City of Grand Junction v. Ute Water Conservancy Dist.

• Decision Date: 30 June 1995
• Docket Number: No. 93SC745,93SC745
• Citation: 900 P.2d 81
• Parties: CITY OF GRAND JUNCTION, Petitioner/Cross-Respondent, v. UTE WATER CONSERVANCY DISTRICT, Respondent/Cross-Petitioner.
• Court: Colorado Supreme Court

Page 81

900 P.2d 81

CITY OF GRAND JUNCTION, Petitioner/Cross-Respondent, v. UTE WATER CONSERVANCY DISTRICT, Respondent/Cross-Petitioner.

No. 93SC745.

Supreme Court of Colorado,

En Banc.

June 30, 1995.

Daniel E. Wilson, City Atty., City of Grand Junction, John P. Shaver, Asst. City Atty., Grand Junction, Grimshaw & Harring, P.C., Wayne B. Schroeder, Ronald L. Fano, Peter J. Whitmore, Denver, for petitioner/cross-respondent.

Williams, Turner & Holmes, P.C., Mark A. Hermundstad, William D. Prakken, Grand Junction, for respondent/cross-petitioner.

Geoffrey T. Wilson, Gen. Counsel, Colorado Municipal League, Denver, for amicus curiae Colorado Municipal League.

Justice LOHR delivered the Opinion of the Court.

The issues in this case arise out of a dispute between the Ute Water Conservancy District (District) and the City of Grand Junction (City) as to which entity has the authority to provide water to domestic water users in areas where the boundaries of the City and the District overlap. The primary issue in this case is whether a bond--originally issued by the District to the Farmers Home Administration (FmHA), an agency of the United States Department of Agriculture, and subsequently reacquired by the District--satisfies the outstanding debt requirement of the applicable federal statute, 7 U.S.C. § 1926(b) (1994). If the bond is still outstanding, section 1926(b) protects the District from competition and prevents the City from supplying water to domestic water users in the overlap areas, except to those domestic water consumers historically served by the City.

In a declaratory judgment action brought by the District, the Mesa County District Court held that the bond remained outstanding, with the result that the District is protected from competition by the City in the overlap areas pursuant to section 1926(b). The district court rejected the District's alternative argument that it is a "municipality" for purposes of section 31-35-402(1)(b), 12B C.R.S. (1986), and therefore enjoys protection from competition by the City under that statute. On appeal, the Colorado Court of Appeals affirmed the trial court's judgment for the District based on section 1926(b) and vacated the trial court's ruling on the section 31-35-402(1)(b) issue as premature. Ute Water Conservancy Dist. v. City of Grand Junction, 870 P.2d 593 (Colo.App.1993). We granted certiorari to review the correctness of the court of appeals' resolution of those issues ¹ and now affirm the judgment of the court of appeals.

I.

The District, a water conservancy district that is a political subdivision of the State of Colorado, was created by decree of the District Court of Mesa County in 1956 in order to provide water service to domestic water users in an area surrounding the City. ² See the Water Conservancy Act, §§ 37-45-101 to -153, 15 C.R.S. (1990 & 1994 Supp.) (providing for the creation and operation of water conservancy districts). Prior to the creation of the District, it was difficult for people in rural areas of Mesa County to obtain domestic water service. These people were forced to haul their water in tanks and store it in cisterns. Other rural residents who lived closer to the City were able to receive water from the City's system, but it was expensive and the service was inadequate. A group of residents who lived outside the City organized and created a water conservancy district in order to provide domestic water service in areas where service was lacking or deficient. The District first provided water service in 1964.

When the District was created in 1956, it surrounded the City but it did not overlap the City's boundaries. As the City expanded, however, the City annexed certain areas served by the District. We refer to these areas within the geographic boundaries of both the District and the City as "overlap areas." In order to resolve conflicts as to which entity would provide water to consumers in overlap areas, the District and the City entered into two written agreements, in 1967 and 1976. ³ These agreements, however, failed to resolve the continuing disputes between the District and the City. Except for historical City service areas, the District has provided water to all new consumers in the overlap areas since 1967.

In order to keep pace with rapid growth, the District made various improvements to its system, and financed them through borrowings including loans evidenced and secured by the issuance of revenue bonds. In 1981, the district issued one such revenue bond, in the original principal amount of $3 million, to the FmHA. ⁴ The bond matures in 2021. The District subsequently conducted two transactions involving this 1981 revenue bond that form the basis of the City's contention that the obligation of the District on the bond has been discharged.

