Aune v. B-Y Water Dist.

• Decision Date: 12 February 1990
• Docket Number: B-Y,No. 16707,16707
• Citation: 464 N.W.2d 1
• Parties: Steven F. AUNE and Karen A. Aune, husband and wife, Plaintiffs and Appellees, v.WATER DISTRICT, Defendant and Appellant. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 1

464 N.W.2d 1

Steven F. AUNE and Karen A. Aune, husband and wife Plaintiffs and Appellees, v. B-Y WATER DISTRICT, Defendant and Appellant.

No. 16707.

Supreme Court of South Dakota.

Considered on Briefs Feb. 12, 1990.

Decided Dec. 5, 1990.

Larry F. Hosmer, Yankton, for plaintiffs and appellees.

Thomas E. Alberts, Avon, for defendant and appellant.

SABERS, Justice (On reassignment).

B-Y appeals from a $12,000 jury verdict in favor of Aune claiming sovereign immunity applies because it is an agency or subdivision of the state.

Facts

Steven and Karen Aune (Aune) purchased land in rural Yankton County in 1984. Two years before Aune bought his land, his predecessor discontinued her membership in the B-Y Water District (B-Y) which supplied water to the property. When Aune attempted to get the water turned back on, B-Y refused unless Aune paid the accrued monthly minimum charges of $1400 for the two years the water had been off. After several attempts to resolve the dispute, Aune sued. In 1989, a jury found B-Y's refusal to deliver water both tortious and a violation of SDCL 46A-9-48. ¹

B-Y appeals claiming the trial court erred in not granting summary judgment and judgment notwithstanding the verdict based on the defense of sovereign immunity. We reject this argument and hold that:

1. SDCL 46A-9-3 permits a cause of action against a water user district.

2. A water user district is a business enterprise with a commercial purpose and is not entitled to sovereign immunity.

3. SDCL 3-22-2(1) is unconstitutional to the extent that it purports to extend sovereign immunity to a water user district.

1. A cause of action is permitted.

Article III, Sec. 27 of the South Dakota Constitution provides that "[t]he Legislature shall direct by law in what manner and in what courts suits may be brought against the state." SDCL 46A-9-3 provides in part: "A water user district may be organized as provided in this chapter, and may sue and be sued in its corporate name."

Although, as argued by B-Y, the "sue and be sued" clause based on Kringen v. Shea, 333 N.W.2d 445 (S.D.1983), does not create a cause of action in tort, it certainly permits a cause of action in tort if one exists. To read the "sue and be sued" clause any other way is contrary to the "plain meaning and intent of the Legislature" by giving effect to only one-half of the clause. Such an interpretation permits a water user district to sue, but prohibits a person wrongfully injured by the water user district from suing. Therefore, even though the "sue and be sued" clause does not create a cause of action in tort, it permits one. Cf. Federal Land Bank of St. Louis v. Priddy, 295 U.S. 229, 55 S.Ct. 705, 79 L.Ed. 1408 (1935) (Statute providing that federal land banks could sue and be sued as fully as natural persons demonstrates Congressional intent that federal land banks not be immune from suit).

In fact, the Legislature has provided a procedure in the statutes in order to bring suit. ² Not only is notice to be given to the public entity but also to the attorney general. SDCL 3-21-3. ³

2. B-Y is a business enterprise with a commercial purpose.

In Jensen v. Juul, 66 S.D. 1, 5, 278 N.W. 6, 8 (1938), we stated: "Although a corporation may be public, and not private, because established and controlled by the state for public purposes, it does not follow that such corporation is in effect the state and that the same immunity from liability attaches." In L.R. Foy Constr. Co., Inc. v. South Dakota State Cement Plant Comm'n, 399 N.W.2d 340, 347 (S.D.1987), we reaffirmed this position and explained that a corporation's status as an agency of the state does not automatically shield the corporation from suit: "[W]here a state creates or organizes a corporation and operates [the] same for a commercial purpose, it is ordinarily held subject to suit, the same as any public [sic: private] corporation organized for the same purpose" (quoting 72 Am.Jur.2d States, Territories, and Dependencies Sec. 106 (1974)). Many other states also recognize that sovereign immunity does not extend to a state's commercial or non-governmental activity. See, e.g., Sterling v. Bloom, 111 Idaho 211, 723 P.2d 755 (1986); Graney v. Board of Regents of University, 92 Wis.2d 745, 286 N.W.2d 138 (Ct.App.1979); Perkins v. State, 252 Ind. 549, 251 N.E.2d 30 (1969); Schippa v. West Virginia Liquor Control Comm'n, 132 W.Va. 51, 53 S.E.2d 609 (1948); Platte Valley Public Power and Irrigation Dist. v. Lincoln County, 144 Neb. 584, 14 N.W.2d 202 (1944).

