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Crystal Clear Spec. Util. Dist. v. Marquez

United States District Court, W.D. Texas, Austin Division

November 17, 2017

CRYSTAL CLEAR SPEC. UTIL. DIST.
v.
BRANDY MARTY MARQUEZ, et al.

          HONORABLE LEE YEAKEL UNITED STATES DISTRICT JUDGE

          REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE

          ANDREW W. AUSTIN UNITED STATES MAGISTRATE JUDGE

         Before this Court are Defendant Public Utility Commission Officials' Motion to Dismiss (Dkt. No. 11); Defendant Las Colinas' Motion to Dismiss (Dkt. No. 12); Plaintiff's Response (Dkt. No. 15); Defendant Las Colinas' Reply (Dkt. No. 16); and Plaintiff's Sur-Response (Dkt. No. 18). The District Court referred the above motions to the undersigned Magistrate Judge for report and recommendation pursuant to 28 U.S.C. §636(b)(1)(A), Fed.R.Civ.P. 72, and Rule 1(c) of Appendix C of the Local Rules.

         I. GENERAL BACKGROUND

         Crystal Clear Special Utility District brings this suit against the Commissioners of the Public Utility Commission of Texas (PUC) in their official capacity, [1] PUC Executive Director Brian H. Lloyd, and Las Colinas San Marcos Phase I, LLC, alleging that the PUC's decertification of property within Crystal Clear's certificate of convenience and necessity violated 7 U.S.C. § 1926.

         Congress enacted § 1926 to protect a utility that is a recipient of federal loans from curtailment of its service area and encroachment by municipalities. N. Alamo Water Supply Corp. v. City of San Juan, 90 F.3d 910, 917 (5th Cir. 1996). The statute makes the territory that a federally-indebted water association serves “sacrosanct, ” and specifically requires that

[t]he 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. . . .

Id. at 915; 7 U.S.C. § 1926. Crystal Clear received a federal loan under § 1926, and its CCN granted by the PUC covers about 165 square miles within Hays, Comal, and Guadalupe counties. In September 2016, Las Colinas filed a petition with the PUC under Tex. Water Code § 13.254(a-5) to decertify property it owns that is within Crystal Clear's CCN. This Water Code section allows for expedited decertification of a property meeting certain requirements when it is “not receiving water or sewer service.” Id. The statute directs that “[t]he utility commission may not deny a petition received under Subsection (a-5) based on the fact that a certificate holder is a borrower under the federal loan program.” After the decertification petition was filed, Crystal Clear intervened in the proceedings, arguing that the Texas statute was preempted by 7 U.S.C. §1926 and the PUC should deny the petition. The PUC found that it was required to abide by the state law and granted Las Colinas' petition. Dkt. No. 11-1 at 18. Shortly after, Crystal Clear filed an appeal in state court. Id. at 3. In addition to appealing the order pursuant to the Texas administrative procedure act, Crystal Clear also sought declaratory relief based on claims of federal preemption and ultra vires acts by the PUC, and seeking a construction of the term “service” in the Texas statute. Several months later, and with very little having happening in the state court case until recently[2], Crystal Clear filed this case in federal court, arguing that Tex. Water Code §§ 13.254(a-5) & (a-6) are preempted by 7 U.S.C. § 1926, and therefore unconstitutional. It seeks an injunction and declaratory relief to this effect.

         II. ANALYSIS

         Both the PUC and Las Colinas filed motions to dismiss alleging that (1) the Anti-Injunction Act bars Crystal Clear's claims, and (2) the Court should abstain from deciding this case under various abstention doctrines. The PUC additionally argues that they are immune from suit under the Eleventh Amendment and that the exception recognized in Ex Parte Young does not apply.

         A. Eleventh Amendment Immunity

         First, the PUC argues that Crystal Clear's claims against them are barred by the Eleventh Amendment.[3] Their argument is broken into four distinct points. First, that Ex Parte Young is not applicable to this action. Second, that Crystal Clear lacks standing to seek an injunction because it cannot show an irreparable injury when Tex. Water Code § 13.254 provides for compensation. Third, that Crystal Clear cannot assert a federal right. And finally, that there is an important state sovereignty interest that precludes application of Ex Parte Young. The Court will take each point in turn.

