08/09/2014 19 01 FAX 9197924999 @001/om Howard E. Manning, Jr. Superior Court Judge Wake County Courthouse (919) 792-4955 FAX-ONLY MEMORANDUM June 9, 2014 From: Judge Howard E. Manning, Jr. To: Robert 8. Long, Jr. 8. The Hon. Ronald K. Payne at828-253-1073 Daniel G. Clodfelter 8. Jonathan M. Watkins at Faison Hicks. Sp. Deputy AG at 919?-716-?6763_ William Clarke 8. Stephen W. Peterson at 828- . A Re: City of Asheville v, State of North Carolina, et al. 13 R6691 Wake County Subject: Memorandum of Decision and Order Re: Summary Judgment Gentlemen: Enclosed you will find a stamped "filed"'copy of the Memorandum of Decieioni and Ordr Re: Summary Judgment in the Asheville Water System case. The M00 is a "few" pages shorter than my MDO in Sullivan II and Ill entered on Groundhog day 2007. This Fax Only Memorandum serves as the Certi?cate of Service to counsel for the parties. Thank you all for your cooperation and professionalism in this case. it endow: 09/09/2014 19 01 FAX 9197924999 JUDGE W02/gm STATE OF NORTH CAROUNA IN THE GENERAL COURT OF SUPERIOR COURT DIVISION WAKE COUNTY CITY OF ASHEWLLE. a municipal corporation, Plaintiff, . W, V. STATE or NORTH CAROUNA and - -- the METROPOLITAN SEWERAGE DISTRICT OF BUNCOMBE COUNTY. Defendants. I MEMORANDUM OF DECISION AND ORDER RE: SUMMARY JUDGMENT MATTER is before the Court upon the State of North Carolina?s ("the State") motion to dismiss the complaint, and upon cross motions for summary judgment pursuant to Rule 56, North Carolina Rules of Civil Procedure. Additionally, plaintiff. City of Ashevilte ("Ashevil e") has filed a motion for sanctions against the State arising out of discovery matters. These motions were heard at a special session" of the Wake County Superior Court on Friday, May 23, 2014. Before proceeding further it is necessary to provide the following: Factual Background and Procedural History of the Case. The lawsuit; -H . The water Act 2to1ie?5oi9 and as amended by session Law 2013.499, . onlvlay 13; 2013 session became the law in the manners prsvadea in iAni?ue9lr_ bee'n"ado'pte'd'by"' 5 not 9 9 I bonnousesior by ?the The; oltm--yeast later r'?'odifi'e'd: on Augustzs, 29139, after the institution? of .'this'eivil 99999, by session tawzomaa. For purposes omit nemarandumsr Decision and Order (MDO) the Act. ?as amended by the"foregoirig,' wi' l' be referred to as the Act. or The Water Act. Sections 1 and of the initial Act purported to immediately and involuntarily transfer all the assets and debts of the Ashe-vitle Water System to defendant Metropoiitan Sewerage District of Bunoombe County without Ashevilles consent, then to be operated as a "metropolitan water and sewerage district" over Ashevilles strenuous objection, and contrary to the wishes of its citizens as expressed by referendum held in November, 2012. which overwhelmingty opposed any sale or lease of the system. Section 1 05/09/2024 18 01 FAX 9197924939 JUDGE [?003,010 got)? does not make any provision for the transfer of the Water System intangible a33ets?L invaluable components without which the System simply cannot function. Section 2 of the Act creates a new form of poiitical so-calied MWSD. That section permits any two or more local governments to form an MWSD by agreement among them; it allows those governments to choose to contribute their existing water supply. treatment. and distribution systems and their existing sewerage collection and treatment systems to such an MWSD. Asheviite, alone among all local governments in North Carolina, has no choice in the matter. Instead, the New MWSD to operate in Buncombe and Henderson Counties is created by flat of the Water Act, and the assets and debts of the Asheviile Water System are tnvoiuntarity taken from Ashevilte and transferred to the New MWSD by operation of law. Sectionslf and 6 (?by operation of taw") of the Act contain mandatory transfer provisions which currently apply only to the Ash'evil'Ie Water System. lncluded in the debts to be transferred, are Water Bonds issued by Ashevilie. From time to time as required for expansion and upgrades to the Water System, Ashe-ville has issued revenue bonds (the ?Water Bonds") under a General Trust lndenture detect December 1, 2005 (the "indenture") with The Bank of New York (the "Truetee"). The Water Bonds were all issued pursuant to Article 5 of Chapter 159 of the General Statutes and are secured by the net revenues of the Water System. The Water Bonds are not issued by a separate entity; rather, the City of Asheviile is the sole issuer and obtigor on such bonds. Currently, the aggregate principal amount of Water Bonds outstanding is approximately $65,570,000. and the bonds carry a current credit rating of Aa2 from Moody?s and AA from Standard 8. Poor?s. These ratings reflect both the rating agencies? and the general pub ic's strong confidence in the long-standing integrity of AsheviIle's operation and management of the Water System.. . 