Jennings Water, Inc. v. City of North Vernon, Ind.

• Decision Date: 28 July 1989
• Docket Number: No. 88-1819,88-1819
• Citation: 895 F.2d 311
• Parties: JENNINGS WATER, INC., Plaintiff-Appellee, v. CITY OF NORTH VERNON, INDIANA, et al., Defendants, and CSL Utilities, Inc., and CSL Community Association, Inc., Intervening Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 311

895 F.2d 311

JENNINGS WATER, INC., Plaintiff-Appellee, v. CITY OF NORTH VERNON, INDIANA, et al., Defendants and CSL Utilities, Inc., and CSL Community Association, Inc. Intervening Defendants-Appellants.

No. 88-1819.

United States Court of Appeals Seventh Circuit.

Argued Jan. 18, 1989.

Decided July 28, 1989.

Albert George, Bell, George & Ost, Indianapolis, In., for intervening defendants-appellants.

Peter Campbell King, Cline, King & King, Columbus, In., for plaintiff-appellee.

Before WOOD, Jr. and RIPPLE, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

RIPPLE, Circuit Judge.

Jennings Water, Inc. (Jennings) filed this suit seeking preliminary and permanent injunctive relief to prevent the City of North Vernon from finishing a water pipeline and commencing water service to CSL Utilities, Inc. and CSL Community Association, Inc. (hereinafter referred to jointly as "CSL") intervened as defendants. Jennings' action alleged that a water purchase agreement between CSL and North Vernon violated 7 U.S.C. Sec. 1926(b). The district court granted Jennings' summary judgment motion and enjoined the defendants. Jennings Water, Inc. v. City of North Vernon, 682 F.Supp. 421 (S.D.Ind.1988) (judgment and entry); R. 69 [hereinafter Entry]. CSL timely appealed the district court's judgment; North Vernon does not appeal. We now affirm the judgment of the district court.

I BACKGROUND

A. Facts

Jennings is a rural, not-for-profit water association operating in Jennings County, Indiana. See 7 U.S.C. Sec. 1926(a)(1). ¹ It was formed in 1975 and became operational upon its merger with two local rural water companies, Geneva Township Water Corp. (Geneva) and Muscatuck Water, Inc. (Muscatuck). R. 32 at Ex. 2; R. 66 at Ex. 5. Both the Geneva and Muscatuck systems were financed by loans from the United States Farmers Home Administration (FmHA). R. 32 at Ex. 2. In October 1977, Jennings itself obtained an additional loan from the FmHA to connect and expand water treatment, storage, and distribution facilities "to supply present and future needs" of the county's rural population. Id. See also id. at Ex. 8, 9. The term of the loan is forty years; Jennings' current total outstanding debt to the FmHA is just under $1.5 million.

CSL is a private, not-for-profit utility company formed in 1974. CSL distributes the water it buys from Jennings to CSL's only customers--the residents of Country Squire Lakes, a subdivision in Geneva Township, Jennings County. CSL does not have its own wells or reservoirs and has always purchased water wholesale from other public utilities. Originally, CSL was supplied by Geneva, R. 29 at Ex. B; since Geneva's merger into Jennings, CSL has purchased all its water from the successor firm. Affidavits and exhibits submitted by the parties reveal that Jennings currently serves approximately 2000 rural customers, that CSL is Jennings' major wholesale purchaser, and that CSL in turn distributes the water it buys from Jennings to approximately 1150 customers in the Country Squire Lakes subdivision--300 permanent and 850 seasonal residents.

The record reflects a turbulent relationship between Jennings and CSL dating back to the 1977 FmHA loan to Jennings. First, CSL refused to sign a $100,000 water user agreement that the FmHA had initially required as a condition precedent to making the loan. See R. 31 at Ex. E, F; R. 32 at Ex. 3. ² CSL simply continued to purchase water from Jennings on a month-to-month basis. Second, in August 1980, Jennings threatened to cut off CSL's water supply by filing a state-court action that sought a declaration that Jennings had no obligation to continue serving CSL. R. 66 at Ex. 7. According to James Rupel, president of CSL, the purpose of this declaratory judgment suit was to force CSL to sign a water user agreement under Jennings' terms. Rupel Deposition at 110. ³ Third, in July 1986, upon learning that Jennings planned to increase its wholesale water rate, CSL notified Jennings that it would seek other sources of water supply. Jennings made no objection to CSL's proposed action. In March 1987, the Public Service Commission of Indiana approved a substantial rate increase for Jennings. R. 55 at Ex. I. In response, CSL decided to sever its relationship with Jennings and seek another supplier. CSL then entered into an agreement to purchase water from a nearby municipality--North Vernon, Indiana--and accordingly planned to hook up the two water systems.

