Bell Arthur Water Corporation v. Greenville Utilities Commission, et al., Cause No. 4:95-CV-122-H2 United States District Court Eastern District, North Carolina Honorable Malcolm Howard, U.S. District Judge, presiding Bell Arthur Water Corporation ("BAWC") has a current loan outstanding with the U.S. Department of Agriculture, Rural Utility Service (formerly FmHA). In November of 1995 BAWC filed suit in federal court to stop the curtailment of service area by the Greenville (North Carolina) Utilities Commission ("GUC"). In its defense against the suit GUC asserted that the USDA loan to BAWC for the Otter Creek extension of BAWC's system was not properly processed, and that the protection afforded to BAWC under 7 U.S.C.  1926(b) did not extend to the rest of BAWC's system. BAWC sought USDA's intervention. USDA subsequently disclaimed any potential for curtailment as well as denied application of 7 U.S.C.  1926(b) protection for BAWC's entire system (excepting the Otter Creek area where improvements were made only). At the summary judgment hearing on April 30, 1997, USDA took the following position regarding its security: THE COURT: What do you say to the fact when you loaned to Bell Arthur some more money in `93. Did you go back then and pick up the whole of Bell Arthur - Ironwood as well as Otter Creek, or don't you know? USDA: I can say this, that the Government acted wisely in this situation and does not always act wisely, to include everything it can as collateral. It did include - it appears everything that it could as collateral . . . [w]e've got this other area that came after a period of time we loaned money to the separate area, which we recognize is separate. And we were fully - the full protection was afforded there. The purpose of the statute was met, and it's still being met. We don't feel impaired in any way, we feel like the law has been complied with. THE COURT: Now, I'm hesitant to ask this question - you just stated that the Secretary of Agriculture takes the position that you have enunciated. USDA: Yes. THE COURT: I assume, prior to your making that statement on the record in this Court, you have verified that with the appropriate officials within the Secretary of Agriculture - USDA This comes from the regional counsel or the Department of Agriculture out of Atlanta. And this is what they say, in fact I'll read to you exactly what they say. They say: "that the federal Government's position is that the loan obligation must be directly related to the service area in question. The fact that a party may have loans from the Government or servicing an entirely different area does not qualify it for protection from all unrelated areas." (Emphasis added). April 30, 1997 summary judgment hearing transcript, pages 35 through 37. Based on the position taken by USDA in the case, the court ruled that: [t]he court must discern to what extent, if any, BAWC has a protectable interest pursuant to 1926(b) in the disputed Ironwood area in light of its 1993 loan. . . . [d]efendants argue that the proceeds from the 1993 loan, which is the only indebtedness BAWC currently has with FmHA, were used solely to finance the Otter Creek project and were not used to construct any water lines or facilities connected with Ironwood. . . In sum defendants ask the court to find that the 1993 loan extends protection only to the Otter Creek project, and not to BAWC's water system as a whole. BAWC counters that its Otter Creek facilities are not "stand alone" facilities capable of generating their own revenue stream. BAWC states that without the connection of the Otter Creek facilities to the rest of BAWC's system, including the pipes running through the Ironwood area, no water could reach the Otter Creek project since the Otter Creek project is but a part of an entire water "system". This court must accord considerable deference to an agency's reasonable interpretation of a statute that it is charged with administering. During the summary judgment hearing, a representative from the USDA presented the government's interpretation of 1926(b) and addressed whether the statute protected more than BAWC's Otter Creek project. When asked by the court whether, in addition to the Otter Creek facilities, the new loan to BAWC was also secured by facilities located in the Ironwood area . . . USDA stated that: `the Federal Government's position is that the loan obligation must be directly related to the service area in question. The fact that a party may have loans from the Government or servicing an entirely different area does not qualify it for protection from all unrelated areas.' BAWC's application for the Otter Creek project appears to fall squarely within this parameter. . . Although the court may envision a circumstance in which a water association's entire water system is appropriately pledged as security to the FmHA, this is not such a case. . . Even the government, who would most likely urge the court to expansively interpret any security agreement to protect its security interest, has conceded that `no issue of a violation of federal statute is involved in this case under the factual disputes of the parties.' (Emphasis added). Court's order of July 25, 1997. Copies of the transcript of the summary judgment hearing and the court's final order and judgment are available from the court in the above-referenced cause number. The court's judgment establishes that, according to USDA, USDA's collateral only extends to the Otter Creek portion of BAWC's entire system and "all rents, revenue, etc." derived from that area. USDA made its loan to BAWC in the Otter Creek area for $1,797,000, calculating revenue from the entire BAWC system. Based on the position taken by USDA, and ratified by the court, USDA is only entitled to revenue from customers in the Otter Creek system. IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NORTH CAROLINA EASTERN DIVISION AT GREENVILLE, NORTH CAROLINA BELL ARTHUR WATER ) NO. 4:95-CV-122-H(2) CORPORATION, ) ) Plaintiff. ) BELL ARTHUR WATER ) CORP.'S MEMORANDUM ) IN SUPPORT OF BAWC'S ) MOTION FOR ) RECONSIDERATION vs. ) PURSUANT TO ) FED. R. CIV. P. 59 ) (FILED WITHIN TEN (10) DAYS GREENVILLE UTILITIES ) OF SUMMARY JUDGMENT COMMISSION, CITY OF ) ORDER) GREENVILLE, N. C. and ) IRONWOOD DEVELOPMENT, INC. ) ) Defendants. ) NOW COMES Bell Arthur Water Corporation ("BAWC"), Plaintiff, and files BAWC's Memorandum in Support of its Motion for Reconsideration Pursuant to Fed. R. Civ. P. 59 (Filed Within Ten (10) Days of Summary Judgment Order). I. INTRODUCTION 1.01 BAWC brings this motion requesting the Court reconsider its July 25, 1997 Order granting Summary Judgment for Defendants on BAWC's claim for Declaratory Judgment and permanent injunction pursuant to 7 U.S.C.  1926(b). 