Note from Jon Mize, NCBA Government & Public Sector Section blog editor: Below please find an article from John C. Cooke examining the implications of a recent North Carolina Court of Appeals case on due process and the vested interest rights applicable to public enterprise customers. The article is shared from the North Carolina Land Use Litigator information initiative (https://nclanduse.blogspot.com/ ) published by Mr. Cooke and Michael C. Thelen.
Sometimes, I read a court’s opinion and put it aside because it is thought provoking beyond its facts and outcome. The case of United States Cold Storage, Inc. v. Town of Warsaw, __ N.C. App. ___, 784 S.E. 2d 575 (April 5, 2016) falls into this category.
United States Cold Storage is interesting from several angles, but this post explores only one – the possibility that governmental utility customers possess due process and common law vested rights to continued utility service.
The facts were simple. United States Cold Storage (USCS) owned a facility located outside the corporate limits of the Town of Warsaw (Town). Through a contract with a county government, USCS secured Town sewer service and a promise that the Town would not annex the facility for seven (7) years.
The Town provided sewer service for seven (7) years. Thereafter, the Town requested USCS to annex its facility into the Town’s corporate limits voluntarily. By annexing the facility into the Town, USCS received other Town services and became obligated to pay property taxes to the Town. In its communication to USCS, the Town stated that if USCS did not voluntarily annex the facility, the Town intended to stop providing sewer service to the facility.
USCS filed a declaratory judgment action requesting the trial court to declare that the Town could not terminate sewer service because USCS had refused to annex the facility into the Town’s limits. After hearing the case, the trial court declared that the Town had no obligation to continue to provide sewer service to the USCS facility. USCS appealed to the North Carolina Court of Appeals.
The majority opinion, written by Judge Dillon, and the dissent, written by Judge Hunter, illustrate two very different understandings of public enterprises – business operations conducted by local governments. The difference is important.
The Two Understandings
The Majority’s Reasoning
The majority opinion relies upon the particular statutes empowering a municipality to own and operate water and sewer systems serving customers within and outside their corporate limits and case law decided under these statutes. The majority concludes that the case of Fulghum v. Selma 238 NC 100 (1953) is a “factually similar case from the middle of the last century.” p. 3. Based upon the majority’s understanding of these statutes and Fulghum, the majority holds that the Town:
- “[H]as the legal right to discontinue sewerage service to the USCS facility, provided thatthe Town is not unfairly discriminating between USCS and other non-residents similarly situated who currently receive sewerage service.” Id. (emphasis by the Court); and
- “[H]as the legal right to condition continued service to USCS’s facility on the voluntary annexation of the facility into the Town’s corporate limits…provided that the Town is not unfairly discriminating between USCS and other non-residents similarly situated who currently receive sewerage service.” Id.
The majority rejects USCS’s contention that Dale v. Morganton, 270 N.C. 567 (1960), another case decided in the last century, applies to USCS. In Dale, the North Carolina Supreme Court held that the Town could not halt utility service to an inhabitant of the Town because of a controversy “which is not related to the service sought.” Dale at 572. The majority observes that the customer in Dale is an inhabitant of Morganton – a municipal taxpayer; whereas, USCS is not an inhabitant and apparently does not want to become a municipal taxpayer. Therefore, like the customer in Fulghum, USCS possesses a right to uninterrupted service only when a town has “obligated itself by contract to provide services.” p. 4 (emphasis by the Court).
The majority’s reasoning understands that public enterprises are unusual statutory creatures – businesses conducted by local governments. As such, the statutes enabling these activities and interpretations of these statutes control.
