Court Opinion

ID: 6933988
Source: CourtListenerOpinion
Date Created: 2022-07-24 00:21:05.290313+00
Date Added: 2024-06-11T16:07:21.487427
License: Public Domain

EDITH H. JONES, Circuit Judge,
with whom, JERRY E. SMITH and DeMOSS, Circuit Judges,
join, dissents from the Denial of Rehearing En Banc:
The panel opinion and opinion on rehearing in this ease have, under the rubric of “frustration preemption,”1 approved a breathtaking federal power-grab by REA from local government units that otherwise enjoy broad eminent domain authority. Neither the REA nor its regulations contemplate preemption of this quintessential local power — the agency’s regulations in fact assume the opposite.2 That REA lacks broad preemptive authority was emphasized by the Supreme Court’s rebuff of agency efforts to thwart local electrical rate regulation. Arkansas Electric Cooperative v. Arkansas Public Service Commission, 461 U.S. 375, 103 S.Ct. 1905, 76 L.Ed.2d 1 (1982). Surely, if state rate regulation is permitted, though it contains the power to hobble a federally financed cooperative,3 then the eminent domain power — exercisable only on payment of just compensation — has not been overridden by statute or, even more vaguely, by a con-clusional judicial stamp labelled “firustration of purpose.” Because the panel opinion has given REA authority that Congress clearly denied it and that the Supreme Court, I am confident, has also withheld, I respectfully dissent from the denial of en banc rehearing.
By relying on the notion of frustration preemption, the original panel opinion held that Morgan City’s attempted annexation of customers from SLECA, an REA-financed rural electrical cooperative, must fail because it might impair SLECA’s ability to repay REA’s loans. Curiously, that opinion never cited Arkansas Electric, the critical Supreme Court decision concerning preemption of local regulatory authority under the Rural Electrification Act. Only in its rehearing opinion does the panel attempt to grapple with the implications of Arkansas Electric. To me, that case is fatal to the panel’s decision.
In Arkansas Electric, the Supreme Court rejected an implied preemption argument *1077nearly identical to that advanced here. REA argued that local rate regulation may “frustrate important federal interests”:
[I]n passing on rate questions, the REA considers, not only the security thus afforded for payment of the loan, but also the suitability of the rates and structure to the Act’s underlying purpose of facilitating the availability of cheap electric power in rural America.
The spectre of state regulation poses a threat to the REA loan because of the possibility that the state may refuse to permit its cooperatives to pay a generation and transmission association the rates to which they agreed and upon the security of which the loan was issued. Moreover, the policy behind the Rural Electrification Act is at stake ... [T]he REA has always encouraged its borrowers to establish affordable rates for all of its subscribers. In this way, costs are shared in a manner which, over the long run, benefits all by the creation of a sound, extensive rural electric system.
Arkansas Electric, 461 U.S. at 385-86, 103 S.Ct. at 1913 (omissions in original).
To REA’s policy arguments, the Court responded, first, that, “[A]lthough the REA was expected to play a role in assisting the fledgling rural power cooperatives in setting their rate structures, it would do so within the constraints of existing state regulatory schemes.” Arkansas Electric, 461 U.S. at 386, 103 S.Ct. at 1913 (citing legislative history of 1936 Act) (emphasis added). Second, the Court noted that REA’s presently published policy was inconsistent "with preemption of state regulatory jurisdiction. Id. at 387-88, 103 S.Ct. at 1914. Third, responding to the possibility that state regulation of rates could jeopardize “the Government’s interest in securing its loans,” the Court observed: “The relevant inquiry, however, is not whether Congress authorized or expected such regulation, but whether it intended by its own actions to forbid it.” Id. at 387 n. 11, 103 S.Ct. at 1914 n. 11 (emphasis in original).4
The premises of decision in Arkansas Electric govern the case before us. Just as the Supreme Court held that the structure of the REA implies coexistence of the agency’s program with local electrical rate regulation, that same structure commands coexistence with local eminent domain authority.5 As in Arkansas Electric, no statutory provision precludes the exercise of the local expropriation power. The panel’s attempt to resurrect, in the opinion on rehearing, 7 U.S.C. § 907 as a source of implied preemptive authority is simply incorrect.6 That provision permits REA, like any lender, to prevent voluntary alienation of its collateral by the borrower; it says noting about REA’s ability to forestall involuntary condemnation of service territory. Under Arkansas Electric, local governmental units plainly retain their right to condemn REA-baeked cooperatives’ assets.