Jennings was fully aware of CSL's decision to commence purchasing water from North Vernon. After the issuance of a public notice, the Jennings County Commissioners had granted the necessary easements to CSL, and CSL had signed a water user agreement with North Vernon. Jennings still did not object. ⁴ Indeed, not only was Jennings cognizant of CSL's plan, but Jennings also actively expedited completion of the CSL-North Vernon systems connection by ordering its employees to mark its water lines so as to allow CSL to lay and connect its own water mains with those of North Vernon. By August 1987, CSL was busy constructing its $71,000 connection pipe.

On September 30, 1987, however, after contacting FmHA officials and notifying them of CSL's actions, Jennings was advised to determine whether the impending loss of CSL as a wholesale customer would significantly affect its revenue. See R. 27 at Ex. 9. Three weeks later, Jennings filed this action against North Vernon to block the completion of the CSL-North Vernon pipe and the sale of water by North Vernon to CSL. See R. 2; 7 U.S.C. Sec. 1926(b). Jennings alleged that the CSL-North Vernon water purchase agreement violated section 1926(b) and that, if CSL "is allowed to hook onto the City's water main for purposes of purchasing water from the City ..., then Jennings Water will suffer irreparable damages by reason of jeopardizing its ability to pay the Farmers' Home Administration." R. 2 at 2, p 7.

B. District Court Opinion

After allowing CSL's intervention, the district court granted emergency relief to CSL. It ordered that the connection line between CSL and North Vernon could be completed and that CSL could purchase enough water from North Vernon as may be necessary to test, sterilize, and backflush the connection. R. 13. Both Jennings and CSL then filed cross-motions for summary judgment. After the submission of affidavits, depositions, and documents, the district court granted summary judgment to Jennings.

The court determined that Jennings is a rural water association indebted to the FmHA. It then concluded that, accordingly, section 1926(b) operated to forbid the sale of water by North Vernon to CSL, because "Jennings' loss of CSL as a major wholesale customer would curtail or limit the service that Jennings has been providing the Country Squire Lakes area in Jennings County." Entry at 5. Additionally, the district court rejected CSL's argument that Jennings' conduct in the months preceding the lawsuit equitably estopped Jennings from raising any objections to the planned CSL-North Vernon water connection. Under the rule that equitable estoppel cannot apply to block the application of a statute enacted to protect the public interest, the court ruled that Jennings was not estopped from filing suit under section 1926(b). Entry at 10-11. After making these determinations, the district court granted summary judgment to Jennings.

II ANALYSIS

In granting summary judgment to Jennings, the district court interpreted section 1926(b) as absolutely prohibiting a municipality like North Vernon from curtailing the area served by a rural water association indebted to the FmHA. CSL submitted as its primary argument before the district court, and reasserts here, that the doctrine of equitable estoppel prevents Jennings from invoking section 1926(b). We shall first examine section 1926(b) and then determine whether Jennings is equitably estopped from invoking that provision.

A. Section 1926(b)

As in all cases of statutory interpretation, the starting point for our analysis is the plain language employed by Congress. See Indiana Port Comm'n v. Bethlehem Steel Corp., 835 F.2d 1207, 1210 (7th Cir.1987). The statute states that:

The 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 for 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.

7 U.S.C. Sec. 1926(b). The statute explicitly prohibits municipal encroachment on a rural water association's service area by means of annexation or grant of private franchise. The district court interpreted section 1926(b)'s ban on "curtailment" as encompassing not only a municipality's use of annexation or condemnation powers but also its contracting to sell water to a customer served by the association. To examine this interpretation of section 1926(b)'s breadth, we turn to the statute's legislative history and earlier judicial interpretations.

Section 1926(b) was enacted as part of a federal statutory scheme to extend loans to certain associations providing water service or management, soil conservation practices, or other essential community services to rural residents. See Glenpool Utilities Auth. v. Creek County Rural Water Dist., 861 F.2d 1211, 1214 (10th Cir.1988). The statute's legislative history confirms that the Congress intended a broad reading for section 1926(b); the Senate report states that:

This section would broaden the utility of this authority somewhat by authorizing loans to associations serving farmers, ranchers, farm tenants, and other rural residents....