Friendship Water Co. v. City of Friendship, Tennessee ( 2022 )

10/10/2022
IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
April 19, 2022 Session
FRIENDSHIP WATER CO. V. CITY OF FRIENDSHIP, TENNESSEE
Appeal from the Circuit Court for Crockett County
No. 2018-CV-3459 Clayburn Peeples, Judge
___________________________________
No. W2021-00659-COA-R9-CV
___________________________________
This is an interlocutory appeal considered pursuant to Rule 9 of the Tennessee Rules of
Appellate Procedure. Specifically at issue is the trial court’s ruling that a contract entered
into between the parties is valid and enforceable. The City of Friendship insists that the
contract at issue, which involves its purchase of a water distribution system, is void due to
the operation of the Municipal Purchasing Law of 1983, Tenn. Code Ann. § 6-56-301 et
seq. For the specific reasons stated herein, we respectfully reject the City’s argument and
affirm the trial court’s holding that the contract at issue is enforceable.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court
Affirmed and Remanded
ARNOLD B. GOLDIN, J., delivered the opinion of the Court, in which KENNY ARMSTRONG
and CARMA DENNIS MCGEE, JJ., joined.
S. Leo Arnold and Matthew W. Willis, Dyersburg, Tennessee, for the appellant, City of
Friendship.
James S. Wilder, III, Christine A. Coronado, and Becky Dykes Bartell, Dyersburg,
Tennessee, for the appellee, Friendship Water Co.
OPINION
BACKGROUND AND PROCEDURAL HISTORY1
1
The order at issue in this appeal was entered in the context of summary judgment proceedings.
Some of the facts established at summary judgment were “[a]dmitted for [p]urposes of the pending [m]otion
. . . [o]nly.”
This case concerns the enforceability of a contract entered into over three decades
ago by the Friendship Water Co. (“the Company”) and the City of Friendship, Tennessee
(“the City”). The contract at issue, which is titled “Agreement for Purchase and Sale” and
dated November 6, 1989, recites that “Company desires to sell and City desires to purchase
Company’s [water] distribution system together with three (3) tracts of real property . . .
owned by Company and more particularly described on Exhibits A, B and C attached
hereto for the consideration and under the terms and conditions hereinafter set forth.” The
contract then goes on to provide that:
Now, therefore, for and in consideration of the undertakings and
obligations of City and Company set forth hereinbelow, the parties do hereby
mutually agree as follows:
1. Company agrees to sell and City agrees to purchase Company’s
distribution system which includes all underground water mains and a steel
water storage tank of approximately 150,000 gallons but excludes
Company’s pumping system which shall remain an asset of Company.
Company’s water mains begin at Company’s master meter and continue
throughout the city limits of the City of Friendship but do not include any
customer service lines which are owned by individual customers.
2. City agrees to pay Company the sum of $13,500.00 for the
distribution system and three (3) Lots. Payment shall be in cash at closing.
3. City agrees to purchase Water from Company for a period of
ninety-nine (99) years from closing. City further agrees that during that
period of time it will purchase Water from no other source nor will it provide
its own pumping facility so long as Company provides Water to City. For
purposes of this Agreement, Water shall be defined as Water in its natural
state together with the addition of such amounts of chlorine as may now or
hereafter be required by the Tennessee Department of Health and
Environment. Any other treatment which may be required by any
governmental authority shall be the responsibility of City and shall be applied
to the Water by City after the Water has passed through Company’s master
meter.
....
5. During the ninety-nine (99) year period, Company agrees to pay all
of the cost of pumping Water to Company’s master meter only including, but
not limited to, all labor and electricity for the operation of the pumps, product
liability insurance premiums, governmental taxes on pumping facilities and
equipment, chlorine, water analysis, office expense, and water operator
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licenses and dues. Company will maintain and/or replace the wells and
pumps as necessary to provide Water to City so long as it is the owner of the
pumping facilities.
