the meeting. Under Section 5.3 of the JV Agreement, a quorum of the Governing Board requires the presence of at least four (4) of five (5) members, or at a minimum, the presence of at least one (1) member appointed by each party. Because no Pinnacle-appointed member was present, no quorum could be established, and the Board was unable to conduct business or take any action.
41.  The combined effect of Pinnacle's September 2022 unilateral deferral of project expenditures and the November 2022 failed Board meeting was to bring the Facility project to a standstill. No further progress was made on the environmental permitting, construction preparations, or any other aspect of the project during this period.
F. The Second Tranche Capital Call and Pinnacle's Default
42.  On March 1, 2023, the CBWTP Governing Board issued a formal capital call notice for the Second Tranche equity contributions, as authorized under Section 3.3 of the JV Agreement. The capital call notice required CSIA to contribute Four Million Nine Hundred Fifty Thousand Dollars ($4,950,000) and Pinnacle to contribute Four Million Fifty Thousand Dollars ($4,050,000), in each case payable within thirty (30) calendar days of the date of the notice — that is, on or before March 31, 2023.
43.  On March 28, 2023, CSIA timely funded its Second Tranche capital contribution of $4,950,000 in full, bringing CSIA's total funded equity in CBWTP to Nine Million Nine Hundred Thousand Dollars ($9,900,000), representing one hundred percent (100%) of CSIA's total equity commitment under the JV Agreement.
44.  March 31, 2023 — the deadline established by the capital call notice — passed without Pinnacle funding any portion of its Second Tranche capital contribution of $4,050,000. Pinnacle did not make its required payment on or before the due date, nor did Pinnacle provide any written notice of an intent to fund, request an extension, or otherwise communicate with CSIA or the Governing Board regarding its failure to fund.
45.  On April 14, 2023, Calderwood & Harkness LLP, acting as counsel for CSIA, transmitted a formal default notice (the "Default Notice") to Pinnacle, addressed to Richard Prumvane, Chief Executive Officer, at Pinnacle's principal offices at 720 SW Quelston Street, Suite 1500, Portland, Oregon 97205. Copies of the Default Notice were simultaneously transmitted to Pinnacle's counsel, Whitfield, Aarons & Greer LLP, to the attention of Elaine Prescott.
46.  The Default Notice stated that Pinnacle had failed to fund its Second Tranche capital contribution of $4,050,000 by the March 31, 2023 deadline, constituting a default under Section 8.1(a) of the JV Agreement. The Default Notice further advised Pinnacle that, pursuant to Section 8.2 of the JV Agreement, Pinnacle had a period of sixty (60) calendar days from the date of the Default Notice — that is, until June 13, 2023 — within which to cure the default by funding its Second Tranche contribution in full, together with any applicable default interest.
47.  The sixty-day cure period expired on June 13, 2023. Pinnacle did not fund its Second Tranche capital contribution of $4,050,000 during the cure period, nor did Pinnacle take any steps to cure or partially cure its default. To this day, Pinnacle has not funded any portion of its outstanding Second Tranche capital contribution. The total outstanding default amount remains $4,050,000.
G. Pinnacle's Force Majeure Claim and CSIA's Rejection
48.  On April 28, 2023, Whitfield, Aarons & Greer LLP, acting as counsel for Pinnacle, transmitted a letter (the "Force Majeure Letter") to Calderwood & Harkness LLP asserting that Pinnacle's failure to fund the Second Tranche capital contribution was excused by force majeure under Section 11.4 of the JV Agreement. The Force Majeure Letter contended that "regulatory delay beyond Pinnacle's control" — referring to the pending Phase II EID review at Thurston County — constituted a Force Majeure Event under the JV Agreement, relieving Pinnacle of its obligation to fund its capital contribution.
49.  On May 12, 2023, Calderwood & Harkness LLP, acting on behalf of CSIA, transmitted a detailed response letter (the "Rejection Letter") to Whitfield, Aarons & Greer LLP, rejecting Pinnacle's force majeure defense in its entirety. The Rejection Letter set forth the following grounds:
(a) Contractual Exclusion. Section 11.4 of the JV Agreement defines "Force Majeure Events" and expressly excludes from that definition "delays in obtaining governmental approvals, permits, licenses, or authorizations." The environmental permitting delay cited by Pinnacle falls squarely within this exclusion and therefore cannot constitute a Force Majeure Event under the JV Agreement.