1 a While? Section Act purports to ?cause the transfer to the?New MWSD of ail existing debtsonfthe Water Systemand the assumption by the New MWSD ofsuch debts "by operation of law,? no "provision ls made anywhere in the Act for obtaining the consentof the Trustee or the bondhoiders to such transfer. The State has declared that the Trustee- and the bondholders must look to a newly created. unrated "successor" to Asheville for repayment of the Water Bonds and performance of the lndenture obligations. The effective date of the act was Mayt5, 2013. What exactly does the Act purport to transfer and take away from the City or Aehevitle? Answer: The entire Ashevllte Water System -- took, stock, barrels, pipes, woodlands and mountain streams as well as transferring the existing debt ($65,570,000) In Water Bonds 08/09/2014 18 02 FAX 9iE ?924989 JUDGE to the "now" MWSD as described above. The Ashe-ville Water System. For over a century Ashevilie has owned, operated, managed, and maintained a system for the supply, treatment, and distribution of water for drinking, cooking, and cleaning purposes, and for the operation of sanitary disposal systems. This Water System supplies water to a diverse customer base, including Ashevilies own residents, residents living in unincorporated areas of Buncombe County, indirectiy by wholesale to residents of other municipalities in Buncombe County, and more recently, to some residents of Henderson County. The Water System has been built and maintained over the past century using a combination of taxes, service fees, connection charges, bonded debt, various federal and state grants, contributions from Buncombe County, and donations from property owners and developers. Asheville owns, operates, and maintains its water system as a pubiic enterprise under NC. Gen. Stat, 160A-311 through By resolution of the Board of Commissioners of Buncombe County (the "County") and by deed. dated May 15, 2012, the County voluntarily conveyed to Ashe-ville ail of the County's ownership interest in various water distribution lines and rotated facilities that had been previously owned by the County. The Water System is no different in its governance and operation from other municipal water systems across North Carolina. The Water Systeminciudes a protected watershed area consisting of over 17,000 acres of mountainous forestlands in Buncombe County, all of it owned by Ashevilie. It is one of the largest municipaliy owned watersheds in the United States. The watershed contains a number of non?navi'gabie streams, including Left Fork Bee Tree Creek, Wolfe Branch. Belt Branch, Right Fork Bee Tree Creek, Sugar Fork, Shute Branch. Long Branch, Saltrock Branch, North Fork Swannanoe River, Giassmine Branch, Stony Fork, Dry Branch, Little Fork, Big Branch, Morgan Branch, as well a's'other'smaiier, unnamed streams. None of the str"eai?ns feeding either? of the two reservoirs in A'shevilie's Water System, Bee Tree Reservoir and North Fork 'Reservoirs is navigable by even the smallest of watercraft, such as a canoe or kayak. Within the watershed area are two impoundments, each of which supports a water t'r'eatrnent plant and which together are capable of treating and supplying a totai of 36 million gallons of water per day. Asheville owns a third water treatment plant located at the confluence of the French Broad and Miils Rivers in Henderson County with a daily treatment capacity of 7 million gaiions of water. The system also includes an additional twenty-?nine treated water storage reservoirs, some 1,660 miles of distribution lines for treated water, and more than forty pump stations. The system currently serves approximately 124,000 customers. some 48,000 of whom are located outside Ashevilie's city limits. 09/09/2014 19 02 mi 9197924939 {?005,010 The Water System is also composed of intangible assets that are essential to its proper functioning but that are not. and cannot be. transferred to the New MWSD by the Water Act. The system has approximately 147 trained and certified employees; numerous licenses and permits required by state and federai law; wholesaie water supply contracts with other municipal entities; operating contracts for the supply of goods and services; and revenue accounts of more than $2,218,000.00 held for the benefit of outstanding public bonds. in addition to the experienced and skiiled workforce, other essential components of the system include well?developed operating procedures and policies, at strong and experienced management structure. and insurance coverage provided by policies held in the name of the City, if allowed to go into effect, Ashevilie contends that the Water Act would break the iinks between the physical assets of the system, which would be transferred to the New MWSD, and these intangible assets, which would remain with Asheviile, thereby destroying the unity and integrity of the Asheville Water System. The Lawsuit by Ashevilie to stop the Act from going into Procedural history up to and Including the May 23, 2014 hearing. This lawsuit was filed before May 15, 2013. The Honorable Donald W. Stephens entered a Temporary R'est'raining Order blocking the Act going into effect. The case was then assigned to this Court pursuant to Local Ruie 2.1 Wake County. The parties, by agreement-,_ extended the TRO pending a hearing on A'sheviile's Motion fora Preliminary Injunction. In the interim, the State of North Carolina? did not file an answer but instead, filed a motion to dismiss pursuant to Rule 12, North Carolina Rules-of'Civil Procedure. In September. 