Prior to the approval of the contract for purchase and sale by the Board of Mayor
and Aldermen, numerous proposals and plans had been pursued and considered regarding
the operation of waterworks in the City, and included the participation of the Comptroller
of the Treasury, the State Director of Local Finance, and the State Attorney General. The
parties’ dealings under their contract proceeded without incident for many years, and in
2014, they specifically executed an addendum to adjust payment rates. Upon testing, in
August 2016, however, a contaminant known as tetrachloroethylene was detected in the
water supply. The following year, on July 28, 2017, the Company was notified through
counsel that the City deemed the Company to be in breach of their contract. The City took
steps to develop its own wells, and by letter dated September 6, 2017, it was advised by
the Tennessee Department of Environment and Conservation that its wells were approved
for use. The City then terminated its contract with the Company on September 11, 2017.2
The present litigation later commenced on March 1, 2018, when the Company filed a
complaint against the City in the Crockett County Circuit Court (“the trial court”),
asserting, among other things, a claim for breach of contract.
As discussed in greater detail below, the City has argued in this case that the parties’
contract is void, specifically complaining that the contract was entered into in violation of
the Municipal Purchasing Law of 1983 (“the Purchasing Act” or “the Act”), Tenn. Code
Ann. § 6-56-301 et seq. Following the Company’s filing of a motion for partial summary
judgment with respect to certain issues, the trial court ruled in a July 22, 2019, order that
the contract between the parties is legal, contrary to the position taken by the City. An
interlocutory appeal pursuant to Rule 9 of the Tennessee Rules of Appellate Procedure
ensued soon thereafter, but when this Court reviewed the matter, we concluded that the
prior appeal had been “improvidently granted as framed” and further observed that the trial
court’s order did not provide a satisfactory explanation relative to its conclusion.
Friendship Water Co. v. City of Friendship, No. W2019-02039-COA-R9-CV, 2020 WL
4919796, at *3-4 (Tenn. Ct. App. Aug. 21, 2020). We therefore dismissed the appeal and
cautioned the trial court that, on remand, it “should endeavor to more clearly articulate the
legal grounds upon which it granted the motion, lest any future appeal . . . be potentially
hindered by the lack of explanation exhibited by the order in its current form.” Id. at *4-
5.
2
Counsel for the City stated at oral argument that the City was “between a rock and a hard spot” at the
point in time the contract was terminated, as counsel acknowledged that the City at the time had no other
ability to distribute water other than through the distribution system purchased pursuant to the parties’
contract.
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On remand, the Company filed an amended motion for partial summary judgment,
arguing that the parties’ contract was valid and enforceable. In connection therewith, the
Company specifically confronted the City’s position in this case that the parties’ contract
was formed in violation of the Purchasing Act. Pursuant to the terms of the Purchasing
Act, assuming it applies, “all purchases and leases or lease-purchase agreements shall be
made or entered into only after public advertisement and competitive bid.” Tenn. Code
Ann. § 6-56-304. The Company offered a number of specific arguments in support of its
position that the Purchasing Act posed no impediment to the contract in this case, including
contending that the contract fell within the purview of certain exceptions under the
Purchasing Act. The City opposed the Company’s position and argued to the trial court
that the parties’ contract was void due to a lack of competitive bidding. In support, the
City noted that it had not advertised or solicited bids as allegedly required of it under the
Purchasing Act.
The trial court subsequently entered an order in favor of the Company regarding the
amended motion for partial summary judgment, concluding in relevant part as follows:
3. The Cou[r]t finds that the 1989 Agreement was a valid and enforceable
contract.
4. The parties agree that the 1989 Agreement is a facially valid contract.
5. The Cou[r]t finds that the City of Friendship had the capacity, power and
authority to enter into the Agreement with the Company.
6. Pursuant to TCA § 7-35-401(a) a City is “authorized and empowered to
own, acquire, construct, extend, equip, operate and maintain within or
without the corporate limits of such city or town a waterworks system or a
sewerage system, to provide water or sewerage service and to charge for such
service.[”] The 1989 Agreement contains the essential elements of a valid
contract under Tennessee law.
