96-462
No. 96-462
IN THE SUPREME COURT OF THE STATE OF MONTANA
1997
CITY OF BILLINGS,
Plaintiff and Respondent,
v.
COUNTY WATER DISTRICT OF
BILLINGS HEIGHTS,
Defendant and Appellant.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone,
The Honorable G. Todd Baugh, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Bruce A. Fredrickson, Antoinette M. Tease, Crowley,
Haughey, Hanson, Toole & Dietrich, Billings,
Montana
For Respondent:
James L. Tillotson, Billings City Attorney,
Billings, Montana
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Submitted on Briefs: December 5, 1996
Decided: February 28, 1997
Filed:
__________________________________________
Clerk
Justice William E. Hunt, Sr., delivered the Opinion of the Court.
Appellant County Water District of Billings Heights (the
District) appeals from the order issued by the Thirteenth Judicial
District Court, Yellowstone County, denying its application for a
preliminary injunction.
We reverse.
The question before us is whether the District Court
manifestly abused its discretion in denying the District's
application for a preliminary injunction that would enjoin the City
of Billings (the City) from enforcing against the District water
rate increases approved by the Billings City Council.
BACKGROUND
In 1963, the City and the District entered into a contract
whereby the District agreed to purchase water from the City. The
District in turn intended to sell the water to its own customers.
The contract states, in relevant part:
(3) Water Rate:
In addition to building the aforesaid 16-inch main
from Sixth Avenue North and North Twelfth Street to
the pumping facilities, the District agrees to pay for
the water obtained from the City each month at the "OP"
rate as follows:
Water Rate per 100 Cubic Feet:
First 1M $.37
Next 1M .23
Next 48M .16
Next 50M .12
Next 900M .08
Over 1,000,000 .07
Payment of the charges for water used by the
District shall be subject to the same discount and
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other rules applying to the accounts of other users
of City water.
The City agrees that it shall not apply to any
court, commission or other authority for any
increase in the District's aforesaid "OP" rate
unless it applies simultaneously for the same
percentage of increase in the rates which apply to
all other users of the City's water.
At the time the parties entered into the contract, the Montana
Public Service Commission (PSC) controlled the setting of municipal
utility rates. In City of Billings v. Public Service Commission
(1981), 193 Mont. 358, 631 P.2d 1295, this Court held that the PSC
could set water rates that were inconsistent with the water rate
provisions of the 1963 contract between the City and the District,
but that its authority to do so could only be exercised "if the
contract poses an immediate threat to the utility's ability to
serve or if the contract adversely affects the utility's rate
structure." City of Billings, 631 P.2d at 1304.
However, in 1981, the Montana Legislature enacted the first of
a number of statutes which effectively abrogated the PSC's power to
oversee water rates. Section 69-7-101, MCA (1981), gave to
municipalities the "power and authority to regulate, establish, and
change, as it considers proper, rates, charges, and classifications
imposed for utility services to its inhabitants and other persons
served by municipal utility systems." The rates charged by the
municipality had to be "reasonable and just," and could not be
raised to yield more than a 12% increase in total annual revenues
unless the increase was approved by the PSC. Sections 69-7-101 and
-102, MCA (1981). Section 69-7-201, MCA, also enacted in 1981,
authorized municipal utilities to create, with some limitations,
their own operating rules. By 1995, with the amendment of 69-7-
101, MCA and the repeal of 69-7-102, MCA, effectively allowing
municipalities to set their own utility rates without PSC review,
the control PSC once had over utility rates had diminished
dramatically; the control and oversight of municipal utility rates
was now largely in the hands of the municipalities themselves.
In 1993, the City increased its water rates. While the
average city water customer experienced a 9.2% increase in her
monthly water bill as a result of the rate increase, the District
experienced a 32% increase in its monthly water bill. The
District, in accordance with its belief that the 1963 contract
prohibited the City from raising the District's water rate payment
obligations by a percentage greater than the percentage increase
imposed on its other customers, increased its monthly payment to
the City by 9.2%.
In August 1994, the City initiated this action to recover from
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the District the difference between the water rate it enacted in
1993 and the rate the District has been paying since that time.
The District answered, alleging that the rate increase was, in a
number of respects, unconstitutional.
