April 22, 2014 Session
An Appeal from the Chancery Court for Obion County No. 30, 034 W. Michael Maloan, Chancellor
James S. Wilder, III, and Scott K. Haight, Dyersburg, Tennessee, for the Appellant, Reelfoot Utility District of Lake County, Tennessee
Joe D. Spicer and Bradford J. Spicer, Memphis, Tennessee, for the Appellee, Samburg Utility District
Damon E. Campbell, Union City, Tennessee, for the Appellee, Hornbeak Utility District
Holly M. Kirby, J., delivered the opinion of the Court, in which Alan E. Highers, P.J., W.S., and J. Steven Stafford, J., joined.
HOLLY M. KIRBY, JUDGE
Facts and Proceedings Below
The underlying facts in this appeal are undisputed. Plaintiff/Appellant Reelfoot Utility District ("Reelfoot") is a utility district located in Lake County, Tennessee. Defendant/Appellee Samburg Utility District ("Samburg") and Defendant/Appellee Hornbeak Utility District ("Hornbeak") are utility districts located in Obion County, Tennessee. All of these utility districts were established pursuant to Tennessee law and are subject to Tennessee law.
In 1965, upon formation of the Samburg Utility District, Samburg and Reelfoot both wanted Reelfoot to supply Samburg's water needs. To this end, Reelfoot extended a water service line to a meter point on the border between Lake County and Obion County. In turn, Samburg installed a water line on the Obion County side to receive water from Reelfoot that would go through the meter.
In 1965, Samburg and Reelfoot entered into the first of three water supply contracts. The first contract was effective from September 1, 1965, through August 31, 2000, a duration of 35 years. Samburg and Reelfoot then entered into a second contract in 2001, effective from August 1, 2001, through July 31, 2006. They entered into the third and final contract in 2008; it was effective from August 1, 2008, through July 31, 2013 ("2008 Contract"). Paragraph 8 of the 2008 Contract indicated a July 31, 2013 termination date: "This Agreement shall remain and continue in effect for a period of five (5) years from and after August 1, 2008, after which Seller [Reelfoot] shall terminate the delivery of water, unless a new Agreement shall be signed by the parties."
All told, Reelfoot provided water to Samburg continuously for over 48 years. Most of this time, one of the three contracts was in effect, but there were some interim periods during which no contract was in effect but Reelfoot nonetheless continued to supply Samburg's water.
In 2005, the Tennessee Department of Environment and Conservation conducted reviews of Reelfoot's infrastructure. The reviews revealed that Reelfoot's system needed upgrading, due in part to Samburg's water demands. In the wake of the reviews, Reelfoot decided to make upgrades to increase storage and resolve difficulties with water flow and water pressure. To pay for the upgrades, Reelfoot borrowed $1.2 million from the State of Tennessee Revolving Loan Fund, payable over 20 years at zero percent interest. Despite the fact that Samburg benefitted from the upgrades, it objected to Reelfoot's loan because Samburg realized that the loan would cause Reelfoot to increase its water prices.
According to Reelfoot, Tennessee's Comptroller of the Treasury required Reelfoot to charge an equity fee to its water customers to ensure repayment of the loan. Consequently, on January 28, 2005, Reelfoot passed a resolution authorizing an equity fee to its customers, including Samburg. Section 7(e) of the 2008 Contract between Reelfoot and Samburg referenced this equity fee:
Seller [Reelfoot] has recently completed a project to upgrade its lines, facilities and the fire protection capabilities for not only the benefit of the Seller [Reelfoot], but also the benefit of the Buyer [Samburg]. As a result, Seller [Reelfoot] has obligated itself to the State of Tennessee for the repayment of a revolving loan at zero percent interest for twenty (20) years. This ...