Xenia Rural Water Dist. v. City of Johnston

Decision Date19 March 2020
Docket NumberNo. 4:18-cv-00431–JEG-CFB,4:18-cv-00431–JEG-CFB
Citation467 F.Supp.3d 696
CourtU.S. District Court — Southern District of Iowa

Frank Murray Smith, Frank Smith Law Office, Des Moines, IA, Michael Dwight Davis, Pro Hac Vice, Steven Massey Harris, Pro Hac Vice, Doyle Harris Davis & Haughey, Tulsa, OK, for Plaintiff.

William J. Miller, Manuel Adolfo Cornell, Dorsey & Whitney LLP, Des Moines, IA, for Defendant City of Johnston, Iowa.

Frank Murray Smith, Frank Smith Law Office, Des Moines, IA, Michael Dwight Davis, Steven Massey Harris, Pro Hac Vice, Doyle Harris Davis & Haughey, Tulsa, OK, for Defendant Xenia Rural Water District.



This matter comes before the Court on Motions for Partial Summary Judgment, ECF Nos. 33 and 44, from Xenia Rural Water District (Xenia) and the City of Johnston, Iowa (Johnston), respectively. A hearing on the motions was held on February 11, 2020. Plaintiff was represented by attorneys Steven Harris and Frank Smith. Defendant was represented by attorneys William Miller and Manuel Cornell. The matter is fully submitted and ready for decision.

A. Factual Background

Johnston is a municipality that operates its own water supply system. Xenia is a rural water provider operating in Polk County, Iowa, among other locations in Iowa. On May 18, 1982, Xenia borrowed $3,200,000 from the United States Department of Agriculture (USDA) and has borrowed additional funds many times since then. Xenia first incorporated in 1977 under Iowa Code Chapter 504A as a nonprofit corporation titled Xenia Rural Water Association. On October 30, 1990, Xenia petitioned the Polk County Board of Supervisors (PCBOS) for conversion to a rural water district under Iowa Code Chapter 357A, and the PCBOS granted the petition in a November 27, 1990 resolution. The resolution stated, in relevant part:

BE IT FURTHER RESOLVED that it is the order of the Polk County Board of Supervisors that the district whose boundary includes the area in Polk County described as follows be and hereby is established as the Xenia Rural Water District with all of the rights, powers and duties specified in Chapter 357A of the code of Iowa, as amended:
All of the following sections in Polk County except that portion lying within the boundary of any incorporated city on the date hereof:
(1) The North ½ of Sections 1, 2, and 3, all of Sections 4 through 9, Sections 16 through 20, and Sections 29, 30, 31, 32, and that part of Section 33 west of Saylorville Lake all in Township 81 North Range 25 West.
(2) All of that part of all Sections in Township 80 North Range 25 West lying westerly of Saylorville Lake.

Pl.’s App. 13, ECF No. 34-1.

There are two sets of service areas subject to the present suit, which Xenia refers to as "Encroachment Areas" and a "Disputed Area." The Encroachment Areas and Disputed Area together comprise what Xenia calls the "areas in dispute." The parties agree that the areas in dispute are within the boundaries described in the PCBOS resolution. Johnston has provided water service to portions of the Encroachment Areas since at least 1995 and continues to do so. The Disputed Area contains approximately 1900 acres, including approximately 550 acres annexed by Johnston in 2018 and approximately 1350 acres over which Johnston intends to annex.

In early 2018, Xenia and Johnston began negotiations relating to a request for water services from the United States Navy for a facility it was building in the Disputed Area. The negotiations led to an April 4, 2018 Interim Agreement, which stated, in relevant part, "Section 357A.2 of the [Iowa] Code provides that Xenia may not provide services within two miles of the limits of Johnston unless Johnston has approved a new water system plan." Def.’s App. 21, ECF No. 40-3. The agreement was signed by the Mayor and City Clerk of Johnston and the Chair and Secretary of Xenia. The area Johnston intended to annex included sections both within and over two miles from Johnston, although the parties dispute the exact portions. Negotiations broke down around September 2018 after Johnston offered to pay Xenia approximately $1.58 million for its rights to the area over two miles from Johnston's city limits.

Xenia filed a three-count Complaint against Johnston on November 3, 2018, and filed a five-count First Amended Complaint on January 4, 2019. Count One alleges that Johnston violated 42 U.S.C. § 1983 by depriving Xenia of its rights under 7 U.S.C. § 1926(b), which protects certain entities indebted to the USDA from municipal encroachment. Count Two requests a Declaratory Judgment under 28 U.S.C. §§ 2201 and 2202 on Xenia's legal rights to serve the areas in dispute. Count Three requests the Court enjoin Johnston from violating § 1926(b), Count Four requests the Court create a constructive trust conveyed to Xenia for Johnston's water infrastructure in the areas in dispute, and Count Five requests damages. In its January 18, 2019 Answer to the Amended Complaint, Johnston asserted nine affirmative defenses and a two-count counterclaim. Counterclaim Count I requests a Declaratory Judgment as to the legal rights between Xenia and Johnston, and Counterclaim Count II requests an injunction against Xenia regarding the same.

