Opinion ID: 985211
Heading Depth: 2
Heading Rank: 2

Heading: The Choice to Pursue a USDA Guarantee

Text: Eudora is a Kansas municipality whose boundaries run up against Douglas-4’s service area. In 2002, Eudora annexed a part of Douglas-4’s service area. Douglas-4 saw Eudora’s actions as a threat to its customer base. In May 2003, Douglas-4’s administrator, Scott Schultz, wrote a memo to Douglas-4’s governing board proposing a new financing arrangement for the Johnson-6 project. Instead of borrowing $1.25 million from the KDHE, Schultz proposed borrowing $1 million from the KDHE and $250,000 through a private loan guaranteed by the USDA’s Rural Development agency. Schultz argued the private, USDA-guaranteed loan was advantageous because federal law prohibits municipalities from poaching a rural water district’s customer base while a USDA-guaranteed loan remains in repayment: The service provided or made available through any [rural water district with a USDA-backed loan] shall not be curtailed or limited by inclusion of the area served by such [district] within the boundaries of any municipal corporation or other public body . . . during the term of such loan . . . . 7 U.S.C. § 1926(b). This restriction helps rural water districts to maintain a revenue stream through which to pay back their loans. See Sequoyah Cnty. Rural Water Dist. No. 7 v. Town of Muldrow, 191 F.3d 1192, 1196 (10th Cir. 1999). Schultz’s memo (which he affirmed in deposition and trial testimony) states that the USDA-backed loan would have a higher interest rate than the already- -4- approved KDHE loan and would cost $5,000 to $10,000 more in closing and professional fees. “Really, the only motivation for this loan,” he said, “is the potential for annexation protection.” Aple. Addendum at 49. Schultz also told the board, “[W]e are going to proceed with the project regardless of the financing issues—if an obstacle surfaces on getting the [federal loan guarantee], we will simply take the entire loan from KDHE as originally planned.” Id. at 51. Based on Schultz’s recommendation, the board approved a plan to finance $1 million through the KDHE and $250,000 through a private bank loan with a USDA guarantee. Douglas-4 eventually got both loans and the guarantee. When Eudora nonetheless threatened to poach Douglas-4’s customer base in the annexed area, Douglas-4 filed a § 1983 complaint, alleging violation of 7 U.S.C. § 1926(b).