City of Cookeville v. Upper Cumberland Elec., 05-5886.

Citation484 F.3d 380
Decision Date19 April 2007
Docket NumberNo. 05-5886.,No. 06-5363.,05-5886.,06-5363.
PartiesCITY OF COOKEVILLE, TENNESSEE, Plaintiff-Appellant, v. UPPER CUMBERLAND ELECTRIC MEMBERSHIP CORPORATION; Hilda G. Legg; Rural Utilities Services, an Agency of the Department of Agriculture; Department of Agriculture; Sheldon Peterson, Governor; National Bank for Cooperatives; National Rural Utilities Cooperative, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

Andree Sophia Blumstein, Sherrard & Roe, Nashville, Tennessee, for Appellant. W. Brantley Phillips, Jr., Bass, Berry & Sims, Nashville, Tennessee, Frances M. Toole, United States Department of Justice, Washington, D.C., for Appellees.

ON BRIEF:

Andree Sophia Blumstein, Sherrard & Roe, Nashville, Tennessee, T. Michael O'Mara, Cookeville, Tennessee, for Appellant. W. Brantley Phillips, Jr., John R. Lodge, Jr., Russell S. Baldwin, Bass, Berry & Sims, Nashville, Tennessee, Frances M. Toole, United States Department of Justice, Washington, D.C., for Appellees.

Before ROGERS and GRIFFIN, Circuit Judges; RUSSELL, District Judge.*

OPINION

ROGERS, Circuit Judge.

In this case, we affirm the federal district court's resolution of a dispute over one element of the compensation that Tennessee law requires when a city annexes territory and exercises its right to purchase electric utility property within the annexed territory. The federal court had jurisdiction because a federal agency, the Rural Utilities Service ("RUS"), was a party defendant. We reverse, however, a post-judgment order enjoining the city from providing electric service in this annexed area pending resolution of the compensation dispute.

When a Tennessee municipality that owns and operates its own electric system annexes territory in which an electric cooperative is providing electric services to customers, the municipality has two choices of how to provide electric services to those customers under Tennessee law. See City of South Fulton v. Hickman-Fulton Counties Rural Elec. Coop. Corp., 976 S.W.2d 86, 90 (Tenn.1998). The municipality can either "grant such cooperative a franchise to serve the annexed area" or, as the City of Cookeville chose to do here, "offer to purchase any electric distribution properties and service rights within the annexed area owned by any electric cooperative." Tenn.Code Ann. § 6-51-112(a). The same Tennessee statute that requires this choice also provides a formula for determining the amount of compensation that the municipality must offer the cooperative. See Tenn.Code Ann. § 6-51-112(a)(2). As part of this compensation, the municipality must offer "[a]n amount equal to the cost of constructing any necessary facilities to reintegrate the system of the cooperative outside the annexed area after detaching the portion to be sold." Tenn.Code Ann. § 6-51-112(a)(2)(B).

Cookeville annexed nine areas in which the Upper Cumberland Electric Membership Corporation ("UCEMC") provided electric services. Cookeville sued UCEMC, originally in state court, to condemn UCEMC's facilities and electric service rights in the annexed areas. RUS was later added as a defendant. Cookeville and UCEMC disagreed on the cost of reintegration—Cookeville argued that the cost was approximately $127,000 whereas UCEMC argued that the cost was $5.825 million. The district court agreed with UCEMC and ordered Cookeville to pay the higher amount so that UCEMC could build a new substation and distribution loop. Cookeville appealed. While that appeal was pending, Cookeville began building electric facilities in the annexed areas and providing electric services to customers in those areas. UCEMC sought and obtained an injunction from the district court enjoining Cookeville from building facilities or providing service until it paid UCEMC the damages owed for the condemnation. Cookeville appealed, and now the propriety of both the damage award and the injunction are before this court. Cookeville also challenges the district court's jurisdiction over the entire case and the district court's jurisdiction to enter the injunction while the first appeal was pending.

The district court properly exercised jurisdiction because a federal agency was a party. The district court order requiring Cookeville to pay reintegration costs of $5.825 million was legally proper and not clearly erroneous. The district court's injunction, entered during the pendency of the appeal from the district court's compensation order, however, improperly expanded the scope of the previous order. We therefore affirm in part and reverse in part.

I.

