Appendix — Middlesex County Utilities Authority v. City of New Brunswick

Supreme Court brief1983

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APPENDIX A

Opinion of the Court of Appeals

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

Nos. 81-2906, 81-2907

CITY OF NEW BRUNSWICK,

Appellee

BOROUGH OF MILLTOWN and the MIDDLESEX

COUNTY UTILITIES AUTHORITY (formerly

Middlesex County Sewerage Authority),

Appellants

and

THE MIDDLESEX COUNTY

UTILITIES AUTHORITY

(formerly the Middlesex County Sewerage Authority),

Appellant

THE UNITED STATES OF AMERICA, by and through

its ENVIRONMENTAL PROTECTION AGENCY,

Appellee

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

(D.C. Civil Action No. 80-4040)

Argued June 24, 1982

Before: GARTH, BECKER, Circuit Judges,

and FULLAM, District Judge*

(Opinion Filed July 22, 1982)

“Honorable John P. Fullam, United States District Judge for the

Eastern District of Pennsylvania, sitting by designation.

Appendiz A

Milton B. Conford

Francis X. Journick (Of counsel)

Wilentz, Goldman & Spitzer, P.C.

900 Route 9, P. O. Box 10

Woodbridge, New Jersey 07095

Attorneys for Appellant

Middlesex County Utilities

Authority

Newark, New Jersey 07102

Attorneys for Appellant

Borough of Milltown

Appendia A

OPINION OF THE COURT

GARTH, Circuit Judge.

In this appeal we are presented with two questions.

The first is whether the Environmental Protection Agen-

cy (“EPA”) acted within its authority in withholding fed-

eral grant funds from the Middlesex County Utilities Au-

thority (“MCUA”) on the ground that the Borough of

Milltown, whose sewage is treated by the MCUA's plant

at Sayreville, New Jersey, has not adopted a system of

user charges as required by the Federal Water Pollution

Control Act Amendments of 1972, as amended, 33

U.S.C. §§1251 et seq. (“the Clean Water Act”), and its

implementing regulations, 40 C.F.R. §§35.900 et seq.

The second issue is whether — assuming that the EPA's

decision to withhold funds does fall within its authority

— the Clean Water Act unconstitutionally impairs a con-

tract which Milltown has with the neighboring City of

New Brunswick, a participating member of the MCUA,

under which New Brunswick is responsible for

Ps sem of Milltown's sewage free of charge to

Milltown. Because we agree with the district court's de-

termination that the EPA is authorized to withhold

funds from the MCUA in the circumstances of the

present case, and that the provisions of the Clean Water

Act authorizing such withholding are not inconsistent

with the constitutional regarding impairment

of contracts, we will affirm the district court's judgment.

The present dispute stems from a decision by the

SeCRSA toceainta ian Naa tietehent teaie tn enchants tx

the expansion and improvement of a sewage treatment

Appendia A

counties, as well as from a number of industrial con-

cerns. Currently, the MCUA is engaged in a construc-

tion project to install new lines and make other improve-

ments which will allow the Sayreville plant to operate —

with less of an adverse impact on water quality.

To help defray the cost of these improvements, the

MCUA applied to the EPA for federal grant funds pursu-

ant to the Clean Water Act.' Title Il of that Act, 33

1. In addition to improving the plant at Sayreville, the MCUA,

spurred on by an amendment to the Marine Protection, Research,

and Sanctuaries Act of 1972, 33 U.S.C. §1412a, is drawing up plans

for the possible construction of a “dewatering plant” which would

enable the MCUA to end its practice of dumping sewage sludge into

the ocean and allow it to dispose of the sludge on land instead. In its"

third-party complaint for relief against the EPA, the MCUA alleged

prove applications by the MCUA for new grants.” 519 F. Supp. at

881. See also affidavit of Sol Seid, 19, Appendix at 88. We also note

that the Clean Water Act provides for

Appendix A

U.S.C. §§1281-1297, establishes a federal grant pro-

gram under which the federal government will bear up

to 75 percent of the construction cost of publicly-owned

waste treatment plants, so long as certain conditions are

met by the grantee. See generally Bosco v. Beck, 475 F.

Supp. 1029, 1031 (D.N.J. 1979), aff'd without opinion,

614 F.2d 769 (3d Cir.), cert. denied, 449 U.S. 822

(1980). On August 30, 1976, the EPA approved the

MCUA's application, on the condition, among others,

that the MCUA comply with the “user charge” provi-

sions of the Clean Water Act.

Under the user charge provisions of the Act, the

EPA administrator is not to approve a grant

uniess he shall first have determined that the appli-

cant (A) has adopted or will adopt a system of

charges to assure that each recipient of waste treat-

ment services within the applicant's jurisdiction, as

determined by the Administrator, will pay its pro-

portionate share (excep: as otherwise provided in

this paragraph) of the costs of operation and mainte-

33 U.S.C. §1284(bX1) (Supp. 1982) acti re-

ferred to as “section 204(bX1)”). The EPA regulations

specify what requirements a user charge system must

meet in order to satisfy section 204(b)\ 1). In general, the

Appendia A

water from all users ....” 40 C.F.R.

§35.929-1(a).* Moreover, in the case of a “regional treat-

ment system accepting wastewaters from other munici-

palities,” such as the MCUA, “the subscribers receiving

waste treatment setvices from the grantee shall adopt user

charge systems in accordance with section 204(b) 1)(A) of

the Act [quoted above] and §§35.929 through 35.929-3” of

the Id. §35.929-2e).

making some payments to the MCUA pursu-

ant te the grant agreement of August 30, 1976, the EPA

determined that the MCUA was not complying fully with

section 204(bX( 1) of the Clean Water Act, or with the im-

plementing

grant agreement. The basis for this determination was the

flow; where approval is given by the EPA Regional Administrator,

the grantee may employ an ad valorem tax for residential and small

non-residential users. See 33 U.S.C. §1284(b\(4) (Supp. 1982); 40

C.F.R. §35.929-1(b). The effect of these amendments on the

present case is discussed in Part 11.B., infra.

3. The district court also noted that

[ijn an affidavit submitted by the government after oral argu-

ment, the EPA has suggested that the withholding of grant

money from MCUA is not solely due to Milltown's failure to

adopt a user charge system and that at least one other munici-

pality has also failed to meet the requirement.

519 F. Supp. at 881 n.3. The MCUA objects to any reference to this

other dispute, which ts currently pending before this court in a sep-

arate appeal at No. 82-5116, on the ground that “the pleadings in

this case do not raise an issue of default by any uther participant in

the system.” Brief of MCUA at 15 n.*. We agree with the MCUA

requirement is not before this court in the case, and for that

reason we do not take into account the noncompliance of

any reciptent of the MCUA's services other than Milltown in deter-

mining whether the EPA is authorized to withhold funds for the

Sayreviile plant.

Appendia A

failure to adopt such a system is a contract that Milltown

signed in 1914 with the City of New Brunswick, which,

unlike Milltown, is a participating member of the MCUA

and so pays the MCUA for sewage treatment. As the dis-

trict court noted, it is undisputed that

in 1914 the City of New Brunswick entered into a

contract with the Borough of Milltown under which

-New Brunswick agreed to receive and dispose of

Milltown's sewage without charge in exchange for

Milltown's promise to discontinue its practice of dis-

charging sewage into the Lawrence Brook, a source

of drinking water for New Brunswick. On two sepa-

rate occasions, New Jersey courts have upheld the

validity of this contract. City of New Brunswick v.

Borough of Milltown, 3 N.J. Super. 113, 65 A.2d

621 (App.Div. 1949); City of New Brunswick v.

Borough of Milltown, 135 N.J.Eq. 310, 38 A.2d 288

(Ch. 1944).

As a result of this contract, the sewage from

Milltown flows free of from Milltown to New

pays

MCUA and has not, to date, adopted a system of

sewer user charges to pay for its proportionate share

of waste treatment.

City of New Brunswick v. Borough of Milltown, 519 F.

‘Supp. 878, 881 (D.N.J. 1981).

treatment services within the [MCUA's] jurisdiction,”

had not adopted a user charge system, the EPA began to

Appendix A

withhold funds for the Sayreville project.‘ It is that de-

termination which is attacked by Milltown and the

MCUA in the present case. .

The legal challenge to the EPA's decision to with-

hold funds for the Sayreville project was brought into

federal district court by a rather involved sequence of

procedures and actions:

[jn August, 1980. . . the City of New Brunswick

instituted suit in the Superior Court of New Jersey,

Chancery Division, Middlesex County, against

Milltown and the MCUA, seeking an injunction and

declaration that a 1914 contract between itself and

Milltown, which obligates New Brunswick to re-

ceive and dispose of Milltown’s sewage without

cost, was void on several grounds, including allega-

tions based on EPA regulations:

Federal Rules and Regulations governing the

New Brunswick further alleged:

[U}nder such Rules and Regulations such us-

ers of the Sewerage Authority's facilities must

pay their fair share of the cost of operating and

4. Under the applicable regulations, tho EPA's Ri Ad-

ministrator may not “pay more than 50 percent of the F share

of any (construction project, such as the improvement and expan-

ston of the Sayreville plant]. . . unless the grantee [the MCUA] has

submitted edequate evidence of development of its system of

user charges|,) nor shall the Administrator pay more than

80 percent of the Federal share unless he has approved the system.”