On May 13, 1996, the Billings City Council enacted another
water rate increase. This increase, effective July 1, 1996, raised
the District's water bill by 123% over the 1993 rates. No other
City water customer experienced as dramatic a percentage increase
as did the District.
On May 14, 1996, the District filed an application for a
preliminary injunction to prevent the City from enforcing the 1996
rate increase against the District until the court had an
opportunity to rule on the constitutional issues raised by the
District in its answer to the City's 1994 complaint. After a
hearing, the court issued an order on June 28, 1996, denying the
District's application. The District appeals from this order.
STANDARD OF REVIEW
A ruling on a motion for preliminary injunction is subject to
the discretion of the district court. Van Loan v. Van Loan (1995),
271 Mont. 176, 178-79, 895 P.2d 614, 615. We will review a
district court's decision regarding a preliminary injunction motion
to determine if the court has manifestly abused its discretion.
Van Loan, 895 P.2d at 615 (citation omitted). If, however, the
district court arrives at a conclusion of law, "no discretion is
involved, and therefore, we review the district court's conclusions
of law to determine whether the district court's interpretation of
the law is correct." Knudson v. McDunn (1995), 271 Mont. 61, 64,
894 P.2d 295, 297 (citation omitted).
DISCUSSION
Did the District Court manifestly abuse its discretion in
denying the District's application for a preliminary injunction
that would enjoin the City from enforcing against the District
water rate increases approved by the Billings City Council?
The purpose of a preliminary injunction is to prevent "further
injury or irreparable harm by preserving the status quo of the
subject in controversy pending an adjudication on the merits."
Knudson, 894 P.2d at 297-98. The District applied for a
preliminary injunction pursuant to 27-19-201(3), MCA, which
states that a preliminary injunction may be granted
(3) when it appears during the litigation that the
adverse party is doing or threatens or is about to do or
is procuring or suffering to be done some act in
violation of the applicant's rights, respecting the
subject of the action, and tending to render the judgment
ineffectual; .... (Emphasis added.)
The District contends that the application here of the statutory
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scheme which replaced PSC control over utility rates with municipal
control ( 69-7-101, MCA (1981) (amended 1995); 69-7-102, MCA
(1981)(repealed 1995); and, 69-7-201, MCA (1981) (collectively
referred to herein as "the statutes")) impairs its contractual
relationship with the City in violation of the Montana and United
States Constitutions. The District further contends that because
of the nature of a constitutional right violation, a legal judgment
of monetary damages would not effectively remedy its injuries.
In Knudson we explained that a preliminary injunction may
issue if the applicant can establish a prima facie case. Knudson,
894 P.2d at 298. The District contends that it has established a
prima facie case of a violation of its constitutional contract
clause rights, and that the court therefore erred in failing to
grant the preliminary injunction.
However, the City argues that because statutes are presumed to
be constitutional, City of Billings v. Laedeke (1991), 247 Mont.
151, 154, 805 P.2d 1348, 1349, and because the District is raising
a constitutional challenge, to be successful here the District must
prove "beyond a reasonable doubt" that the statutes are
unconstitutional as applied, Fallon County v. State (1988), 231
Mont. 443, 445, 753 P.2d 338, 339. We cannot agree with the City
that the District must "prove beyond a reasonable doubt" that the
statutes are unconstitutional as applied; rather, the District must
make out a prima facie case of unconstitutionality.
While the City's contention that a statute's presumption of
constitutionality must be overcome by proof beyond a reasonable
doubt is correct, that rule is nevertheless inapplicable here. In
Laedeke and Fallon County, cited by the City, the rule was applied
in the context of trials on the merits of constitutional challenges
to a municipal ordinance and a legislative tax apportionment,
respectively. See Laedeke, 805 P.2d at 1349-50; Fallon County, 753
P.2d at 339-40. Here, however, in the context of an application
for a preliminary injunction, requiring the District to prove the
statutes unconstitutional beyond a reasonable doubt would be
directly at odds with this Court's holdings that a successful
applicant for a preliminary injunction need only establish a prima
facie case, Knudson, 894 P.2d at 298, and that "[an] applicant [for
a preliminary injunction] need not make out such a case as would
entitle him to final judgment on the merits," Porter v. K & S
Partnership (1981), 192 Mont. 175, 183, 627 P.2d 836, 840 (citing
Atkinson v. Roosevelt County (1923), 66 Mont. 411, 422, 214 P. 74,
78. Therefore, in support of its application for preliminary
injunction, the District must establish a prima facie case of a
violation of its rights under the contract clauses of the Montana
and United States Constitutions.
