Rural Water District No. 4 v. City of Eudora, Kansas

FILED
United States Court of Appeals
Tenth Circuit

July 1, 2013
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

RURAL WATER DISTRICT NO. 4,
DOUGLAS COUNTY, KANSAS,

Plaintiff-Appellant,

v. No. 12-3197

CITY OF EUDORA, KANSAS,

Defendant-Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
(D.C. NO. 2:07-CV-02463-JAR)

Steven M. Harris, Doyle Harris Davis & Haughey, Tulsa, Oklahoma (Michael D.
Davis, Doyle Harris Davis & Haughey, Tulsa, Oklahoma, and John W. Nitcher,
Riling Burkhead & Nitcher, Lawrence, Kansas, with him on the briefs) for
Appellant.

Curtis Tideman (David Frye and Jeffrey R. King with him on the brief), Lathrop
& Gage LLP, Overland Park, Kansas, for Appellee.

Before TYMKOVICH, Circuit Judge, HOLLOWAY, Senior Circuit Judge, and
HOLMES, Circuit Judge.

TYMKOVICH, Circuit Judge.
 This is the second appeal in a dispute involving Rural Water District No. 4

in Douglas County, Kansas and the City of Eudora, Kansas. The water district,

Douglas-4, neighbors Eudora and contends Eudora is trying to poach Douglas-4’s

customers. Douglas-4 is currently indebted on a USDA-guaranteed loan, so

Eudora’s actions potentially violate a federal law which prohibits municipalities

from poaching rural water districts’ customers while a USDA-guaranteed loan is

in repayment. Douglas-4 therefore sued Eudora under 42 U.S.C. § 1983, claiming

Eudora violated Douglas-4’s federal statutory right to be free from poaching. The

case went to trial resulting in a jury verdict and damages for Douglas-4.

On appeal, we vacated the verdict. Rural Water Dist. No. 4, Douglas Cnty.,

Kan. v. City of Eudora, Kan., 659 F.3d 969 (10th Cir. 2011) (Eudora I). The

appeal turned on a Kansas statute that prevents rural water districts from

obtaining USDA loan guarantees unless those guarantees are “necessary.” Absent

a showing the loan was necessary, Douglas-4 could not claim the anti-poaching

protections granted by federal law. We held the jury was improperly instructed

on the meaning of “necessary” and remanded for a new trial.

Soon after our decision, the Kansas legislature amended the relevant

Kansas statute and removed the “necessary” requirement. The district court,

considering cross-motions for summary judgment on remand, ruled that the

amendment does not apply retroactively. The district court also denied summary

judgment for both parties. The district court then certified the retroactivity

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question to us, which we accepted. Douglas-4, however, asks us to reach two

additional issues, both of which come down to whether it deserves summary

judgment on this record. If we agree to expand the scope of the appeal as

Douglas-4 suggests, Eudora asks us to consider whether it, rather than Douglas-4,

deserves summary judgment.

Exercising jurisdiction under 28 U.S.C. § 1292(b), we uphold the district

court’s conclusion that the amended Kansas statute does not apply retroactively.

The “necessary” requirement therefore still binds Douglas-4. We also agree to

take up the parties’ arguments about the propriety of summary judgment. In that

regard, we hold Douglas-4 fails the “necessary” requirement as a matter of law,

entitling Eudora to summary judgment.

I. Background

A. The Johnson-6 Project

Douglas-4 is a rural water district organized under Kansas’s Rural Water

Districts Act. Sometime before 2002, Douglas-4 was running low on water and

looking to buy from an adjoining rural water district known as “Johnson-6.” But

getting water from Johnson-6 would require Douglas-4 to lay new pipes and build

a new pumping station. The estimated cost for such improvements was $1.25

million. Douglas-4 received initial approval of a loan for the entire $1.25 million

from the Kansas Department of Health and Environment (KDHE) at a 4.08%

fixed interest rate for twenty years.

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 B. The Choice to Pursue a USDA Guarantee

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-

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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).

C. The Litigation Before the First Appeal

In prior cases involving rural water districts, we have held that such

districts do not enjoy § 1926(b) protection unless state law authorizes the water

district to incur federal obligations. See, e.g., Pittsburg Cnty. Rural Water Dist.