40 C.F.R. §35.036-13(aX 1).

Appendiz A

maintaining the Sewerage Authority's treat-

ment works.

Complaint, 15, Third Count.

In November, 1980, MCUA brought the Envi-

ronmental Protection Agency into the state court

litigation by naming it as a third-party defendant. In

its cross-complaint, MCUA alleged that neither the

Clean Water Act nor its implementing regulations

requires that Milltown adopt a system of user

charges and that, even if they did, such a require-

ment wouid constitute an unconstitutional abroga-

tion of the 1914 contract. EPA removed this action

to the Federal District Court under 28 U.S.C.

§1442(a\(1) in December, 1980, and. . . answered

and counterclaimed against all other parties, seek-

ing a declaration that section 204 authorizes EPA to

withhold grant funds from MCUA pending adoption

of the user charges by Milltown and an injunction

requiring Milltown to adopt such user charges or al-

ternatively, to cease sending its sewage through

MCUA's facility for treatment.

City of New Brunswick v. Borough of Milltown, 519 F.

Supp. at 880-81 (footnote omitted).

All parties then moved for partial summary judg-

ment on the federal issues presented by the litigation. In

an order of September 9, 1981, the district court essen-

tially ruled in favor of the EPA on the federal

In its accompanying opinion of August 11, 1981, the dis-

trict court first held that under section 204(b\(1)

Milltown is a = eesaie of waste treatment services

from the MCUA, According “great deference” to the

EPA’s interpretation of the Clean Water Act, the district

court held that “[t}he fact that Milltown itself does not

directly place its own waste into the MCUA system or re-

quire that waste water be treated by the MCUA is not

material”; Milltown's sewage is in fact treated by the

10a

Appendiz A

MCUA, and so Milltown is a “recipient” of the MCUA's

services. 519 F. Supp. at 882.

Such an interpretation of the statute, the district

court reasoned, would fulfill what it found to be the

twofold purpose of the user charge requirement of the

Clean Water Act. By requiring that every recipient of

waste treatment services pay its proportionate share of

the treatment costs, section 204(bX(1) ensures that ev-

ery facility built with federal financial assistance will be

economically self-sufficient in its operations; moreover.

the imposition of user charges provides an incentive to

discourage excessive use of the sewage treatment sys-

tem. In the present case, the district court held, the

EPA's determination that adoption of a user charge sys-

tem by Milltown should be a prerequisite to continued

funding of the Sayreville improvements is consistent

with those purposes:

Unless Milltown adopts its own system of user

charges there is simply no incentive on individual or

industrial users within Milltown to decrease their

water consumption and thereby decrease dis-

charges in the MCUA facility. Moreover, should

New Brunswick break its contract with Milltown

and cease paying for the costs of treating Milltown's

wastes, MCUA would, in the absence of a user

charge system in Milltown, be faced with a revenue

519 F. Supp. at 883.

Having held that the EPA's withholding of funds

falls within the scope of the statute and the

the district court turned to the question whether “the

[Clean Water] Act so interpreted unlawfully impairs

Milltown's contract with New Brunswick or is otherwise

invalid or contrary to public policy.” 519 F. Supp. at

883.° Reasoning that “the [federal] government does

5. The district court correctly observed that while the Contract

Clause, Article I, Section 10, Clause 1 (“No State shall. . . pass any

Appendiz A

have the right to impair existing contractual obligations

if the contemplated action is necessary to fur-

ther a legitimate public purpose,” the district court held

that Congress has a legitimate interest in protecting the

quality of the environment, and that the means chosen

to further that end — the conditioning of federal grant

money on compliance with terms designed to promote

the improvement of the environment — were reasonably

related to that end. This was so, the district court held,

especially considering that the Clean Water Act is not an

“automatic abrogation of all contracts involving charges

for sewage treatment.” Id. at 884. See also United States

Trust Co. v. New Jersey, 431 U.S. 1, 31 (1977). As far as

the “public policy” objections to the EPA’s withholding

of funds are concerned, the district court rejected the ar-

gument that MCUA is being “punished” for something

beyond its control:* “MCUA is under no obligation to ap-

ply for grant funds from EPA.” Id.’

Finally, having granted judgment in favor of the

EPA and New Brunswick on the federal claims, the dis-

trict court held that the remaining issues should be re-

solved by the state courts. Thus, rather than order

Milltown either to adopt a user charge system or to cease

sending its sewage to the MCUA’s plant (as the EPA and

. . . Law impairing the Obligation of Contracts. . .”), does not ap-

ply to the federal government, the fifth amendment's prohibition of

the deprivation of property without due process places constraints

on the federal government with respect to contract impairment that

are similar to those placed on the states by the contract clause. 519

F. Supp. at 878; see Lynch v. United States, 292 U.S. 571 (1934).

See generally L. Tribe, American Constitutional Law, §9-5, at 465

n.1 (1978). For ease of reference, therefore, we will refer to both

constraints under the rubric of the “contract clause.”

6. The MCUA also argued that the Clean Water Act in effect

required it to commit tortious jnterference with the contract be-

tween Milltown and New Brunswick. 519 F. Supp. at 885.

7. MCUA also raised an estoppel argument before the district

court which it has not raised on appeal. See id. at 885-86. Thus that

issue is not before us.

12a

Appendiz A

New Brunswick had requested the court to do), the dis-

trict court remanded the case to the state courts for de-

termination of whether, in light of the “dramatic change

in circumstances” occasioned by the passage of the

Clean Water Act, the Milltown-New Brunswick contract

still has binding force. Id. at 886.° Both the MCUA and

Milltown then filed timely notices of appeal.

In considering the arguments of Milltown and the

MCUA that the EPA's decision to withhold funds is

not contest the portion of the district court's order remanding the

case to the state courts for a determination of the validity of the

Milltown-New Brunswick contract. See Order of September 8.

1981, 44% 2 and 3. Moreover, while Milltown has taken an appeal

insofar

pendix at 132. On the other hand, in its motion for summary judg-

ment before the district court — the district court's disposition of

vhich is now before this court on appeal — the MCUA limited itself

to the federal issue of the EPA's authority to withhold funds based

on Milltown's failure to adopt a user charge system. More impor-

tant, in its opening brief and reply brief before this court, the MCUA

has not made any mention of the remand, and accordingly appears

to have decided not to contest the remand.

In view of the parties’ positions with respect to this aspect of the

district court's order, we have no occasion to address the issue of

13a

Appendiz A

tion given the statute by the officers or agency charged

with its administration.” Udall v. Tallman, 380 U.S. 1,

16 (1965); see EPA v. National Crushed Stone Ass'n,

449 U.S. 64, 83-84 (1981). Thus, so long as the interpre-

tation of the Clean Water Act propounded by the EPA “is

reasonable and is consistent with the language and pur-

pose of the legislation,” Chrysler Corp. v. EPA, 631 F.2d

865, 884 (D.C. Cir.), cert. denied, 449 U.S. 1021 (1980),

we will defer to that interpretation. See American Iron

and Steel Institute v. EPA, 526 F.2d 1027, 1041 (3d Cir.

1975), modified on other grounds, 560 F.2d 589 (3d Cir.

1977), cert. denied, 435 U.S. 914 (1978). In the present

case, we agree with the district court that Milltown and

the MCUA have failed to produce the “weighty reasons,”

Brewster v. Gage, 280 U.S. 327, 336 (1930), that would

be needed to persuade us to set aside the EPA's interpre-

tation of the Clean Water Act.

ts’ first contention is that the language of

the Clean Water Act and the implementing regulations

do not support the EPA's position that funds can be

withheld from the MCUA based on Milltown’'s failure to

adopt a user charge system. In support of this conten-

tion, appellants offer three arguments. First, Milltown

argues that it cannot be deemed to be a “recipient” of the

MCUA’s waste treatment services within the meaning of

section 204(b\(1). “Once the sewage crosses into New

Brunswick,” Milltown argues, “the sewage belongs to

New Brunswick,” not Milltown; thus it is New Bruns-

wick, not Milltown, that “receives” services from the

MCUA. See Brief of Milltown at 11-12. We think, how-

ever, that the district court was entirely correct in reject-

ing this argument: sewage generated in Milltown is in

fact treated at the MCUA's Sayreville plant, and there-

fore the EPA is no way inconsistent with the language of

the statute in considering Milltown a “recipient,” albeit

an indirect one, of the MCUA's treatment services.

léa

Appendia A

Second, both the MCUA and Milltown argue that

even if Milltown can in this general sense be deemed a

“recipient” of the MCUA's waste treatment services,

section 204(b)(1) contains a plain and explicit limitation

on the scope of the term “recipient”: only those recipi-

ents who are “within the applicant's [|MCUA’s] jurisdic-

tion” can be required to adopt a user charge system.®

Milltown, the appellants argue, is not within the

MCUA'’s “jurisdiction,” for under state law the MCUA

has no legal power to direct Milltown to do anything. '°

The EPA replies that the phrase “within the applicant's

jurisdiction” does not refer to legal power, but rather

simply means “within the territory served by the sewage

treatment plant.” See 40 C.F.R. §35.929-1(a) (referring

to users “within the grantee’s service area”). The terri-

Like the term “recipient,” the word “jurisdiction” is

not defined in the statute. Nor, in our view, is there any

clear legislative history indicating precisely what the

9 Ae noted earlier, §204(bX 1) requires that “each recipient of

waste treatment services within the applicant's jurisdiction, as de-

termined by the Administrator,. . . pay its proportionate share. . .

of the costs of operation and maintenance. . . of any waste treat-

ment services provided by the applicant.” 33 U.S.C. §1284(bX 1).

