RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 24
ELECTRONIC CITATION: 1996 FED App. 0390P (6th Cir.)
File Name: 96a0390p.06
No. 95-3918
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
SCIOTO COUNTY REGIONAL
WATER DISTRICT NO. 1,
AUTHORITY,
Plaintiff-Appellant,
v.
SCIOTO WATER INC., and DANIEL
R. GLICKMAN, Secretary, United
States Department of Agriculture,
Defendants-Appellees.
>
ON APPEAL from the United States District Court for the Southern District of
Ohio
__________________
Decided and Filed December 18, 1996
__________________
Before: SUHRHEINRICH and DAUGHTREY, Circuit Judges; JOHNSTONE,[*]
District Judge.
MARTHA CRAIG DAUGHTREY, Circuit Judge. Scioto County Regional Water District
No. 1, Authority, the plaintiff in this action, is a regional water district
that has operated in Ohio for 30 years. Although it previously had obtained
financing through bonds issued to the Farmers Home Administration, the
plaintiff repurchased the bonds and obtained private financing. When the
defendant, a competitor, built a wellfield upstream from the plaintiff’s
wellfield, the plaintiff sought protection against the resulting limitation on
its services, citing 7 U.S.C. § 1926(b), a provision in the Consolidated
Farm and Rural Development Act that protects federally financed water
associations from such competition. The district court, however, dismissed the
action under Fed. R. Civ. P. 12(b)(6), finding that the plaintiff lost its
statutory protection when it repurchased its Farmers Home Administration bonds
and canceled its debt. We find no error and affirm the district court’s
judgment.
The plaintiff, Scioto County Regional Water District No. 1, Authority,
referred to throughout this litigation as “Water 1,” is a regional water
district that has operated in Ohio since 1966. Defendant Scioto Water is a
private, non-profit water supply corporation. Defendant Daniel Glickman is the
Secretary of the United States Department of Agriculture, of which the Rural
Economic and Community Development Service, formerly the Farmers Home
Administration, is an agency.
To obtain funding for its water service, Water 1 issued several million
dollars in bonds to the Farmers Home Administration[1]
in the late 1960’s and early 1970’s. In 1969, Scioto Water became a non-profit
corporation authorized to install wells and operate a water distribution
system. It, too, was funded with bonds sold to the
Farmers Home Administration. Since the early 1970’s, however, Scioto Water
has bought its water from Water 1 in order to supply customers; it does not
produce water. In the early 1980’s, Water 1 and Scioto Water modified their
water purchase agreement to lower Scioto Water’s maximum usage. However, as
Scioto Water consistently has bought additional water since the date of the
agreement, Water 1 has added surcharges to the cost of Scioto Water’s
additional water.
In 1989, Water 1 participated in a Farmers Home Administration program
permitting bond issuers to buy back their government debt for a discounted
amount. Water 1 refinanced its obligations through Star Bank and is no longer
indebted to the federal government.
In the early 1990’s, Scioto Water got approval for Farmers Home
Administration loans for development of a wellfield two miles upstream from
Water 1’s wellfield and for a surface water treatment plant. Water 1 applied
for a declaratory judgment, temporary restraining order, and an injunction,
alleging that Scioto Water’s project will harm Water 1’s system and that the
competition violates 7 U.S.C. § 1926(b). Water 1 alleged other federal and
state law claims that are not at issue. Scioto Water moved to dismiss the
complaint, and the district court concluded that it failed to state a claim
upon which relief could be granted.
Title 7 U.S.C. § 1926, as part of the Consolidated Farm and Rural
Development Act, governs federal loans made to water and waste facilities.
Under this provision, the Secretary of Agriculture is authorized to make or
insure loans to associations for water conservation, use, development, and
control projects, among other purposes. Section 1926(b) protects borrowing
associations by providing that
[t]he service provided or made available through any such association shall
not be curtailed or limited by inclusion of the area served by such association
within the boundaries of any municipal corporation or other
public body, or by the granting of any private franchise or similar service
within such area during the term of such loan; nor shall the happening of any
such event be the basis of requiring such association to secure any franchise,
license, or permit as a condition to continuing to serve the area served by the
association at the time of the occurrence of such event.
