Hard-ing Builders, LLC et al v. The City of Phenix City, Alabama

Filing 89

MEMORANDUM OPINION AND ORDER directing as follows: (1) the motion for leave to file reply to defs' opposition to remand 84 is DENIED; (2) the motion to remand 74 is GRANTED; (3) this case is REMANDED to the Circuit Court of Russell County, A labama; (4) directing the clerk to take appropriate steps to effect the remand; (5) any other pending motions are left for resolution by the state court. Signed by Hon. Chief Judge Mark E. Fuller on 8/20/09. (Attachments: # 1 civil appeals checklist)Furnished to YG, HC & KG (terminates PTC 9/8/09 & Non Jury Trial 10/19/09).(djy, )

IN THE UNITED STATES DISTRICT COURT F O R THE MIDDLE DISTRICT OF ALABAMA E A S T E R N DIVISION H A R D -IN G BUILDERS, LLC, et al., P L A IN T IF F S , v. C IT Y OF PHENIX CITY, ALABAMA, a Municipal Corporation, and T H E DEPARTMENT OF PUBLIC U T IL IT IE S FOR THE CITY OF PHENIX C IT Y , ALABAMA, D EFEN D A N TS. ) ) ) ) ) C A S E NO.: 3:07-CV-1069-MEF ) ) (WO) ) ) ) ) ) )

M E M O R A N D U M OPINION AND ORDER IN T R O D U C T IO N P la in tif f s , a group of twenty-two builders, contractors, and developers who operate in and around the City of Phenix City, Alabama, commenced this suit and seek redress under v a rio u s state and federal constitutional provisions for what they claim were illegal sewer tap f e e s and impact fees charged by Defendants. The case is presently before the Court on a M o tio n for Summary Judgment (Doc. # 70), which Defendants filed on June 12, 2009, and a Motion to Remand (Doc. # 74), which Plaintiffs filed with their response to the Motion for S u m m a ry Judgment on July 1, 2009. Both Motions are under submission and ripe for d is p o s itio n . The Motion to Remand challenges the Court's subject matter jurisdiction, so the C o u rt must address it first. The Court finds that the Motion to Remand is due to be

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GRANTED and therefore does not reach the merits of the Motion for Summary Judgment.1 F A C T U A L AND PROCEDURAL BACKGROUND Prior to April 17, 2007, the Department of Public Utilities for Defendant City of P h e n ix City, Alabama ("the City") collected a sewer tap fee from persons or entities applying f o r a building permit. Plaintiffs paid the sewer tap fees in connection with numerous building p ro je c ts . On April 17, 2007, the City repealed the ordinance authorizing the collection of the s e w e r tap fees in pre-stubbed situations.2 These facts were the basis for Plaintiffs' first C o m p la in t, which they filed in the Circuit Court of Russell County, Alabama, on November 6 , 2007. (Doc. # 1-2 p.1.) Plaintiffs sought by their original Complaint reimbursement of sewer tap fees made p rio r to the repeal of the ordinance. Plaintiffs claimed that the collection of the fees (1) v io la te d their rights, privileges, and immunities under the Fourteenth Amendment of the U.S. C o n s titu tio n and Section 235 of the Alabama Constitution, (2) violated their rights under the F if th and Fourteenth Amendment of the U.S. Constitution by taking their property without ju s t compensation, (3) violated Section 233 of the Alabama Constitution by bearing no re la tio n to the increased value to the properties upon which the assessments were imposed. Defendants timely removed the case to this Court on December 7, 2007, arguing that

A Motion for Leave to File Reply to Defendants' Opposition to Remand (Doc. # 84) is also pending. That Motion is due to be DENIED. A "pre-stubbed situation" is a new subdivision in which the builder, rather than the c ity, connects new residences to the sewer system. -22