10. As the MCUA puts it, the user must be “legally subject to —

une legislative and enforcement ‘jurisdiction’ of the ‘applicant’ for a

grant.” Brief of MCUA at 17.

11. The EPA points to statements in the legislative history of

the Clean Water Act, such as the comment in the Senate Report

that “jajs a general rule, the volume and character of each dis-

charge into a publicly owned system should form the basis of deter-

mining the rate at which each user should be required to pay.” S.

‘Rep. No. 414, 92d Cong., Ist Sess. 28 (1971), reprinted in Staff of

Senate Comm. on Public Works, 92d Cong., Ist Sess., A Legislative

History of the Water Pollution Control Act Amendments of 1972 at

1446 (Comm. Print 1973), and in 1972 U.S. Code Cong. & Ad.

News 3668, 3605 [hereinafter “S. Rep. No. 414”). In our view, how-

15a

Appendia A

tainly a plausible one; and considering that section

204(b)(1) speaks of the “applicant's jurisdiction, as de-

termined by the Administrator,” we will not set aside

the agency's interpretation simply because appellants of-

fer another plausible interpretation. Cf. Chrysler Corp. v.

EPA, 631 F.2d at 885 (refusing to set aside plausible and

reasonable interpretation of Clean Air Act by EPA simply

because party offers an _ alternative plausible

interpretation).

Finally, Milltown argues that the language of the

EPA’s own regulations clearly indicates that the “EPA

itself. . . did not intend to override an agreement such

as that between Milltown and New Brunswick.” Brief of

Milltown at 24. Milltown points to 40 C.F.R.

§35.929-2(g), which provides in part that “|t}he user

charge system shall take precedence over any terms or

conditions of agreements or contracts between the

grantee and users. . . which are inconsistent with the

requirements of section 1A) of the [Clean Wa-

ter} Act and these " This regulation,

Milltown argues, “was only intended to supersede incon-

sistent contracts to which the grantee (here MCUA) is a

party, not contracts (such as that between Milltown and

New Brunswick) to which the grantee is not a party.”

Brief of Milltown at 24. We are not presented here,

though, with a case in which the basis for a determina-

tion of a failure to comply with section 204’: require-

ments is a “contract between a grantee and a user.”

Thus for the very reason that Milltown’s interpretation of

section 35.929-2(g) appears correct, that particular reg-

ulation is simply irrelevant to the present case: the EPA

is not basing its withholding of funds on any contract be-

tween the MCUA and Militown.

In attempting to counter Milltown’s argument con-

ever, these general statements shed no more light on the meaning

of the particular phrase, “within the applicant's jurisdiction.” than

does, for example, the language of 40 C.F.R. §35.929-1(a).

16a

Appendiz A

cerning the regulations, the EPA relies on 40 C.F.R.

§35.929-2(e), which provides:

If the project is a regional treatment system accept-

ing wastewaters from other municipalities, the sub-

scribers receiving waste treatment services from the

grantee shall adopt user charge systems in accor-

dance with section 204(bX1\(A) of the Act and

§§35.929 through 35.929-3. These user charge sys-

tems shall also be incorporated in appropriate mu-

nicipal legislative enactments or other appropriate

authority of all municipalities contributing wastes

to the treatment works.

It is possible that the underscored passage in this regula-

tion was intended to require municipalities such as

Milltown, whose sewage is treated by the grantee but

who have no direct relationship with the grantee as a

hand, it is also that the underscored

simply refers to the of a user charge sys-

tem by the subscribers to a regiona! waste

treatment facility. Were the regulations more lucid, this

section might well an alternative ground for our

decision. Given its clarity, however, our decision

that Milltown is a recipient rests not on 40 C.F.R.

§35.929-2(e), but on the plain meaning of the statute, its

intended goals, and the agency's interpretation of its

manaate.

Appellants’ second contention concerning the prop-

er interpretation of the Clean Water Act is that even if

12. We note that we do not today hold that Milltown must be-

come a “subscriber” to the MCUA facility es a condition of the

MCUA's grant. The only requirement imposed by our ‘ecision to

uphold the EFA's action is that, so long as the MCUA receives fed-

eral funding a:d continues to treat Milltown’s sewage, Mi'ltown

must adopt a syxtem of user charges.

17a

Appendia A

the statutory language itself does not compel adoption of

their reading of the Act, an analysis of the purposes of

the Act clearly indicates that Congress’ intent was such

that the MCUA’s eligibility for grant funds should in no

way be jeopardized by the fact that Milltown has not

adopted a user charge system. More specifically, the

MCUA argues that the Clean Water Act, interpreted in

light of its purposes, does not give the EPA the authority

to withhold funds from a grantee because a relatively in-

Cry hh dpe yf Smedley og Arye ® sacs

on the particular facts of this case, id. at 39-43. The

MCUA advances the same arguments in support of its

abuse of discretion claim as it does for its claims con-

project grant, contravenes, or at the very least does noth-

ing to further, three important policies embodied in the

Clean Water Act. The first policy is the congressional de-

termination that because the massive job of cleaning up

the nation’s waters cannot be completed without gener-

ous federal financial assistance, Clean Water Act grants

should not be denied on the basis of trivial matters over

which the grantee has no control. The second policy is

that of flexibility in adapting the grant requirements to

(

13. See also Train v. City of New York, 420 U.S. 35, 45 n.10

(1975) (referring to necessity of federal financial aid “to finance the

construction of waste treatment facilities which will meet the stand-

ards imposed by” the Clean Water Act).

19a

Appendiz A

It is indisputable, of course, that the Clean Water

Act evinces a clear congressional determination that the

_ Clean-up of the nation’s waters is an important aim, one

which requires large amounts of federal financial assis-

tance to state and local governments. It is equally indis-

putable, though, that Congress placed a number of man-

datory conditions on the receipt of such assistance.

Indeed Title II is replete with conditions on the grant of

aid to sewage construction works, conditions which, in

the words of the Senate Report, are intended “to assure

rule that “Congress must express clearly its intent to impose condi-

tions on the grant of federal funds so that the States ca: knowingly

decide whether or not to accept those funds.” Pennhurst State

School & Hospital v. Halderman, 451 U.S. 1, 24 (1981). Thus we

fail to see how Pennhurst in any way undermires the EPA's posi-

tion, as Milltown asserts.

20a

Appendiz A

brief before this court, the MCUA asserts that Milltown's

sewage constitutes only one percent of the average daily

gallonage flow at the Sayreville plant, and that the esti-

mated cost of treating Milltown’s sewage is only 4.7

percent of the total cost of treating the combined

Milltown-New Brunswick sewage flow. Brief of MCUA

at 12-13. Thus, the MCUA claims, even assuming that

Congress did contemplate that an applicant for Clean

Water Act funds would be turned down if it failed to

comply with the Act's conditions in some important re-

spect — no matter how great its need for federal assis-

tance — Congress never intended to give the EPA the

authority to withhold funds when such an applicant has

demonstrated “substantial effectuation of a user charge

requirement.” Brief of MCUA at 34.

We decline the MCUA's invitation to second-guess

the EPA's determination that Milltown’s complete fail-

ure to adopt any user charge system at all is more than

an inconsequential matter. To begin with, the district

court made no finding of fact that Milltown’s contribu-

tion to the sewage flow at the Sayreville plant is de

minimis.'© More important, we believe that the determi-

nation whether a deviation from the conditions of the

Act is important enough to warrant a denial of federal

funds is a matter primarily for the EPA and not the

courts. We can overturn the EPA's decision to withhold

funds from the MCUA's plant at Sayreville only if that

decision is arbitrary and capricious. See Hotel Employers

Association v. Gorsuch, 669 F.2d 1305, 1307 (9th Cir.

1982). In the present case, the EPA has taken the posi-

tion that while there is flexibility in designing the user

iS. For obvious reasons, moreover, we cannot accept the

MCUA's argument that the amount of sewage flowing from

Milltown into the Sayreville plant is a “legislative fact,” or a fact of

which we can take “judicial notice.” The doctrines of “legislative

facts” and “judicial notice” are not talismans by which gape in a liti-

gant’s evidentiary presentation before the district court may be re-

paired on appeal.

2la

Appendia A

charge system, an outright refusal by one of the users to

adopt any user charge system at all is, in itself, a suffi-

cient basis for concluding that the applicant has failed to

meet section 204's mandatory requirement that “each

recipient of waste treatment services . . . will pay its

proportionate share. . . of the costs. . . of any waste

treatment services provided by the applicant.” 33 U.S.C.