1.02 BAWC respectfully suggests, as will be shown below, that the Court should grant this motion for reconsideration because of manifest errors of law and fact committed in the determination of the motions for summary judgment and disposition of this case. Specifically, BAWC will show that pursuant to Fed. R. Civ. P. 56, Defendants were not entitled to summary judgment as a matter of law. Defendants failed to show that no genuine issue of material fact existed for which summary judgment could be granted. II. STANDARD FOR  1926(b) PROTECTION: THE BEAR CREEK PARADIGM 2.01 Before addressing the Court's findings, BAWC asserts that the current jurisprudence controlling in this case must be applied. The first appellate case, which is the benchmark by which all other  1926(b) cases have been measured, is Bear Creek. The similarities between this case and Bear Creek make its teachings applicable to this case. The Court in Bear Creek was faced with the same circumstances as the case at bar: an indebted association with facilities within a subdivision belonging to Bear Creek to which the municipality extended annexation and effected curtailment by condemnation subsequent to the service provided and made available by the indebted association. 2.02 The Hon. Judge Edith H. Jones, in analyzing the policy behind  1926(b) protection, held: The statute unambiguously prohibits any curtailment or limitation of an FmHA indebted water association's services resulting from municipal annexation or inclusion. This language indicates a Congressional mandate that local governments not encroach upon the services provided by such associations, be that encroachment in the form of competing franchises, new or additional permit requirements, or similar means. To read a loophole into this absolute prohibition, as Madison would have us do . . . would render nugatory the clear purpose of  1926(b). Bear Creek at 1059. 2.03 Judge Jones found absolute prohibition was the Congressional policy enacted regardless of the mechanism used by municipalities to provide competing service. Further, the Bear Creek policy statement recognized that the federal debt encompassed the entire system. It is clear that balkanization of a federally indebted association is not allowed, particularly in the manner exercised in the present case. Judge Jones made the following pronouncement as to the protection afforded "an indebted association," such as BAWC: Madison contends that this construction of the statute is untenable because it leads to the `plainly absurd' result that FmHA-financed water authority could avoid condemnation even if it owed only $1.00 on its government loan. However, it was Congress, and not this court, that literally proscribed interference by competing facilities with the rural water authority `during the term of said loan.' The city's logic also assumes Section 1926(b) must somehow be construed to effectuate the local condemnation power. Pursuing such logic, we might decide that so long as the condemnation does not `unduly interfere' with the water authority's payment obligations to FmHA or its ability to service rural water users, the condemnation may proceed. Such a result however, would have a perverse impact upon both the rural water authority and the would be condemnor. In each case, the contending parties could raise and seek adjudication of the fact issue concerning the extent of interference that would result from condemnation. A condemnation case impinging on a rural water authority could easily involve both state and federal court litigation, high legal fees, and considerable delay, to the ultimate detriment of the municipality, the rural water authority, and the consumers of rural water service. A bright-line rule which prohibits condemnation through the FmHA loan term at least creates certainty for the municipal planner and the rural water authority, even if it limits the municipality's options. Id. at 1059 (Emphasis added). 2.04 By creating the Bright Line Rule, Judge Jones intended to preclude adjudication of the [type of] fact issues concerning extent of interference that has been conducted in this case. Competing municipal facilities are "literally proscribed" and "extent of the interference" or the capacity (line size) is not an element for determination of applicability of  1926(b) protection. In point of fact, under Bear Creek, BAWC's entitlement to federal protection is established by the conduct of Defendants by creating additional permit requirements affecting BAWC's provision of service to the Ironwood Developer and thereafter installing a competing transmission line. 2.05 This Court found "[t]he Developer originally requested water service from BAWC in May of 1995. On May 22, 1995, BAWC provided Developer with a Letter of Commitment to enable Developer to obtain financing from its bank. In this letter, BAWC stated unequivocally that it would provide all water needs for Ironwood." (Court Order at 2-3) (Emphasis added). Further, the Court found that "BAWC has in place a 6" water transmission line running through or adjacent to the Ironwood area which the Developer connected to for a temporary water line to service the Developer's construction trailer." (Court Order pp. 22-23). It is clear from the evidence and findings of this Court that Developer was receiving, and BAWC was "providing water service" and "making water service available" for the future development of the Ironwood Subdivision. The Ironwood Subdivision was planned as a multi-phased development to be built out over time with the western portion starting four (4) years from October 1994 (See BAWC Ex. 18, Developer's October 22, 1994 letter to GUC). See infra. 2.06 From May of 1995 until August of 1995, GUC actively and intentionally took steps to oust BAWC as the provider of water service to the Ironwood Developer located in BAWC's service area defined by FmHA (as more fully discussed below). The Engineering Status Reports of the Developer's Engineer which are a weekly report of the progress of the Ironwood development and any events related thereto clearly show that GUC pressured the Developer to rescind Developer's previous water service agreement with BAWC and to enter into an alternative contract with GUC for water service to be provided within BAWC's service area. The Developer's engineers' reports state as follows in pertinent part: June 11, 1995 Ironwood's Engineer Status Report (BAWC's Ex. P-25): There is a real feud between Greenville Utilities and Bell Arthur Water. When we negotiated the agreement with GUC, they met with and verbally committed to Bell Arthur that Bell Arthur would serve Ironwood. GUC now contends that it never intended for Bell Arthur to serve the Speight addition to Ironwood. GUC has approached BAWC with a request to trade to BAWC the right to serve all of Ironwood (i.e. the Speight Property) if BAWC will give up a significant portion of its existing service area elsewhere in the county to GUC. BAWC has apparently told GUC that it has no intention of giving up any area and that it [BAWC] is going to serve all of Ironwood including the Speight Property. We could easily get caught in the middle if we are not careful. Malcolm Green goes out of his way to reassure me that our project will in no way be affected, and that GUC is essentially using the Ironwood service area question as a chip in his negotiations [with BAWC]. Randy Emory has told me that we will have an answer on Thursday as to whether or not GUC will make a bid to compete with BAWC to serve Ironwood with water. (Emphasis added). June 17, 1995 Ironwood's Engineer Status Report (BAWC's Ex. P-22). The feud between [GUC] and [BAWC] has