The important question is how to distinguish between governmental and commercial activity. The test is not whether B-Y was organized or operated for profit. By its very nature a public corporation will seldom, if ever, be established for the purpose of generating profits. The better approach is to assess whether the activity is something only the state can accomplish or whether it could be effectively accomplished by a private enterprise. As the Michigan Court of Appeals has stated:

"[A]s a basic guideline, the crux of the governmental essence test should be founded upon the inquiry whether the purpose, planning and carrying out of the activity, due to its unique character or governmental mandate, can be effectively accomplished only by the government. Unless liability would be an unacceptable interference with government's ability to govern, activities that fall outside this perimeter, although performed by a government agency, are not governmental functions and therefore not immune."

Everett v. County of Saginaw, 123 Mich.App. 411, 333 N.W.2d 301, 302 (1983) (quoting Parker v. City of Highland Park, 404 Mich. 183, 200, 273 N.W.2d 413, 419 (1978) (Moody, J., concurring)); cf. Eagle Ins. Co. v. State, 131 Misc.2d 357, 500 N.Y.S.2d 478 (Ct.Cl.1986).

The delivery of water is not an inherently governmental activity that only the state can effectively accomplish. Indeed, a water district functions more like a cooperative than a state agency since it is controlled by the landowners and subscribers in the district. ⁴ Moreover, subjecting B-Y to liability would not interfere with the state's ability to govern, primarily because the state treasury cannot be used to pay any liability. The water user district has "no power of taxation, or of levying assessments for special benefits; and no governmental authority shall have power to levy or collect taxes or assessments for the purpose of paying, in whole or in part, any indebtedness or obligation of or incurred by the district[.]" SDCL 46A-9-47. Even the commercial profits that are generated by the water user district are not shared with the state. The water user district is self-supporting the same as any other commercial business.

The Wisconsin Supreme Court has held that a state entity with characteristics similar to a water user district is outside the scope of sovereign immunity. Majerus v. Milwaukee County, 39 Wis.2d 311, 159 N.W.2d 86 (1968). The court described the entity's characteristics as follows:

The Armory Board has power to convey real estate and dispose of personal property without express authority from the state. It has the power to hold and disburse its own funds independent of state warrants. It is given no appropriation but has the power to borrow money and issue and sell bonds and other evidences of indebtedness to accomplish its purposes. The debts thus created are satisfied out of rents and interest the Armory Board receives from the property it acquires.

Id., 39 Wis.2d at 314-315, 159 N.W.2d at 87. These characteristics were found to be "independent proprietary functions" of the Wisconsin State Armory Board which sufficiently distinguished it from the sovereign state as such--even though the board lacked the power to tax and was ultimately dependent on the state in certain other respects. A water user district has similar "independent propriety functions": it may acquire and dispose of real or personal property, SDCL 46A-9-40; it may disburse funds upon the approval of the district's board of directors, SDCL 46A-9-67; it may borrow money and incur indebtedness for any corporate purpose, SDCL 46A-9-56; it may pay any indebtedness or liability only from its operation revenues or issuance of bonds, id.; it has the power of eminent domain, SDCL 46A-9-46, but it has no power of taxation, SDCL 46A-9-47. These extensive, independent powers compel the conclusion that a water user district is like a private enterprise and distinct from the state, and, consequently, is outside the state's sovereign immunity shield.

In short, the function of a water user district is commercial and it should be treated the same as any other commercial enterprise. We abide by our statement in Foy Constr., supra at 346: "Where the State elects to operate a business enterprise solely for commercial purposes, it ought not be permitted to avoid its legal responsibility by invoking the doctrine of governmental immunity." As a business enterprise with a commercial purpose, B-Y ought not be permitted to hide behind the state's sovereign immunity.

3. Sovereign immunity does not extend to business

enterprises with a commercial purpose.

Having concluded that B-Y is a business enterprise with a commercial purpose, it follows that the legislature cannot extend the state's sovereign immunity to shield B-Y from damages arising in contract or tort.

In Oien v. City of Sioux Falls, 393 N.W.2d 286 (S.D.1986), we held that the extension of sovereign immunity beyond traditional bounds was unconstitutional under the "open courts" provision of the South Dakota Constitution. In Oien, we interpreted the "open courts" provision as a guarantee that "for such wrongs as are recognized by the law of the land the courts shall be open and afford a remedy." Id., at 290 (citing Simons v. Kidd, 73 S.D. 41, 46, 38 N.W.2d 883, 886 (1949) and Mattson v. Astoria, 39 Or. 577, 65 P. 1066, 1067 (1901)). While Oien dealt with an improper...