Friday, May 14, 2010

Public Water Supply District No. 3 of Laclede County v. City of Lebanon [1]

--> Opinion handed down May 14, 2010
Link to Eighth Circuit Opinion

The Eighth Circuit Court of Appeals examined 7 U.S.C. § 1926(b) which protects rural districts’ utilities financed by a federal loan from competition with surrounding municipalities by not allowing municipalities to extend service to coverage within the area covered by the district. The Eighth Circuit held that the City of Lebanon, Missouri did not violate § 1926 by continuing to provide sewer and water services to pre-existing customers within the District’s boundaries. The court limited the services protected under § 1926(b) to those that are financed by the federal loan. Additionally, the court held that even though a developer or customer may not want to receive services from a rural district, if those services are available at a reasonable cost, the rural district is entitled to the customers.

I. Facts and Holding

Public Water Supply District No. 3 of Laclede County, Missouri (the District) brought suit against the City of Lebanon, Missouri (the City) accusing the City of providing water and sewer services to customers within the District’s boundaries.[2] The District alleged that the City violated 7 U.S.C. § 1926(b) by providing these services to customers within the District.[3]

The District was founded in 1967 to provide water service to customers residing within its boundaries and was amended in 1998 in order to authorize the District to provide sewer service.[4] On August 31, 2007 the District was given a United States Department of Agriculture (USDA) loan pursuant to 7 U.S.C. § 1926(b) in order to extend and improve the District’s sewer system.[5] The District was insulated from competition under 7 U.S.C. § 1926(b) as a federally indebted rural water association.[6]

At the time the USDA loan was made to the District, the City was already providing service to some customers within the District’s boundaries.[7] After the loan was advanced the City continued to extend service to additional customers who were not receiving service from the District but who resided within the District’s boundaries.[8]

The customers in dispute can be divided into three categories: “(1) sewer customers the City began serving before August 31, 2007; (2) water customers, regardless of when the City began providing service to them; and (3) sewer customers living in seven tracts of properties that the City began serving after August 31, 2007.”[9]

The district court granted the City’s motion for summary judgment, stating that § 1926(b) does not entitle the District to be the sole service provider for any of the disputed customers.[10]

A. Customers Being Served by the City Prior to the Loan

The District argued that, as of August 31, 2007, the City no longer had the right to serve any customers that reside within the boundaries of the District.[11] The City argued that § 1926(b) merely prevents cities from providing service to new customers.[12] The Eighth Circuit identified the key language of § 1926(b), which states that a “rural district’s service ‘shall not be curtailed or limited.’”[13]

After examination of the plain language of the statute, the court found that the ordinary meaning of the terms and their use within the statute suggest that a city does not violate § 1926(b) by continuing to provide service to pre-existing customers.[14] Additionally, the Eighth Circuit pointed out that without this limitation cities would resist spending capital to develop services out of fear that they will automatically lose their customers if a rural association receives a federal loan.[15]

The Eighth Circuit went on to state that §1926(b) was enacted “to encourage rural water development and provide additional security for [USDA] loans.”[16] With respect to the customers previously served by the city, § 1926(b) provides a shield, not a sword.[17] Therefore, the city would not be violating § 1926(b) by continuing to serve customers that lie in the District’s boundaries.[18]

B. Sewer Customers

The Eighth Circuit also determined whether § 1926(b) protections extended only to those services provided by a federal loan or all services provided by the District.[19] The court pointed to the statute’s use of the singular “service” and held that the language of the statute indicates that it was only meant to cover the service financed by the qualifying federal loan.[20]

The court also looked at the statute in its entirety to determine what Congress intended.[21] The court determined that discouraging cities in rural areas to develop water and sewer programs defeats the purpose of the bill.[22] If the protection were to extend to all services provided by the District, cities would be discouraged from serving the rural communities, resulting in lowering the quality of services in rural areas, which this bill was designed to promote.[23] Additionally, the loan is secured with the payments received for the service provided by the loan while the other services remain unaffected.[24]

C. Customers Acquired by the City after the USDA Loan to the District

The last group of customers at issue are those who the City extended service to after the USDA loan was given to the District.[25] The Eighth Circuit identified three requirements that must be met before a rural district qualifies for §1926(b) protections: “(1) be an ‘association’ under the statute, (2) have a qualifying federal loan, and (3) have provided or made service available to the disputed area.’”[26] The first two requirements are not in doubt in this case.[27] As to the third requirement, the district must have: “(1) the physical ability to serve an area; and (2) the legal right to serve an area.”[28] The Eighth Circuit held that courts can examine whether a district’s services are unreasonably costly or unreasonably delayed as constructive denials of service; however, allowing mere preference for other service to be a sufficient reason to avoid § 1926(b) would dilute the protections afforded by the statute. [29]

