Village of Grafton v. Rural Lorain Water

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 05a0365p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

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Plaintiffs-Appellants, -

VILLAGE OF GRAFTON; KNG, LTD.,

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No. 04-3643

v.

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RURAL LORAIN COUNTY WATER AUTHORITY, et al., -

Defendants-Appellees. -

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Appeal from the United States District Court

for the Northern District of Ohio at Cleveland.

Nos. 02-02037; 02-02039—Dan A. Polster, District Judge.

Submitted: June 7, 2005

Decided and Filed: August 23, 2005

Before: SILER and GIBBONS, Circuit Judges; LAWSON, District Judge.*

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COUNSEL

ON BRIEF: Gretchen A. Holderman, LILLIE & HOLDERMAN, Cleveland, Ohio, Richard G.

Lillie, BENESCH, FRIEDLANDER, COPLAN & ARONOFF, Cleveland, Ohio, for Appellants.

Daniel D. Mason, Dennis M. O’Toole, BAUMGARTNER & O’TOOLE, Sheffield Village, Ohio,

for Appellees.

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OPINION

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SILER, Circuit Judge. The Village of Grafton (“Village” or “Grafton”) and KNG, Ltd.

appeal the district court’s grant of summary judgment to Rural Lorain County Water Authority

(“RLCWA”) regarding RLCWA’s right to provide water services to Fox Run Subdivision (“Fox

Run”), a recently developed property that was annexed by the Village in 1990. For the reasons

discussed hereafter, we AFFIRM.

*

The Honorable David M. Lawson, United States District Judge for the Eastern District of Michigan, sitting

by designation.

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No. 04-3643 Village of Grafton, et al. v. Rural Page 2

Lorain County Water Auth., et al.

BACKGROUND

RLCWA was formed in 1974 to provide water and/or sewer service to rural areas in Ohio,

pursuant to Ohio Revised Code § 6119.01 et seq. Fourteen townships and two villages filed a

petition to organize RLCWA. The Lorain County Court of Common Pleas approved RLCWA’s

organization plan and found that it was “necessary, that it and the plan for the operation of . . .

[RLCWA] [were] conducive to the public health, safety, convenience, and welfare and that the plan

for [its] operation . . . [was] economical, feasible, fair, and reasonable.” RLCWA asserts that its

approved water service area included the areas constituting Fox Run and the Village, although the

Village was not specifically listed in the petition to organize RLCWA. Eaton and Grafton

Townships each passed Resolutions to express their intentions that “the entire territory of [the]

Township[s] be included within the proposed regional water district for southern Lorain County to

be known as [RLCWA]; excluding, however, any and all existing water lines within [the]

Township[s].” The land that is now called Fox Run was in Eaton Township until June 1990, when

it was legally annexed by the Village.

The Village operated its own water plant when RLCWA was established, and it continued

to supply its own water until 1994, when its plant was closed. In September 1994, the Village and

RLCWA executed the first of three Water Purchase Agreements, and the Village’s water distribution

system was connected to a RLCWA transmission line. Thereafter, RLCWA supplied water to the

Village, and the Village distributed this water. In March 1999 and March 2002, RLCWA and the

Village executed additional water purchase agreements to increase the amounts of water that could

be purchased by the Village.

In January 2002, RLCWA obtained a $3.25 million loan from the U.S. Department of

Agriculture, Rural Economic and Community Development Service (“RECDS”), which was

formerly known as the Farmers Home Administration. Approximately $280,000 of this loan was

used to install a water line that was made necessary by the Village’s increasing water demands.

Fox Run, the property in dispute, consists of approximately twenty-nine acres and is now

owned by KNG. Plans and negotiations to develop this property began in the early 1990s, and the

original owners believed “that water services to Fox Run would be provided by the Village of

Grafton at rates substantially lower than those which would be charged by RLCWA.” In April 1990,

the Village passed “a Resolution of Intent to Supply Services upon Annexation and Declaring an

Emergency,” in which it resolved to provide water and sewer services to the Fox Run area if the

Lorain County Commissioners approved the annexation.

Although Fox Run was annexed in 1990, it was not developed for over twelve years. In

August 2002, the Village accepted Fox Run’s dedication plat. Thereafter, the water lines were

installed, and the Village began to provide water to the development. The parties agree, however,

that “RLCWA has a transmission line running up to the Fox Run subdivision” and that it “could run

service lines from the existing lines into [Fox Run] and supply water to [Fox Run] overnight.”