The contract clauses of the Montana and United States
Constitutions have generally been interpreted as "'interchangeable
guarantees against legislation impairing the obligation of
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contract.'" Carmichael v. Workers' Compensation Court (1988), 234
Mont. 410, 414, 763 P.2d 1122, 1125 (quoting Buckman v. Montana
Deaconess Hosp. (1986), 224 Mont. 318, 325, 730 P.2d 380, 384; see
also Art. II, Sec. 31, Mont.Const.; Art I, Sec. 10, U.S.Const.
This Court employs a three-part test when analyzing a contract
clause challenge:
(1) Is the state law a substantial impairment to the
contractual relationship?
(2) Does the state have a significant and legitimate
purpose for the law?
(3) Does the law impose reasonable conditions which are
reasonably related to achieving the legitimate and public
purpose?
Carmichael, 763 P.2d at 1125.
As to part (1), we point out that "[t]otal destruction of
contractual expectations is not necessary, and a law which
restricts a party to gains reasonably expected from a contract is
not a substantial impairment." Carmichael, 763 P.2d at 1125. The
District argues that the application of the statutes granting the
City control over utility rates substantially impairs the
contractual relationship between the District and the City.
Specifically, the District argues that the statutes are
unconstitutional as applied because they allow the City to modify
the utility rates in the 1963 contract to which it is a party; this
unilateral power was not contemplated by the parties when they
entered into the contract. The District claims that the 1993 32%
increase, and the 1996 123% rate increase, clearly manifest the
substantial impairment caused by the application of the statutes in
this matter; the District's percentage increase is many times
higher than other City water users' percentage increase,
contradicting the relevant language in the contract. The District
explains that if the rate increases continue, it will no longer
enjoy the benefit of the bargain for which it contracted in 1963.
The District's claims are supported by the record. Moreover,
the City does not expressly deny that its actions violated the
relevant language of the contract; rather, the City merely asserts
that its actions, whatever their effect on the contract, were
authorized by statute. For purposes of our review then, we presume
as true the District's allegation that the City's 1993 and 1996
rate increases violate the language of the contract. We conclude
that the District has made a sufficient showing that the
application here of the statutes granting the City control over
utility rates substantially impairs the District's rights under the
1963 contract.
Next, according to part (2), we must consider whether the
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state has a legitimate and significant purpose for the law. Our
review of the legislative history reveals that the general purposes
behind replacing PSC control over municipal utility rates with
municipal control were to avoid the cost and delay of PSC review of
every proposed rate increase, and to allow municipalities to deal
more immediately and directly with financial realities such as
inflation. We conclude that these are legitimate state purposes.
Finally, with respect to part (3), we must consider whether
the application of the statutes to the facts at issue here is
reasonably related to achieving the legitimate and public purposes
of the statutes. We point out at the outset that a heightened
level of scrutiny applies when a governmental entity is a party to
the contract. See Buckman, 730 P.2d at 385. As we stated in
Buckman, quoting United States Trust Co. of New York v. New Jersey
(1977), 431 U.S. 1, 25-26, 97 S.Ct. 1505, 1519, 52 L.Ed.2d 92,
111-12:
The Contract Clause is not an absolute bar to subsequent
modification of a State's own financial obligations. As
with laws impairing the obligations of private contracts,
an impairment may be constitutional if it is reasonable
and necessary to serve an important public purpose. In
applying this standard, however, complete deference to a
legislative assessment of reasonableness and necessity is
not appropriate [when] the State's self-interest is at
stake.
Buckman, 730 P.2d at 385. In Buckman we also stated that "[t]he
severity of the impairment [to the contract] increases the level of
scrutiny to which the legislation is subjected." Buckman, 730 P.2d
at 385.