No. 7 v. City of McAlester, 358 F.3d 694, 717–19 (10th Cir. 2004). Much of the

litigation between Douglas-4 and Eudora therefore revolved around whether

Kansas law permits rural water districts to take out federal loans, or guarantees,

or both.

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 The question at trial, as framed by the district court, was whether the

USDA-guaranteed private loan was “necessary” as required by a Kansas statute

that gives rural water districts power to “cooperate with and enter into agreements

with the secretary of the United States department of agriculture or the secretary’s

duly authorized representative necessary to carry out the purposes of its

organization.” K.S.A. § 82a-619(g) (emphasis added). If the loan was not

“necessary to carry out the purposes of its organization,” then Douglas-4 would

not merit § 1926(b) protection.

Eudora objected, arguing that the necessity of the loan (i.e., to build the

Johnson-6 project) was never at issue, just the necessity of the federal guarantee

on that loan. The district court overruled the objection, stating that the loan and

the guarantee were “one and the same” for purposes of this case.

The district court therefore instructed the jury to consider whether the loan

guaranteed by the USDA was necessary, not whether the guarantee itself was

necessary. The jury found the loan necessary (presumably to fund the Johnson-6

project) and gave a verdict in favor of Douglas-4.

D. The First Appeal

On appeal, Eudora again argued that the district court erred by not

separating the necessity of the loan from the guarantee. We agreed with Eudora

on this question, holding that the necessity of the guarantee, not the loan, was the

salient question. Eudora I, 659 F.3d at 977.

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 We also addressed a cross-appeal argument from Douglas-4 regarding

K.S.A. § 82a-619(g), the subsection creating the “necessary” requirement. That

subsection actually contains two clauses, one containing the “necessary”

requirement and another which has no such requirement. At that time, the entire

subsection provided as follows:

Every district incorporated under this act . . . shall have
the power to * * * cooperate with and enter into
agreements with the secretary of the United States
department of agriculture or the secretary’s duly
authorized representative necessary to carry out the
purposes of its organization; and to accept financial or
other aid which the secretary of the United States
department of agriculture is empowered to give pursuant
to 16 U.S.C., secs. 590r, 590s, 590x-1, 590x-a and 590x-
3, and amendments thereto . . . .

K.S.A. § 82a-619(g) (1997 & Supp. 2002) (emphasis added). Douglas-4 claimed

that the “accept financial or other aid” clause, which contains no “necessary”

requirement, gave it authority to obtain a USDA guarantee and its attendant

§ 1926(b) protection without making a necessity showing.

We rejected that argument because the cross-referenced federal statutes—

“16 U.S.C., secs. 590r, 590s, 590x-1, 590x-a and 590x-3”—had been repealed in

1961. Moreover, they had been replaced with what we characterized as a

“radically different statutory scheme” with different numbering, so “amendments

thereto” could not plausibly encompass the new federal regime. Eudora I, 659

F.3d at 977 n.5.

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 After resolving various other issues not relevant here, we remanded “for a

new trial for the limited purpose of determining whether Douglas-4’s cooperation

to secure the federal guarantee was necessary for the purposes of its

organization.” Id. at 980.

E. Developments on Remand

Our discussion in Eudora I of § 82a-619(g)’s “accept financial or other aid”

clause apparently prompted the Kansas legislature to propose a statutory

amendment:

The supplemental note [to the bill proposing the
amendment] indicates that [a representative from the]
Kansas Rural Water Association[] spoke in favor of the
amendment, noting that the federal code had changed
and been put into another statute, that “an alert Attorney
General caught the change in the federal law,” and the
amendment “just puts back into place the authority to
issue and refinance the bonds.”