....
9. The Company sold its distribution lines, real property and water storage
tanks in consideration for an exclusive right to sell water to the City for 99
years.
....
11. There is no requirement in the Waterworks Statutes, TCA §§ 7-35-401
et[] al. for the City to solicit bids when acquiring a waterworks system.
Specifically, TCA § 7-35-423 states that it is an “additional and alternate
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method for the acquisition of waterworks or a sewerage system by an
incorporated city or town and does not include, amend, alter or repeal any
other statute.” Both Zirkle v. Kingston, 217 Tenn. 210 (Tenn. 1965) and
Selmer v. Allen, 166 Tenn. 476 (Tenn. 1933) hold that TCA § 7-35-423 is
constitutional and that the Waterworks statutes are complete within that
specific section of code. Therefore, the Municipal Purchasing Act does not
apply to the acquisition of a waterworks system, and does not apply to the
1989 Agreement that is the subject of this case. (TR 683-685)
Regarding the issue of exceptions under the Purchasing Act, the trial court further
stated as follows:
13. TCA § 6-56-304(2) provides that all purchases shall be made or entered
into only after public advertisement or competitive bid except when the
goods may not be procured by competitive means because of the existence
of a single source of supply. At the time of the 1989 Agreement, the
Company was the single source of supply of a waterworks system for the
City, and therefore this Agreement is an exception to the Municipal
Purchasing Act and is a valid and enforceable contract.
14. As to the question of competitive bidding, TCA § 6-56-304(2) provides
that all purchases shall be made or entered into only after public
advertisement or competitive bid except when the goods may not be procured
by competitive means because of the existence of a proprietary product. The
court finds that at the time this contract was entered into, the distribution
system purchased by the City was the proprietary property of Friendship
Water Company, and that as a result, the 1989 Agreement is an exception to
the Municipal Purchasing Act and is a valid and enforceable contract.
Furthermore, TCA § 6-56-304(5) exempts “purchases, leases, or lease-
purchases of real property” from the requirements of the Municipal
Purchasing Act. The 1989 Agreement involved the sale of three tracts of real
property, owned by the Company, to the City. The City purchased three
parcels of real estate from the Company. The Court finds that the purchase
and sale of the real estate was an essential element of the 1989 Agreement,
and therefore cannot be severed from the other portions of the contract. This
sale of the real property was a significant consideration for the Company’s
99 year exclusive lease to sell water to the City, and because of this also, the
1989 Agreement was an exception to the Municipal Purchasing Act, and is a
valid and enforceable contract.
The City again sought to pursue an interlocutory appeal, and the trial court later
entered an order to allow it, specifically opining that an interlocutory appeal “would best
serve the economic interests of the parties, and the Court.” Following the subsequent filing
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of an application in this Court by the City seeking review under Rule 9 of the Tennessee
Rules of Appellate Procedure, we granted an interlocutory appeal limited to the following
issue: “Whether the contract between the parties is legally void as violative of the
competitive bidding statutes codified at Tenn. Code Ann. § 6-56-302 and Tenn. Code Ann.
§ 6-56-304, or is a valid and enforceable contract.”
STANDARD OF REVIEW
The issue before us was decided by the trial court in connection with a motion for
partial summary judgment. “[A]ppellate review of a trial court’s summary judgment
decision is de novo without a presumption of correctness.” Regions Bank v. Prager, 625
S.W.3d 842, 849 (Tenn. 2021).
DISCUSSION
The City’s position in this case is that, notwithstanding its entry into the contract at
issue and performance under it for several decades, the contract is void and unenforceable
due to the operation of the Purchasing Act. As noted earlier, the Purchasing Act generally
requires public advertisement and competitive bidding for municipal purchases, Tenn.
