Why a Deal Between Indianapolis and Covanta Hit a Legal Roadblock

City officials in Indianapolis, Ind., thought they had a great deal with a waste-to-energy firm until a state appeals court effectively said, “Not so fast.” The approval process violated the state waste disposal law.

In 1985, the city signed a contract (Original Agreement) with Massburn, Inc., the predecessor of Covanta Indianapolis, Inc., for the disposal of solid waste via waste-to-energy technology. Under the Original Agreement, Covanta committed to receive and dispose of all acceptable solid waste provided to it by the city at a facility Covanta would design, construct, own, operate and maintain. Construction commenced in 1985, and the facility was fully operational in 1989.

Some 20 years later, the city and Covanta amended the Original Agreement (First Amendment) by extending the term of the contract until 2018, with two optional five-year extensions thereafter, and by imposing on the city a put-or-pay requirement.

In August 2014, the city and its board of public works, without holding a public meeting or conducting a public bidding process, approved yet another amendment. Among other things, this Second Amendment changed the Original Agreement in several respects:

•Covanta may design, construct and operate an advanced materials recovery center (ARC Facility) for the recovery of certain materials from the waste stream that may be suitable for recycling.

•Covanta has exclusive right to the city's waste for another 10 years, extending the contractual term to December 31, 2028.

•Covanta has no minimum recovery of recyclables.

•The put-or-pay provision is deleted.

•The city pays 70 percent of Covanta's taxes for the ARC Facility, up to $4 million.

•If the city expands its clean recycling options, it faces significant liquidated damages.

•If the current subscription curbside recycling program were to collect 5 percent more recyclables per year than in the year prior to the opening of the ARC Facility, then the city's portion of revenue decreases.

•The city is prohibited from working with the private sector to improve recycling programs for the next 14 years.

Moreover, the Second Amendment eliminated source separation for trash and recyclables. Instead, the collected materials would be sorted at the ARC Facility. Compared to a program that does not mix recyclables with trash, the new system would produce a significantly higher rate of recovered materials that are unsuitable in manufacturing items and products with recycled content. Covanta would see its feedstock—and its energy sales—correspondingly grow. Graphic Packaging International (GPI) and Rock-Tenn Converting Co. (R-T) are in the business of manufacturing and selling paperboard and folding cartons. GPI and R-T purchase recycled paper and paperboard to produce their products, but they will not buy the contaminated recycled material originating from the ARC Facility. The new arrangement will reduce the amount of materials in the market that meet the companies’ quality specifications. For its part, R-T claimed that it would have responded to a request for proposals for a recyclables recovery facility if the city had followed public bidding procedures.

Shortly after the city and its board of public works announced the Second Amendment, GPI and R-T, together with an Indianapolis resident, filed a complaint in Marion County Superior Court challenging the validity of the Second Amendment and the procedure by which it was awarded. The city responded by filing a motion to dismiss and for summary judgment.

The plaintiffs objected to dismissal and filed their own motion for summary judgment. Following briefing and oral argument, the trial court ruled in favor of the city. The trial judge found that (1) the plaintiffs lacked a legally recognizable degree of interest in the matter that would enable them to file a lawsuit; (2) even if the plaintiffs had such an interest, the city was not required by law to engage in competitive bidding; and (3) the term of the contract does not exceed the 40-year statutory limit. The plaintiffs appealed.

A three-judge panel of the Indiana Court of Appeals found that the amendment, requiring the design, construction and maintenance of a $45 million facility, was subject to the state waste disposal statute, which requires, among other things, public bidding and public participation in the process. As these things did not occur, the contract was ruled void.

The city initially challenged the plaintiffs’ right to bring the lawsuit. The city argued that no private cause of action should be inferred because the state law imposes a duty that benefits the public, rather than a private interest. By way of illustration, the city, for unfathomable reasons,

pointed to the public bidding provisions of the statute—this, despite the fact that the city’s failure to abide by the public bidding requirement is the central issue of the case. Mystified by the city’s rationale, the appellate panel held that the statute, which specifically mentions an “action to contest the validity of the contract awarded or the procedure by which it was awarded” clearly creates a right to challenge contracts by going to court.

 “As members of the public, these Plaintiffs have an interest in ensuring that their government complies with the law, and the Waste Disposal Statute in no way limits who is entitled to file a cause of action seeking to enforce it,” the panel said. “Therefore, we find that they have standing to raise these claims.”

The parties argued about whether the contract ran afoul of the state law provisions governing “design, construction, operation, financing, ownership, or maintenance of a facility for waste disposal.” These provisions require public bidding, public notice and comment, and hearings. Ind. Code § 36-9-31-4. It was undisputed that the city for the Second Amendment did not comply with any of these provisions. The city insisted that the amendment should be considered a service contract and not a construction contract. Ind. Code § 36-9-31-3. To no avail.

“While the provision of services is also a part of the Second Amendment, we decline to ignore the contractual requirement for the construction of a multi-million dollar facility,” the opinion said. “In no way do we intend to curtail the ability of local governments to enter into waste disposal service contracts under section 3. We merely hold that when a contract goes well above and beyond the provision of services by requiring the construction of a massive facility, it walks and quacks like the proverbial section 4 duck we deem it to be.”

Rebuffing the city’s additional argument—that it would be exempt from Section 4 as the facility would be owned by a private entity, the appeals court cited a friend-of-the-court brief: “the fact that the decision to create the facility might have originated with the private corporation—motivated, at least in part, by a desire to increase profits—simply underscores the importance of an open and transparent decision-making process.”

Finally, as a matter of public policy, the appeals court embraced the plaintiffs’ contention that the concept of the waste disposal statute is "a transparent, public process that allows competition and public review and input." The opinion continued: “Had the policy of public input and transparency been honored, the citizens of this City would have had the chance to learn about and provide input regarding the Dirty Recycling process. They have the right to have their say, especially when a multi-million-dollar, multi-decade contract affecting one and all is involved.”

As for the length of the contract, the appeals court firmly rejected the lower court findings and held that the contract exceeded the statutory maximum of 40 years. “[B]eginning in 1985, the parties had contractual obligations, including meeting financial obligations, issuing bonds, obtaining permits, designing the facility, meeting construction schedules, completing a lease agreement, facility testing, etc.” the opinion said. “Therefore, the ‘effective date’ in the contract merely defines future trigger points in the contract rather than being synonymous with the actual start date of the contract for purposes of the forty-year time limit.”

Graphic Packaging Int’l, Inc., et al. v. City of Indianapolis, No. 49A04-1504-PL-165, Ind.App., Feb. 24, 2016.