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the Court had subject matter jurisdiction as a result of Plaintiffs' federal constitutional c la im s . (Doc. # 1.) Plaintiffs filed a Motion to Remand on January 28, 2008, in which they a rg u e d , among other things, that the Court lacked subject matter jurisdiction because of the a p p lic a tio n of the Tax Injunction Act ("TIA"), 28 U.S.C. § 1341. (Doc. # 49.) The Court d e n ie d the Motion to Remand on May 27, 2009. (Doc. # 54). The Court began its M e m o ra n d u m Opinion and Order by noting that under the TIA, "[t]he district courts shall not e n jo in , suspend or restrain the assessment, levy or collection of any tax under State law w h e re a plain, speedy and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1341. The Court also noted that the TIA, when applicable, deprives a federal court of s u b je c t matter jurisdiction. California v. Grace Brethren Church, 457 U.S. 393, 408 (1982). The central question for purposes of the first Motion to Remand, therefore, was whether the s e w e r tap fees were a tax or a regulatory fee. "A tax is generally a revenue-raising measure, im p o s e d by a legislative body, that allocates revenue to a general fund, and is spent for the b e n e f it of the entire community. A user fee, by contrast, is a payment given in return for a g o v e rn m e n t provided benefit and is tied in some fashion to the payor's use of the service." (Doc. # 54 p.3.) Applying these principles, the Court held that, "based on the evidence before the C o u rt, it appears that the sewer tap [fee] was a regulatory fee, and not a tax, because it was re la te d to the inspection and maintenance of the new sewer lines, and not used for a more g e n e ra l purpose." (Doc. # 54.) The result of this finding was that the TIA did not deprive the

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Court of subject matter jurisdiction. The Court noted in its Opinion the Motion to Remand th a t "[i]f additional evidence indicates that the sewer tap [fee] was not used to offset the cost o f inspection and maintenance of sewer lines, then the Court may revisit the issue of subject m a tte r jurisdiction." (Doc. # 54 p.7 n.1.) Plaintiffs filed an Amended Complaint on September 17, 2008. (Doc. # 60.) The A m e n d e d Complaint contained the same claims arising from the sewer tap fees as the o rig in a l Complaint, but added parallel claims arising from something called impact fees. Like sewer tap fees, Defendants charged an impact fee to every person or entity who applied f o r a residential or commercial building permit. An impact fee is "a one-time charge to a n e w connection to the system for the value of that connection in the sense that it results in a reduction of the capacity to serve at a wastewater treatment plant or a water treatment p la n t." (Doc. # 74 p.9.) The Amended Complaint also added the Department of Public

S e rv ic e s for the City of Phenix City as a defendant. Defendants filed a Motion for Summary Judgment on June 12, 2009. (Doc. # 70.) They seek dismissal of Plaintiffs' claims in toto. Plaintiffs included with their response to th e Motion for Summary Judgment a renewed Motion to Remand; they claim evidentiary d e v e lo p m e n ts subsequent to the Court's prior Order on the first Motion to Remand support th e ir earlier argument that the sewer tap fees are taxes and show that the impact fees are also

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taxes.3 Defendants filed a response to the Motion to Remand in which they vigorously c o n te s t Plaintiffs' characterizations of the sewer tap fees and impact fees as taxes and also a tta c k Plaintiffs' presentation of the record. The Motion to Remand is therefore under s u b m iss io n and ripe for disposition.4 D IS C U SS IO N A . Legal Framework F e d e ra l courts are courts of limited jurisdiction. Kokkonen v. Guardian Life Ins. Co. o f Am., 511 U.S. 375 (1994); Burns v. Windsor Ins. Co., 31 F.3d 1092, 1095 (11th Cir. 1994); W y m b s v. Republican State Executive Comm., 719 F.2d 1072, 1076 (11th Cir. 1983). As s u c h , federal courts only have the power to hear cases that they have been authorized to hear b y the Constitution and the Congress of the United States. Kokkonen, 511 U.S. at 377. When a case is originally filed in state court, a party may remove it if the case o rig in a lly could have been brought in federal court. See 28 U.S.C. § 1441(a); Lowery v. Ala. P o w e r Co., 483 F.3d 1184, 1207 (11th Cir. 2007), cert. denied, 128 S. Ct. 2877 (2008) (h o ld in g that "the party seeking a federal venue must establish the venue's jurisdictional re q u ire m e n ts " and that removing defendants bear that burden in the context of a motion to r e m a n d ). The non-moving party may move for remand, however, which motion the court