Code Ann. § 6-56-304, and the City notes that it entered into the contract at issue without
public advertisement or bidding. The Company, on the other hand, argues that the parties’
agreement was not made in violation of competitive bidding requirements. It argues that
the contract was “made within the authority of the Waterworks statute, TCA § 7-35-401
et[] seq., which does not require the City to advertise or solicit bids in its effectuation of
establishing a waterworks system.” It accordingly argues that the Purchasing Act does not
even technically apply to the parties’ contract. Independent of its specific reliance on the
provisions found at Tennessee Code Annotated section 7-35-401 et seq. (generally
referenced herein as “the Waterworks Statute”), the Company further argues that multiple
exceptions under the Purchasing Act apply to the agreement at issue. The trial court’s order
reflects that it found favor in the Company’s various arguments, stating, as we quoted
previously, that the “Municipal Purchasing Act does not apply to the acquisition of a
waterworks system,” while at the same time concluding that the parties’ contract was
excepted from the Purchasing Act for various reasons. The City challenges each of these
holdings on appeal. The Company and City have also offered arguments concerning the
potential relevance that the provisions in the Revenue Bond Law, Tennessee Code
Annotated section 7-34-101 et seq., have to the defined issue on appeal.3 Whereas the City
maintains its position that the contract here is void due to the operation of the Purchasing
3
These arguments were offered following this Court’s entry of an order wherein we stated that “in
this appeal which concerns the powers of a municipality in contracting for a water distribution system, it is
in the public interest that the effect of the Revenue Bond Law be considered.” We noted therein that “the
potential applicability of the Revenue Bond Law’s provisions, like the [Company’s] argument under
Tennessee Code Annotated section 7-35-401 et seq., is subsumed under the general issue for which we
granted review.”
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Act, the Company argues that the Revenue Bond Law supports its position that the entry
into the contract at issue was not encumbered by the advertising and bidding requirements
cited by the City.
We will address each of the parties’ arguments as is necessary to the disposition of
this appeal, and we begin by focusing on the Company’s reliance on the Waterworks
Statute and the Revenue Bond Law.4 At the time of the execution of the parties’ contract,
the Waterworks Statute provided in relevant part as follows:
Every incorporated city and town in this state is authorized and empowered
to own, acquire, construct, extend, equip, operate and maintain within and/or
without the corporate limits of such city or town a waterworks system and/or
a sewerage system, to provide water and/or sewerage service and to charge
for such service.
Tenn. Code Ann. § 7-35-401(a). As defined by the statute, a “waterworks system” included
“all or any part of the following: source of supply, pumping facilities, purification works,
storage facilities and distribution system, together with all necessary parts and
appurtenances for proper operation.” Tenn. Code Ann. § 7-35-401(b)(2).
The Waterworks Statute further stated that:
This part shall be deemed to create an additional and alternate method for the
acquisition of waterworks and/or sewerage system by any incorporated city
or town, and shall not be deemed to include, amend, alter or repeal any other
statute. No proceedings shall be required for the acquisition of any
waterworks and/or sewerage system hereunder, or for the issuance of any
bonds hereunder, except such as are provided by this part, any provision in
the general or private laws of the state of Tennessee or charter of any city or
town to the contrary notwithstanding.
Tenn. Code Ann. § 7-35-432.
The Company reasons that because the Waterworks Statute itself did not explicitly
require the City to advertise or solicit bids to effectuate the purchase of a waterworks
system, the parties’ contract was “not made in violation of the competitive bidding statutes
and is not void as argued by the City.” Moreover, as the Company has noted, the trial
court’s ruling referenced prior reported case law for the proposition that “the Waterworks
statutes are complete within that specific section of code.” In one of the relied-upon cases,
the Tennessee Supreme Court had remarked that the Waterworks Statute was “not
4
Arguments which are not expressly resolved are pretermitted in light of the specific discussion
contained herein.
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dependent upon any other statute.” Selmer v. Allen, 63 S.W.2d 663, 664 (Tenn. 1933).