App. 1305 (quoting http://www.kslegislature.org/li_2012/b2011_12/committees/

resources/ctte_h_engy_utls_1_20120208_min.pdf). Subsection (g) was therefore

amended, effective July 1, 2012, as follows (strikeouts indicate deletions;

underscoring indicates insertions):

Every district incorporated under this act . . . shall have
the power to * * * cooperate with and enter into
agreements with the secretary of the United States
department of agriculture or the secretary’s duly
authorized representative necessary to carry out the
purposes of its organization; and to accept financial or
other aid which the secretary of the United States
department of agriculture is empowered to give pursuant

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 to 16 U.S.C.A., secs. 590r, 590s, 590x-1, 590x-a and
590x-3, and amendments thereto 7 U.S.C. § 1921 et seq.,
as in effect on the effective date of this act . . . .

The citation to “§ 1921 et seq.” includes § 1926(b). See Consolidated Farmers

Home Administration Act, Pub. L. No. 87-128, Tit. III, § 306(b), 75 Stat. 307,

308 (1961).

At the time of the amendment, the district court had been considering new

cross-motions for summary judgment on the “necessary” question. Douglas-4

then raised the possibility that the amended version of § 82a-619(g)’s “accept

financial or other aid” clause might moot the “necessary” question and give

Douglas-4 the power, as a matter of law, to enter into the loan guarantee.

The district court rejected Douglas-4’s argument, holding that the

amendment does not apply retroactively to this dispute. The district court

nonetheless certified to us this question: “whether the recent amendment to

K.S.A. § 82a-619(g) is retroactive and, if so, whether Douglas-4 was empowered

to accept financial or other aid from the USDA in the form of a guarantee,

without the requirement of necessity.” App. 1312. We agreed to hear the appeal.

II. Analysis

A. Retroactivity of 2012 Amendment to K.S.A. § 82a-619(g)

As we explained in Eudora I, a rural water district may only obtain

§ 1926(b) protection if state law authorizes it to do so. This requirement

accommodates federalism concerns. If a rural water district could obtain

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§ 1926(b) protection without state authorization, it might unduly upset the states’

interests in maintaining control of quintessentially local activities such as land

development and zoning—both of which almost always involve questions of water

supply. No matter what the state or its municipalities deem best for the

advancement of the community, a rural water district with § 1926(b) protection

may effectively veto any plan that would diminish its customer base. Thus, we

require states to authorize their rural water districts to seek § 1926(b) protection

(with whatever conditions the state may impose) so that the state itself maintains

ultimate control over the circumstances in which a water district may call down

federal protection and potentially frustrate future zoning, development, or

annexation plans. See Eudora I, 659 F.3d at 976.

As previously noted, the Kansas statute under which Douglas-4 claims its

authority is § 82a-619(g), which we will refer to as “subsection (g)” for

simplicity. As also noted, subsection (g) has two clauses. At the time this

dispute arose (and at the time we issued Eudora I), the first clause gave Douglas-

4 power to “cooperate with and enter into agreements with the secretary of the

United States department of agriculture or the secretary’s duly authorized

representative necessary to carry out the purposes of its organization,” and the

second clause granted Douglas-4 power “to accept financial or other aid which the

secretary of the United States department of agriculture is empowered to give

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pursuant to 16 U.S.C.A., secs. 590r, 590s, 590x-1, 590x-a and 590x-3, and

amendments thereto.” K.S.A. § 82a-619(g) (1997 & Supp. 2002).

Before the first appeal, Eudora primarily argued that Douglas-4 did not

satisfy the “necessary” condition imposed by the first clause and therefore

deserved no § 1926(b) protection. Douglas-4 disputed that, but also argued in the

alternative that the second clause gave it authority to obtain the USDA guarantee

with no need to prove necessity. The district court rejected this argument and we

affirmed that decision in Eudora I.

The Kansas legislature has now amended the second clause, striking out the

cross-reference to the repealed federal statutes and replacing it with a cross-

reference to “7 U.S.C. § 1921 et seq., as in effect on the effective date of this

act.” The “et seq.” brings § 1926(b) within the second clause’s ambit, thus

suggesting that water districts may seek § 1926(b) protection without making any

showing of necessity. If so, and if the amendment applies retroactively, this

case’s focus on necessity becomes moot.

Whether the amendment to subsection (g) applies retroactively is a matter

of Kansas law. We review a district court’s interpretation of state law de novo.

Salve Regina Coll. v. Russell, 499 U.S. 225, 239 (1991). As the district court did,

we must look to Kansas courts’ retroactivity principles for resolving this question.