escalated to an open grab for territory. I feel that GUC will be the winner in the conflict just because they are so much bigger and better staffed than BAWC. I can't help but feel that BAWC is getting screwed in the process, but I don't see anything that we can do other than try to maintain good relations with each group. I saw Doug Parker Friday afternoon and he gave me a draft of a letter that Malcolm [Green, GUC] had given him for Ironwood's consideration. The letter is from Ironwood to BAWC notifying them that Ironwood wishes to rescind its request for water service. Doug is not pushing at all to have the letter sent. . . . Malcolm [Green, GUC] claims that they can have a 12" line extended to us within 10 days. I don't believe it but it is clear that they are prepared to move quickly to claim this territory. Malcolm is pressing us to purchase irrigation water from GUC in order to substantiate GUC's claim. (Emphasis added). June 28, 1995 Ironwood's Engineer Status Report (BAWC's Ex. P-23). [GUC] and [BAWC] have decided to fight for the right to serve the project. We already have a commitment from BAWC for water and the rest of the utilities from [GUC]. The controversy is over whether GUC can legally provide water to the project. They have stated that they can and will. We have been asked by GUC to rescind our request our service from BAWC and to make a request of GUC. I have checked water rates, and it appears that GUC has much more favorable rates for residential customers. I feel that GUC will prevail. I do however, feel that we should have written commitment from GUC prior to rescinding our request from BAWC. (Emphasis added). July 3, 1995 Ironwood's Engineer Status Report (BAWC's Ex. 20). I talked to Randy Emory of GUC regarding GUC's desire to provide water service. Randy really wanted Ironwood to rescind the request to [BAWC], but I explained to him that we would need a letter from GUC stating that GUC could and would deliver water service if we requested it prior to us taking any action with regard to the request that has been made to [BAWC]. Randy also stated that GUC had already ordered the pipe to extend the water main along NC 43 to Ironwood. (Emphasis added). July 23, 1997 Ironwood's Engineer Status Report dated 7-23-95. (BAWC's Ex. P-27) We have now received a letter from GUC stating they will provide water to the entire Ironwood Project. I have not yet had additional contact with [BAWC] regarding this issue." [See BAWC's Ex. 28, GUC's letter to Developer's Engineer assuring provision of water to Ironwood]. (Emphasis added). August 2, 1995 Ironwood's Engineer Status Report dated 8-2-95. (BAWC P-31). I have now been contacted by GUC and BAWC stating that each is ready to extend lines to the project. Randy Emory of GUC called me on Monday to ask that we acknowledge in writing that GUC was the water provider. BAWC is having a Board meeting on this Thursday. I feel that I must apprise them of our position by the time of the meeting. I will prepare a letter to send to each company. Considering the mess that might ensue, I think that I will just sent the letter out over my signature to try to keep the Owners and DFI out of the line of fire. (Emphasis added). 2.07 The Court found that on August 15, 1995 Ironwood's Vice President, Doug Parker sent a letter to BAWC rescinding Ironwood's prior water service request of May 1995. Thereafter, Developer requested GUC to supply its water needs and GUC constructed a 12" water main to supply Ironwood with water and sewer. (Court Order p. 3). See also, BAWC's Ex. 32 & 33). 2.08 Developer's reason for rescinding its request for service from BAWC had nothing to do with: (a) BAWC's "capacity" to serve; (b) size of BAWC's pipes running through the Ironwood Subdivision; (c) BAWC's ability to provide or make water service available to its customer/user within BAWC's service area; (d) BAWC's ability to provide or make service available within a "reasonable time after application;" (e) BAWC's not making application for funding Ironwood's phased project. According to the Developer the reason for rescinding its water service with BAWC was: After determining that it would probably be in the best political and financial interests of Ironwood, we drafted the 8/15/95 letter (to Glenn Strickland) and 8/17/95 letter (to Randy Emory) for Doug Parker's signatures. (Emphasis added). See BAWC Ex. P-34), 8-22-95 Memorandum from Engineer Daniel to Tom Caddell, et al. with Attachments. 2.09. "Political" and "financial" interests do not form the legal authority to encroach on BAWC's FmHA-defined service area in violation of 7 U.S.C. Section 1926(b). The Defendants federally proscribed curtailment and this Court's affirmation thereof renders "nugatory the clear purpose of Section 1926(b)," as held by Judge Edith Jones in Bear Creek. 2.10 Municipalities, as instruments of the state, are bound by the Spending Clause conditions imposed by Congress when the state authorizes an association, BAWC in this case, to obtain federal funds to provide water service to rural areas of the state, regardless of whether those rural areas eventually become urbanized. See 7 C.F.R.  1951.232(a) [Curtailment or limitation of service. Service may not be curtailed or limited by the inclusion of a system within an urban area.]; See also Glenpool , describing the federal franchise. Further, the FmHA debt is not fixed at a particular location. Rather, the debt covers the entire system through its revenue based debt, facilities, chattels and real estate. The Bright Line Rule precludes any impairment even if the debt is as little as one dollar. Bear Creek at 1059. 2.11 Every court subsequent to Bear Creek that considered the Bright Line Rule of law Judge Jones established has held that  1926(b) literally proscribed any interference. The Bear Creek court, having established the elements of (1) an association with indebtedness and (2) curtailment, left it to subsequent courts to deal with the territory issue of where service was provided or made available as a marker of the territory to be protected. That marker, as developed by subsequent courts, is the "pipe in the ground test". The "pipe in the ground test" faithfully adheres to the first-in-time, first-in-right doctrine of Bear Creek, thereby precluding literal interference to existing service proscribed by Congress. No case, prior to the case at bar, has ever considered "capacity" as the basis for denying  1926(b) protection. So long as the indebted association has facilities in or near the customer to be served, and makes the effort to do so under the indebted association's obligations set forth in the Code of Federal Regulations, as well as its contractual loan documents, that indebted association's entire system has heretofore been judicially protected from any curtailment --- literally --- as required by Congress. III. STANDARD UNDER FED. R. CIV. P. 59 3.01 The court may properly reconsider a grant of summary judgment upon the timely filing of a motion for reconsideration pursuant to Fed. R. Civ. P. 59. Accordingly, BAWC has filed this Motion under the guidelines established by the Federal Rules of Civil Procedure, and done so in a timely manner under Rule 59. 