2013, the Court heida hearing on Ashe'ville?s motion for preliminary injunction and the State's motion to dismiss the complaint. The TRO entered by the Honorable Donald W. in May 201' rest'r'airri'ng the iriiplementation ofthe legislationat issue 'rern'ained in effect by consort: of thepaities and Order of this Court. Prior to the September. 2013 hearirig the p'art'ies submitted rnentoranda of law, exhibits-. affidavits and a'uthorities. all of which the Court reviewed prior to the hearing. Following that hearingthe Court, in'cons'ultation"with the parties?-, ?reached an accord that the: parties would engage in discovery, be permitted to file an amended complaint and pleadings, and continue the original TRO in effect in order to have this matter come before the Court upon cross motions for summary judgment based upon undisputed material facts. This procedure made good sense because this case. no matter what the outcome. will be appealed to the appellate division and a decision on summary judgment declaring the rights of the parties under the law would be. in essence, a final judgment on most, if not all issues. 09/09/2914 19 02 FAX 3187924963 COURT JUDGE @003/010 On September 30, 2013, Ashevilte filed its Verified Amended Complaint. On October 31, 2013, the flied its Answer. On November 6, 2013, the State of North Caroiine fiied a Motion to Dismiss and Answer in response to the Verified Amended Complaint. On February 27, 2014, Ashevilie filed its Motion For Partial Summary Judgment and a Motion for Discovery Sanctions against the State of North Carolina. On February 27, 2014, the State of North Carotina filed its Motion for Summary Judgment. On March 14, 2014, the State of North Caroiina filed its Response to Ashevi le's Motion for Partial Summary Judgment. On April 14, 2014, the State of North Carolina filed a Reply in further support of its Motion for Summary Judgment. In addition, both parties have submitted memorandum of few and various replies to the motions for summary judgment. The parties requested that the Court hold a hearing on the motions for summary judgment and the State?s motion to dismiss on May, 23, 2014. The Court, in preparation for the May 23, 2014 summary judgment hearing, spent over 12 hours reviewing the memorenda of iaw, exhibits, affidavits and the iegisiative Act at issue and other materials submitted by the State and Ashevitle, the totai combination of which exceeded approximately one foot" in height notwithstanding the case law submitted by "flash drive.? On May 23', 2014. counsei for-all parties were pr'es'ent'and counsel for the State and Asheville presented oral arguments. The Court. at theoonclusion of the hearing, requested that counsel for the State and Asheville submit by Friday, May 30. a maximum two?-page submission setting for the relief requested by each party (except nominal"defendant' MISD) and from copies of atediaecsuonsin the N. to; Theseiiwere tin1ely"senred.? 1 Thet3ou'rt has'noW"'had "the" time and oppo'rt'uh'i'ty;: 'uh'interrup'ted by other court b'usi'ries's, I eereugniy reuse the arg omens, suitcase earl 'siide's?1in this dispute about From a reviewot the memoranda" of but the state arid_'__ 2 2 Asheville and statements of oounset at the May? 23," 2014 hearing as well as the "record; there is . no genuine issue as to any material facts in this matter that would prevent this Court from ruling on the issues presented as a matter of law pursuant to Rule 56, North Carolina Rules of Civil Procedure. This matter is now ripe for disposition. Decision: The Court has reached a decision on all of Asheviltes Claims For Relief except for the two olairne relating to the Water Bonds. The Court's decision on each oiairn follows: 09/09/2914 18 ea FAX 9197324999 JUDGE [$007,010 First Claim for Relief: The Water Act violates Article It, Section 24(1)(a) of the Constitution of North Carolina which provides as follows: that "[t]he General Assembly shall not enact any local, private, or special act or resolution: [deleting to health, sanitation and the abatement of nuisances.? Article Ii, Section 24(2) of the Constitution of North Carolina provides as foliowst "[n]or shall the General Assembly enact such local. private, or speciai act by the partial repeal of a general law, but the Generai Assembly may at any time repeat local, private or special laws enacted by it.? Article II. Section 24(3) of the Constitution of North Carolina provides as follows: ?