In City of Madison, Mississippi v. Bear Creek Water Ass’n, 816 F.2d
1057, 1060 (5th Cir. 1987), the Fifth Circuit explained that there are “two
congressional purposes behind § 1926: (1) to encourage rural water development
by expanding the number of potential users of such systems, thereby decreasing
the per-user cost, and (2) to safeguard the viability and financial security of
such associations (and [Farmers Home Administration’s] loans) by protecting
them from the expansion of nearby cities and towns.”
As part of the Omnibus Budget Reconciliation Act of 1986, the Farmers Home
Administration was required to sell some of the bonds it had acquired under the
Consolidated Farm and Rural Development Act. See Wayne v. Village of
Sebring, 36 F.3d 517, 526-7 (6th Cir. 1994), cert. denied, 115 S.Ct.
2000 (1995). The Agricultural Credit Act of 1987 then required the Secretary to
offer the issuer of such bonds the right to buy them back before the Secretary
sold them to a third party. See Pub.L. 99-509, § 1001, 100 Stat. 1874,
as amended by Pub.L. 100-233, § 803, 101 Stat. 1714 (1988)(see 7 U.S.C.
§ 1929a note “Sale of Rural Development Notes and Other Obligations”)
(referred to as “subsection (f)”). Also within the Agricultural Credit Act of
1987 was a provision known as “subsection (g),” stating that 7 U.S.C.
§ 1926(b), the curtailment prohibition, “shall be applicable to all notes
or other obligations sold or intended to be sold” under the Agricultural Credit
Act. See 7 U.S.C. § 1929a note (“Applicability of Prohibition on
Curtailment or Limitation of Service”). The issue before this court then is
whether subsection (g)’s provision that § 1926(b) applies to “all” obligations
“sold or intended to be sold” means that § 1926(b)’s protection extends to
a bond issuer, such as
Water 1, that buys back its own bonds from the Farmers Home Administration,
effectively extinguishing them.
This question appears to be one of first impression in the federal courts.
The only reported decision directly on point comes from the Supreme Court of
Colorado, which addressed this issue in City of Grand Junction v. Ute Water
Conservancy Dist., 900 P.2d 81 (Colo. 1995). In that case, the rural water
district had issued Farmers Home Administration bonds to finance growth in its
system. It bought back its own bonds in 1988 pursuant to the same legislation
that prompted Water 1’s purchase of its bonds. The water district then brought
a declaratory judgment action alleging that it maintained the exclusive right
to provide water service, and it sought an injunction against the City’s
efforts to provide water service to annexed areas within the water district.
Although the City argued that the water district’s bond was discharged when the
water district purchased it from the Farmers Home Administration, the Colorado
court found that the water district’s reacquisition of the bond did not
discharge the debt, and that subsection (g) allowed the Farmers Home
Administration to sell bonds without eliminating § 1926(b) protection for the
issuer. Because subsection (g) extended § 1926(b) protection to “all notes or
other obligations sold or intended to be sold” under the Agricultural Credit
Act, the court concluded that § 1926(b) protection should continue even if the
bond issuer purchased its own bonds. Id. at 92. The court believed that
because subsection (f) gave bond issuers the “right of first refusal” before
the Farmers Home Administration sold the bonds, and was placed in the same act
with subsection (g), that Congress meant to create a “comprehensive scheme”
that allowed bond issuers to maintain § 1926(b) protection even after they
purchased their own bonds. Id. In reaching this conclusion, however, the
court carefully observed that state law permitted a bond issuer to reacquire
its own bond without extinguishing the debt. Id. at 93.
