Bell Arthur Water Corporation, and Daniel R. Glickman, Secretary, United States Department of Agriculture v. Greenville Utilities Commission City of Greenville, Nc Ironwood Development, Incorporated, North Carolina Rural Water Association Arkansas Rural Water Association South Carolina Rural Water Association Eastern Pines Water Corporation Texas Rural Water Association, Amici Curiae

Citations: 173 F.3d 517; 1999 U.S. App. LEXIS 6376Docket: 97-2533

Court: Court of Appeals for the Fourth Circuit; April 9, 1999; Federal Appellate Court

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Bell Arthur Water Corporation, serving rural Pitt County, North Carolina, seeks protection under § 306(b) of the Consolidated Farm and Rural Development Act (7 U.S.C. § 1926(b)) against competitive actions from the City of Greenville and the Greenville Utilities Commission. The City annexed the Ironwood area, claimed by Bell Arthur as part of its service area, and began providing water services there. The district court found that Bell Arthur failed to satisfy two requirements of § 1926(b), denying it the statute's protections. Agreeing with the district court on the failure to meet one requirement, the appellate court affirms this decision.

The Consolidated Farm and Rural Development Act was enacted to enhance farm prices, income, and development, allowing the Secretary of Agriculture to facilitate credit for farmers. Specifically, § 306 authorizes federal loans to nonprofit water service associations to aid the conservation and use of water for farmers and rural residents. The Act aims to reduce costs per user, enhance security for federal loans, and ensure a reliable water supply. It includes protective measures to shield nonprofit water service associations from competition due to municipal expansions into their service areas, thereby securing federal loan investments in rural water infrastructure.

The legal protections for associations under 7 U.S.C. § 1926(b) prevent municipal corporations or public bodies from limiting or curtailing services provided by these associations during the term of an outstanding federal loan from the Farmer's Home Administration (FmHA). Such protections apply specifically to the area where the association is currently providing services, prohibiting actions like annexation or requirements for franchises, licenses, or permits.

In the case concerning Bell Arthur, a nonprofit water service corporation, the City of Greenville and the Greenville Utilities Commission are accused of infringing upon Bell Arthur's service area in Ironwood, Pitt County, by annexing it and providing water service there. The City and the Commission argue that Bell Arthur is not entitled to § 1926(b) protections because it lacked an outstanding FmHA loan for Ironwood and was not currently providing water service to the area.

Bell Arthur, established in 1970, had previously secured loans from the FmHA to improve its water system, including a six-inch water line installed in 1979 along North Carolina Highway 43, which runs through Ironwood. After retiring its federal debt in 1989, Bell Arthur borrowed again in 1993 for extending water service to Otter Creek, securing this loan with revenue from its customer accounts.

In late 1994, Ironwood Development, Inc. sought water and sewer services for Ironwood, leading to the City of Greenville's annexation of the area in January 1995 after negotiations with Bell Arthur over water service failed. Ultimately, the Greenville Utilities Commission temporarily agreed to refer the Developer back to Bell Arthur for water service, given its existing infrastructure in the area.

The Developer engaged Bell Arthur to discuss the provision of water service and sought a method for billing sewer service costs from the Greenville Utilities Commission in conjunction with water service. In early 1995, Bell Arthur's engineering consultants determined that a new tank and a 14-inch water line were necessary to serve the area, estimating the construction cost at approximately $650,000. In May 1995, Bell Arthur committed in writing to provide both temporary and permanent water service to Ironwood, initially supplying water to a construction trailer via an existing six-inch line. However, Bell Arthur did not progress further until early 1996, when it secured state permits. By August 1996, prompted by legal counsel, Bell Arthur's board resolved to borrow funds for the recommended infrastructure, ultimately obtaining a $1 million loan commitment in December 1996, contingent on the litigation's outcome.

Simultaneously, in July 1995, the Greenville Utilities Commission expressed willingness to provide water service to Ironwood, noting the area’s integration into the city and ordering the necessary piping. The Developer opted to withdraw its request from Bell Arthur and requested service from the Commission on August 17, 1995. The Commission completed a 12-inch water line to Ironwood by October 5, 1995. Despite this, Bell Arthur continued to supply the construction trailer until February 1996.

In November 1995, Bell Arthur initiated litigation, alleging that the Commission and the City of Greenville violated § 306(b) of the Consolidated Farm and Rural Development Act due to the installation of the pipeline and the area's annexation. The district court ruled against Bell Arthur on summary judgment, determining it did not qualify for protection under § 1926(b) for several reasons: its protection lapsed when it paid off its FmHA loans in 1989, a subsequent 1993 loan was unrelated to Ironwood service, and it was not actively providing or capable of providing service to Ironwood within a reasonable timeframe. Following this ruling, Bell Arthur appealed, contesting the court's finding regarding its indebtedness to the FmHA and asserting its eligibility for § 1926(b) protection based on the retirement of its federal debt and the 1993 loan.

In 1989, Bell Arthur secured a loan from a private lender to buy back and cancel all its outstanding notes issued to the Farmers Home Administration (FmHA), thus eliminating its federal debt. Bell Arthur asserts that it still retains protections under § 1926(b) despite this retirement of federal indebtedness, referencing the statutory framework governing the retirement process. The Omnibus Budget Reconciliation Act of 1986 (OBRA) mandated FmHA to sell federally insured notes to generate revenue for deficit reduction, later amended by the Agricultural Credit Act of 1987, which granted water service associations a right of first refusal to repurchase their notes at a discount before public sale.