In their rehearing opinion, the panel has' belatedly placed a fig leaf over its conflict with Arkansas Electric, distinguishing that ease as a facial challenge to local regulation, while Morgan City’s case involves an alleged *1078actual conflict wrought by specific expropriations of SLECA’s customers. As the panel observes, Arkansas Electric did not entirely foreclose the possibility that a particular rate may so seriously compromise federal interests, including the ability to repay loans, as to be impliedly preempted. Id. 461 U.S. at 389, 103 S.Ct. at 1915. For several reasons, this argument is unpersuasive. First, whether there is an actual conflict that “frustrates the ability to repay REA-baeked loans” raises a factual question. Yet no hearing or trial occurred here, despite conflicting affidavits of competent experts on both sides.7 Second, the trial court did not view this as a factual but as a purely legal dispute. See City of Morgan City v. South Louisiana Electric, 837 F.Supp. 194, 199 (W.D.La.1993) (review of REA’s withholding approval decision under § 907 limited to “arbitrary and capricious, in light of the record as a matter of law”). Third, REA’s and SLECA’s fears of conflict between federal and local authority are utterly hypothetical, because they predict dire domino-like consequences of future expropriations if even one be allowed to occur, and because they essentially assume that- in no expropriation will local regulations adequately reimburse SLECA with just compensation. Fourth, and most tellingly, if the condemnation of 252 customers, a mere one percent of those served by SLECA, “frustrates” a federal purpose, then what exercise of eminent domain would not do so? The practical effect of the panel’s decision is much broader than its self-deprecating language would suggest. Because the panel has not based its decision on a factual finding of “frustration” so much as upon a rubber-stamp of an agency conclusion,8 the real frustration here is of the Arkansas Electric holding.
What particularly troubles me about this ease is the panel’s willingness to allow a federal lending agency to get more than its due at the expense of local sovereignty. REA claims the authority to override municipal condemnation authority because 'otherwise, .it asserts, SLECA’s operating costs may rise and-may necessitate higher rates to customers and jeopardize SLECA’s ability to repay its federal loans. The Seventh Circuit pointedly answered such arguments: “To the extent the REA believes that states must adopt rules of the law that always allow federal lenders to recoup their investments, it is mistaken.” Wabash Valley Power Ass’n v. REA, 903 F.2d 445, 454 (7th Cir.1990) (citing United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979)). Further, “Congress’ assumption when it created the Rural Electrification Act in 1936 seems to have been that the REA could protect itself [from this parade of hor-ribles] by setting conditions on the extension of credit.” Wabash Valley Power Ass’n, 903 F.2d at 453 (holding that direct, invasive regulation of state utility rates was not preempted).9
Even the core of the panel’s opinion-preemption premised in frustration of a federal purpose — is highly problematic, rarely *1079utilized by the Supreme Court and of dubious propriety.10 As Judges Higginbotham, Seymour, Sneed, and then-judge Starr, Justices William C. Clark and John Criswell have observed, “obstacle preemption demands a high degree of judicial policymaking.” The LAW OF PREEMPTION, a Report of the Appellate Judges Conference American Bar Association at 38 (1991).
The effect of this decision must be to embolden federal lending agencies to overcome costly or inconvenient local regulations by advancing newly-minted frustration of purpose arguments in federal court. Such an extension of this type of implied preemption doctrine is an unwholesome development because it takes power away from
—Congress, which carefully described the agency’s authority; .
—the administrative rule-making process, which could preempt local regulation after allowing all affected parties to participate; and
—local, politically responsible authorities.
The panel decision transfers power to
—REA officials, without benefit of express statutory authority or regulation;
—federally financed rural electrical coops, who must be surprised at this development; 11 and
—federal, judges, who have the final, delphic say in what constitutes a “frustration of purpose.”
“Frustration of purpose” preemption should not be allowed drastically to expand a federal lending agency’s authority where Congress expressly contemplated it would' play by local regulatory rules.
I respectfully dissent.