In 2000, Cookeville annexed five areas surrounding the city. In 2002, Cookeville annexed four additional areas. With respect to each annexed area, Cookeville gave notice to UCEMC, an electric cooperative serving customers in the annexed areas, as required by Tennessee law, but UCEMC refused to sell voluntarily any of its electric distribution properties or service rights in those areas. See Tenn.Code Ann. § 6-51-112(a)(1) (requiring notice).

Removal and Denial of Motion to Remand

On July 31, 2001, Cookeville brought a civil action against UCEMC in Tennessee state court in order to condemn UCEMC's facilities and service rights. On August 14, 2002, Cookeville amended its complaint and added RUS and National Rural Utilities Cooperative Finance Corporation ("CFC") as defendants. RUS is a federal agency. See 7 U.S.C. § 6942. RUS and CFC each hold a security interest in all of UCEMC's equipment and service rights within the annexed areas. UCEMC, RUS, and CFC removed the case under 28 U.S.C. § 1442(a)(1) to the United States District Court for the Middle District of Tennessee. Cookeville then filed a motion to remand in the district court arguing that the district court lacked subject matter jurisdiction.

The district court denied Cookeville's motion to remand. Tennessee ex rel. City of Cookeville v. Upper Cumberland Elec. Membership Corp., 256 F.Supp.2d 754, 758 (M.D.Tenn.2003). Section 1442 states that "[t]he United States or any agency thereof or any officer (or any person acting under that officer) of the United States or of any agency thereof, sued in an official or individual capacity for any act under color of such office or on account of any right, title or authority claimed under any Act of Congress for the apprehension or punishment of criminals or the collection of the revenue" can remove a civil action to the district court. Courts have also required as necessary for removal under this statute that the defendant assert a colorable federal defense. Here, the district court held that "[c]learly, the RUS is an agency of the United States being sued for acting under color of its office in this case." Tennessee ex rel. City of Cookeville, 256 F.Supp.2d at 758. The court also held that defendants asserted the colorable federal defense of preemption because they "adequately pled" such a defense and the defense was an issue the district court needed to decide. Id.

Tennessee Statute

The crux of this case is what compensation Cookeville must pay to UCEMC for UCEMC's facilities and service rights in the annexed areas. Tennessee law provides the following formula for determining the amount of compensation an annexing municipality must pay an electric cooperative:

The municipality shall offer to purchase the electric distribution properties of the cooperative located within the annexed area, together with all of the cooperative's rights to serve within such area, for a cash consideration, which shall consist of:

(A) The present-day reproduction cost, new, of the facilities being acquired, less depreciation computed on a straight-line basis; plus

(B) An amount equal to the cost of constructing any necessary facilities to reintegrate the system of the cooperative outside the annexed area after detaching the portion to be sold; plus

(C) An annual amount, payable each year for a period of ten (10) years, equal to the sum of:

(i) Twenty-five percent (25%) of the revenues received from power sales to consumers of electric power within the annexed area, except consumers with large industrial power loads greater than three hundred kilowatts (300kW), during the last twelve (12) months preceding the date of the notice provided for in subdivision (a)(1); and

(ii) Fifty percent (50%) of the net revenues, which is gross power sales revenues less wholesale cost of power including facilities rental charge, received from power sales to consumers with large industrial power loads greater than three hundred kilowatts (300kW) within the annexed area during the last twelve (12) months preceding the date of the notice provided for in subdivision (a)(1).

Tenn.Code Ann. § 6-51-112(a)(2). Cookeville and UCEMC agreed on the first and third elements of the statutory formula. Cookeville agreed to pay UCEMC $1,136,325.25 for the present-day reproduction cost, new, less depreciation of UCEMC's electric distribution properties located in the annexed areas. Cookeville also agreed to make ten annual payments to UCEMC of $276,330 to comply with section 6-51-112(a)(2)(C).

Trial

Cookeville and UCEMC did not agree on the second element of the statutory formula: "the cost of constructing any necessary facilities to reintegrate the system of the cooperative outside the annexed area after detaching the portion to be sold." See City of Cookeville v. Upper Cumberland Elec. Membership Corp., 360 F.Supp.2d 873, 879 (M.D.Tenn.2005) (quoting Tenn.Code Ann. § 6-51-112(a)(2)(B)). At a bench trial in November of 2004, each side presented testimony of an expert who had produced a "reintegration" plan. Cookeville's expert, Thomas M. Barnes, testified about the report that he prepared. In the report, Barnes stated that to reintegrate UCEMC's system, UCEMC would only need to construct facilities in one of the annexed areas and would incur "costs related to coordination of the facility transfer" and "a...

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