         1. Ex Parte Young

         The Eleventh Amendment precludes suits in which a state agency is named as a defendant. Pennhurst State Sch. & Hosp. v. Halderman, 465 U.S. 89, 100 (1984). This includes suits against state officials when “the state is a real, substantial party in interest.” Id. at 101-02. However, there is a narrow exception to Eleventh Amendment immunity under Ex Parte Young, 209 U.S. 123 (1908), allowing a plaintiff to bring a suit for a violation of the Constitution or federal law when it is “brought against individual persons in their official capacities as agents of the state, and the relief sought [is] declaratory or injunctive in nature and prospective in effect.” Aguilar v. Tex. Dep't of Crim. Justice, 160 F.3d 1052, 1054 (5th Cir. 1998). To decide if the Eleventh Amendment bar is inapplicable under Ex Parte Young, “a court need only conduct a straightforward inquiry into whether [the] complaint alleges an ongoing violation of federal law and seeks relief properly characterized as prospective.” Va. Office for Prot. & Advocacy v. Stewart, 563 U.S. 247, 255 (2011).

         Crystal Clear contends that its claims fall into the Ex Parte Young exception because it asserts a violation of federal law and seeks declaratory and injunctive relief that is prospective in nature against the appropriate state officials, in their official capacity.[4] The PUC disputes this, arguing that Crystal Clear's claims are actually retrospective. However, Crystal Clear's claims for declaratory and injunctive relief are clearly prospective in nature. Crystal Clear alleges that the PUC decertified a portion of its CCN in violation of § 1926 and seeks to enjoin the PUC from enforcing the allegedly unconstitutional decertification order, “which would prospectively abate the alleged violation.” Id. at 255-56; see also Verizon Md., Inc. v. Pub. Serv. Comm'n, 535 U.S. 635, 645 (2002) (“The prayer for injunctive relief-that state officials be restrained from enforcing an order in contravention of controlling federal law-clearly satisfies our ‘straightforward inquiry.'”). Crystal Clear's claims for declaratory and injunctive relief fit squarely within the Ex Parte Young exception and are not barred by the Eleventh Amendment.

         2. Irreparable Injury

         The PUC next argues that Crystal Clear lacks standing to assert a claim for injunctive relief because it cannot show an irreparable harm arising from the decertification. The PUC points to Tex. Water Code § 13.254(a-6) which states that “[t]he utility commission may require an award of compensation by the petitioner to a decertified retail public utility” if it grants a petition filed under § 13.254(a-5). This, they argue, sufficiently compensates Crystal Clear, and thus it cannot show an irreparable injury.

         This argument is based on a flawed understanding of the law governing permanent injunctions. The standard for obtaining a permanent injunction in an express preemption case does not require a showing of irreparable injury, as it is presumed when preemption is established. As the Fifth Circuit has stated several times:

The party seeking a permanent injunction must meet a four-part test. It must establish (1) success on the merits; (2) that a failure to grant the injunction will result in irreparable injury; (3) that said injury outweighs any damage that the injunction will cause the opposing party; and (4) that the injunction will not disserve the public interest. In an express preemption case, however, “the finding with respect to likelihood of success carries with it a determination that the other three requirements have been satisfied.”

VRC LLC v. City of Dallas, 460 F.3d 607, 611 (5th Cir. 2006) (citing Trans World Airlines, Inc. v. Mattox, 897 F.2d 773, 783 (5th Cir.1990)) (citations omitted) (emphasis added). Thus, a district court in Mississippi rejected the irreparable harm argument in a case under § 1926(b). Miss. Rural Water Ass'n, Inc. v. Miss. Pub. Serv. Comm'n, 2014 WL 12540566, at *3-4 (S.D.Miss. Dec. 9, 2014) (finding that any action that violated this statute results in irreparable harm). This argument thus has no merit.

         3. No Federal Right Under § 1926

         The PUC next argues that Crystal Clear cannot assert a federal right under § 1926 for decertification of its CCN because “[a] water utility's right to ‘provide service' or ‘make service available' for purposes of § 1926 arises solely under state law, ” and “Section 1926(b) does not confer any right to a particular service area.” Dkt. No. 11 at 8. According to the PUC, because Texas grants the utility's CCN, any decertification of that area by the state would not curtail or limit the utility's service area protected under § 1926. This argument is directly contrary to the federal statute and applicable case law, and begs the entire question presented by this case. Under § 1926, “[t]he service area of a federally indebted water association is sacrosanct.” N. Alamo, 90 F.3d at 915. This statute is intended to be interpreted broadly. Id. Thus, encroachment in any form, such as “competing franchises, new or additional permit requirements, or similar means, ” is prohibited. Id. (quoting City of Madison v. Bear Creek Water Ass'n, Inc., 816 F.2d 1057, 1060-61 (5th Cir. 1987)). Section 1926(b) plainly grants federally indebted rural water utilities a right to protection against encroachment, and there is no legal support whatsoever for the PUC's claim to the contrary. See Miss. Rural Water Ass'n, 2014 WL 12540566, at *1 (allowing a § 1983 action against the state public service commission for application of a statute that conflicted with § 1926). This argument is meritless.

         4. Important State ...


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