Burleson v. Saffle, 278 F.3d 1136, 1140 (10th Cir. 2002) (“whether or not a new

rule of state law may be applied retroactively is a pure state law question”).

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 In Kansas, “[t]he fundamental rule is that a statute operates prospectively

unless its language clearly indicates that the legislature intended it to operate

retroactively.” State v. Williams, 244 P.3d 667, 670 (Kan. 2010) (citation

omitted). The amended version of subsection (g) does not “clearly indicate[]”

that it should operate retroactively.

But there is an exception to the “clearly indicates” rule, namely: “if the

statutory change [1] does not prejudicially affect the substantive rights of the

parties and [2] is merely procedural or remedial in nature, it applies

retroactively.” Williams, 244 P.3d at 670. A law affects “substantive rights” if it

“establish[es] the rights and duties of parties.” State of Kansas/State of Iowa ex

rel. Sec’y of Soc. & Rehab. Servs. v. Bohrer, 189 P.3d 1157, 1162 (Kan. 2008).

By contrast, a law is “merely procedural” if it “deal[s] with the manner and order

of conducting suits—in other words, the mode of proceeding to enforce legal

rights.” Denning v. Johnson Cnty., Sheriff’s Civil Serv. Bd., 266 P.3d 557, 572

(Kan. Ct. App. 2011).

Under these principles, the amendment to subsection (g) is a substantive

amendment. Before the amendment, a municipality could annex a rural water

district’s territory and take the district’s customers despite a USDA-backed loan

if the municipality was willing to prove that the loan was not necessary to the

district’s purposes. In other words, Eudora had a right to take Douglas-4’s

customers if Douglas-4’s USDA-backed loans were unnecessary. Retroactively

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applying subsection (g), as amended, would strip Eudora of that right. That is not

simply an amendment to “the manner and order of conducting suits.” Denning,

266 P.3d at 572. Thus, it appears to be a substantive amendment.

Douglas-4 counters that the amendment was remedial or clarifying. No

party has directed us to a Kansas state-law definition of “remedial” in this

context. Douglas-4 apparently believes it means “to remedy a mistake or

ambiguity in the text,” which is really another way of saying “clarifying.”

Douglas-4 further believes the Kansas legislature simply clarified that “16

U.S.C.A., secs. 590r, 590s, 590x-1, 590x-a and 590x-3, and amendments thereto”

was always meant to refer to “7 U.S.C. § 1921 et seq.”

The legislative history cited by the district court admittedly provides some

loose support for this idea. See App. 1305 (noting the Kansas legislative report

stating that the amendment “just puts back into place the authority to issue and

refinance the bonds”). The Kansas Supreme Court, however, has never endorsed

a “clarifying” exception to the rule against retroactivity. The first instance we

can locate of a clarifying exception in Kansas law is a Kansas Court of Appeals

decision from 2004 which explored the possibility of a clarifying exception solely

through citations to federal cases. In re Hunt, 82 P.3d 861, 871 (Kan Ct. App.

2004). Among other examples, the Kansas court cited one of our cases

interpreting Oklahoma law for the proposition that “a clarifying amendment that

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explained an ambiguous statute to more clearly express legislative intent would be

given retroactive application if it did not impair vested rights.” Id.

Ultimately, the Kansas Court of Appeals in Hunt did not explicitly adopt a

clarifying exception, but instead concluded that the amendments at issue

“constitute[d] a clear statement not only that legislators wanted the amendments

to be seen as clarifying but that they intended them to be applied retroactively.”

Id. at 872. Of course, if the legislature made a clear statement of intent to apply

the amendments retroactively, then there is no need for a clarifying exception—

because the exceptions apply only when the legislature has made no “clear

statement.”

Nonetheless, subsequent Kansas Court of Appeals decisions have read Hunt

as establishing a clarifying exception. See, e.g., State v. Montgomery, 120 P.3d

1151, 1154 (Kan. Ct. App. 2005). The Kansas Supreme Court also noted in

passing that Hunt discusses a clarifying exception but it did not endorse (or

impugn) the analysis. Brennan v. Kan. Ins. Guar. Ass’n, 264 P.3d 102, 112–13

(Kan. 2011).