[a]ny locai. private, or special act or resolution enacted in violation of the provisions of this Section shall be void.? Article II, Section 24(t)(e) of the Constitution of North Carolina provides that "[t]hat the General Assembly shall not enact any local, private, or special act or resolution: [r]relating to non- navigable streams." Decision on For Relief. The Court based. upon the undisputed material facts of record, concludes as a matter of law that: The Water Act is a local act which was specificaliy drafted and amended to apply only to Asheville and the Ashevitle Water System 2. The Water Act is a locai act relating to the treatment and supply ofwater for drinking, cooking and cleaning purposes, and for the operation of sanitary disposai systems which is applicable only to Asheville and the Asheviile Water System and therefore is a local act which relates to health and sanitation in violation of Article II. Section 24(1)(a) of the North Carolina Constitution. I 3. The Water Act is a toast act relating to non-?navigable streams and is applicable only to Asheville and the Asheville Water System in violation of Article II, Section 24(1 of the North. Caroiina Constitution. 4. The Water Act. a focal act-, was enacted in violation of the provisions of Article Ii, Section and Section 24(1)(3) and pursuant to Article ll. Section 24(3) of the North Carolina Constitution is void, of no force and effect. Second Claim For Reiief: The Water Act violates Article I, Section 19 of the Constitution of North Caroiina in that the Act takes, without Asheville's consent, the Water System and transfers the Water System to another entity without any rationai basis for doing so. Decision on Second claim For Relief. The Court based. upon the undisputed material facts of record, concludes as a matter of law that: 1. Asheville, in its ownership and operation of the Water System. pursuant to Article 14A of 6 08/09/2014 18 03 FAX 818?924968 JUDGE @003/010 Chapter 160A of the N.C. General Statutes, acts in a proprietary capacity and function. Acting in a proprietary capacity with respect to the Water System. Asheville is entitled to the protections of Article i, Section 19 of the North Carolina Constitution as a private individual or corporation engaged in a similar business enterprise. Ashbury v. Albemarle, 162 N. C. 24 7(1913); Candler v. City of Asheville, 24 7 N. C. 398(1958). 2. The Water Act, by operation of law, transfers the assets and debts of the Ashevtlle Water System without consent and over the objection of Asheville, the Water System's owner. The transfer of the entire Water System required by the Water Act results in no change in the existing uses or purposes currentty served by the Asheville Water Systems. 3. section 1 of the Act lacks a rational basis for selecting the Asheville Water System and subjecting the Water System to treatment different from that provided under the Act for all other publicly owned water systems in North Carolina and fails to make a reasonable classification as required bylaw. 4. The Water Act lacks a rational basis, including, but not limited to the fact that (3) the use of the assets of the Water System wilt not change under the transfer; (to) the transfer to the new "owner? the MSWD, will not result in any higher quality of water that is now provided by the Ashevilte Water System; the Water Act does not expand or improve protection of health and sanitation beyond that now being provided by the Asheville Water System; the new "owner" of the Asheviile Water System is an entity that has never owned or operated a public water supply" and delivery system; The Water Act removes ownership of a proprietary function of local government which operates similar to a public corporate entity by simply taking the Water System away from the City of Ashevitle by force or law and "without" a rational -The Water Act" is. contraw to "the" law of the land in l, 'Se?cti"oin' 19 of the a North Carolina Constitution ?as? the rnea'ns? utilized to aeliaewhat A to obtain bears maternal, rational basis orsothsmese; stated? purses. A A A The Third Claim for Relief: The Water Act violates Article i, Sections 19 and 35 of the Constitution of North Carolina in that- the Water Act transfers the Water System, a proprietary function of the City of Asheville, to the MWSD, resulting an unlawful taking of the Asheviile Water System, which system is to be used for the some purposes as the Asheville Water System is presently being used. Decision on Third Claim For Relief. The Court based. upon the undisputed material facts of record, concludes as a matter of law that: as/o9x2o1a 18 03 FAX 9197924963 JUDGE [?003,010 1. Ashevilte in its ownership and operation of the Water System, pursuant to Artists 14A of Chapter 160A of the No. General Statutes, acts in a proprietary capacity and function. Acting in a proprietary capacity" with respect to the Water System, Asheville is entitled to the protections of Article 1, Sections 19 and 35 of the North Carolina Constitution as a private individual or corporation engaged in a similar business enterprise. Ashbury v. Albemerle, 162 N. C. 247(1913); Candler v. City omshevi?e, 247 NC. 398(1958). 