3.02. Although Rule 59 itself does not set forth a standard for when a district court may grant such a motion, courts interpreting the rule have fashioned several grounds, including (1) correction of a clear error of law or prevention of manifest injustice; (2) accommodating an intervening change in controlling law; (3) accounting for new evidence not available at trial; or (4) where disputed inferences have not been resolved in favor of the non-moving party. 3.03 BAWC asserts that under Rule 59, this Court's July 25, 1997 Order Granting Summary Judgment should be set aside for reasons set forth in this Memorandum in Support. IV. PROCEDURAL REQUIREMENTS OF FED. R. CIV. P. 56 4.01 As this Court noted in its Order (p. 5) "[t]he party seeking summary judgment bears the burden of initially coming forward and demonstrating the absence of a genuine issue of material fact." Further, as this Court stated [at Page 5] that "[w]hen making the summary judgment determination, the facts and all reasonable inferences must be viewed in the light most favorable to the non-movant." For all purposes in this memorandum BAWC is the non-movant entitled to all such reasonable inferences to be viewed in the light most favorable to BAWC. 4.02 BAWC asserts that the facts, and all reasonable inferences pertaining to the existence of BAWC's FmHA defined seven-township service area, at least as it existed at the time of BAWC's 1993 federal re-indebtedness while processing BAWC's FmHA application in compliance with 7 C.F.R.  1942.17(f)(6) and 7 C.F.R.  1942.5(a), was not viewed by the Court in the light most favorable to BAWC as required by the Rule 56. The FmHA documents are asserted as controlling (as recognized by FmHA), having been executed prior to the 1993 Loan, before any controversy between the parties here, pursuant to 7 U.S.C. Section 1926(b). 4.03 BAWC asserts that the facts, and all reasonable inferences pertaining to BAWC's pledge of its entire system [and service area's customer revenue] as collateral for BAWC's 1993 FmHA indebtedness on the Otter Creek extension of BAWC's existing system was not viewed by the Court in the light most favorable to BAWC as required by the Rule 56. As a result, summary judgment should not have been granted to Defendants on a theory of partial lien, allocated system debt, or other artifice that creates an exception to the literal Congressional preclusion of curtailment. Preclusion of curtailment to protect low user costs and the federal repayment are the sine qua non of the Act, and cannot be overlooked by FmHA in its litigation position. 4.04 Further, BAWC asserts that the facts, and all reasonable inferences proving that BAWC has been "providing or making service available" in BAWC's service area, including Ironwood Subdivision and Frog Level, were not viewed by the Court in the light most favorable to BAWC as required by Rule 56. 4.05 Because this Court did not view the material facts in a light most favorable to BAWC, as the non-movant to Defendants' motions for summary judgment, this Court has committed manifest procedural error which requires a new trial. 4.06 Further, for reasons stated below, the Court did not consider the element of curtailment [P. 24]. The most recent enunciation of  1926(b) tests for protection from curtailment is in Lexington-South Elkhorn Water District v. City of Wilmore, Kentucky where that Court stated: Before a party can prevail on such a claim, however, it must show that it is entitled to Section 1926(b) protection by establishing that: (1) it is an "association" within the meaning of the Act; (2) it has a qualifying outstanding Farmers Home Administration loan obligation; and (3) it has provided or made service available in the disputed area . . . The district court relied on North Shelby Water Co. v. Shelbyville Municipal Water & Sewer Commission, 803 F.Supp. 15 (E.D.Ky. 1992), in construing the term "made available." In the case at bar, FmHA defined the service area for BAWC by virtue of the application process required for funding approval by FmHA. The extension of the federal loan to the state authorized borrower fulfilled the Spending Clause based federal franchise enunciated in Glenpool, and, as required by North Shelby and Lexington, the ". . . association makes service available prior to the time a municipality begins providing service to a disputed area when it actually has water lines adjacent to or within the area at issue before municipal service begins." V. MANIFEST ERRORS. 5.01 BAWC sets forth below certain manifest errors committed by this Court which justify granting new trial in this case. A. BAWC's FmHA-Defined Service Area (Seven-Townships) Pursuant to 7 C.F.R.  1942.5(a) and  1942.17(f)(6) 5.02 According to the Court (Order p. 15) "BAWC is entitled to  1926(b) protection covering an as yet undetermined area." This Court relied on BAWC's FmHA "application" process in its analysis and even cites FmHA regulation 7 C.F.R.  1942.17(f)(6) to define an association's service area (Order at p. 20). This Court committed manifest error by failing to consider the FmHA Records in BAWC's Ex. 50 ("FmHA's Running Record") -- that is, at the time of BAWC's federal 1993 re-indebtedness, FmHA's form recites that BAWC had a "seven-township existing service area," which FmHA recognized and incorporated in its compliance with  1942.17(f)(6). This Court also committed manifest error by failing to consider the factual evidence as reflected in Defs. Sum. J. Ex. 7, FmHA Form 1942-45 BAWC's Summary Project, which consisted of calculations and data from BAWC's existing [and entire] seven-township service area to support the 1993 FmHA Loan for BAWC's extension of facilities to Otter Creek. See also, 7 C.F.R.  1942.5(a) (District Director's determination of a service area and documenting in a "Running Record"); (See BAWC's Exh. 50, "FmHA's Running Record," as to the issues of "BAWC's service area" and "Median Household Income calculations based on BAWC's seven-township service area" pursuant to Sec. 1942.17(f)(6); See also Defs Sum. J. Ex. 7, FmHA Form 1942-45 Project Summary of Applicant BAWC - Section L, p. 4 incorporating the "weighted median household income data" from BAWC's Ex. 50). 5.03 FmHA's own "Running Record," pursuant to 7 C.F.R.  1942.5(a), determined and defined that BAWC's existing service area encompassed seven (7) townships [one of which includes the Ironwood area]. BAWC's Exhibit 50 reflects that FmHA conducted calculations of the total number of users (customers) within BAWC's seven-township service area as the basis for the 1993 Loan. The total number of BAWC's users (customers) in each township are added together to arrive at a total of 2,352 users. This total number of users became FmHA's minimum requirement for qualification of BAWC's 1993 loan as evidenced by Defs. Sum. J. Ex. 7, FmHA Form 1942-45 Project Summary of Applicant BAWC, p. 2. Specifically, on Section "H USER CONSIDERATION, Subsection (A)(1) Total Users" the form states "Number of users required for Loan Closing (establishment of the lien) is indicated by FmHA as 2,352, the same total number of users calculated by FmHA on its "Running Record" (BAWC Exhibit 50) pursuant to 7 C.F.R.  1942.17(f)(6) relied on by this Court. (See entire FmHA Form 1942-45 at Defs. Sum. J. Exhibit 7). 