The Agricultural Credit Act requires the Secretary of Agriculture to determine if the issuer wishes to repurchase notes before any sale under OBRA § 1001. It also clarifies that § 1926(b) protections apply to notes sold under OBRA § 1001. Bell Arthur contends that OBRA § 1001(g) provides ongoing § 1926(b) protection even after retiring its debt, claiming this applies to both third-party sales and issuer repurchases.

However, a detailed analysis of the statutes shows that Bell Arthur's interpretation conflicts with the statutory language, structure, and congressional intent. The right-of-first-refusal allows an issuer to retire its debt instead of selling notes to third parties. Since this retirement occurs before any sale, it logically precludes the issuer from receiving § 1926(b) protection, which is intended for outstanding debts. The distinction between issuer repurchases and third-party sales is crucial; while the latter maintains outstanding indebtedness, the former extinguishes it, negating the need for protection. Therefore, the protections under § 1926(b) cannot apply to notes that have been retired, as they do not require safeguarding against default.

Interpretation of 7 U.S.C. § 1926(b) emphasizes its purpose of safeguarding federal loans insured by the Rural Development Insurance Fund, specifically noting that protection is only applicable "during the term of such loan." Following Congress's directive to sell federally insured loans to aid budget balancing, OBRA § 1001(g) was enacted to maintain protections under § 1926(b) for these loans, enhancing their marketability. Consequently, water services associations retain income-preserving protections throughout the loan's term, assuring third-party purchasers of repayment reliability akin to that of the federal government.

The language in OBRA does not indicate any intent to alter the stipulation that protections under § 1926(b) apply only during the loan term. If a loan is canceled through payment, the conditions for § 1926(b) protection are no longer satisfied. It is determined that § 1001(g) protections apply solely to the sale of notes to third parties under § 1001(a), excluding retirement of indebtedness authorized by § 1001(f). This is supported by case law indicating that when an issuer repurchases and cancels its own bonds, it forfeits § 1926(b) protections.

For Bell Arthur to claim § 1926(b) protection concerning Ironwood, it must rely on the 1993 FmHA loan intended for the Otter Creek project, which is not directly linked to Ironwood. Bell Arthur asserts that the statute imposes no territorial restrictions beyond the total service area. Conversely, the Greenville defendants argue that § 1926(b) protection does not extend to Ironwood since the 1993 loan was meant exclusively for Otter Creek. The district court sided with the defendants, concluding that protections apply only to improvements financed by loan proceeds and not the entire system. However, the court found no statutory basis for limiting § 1926(b) protections geographically, as such limitation would undermine the section's intended safeguards.

Congress did not limit the protections of § 1926(b) to only those areas developed with loan proceeds, as it explicitly provides protection for "the area served by such association." The statute does not restrict this protection to the specific areas financed by loans, allowing for a broader interpretation. The Greenville defendants' arguments threaten the purpose of § 1926(b) by potentially diminishing Bell Arthur's customer base and financial viability, which would contradict Congressional intent to maintain low user costs and support loan repayments. The district court improperly relied on a USDA official's statement regarding the loan's security, misinterpreting the statute's clear language. Under the Chevron doctrine, courts are not obliged to defer to agency interpretations that contradict clear statutory language. Furthermore, the USDA official's comments conflated legal and factual issues, making them insufficient for determining the statute's scope. Ultimately, the 1993 FmHA loan qualifies Bell Arthur for protection under § 1926(b) as defined by the statute.

Ironwood is not within Bell Arthur's service area, which limits the protection afforded under § 1926(b). The district court determined that Bell Arthur lacked the capacity to serve Ironwood and could not do so in a reasonable timeframe after a service request. Bell Arthur's assertion of service capability is based solely on a six-inch pipeline along Highway 43, which historically served a limited number of customers and a construction trailer. However, this pipeline is insufficient for the proposed development of over 900 houses and two golf courses, as indicated by both Bell Arthur's and the Greenville Utilities Commission's assessments, which called for larger pipelines (14-inch and 12-inch, respectively). Despite the phased nature of the development, Bell Arthur failed to show any capacity to meet the Developer's timeline, taking no significant action to secure funding or begin construction until more than a year after agreeing to provide service. The legal protections of § 1926(b) require that a water association demonstrate the ability to provide service through adequate facilities within or adjacent to the disputed area, which Bell Arthur did not do.

The Fifth Circuit has established that an association can demonstrate it is "making service available" by showing a statutory duty under state law to provide service to a specific area. Other circuits require both a statutory duty to serve and the presence of a nearby facility to provide that service. Cases such as Lexington-South Elkhorn emphasize the importance of proximity to water lines in determining service availability, as Kentucky law necessitates obtaining state certification and making reasonable extensions to serve customers. Similarly, the Tenth Circuit in Glenpool Utility Services confirmed that a state duty to serve upon customer request, along with a nearby water line, fulfills the service availability requirement.

However, these precedents do not support Bell Arthur's claim regarding service availability to Ironwood. Despite having facilities in the area, Bell Arthur lacks a statutory duty to serve Ironwood because, as a nonprofit water service corporation, it is not bound by the North Carolina public utility obligation to serve a designated area. The court found that Bell Arthur's existing inadequate six-inch pipe and its vague future intentions to install a 14-inch pipe do not constitute "service provided or made available" under 7 U.S.C. § 1926(b). Consequently, the court concluded that Bell Arthur is not entitled to protection against the City of Greenville's annexation of Ironwood or the Greenville Utility Commission's provision of water to that area, affirming the district court's judgment.