T h e impact fees were not added to Plaintiff's claims until after the Court ruled on the f irs t Motion to Remand. The Motion for Summary Judgment is also under submission, but because of its ru lin g on the Motion to Remand, the Court does not reach the merits of that Motion. -54

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should grant if "it appears that the district court lacks subject matter jurisdiction." See 28 U .S .C . § 1447(c). Because removal jurisdiction raises significant federalism concerns, " re m o v a l statutes are construed narrowly; where plaintiff and defendant clash about ju ris d ic tio n , uncertainties are resolved in favor of remand." Burns, 31 F.3d at 1095. B. Analysis T h e operative legal principles for purposes of this Motion to Remand are the same as th e y were before. Under the TIA, "[t]he district courts shall not enjoin, suspend or restrain th e assessment, levy or collection of any tax under State law where a plain, speedy and e f f ic ie n t remedy may be had in the courts of such State." 28 U.S.C. § 1341. The TIA, when a p p lic a b le , deprives a federal court of subject matter jurisdiction. Grace Brethren Church, 4 5 7 U.S. at 408. Thus, the central issue is whether the sewer tap fees and impact fees are ta x e s or regulatory fees. If they are taxes, then the TIA deprives the Court of subject matter ju ris d ic tio n . If they are regulatory fees, then the Court has subject matter jurisdiction because o f the federal constitutional claims. This determination should be made pursuant to federal, a n d not state, law. Lightwave Technologies, L.L.C. v. Escambia County, 43 F. Supp. 2d 1311, 1 3 1 4 (S.D. Ala. 1999) (citing Robinson Protective Alarm Co. v. City of Philadelphia, 581 F. 2 d 371 (3d Cir. 1978)). Courts have made the following distinction between a tax and a re g u la to ry fee: A tax is generally a revenue-raising measure, imposed by a legislative body, th a t allocates revenue to a general fund, and is spent for the benefit of the e n t i r e community. A user fee, by contrast, is a payment given in return for a g o v e rn m e n t provided benefit and is tied in some fashion to the payor's use of -6 -

the service.

Id . (quoting Folio v. City of Clarksburg, 134 F.3d 1211 (4th Cir. 1998)). A factor that courts h a v e considered is whether the assessment provides a benefit to the public, like a general tax, o r whether it defray's the agency's cost of regulating the activity that is the subject of the a s s e s sm e n t. Id. at 314-16; Bidart Bros. v. California Apple Com'n, 73 F.3d 925, 932 (9th Cir. 1 9 9 6 ). In support of the Motion to Remand, Plaintiff argue that both the sewer tap fees and th e impact fees are illegal taxes, and their status as taxes deprives this Court of jurisdiction. In particular, they argue that the fees are taxes because they are not related to the cost of the s e rv ic e provided by the municipality and because they are used to provide general revenue. T h e y rely principally upon Town of Electic v. Mays, 547 So. 2d 96 (Ala. 1989) and L ig h tw a v e Technologies, LLC v. Escambia County, 43 F. Supp. 2d at 1314. Moreover, they rig h tl y point out that the Court should remand the case unless jurisdiction is "absolutely c le a r," Newman v. Spectrum Stores, Inc., 109 F. Supp. 2d 1342, 1345 (M.D. Ala. 2000) (A lb ritto n , C.J.), and that Defendants bear the burden of providing absolute clarity in the c o n te x t of a motion to remand. Leonard v. Enterprise Rent-A-Car, et al., 279 F. 3d 967, 972 (1 1 th Cir. 2002). Defendants oppose the Motion to Remand. They argue that Plaintiffs have

m isc h a ra c te riz e d the record and that the sewer tap fees and impact fees are regulatory fees a n d not taxes. They rely heavily on the analysis in the Court's prior Order denying the first -7 -