5.04 Therefore, the Court committed manifest error by relying solely on the additional projected 312 customers [rather than 2,352 users] projected to FmHA in BAWC's Otter Creek system extension as the basis of FmHA's lien, customer based revenue source for BAWC's repayment of its federal debt, and concomitant  1926(b) protection. 5.05 Further, during BAWC's application processing phase, and pursuant to 7 C.F.R.  1942.17(f)(6), FmHA was required to determine median household income. 7 C.F.R.  1942.17(f)(6) Income Determination - states in pertinent part: The income data used to determine median household income should be that which most accurately reflects the income of the service area. The service area is that area reasonably expected to be served by the facility being financed by FmHA . . . . The median household income of the service area and the nonmetropolitan median household income of the State will be determined from income data from recent decennial census of the U.S. . . . areas would include areas such as: Counties, . . . townships, Boroughs and other places. Section 1942.17(f)(6) (Emphasis added). In applying 7 C.F.R.  1942.17(f)(6) to BAWC's application process, FmHA recognized that "the service area [] reasonably expected to be served by the facility [BAWC] being financed by FmHA" included seven (7) townships as reflected on FmHA Running Record (BAWC Ex.50) [Arthur, Ayden, Farmville, Fountain, Grifton, Winterville & Falkland]. FmHA made the service area determination, absent any state procedure [See Bear Creek at 1058, Background], and thereby met the requirement of Bear Creek. ["This language indicates a Congressional mandate that local governments not encroach upon the services provided by such associations . . ." at 1059]. 5.06 There is ample evidence in the record, as demonstrated above, that BAWC does have an FmHA defined service area, contrary to the finding of the Court in its Summary Judgment Order (p. 15). That service area defined by regulation and determined by FmHA through the FmHA Application Review Process is required pursuant to numerous provisions within the regulations of 7 C.F.R.  1942 [and as cited above]. This Court's finding that BAWC's service area does not include Ironwood commits the error prohibited by FmHA's 7 C.F.R.  1942.5(a) against gerrymandering and thereby allows GUC to take BAWC's federally protected customer and "skim the cream of the Ironwood phased development," which the court in Bear Creek found to violate 7 U.S.C.  1926(b). B. PLEDGE OF BAWC'S ENTIRE WATER SYSTEM. 5.07 While this Court acknowledged that BAWC was an association that was FmHA indebted that regained its federally indebted status on January 27, 1993, the Court, however, stated that "[t]hus, only if BAWC's entire water system was pledged as security for its 1993 loan could it successfully claim that protection against curtailment applied to the Ironwood area." [Court Order at p. 16]. The FmHA documents, rules and statute preclude both FmHA and the Court from adopting a position contrary to the Application Process Rules. 5.08 The evidence in the record amply demonstrates, based on statutory and regulatory requirements, that BAWC's entire water system was pledged as security for BAWC's 1993 FmHA loan. This Court held to the contrary, relying on the statement of the Asst. U.S. Attorney during the Summary Judgment Hearing of April 30, 1997, discussed below. In addition to authority cited above, the following regulations of the U.S. Department of Agriculture required and established that the BAWC's entire system be [and was] pledged: (1) Application Review & Approval - Section 1942.5(a) states in pertinent part: An overall review of the applicant's financial status, including a review of all assets and liabilities, will be a part of the docket review process by the staff and approval official . . . the District Director will also determine how the service area was defined to assure that gerrymandering of specific communities or areas has not occurred. The findings should be documented in the running record [BAWC's Ex. 50] . . . The District Director will complete the Project Summary including written analysis and recommendations using . . . Form 1942-45, "Project Summary - Water and Waste Disposal and Other Utility Type Projects." (Emphasis added) [Defs. Sum. J. Ex. 7]. (2) Security - Section 1942.17(g)(3)(i)(B) states in pertinent part: Loans will be secured by the best security position practicable in a manner which will adequately protect the interest of FmHA. . . . (B) A lien will be taken on the interest of the applicant in all land, easements, rights-of-way, water rights, water purchase contract, water sales contracts, sewerage treatment contracts and similar property rights, including leasehold interest, used, or to be used in connection with the facility whether owned at the time the loan is approved or acquired with loan funds. . . . (Emphasis added). (3) Loan Resolution - Section 1942.17(n)(2) states in pertinent part: Loan Resolutions will be adopted by . . . other-than-public bodies using Form FmHA . . . 1942-9, "Loan Resolution (Security Agreement). . . Additionally See: (4) Preparation for Loan Closing - Section 1942.6 (5) Loan Closing - Section 1942.7 (6) Actions Subsequent to Loan Closing - Section 1942.8 5.09 FmHA Form 1942-9, in accordance with the above referenced regulation, describes the inclusion of BAWC's entire system, i.e. operation of facilities, pledged as collateral to FmHA: (1) BAWC's Exhibit 63, the January 8, 1993 FmHA Form 1942-9 Loan Resolution (Security Agreement) executed by BAWC officials stated in pertinent part: WHEREAS, the Bell Arthur Water Corporation (. . .the "Organization"), was organized . . . for the purpose of providing a rural water system to users throughout the Bell Arthur and western region of Pitt County, North Carolina ("Facility") . . . * * * Section 3. (Assignment and Pledge of Revenue). The indebtedness hereby authorized to be incurred together with interest thereon shall be payable from the gross income and revenue to be derived from the operation of the Facility, a sufficient portion of which, to pay the principal and interest as and when the same shall become due is hereby assigned, and pledged and shall be set aside for that purpose and this assignment and pledge shall extend to and include any assessments that may be levied pursuant to Section 5 (d) hereof. . . . Section 5. . . The Organization [BAWC] covenants and agrees that so long as the indebtedness hereby authorized remains unpaid: . . . (l) All present and future contract rights, accounts receivable, and general intangibles arising in connection with the facility are pledged as security for the loan. . . . Section 6. (Security Instruments). In order to secure the payment of the principal and interest of the note, the President and Secretary of the Organization [BAWC] are hereby authorized and directed to execute and deliver good and sufficient lien instruments . . . encumbering the properties and assets both real and personal constituting said Facility. . . [emphasis added]. (2) BAWC Exhibit 63, FmHA Security Agreement dated January 27, 1993 states in pertinent part: Debtor [BAWC] hereby grants to Secured Party [FmHA] a security interest in the following collateral, including the proceeds thereof: . . All rents, revenues, fees, charges, assessments, all income from whatever source derived, accounts receivable, other choses in action of whatever nature . . . in connection with operation of the facilities [entire system, as defined in FmHA Form 1942-9 Loan Resolution] of the Debtor. [emphasis added]. (3) See identical language in FmHA's Financing Statements on BAWC's collateral, Exhibit 63. (4) See also conveyance language in Deed of Trust dated January 27, 1993 at Book 411, Page 321, BAWC Exhibit 63. 