The City argues, however, that, “[w]hen read correctly, [the Waterworks Statute] does
nothing more than give a waterworks or sewage board the authority to function as
otherwise allowed by, or restricted by, the prevailing statutes of the State of Tennessee,
including [the Purchasing Act].”
Assuming arguendo that the City is correct as to this precise question regarding the
narrow interplay between the Waterworks Statute and the Purchasing Act, other statutory
authority within the Tennessee Code indicates that the purchase of a water distribution
system is not subject to the competitive bidding requirements of the Act. Indeed,
irrespective of the impact of the Waterworks Statute specifically vis-à-vis the Purchasing
Act, the Revenue Bond Law clearly operates in our view to permit a municipality to acquire
a waterworks system in a manner that is not encumbered by the complained-of bidding and
advertising requirements.
The Revenue Bond Law, which is in the chapter immediately preceding the
Waterworks Statute in the Tennessee Code, provided in relevant part as follows at the time
the parties’ 1989 contract was executed:
In addition to powers which it may now have, any municipality shall have
power under this chapter:
(1) To construct, acquire by gift, purchase, or the exercise of the right
of eminent domain, reconstruct, improve, better or extend any public
works, within or without the municipality, or partially within or partially
without the municipality, and to acquire by gift, purchase, or the exercise of
the right of eminent domain, lands or rights in land or water rights in
connection therewith[.]
Tenn. Code Ann. § 7-34-104(1) (emphasis added). “Public works,” as then-defined, meant:
[A]ny one (1) or combination of two (2) or more of the following: water,
sewerage, gas or electric heat, light or power works, plants and systems or
parking facilities, together with all parts thereof and appurtenances thereto
including, but not limited to, supply and distribution systems, reservoirs,
dams, sewage treatment and disposal works and generating plants.
Tenn. Code Ann. § 7-34-102(3). Further, and as is of especial importance here, the
Revenue Bond Law stated as follows concerning its relation to other legal authority:
The powers conferred by this chapter shall be in addition and supplemental
to, and the limitations imposed by this chapter shall not affect, the powers
conferred by any other general, special or local law. Public works may be
acquired, purchased, constructed, reconstructed, improved, bettered, and
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extended, and bonds may be issued under this chapter for such purposes,
notwithstanding that any general, special or local law may provide for the
acquisition, purchase, construction, reconstruction, improvement, betterment
and extension of a like public works, or the issuance of bonds for like
purposes, and without regard to the requirements, restrictions,
limitations or other provisions contained in any other general, special or
local law, including but not limited to, any requirement for the approval by
the voters of any municipality.
Tenn. Code Ann. § 7-34-118 (emphasis added).
As we construe it, the above language from Tennessee Code Annotated section 7-
34-118 appears to provide a clear signal that “requirements, restrictions, [and] limitations,”
such as those at issue in the Purchasing Act, do not circumscribe or govern the acquisition
or purchases of public works. Beyond the clarity of the plain language utilized in the
statute, we note that a like understanding has previously been accorded to similar statutory
language in reference to competitive bidding laws. See Shankle v. Bedford Cty. Bd. of
Educ., No. 01-A-01-9609-CH-00387, 1997 WL 83662, at *5 (Tenn. Ct. App. Feb. 28,
1997) (discussing Tennessee Code Annotated section 12-10-122[5] and holding that the
provision, with respect to the “acquisition, purchase, construction, reconstruction,
improvement, betterment, or extension of projects,” “clearly exempts public building
authorities from any other general, special, or local laws including competitive bidding
laws”).