(b) Allocation of Permitting Responsibility. Section 4.3 of the JV Agreement assigns responsibility for obtaining all necessary governmental approvals and permits for the Facility to CBWTP, acting through its Manager. Because Pinnacle serves as the Manager of CBWTP, the permitting responsibility rested with Pinnacle, not with CSIA. Pinnacle cannot invoke its own failure to advance the permitting process as a force majeure defense to its separate and independent obligation to fund its equity contribution.
(c) Self-Inflicted Delay. Pinnacle itself unilaterally deferred project expenditures on September 14, 2022, and Pinnacle's appointed Governing Board members failed to attend the November 30, 2022 Board meeting, preventing the Board from taking action to advance the project. To the extent any delay existed in the permitting process, it was attributable in material part to Pinnacle's own decisions and conduct as Manager.
(d) Independence of Capital Obligations. The obligation to fund capital contributions upon a validly issued capital call is an independent financial obligation under Section 3.3 of the JV Agreement. Capital call obligations are not conditioned upon or subject to the status of any particular project milestone, including the completion of environmental permitting. Pinnacle's duty to fund is unconditional upon receipt of a valid capital call notice, subject only to the cure period set forth in Section 8.2.
50.  Pinnacle did not respond substantively to the Rejection Letter and has not advanced any additional legal theories or defenses in support of its refusal to fund.
H. Lapse of Project Financing Commitment
51.  On August 15, 2023, the Pacific Cascade Bank, N.A. commitment letter (Reference Number PCB-PF-2022-0417) for the $27,000,000 senior secured project finance credit facility expired without any draws having been made thereunder. The commitment letter had an eighteen (18) month tenor from its date of issuance on February 15, 2022, and its expiration on August 15, 2023 was a direct and foreseeable consequence of the project delay caused by Pinnacle's default and its preceding failures as Manager.
52.  Thomas Rennick, Senior Vice President, Public Finance, at Pacific Cascade Bank, N.A., confirmed the expiration of the commitment and indicated that the commitment had not been renewed. The loss of this $27,000,000 in committed project financing has materially impaired the viability of the $45,000,000 Facility project and has necessitated that CSIA explore alternative financing options at potentially higher cost and on less favorable terms.
I. Current Financial Position of CBWTP
53.  As of June 30, 2023, the last date for which financial statements have been prepared, the financial position of CBWTP is as follows, based on financial statements prepared by Hargrove & Tillman, CPAs, of Olympia, Washington (engagement partner: Laura Svensson, CPA):
(a) Total Assets: Approximately $9,847,000, consisting of:
(i) Cash held in the operating account at Pacific Cascade Bank, N.A.: $8,412,000;
(ii) Prepaid environmental consulting fees (Westmark Environmental Consulting, Inc.): $385,000; and
(iii) Organizational and legal costs capitalized: $1,050,000.
(b) Total Liabilities: Approximately $214,000, consisting of accounts payable to Westmark Environmental Consulting, Inc. and Hargrove & Tillman, CPAs.
(c) Net Equity: $9,633,000.
(d) Capital Accounts:
(i) CSIA capital account: $9,900,000 (fully funded — both tranches); and
(ii) Pinnacle capital account: $4,050,000 (First Tranche only; Second Tranche unfunded).
(e) Cumulative Expenses: $4,317,000, reflecting pre-development costs including environmental assessments, legal and organizational expenses, and management fees.
J. Current Status
54.  Since October 2023, the matter has been dormant with no further substantive action taken by either party. Counsel for CSIA and Pinnacle have exchanged periodic status updates but have not engaged in any mediation or settlement discussions. No additional capital contributions have been made by either party, and the JV Entity has not undertaken any further project development activities.
55.  Pursuant to Section 9.1 of the JV Agreement, the buy-sell (or "shotgun") provision became exercisable on November 2, 2023, the second anniversary of the formation of CBWTP. CSIA has not yet elected to exercise this provision but expressly reserves its right to do so.
56.  CBWTP has not commenced construction of the Facility. The Thurston County Advanced Water Treatment Facility has not been built. The project remains stalled, and the committed project financing has lapsed, all as a direct result of Pinnacle's default and its preceding failures as Manager of the JV Entity.
