Sioux Rural Water System, Inc. v. City of Watertown et al

Filing 52

OPINION AND ORDER granting in part and denying in part 22 MOTION for Summary Judgment or in the Alternative for Partial Summary Judgment filed by Sioux Rural Water System, Inc., and denying 28 MOTION for Summary Judgment filed by City of Watertown, Watertown Municipal Utilities. Signed by U.S. District Judge Charles B. Kornmann on 4/7/17. (SKK)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
NORTHERN DIVISION

FILED
APR 12 2017

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SIOUX RURAL WATER SYSTEM, INC.,
A Non-Profit Corporation,
CIV 15-1023-CBK

Plaintiff,

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OPINION AND ORDER
vs.
CITY OF WATERTOWN, a South Dakota
Municipality, and WATERTOWN
MUNICIPAL UTILITIES, an agency of the
City of Watertown,
Defendants.

INTRODUCTION
Sioux Rural Water System, Inc. ("Sioux") is a South Dakota corporation formed in
1974 to provide water to rural Codington, Deuel, and Hamlin Counties in South Dakota.
Sioux is a not-for-profit corporation organized under the South Dakota Nonprofit
Corporation Act, SDCL Chapter 47-22 and 26 U.S.C. § 501(c)(3). Sioux submitted
articles of incorporation to the South Dakota Secretary of State listing as its purposes
inter alia:
A. To acquire, construct, maintain, and operate a system for the diversion,
supply, storage, and distribution of water to the members of this Corporation
for domestic purpose (sic) within the area served by the Corporation in the
Counties of Hamlin, Codington, and Deuel, South Dakota, and
B. To acquire by appropriation or otherwise, and to lease, sell or dispose of water
and water rights for domestic purposes (emphasis supplied).
In order to finance the building of its water system, Sioux took out loans from the
United States Department of Agriculture ("USDA") under the Consolidated Farm and
Rural Development Act, 7 U.S.C. §§ 1921 et seq. That Act authorized the Secretary of
Agriculture to make or insure loans to, inter alia, nonprofit corporations, to provide water

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services "primarily serving farmers, ranchers, farm tenants, farm laborers, rural
businesses, and other rural residents." 7 U.S.C. § 1926(a). It is undisputed that Sioux is
and has been continuously indebted to the USDA since 1974 by virtue of loans from the
Rural Development Agency issued pursuant to 7 U.S.C. § 1926(a). Sioux makes
payments on its USDA loans from revenue it receives from the sale of water to its
customers.
Sioux's USDA loans are secured in part by the income Sioux receives from the
sale of water to its customers. Federal law affords federally indebted rural water
associations (which includes corporations not operated for profit, Indian tribes on Federal
and State reservations and other federally recognized Indian tribes, and public and quasipublic agencies) the exclusive right to provide water service to current and prospective
customers in the service area until the federal loans are paid in full. 7 U.S.C.A.
§ 1926(b ). Section 1926(b) protects indebted rural water associations from loss of
customers by prohibiting municipal entities from, inter alia, providing water services to
customers in the service area. Public Water Supply Dist. v. City of Lebanon, Mo., 605
F.3d 511, 515 (8th Cir. 2010). Federal law specifically provides:
The service provided or made available through any such association
shall not be curtailed or limited by inclusion of the area served by
such association within the boundaries of any municipal corporation
or other public body, or by the granting of any private franchise for
similar service within such area during the term of such loan; nor
shall the happening of any such event be the basis of requiring such
association to secure any franchise, license, or permit as a condition
to continuing to serve the area served by the association at the time
of the occurrence of such event.
7 u.s.c. § 1926(b).
7 U.S.C. 1926(b) was enacted to protect the service area of Agency
borrowers with outstanding loans ... from loss of users due to
actions or activities of other entities in the service area of the
Agency financed system. Without this protection, other entities
could extend service to users within the service area, and thereby
undermine the purpose of the congressionally mandated water and
waste loan and grant programs and jeopardize the borrower's ability
to repay its Agency debt.