Even assuming a clarifying exception exists, we can confidently predict

that the Kansas courts would apply it only if the clarification “did not impair

vested rights,” as Hunt suggested. 82 P.3d at 871. This is evident from how the

Kansas-endorsed exception analysis is phrased: “if the statutory change [1] does

not prejudicially affect the substantive rights of the parties and [2] is merely

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procedural or remedial in nature, it applies retroactively.” Williams, 244 P.3d at

670 (emphasis added). Assuming we insert “or clarifying” after “merely

procedural or remedial,” we are still left with a conjunctive test. Thus, even if

clarifying, an amendment may not apply retroactively if it would “prejudicially

affect the substantive rights of the parties.”

Here, as already noted, retroactively applying the subsection (g)

amendment would strip Eudora of its only defense to this lawsuit. Accordingly,

we agree with the district court that subsection (g), as amended, is “substantive”

and not retroactive. Douglas-4 therefore remains constrained by the requirement

that the USDA guarantee be “necessary to carry out the purposes of its

organization.” 1

B. Propriety of Summary Judgment

1. Whether We May Consider Douglas-4’s Proposed Summary
Judgment Issues

In the same order in which the district court certified the retroactivity

question, it also refused to grant summary judgment for either side. Having ruled

that Douglas-4 must satisfy the “necessary” requirement regardless of the

amendment, the district court went on to evaluate the parties’ claims in that

1
The district court alternatively held that even if the amended subsection
(g) applies retroactively, it would not relieve Douglas-4 from satisfying the
“necessary” requirement. Given our conclusion that amended subsection (g) does
not apply retroactively, we need not reach this alternative reasoning.

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regard and concluded that genuine issues of material fact precluded summary

judgment.

The district court did not certify that question to us—i.e., whether a

genuine material factual dispute precludes summary judgment. It only certified

whether retroactive application of the amended subsection (g) has any effect on

the current dispute. Douglas-4’s opening brief nonetheless attempts to expand the

issues on appeal to include:

1. Is the issue of whether the Bank Loan was
“necessary” barred by the law of the case, and/or beyond
the scope of the remand?

2. Did the District Court commit error by denying
Douglas-4’s summary judgment motion because the
undisputed evidence discloses that the Guarantee was
necessary (“absolutely necessary” as defined by this
Court in [Eudora I]) to obtain the Bank Loan?

Aplt. Br. at 2.

Whether we may take up Douglas-4’s proposed extra issues depends on the

statute giving us jurisdiction here, 28 U.S.C. § 1292. In pertinent part, it reads:

When a district judge, in making in a civil action an
order not otherwise appealable under this section, shall
be of the opinion that such order involves a controlling
question of law as to which there is substantial ground
for difference of opinion and that an immediate appeal
from the order may materially advance the ultimate
termination of the litigation, he shall so state in writing
in such order. The Court of Appeals which would have
jurisdiction of an appeal of such action may thereupon,
in its discretion, permit an appeal to be taken from such
order . . . .

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28 U.S.C. § 1292(b). Facing an issue similar to ours (an interlocutory appeal

ranging beyond the district court’s certified question), the Supreme Court

expounded on § 1292(b) and concluded that courts of appeal are not limited to the

certified question:

As the text of § 1292(b) indicates, appellate jurisdiction
applies to the order certified to the court of appeals, and
is not tied to the particular question formulated by the
district court. The court of appeals may not reach
beyond the certified order to address other orders made
in the case. But the appellate court may address any
issue fairly included within the certified order because it
is the order that is appealable, and not the controlling
question identified by the district court.

Yamaha Motor Corp., U.S.A. v. Calhoun, 516 U.S. 199, 205 (1996) (internal

quotation marks and citations omitted; emphasis in original); see also Pelt v.

Utah, 539 F.3d 1271, 1283 n.6 (10th Cir. 2008) (applying Yamaha Motor to reach

an “issue [that] was ‘fairly included’ in the [certified] order,” even though the

certified question did not encompass that issue); 16 Charles Alan Wright et al.,

Fed. Prac. & Proc. § 3929 (2d ed., April 2013 update) (“The court may . . .

consider any question reasonably bound up with the certified order, whether it is

antecedent to, broader or narrower than, or different from the question specified

by the district court.”).