§ 1284(b)( 1) (emphasis supplied). Such a determination,

in our view, hardly qualifies as a “clear error of judg-

ment,” Hotel Employers Ass’n, 669 F.2d at 1307, and so

we will not disturb the EPA's determination that

Milltown's failure to adopt a user charge system is more

than the trivial matter that the MCUA pictures it to be.

_ (2)

For similar reasons, we find unpersuasive the appel-

lants’ arguments concerning the flexibility that Con-

gress intended the EPA to show in administering the

Clean Water Act grant program. Both the MCUA and

Milltown place heavy reliance on the Senate Report ac-

companying the Clean Water Act, which states:

Although the committee is aware of the many

different legal and financial circumstances that

characterize state and local governments and agen-

cies throughout the country, the bill directs the Ad-

ministrator to promulgate guidelines for the estab-

lishment and imposition of user charge systems as a

guide to grant applicants for waste treatment works

grants. These guidelines should take into account

the diversity of legal and financial factors that exist

from jurisdiction to jurisdiction, and each appli-

cant should be permitted reasonable flexibility in

the design of a system of user charges that meets

the unique requirements of his own jurisdiction. As

a general rule, the volume and character of each

cischarge into a publicly owned system should form

22a

Appendix A

the basis of determining the rate at which each user

should be required to pay.

S. Rep. No. 414, at 28 (emphasis supplied). '® According

to appellants, the 1914 New Brunswick-Milltown con-

tract is one of those unique “legal and financial circum-

stances” to which the Senate Report refers. In essence,

appellants argue that taking into account the special cir-

cumstances created by the Milltown-New Brunswick

contract, the MCUA has adopted a “system of user

charges” in requiring that every user with whom it has a

direct relationship and over whom it can thus exercise

some control institute a system of user charges.

The EPA, however, takes the position that the flexi-

bility which Congress envisioned relates not to whether

a particular user must adopt a user charge system at all,

see 40 C.F.R. §35.929-1(a) (“each user. . . [must] pay/|)

its proportionate share”), but rather tu the precise form

that the user charge system takes. Significantly, the

Sonate Rapun aheake ous of “Sukie? in general, but

of “flexibility in the design of a system of user charges.”

We see no reason to conclude that the congressional pol-

icy of flexibility necessarily extends to the very question

of whether a particular recipient of treatment services

will adopt a user charge system in. the first place.'’

16. See also 33 U.S.C. §1251(b) (“It ts the policy of Congress

that the States manage the construction grant program. . .”); Sen-

ate Debate on S. 2770, November 2, 1971, reprinted in Staff of Sen-

ate Comm. on Public Works, 92d Cong., ist Sess. A Legislative

History of the Water Pollution Control Act Amendments of 1972 at

1353 (remarks of Senator Muskie) (“the flexibility point is ernpha-

sized, and | think should be, because we are trying to encourage

and flexibility”).

17. in Garden State Paper Co. v. County Sanitation District

No. 21, Civil No. 78-0042-IH (C.D. Cal. February 6, 1980)

(unreported bench opinion). a sanitation district which had applied

for and received Clean Water Act grants for a sewage project sought

to abrogate a contract which it had with one user. on the ground

that the contract did not incorporate a user charge system. Sve 40

_ C.F.R. §35.929-2(g) (“The user charge system shall take prece-

23a

Appendiz A

(3)

Finally, appellants object to the district court's hold-

ing that requiring Milltown to adopt a system of user

charges as a condition of the grant would serve the dual

purposes of section 204(b)(1), which are to ensure that

federally-assisted facilities become economically self-

sufficient in their operations, and to promote water con-

dence over any terms or conditions of agreements or contracts be-

tween the grantee and users. . . .“). The district court held. among

other things, that that regulation was invalid:

[Tihe [Clean Water Act] does not require that a system of

charges which otherwise meets its criteria should also provide

for the abrogation of an existing contract and does not author-

ize a regulation which would so require. . . . |T}he perfor-

mance of a preexisting contract, othervtse valid. for the length

of its term, is not a violation of the statute so long as the rate

system adopted by the applicant and in effect requires of ail

other users their proportionate share of costs.

Similarly, the MCUA argues, the Clean Water Act should not be

read as requiring the abrogation of a pre-existing contract between

two users such as Milltown and New Brunswick. so long as the

grantee has adopted a system of user charges for all other users.

The Garden State court, however. pointed to no authority in

support of its reading of the Clean Wa» + Act; nor are we aware of

any. Rather, the Garden State court was influenced by its premise

that if the regulation were held to be valid, the statute would violate

the constitutional prohibition against the impairment of contracts.

We reject that premise, see Part Ill, infra, and we reject the argu-

ment that the congressional policy of flexibility excuses the MCUA

from effectuating full compliance with §204(b 1).

Appellants also rely upon Hotel Employers Ass'n v. Gorsuch,

669 F.2d 1305 (9th Cir. 1068), in eupport of Choir “Beatbélity” argu.

ment. Hotel Employers valved «challenge 10 the EPA's approval

of a particular form of user charge system, a challenge which

cant labeled aa Gis domaat tan Ee Ee oeeomatins' at

§204(bX1) had a “rational basis.” In our view Hotel E

stands for the proposition that the courts will defer to the EPA's ex-

ercise of the flexibility that it undoubtedly has in administering the

Clean Water Act grants, and will not substitute their own judgment

for the EPA's. Thus we read Hotel Employers as entirely consistent

with our holding in the present case.

24a,

Appendia A

servation by discouraging excessive user of the sewage

system. 519 F. Supp. at 883, 885. According to appel-

lants, the aim of financial self-sufficiency is fully assured

even without adoption of a user charge system by

Milltown; because New Brunswick pays for treatment of

Milltown's sewage out of user charges imposed on busi-

nesses and residences within New Brunswick, there is

no danger that the MCUA will suffer a shortfall in rev-

enues. As the district court pointed out, however, should

New Brunswick ever abrogate its contract and cease

paying for the treatment of Milltown’s sewage, the

MCUA would indeed be faced with a revenue shortfall.

519 F. Supp. at 883.'®

Moreover, it is clear that one of the purposes of sec-

tion 204's user charge requirement is to promote water

conservation. See S. Rep. No. 217, 95th Cong. 2d Sess.

27, reprinted in 1977 U.S. Code Cong. & Ad. News

4326, 4352 (“A charge to the ‘consumer’ based on cost of

treatment would be a positive force in encouraging more

efficient management of wastes discharged through a

municipal system as well as an economic inducement to

reduce excessive use.”).'® Although Congress in 1977

18. Relying on the fact that the New Brunswick- Milltown con-

still in effect. And such an action would the MCUA open to

precisely the kind of revenue shortfall that all the parties agree the

statute was intended to avoid. See S. Rep. No. 114 at 28.

19. Appellants object to any reliance on the legislative history

to the 1977 amendments to the Clean Water Act. in this case. how-

ever, water conservation is an obvious if unstated goal of the 1972

Act, as evidenced by the Comptroller General's decision in 1974 that

section 204(b) 1) did not permit ad valorem taxes because such tax-

es would not promote the purpose of water conservation served by

user charges. 54 Comp. Gen. 1, 5 (1974). When Congress amended

section 204 to permit ad valorem taxes as an alternative to user

25a

Appendia A

amended the Clean Water Act to allow charges to be

based on ad valorem taxes or flat fees in certain cases

rather than on direct measures of sewage flows such as

metering, see 33 U.S.C. §1284(b)(4) (Supp. 1982),?° we

cannot agree with appellants that in so doing Congress

“eviscerated” any cone*rvation purpose to the user

charge requirement. On che contrary, conservation of

water is heavily stressed in the legislative history to the

1977 amendments to the Clean Water Act. See, e.g.,

1977 U.S. Code Cong. & Ad. News at 4351. In our view,

the 1977 amendments were intended simply to provide

“greater flexibility ... for the assessment of user

charges,” id. at 4352, and not to undermine the user

charge concept itself of its underlying purposes.

Accordingly, we reject the appellants’ arguments

that the EPA's decision to withhold funds in this case

contravenes the underlying policies of the Clean Water

Act or constitutes an abuse of discretion.

Milltown’s final contention is that if section

20 4(b\( 1) does authorize the EPA's decision to withhold

funds, that section unconstitutionally impairs the obliga-

tion of a contract.2' The district court rejected this con-

charges, it explicitly preserved the water conservation objective by

requir'ng users to be notified of the portion of their bill attributable

to the cost of water treatment. A Legislative History of the Clean

Water Act of 1977, 95th Cong., 2d Sess. (Comm. Print 1978), at 439

(statement of Senator Muskie, who also was manager of the 1972

bill). Under the circumstances the 1977 legislative history merely

acknowledges the water conservation goal already implicit in the

Act. Cf. North Haven Board of Education, 102 S. Ct. 1912, 1925

(1982).

20. An ad valorem tax system is one based on property values;

a flat fee charge is one assessed “per household or per plumbing fix-

ture (such a sink or toilet).” See generally 40 C.F .R. §35.929-1(b);

1977 U.S. Code Cong. & Ad. News at 4351.

21. Though both the MCUA and Milltown pressed this argu-

ment before the district court, only Milltown now raises the consti-

tutional objection to §204.