5.10 Nothing in the language of the regulations or the loan documents (BAWC Exhibits 63), implicitly or explicitly, supports the conclusion that the lien held by the U.S. government applies solely to the physical improvements funded by the Otter Creek extension of BAWC's existing system. The Court acknowledges that the Otter Creek system cannot stand alone. Revenue from the entire system was required by FmHA to be pledged to repay the federal debt. For the Assistant U.S. Attorney to argue otherwise, as he purports he was instructed, is to argue that BAWC has no debt to the USDA because Otter Creek, per se, did not produce customer revenue to secure the USDA loan. No exception was created in the CFR's Application, loan documents, in  1926(b), or its case law, to allow a municipal curtailment, by pressure applied to the Developer or construction of competing facilities, to allow a keyhole to be punched into the system, or the system's receivables, or its customer base that are protected by the Bear Creek Bright Line Rule precluding curtailment to service area or system facilities ("the service provided;" at 1059). This Court erred by failing to consider the evidence in the record and find that BAWC's entire existing system was "appropriately pledged as security to FmHA". Summary judgment, based in part on this issue, should not have been granted. 5.11 Additionally, this Court's reliance on the statements of the Asst. U.S. Attorney is precluded under the Chevron doctrine and its progeny. First, the Court's first obligation is to interpret the rights of BAWC based on the actual language of the statute and the regulations that implement that congressional enactment,  1926(b). If the language is clear and unambiguous, that is the end of the inquiry. The Court is not authorized to give deference to an agency without first determining the requirements of the law and regulations generated therefrom. Second, agency deference is based on expertise in interpreting the statute. That expertise must be based both on knowledge of the statutes and regulations the agency is required to effect and the facts on which the agency is expressing a position. Deference afforded to agency interpretation is applicable only to the extent the agency's interpretation is not contrary to the underlying statute or its implementing regulation. More specifically, it is well-settled that an agency must abide by its own regulations and that interpretations cannot contradict the regulations while they remain in force. Courts are not obliged to endorse every interpretation by the agency, agency expertise notwithstanding. As a consequence, this Court cannot condone or adopt the articulation of a position at variance with the agency's own rules. The Court was rightfully hesitant to rely on the position espoused by the Asst. U.S. Attorney, as representative of the Secretary of Agriculture's interpretation of  1926(b) and related regulations. BAWC emphatically objects to the Court's reliance on the U.S. Attorney's reference to a letter or document, the nature and origin of which was never clarified for the Court, nor offered for any inspection. Mr. West merely based his interpretation as "com[ing] from the regional counsel or the Department of Agriculture out of Atlanta." Subsequently, Mr. West proceeded to read from this document. In this case, the Asst. U.S. Attorney, Mr. West, admitted on the record that his "knowledge of the facts is a little bit thin." Despite his lack of knowledge, Mr. West made two statements on which the Court based its decision. On Hearing Transcript page 35, line 12, the following colloquy took place between the Court and Mr. West: THE COURT: . . .What do you say to the fact when you loaned to Bell Arthur some more money in '93. Did you go back then and pick up the whole of Bell Arthur - Ironwood as well as Otter Creek, or don't you know? MR. WEST: I can say this, that the government acted wisely in this situation and does not always act wisely, to include everything that it can as collateral. It did include - it appears everything that it could as collateral, 5.12 In the very next breath, Mr. West goes on to state [p. 35, line 21]: but what I would say is, that in terms of whether there can be a curtailment of the area from which those revenues can be sought is a question of federal law, and this statute would control over whatever financing instrument there may be. So, yes we may have a lien on whatever revenue they [BAWC] have but we not have any revenues from that particular area in question [Otter Creek]. In summary, a close reading of these statements reflects that Mr. West first acknowledges "it did include . . . everything as collateral" and "so, yes, we may have a lien on whatever revenue they have. . . ." 5.13 The Asst. U.S. Attorney's statement does not support the Court's finding. Furthermore, the position of the U.S. government in its motion to dismiss is contradictory and inappropriately at cross-purposes with the agency's regulations. If Mr. West's representation of the Department's position concerning the definition of this protected service area is as the Court understood it, the position directly contradicts the agency's regulations. It is well settled that the "pipe in the ground test" is applicable to determining whether an area in controversy is subject to protection as collateral of the federal debt obligation. The FmHA regulations require that sufficient revenue be pledged to repay the federal debt. If no revenue comes from the portion of the system outside the area where improvements were financed [Otter Creek], the loan is either in violation of the regulations [or is BAWC is not required to pay]. Conversely, if revenue from other parts of the existing system are necessary to repay the federal debt for the portion of the system which does not generate revenue, but for which federal funds were loaned, then the rest of the system for which revenues are used to repay the federal debt must be considered as within FmHA C.F.R. requirements that all revenues are pledged from the FmHA defined service area in its entirety. 