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Sioux Rural Water System, Inc. v. City of Watertown

United States District Court, D. South Dakota, Northern Division

April 7, 2017

SIOUX RURAL WATER SYSTEM, INC., A Non-Profit Corporation, Plaintiff,
CITY OF WATERTOWN, a South Dakota Municipality, and WATERTOWN MUNICIPAL UTILITIES, an agency of the City of Watertown, Defendants.


          CHARLES B. KORNMANN United States District Judge


         Sioux Rural Water System, Inc. ("Sioux") is a South Dakota corporation formed in 1974 to provide water to rural Codington, Deuel, and Hamlin Counties in South Dakota. Sioux is a not-for-profit corporation organized under the South Dakota Nonprofit Corporation Act, SDCL Chapter 47-22 and 26 U.S.C. § 501(c)(3). Sioux submitted articles of incorporation to the South Dakota Secretary of State listing as its purposes inter alia:

A. To acquire, construct, maintain, and operate a system for the diversion, supply, storage, and distribution of water to the members of this Corporation for domestic purpose (sic) within the area served by the Corporation in the Counties of Hamlin, Codington, and Deuel, South Dakota, and
B. To acquire by appropriation or otherwise, and to lease, sell or dispose of water and water rights for domestic purposes (emphasis supplied).

         In order to finance the building of its water system, Sioux took out loans from the United States Department of Agriculture ("USDA") under the Consolidated Farm and Rural Development Act, 7 U.S.C. §§ 1921 et seq. That Act authorized the Secretary of Agriculture to make or insure loans to, inter alia, nonprofit corporations, to provide water services "primarily serving farmers, ranchers, farm tenants, farm laborers, rural businesses, and other rural residents." 7 U.S.C. § 1926(a). It is undisputed that Sioux is and has been continuously indebted to the USDA since 1974 by virtue of loans from the Rural Development Agency issued pursuant to 7 U.S.C. § 1926(a). Sioux makes payments on its USDA loans from revenue it receives from the sale of water to its customers.

         Sioux's USDA loans are secured in part by the income Sioux receives from the sale of water to its customers. Federal law affords federally indebted rural water associations (which includes corporations not operated for profit, Indian tribes on Federal and State reservations and other federally recognized Indian tribes, and public and quasi-public agencies) the exclusive right to provide water service to current and prospective customers in the service area until the federal loans are paid in full. 7 U.S.C.A. § 1926(b). Section 1926(b) protects indebted rural water associations from loss of customers by prohibiting municipal entities from, inter alia, providing water services to customers in the service area. Public Water Supply Dist. v. City of Lebanon, Mo., 605 F.3d 511, 515 (8th Cir. 2010). Federal law specifically provides:

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. § 1926(b).

7 U.S.C. 1926(b) was enacted to protect the service area of Agency borrowers with outstanding loans . . . from loss of users due to actions or activities of other entities in the service area of the Agency financed system. Without this protection, other entities could extend service to users within the service area, and thereby undermine the purpose of the congressionally mandated water and waste loan and grant programs and jeopardize the borrower's ability to repay its Agency debt.

7C.F.R. § 1782.14(a).

         As a USDA borrower, it is Sioux's responsibility to initiate suit against any entity violating § 1926(b) by curtailing the borrower's exclusive right to provide water in its service area. 7 C.F.R. § 1782.14(b).

         Sioux filed suit against the City of Watertown and Watertown Municipal Utilities ("Watertown"), seeking protection from loss of customers under § 1926(b). Sioux's suit against Watertown alleges that the City of Watertown has annexed territory and has extended water supply service to areas within Sioux's service territory, taking existing and potential customers from Sioux, in violation of federal law.

         Sioux filed a motion for summary judgment seeking (1) an injunction enjoining Watertown from providing water service to Sioux's current customers, (2) partial summary judgment on the issue of liability as to the provision of services to certain potential customers, (3) summary judgment on the issue of whether Sioux is required to provide fire protection to any customer as a prerequisite for § 1926(b) protection, and (4) summary judgment as to Watertown's affirmative defenses of estoppel, laches, and waiver.

         Watertown filed a cross-motion for summary judgment, contending that Sioux is not entitled to the protection it seeks. Watertown contends that (1) Sioux does not have a legal right to serve customers in the disputed area, and (2) Sioux does not have ...

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