No other court has addressed the issue of whether a bond issuer that
repurchases its own bonds may claim continued
protection under 7 U.S.C. § 1926(b). In light of this scant case law, the
plaintiff argues that bond issuers, such as itself, that exercised their right
to buy back their bonds are entitled to the same § 1926(b) curtailment
protection that is available to third-party bond purchasers. Water 1 argues
that the coupling of subsections (f) and (g) of the Agricultural Credit Act
means that the bond issuer’s right of first refusal incorporates the right to
continued protection against curtailment. It relies on common law, stating that
when a seller makes a “unilateral option contract” and receives an offer from a
third party, it must make both the price and terms of the offer available to
one with a right of first refusal. Citing W. Texas Transmission, L.P.
v. Enron Corp., 907 F.2d 1554, 1561-9 (5th Cir. 1990), cert. denied,
499 U.S. 906 (1991), Water 1 insists that it is therefore entitled to the same
§ 1926(b) protection that would have been available to a third-party purchaser
of its bonds. W. Texas Transmission, however, concerned a natural gas
supplier’s right of first refusal to repurchase a pipeline, and applied Texas
law to the terms of a particular contract.
Scioto Water first responds that Water 1 failed to raise the issue of the
common law right of first refusal at the trial level and has therefore waived
the issue. Bannert v. Am. Can Co., 525 F.2d 104, 111 (6th Cir. 1975), cert.
denied, 426 U.S. 942 (1976). Then, addressing the merits, Scioto Water
argues that Water 1 does not qualify for § 1926(b) protection. It first
explains that the main purposes of the Agricultural Credit Act are to protect
“the supply of running household water in rural areas” and to protect “the
repayment of funds advanced for the implementation of such systems.” Rural
Water Dist. No. 3 v. Owasso Utils. Auth., 530 F.Supp 818, 823 (N.D.Okla.
1979). It notes that in cases such as Bear Creek, supra, and Glenpool
Util. Servs. Auth. v. Creek County Rural Water Dist. No. 2, 861 F.2d 1211
(10th Cir.), cert denied, 490 U.S. 1067 (1988), the infringing cities
were found to have violated § 1926(b) only because the protected water
districts were indebted to the Farmers Home
Administration. Moreover, as the opinion in Pinehurst Enterprises, Inc.
v. Town of Southern Pines, 690 F. Supp. 444 (M.D.N.C. 1988), aff’d,
887 F.2d 1080 (4th Cir. 1989), makes clear, the first element of a § 1926(b)
violation is curtailment or limitation of service provided by a “covered
association,” and to be covered, the association must be indebted to the
Farmers Home Administration.
As well as arguing that Water 1 is not entitled to protection under
§ 1926(b) itself, Scioto Water contends that the Agricultural Credit Act
did not alter Water 1’s current ineligibility for curtailment protection.
Scioto Water points out that Water 1’s indebtedness to the Farmers Home
Administration was marked “paid in full” and insists that the debt was thus
discharged, not sold. We agree.
Finally, Scioto Water contends, correctly we conclude, that the decision in Ute
Water is distinguishable. In that case, the Colorado court found that
§ 1926(b)’s protection extends to those that buy back bonds only if the
bonds are reacquired “with the intent not to discharge the instrument.” 900
P.2d at 92. The Ute Water court analyzed the question of intent and
looked to Colorado law to determine whether the reacquisition of a bond
discharged the debt. Unlike the loan documents in Ute Water, the loan
documents in this case were marked “paid in full.”
We note that cases brought in federal court under 7 U.S.C. § 1926(b) have
consistently emphasized the requirement of federal indebtedness to obtain
§ 1926(b) protection. When an issuer buys back its own bond and cancels
the debt, however, it no longer qualifies as a debtor for § 1926(b) protection.
This statutory interpretation is also faithful to one of the main legislative
purposes in enacting § 1926(b) -- safeguarding Farmers Home Administration
loans. Although the government maintains an interest in providing affordable
rural water service, its interest in protecting against competition diminishes
as its loans are repaid. We also note that Water 1’s reliance on the common law
“right of first refusal” does not alter this
outcome, which must be gleaned from the federal statutes themselves rather
than from such sources as Texas common law.
In a well-reasoned opinion, the district court held that 7 U.S.C. § 1929a
note, subsection (g), applies only to obligations sold by the Farmers Home
Administration to third parties. It therefore concluded that Water 1, having
repurchased its own bonds, was no longer entitled to the protection provided by
§ 1926(b) and had failed to state a claim for relief under that section of
Title 7. As a result, the district court entered judgment for defendant Scioto
Water. We AFFIRM that judgment.
Return
to 6th Circuit Home Page