Motion to Remand. In particular, they argue that the sewer tap fees are regulatory fees and n o t taxes because they are collected and maintained in the Department's account, which is s e p a ra te from the City's general revenue fund, and that therefore the tap fee benefits inure o n ly to sewer users and not to the public at large. They also argue that the impact fees are not ta x e s because they are not allocated or used by the City and are used to defray costs related to the sewer system's capital improvements. In light of the now-developed and voluminous state of the record, the Court cannot b e "absolutely certain" that the sewer tap fees and impact fees are regulatory fees and not ta x e s . The Court is thus compelled by Eleventh Circuit precedent to remand this case to the C irc u it Court of Barbour County for further proceedings. A . Sewer Tap Fees P la in tif f s argue the sewer tap fees are taxes because the City did not tailor them to the expenses they were supposed to offset and used the monies to fund the general operations o f the Department of Public Utilities. Plaintiffs offer Lightwave in support of their position. The United States District Court for the Southern District of Alabama in Lightwave rejected th e defendant county's argument that a right-of-way fee was a regulatory fee and not a "tax u n d e r state law" because "concern over maintenance and repairs were the principal m o tiv a tin g factor in imposition of the user fees," but the defendant County did not use the f e e s for that purpose. 43 F. Supp. 2d at 1314. The Court in Lightwave considered two f a c to rs when determining that the assessments in question were taxes: (1) whether the

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municipality tailored the amount of the fee to its purported purpose, and (2) whether the re v e n u e from the fee was used for expenditures related to the service for which the fee was a s s e s se d . Id. This Court in its prior order stated that "[i]f additional evidence indicates that the s e w e r tap [fee] was not used to offset the cost of inspection and maintenance of the sewer lin e s , then the Court may revisit subject matter jurisdiction." (Doc. # 54.) Plaintiffs have p re s e n te d such evidence. First, they present evidence of the incongruence between the City's c la im that the fees were intended to offset the costs of actually making the sewer tap and the C ity's practice of charging this fee even in pre-stubbed neighborhoods, where the builder and n o t the City actually makes the connection.5 In response, the City claims that the sewer tap f e e s were collected to offset costs of maintaining, inspecting, and televising sewer lines; but P la in tif f s present evidence that the City's Building Department conducts inspections of the s e w er lines. Defendants admit that the Building Department inspections occur, but claim that th e Department conducts inspections and maintenance too. Plaintiffs respond with evidence th a t the Department is compensated for any inspection expenses when the builder deeds the s e w e r lines to the City. Finally, Plaintiffs point out that the amount of the sewer tap

P la in tif f s raise the statements of the City's attorney, who once hoped that by charging a sewer tap fee in pre-stubbed neighborhoods the City was not "charging the Plaintiffs for s o m e th in g the City does not do." The City's fee consultant also wrote a letter stating: "we d id agree that it was inappropriate for the Department of Public Utilities to charge a d e v e lo p e r for a sewer tap fee on pre-stubbed and developed lots because it is he who incurs a cost that would otherwise have been borne by the Department of Public Works." -9-