26a

Appendix A

stitutional challenge. holding that section 204's user

charge requirement is reasonably necessary to accom-

plish a legitimate congressional purpose. 519 F. Supp. at

883-85. In so holding, the district court apparently as-

sumed that section 204(b) 1) does impair the obligation

of the New Brunswick-Milltown contract. but deter-

mined that such impairment did not run afoul of the

constitutional strictures on the contract impairment.??

While we agree that section 204(b) 1) is constitutional.

we do so on a different basis from that relief upon by the

district court: in our view, section 204(b)1) canno* be

said to impair the New Brunswick-Milltown contract.’

The Clean Water Act provides for a grant of funds to

the MCUA on the condition that the MCUA comply with

certain requirements. Neither the statute itself nor the

regulations contain any provision explicitly abrogating

contracts such as that between Milltown and New

Brunswick. Nor can it be said that section 204(b) 1) im-

plicitly abrogates such contracts. In the present case, it

is by no means clear that the EPA's withholding of funds

from the MCUA on the Sasis of Milltown's failure to

adopt a user charge system miakes abrogation or impair-

ment of the 1914 contract necessary or inevitable. First,

the MCUA could forego funding under the Clean Water

Act; nowhere in its pleadings or in its brief before this

court has the MCUA alleged. that completion of the

22. The district court did note that the “MCUA is under no ob-

ligation to apply for grant funds from EPA,” but it made that obser-

vation in the context of the MCUA's argument that the user charge

as applied to the present case, amounted to “punish-

pairment” of the New Brunswick-Milltown contract for purposes of

27a

Appendiz A

Sayreville project or, for that matter. construction of the

dewatering plant, would be impossible without federal

funds. Rather, the MCUA has argued that a loss of fed-

eral funds will seriously burden it, will cause large and

unanticipated increases in expenses to the municipal-

ities participating in the MCUA, and so on. Second.

while the MCUA has no control over Milltown, it could

simply refuse to accept New Brunswick's sewage, and so

qualify for federal funds (at least insofar as the EPA's ob-

jections to Milltown's failure to adopt a user charge gvs-

tem are concerned). Neither contingency is necessarily

incompatible with New Brunswick's retaining responsi-

bility for Milltown's sewage, as called for in the 1914

contract.

To be sure, neither course of action — foregoing

federal funds or refusing to accept the New

Brunswick-Milltown sewage —- would likely be very pal-

atable to the MCUA, Milltown, or New Brunswick as a

financial matter, and both alternatives might make it

significantly more difficult for the parties to comply with

mandatory federal water quality standards. In that

sense, it cannot be denied that the EPA's decision to

withhold funds makes abrogation of the Milltown-New

Brunswick contract a more attractive alternative than it

might otherwise be. That fact alone, however, cannot

constitute a sufficient basis for deeming section

204(b)1) to impair the obligation of a contract, for “to

hold that motive or temptation is equivalent to coercion

[would be] to plunge the law in endless difficulties.”

Steward Machine Co. v. Davis, 301 U.S. 548, 589-90

(1937).

The reason why “temptation” cannot be deemed

equivalent to “coercion” — that is, to contract impair-

ment — is not hard to discern. As a general rule, it is

clear that “Congress may fix the terms on which it shall

disburse federal money to the States.” Pennhurst State

School & Hospital v. Halderman, 451 U.S. 1, 17 (1981);

see King v. Smith, 392 U.S. 309, 333 n.34 (1968). More-

28a,

Appendix A

over, while that power is not without limits, see 451 U.S.

at 17 n.13, it is indisputable that the power to fix terms

lies essentially with the Congress, and not with the fed-

eral courts. Yet because a great many if not all condi-

tions on federal grants might very well have an impact

on pre-existing contractual arrangements, to hold that

every condition of a federal grant program that possibly

enhances the likelihood that a contract will be breached

is an “impairment of contract” in the constitutional

sense, would be tantamount to ruling that virtually every

federal funding statute is subject to the heightened judi-

cial scrutiny that is invoked whenever the contract

clause is implicated. As a result, no condition in a federal

grant program could be upheld unless it was demon-

strated to the satisfaction of the courts that the condition

represented the only way to achieve an important state

purpose. See generally Allied Structural Steel Co. v.

Spannaus, 438 U.S. 234 (1978); United States Trust

Co. v. New Jersey, 431 U.S. 1 (1977). To adopt such an

approach would be drastically to undercut Congress’

broad discretion to set such terms on federal funding

programs as it deems appropriate, and, in conséquence

to give to the courts extensive power over the conditions

that may be attached to the disbursement of federal

money. We know of nothing in the constitution that

compels such a result.

Accordingly, we decline to give the contract clause

the expansive scope that Milltown urges upon us. As a

matter of state law, the obligations of the 1914 contract

remain untouched by the district court's decision; the

user charge requirement of section 204(b\(1) and the

regulations do not by their terms purport to

the Milltown-New Brunswick contract, nor do

that fact alone is a sufficient basis for rejecting

ssibasurseieeabstnatiendh aleienines epetien SB4ENAY

29a

Appendiz A

IV.

For the reasons expressed in this opinion. we will

affirm the judgment of the district court.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

Judgment of the United States Court of Appeals for the

Third Circuit

(Filed—August, 13, 1982)

UNITED STATES COURT OF APPEALS

For tae Tarp Cracurr

No. 81-2906/7

CITY OF NEW BRUNSWICK,

vs.

BOROUGH OF MILLTOWN and the MIDDLESEX

COUNTY UTILITIES AUTHORITY (formerly Mid-

dlesex County Sewerage Authority),

Defendants,

and

THE MIDDLESEX COUNTY UTILITIES AUTHORITY

(formerly the Middlesex County Sewerage Authority),

Defendant-Third Party Plaintiff,

vs.

THE UNITED STATES OF AMERICA, by and through

its ENVIRONMENTAL PROTECTION AGENCY,

Third Party Defendant.

Sila:

Appendiz B

Borough of Milltown,

Appellant in No. 81-2906,

Middlesex County Utilities Authority (“MCUA”),

Appellant in No. 81-2907.

(D.C. Civil No. 80-4040)

—

Ow Appear From trae Unrrep States: District Court

FoR THE District or New ./ersey

Present: Garru and Becker, Circuit Judges; and Futiam,

District Judge.*

JUDGMENT

This cause came on to be heard on the record from the

United States District Court for the District of New Jer-

sey and was argued by counsel on June 24, 1982.

On consideration whereof, it is now here ordered and ad-

judged by this Court that the judgment of the said District

Court, entered September 10, 1981, be, anc the same is

hereby affirmed. Costs taxed against appellants.

32a

Appendia B

Certified as a true copy and issued

in lieu of a formal mandate on

August 13, 1982

Satity Mrvos

Test:

Chief Deputy Clerk, United States Court of Appeals for

the Third Cireuit.

July 22, 1982

33a

APPENDIX C

Opinion of the United States District Court for the

District of New Jersey

(Filed—August 11, 1981)

UNITED STATES DISTRICT COURT

District or New JERSEY

Civil Action No. 80-4040

»™

—_

CITY OF NEW BRUNSWICK,

Plaintiff,

BOROUGH OF MILLTOWN and THE MIDDLESEX

COUNTY UTILITIES AUTHORITY (formerly MID-

DLESEX COUNTY SEWERAGE AUTHORITY),

Defendants,

THE MIDDLESEX COUNTY UTILITIES AUTHORITY

(formerly MIDDLESEX COUNTY SEWERAGE

AUTHORITY),

Defendant-Third Party Plaintiff,

Vv.

THE UNITED STATES OF AMERICA, by and through

its ENVIRONMENTAL PROTECTION AGENCY,

Third Party Defendant.

34a

Appendwa C

Desevorse, District Judge.

Appearances :

James M. Cahill, Esquire

Assistant City Attorney

City of New Brunswick

78 Bayard Street

New Brunswick, New Jersey 08903

(Attorney for Plaintiff,

City of New Brunswick)

Robert S. Seguin, Esquire

Booream and Seguin, Esquires

2 Booream Avenue

Milltown, New Jersey 08850

and

Roger S. Clapp, Esquire

Arnold K. Mytelka, Esquire

Clapp & Eisenberg, P.C.

80 Park Plaza

Newark, New Jersey 07102

(Attorneys for Defendant,

Borough of Milltown)

Francis X. Journick, Esquire

Richard P. Daingerfield, Esquire

Wilentz, Goldman & Spitzer, P.C.

900 Route No. 9, Post Office Box No. 10

Woodbridge, New Jersey 07095

(Attorneys for Defendant-Third Party

Plaintiff, The Middlesex County Sewerage

Authority (formerly Middlesex County

Sewerage Authority) )

35a

Appendix C

William W. Robertson, Esquire

United States Attorney

By: Rosanne Mayer, Esquire

Pollution Control Section

Land and Natural Resources Division

United States Department of Justice

Ninth and Pennsylvania Avenue, N.W.

Washington, D.C. 20530

and

By: Lee Dehihns, Esquire

Acting Assistant General Counsel

for Grants Office of General Counsel

Environmental Protecticn Agency

401 “M” Street, N.W.