In October 2002, the Village and KNG filed a complaint for injunctive relief and declaratory

judgment against RLCWA, its Board of Trustees, and John Does I-V. On the same day, RLCWA

also filed a complaint for injunctive relief and declaratory judgment. These cases were consolidated,

and the parties moved for summary judgment. As the court observed:

[T]his case is really about whether [the Village] can continue to provide water to

persons in previously undeveloped parts of [the Village] at either the bulk rate (the

rate charged by RLCWA to [the Village]) or at a markup similar to what the

RLCWA charges its non-bulk customers. The parties agree that RLCWA will

continue to supply water to [Village] residents after the conclusion of this lawsuit.

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Lorain County Water Auth., et al.

The parties are not fighting over the water supply itself. Rather, they are fighting

over who will retain the tap-in fees and monthly revenues for serving these new

customers.

RLCWA currently supplies water to the Village at a monthly bulk rate of $11.50 per 5,131 gallons

of water (the average number of gallons used by a consumer in a month). RLCWA’s non-bulk

customers are charged $30.24 per month per 5,131 gallons. RLCWA also charges its customers a

one-time tap-in fee of $2,000. Because the parties estimate that Fox Run will include approximately

thirty new homes and businesses, RLCWA’s annual income from this area will be approximately

$6,720 less if it cannot serve Fox Run directly but is required to provide water through the Village.

The district court determined that “the curtailment of service provided or made available to

Fox Run by the RLCWA occurred at the time that Grafton began to provide water service to the

development. Because the RLCWA was the recipient of federally insured funds at that time, . . .

§ 1926(b) prohibits Grafton from serving Fox Run.” As a result, the court granted summary

judgment to RLCWA.

ANALYSIS

This court reviews a district court’s grant of summary judgment de novo. Le-Ax Water Dist.

v. City of Athens, 346 F.3d 701, 704 (6th Cir. 2003). “[W]hen an appeal from a denial of summary

judgment is presented in tandem with a grant of summary judgment, this court has jurisdiction to

review the propriety of the district court’s denial of summary judgment.” Id. (quotation omitted).

When based on purely legal grounds, the denial of summary judgment is also reviewed de novo. Id.

“In order to encourage rural water development by expanding the number of potential users

and to safeguard the financial viability of rural associations and [RECDS] loans, 7 U.S.C. § 1926(b)

was enacted.” Lexington-South Elkhorn Water Dist. v. City of Wilmore, 93 F.3d 230, 233 (6th Cir.

1996) [hereinafter, “Lexington-S. Elkhorn”]. RLCWA contends that Grafton’s provision of water

service to Fox Run violates the anti-curtailment provision in § 1926(b), which states:

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.

7 U.S.C. § 1926(b). This provision “should be given a liberal interpretation that protects rural water

associations indebted to the [RECDS] from municipal encroachment.” Lexington-S. Elkhorn, 93

F.3d at 235 (quoting Wayne v. Village of Sebring, 36 F.3d 517, 527 (6th Cir. 1994)).

To establish that it is entitled to protection under § 1926(b), RLCWA must show that: “(1) it

is an ‘association’ within the meaning of the Act; (2) it has a qualifying outstanding [RECDS] loan

obligation; and (3) it has provided or made service available in the disputed area.” Id. at 234. In

this case, the parties do not dispute that RLCWA is a qualified “association” that has been indebted

to RECDS since January 2002. The parties’ arguments in this appeal focus upon the impact of the

timing of events, i.e., the fact that RLCWA obtained the RECDS loan approximately twelve years

after Fox Run was annexed by Grafton, and whether RLCWA had a legal right to make service

available to Fox Run.

This court determines whether an association has made water service available through a

two-part test. First, the court considers the “pipes in the ground” requirement. See Le-Ax Water

Dist., 346 F.3d at 706 (citing Lexington-S. Elkhorn, 93 F.3d at 237). Second, the court considers

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Lorain County Water Auth., et al.

whether the association has “the legal right under state law to serve the area in question.” Id. (citing

Lexington-S. Elkhorn, 93 F.3d at 235-36).

The parties agree that RLCWA has a transmission line that runs to Fox Run and that service

could be provided “overnight.” Therefore, RLCWA has met the “pipes in the ground” requirement.

See Lexington-S. Elkhorn, 93 F.3d at 237 (“If an association does not already have service in

existence, water lines must either be within or adjacent to the property claimed to be protected by

Section 1926(b) prior to the time an allegedly encroaching association begins providing service in

order to be eligible for Section 1926(b) protection.”).