5.14 In summary, FmHA's litigation position that would ignore its regulations implementing the Consolidated Farm and Rural Development Act of 1961 cannot be given deference when (1) it is contrary to its FmHA regulatory requirements [7 C.F.R.  1942.17 Community Facility Loans], (2) contrary to its contractual loan documents [BAWC Loan Documents Ex. 63], and (3) is internally inconsistent or, in the alternative is a statement against interest. Fed. R. Evid. 801(d)(1). The Courts have formulated a rule which bars a court's consideration of an agency's post hoc rationalizations. In brief, this rule provides that a court ought not allow an agency in the context of litigation to take a position contrary to its own regulations implementing a statute. Id. A similar rule concerning appeals was enunciated in American Trucking Ass'ns, Inc. v. Federal Highway Admin. 5.15 BAWC has complied with the FmHA regulations administered by the USDA, BAWC has relied thereon, and BAWC asserts the FmHA rules implemented the absolute prohibition [loophole prohibited] found by Bear Creek to be the Congressional mandate that literally proscribed interference by competing facilities during the term of the rural water association's FmHA Loan. As a consequence of the relationships existing with FmHA, BAWC's reliance on federal protection is supported by the U.S. Supreme Court's analysis set forth in Winstar. 5.16 BAWC has provided water service to the area of service that the FmHA State Director found to be the USDA federally defined service area for BAWC's loan approval, lien, regulation and supervision. As such, the USDA/FmHA relationship is similar to that of a federal instrumentality. C. BAWC PROVIDED AND MADE SERVICE AVAILABLE. 5.17 This Court found that, in the alternative: [E]ven if the court agreed that viewing BAWC's water system as a singular unit encompassing the Ironwood area triggers the potential applicability of  1926(b) to the area, the court finds that BAWC has not `provided' or `made service available' in the Ironwood area, and, therefore, is not entitled to  1926(b) protection." (Court's Order pp. 19-20). 5.18 This Court's finding is both a manifest error of fact and a manifest error of law. The Court found that: The parties do not dispute that BAWC had pipes running through or adjacent to the Ironwood area. The pipes had been in place since [BAWC's] 1979 Bruce-Renston project. However, the court is not persuaded that having pipes in the ground standing alone, is invariably a sufficient basis to prove that a water association has made service available. (Court's Order p. 21). 5.19 The Court appears heavily reliant on the reasoning of the Court in Rural Water System No. 1 v. City of Sioux Center, No. C-95-4112-MWB, 1997 WL 289481 (N.D. Iowa May 27, 1997) ("RWS") in making its determination of the applicability of  1926(b) protection to BAWC. The court in RWS held that the operative legal test of "whether an association has `made service available' involves both whether service is physically available, "by virtue of [the association's] line adjacent to property," and whether an association has legal rights and responsibilities to provide such service, as determined by applicable law." Id. at *33. 5.20 BAWC respectfully suggests that this Court, while relying on what it considered "the well-reasoned opinion" in RWS, did not follow the RWS' court's reasoning when this Court made "capacity" the crucial determination on which this Court granted summary judgment. The court in RWS found that physical ability to serve application of the ("pipe in the ground test") was a fact issue [precluding summary judgment] which is currently the subject for pending trial. This Court, however, has found that "capacity" is a material fact issue, but nevertheless granted summary judgment. Capacity has not previously been established as a material fact requisite for determining whether BAWC "provided or made service available" according to the jurisprudence of  1926(b). Basing Summary Judgment on a disputed issue of capacity is where the factual and procedural similarities between this case and RWS end. Ironwood's engineer's journal entries, discussed above, strongly suggest capacity was never an issue in this case until raised in Defendant's Answer. Certainly Ironwood never raised capacity as an issue that precluded its financing or development. BAWC's engineering firm, per Randy Gould, continued with its analysis and report (Defs. Sum. J. I. Ex. 22) to BAWC November 22, 1995, notwithstanding Developer's August 1995 letter rescinding water service for the entire Ironwood Subdivision. BAWC continued to provide and make water available to the Ironwood headquarters until February, 1996. 5.21 This Court also relies on North Shelby as to BAWC's capability of "providing the requisite service `within a "reasonable" time after application was made for the service,' nor would it be able to do so with only minor adjustments to the already existing system." (Order p. 24). BAWC asserts that the court in North Shelby did not analyze the plaintiff's size of the pipes in the ground, nor funding sources, as the basis of its ruling that the plaintiff had provided or made service available. 5.22 North Shelby based its decision exclusively on "the proximity of North Shelby's distribution lines . . . and the location of a distribution line within the . . . property." Id. at 22. Further, North Shelby held that "the fact that North Shelby does not have water lines nor prior customers actually within the . . . property is not dispositive." Id. (Emphasis added). North Shelby was relied upon by Lexington-South Elkhorn where the 6th Circuit affirmed the district court's finding that "an association makes service available prior to the time a municipality begins providing service to a disputed area when it actually has water lines adjacent to or within the area at issue before municipal service begins." Id. at 234 (Emphasis added). Here BAWC was providing service to existing customers and was making service available to the Developer as well as by providing a letter of intent to service the Developer, which Ironwood provided for its financing and which formed the basis for BAWC's Engineer to design the necessary infrastructure for the subdivision when totally built out over a four (ñ) year period. 5.23 The Court also found that BAWC did not "provide or make service available" in that BAWC was not capable of providing the requisite service to Ironwood in a "reasonable" time after application was made by Ironwood to BAWC in May, 1995. (BAWC Ex. 56 & 26). Elevating the issue of reasonableness of time [of delivery of additional service] created another material fact which as a matter of law, precluded summary judgment. 5.24 Further, the Court erred when it failed to consider the evidence in the record regarding service being provided or made available, when the Court stated it had to consider BAWC's "physical ability to serve" when confronted with the reality that both the present and "future" residents of Ironwood "need immediate" water service." (Court Order. p. 24). The clear facts in the record states otherwise. See BAWC Ex. 18, October 22, 1994, letter from Ironwood's Engineer to GUC. BAWC's Ex. 18 states there was no "future immediate need" to serve the entire "850 home lots" contrary to what this Court stated (p. 24). Ironwood's Engineer states in pertinent part: The development will be phased over several years. . . . The schedule of development of the property west of N.C. 43 [Ironwood] will be somewhat dependent upon the marketing success of the eastern portion of the project. However, it is probably realistic to anticipate that development west of N.C. 43 [Ironwood] will begin within four (4) years from now. BAWC Ex. 18. 