."Frustration preemption” is employed as a short-hand reference for the proposition that state law is (impliedly) preempted when, though it does not conflict with a federal statute, it would unduly frustrate the purposes of such a statute by "discouraging conduct that federal legislation specifically seeks to encourage.” Morgan City, 31 F.3d at 322.

. See 7 C.F.R. § 1710.12(b)(5) (Administrator to account for risks "of loss of portions of borrower’s service territoiy from annexation” in assessing likelihood that loan will be repaid.)

. Cajun Electric Power Co., an REA-financed supplier of electricity to SLECA and participant in this case, recently entered bankruptcy proceedings in part because of niggardly local rate regulation.

. See also Commonwealth Edison v. Montana, 453 U.S. 609, 633-34, 101 S.Ct. 2946, 2961-62, 69 L.Ed.2d 884 (1981) (rejecting that- general statements of national policy can demonstrate congressional intent to pre-empt state legislation that may have an adverse impact on attainment of that policy objective). ‘‘[P]re-emption of state law by federal statute or regulation is not favored in the absence of persuasive reasons — either that the nature of the regulated subject matter permits no other conclusion, or that the Congress has unmistakably so ordained.” Id. at 634, 101 S.Ct. at 2962 (citations omitted). “In cases such as this, it is necessary to look beyond general expressions of 'national policy' to specific federal statutes with which the state law is claimed to conflict.” Id. Nor is this requirement limited to facial challenges. Id. at 633, 101 S.Ct. at 2961-62. The appellants in Commonwealth Edison "insist[ed] that they [wejre entitled to a hearing ... to adduce evidence supporting their claim that the "state action” frustrates and impairs” the national policy of encouraging the use of coal.” Id.

. Compare City of Madison v. Bear Creek Water Ass'n., 816 F.2d 1057 (5th Cir.1987) (federal statute unambiguously barred annexation or condemnation.).

. Although the district court relied on § 907, the original panel opinion pointedly declined to do so. 31 F.3d 319.

. Letters by the administrator of the REA cannot suffice to ordain preemption. Wabash Valley Power Association v. REA, 903 F.2d 445, 453 (7th Cir.1990). ("In order to preempt state authority, the REA must establish rules for the force of law.”); Thomas v. New York, 802 F.2d 1443 (D.C.Cir.1986) (Scalia, J.) (holding that a letter from the Administrator of the EPA does not have force of law). “We have not found any case holding that a federal agency may preempt state law without either rulemaking or adjudication.” Id.

. Interestingly, the Court itself sounded warning about the need to discount the REA's prefer-enees: "All this is not to say that officials of the REA have always welcomed state regulation of rural power cooperatives, or thought it was a good idea. But, of course, such expressions of opinion do not constitute sufficient grounds for pre-emption." Arkansas Electric, 461 U.S. at 386 n. 10, 103 S.Ct. at 1913 n. 10 (citation omitted).

.Judge Easterbrook also noted the economic windfall reaped by the REA by virtue of its preemption argument:
|T]he REA made its loans and guarantees on the assumption that state regulation would apply.... '
[This] may have led to an adjustment in the interest rate, which, in turn increases the rates [the utility] charges. (If there was no adjustment, people at the REA were asleep on the job.) When the risk materialized, the REA has demanded shelter of federal law plus the interest rate that reflected the interest risk created by state law. Nice cushion, if you can get it.
Wabash Valley, 903 F.2d at 455.

. See also Stephen A. Gardbaum, The Nature of Preemption, 79 Cornell L.Rev. 767 (1994), who argues that the vitality of this strain of preemption hinges on confusing the' Supremacy Clause and preemption. On the one hand, the supremacy of federal law means that valid federal law overrides otherwise valid state law in cases of conflict between the two. Hence supremacy does not deprive the state of any of its preexisting concurrent lawmaking authority, but merely dictates that a particular state law in conflict with a particular federal law will be trumped in cases where both apply. Preemption, by contrast, means (a) that states are deprived of their power to act at all in a given area, and (b) that this is so whether or not state law is in conflict with federal law.

. In an amicus brief filed with this case in October, 1993, the National Rural Electrical Cooperative Association attached a "Final Report of the Territorial Integrity Committee,” which explains and complains about how many municipal annexations of members’ property were occurring in the late 1980’s.