Washington, D.C. 20460

(Attorneys for Third Party Defendant,

Environmental Protection Agency)

This case presents a challenge to the Environmental

Protection Agency’s (EPA) decision to withhold part of

its grant funds from the Middlesex County Utilities Au-

thority (MCUA) because tie Borough of Milltown, whose

waste water is treated by the MCUA, had failed to adopt

a system of user charges to pay for its proportionate share

of the MCUA facility as mandated by section 204(b)(1)

of the Clean Water Act, 33 U.S.C. 4 1284(b)(1). The legal

challenge began in August, 1980 when the City of New

Brunswick instituted suit in the Superior Court of New

Jersey, Chancery Division, Middlesex County, against Mill-

town and the MUCA, seeking an injunction and declara-

tion that a 1914 contract between itself and Milltown, which

obligates New Brunswick to receive and dispose of Mill-

town’s sewage without cost, was void on several grounds,

including allegations based on EPA regulations:

36a

Appendia C

Federa! Rules and Regulations governing the Mid-

diesex County Sewerage Authority must be made

applicable to all users of the system, including the

Defendant, Borough of Milltown, regardless of

whether or not the user has a direct contract with

the Sewerage Authority.

Complaint, { 4, Third Count.

New Brunswick further alleged:

[U]nder such Rules and Regulations such users of

the Sewerage Authority’s facilities must pay their

fair share of the cost of operating and maintaining

the Sewerage Authority’s treatment works.

Com slaint, 5, Third Count.

In November, 1980, MCUA brought the Environmental

Protection Agency into the staie court litigation by nam-

ing it as a third-party defendant. In its cross-complaint,

MCUA alleged that neither the Clean Water Act nor its

implementing regulations requires that Milltown adopt a

system of user charges and that, even if they did, such a

requirement would constitute an unconstitutional abroga-

tion of the 1914 contract. EPA removed this action to the

Federal District Court under 28 U.S.C. § 1442(a)(1)* in

December, 1980, and has answered and counterclaimed

against all other parties, seeking a declaration that section

128 U.S.C. § 1442(a)(1) permits removal of a civil action com-

menced in a state court against “any officer of the United States

or agency thereof” to the United States District Court. For a

general discussion of the power of the federal government to

have actions brought against its officers or agencies removed to

the federal forum under this statute see Willingham v. Morgan,

395 U.S. 402 (1969).

37a |

Appendiaz C

204 authorizes EPA to withhold grant funds from MCUA

pending adoption of the user charges by Milltown and an

injunction requiring Milltown to adopt such user charges

or, alternatively, to cease sending its sewage through

MCUA’s facility for treatment.

All parties now move for partial summary judgment

with respect to the federal issues presented in this litiga-

tion: Whether section 204(b)(1) of the Clear. Water Act,

33 U.S.C. § 1284(b)(1), and its implementing regulations,

40 C.F.R. § 35.900, et seq., authorize EPA to withhold

grant funds from MCUA prior to the adoption of sewer

user charges by Milltown, and whether the enforcement of

a user charge system would cause an unconstitutional im-

pairment of Milltown’s contract with New Brunswick in

violation of the Fifth Amendment?

There is no dispute concerning the material facts in this

ease. As already mentioy 4d, in 1914 tha City of New Bruns-

wick entered into a con.cact with the Borough of Milltown

under which New Brunswick agreed to receive and dispose

of Milltown’s sewage without charge in exchange for Mill-

town’s promise to discontinue its practice of discharging

sewage into the Lawrence Brook, a source of drinking

water for New Brunswick. On two separate occasions, New

Jersey courts have upheld the validity of this contract.

City of New Brunswick v. Borough of Milltown, 3 N.J.

Super. 133 (App. Div. 1949); City of New Brunswick v.

Borough of Milltown, 135 N.J. Eq. 310 (Ch. 1944).

As a result of this contract, the sewage from Milltown

flows free of charge from Milltown to New Brunswick, and

the combined flows from the two municipalities are treated

at the MCUA plant. New Brunswick pays MCUA for its

38a

Appendia C

own and for Milltown’s sewage at a rate set by the MCUA.

Milltown pays nothing to New Brunswick or to MCUA and

has not, to date, adopted a system of sewer user charges

to pay for its proportionate share of waste treatment.

MCUA is currently expanding its Sayreville plant and

is planning to build a sludge dewatering facility to aid its

disposal of solid wastes on land which is mandated after

December 31, 1981 by the Marine Protection, Research

and Sanctuaries Act of 1972, 33 U.S.C. § 1401, et seg. To

help defray the costs of its projects, the MCUA has ap-

plied for and been awarded various grants from the EPA.

At present, payments under one outstanding grant agree-

ment have been withheld because of MCUA’s failure to

meet the User Charge requirements.? This grant agree-

ment, adopted on August 30, 1976, contains an express

condition notifying MUCA that payments under the grant

may be subject to withholdings in excess of 50% and/or

80% of the grant amount “for failure to comply with the

requirements as to industrial cost recovery and user charge

systems... .”. (See Exhibit B attached to the Supplemen-

tal Affidavit of Sol Seid.) For the same reason, the EPA

* There is one other grant agreement between the MCUA and

the EPA for which payments remain outstanding. That agree-

ment, approved on January 16, 1973, contains no user charge sys-

tem requirements since it was accepted before the user charge

system was mandated by the Federal Water Pollution Control Act

Amendments of 1972 (Pub. L. 92-500) (see Exhibit A attached

to the Supplemental Affidavit of Sol Seid). Consequently, no

payments under this grant have been withheid because of Milltown’s

refusal to adopt a User Charge System. (See Affidavits of Edward

Markus and Allan Jacobs. )

39a

Appendiz C

has also refused to approve applications by the MCUA for

new grants.*

Defendants MCUA and Milltown both contend that sec-

tion 204 should not apply to Milltown on the theory that

Milltown is not a “recipient” of waste treatment services

from the MCUA. According to the defendants’ reading of

the statute and its implementing regulations, Milltown is

not a recipient for two reasons: (i) Milltown does not dis-

charge waste water in to the MCUA system directly; rather,

it disposes of its waste water by transmitting it to New

Brunswick in accordance with the contractual relationship

between those two municipalities; and (ii) Milltown is not

a “subscriber” to services provided by MCUA. If section

204 is found to apply to Milltown, defendants argue, in the

alternative, that section 204 is unconstitutional since it

would abrogate an existing contract between Milltown and

New Brunswick, and that the EPA’s decision “to force the

MCUA to exact user charges from Milltown” is wholly ir-

rational and contrary to public policy. EPA, on the other

hand, interprets both section 204 and the regulations, par-

ticularly 40 C.F.R. 4 35.929-2(e), as applying to the situ-

ation here and as requiring Milltown to pay user charges

before full grant funds may be transferred to the MCUA.

EPA further maintains that the section is fully constitu-

tional and that the decision to enforce the user charge re-

quirement is rational.

%In an affidavit submitted by the government after oral argu-

ment, the EPA has suggested that the withholding of grant money

rom MCUA is not solely due to Milltown’s failure to adopt a

charge system and that at least one other municipality has

the requirement (see Affidavit of Edward

40a

Appendiz C

Under section 204(b)(1) of the Clean Water Act, 33

U.S.C. § 1284(b)(1), the EPA Administrator may not ap-

prove any grant for sewage treatment facilities

unless he shall first have determined that the appli-

cant (A) has adopted or will adopt a system of

charges to assure that each recipient of waste treat-

ment services within the applicant’s jurisdiction, as

determined by the Administrator, will pay its pro-

portionate share ... of the costs of operation and

maintenance (including replacement) of any waste

treatment services provided by the applicant . . .

(emphasis added).

Neither the Act nor the regulations define who is a “re-

cipient” of waste treatment services from the grantee, 33

U.S.C. § 1292; 40 C.F.R. § 35.905. Recipient is defined in

Webster’s New Collegiate Dictionary (1975) as “one taat

receives”. To receive is defined as “to come into possession

of” or “to acquire”.

Given the plain meaning of “recipient” and the great

deference to be accorded to statutory interpretations by the

agency charged with its administration, EPA v. National

Crushed Stone Association, —— U.S. ——, 101 S. Ct. 295

(1980), I find that Milltown is a recipient of waste treat-

ment services within the meaning of section 204 of the Clean

Water Act. The fact that Milltown itself does not directly

place its own waste into the MCUA system or require that

it waste water be treated by MCUA is not material. Since

Milltown’s waste water is discharged through New Bruns-

wick into the MCUA system and receives its only treat-

ment from the MCUA system, Milltown is inarguably a

“recipient” of MCUA’s treatment services.

4la

Appendia C

Moreover, the fact that Milltown does not have a sub-

seription contract with MCUA has no bearing on the de-

fendants’ claims here because the application of the statute

is not limited to subscribers. The statute itself does not

refer to subscribers but only to recipients of waste treat-

ment services. The regulations specifically deal with muni-

cipalities contributing wastes to the treat sent works re-

gardless of whether such municipalities are “subscribers”.