Although the Supreme Court did not emphasize it, presumably an additional

requirement (drawn from § 1292(b)’s text) also applies, i.e., that the issue must

comprise “a controlling question of law.” Thus, if an issue is “fairly included

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within the certified order” and is “a controlling question of law,” then we have

discretion to take it up on appeal. Here, the summary judgment denial was a part

of the district court’s retroactivity order.

Having reviewed the parties’ positions at summary judgment, we believe

that no re-trial is necessary. In the interest of judicial economy, we therefore

exercise our discretion to address Douglas-4’s proposed additional issues. We

condense and reformulate those issues into the following inquiry: Did the district

court err in determining that a genuine issue of material fact precluded summary

judgment? We review that question de novo. Borchardt Rifle Corp. v. Cook, 684

F.3d 1037, 1041–42 (10th Cir. 2012).

2. “Necessary” Generally

As already noted at length, this case turns on whether Douglas-4’s USDA

guarantee was “necessary to carry out the purposes of its organization.” K.S.A.

§ 82a-619(g). In Eudora I, we discussed what sorts of needs would suffice to

show that Douglas-4’s USDA guarantee is “necessary.”

First, in general terms, we distinguished the need for a loan from the need

for a guarantee:

Generally, a loan functions as a source of funds, whereas
a guarantee serves to bolster an organization’s existing
credit.

Although each has its own purpose and must be analyzed
independently, without a loan there is nothing to
guarantee. Thus, for a guarantee to be necessary the

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 underlying loan must also be necessary. The converse,
however, is not always true: not every loan gives rise to
a guarantee. Therefore, even if the parties would agree
that the loan was necessary to carry out the purposes of
Douglas-4’s organization, Douglas-4 must still prove
that its cooperation with the USDA—i.e., the
guarantee—was also necessary.

659 F.3d at 977–78 (emphasis in original; citations omitted).

Second, we concluded that

Douglas-4’s decision to seek out a federal guarantee
must . . . be justified by more than the incidental
monopoly protections afforded by § 1926(b); the
guarantee must further at least one of the District’s
purposes as a rural water service provider as provided in
its charter, bylaws, or enacting statutes. Protection from
competition does not suffice. Nor can Douglas-4 justify
its cooperation by appealing to the abstract goals of
maintaining its corporate existence, profits, or integrity
without some direct association to an enumerated
purpose under its charter, bylaws, or relevant statutes.

Id. at 980.

3. Douglas-4’s “Absolutely Necessary” Theory

The foregoing restrictions on the meaning of “necessary” present a problem

for Douglas-4. Douglas-4’s administrator, Scott Schultz, told Douglas-4’s board

members that the USDA-backed loan would have a higher interest rate than the

already-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. This seems to run

afoul of our requirement that “Douglas-4’s decision to seek out a federal

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guarantee must . . . be justified by more than the incidental monopoly protections

afforded by § 1926(b).” Eudora I, 659 F.3d at 980.

But Douglas-4 sees something of a lifeline in subsequent language from

Eudora I, where we clarified that necessity does not imply absolute need: “This

does not mean that Douglas-4’s cooperation with the USDA must be ‘absolutely

necessary,’ i.e., that it could not receive financing without the guarantee. Nor

must Douglas-4 prove that a guarantee was the only or even the cheapest course

of action available.” Id. Douglas-4 therefore argues as follows in support of

summary judgment in its favor:

First, according to Eudora I, a water district need not prove “absolute

necessity”—but it stands to reason that it is a home run for the water district if it

can prove “absolute necessity.” Second, according to Eudora I, the “necessary”

requirement is an inquiry directed at the guarantee, not the loan—and no party

disputes that Douglas-4 needed a loan to borrow money to build the Johnson-6

project. Third, Douglas-4 submitted uncontradicted testimony from a bank officer

that the bank would never have made the $250,000 loan but for the USDA

guarantee. Therefore, according to Douglas-4, the USDA guarantee was

“absolutely necessary” to obtaining the loan.