We fail to see how the application of the statutes here,
ostensibly allowing the City to modify its own contractual
obligations, is reasonably related to the legitimate purposes of
the statutes. To justify its rate increases, the City claims that
the language in the 1963 contract limiting its ability to raise the
District's rates is unrealistic, and that it needs to raise
revenue. Also, the City states in its brief that "[i]f the rate
provisions of the 1963 Contract were superseded by the PSC prior to
the enactment of Sec. 69-7-101, MCA, then it stands to reason that
the enactment of Sec. 69-7-101, MCA vested the City Council with
that same authority for any utility rate increases."
We do not agree with the City's arguments. There is no
relationship between the purpose of 69-7-101, MCA, avoiding the
undue costs and delay of PSC rate hearings, and the City's need to
raise revenue (and its "need" therefore to disregard what it
considers unrealistic or outdated contract language). Moreover,
the City's argument that its assumption of rate control from the
PSC necessarily authorizes it to modify, "supersede," or otherwise
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disregard its contractual obligations is flawed. Because the PSC,
as overseer of rate increases prior to 1981, was able to
"supersede" some of the language in the 1963 contract between the
City and the District does not now mean that the City, in assuming
the PSC's power, can "supersede" language in that same contract or
any other contract to which it is a party, particularly when its
reasons for doing so are not related whatsoever to the purposes of
the statute which transferred to it control once held by the PSC.
We hold that the District has made a prima facie showing that
the application in this case of the statutes granting
municipalities control over utility rates violates its rights under
the contract clauses of the Montana and United States
Constitutions. The District has sufficiently shown that the City's
rate increases, pursuant to the statutes and in violation of the
rate increase provisions of the 1963 contract, substantially impair
the contractual relationship between the District and the City.
Further, the District has sufficiently shown that the City's
reasons for utilizing the authority of the statutes to override the
contractual language are not reasonably related to the legitimate
purposes of those statutes. Therefore, pursuant to the second
prerequisite for obtaining a preliminary injunction under 27-19-
201(3), MCA, we must now determine whether the City's actions would
"[tend] to render [a] judgment [in the District's favor]
ineffectual."
The City argues that the District cannot meet this requirement
because, despite its water rate increases, a judgment in the
District's favor would be effective; assuming the District had been
or will begin paying the increased rates, upon a judgment in its
favor it could be recompensed the overpaid amount. More
realistically, the City argues, because the District has not been
paying the increased rates, and therefore essentially suffering no
injury, the District has no need for an injunction.
The City's arguments are misplaced. The District requested
that the court enjoin the City from enforcing the increased rates
pending the outcome of a trial on the merits. The District alleges
that the enforcement of the increased rates will severely harm,
perhaps dissolve, its business. The manager of the District, in a
sworn affidavit, claims that enforcement of the 123% increase will
either cause the District to become financially insolvent, or will
require the District to pass the increase on to its bondholders,
who would then be authorized, because its rates would be
substantially higher than those charged by the City, to petition
for dissolution of the District. See 7-13-2351, MCA. These are
not the types of injuries which could be effectively remedied by a
monetary damages award after a trial on the merits. See Doran v.
Salem Inn, Inc. (1975), 422 U.S. 922, 932, 95 S.Ct. 2561, 2568, 45
L.Ed.2d 648, 660 (threat of loss of business and threat of
bankruptcy due to city ordinance are potential injuries worthy of
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injunctive relief).
Moreover, the District's application for preliminary
injunction is based on alleged violations of its constitutional
rights. We are mindful that courts often consider constitutional
rights violations as producing injuries which cannot effectively be
remedied by a legal judgment. See, e.g., Elrod v. Burns (1976),
427 U.S. 347, 96 S.Ct. 2673, 49 L.Ed.2d 547 (violation of First
Amendment rights produces irreparable injury); Mitchell v. Cuomo
(2d Cir. 1984), 748 F.2d 804 (violation of Eighth Amendment rights
produces irreparable injury).
Lastly, for this Court, or any other court, to adopt the
City's argument that the District has no need for an injunction
because it is not paying the increased rates would, we believe,
effectively encourage non-compliance with obligations absent legal
authority to do so. The City has raised the District's rates,
allegedly pursuant to statutory authority. Until the merits of the
parties' respective claims regarding the propriety of raising the
rates have been tried, it must be presumed that the City's actions
were correct, see 26-1-602(15), MCA, and that it acted pursuant
to statutes that are constitutional, see Laedeke, 805 P.2d at
1349. That being the case, we must also presume then that the
District is obligated to pay the increased rates. It is the
injunctive relief issued by the court, not the District's
unilateral decision not to pay the increased rates, that has any
significance with respect to the suspension of the District's
performance of its obligations.