First, in 1983, the District refinanced the 1981 revenue bond through a transaction referred to as an "advance refunding"--whereby new bonds were sold and the proceeds of these new bonds were deposited in an escrow account and were used to pay the installments of principal and interest on the 1981 revenue bond as they came due. The escrowed bond proceeds replaced the District's revenues as the security for the 1981 revenue bond, while the District's revenues became the security for the new bonds.

Second, in 1988, the District reacquired the 1981 revenue bond from the FmHA pursuant to revenue generating legislation enacted by Congress, authorizing the FmHA to sell all notes and bonds in its possession without canceling the protection provided to rural water districts and their lenders under section 1926(b), which prescribes that during the term of a bond held by the FmHA the water services provided by a borrower cannot be curtailed or limited. ⁵ If the District, as the issuer of the bond, was allowed to reacquire the bond from the FmHA without discharging the debt, the District would remain under the protection of 7 U.S.C. § 1926(b) until the bond obligation is discharged or the bond reaches maturity in 2021.

In 1991, the District filed a complaint against the City in Mesa County District Court, seeking declaratory relief in the form of a determination that the District was the only entity authorized to provide water to domestic water users in the overlap areas, except where the City historically has served consumers. The District asserted, among other things, that under the Agreement and, alternatively, under applicable Colorado law, the District was authorized to provide domestic water service in the overlap areas. ⁶ The City filed an answer and counterclaim asserting, among other things, that the District could not serve water in the overlap areas without the City's consent, citing section 31-35-402(1)(b), 12B C.R.S. (1986). The City further alleged that the District was obligated under the Agreement to sell certain facilities to the City. Alternatively, the City claimed that it could terminate the Agreement upon ninety days notice. ⁷ Both the City and the District relied upon the Agreement and Colorado law--specifically sections 31-35-401 to -417, 12B C.R.S. (1986 & 1994 Supp.), which govern a municipality's authority to provide water and sewage services--as the bases for their claims that each had the exclusive right to provide water in the overlap areas.

The District filed a Motion for Temporary Restraining Order and/or Preliminary Injunction, asserting that the City should be prohibited from providing domestic water service to new customers in the overlap areas, except those areas served by the City prior to 1967. After a hearing, the district court denied the District's motion in an order dated January 10, 1992, because the District failed to demonstrate a danger of irreparable injury.

Upon the filing of cross-motions for summary judgment, the district court determined that the District was not a "municipality" under section 31-35-402(1) and thus it could not rely on that statute. ⁸ The district court also concluded that the City was a "municipality" and the District must therefore obtain the City's consent before serving domestic water consumers in the overlap areas. The district court further ruled that there were disputed issues of fact relating to the applicability of 7 U.S.C. § 1926(b) and set those issues for trial. Specifically, the district court stated that "[i]f it is determined upon a hearing of this matter that there is any outstanding federal debt, 7 U.S.C. 1926(b) prohibits the curtailing of any service provided by a water district that is the recipient of federal funds."

The district court conducted a bench trial on several issues, including the applicability of the federal statute. Richard E. Mitchell (Mitchell), the District's bond counsel, testified as an expert witness in the fields of municipal finance and corporate finance. Mitchell testified that he represented the District in six bond transactions between 1980 and 1987, as well as in the District's reacquisition of the 1981 revenue bond. According to Mitchell, who structured the advance refunding transaction in 1983, the District remained liable if the escrow account was insufficient to make the requisite payments on the 1981 revenue bond. Mitchell further testified that in 1988, the District reacquired the bond from FmHA at the discounted price of approximately $1.5 million, but expressly structured the transaction to prevent a merger and to keep the bond outstanding, rather than simply extinguishing the debt. Mitchell testified that the transaction was structured in this manner in order to maintain the District's flexibility to sell the bond again in the future.

Upon conclusion of the bench trial, in an order dated July 17, 1992, the district court held "that 7 U.S.C. 1926(b) prohibits the City from providing water service to the overlap areas so long as the District's 1981 water revenue bond remains outstanding, which may be until July 1, 2021 (Exhibit 98)." ⁹ The district court ...