The City argues that the authority in the Revenue Bond Law cannot be considered
to apply here, however, because, among other things, “[t]he contract . . . at issue was not
funded in any manner which implicated the Revenue Bond Act.” In support of this
position, the City argues that the transaction was “funded through a loan secured from a
private bank.” We agree with the Company that the City’s argument to this end is without
merit, as we fail to see how the provisions in the Revenue Bond Law can only be implicated
when bonds have been issued. Section 118 contains specific language stating that “bonds
may be issued under this chapter” for certain purposes municipalities are empowered to
carry out under the statute. Tenn. Code Ann. § 7-34-118 (emphasis added). It does not
5
As quoted in Shankle, this statute reads in part as follows:
Projects may be acquired, purchased, constructed, reconstructed, improved, bettered and
extended and bonds may be issued under this chapter for such purposes, notwithstanding
that any other general, special or local law may provide for the acquisition, purchase,
construction, reconstruction, improvement, betterment and extension of a like project, or
the issuance of bonds for like purposes, and without regard to the requirements, restrictions,
limitations or other provisions contained in any other general, special or local law.
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state that they must be.6 Moreover, we observe that the Office of the Attorney General has
previously opined that the Revenue Bond Law “generally [does not] require[] a
municipality to issue bonds in order to be able to exercise the statutory powers.” Tenn.
Op. Atty Gen., No. 92-71, 1992 WL 545048, at *2 (Dec. 28, 1992).
Beyond the above considerations, the Company has argued, as noted previously,
that various exceptions under the Purchasing Act actually apply in this case. At the time
the parties’ contract was entered into, the Purchasing Act specifically excepted, among
other things, the following from public advertisement and competitive bidding:
(2) Any goods or services which may not be procured by competitive
means because of the existence of a single source of supply or because of
a proprietary product. A record of all such sole source or proprietary
purchases shall be made by the person or body authorizing such purchases
and shall specify the amount paid, the items purchased, and from whom the
purchase was made. A report of such sole source or proprietary purchases
shall be made as soon as possible to the municipal governing body and the
chief executive officer of the municipality and shall include all items of
information as required for the record.
....
(5) Purchases, leases, or lease-purchases of real property[.]
Tenn. Code Ann. § 6-56-304 (emphases added).
As is evident from our earlier discussion of the contract, the primary focus and
purpose of the parties’ agreement, the “Agreement for Purchase and Sale,” was on the
acquisition of a water distribution system and associated real property by the City, as the
contract began by reciting that “Company desires to sell and City desires to purchase
Company’s [water] distribution system together with three (3) tracts of real property . . .
owned by Company and more particularly described on Exhibits A, B and C attached
hereto for the consideration and under the terms and conditions hereinafter set forth.”
(emphasis added) In addition to the fact that the acquisition of the distribution system was
not encumbered by the Purchasing Act for the reasons previously stated herein, it is clear
that the purchase of the real property also did not necessitate any competitive bidding per
the codified exception at Tennessee Code Annotated section 6-56-304(5). Thus, the
primary purpose for which the agreement was entered into, i.e., the acquisition of
waterworks and associated real property, did not require any competitive bidding
6
The Company has also noted that the statute actually references the ability to “acquire by gift,”
Tenn. Code Ann. § 7-34-104(1), an action and power that obviously does not entail financing given what a
gift connotes.
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concerning either aspect of the City’s objective, and the contract was financially structured
to provide consideration for the City’s purchases by (1) initial monetary consideration at
closing and (2) additional consideration in the form of an agreement to purchase water.
Because we conclude that competitive bidding was not required given the predominant
purpose of the contract, we respectfully reject the City’s argument on appeal that the
contract is void and therefore affirm the trial court’s judgment that the contract was valid
when it was entered into by the parties.
CONCLUSION
For the specific reasons discussed above, we hold that the parties’ contract was a
valid agreement that the parties could enter into in the absence of competitive bidding and
accordingly affirm the trial court’s judgment on that question. Given the limited scope of
this interlocutory appeal, we express no opinion regarding other questions and concerns
that are at issue in this litigation. The case is hereby remanded to the trial court for further
proceedings as may be necessary and are consistent with this Opinion.
s/ Arnold B. Goldin
ARNOLD B. GOLDIN, JUDGE
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