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assessment was never calculated to accurately reflect the cost of either tapping the sewer lin e s or inspecting and maintaining those lines. As the Court foresaw in its prior Opinion, th e re are now substantial uncertainties about whether the sewer tap fees are taxes or re g u la to ry fees. Thus, as in many cases when the parties clash over the question of ju ris d ic tio n , this uncertainty requires remand of the claims arising from allegedly wrongfully a s s e s se d sewer tap fees.6 B . Impact Fees T h e Parties also clash about whether the impact fees are taxes or regulatory fees. Plaintiffs make similar arguments about why the impact fees are taxes as they made about th e sewer tap fees. They argue that the amount of the impact fee is not related to the p u rp o rte d purpose, i.e. to offset the reduction in capacity, because the City did not attempt to tie the fee amount to the diminution in available capacity when setting the rates. Specifically, the City imposed the original $1,000.00 fee without study, and imposed the later $ 1 ,7 5 0 .0 0 fee as the result of an upward departure from a number recommended by its fee c o n s u lta n t "off the top of his head," rather than by calculating the actual reduction in capacity re p re se n te d by one additional connection. Moreover, they present evidence that the fees are u s e d for general purposes, and might have been initially adopted to pay for a specific project k n o w n as the "Mill Creek outfall." In particular, they point to testimony of a fee consultant

T h e Court expresses no opinion on the ultimate issue of whether the sewer tap fees a re taxes or regulatory fees. -10-

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for the City, and others, that indicates that the Department experienced revenue shortfalls and th a t impact fees were a method to offset the shortfalls when the City did not want to raise u s e r fees. Defendants point to the consultant's testimony that the increase in revenue from im p a c t fees would have been immaterial relative to the total revenue requirements. Plaintiffs ra ise the statement of the former City Utilities director that the impact fees were used " w h e re v e r needed" in the Department, and only later was a separate capital outlay fund e s ta b lis h e d into which the Department would place the assessed impact fees. In light of the e v id e n c e Plaintiffs present of the City's failure to calibrate the amount of the fee to the d im in u tio n in capacity, together with the evidence that impact fees were used for purposes o th e r than capital investment or recoupment, the Court finds that Defendants have failed to m e e t their burden of showing that the impact fees are not taxes. Thus, these claims are due to be remanded.7 F in a lly, the Court notes that remand serves the policy purposes underlying the TIA b y allowing the State of Alabama and its constituent municipalities to handle for themselves m a n a g e m e n t of the public treasury. Whether a particular exaction is a tax under the TIA is a question of federal law, to be determined in accordance with the congressional policies u n d e rlyin g the Act. Lightwave, 43 F. Supp. 2d at 1314 (citing Robinson, 581 F.2d at 371). T h a t policy is: "to promote comity and to afford the states the broadest independence,

T h e Court expresses no opinion on the ultimate issue of whether the assessment fees a re taxes or regulatory fees. -11-

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consistent with the federal constitution, in the administration of their affairs, particularly re v e n u e raising." Id. (quoting Wright v. McClain, 835 F.2d 143, 144 (6th Cir. 1987)); see a ls o Robinson, 581 F. 2d at 375 ("Congress intended that the Tax Injunction Act be u n if o rm ly applied, consistent with the principles of federalism, comity and non-interference w ith state fiscal affairs embodied in the Act."). Thus, the Court refuses to apply a hyperte c h n ic a l test distinguishing between taxes and regulatory fees given the uncertainty in this c a s e , because the principles of federalism and comity that undergird the TIA counsel remand. The State, the City, and the plaintiffs should be able to work out amongst themselves these m a tte rs of revenue raising and public utility maintenance without a federal court in te rm e d d lin g . CONCLUSION F o r the foregoing reasons, it is hereby ORDERED as follows: 1. T h e Motion for Leave to File Reply to Defendants' Opposition to Remand (Doc. # 84) is DENIED. The Motion to Remand (Doc. # 74) is GRANTED. T h is case is REMANDED to the Circuit Court of Russell County, Alabama. T h e Clerk is DIRECTED to take appropriate steps to effect the remand. Any other pending motions are left for resolution by the state court.

2. 3. 4. 5.

D O N E this the 20th day of August, 2009. /s/ Mark E. Fuller CHIEF UNITED STATES DISTRICT JUDGE

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