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Original Author: Huffer, Dennis
Date of Material: 05/21/2004

Utilities--Contracts and agreements
Utilities--Utility districts

Contract with Utility District

Reviewed Date: 04/22/2021
MTAS was asked about a proposed contract between the City (and other county municipalities) and the County Municipal Water District.

May 21, 2004

Re: Proposed Contract between the City (and other County Municipalities) and the County Municipal Water District

Dear Mayor:

You asked my opinion on the above-mentioned proposed contract. Your management consultant has written you and listed several concerns with this agreement, and I share those concerns. I see little in the contract that is beneficial to the cities involved. In addition, I doubt that the contract is enforceable against the District because their actions under the contract are contingent on the approval of persons who are not parties to the contract and for whom the District cannot make a contract. Therefore, the District could be stymied by disapproval even if the District were acting in good faith.

7 U.S.C. § 1926(b) provides in pertinent part relative to rural water districts or associations:

(b) Curtailment or limitation of service prohibited

The service provided or made available through any such association shall not be curtailed or limited by inclusion of the area served by such association within the boundaries of any municipal corporation or other public body ... .

One of the main purposes in enacting this provision was to safeguard Farmers Home Administration loans to these districts. Scioto County Regional Water District No. 1 v. Scioto Water, Inc., 103 F.3d 38 (6th Cir. 1996). As I understand it, FmHA is now defunct and has been succeeded by USDA/Rural Development. USDA/Rural Development would have a substantial interest in agreements made by a rural district with a loan under which the district agreed to waive the protection of 7 U.S.C. § 1926(b). The only possible allusion to this interest is in Paragraph 3 of the proposed contract. Although this paragraph says that the District “at its sole option” may elect to relinquish its rights under § 1926(b), it later contains this sentence:

When the District’s election requires the consent of the District’s bondholders under its outstanding bond resolutions, the District shall obtain such consent as soon as possible.

The words “as soon as possible” here might mean “never.” If the bondholders do not consent, the District’s duties under the contract do not just become illusory, they disappear. The District cannot obligate the bondholders or USDA/Rural Development to do anything. The written approval of these parties of the terms of the contract should be required in the contract before the contract can become binding on any party.

The only reported appellate case I have found in which a city and a district made a contract similar to the one proposed here is Clay Regional Water v. City of Spirit Lake, Iowa, 193 F.Supp.2d 1129 (N.D. Iowa, 2002). The federal court did not decide the merits of the case because the city had filed a state court action on the same facts, and the federal court decided to abstain from deciding in deference to the state proceedings. I could find no reported state court resolution of the case. It might have been settled, but the issues raised by the utility district are instructive here.

The contract was called “New Water Service Plan for Property Within Two Miles of the City of Spirit Lake, Iowa.” It was entered into by the City and the District in 1990. The City annexed and tried to enforce its rights under the contract. The utility district questioned the validity of the contract on several grounds. First the District claimed the contract was void because it had not been approved by FmHA. A clause in the contract required this approval, and the rural District claimed the approval had not been obtained.

Second, the District claimed the contract was void as against the public policy embodied in § 1926(b). In other words, the District questioned its own authority to relinquish the rights granted by the federal law. In an apparently similar defense, the District asserted the City’s claims were precluded by federal statutory compliance. The District also asserted estoppel and justification as defenses.

The District also made several counterclaims. The District claimed the City had violated § 1926(b). The District also claimed damages under 42 U.S.C. § 1983 for violations of this federal law. In addition, the District claimed attorneys fees under 42 U.S.C. § 1988 and statutory compensation under state law.

This case is ample illustration that having a contract does not necessarily eliminate the possibility of litigation. The assertions made by the utility district in this case could also be asserted in a dispute with the County District against the City and other cities that enter this contract. I am not saying this will happen, but simply that it is in the realm of possibility.

I have two (2) other suggestions in case the City insists on entering into this contract:

(1) The City should have the prior right to provide service in annexed areas within the District’s service area in which the District has not made service available. See T.C.A. § 6-51-111 and Lexington-South Elkhorn Water District v. City of Wilmore, Ky., 93 F.3d230 (6th Cir. 1996). This can be accomplished by adding an item (c) to Paragraph 1:

(c) The municipality has priority in providing water service in areas within the District’s service area in which the District has not made water service available.

(2) There should be a termination date after a short number of years, possibly with an option to renew the contract. The proposed contract has no termination date. Therefore, even if the federal law changed to become more favorable to cities and their annexation efforts, the cities entering this contract would be stuck with its restrictions indefinitely. Many cities have gotten into trouble and lawsuits over local sales tax agreements that had no ending date. You probably do not want to repeat that mistake.

I hope this is helpful. If you have further questions, please contact us.


Dennis Huffer
MTAS Legal Consultant