The court remanded a portion of the judgment dealing with a development known as Castle Rock because the lower court improperly focused on the preferences of the potential customer.[30] The Eighth Circuit provided that after additional factual development the district court should apply the “pipes in the ground” test which examines whether adequate facilities exist “within or adjacent to the area” in question to determine if the district had “made service available.”[31]

II. Legal Background

The controversy in this case is rooted in the question of whether § 1926(b) can be used offensively by rural districts to force customers being served by a city to switch their service to the federally financed districts.[32]

The Eighth Circuit addressed the Sixth Circuit’s decision in Le-Ax Water Dist. v. City of Athens.[33] In Le-Ax both the city and district sought to supply water to a new development that was situated outside the boundaries of both parties to the lawsuit.[34] The district claimed that, although service was not extended to that area at the time, it was possible to extend the service almost immediately.[35] The key question for the Sixth Circuit was whether the district satisfied the requirement that the association had made service available to the area.[36] In Le-Ax it was apparent that the rural district was attempting to use § 1926(b) not for protection but instead to “foist an incursion of its own on users outside of its boundaries.”[37] The Sixth Circuit held that a rural district could not use § 1926(b) as a sword to force new customers outside that geographic area to receive water.[38] The court explained that the “goal of the statute is only to protect territory already served by a rural water association from municipal expansion into the rural water association’s area; it does not give credence to [the district’s] hypothesis that the statute can be used to recruit unwilling new users.”[39]

The Tenth Circuit has taken a different position on the issue as illustrated by Pittsburgh County Rural Water Dist. NO. 7 v. City of McAlester and Sequoyah County Rural Water Dist. NO. 7 v. Town of Muldrow.[40] Both McAlester and Sequoyah involved rural water districts that received federal loans entitling them to protection; however, they subsequently paid those loans off, which allowed other municipalities to start serving some of the customers.[41] After taking out additional federal loans, the districts sought to reclaim the customers located in their territories that were then being served by the city.[42] In Sequoya, the Tenth Circuit held that the district could be compensated for any time the city provided service to customers within the district’s territory while the district was protected under § 1926(b) even if the city had previously provided services to these customers.[43]

In McAlester, the Tenth Circuit expanded on Sequoya while examining a dispute between a rural district and municipality involving who had the right to serve certain areas.[44] The Tenth Circuit held that when a district can show that (1) it was “in debt to the federal government through a loan administered by the FMHA and (2) made service available,” then the district has the right under § 1926(b) to serve the customers.[45] The Tenth Circuit held this is not barred by a municipality having provided service to those properties prior to the federal loan entitling the district to protection under § 1926(b).[46]

III. Comment

The Eighth Circuit is on solid ground in ruling that the City is entitled to retain customers served prior to a rural district coming under the protection of § 1926(b). The purpose of § 1926(b) is to encourage development of services to rural communities. Following the Tenth Circuit’s line of reasoning could lead cities to delay their decisions to update or establish essential services to rural districts. This ruling in Laclede will clearly encourage both cities and rural districts to develop these essential services.

-Lawrence Hall

[1] No. 09-2006 (8th Cir. May 14, 2010). The West reporter citation is Public Water Supply Dist. No. 3 of Laclede County, Mo. v. City of Lebanon, Mo., 605 F.3d 511, 514 (8th Cir. 2010).
[2] Id. at 514.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id. at 515.
[10] Id.
[11] Id.
[12] Id.
[13] Id. at 516.
[14] Id.
[ 15] Id. at 517.
[16] Id.
[17] Id. at 517-18.
[18] Id. at 519.
[19] Id.
[20] Id. at 520.
[21] Id.
[22] Id.
[23] Id.
[24] Id. at 521.
[25] Id.
[26] Id.
[27] Id.
[28] Id.
[29] Id at 522.
[30] Id. at 521.
[31] Id.
[32] Id. at 518.
[33] 346 F.3d 701 (6th Cir. 2003).
[34] Id. at 703.
[35] Id. at 703-04.
[36] Id. at 705.
[37] Id. at 707.
[38] Id. at 708.
[39] Id.
[40] 358 F.3d 694 (2004); 191 F.3d 1192 (1999).
[41] Laclede, 605 F.3d at 518.
[42] Id.
[43] 191 F.3d at 1206.
[44] 358 F.3d at 712.
[45] Id.
[46] Id.