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7 C.F.R. § 1782.14(a).
As a USDA borrower, it is Sioux's responsibility to initiate suit against any entity
violating § 1926(b) by curtailing the borrower's exclusive right to provide water in its
service area. 7 C.F.R. § 1782.14(b).
Sioux filed suit against the City of Watertown and Watertown Municipal Utilities
("Watertown"), seeking protection from loss of customers under § 1926(b ). Sioux's suit
against Watertown alleges that the City of Watertown has annexed territory and has
extended water supply service to areas within Sioux's service territory, taking existing
and potential customers from Sioux, in violation of federal law.
Sioux filed a motion for summary judgment seeking ( 1) an injunction enjoining
Watertown from providing water service to Sioux's current customers, (2) partial
summary judgment on the issue of liability as to the provision of services to certain
potential customers, (3) summary judgment on the issue of whether Sioux is required to
provide fire protection to any customer as a prerequisite for § 1926(b) protection, and (4)
summary judgment as to Watertown's affirmative defenses of estoppel, laches, and
waiver.
Watertown filed a cross-motion for summary judgment, contending that Sioux is
not entitled to the protection it seeks. Watertown contends that (1) Sioux does not have a
legal right to serve customers in the disputed area, and (2) Sioux does not have the
prerequisite physical ability to serve customers in the disputed area.

DECISION
"Congress enacted section 1926(b) to encourage rural water development and to
provide greater security for [USDA] loans." Rural Water System # 1 v. City of Sioux
Center, 202 F.3d 1035, 1038 (8th Cir. 2000). "[A]ny doubts about whether a water
association is entitled to protection from competition under § 1926(b) should be resolved
in favor of the [USDA] indebted party seeking protection from its territory." Id. (quoting
Sequoyah County Rural Water Dist. No. 7 v. Town of Muldrow, 191F.3d1192, 1197
(lOthCir.1999)).

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Watertown contends that Sioux is not entitled to § 1926(b) protection because
( 1) Sioux does not have the legal right to serve the customers at issue, (2) Sioux does not
have the ability to serve the customers at issue, and (3) Sioux is equitably barred from
asserting § 1926(b) protection. I reject such contentions as to one and three.
I.

Legal Right to Provide Service under South Dakota Law.
Watertown contends that, under South Dakota law, Sioux does not have the right

to serve the customers at issue. Watertown contends that Sioux has no defined territory
and SDCL 9-47-22 therefore applies to give Watertown the right of first refusal to serve
the customers within three miles of the Watertown city limits. I reject these Watertown
contentions.
In 1972, the South Dakota legislature adopted comprehensive statutes for the use
of water resources in the state. SDCL Chapter 46A. Chapter 46A includes laws for the
establishment of the South Dakota Conservancy District, water development districts,
irrigation districts, water user associations, water user districts, drainage districts, and
water project districts, all having clearly defined boundaries. Sioux is not a water district
established under Chapter 46A but is instead a not-for-profit corporation organized under
the South Dakota Nonprofit Corporation Act, SDCL Chapter 47-22 and 26 U.S.C.
§ 501 (c)(3 ). Sioux's boundaries are set forth in its articles of incorporation - Codington,
Deuel, and Hamlin Counties.
In 1989, the South Dakota legislature enacted SDCL 9-47-22 which provides:
If a rural water system is requested after July 1, 1989, to provide
water service to any person who resides within three miles of a
municipality owning and operating a water supply system, the rural
water system shall promptly notify such municipality of such request
in writing. Within sixty days from the receipt of such notice, the
municipality may elect to provide water service to such person. If
the municipality does not so elect, the rural water system may
provide such service.
SDCL 9-47-23 provides:
If a rural water system provides service to a person whom a
municipality has declined to serve, pursuant to § 9-4 7-22, and the
municipality thereafter elects to provide water service to such
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person, the municipality shall first purchase the facilities of the rural
water system which were required and used to provide service to
such person. The purchase price shall be the present day
reproduction cost, new, of the facilities being acquired, less
depreciation computed on a thirty-year straight-line basis, plus an
amount equal to the cost on a non betterment basis of constructing
any necessary facilities to reintegrate the system of the rural water
system after detaching the portion to be sold; plus as compensation
for service rights, an annual amount, payable each year for a period
of five years, equal to the sum of five percent of the gross revenues
received from the sale of water service to such person during the
five-year period. Gross revenues received shall be determined by
applying the rate in effect by the purchased rural water system at the
time of purchase.
Watertown contends the above statutes give Watertown a right of first refusal to
provide service to customers within three miles of city limits. Watertown's assertion
would result in an ex post facto right to curtail the area served by Sioux, in violation of§
l 926(b ). The issues in this case arise out of Watertown's continued annexation of
territory. Each time Watertown annexes territory, the three mile zone (in which
Watertown contends it has the right to provide water service) pushes further and further
into Sioux's territory.
Watertown's assertion that state law gives it the right of first refusal to provide
water service in what, prior to annexation, was Sioux's territory is contrary to federal
law. Section 1926(b) pre-empts any state law that would allow a municipality to curtail
Sioux's service area.
The South Dakota statutory scheme would permit Watertown (and others) to take
property rights as to which the United States has rights as a secured party. This is
something that runs afoul of federal supremacy.
II.