On June 12, 2019, Xenia moved for partial summary judgment as to several elements of its claims and against all of Johnston's affirmative defenses and counterclaims. On July 18, 2019, Johnston moved for partial summary judgment only as to Xenia's request for a ruling declaring that federal law preempts Iowa Code § 357A.2. On January 8, 2020, Xenia filed a Second Motion for Partial Summary Judgment, which requested summary judgment as to an additional aspect of an element of Xenia's claims and as to past damages. Xenia has not moved for summary judgment as to future damages or its requests for equitable relief. The February 11, 2020 hearing concerned Johnston's Motion and Xenia's first Motion. Neither the hearing nor this Order addresses Xenia's second Motion.

B. Legal Background

Federal law permits the USDA1 to issue loans to certain entities for financing, among other things, rural water service. 7 U.S.C. § 1926(a)(1). Section 1926(b) provides that the "service provided or made available" by a loan recipient "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." 7 U.S.C. § 1926(b). "Congress enacted section 1926(b) to encourage rural water development and to provide greater security for [USDA] loans." Rural Water Sys. No. 1 v. City of Sioux Ctr., 202 F.3d 1035, 1039 (8th Cir. 2000) (citing Sequoyah Cty. Rural Water Dist. No. 7 v. Town of Muldrow, 191 F.3d 1192, 1196 (10th Cir. 1999) ). "To qualify for protection, an entity must: (1) be an ‘association’ under the statute, (2) have a qualifying federal loan, and (3) have provided or made service available to the disputed area." Pub. Water Supply Dist. No. 3 of Laclede Cty. v. City of Lebanon, 605 F.3d 511, 521 (8th Cir. 2010) (citing Sequoyah Cty. Rural Water Dist. No. 7, 191 F.3d at 1197 ).

"Making service available has two components: (1) the physical ability to serve an area; and (2) the legal right to serve an area." Id. (quoting Rural Water Sys. No. 1, 202 F.3d at 1037 ). Courts evaluate the physical ability to serve element using the "pipes in the ground" test, which asks "whether a water association ‘has adequate facilities within or adjacent to the area to provide service to the area within a reasonable amount of time after a request for service is made.’ " Pub. Water Supply Dist. No. 3 of Laclede Cty., 605 F.3d at 523 (quoting Sequoyah Cty. Rural Water Dist. No. 7, 191 F.3d at 1202 ). A water provider's legal rights are determined by state law. See Rural Water Sys. No. 1 v. City of Sioux Ctr., 967 F. Supp. 1483, 1525 (N.D. Iowa 1997) (citing Lexington-S. Elkhorn Water Dist. v. City of Wilmore, 93 F.3d 230, 234 (6th Cir. 1996) ), aff'd, 202 F.3d 1035 (8th Cir. 2000). The party's "protected service area is defined by state law as of the date" when the debt was assumed. Id. at 1530. "[A]ny [d]oubts about whether a water association is entitled to protection from competition under § 1926(b) should be resolved in favor of the [USDA]-indebted party seeking protection for its territory.’ " Rural Water Sys. No. 1, 202 F.3d at 1038 (second alteration in original) (quoting Sequoyah Cty. Rural Water Dist. No. 7, 191 F.3d at 1197 ). At the same time, the Court's "role is to interpret and apply statutes as written, for the power to redraft laws to implement policy changes is reserved to the legislative branch." Pub. Water Supply Dist. No. 3 of Laclede Cty., 605 F.3d at 515 (quoting Doe v. Dep't of Veterans Affairs, 519 F.3d 456, 461 (8th Cir. 2008) ).

The parties dispute whether and how Iowa Code § 357A.2 applies to Xenia's legal rights. The current version states, in relevant part, "Water services, other than water services provided as of April 1, 1987, shall not be provided within two miles of the limits of a city by a rural water district incorporated under this chapter except as provided in this section." Iowa Code § 357A.2(3). The parties refer to this as the "two-mile rule." The statute then sets forth a process by which a rural water district may receive an exception to the two-mile rule, which requires the district to notify the relevant city of its intent to serve an area within two miles of the city's limits by submitting a proposed plan. Iowa Code § 357A.2(4). After the rural water district submits the plan, "the city may affirmatively waive its right to provide water service within the areas designated for water service by the rural water district, or the city may reserve the right to provide water service in some or all of the areas which the district or association intends to serve." Iowa Code § 357A.2(4)(d)(1). If the...

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