While 40 C.F.R. § 35.929-2(e) provides that if the applica-

tion is for a “regional treatment system accepting waste-

waters from other municipalities” all “subscribers” must

adopt user charge systems, the regulation also continues

to require that all municipalities contributing wastes to the

system to adopt user charges:

These user charge systems shall also be incorpo-

rated in appropriate municipal legislation enacted or

other appropriate authority of all municipalities con-

tribultng to the treatment works . . . (emphasis

added.)

Similarly, 40 C.F.R. § 35.929-1, which sets forth the gen-

eral requirement for user charge systems, does not limit

the user charge requirements to the grantee’s “subscribers”.

If the grantee’s user charge system is based on actuai use,

that system may be approved “if each user . . . pays its pro-

portionate share of operation and maintenance . . . costs”.

40 C.F.R. 4 35-929-1(a) (emphasis added). Thus, even

though Milltown does not have a subscription contract

with MCUA it nonetheless must adopt user charges before

MCUA may receive full grant funds from EPA.

My interpretation of the Act’s user charge requirements

and its implementing regulations is consistent with the un-

derlying purposes and policies of the Act. Legislative his-

42a

Appendiz C

tory reveals that Congress’ purpose in providing for a user

charge system was twofold: first, it was enacted “as a

means of assuring that each federally assisted facility

would have adequate operation and maintenance funds”,

and, second, the system was intended to be “a positive force

in encouraging more efficient management of wastes dis-

charged through a municipal system as well as an eco-

nomic inducement to reduce excessive use”. 8. Rep. No. 93-

370, 95th Cong., Ist Sess. (1977), reprinted in [1977] US.

Code & Cong. Ad. New 4326, 4352. Requiring Milltown to

pay for its proportionate share of the cost of operation

and maintenance for the MCUA facility clearly furthers

the joint objectives of conservation and financial security.

Unless Milltown adopts its own system of user charges

there is simply no incentive on individual or industrial users

withie Milltown to decrease their water consumption and

thereby decrease discharges in the MCUA facility. More-

over, should New Brunswick break its contract with Mill-

town and cease paying for the costs of treating Milltown’s

wasts, MCUA would, in the absence of a user charge sys-

tem in Milltown, be faced with a revenue shortfall.

Defendants point to legislative history which also re-

flects a congressional determination that EPA “take into

account the diversity of legal and financial factors that

exist from jurisdiction to jurisdiction” and that EPA

permit to each applicant “reasonable flexibility in the

design of a system of user charges that meet the unique

requirements of his own jurisdiction”. S. Rep. No. 92-

414; 92nd Cong., 2nd Sess. (1972), reprinted in [1972]

U.S. Code & Cong. Ad. News, 3668, 3695 This flexi-

bility, however, is qualified by the further determina-

tion that “[a]s a general rule, the volume and character

of each discharge into a publicly owned system should

43a

Appendiz C

form the basis of determining the rate at which each

user should be required to pay”. Jd. Thus, to fulfill

the purposes of the Act, Milltown must be considered

a “recipient of waste treatment services” within MCUA’s

jurisdiction, and must adopt a system of user charges

as required by section 204 and its implementing regu-

lations.

Having determined that the Clean Water Act auth-

orizes the EPA to withhold grant funds from the MCUA

in these particular circumstances, the question must now

be addressed whether the Act so interpreted unlawfully

impairs Milltown’s contract with New Brunswick or is

otherwise invalid or contrary to public policy.

The Contract Clause protects against actions by states

impairing the obligations of contracts. A similar meas-

ure of protection against contract impairment by the

federal government is given by the Fifth Amendment’s

provision that no person shall be deprived of property

without due process. Lynch v. United States, 292 U.S.

571 (1933); Perry v. United States, 294 U.S. 330 (1930).

Although the prohibition appears to be absolute, neither

the contract clause nor the due process clause invali-

dates every action by the government which interferes

with a contract:

[The government] must possess broad power to

adopt general regulatory measures without being

concerned that private contracts will be impaired,

* The Contract Clause is contained in Article I, Section 10, Clause

1 to the United States Constitution and states, in relevant part: “No

State shall . .. pass any . . . Law impairing the Obligation of

Contracts ...”.

44a

Appendiz C

or even destroyed, as a result. Otherwise, one

would be able to obtain immunity from state regu-

lation by making private contractual arrangements.

This principle is summarized in Mr. Justice Holm-

es’ well-known dictum: ‘One whose rights, such

as they are, are subject to state restriction, can-

not remove them from the power of the state by

making a contract about them.’ Hudson Water

Co. v. McCarter, 209 U.S. 349, 357 (1908).

United States Trust Co. v. New Jersey, 481 U.S. 1,

22 (1977).

Thus, the Court has recognized that the government does

have the right to impair existing contractual obligations

if the contemplated action is reasonably necessary to

further a legitimate public purpose:

Legislation adjusting the rights and responsibili-

ties of contracting parties must be upon reason-

able conditions and of a character appropriate to

public purpose justifying its adoption.

Id. at 22.

Accord, Allied Structural Steel Co. v. Spannaus, 438

U.S. 234 (1978).° Moreover, when reviewing such legis-

5In Allied Structural Steel Co. v. Spannaus, the Supreme Court

recently struck as an impermissible violation of the Contract Clause

of the Constitution a Minnesota statute which subjected the plain-

tiff company to a “pension funding charge” if the company termi-

nated its pension plan or closed a Minnesota office. In so hold-

ing, the Court applied the standard set in the United States Trust

Co. case of a reasonable necessity to further a legitimate public pur-

(Footnote continued on following page)

States Trust Co. v. New Jersey, supra, at 23.

In enacting section 204 and requiring the adoption

of user charges applicable to all users as a prerequisite

tect the public health and welfare. Since the protec-

-_—_—_-_—_—_--—

(Footnote continued from preceding page)

46a

Appendix C

tion of the environment is a legitimate public purpose,

section 204 must be upheld if it is reasonably necessary

to accomplish this purpose.

The requirements of section 204 may impair the obli-

gations of an existing contract only after a grantee has

chosen to apply to EPA for construction grant funds.

As such, the user charge requirement is not an auto-

matie abrogation of all contracts involving charges for

sewage treatment, but only a reasonable condition to

the availability of financial assistance. Terms and con-

ditions to federal financial assistance uniformly have been

upheld against constitutional attack if those terms and

conditions are reasonably related to the statutory goal.

See King v. Smith, 392 U.S. 309, 333 (1968); Massa-

chusetts v. Mellon, 262 U.S. 447, 480 (1923).

Moreover, Congress determined that a significant in-

centive for water conservation would be to provide in-

dividual discharges into a municipal waste treatment fa-

cility with a financial incentive to conserve water. S.

Rep. No. 95-370, 95th Cong., Ist Sess. (1977), reprinted

in [1977] U.S. Code & Cong. Ad. News 4326, 4351-52.

User charges clearly provide such an incentive to each

discharger into a waste treatment system. In light of

the deference to be accorded the Coagressional determin-

ation concerning these financial incentives and their re-

lationship to water conservation, United States Trust Co.

v. State of New Jersey, supra, I find the specific tool

employed by Congress in section 204—requiring the es-

tablishment of user charge systems as a prerequisite

to federal financial assistance—to be reasonably neces-

sary to protect the environment and achieve the specific

47a

Appendiz C

goals of water conservation and a decrease in water

pollution.*®

MCUA’s final argument is that in requiring Milltown

to adopt user charges prior to disbursement of full grant

funds to MCUA, section 204 is contrary to public policy.

MCUA first contends that it has no power to compel

Milltown to adopt user charges and, therefore, EPA is

“punishing” MCUA for something over which it has

no control. MCUA also contends that section 204 re-

quires MCUA to tortiously interfere with Milltown’s con-

tract with New Brunswick.

The arguments that EPA is “punishing” the MCUA

and requiring MCUA to commit a tort against Mill-

*MCUA’s argument to the contrary relies primarily on an un-

reported oral decision of the Central District of California.

Garden States Paper Co., Inc. v. County Sanitation District No.

201 of Los Angeles County, No. 78-0042-IH (C.D. Cal. Feb. 6,

1980). That case, however, is unpersuasive authority. In de-

Hf ;

2855

— U.S. —., 101 S. Ct. 659, 668-669 (1981). For this reason,

I decline to follow the reasoning of the Garden State Court. Cf.

ime Container of Monroe v. Alexander, No. 77-725 97 (E.D.

48a

Appendia C

town overlook the fact that MCUA is under no obligation

to apply for grant funds from EPA. Its obligation to

comply with the treatment and discharge requirements

of the Clean Water Act is completely independent of

the receipt of any financial assistance from the govern-

ment. State Water Control Board v. Train, 559 F.2d

921 (4th Cir. 1977). Only after it applied to EPA for

grant funds was MCUA obliged to comply with all re-

quirements and conditions of the construction grants pro-

gram, including the user charge requirement. See Named

Individual Members of the San Antonio Conservation So-

ciety v. Texas Highway Dept., 446 F.2d 1013, 1027-28

(5th Cir. 1971). EPA has in no way forced MCUA

into anything. MCUA freely applied to EPA for grant

assistance, and the EPA, in providing the assistance,

expressly stated the grant program requirement of user

charges. If the conditions imposed on the MCUA for

the grant money force it to interfere tortiously with

Milltown’s contract with New Brunswick, the obvious

and simple solution for MCUA is to withdraw its grant

application.