This court must also determine whether RLCWA has a legal right to provide service to Fox

Run. As noted by this court in Le-Ax Water District, Ohio law permits RLCWA “[t]o supply water

to users within and without the district.” Le-Ax Water Dist., 346 F.3d at 707 (quoting O.R.C.

§ 6119.01(A)). The Le-Ax Water District court held, however, that “when a rural water district’s

boundaries are geographically determined by the state, a rural water district cannot use § 1926(b)

to obtain new customers outside the geographic area.” Id. at 709. As a result, resolution of this case

requires consideration of whether Fox Run continues to fall within RLCWA’s state-determined

boundaries.

The Village asserts that RLCWA lost the right to service Fox Run in 1990, when that area

was annexed by the Village. The Village’s argument fails, however, if RLCWA’s original service

area included the Village. Although the parties do not clearly articulate the Village’s relationships

with Eaton and Grafton Townships, they do not dispute the assertion that RLCWA’s original water

service area included the Village.

Both Grafton and Eaton Townships passed resolutions providing that their entire territories,

excluding then existing water lines, were to be included within the RLCWA service area. Although

the Village was not explicitly named in the petition for RLCWA’s formation, there is no indication

that it objected to its inclusion within the RLCWA’s service area. In this case, the Village does not

contend that it was not part of RLCWA’s original service area or that the Townships’ attempts to

include it in the service area were somehow ineffective; its arguments instead focus upon its

allegedly “exclusive right” to provide utility service within its boundaries. If the Village was a part

of RLCWA’s approved district, however, the effect of annexing Fox Run was merely to transfer it

from Eaton Township, one part of RLCWA’s service area, to the Village, another part of RLCWA’s

service area. Consequently, Fox Run was never removed from RLCWA’s district.

Prior to the Village’s expansion of its water distribution system to include Fox Run, its

actions generally appear to have been consistent with the Townships’ resolutions and its inclusion

in RLCWA’s service area. One exception has been identified, however – in April 1990, the Village

passed a resolution that expressed an intent to provide water and sewage service to Fox Run. No

steps were taken to implement this plan until August 2002, which was after RLCWA became

indebted to RECDS. As a result, this 1990 resolution was insufficient to remove Fox Run from the

RLCWA service area.

If § 1926(b) were not implicated in this situation, the Village would have an “exclusive

right” to provide utility services. See, e.g., Village of Grafton v. Ohio Edison Co., 671 N.E.2d 241,

245 (Ohio 1996). This “exclusive right” is subject to certain limitations, however. The Supreme

Court of Ohio has recognized that “a statute enacted to promote the health, safety, and welfare of

the public can override the municipality’s authority if the statute does not substantially interfere with

the municipality’s constitutionally granted power.” Bd. of County Comm’rs of Ottawa Cty. v.

Village of Marblehead, 711 N.E.2d 663, 665 (Ohio 1999). As the district court noted, “all parties

involved in the creation of the RLCWA district . . . considered that act to be an appropriate use of

the State’s police power.” Grafton and Eaton Townships declared that the inclusion of their

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Lorain County Water Auth., et al.

territories in RLCWA’s service district was an “emergency measure necessary for the immediate

preservation of the health, safety and welfare of the Township[s].” The Lorain County Common

Pleas Court determined that RLCWA was “necessary, that it and the plan for [its] operation. . .

[were] conducive to the public health, safety, convenience, and welfare.”

The Village did not make any effort to provide water service to Fox Run until 2002, after

RLCWA had obtained a RECDS loan. Prior to RLCWA’s indebtedness, the Village’s “exclusive

right” to provide utility service would have allowed it to deny RLCWA the right to provide service

to this area. The Village’s “exclusive right,” however, is limited by § 1926(b). This provision

“should be given a liberal interpretation that protects rural water associations indebted to the

[RECDS] from municipal encroachment,” Lexington-S. Elkhorn, 93 F.3d at 235 (quoting Wayne,

36 F.3d at 527). “Construing § 1926 liberally, as this Court is required to do, it is not necessary that

[the Village] actually annex or attempt to physically include [Fox Run] in its municipality in order

for curtailment to be found.” Adams Cty. Regional Water Dist. v. Village of Manchester, 226 F.3d

513, 518 (6th Cir. 2000) (internal citation omitted).

Because the Village started to provide water service to Fox Run only after RLCWA became

indebted to RECDS, § 1926(b) prevents the Village from denying RLCWA the right to provide

service. Requiring the Village to remain within RLCWA’s service area while the RECDS loan is

outstanding does not “substantially interfere with the municipality’s constitutionally granted power.”

Marblehead, 711 N.E.2d at 665.

AFFIRMED.