5.25 Furthermore, BAWC's Ex. 68, BAWC's Engineers Report on BAWC's Ironwood Extension (p. 3-4) indicates that the Ironwood Subdivision was to be "built-out" in phases, which is supported by BAWC's Ex. 18 (Developer's Letter to GUC October, 1994), and as well as BAWC's Ex. 23 (Developer's Engineering Status Report 6/28/95), a fact this Court failed to acknowledge in its factual consideration as to whether BAWC was "capable of providing the requisite service within a `reasonable' time after application was made for service. . . ." (Court's Order. p. 24) (Emphasis added). Since the Ironwood's development is phased over a minimum of four (4) years, the facts, and any inferences derived therefrom, do not indicate an "immediate need" for service to the "850 home lots" of the "future residents of Ironwood." (Court's Order pp. 23-24). 5.26 As one of the bases for this Court's finding that BAWC failed to provide or make service available, the Court relied on BAWC's billings of those customers to whom BAWC is providing and making service available within the Ironwood area. BAWC submitted those billings simply to establish BAWC's prior first-in-time, first-in-right entitlement to Section 1926(b) protection. The Court however, suggests that "BAWC presented insufficient evidence to satisfy the second criterion that it has provided or made service available to the contested area" (Court Order p. 24), because the billings end in 1986. (Court Order p. 22). 5.27 On April 30, 1997, BAWC responded to this Court's April 8, 1997 Order requesting additional information from the parties regarding BAWC's billings in the Ironwood area from 1986 to present. BAWC submitted Exhibits 7, 7A, 7B, 7C and 51 identifying those BAWC customers located in the Ironwood vicinity and being served by BAWC. This Court accepted BAWC's Exhibits submitted in in support of BAWC's opposition to Defendants motions for summary judgment as well as in support of BAWC's own motion for summary judgment. (See Hearing Trs. pp. 76-77.) 5.28 The Court failed to address those documents submitted as the April 30, 1997 summary judgment hearing in its Summary Judgment Order. However, such proof was supplemental since the issue of whether BAWC had current customers in the Ironwood area was a material fact issue not in dispute. A review of BAWC's Exhibits submitted in support of summary judgment show that as early as December 2, 1994 GUC acknowledged that BAWC had current customers -- 20 customers along NC 43. (See BAWC's Ex. 42, GUC's 12/2/94 Letter to BAWC; See also BAWC Ex. 36, GUC Board Minutes 12/9/97). As late as May 24, 1995, as shown on BAWC's Ex. 57, GUC's letter to BAWC again evidences GUC's effort to purchase BAWC's "existing customers along the lines already in place" in the Ironwood Subdivision. 5.29 Contrary to the Court's finding at p. 23, BAWC's Ex. 77 evidences Co-Bank funding approval, subject to this Court's ruling, and shows that BAWC has applied for funding in connection with fulfilling BAWC's commitment to make increased service available on NC 43, including to the Ironwood Subdivision. Furthermore, the Court correctly observes that BAWC did not make a funding request to FmHA, because, with the City's 1995 annexation of the Ironwood Subdivision, BAWC was caught in a catch-22 situation. Once annexation became official, even though FmHA was required to continue servicing both rural and non-rural areas pursuant to 7 C.F.R. Section 1942.17(b)(2)(i), FmHA was foreclosed from processing a request for BAWC loan funds since GUC/City had a population of over 10,000, denying eligibility to BAWC for such funding. The legal effect of this catch-22 is precisely what is precluded by 7 U.S.C. Section 1926(b) when the Act literally forecloses curtailment of any nature [Bear Creek bright-line rule]. 5.29 The Court's conclusion that BAWC was not providing or making service available to the Ironwood area after 1986 is not supported by the undisputed facts evidenced by the record set forth above. Attached to this Memorandum and in support of the proposition that customers along NC 43, including in the vicinity of Ironwood, have been continuously served is evidenced by the Affidavit of BAWC's Mervis Joyner, reflecting the customer ledgers for annual billing periods, raised an issue of fact herein. Such records indicate continuous service has been provided and made available within the meaning of North Shelby, and the teachings of Lexington South-Elkorn at 237. 5.30 Moreover, the service provided and made available to Ironwood came from BAWC's permanent line (pre-existing) which Ironwood cannot abandon to obtain service from GUC simply for "political and financial interests" (BAWC Ex. 34) when such an arrangement violates Section 1926(b). VI. APPLICABILITY OF AGRICULTURAL CREDIT ACT OF 1987 6.01 The Agricultural Credit Act of 1987 ("ACA"), Joint Explanatory Statement of the Committee of Conference [December 18, 1987] (BAWC's Legis. Folio, Tab 7) sets forth the provisions and rationale thereof, that was subsequently adopted by both Chambers of the Congress in December 1987, and form the basis for its interpretation and application to this case, based on the uncertainty evident in the original consideration of the statute by Judge Beckwith in the Scioto case. PRAYER WHEREFORE PREMISES CONSIDERED BAWC prays this Court grant BAWC's Motion for Reconsideration and grant such other and further relief, in law or in equity, which this Honorable Court finds BAWC justly entitled. Respectfully submitted, SPEIGHT, WATSON & BREWER LOUIS T. ROSENBERG, P.C. 109 South Evans Street De Mazieres Building P. O. Drawer 99 322 Martinez Street Greenville, North Carolina 27835-0099 San Antonio, Texas 78205 Telephone: (919) 758-1161 Telephone: (210) 225-5454 Telefax: (919) 758-4571 Telefax: (210) 225-5450 W. H. Watson Louis T. Rosenberg North Carolina State Bar No. 4599 State Bar No. 17271300 Attorneys for Plaintiff Attorneys for Plaintiff L.R. 2.04 Local Counsel Attachment 1 - Hamilton v. Prudential Ins. Co. of Amer., 908 F.2d 967 (4th Cir. 1990)(Unpublished). Attachment 2 - Affidavit of Meris Joyner. CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing has been mailed on this ___ day of __________, 1997, to the following: Phillip Dixon, Esq. William J. Little, III, Esq. Dixon, Doub & Conner P. O. Drawer 8668 Greenville, N.C. 27835-8668 Attorneys for Greenville Utilities Commission David A. Holec, Esq. City Attorney Greenville City Legal Department City Hall 200 West 5th Street P.O. Box 7207 Greenville, NC 27835-7207 Attorneys for City of Greenville, N.C. Thomas M. Caddell, Esq. P.O. Box 198 Salisbury, North Carolina 28145 Attorney for Ironwood Development, Inc. Danny McNally, Esq. Michael Strickland, Esq. Gaylord, McNally, Strickland Snyder, LLP P. O. Drawer 545 Greenville, NC 27835-0545 Attorneys for Ironwood Development, Inc. R.A. Renfer, Jr., Esq. Assistant United States Attorney Chief, Civil Division 310 New Bern Avenue Suite 300 Federal Building Raleigh, NC 27601-1461 Attorney for USDA/Rural Development Louis T. Rosenberg W. H. Watson ATTACHMENT 2