Legal Right to Provide Service under Federal Law.

The Eighth Circuit applies a well-established three-part test for determining
whether a rural water entity is entitled to protection under § l 926(b ):
To qualify for protection, an entity must: (1) be an "association"
under the statue, (2) have a qualifying federal loan, and (3) have
provided or made service available to the disputed area.
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Public Water Supply Dist. v. City of Lebanon, 605 F.3d 511, 521 (8th Cir. 2010). There
is no genuine issue of material fact that Sioux is a qualifying rural water entity entitled to
seek enforcement under § 1926(b) and no issue as to whether it has qualifying loans.
Watertown contends that Sioux is not entitled to § 1926(b) protection because it does not
satisfy the "making service available" prerequisite. An evidentiary hearing will be
required to address this contention.
"Making service available has two components: (1) the physical ability to serve an
area; and (2) the legal right to serve an area." Public Water Supply Dist. v. City of
Lebanon, 605 F .3d at 521 (quoting Rural Water System# 1 v. City of Sioux Center, 202
F.3d at 1037).
As set forth above, Sioux does have the legal right to serve the areas at issue in
this case. Watertown asserts, however, that Sioux does not have the physical ability to
serve the areas at issue. The "physical ability to serve" an area is referred to as the "pipes
in the ground" test. Public Water Supply Dist. No. 3 of Laclede County, Mo. v. City of
Lebanon, Mo., 605 F.3d 511, 523 (8th Cir. 2010). This test requires the court to
determine "whether a water association 'has adequate facilities within or adjacent to the
area to provide service to the area within a reasonable amount of time after a request for
service is made."' Id. (quoting Sequoyah County Rural Water Dist. No. 7 v. Town of
Muldrow, 191F.3d1192, 1202 (10th Cir. 1999)).
There is no genuine issue of material fact that any attempt by Watertown to annex
areas already served by Sioux followed by claimed "water rights" would amount to
curtailing Sioux's service area in violation of federal law. Clearly, Sioux had "pipes in
the ground" as to the customers it was serving prior to Watertown's annexation.
Genuine issues of material fact exist as to whether Sioux can satisfy the "pipes in
the ground" test as to customers in any area annexed by Watertown (and thus now within
three miles of city limits). Genuine issues of material fact also exist as to "pipes in the
ground" in other areas in Codington County.

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III.

Injunctive Relief.
Sioux seeks an injunction enjoining Watertown from providing service to any of

Sioux's current customers. Genuine issues of material fact exist as to whether there is an
adequate remedy at law if Watertown acts in violation of§ 1926(b). Watertown is on
notice, however, that there is no genuine issue of material fact that providing water
service to Sioux's existing customers is in fact a violation of federal law, entitling Sioux
to relief. Whether that relief is injunctive or monetary, or both, remains to be seen.
IV.