V. CLAIMS FOR RELIEF
A. Count I: Breach of Contract — Failure to Fund Second Tranche Capital Contribution
57.  CSIA incorporates by reference paragraphs 1 through 56 above as though fully set forth herein.
58.  The JV Agreement constitutes a valid and binding contract between CSIA and Pinnacle, enforceable in accordance with its terms. Under Section 3.3 of the JV Agreement, each member is unconditionally obligated to fund its pro rata share of any capital call duly issued by the Governing Board within thirty (30) calendar days of the capital call notice.
59.  On March 1, 2023, the Governing Board of CBWTP duly issued a formal capital call notice for the Second Tranche equity contributions. The capital call was authorized in accordance with the procedures set forth in the JV Agreement and required Pinnacle to contribute Four Million Fifty Thousand Dollars ($4,050,000) on or before March 31, 2023.
60.  Pinnacle failed to fund any portion of its Second Tranche capital contribution by the March 31, 2023 deadline. Pinnacle further failed to cure such default within the sixty (60) day cure period provided under Section 8.2 of the JV Agreement, which expired on June 13, 2023. Pinnacle has not funded any portion of its Second Tranche capital contribution to date.
61.  Pinnacle's assertion of force majeure under Section 11.4 of the JV Agreement is without merit and does not excuse Pinnacle's non-performance. Section 11.4 expressly excludes "delays in obtaining governmental approvals, permits, licenses, or authorizations" from the definition of Force Majeure Events. The environmental permitting delay cited by Pinnacle falls squarely within this exclusion.
62.  Moreover, Section 4.3 of the JV Agreement allocates responsibility for obtaining all necessary governmental approvals and permits for the Facility to CBWTP, acting through its Manager — which is Pinnacle. Pinnacle, having unilaterally deferred project expenditures and having caused the failure of a Board meeting for lack of quorum, cannot invoke its own dereliction of managerial duty as a basis to excuse its separate and independent obligation to fund its capital contribution.
63.  CSIA performed all of its obligations under the JV Agreement in all material respects, including funding its full equity commitment of $9,900,000 across both tranches. CSIA's performance was timely, complete, and in strict compliance with the JV Agreement.
64.  Pinnacle's failure to fund its Second Tranche capital contribution of $4,050,000 constitutes a material breach of the JV Agreement. Such breach remains uncured.
B. Count II: Breach of Managerial Duties
65.  CSIA incorporates by reference paragraphs 1 through 64 above as though fully set forth herein.
66.  Pursuant to Section 6.1 of the JV Agreement, Pinnacle was designated as the Manager of CBWTP and was charged with the day-to-day management and operations of the JV Entity. Among the Manager's express responsibilities was the obligation to advance the design, permitting, and construction of the Facility, including the coordination and prosecution of all necessary environmental reviews and governmental approvals under Section 4.3.
67.  Beginning on or about September 14, 2022, Pinnacle unilaterally deferred further project expenditures without obtaining the prior authorization or approval of the Governing Board. This unilateral action was inconsistent with Pinnacle's duties as Manager and exceeded the scope of the Manager's authority under the JV Agreement, which requires Board approval for significant decisions affecting the project schedule and budget.
68.  On November 30, 2022, Pinnacle's appointed Governing Board members, Richard Prumvane and Cynthia Voss, failed to attend a duly noticed meeting of the Governing Board, thereby depriving the Board of a quorum and preventing the Board from conducting business. The failure of Pinnacle's Board appointees to attend this meeting was not justified by any recognized excuse and further impeded the governance and progress of the JV Entity.
69.  As a direct result of Pinnacle's failures as Manager — including the unilateral deferral of project expenditures and the failure to maintain Board quorum — the Phase II EID review at Thurston County stalled, the project timeline was materially delayed, and the PCB credit facility was not drawn upon prior to its expiration. Pinnacle's breaches of its managerial duties caused direct and foreseeable harm to CBWTP and to CSIA as the majority member.