2. The Water Act. by operation of law, transfers the assets and debts of the Ashevitle Water System without consent and over the objection of Asheville, the Water System's owner. The transfer of the entire Water System required by the Water Act results in no change in the existing uses or purposes currently served by the Asheville Water Systems. The Water Act's transfer of the entire Water System. reduced to essentials. amounts to a taking of ail the assets and debts of a proprietary municipal business from Asheviile and places the assets and debts in the ownership of another entity. Consider the impact of the enactment of a statute requiring SAS to transfer its entire proprietary corporate business and its control to a competitor. another proprietary corporate business without consent for an alleged public purpose in favor of cutting costs and consolidation of business resources. 3. The Water Act is not a valid exercise of the sovereign power of the legislative branch of government (or the State of North Carolina) to take ?or condemn property for a? public use where here, the property (the Water System) is being used for the some purposes as are intended to be done by the transfer of the Water System to the MWSD. 4. The Wate'r'Act violates Article i, Sections 19 and :45 of the North Carolina Constitution. The Sixth (Alternative) For Relief. The weterincti violates Anise "l.?srectio?ns '19-and 35; or the Constitution? of North" Caroiina by trensferring the Water "System to MWSD without just compensation. Decislon on sixth For Relief. The? com basedt, upon the undisputed materiai facts of record, concludes as a matter of law that in the event? that hay be ?Kt cf? (?pt determined that the Water Act is a valid exercise of the sovereign power of the State of North to? Caroiina to take the Asheville Water System in the manner set forth in the Act then Asheville, as the owner of the Ashevitle Water System, is entitled to be paid just compensation for the Asheville Water System which current audited finenctai statements asses as its Net Asset Value to be greater than One hundred rnitlion dollars (Veri?ed Amended Complaint, p.75.) State Highway Cornm'n v. Greensboro Bd of Educ, 265 N. C. 35, 49 (1965). The Fourth and Fifth Claims for Relief attack the constitutionality of the Water Act on the 06/03/2014 16 03 FAX 9137924983 basis that the Act. if implemented would violate Article I, Section 10 of the United States Constitution prohibiting states from passing any law which wouid impair the obligation of contracts and Article l. Section 19 of the North Carolina Constitution which prohibits the State from impairing the obligation of contracts. Bnoadfoot v. City of Fayettevile, 124 N. C. 472 (1899). Because of the decisions of the Court above, the Court declines to address these two claims. IT IS, THEREFORE, ORDERED, ADJUDGED AND DECREED THAT: 1. That the Water Act is in violation of Article ll, Section 24(1)(a) and Article ll, Section 24(1)(e) and pursuant to Article Ii, Section 24(3) of the North Carolina Constitution is void and unenforceable. 2. The Water Act is contrary to theiaw of the land in violation of Article i, Section 19 of the North Carolina Constitution as the means to achieve what the legislation sought toobtain bears no relation?, rationai basis or otherwise. to the Act's stated purpose and is void and unenforceable. 3. The Water Act is not a valid exercise of the sov'er'ei'gn power of the legislative branch of government (or the State of North Carolina) to take or condemn property for a public use where here-, theproperty (the Water System) is being used for the some purposes? as are intended tobe done by the transfer of the Water System? to the MWSD. The Water Act violates Article I, Sections 19 and 35 of the North Carolina Constitution and is void and unenforceable. 4. The City of Motion For Partial Summary Judgment as to the First. Second, Third and its Alternate Sixth Claims for Relief is granted. 5. That the State of North Carolina's Motion to Dismiss the compiaint is denied. 6, That the State of North Carolina's Motion for Summary Judgment as to all Claims for Relief is ?denied. 9 i A 7. That the City or 'As'heviil"e"'s' Motion for l)iacover'y' Sanctions? is denied}- s. That the State of North Caroiiha iepermanently enjolrtedtrom implertienting or attempting to implement The Water Act. . Thisthe C1 day9oraone,2to14.i 9 Howard E. Manning, Jr. 7 Superior Court Judge