## Facts

- Worcester County, Maryland sought an EPA construction grant under the Federal Water Pollution Control Act (FWPCA) to build a central sewer collection system in West Ocean City to address widespread failures of private septic systems causing water-quality harms.
- Shanty Town Associates Limited Partnership owned property in the West Ocean City area, including land in environmentally sensitive floodplain and wetlands.
- EPA concluded, after environmental review, that the sewer project would be acceptable only if its growth-inducing effects were limited to reduce risks of increased runoff, nonpoint-source pollution, and related environmental impacts in wetlands and floodplain areas.
- EPA conditioned the grant through an assistance agreement that, among other restrictions:
  - limited sewer service largely to property already developed or platted as of a specified 1977 date;
  - prohibited extension of sewer service into wetlands and to new buildings in the floodplain; and
  - left excluded property owners the option to use alternative wastewater systems subject to state and local approval.
- Shanty Town later sought increased sewer service to support additional commercial development, but local and state authorities denied the request based on the federally imposed restrictions and related implementing measures.
- Shanty Town sued EPA and related state and local entities, asserting the grant conditions exceeded EPA’s statutory authority, unlawfully intruded on state land-use and nonpoint-source responsibilities, and were arbitrary and capricious.
- The district court granted summary judgment to defendants, and Shanty Town appealed.

## Issues

1. Whether the FWPCA construction-grant provisions authorize EPA to impose grant conditions limiting sewer service to existing/platted development and barring extension into wetlands and floodplains to address growth-induced environmental and nonpoint-source impacts.
2. Whether the conditions unlawfully conflicted with federalism allocations under the FWPCA and related statutes, including the Coastal Zone Management Act and the National Flood Insurance Act.
3. Whether EPA’s imposition of the conditions was arbitrary, capricious, or otherwise unlawful under the Administrative Procedure Act.

## Decision

- The Fourth Circuit affirmed summary judgment for EPA and the other defendants.
- The court held EPA had statutory authority under the FWPCA to attach the challenged conditions to the construction grant to further water-quality objectives.
- The court held the conditions did not unlawfully displace state authority or directly regulate land use; they permissibly limited the use of federally funded sewer capacity in sensitive areas.
- The court held EPA’s decision was not arbitrary or capricious because it was supported by the administrative record and reasoned environmental analysis.

## Legal Principles

- Under the FWPCA, EPA may impose construction-grant conditions it deems necessary or appropriate to carry out the Act’s purposes, including conditions aimed at indirect, growth-inducing impacts of federally funded wastewater infrastructure.
- EPA may consider and mitigate foreseeable nonpoint-source consequences of a funded project without directly regulating nonpoint sources; conditioning federal assistance differs from direct land-use regulation.
- Cooperative-federalism statutes do not bar federal agencies from tailoring grant terms to protect water quality when states and localities remain free to make independent land-use decisions without an entitlement to federally subsidized infrastructure.
- Agency grant conditions supported by an environmental record and a rational connection between findings and choices satisfy arbitrary-and-capricious review.

## Conclusion

The Fourth Circuit upheld EPA’s authority to condition a federally funded sewer project to prevent the project from encouraging new development in wetlands and floodplains, concluding the restrictions furthered the FWPCA’s water-quality goals, respected state land-use prerogatives by operating through funding conditions, and were adequately supported by the administrative record.


Shanty Town Assocs. Ltd. P’ship v. EPA, 843 F.2d 782 (4th Cir. 1988)