Therefore, the City's actions here, raising the District's
water rates, allegedly pursuant to statutory authority, "[tend] to
render [a] judgment [in the District's favor] ineffectual." The
District has made a prima facie showing of a violation of its
constitutional rights under the contract clause. Thus, the
District has met the requirements of 27-19-201(3), MCA, and is
entitled to a preliminary injunction. The District Court erred in
failing to grant the injunction.
Finally, in its opening brief, the District requests that in
the event this Court vacates the order denying the District's
application for a preliminary injunction that we also instruct the
District Court to waive the security requirement, pursuant to 27-
19-306(1)(b)(ii), MCA. The record reveals that the District Court
has not yet considered this matter, a matter wholly within its
discretion. We will not deny the District Court the opportunity or
ability to exercise its discretion with respect to this issue.
CONCLUSION
For the reasons discussed above, the order of the District
Court denying the District's application for a preliminary
injunction is vacated, and this matter is reversed. We hold here
that the District, by establishing a prima facie case that its
rights under the contract clauses of the Montana and United States
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Constitutions have been violated and that a judgment in its favor
would be "ineffectual," has met the requirements of 27-19-201(3),
MCA, and is therefore entitled to the preliminary injunction for
which it has applied. In holding as we do, we comment neither on
the merits of the District's constitutional claims, nor on the
propriety or impropriety of waiving the security requirement
pursuant to 27-19-306(1)(b)(ii), MCA; the former is irrelevant to
a discussion of a preliminary injunction application, the latter
within the District Court's discretion, as yet unexercised.
Reversed.
/S/ WILLIAM E. HUNT, SR.
We Concur:
/S/ J. A. TURNAGE
/S/ TERRY N. TRIEWEILER
/S/ W. WILLIAM LEAPHART
Justice Karla M. Gray, dissenting.
I respectfully dissent from the Court's opinion. While I do
not disagree that the Water District made a prima facie showing
that the statutes at issue, as applied by the City, violate its
rights under the contract clauses of the United States and Montana
Constitutions, I cannot agree that the Water District has
established that allowing the City to enforce the 1996 water rates
would tend to render a later judgment in its favor ineffectual.
Nor do I agree with the manner in which the Court applies standards
of review in this case.
At the outset, it is important to observe that our standard in
reviewing a trial court's denial of an application for a
preliminary injunction is "manifest abuse of discretion." That the
grant or denial of a preliminary injunction is a matter within the
trial court's discretion is evident from the permissive language of
the controlling statute, which states that an injunction "may" be
granted when the enumerated circumstances are met. See 27-19-
201, MCA. The Court, having correctly cited the applicable
standard of review, never returns to it or discusses how the
District Court abused its discretion in denying the Water
District's application for a preliminary injunction.
Nor does the Court's reliance on the "conclusion of law"
standard excuse its failure to properly apply the "abuse of
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discretion" standard of review. I agree with the Court's implicit,
but unstated, conclusion that the question of whether a party has
made a prima facie showing is a legal question. Thus, to the
extent we are reviewing a determination by the District Court that
the Water District did not make a prima facie case of violation of
its constitutional contract clause rights, it is proper to do so by
determining whether that court's interpretation of the law is
correct. The Court concludes, and I agree, that the District Court
erred as a matter of law when it determined that the Water District
had not made a prima facie case.
That conclusion, however, is unrelated to the District Court's
ruling that allowing the City to enforce its 1996 water rates would
not tend to render an ultimate judgment in the Water District's
favor ineffectual. See 27-19-201(3), MCA. This is a
discretionary call by the District Court, subject to the manifest
abuse of discretion standard the Court cites. The Court refuses to
apply the standard, however, preferring instead to merely
substitute its own judgment for that of the District Court on this
matter within the trial court's discretion.
It is my view that, on the record before us, the District
Court did not abuse its discretion in deciding that allowing the
City to enforce its 1996 water rates would not tend to render a
judgment in the Water District's favor ineffectual. The record is
very limited on this question and the Court's statements in this
regard are, at best, general. It is true that the affidavit of Mr.