Fire Protection as a Prerequisite to §1926(b) Protection.
Watertown claims that Sioux does not have source capacity (adequate supply of

water or adequate water pressure) to provide fire protection to the customers at issue.
Sioux seeks summary judgment as to any claim it is required to provide fire protection as
a prerequisite to § 1926(b) protection.
Watertown has cited no federal law or regulation that conditions Section 1926(b)
protection on the ability of a rural water provider to provide fire protection to its
customers. Indeed, the courts that have addressed the issue have rejected such
requirement. "It is well established that a water district's ability to provide water for fire
protection is not a factor the court should analyze when determining whether the district
has made service available." Rural Water Dist. No. 4, Douglas City, Kan. v. City of
Eudora, Kan., 659 F.3d 969, 982 (10th Cir. 2011). "Section 1926(b) of the Agricultural
Credit Act, Title 7 U.S.C. § 1921 et seq. was not enacted for the purposes of fire
protection - it was enacted to provide means of securing a 'safe and adequate supply of
running household water."' Rural Water Dist. No. 3 v. Owasso Utilities Auth., 530 F.
Supp. 818, 823 (N.D. Okla. 1979). Accord, Sequoyah County Rural Water Dist. No. 7 v.
Town of Muldrow, 191 F.3d at 1206 n. 10 ("a water association's capacity to provide fire
protection is irrelevant to its entitlement to protection from competition under
§ l 926(b )").
Sioux is entitled to summary judgment on any claim that its failure to provide or
inability to provide fire protection precludes its ability to enforce § 1926(b ).

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V.

Affirmative defenses.
Watertown asserted in its answer the affirmative defenses of, inter alia, estoppel,

laches, and waiver. Specifically, Watertown contends that Sioux previously engaged in
negotiations with Watertown pursuant to SDCL 9-47-22 and 23 when Watertown
annexed new territory in Codington County. This contention by Watertown is correct.
Watertown further contends that Sioux is therefore equitably barred from claiming it is
entitled to § l 926(b) protection and that state law dealing with Watertown's right of first
refusal does apply. Sioux seeks summary judgment striking those defenses.
Sioux is entitled to summary judgment as to the foregoing claimed equitable
defenses. One of the purposes of§ l 926(b) is "to safeguard the interest of the United
States in having its loans repaid." Jennings Water, Inc. v. City ofN. Vernon, Ind., 682 F.
Supp. 421, 426 (S.D. Ind. 1988), aff d, 895 F.2d 311 (7th Cir. 1989). In this suit, Sioux
is fulfilling its responsibility to initiate suit against any entity violating § 1926(b) and
thereby possibly impairing Sioux's ability to repay its USDA loans. The federal
government may be estopped only by proof of the affirmative misconduct of its
employee. Bartlett v. U.S. Dep't. of Agriculture, 716 F.3d 464, 475 (8th Cir. 2013).
However, there is no authority for holding that a private party (Sioux in this case) can, by
its conduct, waive the right to enforce a federal statute intended to protect the federal
government.

VI.

Watertown's Motion for Summary Judgment.
Watertown seeks a summary judgment that Sioux does not have the legal right to

serve customers in the disputed area. As set forth above, I find that, as a matter of law,
Sioux does have the legal right to serve customers in the disputed area if Sioux meets its
burden to prove the "pipes in the ground" test.
Watertown also seeks a summary judgment that Sioux does not have the
prerequisite physical ability to serve customers in the disputed area. As set forth above, I
find that genuine issues of material fact exist as to whether Sioux satisfies the "pipes in
the ground" test as to the disputed areas.

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ORDER

Based upon the foregoing,
IT IS ORDERED:
1. Sioux's motion, Doc. 22, for summary judgment is granted in part and denied

in part. As a matter of law, I find that Sioux has the legal right to provide services to its
existing customers and future customers in its service territory of Codington, Deuel, and
Hamlin Counties in South Dakota. Genuine issues of material fact exist as to whether
Sioux is entitled to injunctive or monetary relief, or both. As a matter of law, I find that
Sioux is not required to provide fire protection as a prerequisite to having the legal right
to assert protection under 7 U.S.C. § 1926(b). As a matter of law, I find that Watertown
cannot assert the affirmative defenses of estoppel, ]aches, or waiver in defense of Sioux's
claims.
2.

Watertow~otion,

Dated this

Doc. 28, for summary judgment is denied.

_Z~f April, 2017.

BY THE COURT:

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CHARLESB.KORNMANN
United States District Judge

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