The problem with Douglas-4’s argument is that it would obviate the

“necessary” inquiry because no water district with a USDA guarantee could ever

fail this test. Before the USDA will agree to guarantee a loan, the lender must

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certify that it “would not make the loan without [the] guarantee.” 7 C.F.R.

§ 1779.63(a)(13). Under Douglas-4’s theory, then, every USDA-guaranteed loan

is “absolutely necessary.” We cannot accept a construction that makes all USDA

guarantees “absolutely necessary” as a matter of Kansas law.

4. Applying the Appropriate Standard

Douglas-4 also erroneously interprets our distinction in Eudora I between

the loan and the guarantee. Although no party disputes that the Johnson-6 project

was necessary in a larger sense, nor that some loan was necessary to build the

Johnson-6 project, we cannot divorce the guarantee’s purpose from the loan’s

purpose. If Douglas-4 could not have received any loan for the Johnson-6 project

without the guarantee, or could not have borrowed the needed amount without it,

then the guarantee would be absolutely necessary because the loan depends on the

guarantee, the project depends on the loan, and Douglas-4’s continuing viability

depends on the project. We presume that would satisfy § 1926(b).

But if the guarantee was not absolutely necessary in this sense, the

guarantee must have a “direct association to an enumerated purpose under its

charter, bylaws, or relevant statutes.” Eudora I, 659 F.3d at 980. A “direct

association” means the guarantee would further at least one of the water district’s

enumerated purposes even if the guarantee did not provide § 1926(b) protection.

If a direct association exists, the final question is whether the USDA

guarantee is ultimately “necessary.” To sustain a finding that the guarantee was

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necessary, the water district would need to demonstrate that the guarantee made

the loan qualitatively better than other reasonably available loans. The

guaranteed loan need not present literally “the cheapest course of action

available.” Eudora I, 659 F.3d at 980. But interest rates, closing fees,

professional fees, and so forth are highly probative of the quality of the loan as

compared to other loans, as are less quantifiable terms (e.g., collateral

requirements, the length of the repayment period, and so forth). The water

district’s own views, if any, on the quality of various loans in comparison to each

other would certainly be relevant.

Under this standard, Douglas-4 fails both the “absolutely necessary” and

“necessary” inquiries. As to “absolutely necessary,” the evidence shows that

Douglas-4 could have obtained the KDHE loan for the entire $1.25 million. Thus,

the USDA-guaranteed private loan was not absolutely necessary.

As to “necessary,” Douglas-4 fails both the direct association element and

the necessary inquiry itself. Douglas-4 offers numerous arguably direct

associations, such as “prevent[ing] the city from cherry picking Douglas-4’s

customers which would result in higher rates and charges to remaining customers”

and “prevent[ing] the city from annexing areas causing Douglas-4 to have one or

more dead-end lines serving customers, requiring more flushing, and more wasted

water.” Aplt. Br. at 47, 53 (capitalization normalized). But all of these outcomes

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depend on § 1926(b) protection, not on the guarantee. They do not stand

independent of § 1926(b). Accordingly, they are not direct associations.

As for “necessary,” the undisputed evidence shows that the USDA-

guaranteed loan was not the qualitatively best loan available—save for § 1926(b)

protection. Indeed, § 1926(b) protection was the sole reason Schultz

recommended obtaining a USDA-guaranteed loan. Schultz further acknowledged

that it would be cheaper to finance the entire project through a KDHE loan.

Given this evidence, no reasonable jury could find in favor of Douglas-4 on

the “necessary” question. Eudora therefore deserves summary judgment.

III. Conclusion

We AFFIRM the district court’s conclusion that the 2012 amendment to

K.S.A. § 82a-619(g) does not apply retroactively. We also AFFIRM the district

court’s denial of summary judgment to Douglas-4 but REVERSE the district

court’s denial of summary judgment to Eudora.

On remand, the district court should enter summary judgment in Eudora’s

favor on the question of whether Douglas-4’s USDA guarantee was “necessary to

carry out the purposes of its organization” and otherwise proceed in a manner

consistent with this opinion.

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