C. Count III: Consequential Damages from Loss of Project Financing
70.  CSIA incorporates by reference paragraphs 1 through 69 above as though fully set forth herein.
71.  Pinnacle's material default under the JV Agreement and its failures as Manager directly and foreseeably caused the expiration of the Pacific Cascade Bank, N.A. $27,000,000 senior secured project finance credit facility (PCB-PF-2022-0417) on August 15, 2023, without any draws having been made thereunder. The expiration of this commitment was a direct consequence of the project stall caused by Pinnacle's conduct, including its unilateral deferral of project expenditures, its failure to maintain Board quorum, and its failure to fund the Second Tranche capital contribution.
72.  The loss of the $27,000,000 in committed project financing has materially impaired the viability of the $45,000,000 Facility project. The debt component represented sixty percent (60%) of total project funding and was essential to the project's capital structure and financial feasibility.
73.  As a direct and proximate result of the loss of the PCB credit facility, CSIA and CBWTP have been and will be required to incur substantial additional costs to secure replacement project financing, including but not limited to increased borrowing costs (reflecting changed market conditions and higher interest rates), additional financial advisory and legal fees, extended carrying costs during the project delay, and potential restructuring costs associated with modifying the project's capital structure.
74.  CSIA seeks an award of consequential damages arising from the project delay and the loss of the PCB credit facility, in an amount to be proven at the arbitration hearing through the introduction of competent evidence regarding the costs and losses attributable to Pinnacle's default.
VI. RELIEF REQUESTED
WHEREFORE, Claimant Cascadia State Infrastructure Authority respectfully requests that the arbitral tribunal render an award granting the following relief:
A. Specific Performance
75.  An order of specific performance compelling Pinnacle Water Solutions, LLC to fund its Second Tranche capital contribution of Four Million Fifty Thousand Dollars ($4,050,000) to Columbia Basin Water Treatment Partners, LLC, together with interest thereon from March 31, 2023 (the date such payment was due) at the applicable rate under Washington law.
B. Alternative Damages
76.  In the alternative to specific performance, in the event the arbitral tribunal determines that specific performance is unavailable or impracticable, an award of damages in the amount of Four Million Fifty Thousand Dollars ($4,050,000), representing the unfunded Second Tranche capital contribution, together with prejudgment interest thereon from March 31, 2023 at the applicable rate under Washington law.
C. Consequential Damages
77.  An award of consequential damages arising from the project delay and the loss of the $27,000,000 Pacific Cascade Bank, N.A. credit facility, including but not limited to increased borrowing costs, additional advisory and legal fees, extended carrying costs, and other damages directly resulting from Pinnacle's default, in an amount to be proven at the arbitration hearing.
D. Declaration of Default
78.  A declaration that Pinnacle Water Solutions, LLC is in material, uncured default under Section 8.2 of the JV Agreement, and that CSIA is entitled to exercise all remedies available to it under the JV Agreement by reason of such default, including but not limited to:
(i) Pro rata dilution of Pinnacle's forty-five percent (45%) membership interest in CBWTP in accordance with the dilution provisions of the JV Agreement;
(ii) Purchase of Pinnacle's membership interest in CBWTP at seventy-five percent (75%) of fair market value, as determined in accordance with the JV Agreement; and
(iii) Election of dissolution of CBWTP, subject to the procedures set forth in the JV Agreement and applicable Washington law.
E. Costs and Fees
79.  An award of CSIA's costs of arbitration, including all arbitrator fees, PNAA administrative fees, and reasonable attorneys' fees and expenses incurred in connection with this proceeding, to the extent permitted under the JV Agreement and applicable Washington law.
F. Other Relief
80.  Such other and further relief as the arbitral tribunal deems just, equitable, and appropriate under the circumstances.
VII. DESIGNATION OF ARBITRATOR AND PROCEDURAL MATTERS
81.  CSIA respectfully requests that the arbitral tribunal be constituted in accordance with the applicable rules of the Pacific Northwest Arbitration Association. CSIA is amenable to the appointment of either a sole arbitrator or a three-member arbitral panel, as may be determined under the PNAA rules and in consultation with Respondent.
82.  The seat of arbitration shall be Seattle, Washington, in accordance with Section 12.2 of the JV Agreement.
83.  The language of the arbitration shall be English.
84.  The substantive law governing all claims and defenses shall be the law of the State of Washington, as specified in Section 12.3 of the JV Agreement.