Aarness, the Water District's manager, states that enforcement of
the 1996 water rates will cause the Water District to "eventually"
become financially insolvent--at some unspecified time in the
future--if it does not pass the increases along to its customers.
It is undisputed, however, that the Water District has $3,000,000
in unallocated reserves with which, presumably, it could pay the
1996 water rate increases over a significant period of time, either
in whole or in part, to cushion the impact of the increased rates
on its customers. The Water District has made no showing
whatsoever that its available reserves would not be sufficient to
absorb the entirety, much less only part, of the 1996 rate increase
over the time period required for a decision on the merits in this
litigation.
As an alternative to this insufficiently supported insolvency
argument, Mr. Aarness' affidavit states that, if the Water District
passes the water rate increases on to its customers, they "likely"
will petition to dissolve the Water District because their rates
will be substantially higher than those charged by the City. This
statement is problematic in several regards.
First, affidavits based on personal knowledge, as Mr. Aarness'
purports to be, are required to be based on admissible facts. They
cannot properly be used to speculate or to predict the future
actions of other people. No basis, much less any factual basis, is
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provided for Mr. Aarness' statement. Thus, Mr. Aarness' view of
the "likely" response of the Water District's customers in the
event it passes the City's water rate increase along is not
properly considered here.
Moreover, as a practical matter, the fact that the Water
District's customers' water rates would be substantially higher
than those paid by City residents would not necessarily result in
a petition to dissolve the Water District. It is not as simple a
matter as switching from water service by the Water District to
water service by the City. The customers of the Water District are
not individually or directly attached to the City water system; nor
are they necessarily entitled to City water service at all absent
the existence of the Water District. Thus, the "likelihood" of a
petition to dissolve is minimal, absent some showing by the Water
District that its customers had options or alternatives regarding
water service. No such showing has been made here.
Finally, a petition to dissolve pursuant to 7-13-2351, MCA,
even if one actually were signed by more than 50% of the
freeholders of the district, does not dissolve the Water District.
Such a petition is the beginning of a process, not the end of one.
The Water District could be dissolved only if, after a public
hearing, the board of directors determined that dissolution is in
the best interest of the public and the Yellowstone County
Commissioners approved the dissolution. Section 7-13-2351, MCA.
Here, nothing of record supports reliance on the specter of
dissolution of the Water District as a basis for this Court's
determination that the Water District established that a judgment
in its favor would tend to be rendered ineffectual by allowing the
City to enforce its 1996 water rates during the pendency of this
litigation.
Faced with this record, and with an opening brief by the Water
District that does not even mention the requirements of 27-19-
201(3), MCA, the statute under which it sought the preliminary
injunction, the Court is compelled to rely on being "mindful that
courts often consider constitutional rights violations as producing
injuries which cannot effectively be remedied by a legal judgment."
Indeed, the Court cites to decisions where courts have done so in
situations where irreparable injury is produced by a violation of
certain constitutional rights. Those cases involve First and
Eighth Amendment rights, however, and I submit that a violation of
such rights is entirely and qualitatively different from a
potential violation of the contract clause, in which money is at
stake, such as the case presently before us. Neither the Water
District nor the Court explains or establishes how the potential
violation of constitutional contract clause rights will produce
injuries to the Water District which cannot be remedied by a legal
judgment.
In addition, the "irreparable injury" cases are not applicable
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here. Section 27-19-201, MCA, sets out a variety of circumstances
under which a preliminary injunction may be granted. It is
undisputed that the Water District brought its injunction
application under 27-19-201(3), MCA, which is the focal point of
both the Court's opinion and this dissent. The "irreparable
injury" basis for seeking a preliminary injunction is contained in
27-19-201(2), MCA, which is not at issue here. Indeed, counsel
for the Water District stated unequivocally during oral argument on
its application that it was not even attempting to show irreparable
injury.
I cannot agree with the Court's "stretch" to principles that
have no application here or with its failure to properly apply our
standard of review. I would hold that the District Court did not
manifestly abuse its discretion in denying the Water District's
application for a preliminary injunction.
/S/ KARLA M. GRAY
Justice James C. Nelson joins in the foregoing dissenting opinion.
/S/ JAMES C. NELSON
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