The Dissent’s Reasoning
Judge Hunter disagrees with the majority’s interpretation of Fulghum and Dale. Specifically, Judge Hunter concludes that Fulghum and Dale stand for the rule that the Town can establish different user rates for inhabitants and USCS, a customer located outside its corporate limits, but the Town cannot stop providing sewer service to USCS for reasons not related to the service sought. Specifically:
[T]he Town of Warsaw did not have a duty to extend sewer services to USCS. However, the Town of Warsaw elected to extend a public utility to an area outside the city. As a result of that decision, the town cannot unreasonably discriminate or discontinue services for a reason unrelated to the provision of the utility itself. p. 6.
If Judge Hunter had ended his analysis at this point, the difference between the judges’ understandings of public enterprises would have been contained within the statutes and case law specifically applicable to public enterprises. But, Judge Hunter provided an additional analysis – the cutting edge theory that the Town had deprived USCS of substantive due process and its common law vested rights.
Judge Hunter’s understanding is that once the Town extended services to USCS, USCS acquired “a protected property right in the continued provision of sanitary sewer service and that the Town of Warsaw arbitrarily or capriciously deprived [USCS] of that property right.” p. 7.
Under Judge Hunter’s analysis, there is no difference between a municipality issuing a permit as a land use regulator and a municipality providing utility service as a business operator. Accordingly:
…[T]the government is wielding its power to achieve its objective, violating the very purpose of due process protections. The government is forcing USCS to submit to “voluntary” annexation or lose access to vital utilities. Such arbitrary and capricious government action is in violation of constitutionally protected due process rights. Id.
- The dissent’s understanding that customers of public enterprises possess due process and common law vested rights is thought provoking. It lacks a basis in public enterprise statutes or case law decided under these statutes, but extends, by logic, the theory that due process applies to all types of governmental actions.
- Judge Hunter’s extension of due process protections to customers of a governmentally owned and operated utility system follows the continuing expansion of common law vested rights by North Carolina appellate courts. Judge Hunter’s phrase of a right “in continued provision of sanitary sewer service” is similar to Justice Newby’s phrase of a right “to continue with an approved use of his land.” See, Town of Midland v. Wayne, ___ N.C. ___, 773 S.E.2d. 301 (2015).
- The legal implications of due process and vested rights applying to public enterprise customers are significant. Here are a few questions which arise:
i. Does the common law vested right arise out of the federal constitution so that a citizen living in Virginia who receives sewer services from a North Carolina municipality possesses the same vested right? Or does it arise out of the common law of North Carolina and a citizen living in Virginia would not possess it?
ii. Can a municipality, which has a right to form a contract with utility customers not located in the municipality, require the customers to waive due process and vested rights as a condition of receipt of services or coerce these future customers into annexing through hard negotiations? Or is this type of contractual negotiation “a government abuse of power”? p. 7.
iii. If customers possess due process and vested rights to receive continued service, are these customers/citizens protected from the General Assembly “wielding its power” by transferring ownership and control of a municipal water system to a service district without their consent? See, City of Asheville, 777 S.E. 2d 92 (2015)(holding that transfer of existing water system serving customers to sewer service district did not violate Law of the Land Clause or exceed authority to take property.
iv. Assume a town grows rapidly and cannot serve all of the people living in the town. Does the town deny service to new inhabitants and continue to service customers who are not inhabitants because they have due process and common law vested rights?
- Public enterprises do not fit neatly into a political theory of smaller government – government should not engage in business activities. But, long ago, the people of this State learned that local governments must fill the gap unfilled by the free market in order to have sufficient water/sewer services. Today, most North Carolina citizens receive water and/or sewer service from local governments.
Both the majority and the dissent recognize that “hard cases are the quicksands of the law.” p. 4; 5. Hard cases encourage innovative analysis because judges feel the hardship in the case and seek to achieve justice. At least one appellate judge would extend substantive due process protection and common law vested rights to customers located outside the municipality providing services. But is that fair to those customers who are the inhabitants (and paying municipal taxes)?
John C. Cooke is a land use and real estate attorney in the Raleigh office of Womble Carlyle Sandridge & Rice, LLP. Follow him on Twitter: @NCLandUseLaw