85.  CSIA reserves its right to amend, supplement, or modify this Demand for Arbitration at any time prior to and after filing, in accordance with applicable PNAA rules and any procedural orders of the arbitral tribunal.
VIII. MEDIATION COMPLIANCE STATEMENT
86.  CSIA acknowledges and affirms that Section 12.1 of the JV Agreement requires mandatory mediation of disputes arising under the JV Agreement prior to the commencement of binding arbitration. CSIA is committed to complying with this prerequisite in good faith.
87.  CSIA intends to serve a formal mediation demand upon Pinnacle Water Solutions, LLC concurrently with or prior to the filing of this Demand for Arbitration with the PNAA. CSIA proposes that the mediation be conducted in Seattle, Washington, before a qualified neutral mediator to be agreed upon by the parties or, in the absence of agreement, to be appointed in accordance with the PNAA rules.
88.  In the event that Pinnacle refuses to participate in mediation or fails to engage in mediation in good faith within a reasonable period of time following the service of CSIA's mediation demand — not to exceed forty-five (45) days — CSIA will request the PNAA to permit this arbitration to proceed directly, on the grounds that the mediation prerequisite has been satisfied or should be deemed excused by reason of Pinnacle's non-participation.
89.  CSIA has been ready and willing to mediate this dispute at all relevant times and continues to remain so. CSIA's preparation of this Demand in draft form is intended to ensure that no further time is lost in the event mediation does not result in a resolution of the dispute.
IX. RESERVATION OF RIGHTS
90.  CSIA expressly reserves all of its rights, remedies, claims, and defenses under the JV Agreement, at law, and in equity, whether or not specifically identified in this Demand, including but not limited to:
(a) The right to exercise the buy-sell (shotgun) provision under Section 9.1 of the JV Agreement, which became exercisable on November 2, 2023, the second anniversary of the formation of CBWTP, and which permits either member to initiate a buy-sell procedure following a material default by the other member;
(b) The right to exercise all default remedies set forth in Section 8.2 of the JV Agreement, including pro rata dilution of Pinnacle's membership interest, purchase of Pinnacle's membership interest at seventy-five percent (75%) of fair market value, and election to dissolve CBWTP;
(c) The right to enforce the non-competition covenant set forth in Section 10.3 of the JV Agreement, which prohibits Pinnacle from competing in the water treatment sector within a seventy-five (75) mile radius of the Facility Site for a period of five (5) years following termination of the JV;
(d) All rights under the Ground Lease (Thurston County Auditor Recording Number 2021-1102-004788), including the right of reversion of the Facility Site and all improvements thereon to CSIA upon termination of the JV; and
(e) All other rights and remedies available under the JV Agreement, applicable Washington law, or in equity, whether arising by contract, statute, or common law.
91.  Nothing contained in this Demand for Arbitration, and no action or inaction taken by CSIA in connection with the preparation, filing, or prosecution of this arbitration, shall be deemed, construed, or interpreted as a waiver, relinquishment, or election of any right or remedy available to CSIA. CSIA's pursuit of arbitration relief shall not preclude or limit CSIA's exercise of any other right or remedy to which it may be entitled, and all such rights and remedies are cumulative and not exclusive.