At oral argument on this motion the possibility of

an estoppel argument was raised for the first time and,

on the Court’s direction, briefed by the parties. In short,

it is the contention of MCUA that EPA should be es-

topped from requiring Milltown to pay user charges

since it was more than five years after the original

Grant Agreement was entered into in 1973 that EPA

first mentioned the obligation of a user charge system

with respect to the Borough. According to Sol Seid,

Executive Director of the MCUA, had EPA made it

clear at the time it offered the grants that the Borough

of Milltown would be required to adopt a sewer user

charge system, the Authority would not have agreed to

49a

Appendia C

accept the grants. Contrary to the MCUA’s deserip-

tion of the events, however, the EPA did, in fact, make

its position with respect to a user charge system as

clear as possible. The user charge system became a

mandatory condition to the receipt of funds after the

1973 grant agreement was approved and therefore no-

tice of its requirements is relevant only to the second

grant application submitted by MCUA in 1976." Al-

though the 1976 grant agreement does not specifically

mention Militown by name, it did specifically condition

payment of the grant on compliance with the require-

ments as to “user charge systems in 40 C.F.R. § 35.-

935-13.” This is the pri vision under which EPA is with-

holding the grant funds from MCUA at approximately

80% of the total grant. Moreover, when MCUA first

informed EPA of the Milltown situation in early to mid-

1979 (well after the 1976 grant had been approved),

the department immediately notified MCUA of its ob-

ligation to obtain the adoption by Milltown of a user

charge system, even though Milltown was an indirect

discharger into the MCUA system through the New

Brunswick facilities and had entered into no subscriber’s

agreement with MCUA. The EPA had consistently main-

taied this position with the MCUA. (See Affidavit of

Edward Markus, Chief of the Raritan-Passaic Section

of the New Jersey/Caribbean Water Programs Branch

of the Region II Office of the EPA.) In view of the

clear condition expressed in the 1976 grant agreement

and the EPA’s unequivocal stance in this matter, there

is no basis for an estoppel theory of relief.

In conclusion, I find that section 204(b)(1) of the Clean

Water Act, 33 U.S.C. § 1284(b)(1), and its implementing

7 See n. 2.

50a

Appendia C

regulations authorize EPA to withhold grant funds from

the MCUA until such time as the Borough of Milltown

adopts a system of user charges as required by the Act.

Because the EPA’s options usver the Act are limited to

granting or not granting the funds to the Authority and do

not include the power to order Milltown’s generators of

sewage to pay their share of costs, I decline to order the

Borough of Milltown to adopt a user charge ordinance or

to cease sending its sewage through MCUA’s facility for

treatment.

The consequences of the disposition of the summary judg-

ment motions set forth below will be to deny all requests

for relief which MCUA seeks against EPA in its third

party complaint, requiring its dismissal. A further conse-

quence of the disposition of the summary judgment motion

will be to grant the first and third requests for relief set

forth in EPA’s counterclaim against MCUA and to deny

its second request for relief.

Upon entry of the order disposing of the summary judg-

ment motion EPA, which removed this case to this Court,

will no longer be a party to these proceedings. The only

issues remaining will be state issues which should be re-

solved by the state courts. Critical to the outcome of the

ease is resolution of the question whether the dramatic

change in cireumstances occasioned by the availability of

financing under the Clean Water Act and the conditions

imposed for the granting of such financing have any effect

upon the pre-World War I contract between New Bruns-

wick and Milltown which now stands as a bar to such financ-

ing. That is a question of state law which should be re-

solved in the state courts (or legislaturs}.

Turning to the individual motions for summary judg-

ment, they will be disposed of as follows:

5la

Appendiz C

1. MCUA’s motion for summary judgment for MCUA

and against EPA “ordering review and approval of grant

applications and payment of grant funds in accordance

with the provisions of the Clean Water Act ... and the

regulations promulgated pursuant thereto without regard

to whether [Milltown] has adopted a sewer user charge

ordinance until such time, if ever, as [Milltown] com-

mences subscribing to services provided by [MCUA]”—

denied.

2. Milltown’s motion for an order

(a) Entering summary judgment in favor of Milltown

against PPA on the counterclaim by EPA against Mill-

town—granted.

(b) Entering summary judgment in favor of Milltown

against MCUA on its cross-claim against Milltown—denied

without prejudice in order that the questions raised may

be resolved by the Courts of the State of New Jersey.

New Brunswick on the Third Count of the Complaint—

denied without prejudice in order that the questions raised

may be resolved by the Courts of the State of New Jersey.

(d) Dismissing the remaining Counts of the Complaint

without prejudice—denied.

(e) Rermanding this action to the state court—granted.

3. New Brunswick’s motion for summary judgment in

favor of New Brunswick 2gainst Milltown and MCUA or-

dering Milltown to adopt a user charge ordinance and to

pay its proportionate share of the treatment of its waste

water in accordance with the provisions of the Clean Water

Act and the regulations promulgated pursuant thereto—

52a

Appendia C

denied without prejudice in order that the questions raised

may be resolved by the Courts of the State of New Jersey.

4. EPA’s motion for summary judgment in EPA’s favor

on MCUA’s complaint and declaring that Section 204(b) (1)

of the Clean Water Act and its implementing regulations

authorize EPA to withhold grant funds from MCUA until

such time as Milltown adopts a sytem of user charges as

required by the Act—granted.

No costs will be allowed to any party.

EPA is requested to submit an order consistent with this

opinion, giving the other parties seven (7) days to notify

the Court of any objections to its form or substance.

Dated: August 11, 1981.

Dickinson R. Desevorse

United States District Judge

APPENDIX D

Order of Dismissal, Remand, etc. of the United States

District Court for the District of New Jersey

(Filed—September 9, 1981)

UNITED STATES DISTRICT COURT

District or New JERSEY

Hon. Dickinson R. Debevoise

Civil Action No. 80-4040

- =

—

CITY OF NEW BRUNSWICK,

Plaintiff,

vs.

BOROUGH OF MILLTOWN and THE MIDDLESEX

COUNTY UTILITIES AUTHORITY (formerly MID-

DELSEX COUNTY SEWERAGE AUTHORITY),

Defendants,

THE MIDDLESEX COUNTY UTILITIES AUTHORITY

(formerly MIDDLESEX COUNTY SE"VERAGE

AUTHORITY),

Defendant-Third Party Plaintiff,

vs.

THE UNITED STATES OF AMERICA, by and through

its ENVIRONMENTAL PROTECTION AGENCY,

Third Party Defendant.

54a

Appendia D

ORDER

Upon consideration of the motion of defendant-third-

party plaintiff Middlesex County Utilities Authority

(“MCUA”) for summary judgment; the motion of de-

fendant the Borough of Milltown (“Milltown”) for sum-

mary judgment, to dismiss, and for an order of re-

mand; the motion of plaintiff the City of New Bruns-

wick (“New Brunswick”) for summary judgment; and

the motion of third party defendant the United States

of America, by and through its Environmental Protec-

tion Agency (“EPA”), for summary judgment, and all

the briefs, affidavits, pleadings and papers filed herein,

for the reasons set forth in the opinion filed August

11, 1981, it is, by the Court, this 9th day of September

1981, hereby ORDERED that:

1. MCUA’s motion for summary judgment for MCUA

and against EPA “ordering review and approval of grant

applications and payment of grant funds in accordance

with the provisions of the Clean Water Act ... and

the regulations promulgated pursuant thereto without re-

gard to whether [Milltown] has adopted a sewer user

charge ordinance until such time, if ever, as [Milltown]

commences subscribing to services provided by [MCUA]”

is denied;

2. Milltown’s motion for an order

(a) entering summary judgment in favor of Mill-

town and against EPA on the counterciaim by

EPA against Milltown is granted;

(b) entering summary judgment in favor of Mill-

town and against MCUA on its cross-claim

55a

Appendia D

against Milltown is denied without prejudice in

order that the questions raised may be resolved

by the Courts of the State of New Jersey;

Brunswick on the Third Court of the Complaint

is denied without prejudice in order that the

i raised may be resolved by the Courts

of the State of New Jersey;

(d) dismissing the remaining Counts of the Com-

plaint without prejudice is denied;

(e) remanding the main action to the state court

is granted;

3. New Brunswick’s motion for summary judgment in

favor of New Brunswick and against Milltown and MCUA

ordering Milltown to adopt a user charge ordinance and

to pay its proportionate share of the treatment of its

waste water in accordance with provisions of the Clean

Water Act and the regulations promulgated pursuant

thereto is denied without prejudice in order that the

questions raised may be resolved by the Courts of the

State of New Jersey;

4. EPA’s motion for summary judgment

(a) in EPA’s favor dismissing MCUA’s third party

complaint against EPA is granted and

(b) declaring that Section 204(b)(1) of the Clean

Water Act and its implementing regulations

authorize EPA to withhold grant funds from

56a

Appendiz B

MCUA until such time as Milltown adopts a

system of user charges as required by the Act

is granted.

5. No costs will be allowed to any party.

Dickinson R. Debevoise

United States District Judge

oe Fe

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.