X. IDENTIFICATION OF COUNSEL
92.  Claimant Cascadia State Infrastructure Authority is represented in this arbitration by:
Oliver Mackenzie Responsible Partner, Mergers & Acquisitions
Tiffany Rosenthal Lead Associate, Mergers & Acquisitions
Calderwood & Harkness LLP 901 Fifth Avenue, Suite 3200 Seattle, Washington 98164 Telephone: (206) 555-7800 Facsimile: (206) 555-7801
C&H Matter Number: 47291.00001
93.  All communications regarding this arbitration proceeding, including all notices, correspondence, filings, and service of process, should be directed to Oliver Mackenzie at the address set forth above, with copies to:
David Tanaka General Counsel Cascadia State Infrastructure Authority 1100 Jefferson Street SE, Suite 400 Olympia, Washington 98501 Telephone: (360) 555-4200 Facsimile: (360) 555-4201
XI. LIST OF SUPPORTING DOCUMENTS AND EVIDENCE
94.  CSIA intends to submit the following documents and evidence in support of this Demand for Arbitration, subject to supplementation as the proceedings develop:
1.  Amended and Restated Limited Liability Company Agreement of Columbia Basin Water Treatment Partners, LLC, dated November 2, 2021 (JV Agreement — execution version with all exhibits and schedules);
2.  Ground Lease Agreement between CSIA and CBWTP, dated November 2, 2021 (Thurston County Auditor Recording Number 2021-1102-004788);
3.  Capital Call Notice issued by the CBWTP Governing Board, dated March 1, 2023;
4.  Proof of CSIA's Second Tranche funding ($4,950,000), including wire transfer confirmation dated March 28, 2023;
5.  Default Notice Letter from Calderwood & Harkness LLP to Pinnacle Water Solutions, LLC, dated April 14, 2023;
6.  Force Majeure Letter from Whitfield, Aarons & Greer LLP (on behalf of Pinnacle Water Solutions, LLC), dated April 28, 2023;
7.  Response Letter from Calderwood & Harkness LLP rejecting Pinnacle's force majeure defense, dated May 12, 2023;
8.  Pacific Cascade Bank, N.A. Commitment Letter (Reference Number PCB-PF-2022-0417), dated February 15, 2022, together with evidence of the expiration of such commitment on August 15, 2023;
9.  CBWTP financial statements as of June 30, 2023, prepared by Hargrove & Tillman, CPAs, Olympia, Washington;
10.  Phase I Environmental Site Assessment prepared by Westmark Environmental Consulting, Inc., dated April 22, 2022;
11.  Thurston County Department of Environmental Health supplemental data request, dated July 8, 2022;
12.  Pinnacle's September 14, 2022 notice of deferral of project expenditures;
13.  Records of the November 30, 2022 failed Governing Board meeting, including the meeting notice and attendance record documenting the absence of quorum; and
14.  Such additional documents, evidence, witness statements, expert reports, and other materials as may be relevant and identified during the course of these proceedings.
XII. SIGNATURE
Respectfully submitted on behalf of Claimant Cascadia State Infrastructure Authority.
CALDERWOOD & HARKNESS LLP
By: ________
Name: Oliver Mackenzie
Title: Responsible Partner, Mergers & Acquisitions
Date: ________
By: ________
Name: Tiffany Rosenthal
Title: Lead Associate, Mergers & Acquisitions
Date: ________
Calderwood & Harkness LLP 901 Fifth Avenue, Suite 3200 Seattle, Washington 98164 C&H Matter Number: 47291.00001
On behalf of Claimant Cascadia State Infrastructure Authority 1100 Jefferson Street SE, Suite 400 Olympia, Washington 98501
DRAFT NOTATIONS
DRAFT — FOR INTERNAL REVIEW AND DISCUSSION PURPOSES ONLY
THIS DOCUMENT HAS NOT BEEN FILED WITH THE PACIFIC NORTHWEST ARBITRATION ASSOCIATION AND HAS NOT BEEN SERVED ON RESPONDENT PINNACLE WATER SOLUTIONS, LLC OR ITS COUNSEL.
THIS DOCUMENT IS SUBJECT TO THE ATTORNEY-CLIENT PRIVILEGE AND THE WORK PRODUCT DOCTRINE. IT CONTAINS CONFIDENTIAL ATTORNEY WORK PRODUCT PREPARED IN ANTICIPATION OF LITIGATION AND IS NOT INTENDED FOR DISCLOSURE TO ANY THIRD PARTY WITHOUT THE EXPRESS WRITTEN AUTHORIZATION OF CASCADIA STATE INFRASTRUCTURE AUTHORITY AND CALDERWOOD & HARKNESS LLP.
Filing of this Demand is pending CSIA's strategic decision on path forward. See Status Memorandum and Recommended Path Forward prepared by Calderwood & Harkness LLP, dated January 15, 2024, for a discussion of available strategic options, including (i) filing this Demand upon completion of the mediation prerequisite, (ii) exercising the buy-sell provision under §9.1 of the JV Agreement, (iii) pursuing a negotiated settlement or restructuring of the JV, and (iv) electing dissolution of CBWTP. This Demand should not be filed, served, or disclosed without prior authorization from the client.
CASCADIA STATE INFRASTRUCTURE AUTHORITY,
Claimant,
PNAA Case No. _______________
v.
PINNACLE WATER SOLUTIONS, LLC,
Respondent.