Penguin Random House LLC v. Mayor & Common Council of Westminster

PENGUIN RANDOM HOUSE LLC v. MAYOR AND COMMON COUNCIL OF WESTMINSTER

No. 2123

COURT OF SPECIAL APPEALS OF MARYLAND

September Term, 2019

April 13, 2021

Circuit Court for Carroll County

Case No. C-06-CV-19-000163

UNREPORTED

Fader, C.J., Leahy, Reed, JJ.

Opinion by Fader, C.J.

*This is an unreported opinion, and it may not be cited in any paper, brief, motion, or other document filed in this Court or any other Maryland Court as either precedent within the rule of stare decisis or as persuasive authority. Md. Rule 1-104.

Penguin Random House, LLC ("Penguin"), the appellant, challenges the decision of the Mayor and Common Council of Westminster ("Westminster"), the appellee, to deny Penguin's request for a refund on a levied special assessment. Westminster imposes a special water and sewer assessment on all newly constructed buildings that connect to water and sewer lines it builds and maintains. The purpose of the assessment is to recover the capital costs of improvements to the city's water and sewer system from properties that benefit specially from the improvements. Penguin contends that the special assessment Westminster charged for Penguin's construction of a new warehouse violated Maryland common law and the United States Constitution because the amount charged was disproportionate to the benefit it will receive based on its anticipated water usage. Penguin sought a refund of the special assessment on that ground, which Westminster denied. The Maryland Tax Court affirmed Westminster's denial, and the Circuit Court for Carroll County upheld the Tax Court's decision on judicial review.

Penguin's challenge is premised on a misunderstanding of how benefits from improvements that are funded by a special assessment are evaluated. Under well-established Maryland law, such benefits are measured by the value accruing to the property from the improvements; the property owner's present or anticipated use of the property is irrelevant. Penguin failed to introduce any evidence to challenge Westminster's presumptively valid legislative judgment that Penguin's property benefitted by an amount at least equal to the amount of the assessment. As a result, we discern no error in the Tax Court's decision, which was based on substantial evidence in the record, and will therefore affirm the circuit court's judgment.

BACKGROUND

Westminster's Special Benefit Assessments for Water and Sewer Service

Sections 124-24 and 160-8 of the Westminster City Code authorize special benefit assessments against any building to which Westminster provides water and sewer service, respectively, "prior to the issuance of a building permit[.]" Westminster imposes these special assessments on all new construction serviced by its water and sewer system to recover its capital costs in building capacity to provide service to new customers. At the relevant time, Westminster imposed such assessments pursuant to Amended Ordinance No. 795 ("Ordinance 795"), which became effective on January 1, 2009.¹

The preamble to Ordinance 795 identifies that Westminster had "undertaken an extensive review of . . . fees, charges and costs in order to establish and collect reasonable amounts for its services," and that the purpose of the ordinance was "to adopt a comprehensive schedule" "to amend, update and standardize various fees, charges and costs regarding the provision of its utility services[.]" Ordinance 795 thus establishes fee schedules for, among other things, applications, waivers, and extensions of service; permits; connection charges; appeals; meters; main extensions; and service discontinuation. The ordinance also sets the amounts of the special utility benefit assessments for both sewer and water based on the type of use, with separate schedules applicable to single-family dwelling units; multifamily dwelling units; industrial manufacturing; schools and colleges; hospitals and nursing homes; hotels and motels;commercial space; and, as most relevant here, industrial warehousing. For warehousing, the charges are calculated based on the square footage of the warehouse according to the following schedule:

   Sewerage  Water  Up to 2,000 square feet  $5,496  $5,244  Next 3,000 square feet  $1.02 per square foot  $1.00 per square foot  Next 5,000 square feet  $0.84 per square foot  $0.84 per square foot  Next 20,000 square feet  $0.67 per square foot  $0.69 per square foot  All over 30,000 square feet  $0.46 per square foot  $0.46 per square foot 

The rates included in the schedule were based on a 2008 cost-of-service study conducted for Westminster by Municipal & Financial Service Group, a public sector utilities consulting firm. Beginning January 1, 2009, these rates have applied uniformly to all new warehouse construction. Westminster has used square footage as the sole method of calculating water and sewer special assessments for warehouses since at least 2004.

Westminster's Special Benefit Assessment Levied on Penguin

Penguin owns and operates a book distribution business in Carroll County that is outside of Westminster city limits, but which is serviced by the city's water and sewer system. During the summer of 2017, Penguin submitted a site plan to Carroll County to expand its facilities, which then comprised roughly 1.3 million square feet, by the addition of a new 189,865 square foot warehouse, in which Penguin intended to store seldom-used books. At the same time, Penguin also submitted a water and sewer service application to Westminster. In the application, Penguin projected that its intended use of the new warehouse would require only 20 employees and the addition of a single restroom. Penguin estimated that each employee would generate a water demand of 15 gallons per day, for atotal of 300 gallons a day. Westminster approved the water and sewer application in June 2017, and Carroll County approved the site plan in September 2017.

When Penguin applied for a permit to begin construction, Westminster issued an invoice for water and sewer special assessment fees calculated pursuant to the rates set forth in Ordinance 795, which amounted to $99,793 for water and $99,705 for sewer, for a total of $199,498. Penguin disputed the assessment in writing, complained that the amount was "excessive in relation to the benefit being conferred upon the property," and requested that the assessment instead be calculated based on Penguin's expected water usage. After Westminster declined to change the assessment amount, and because Penguin could not begin construction without the building permit, Penguin paid the assessment. Penguin then submitted a claim for a refund.

Westminster held a hearing on Penguin's refund request in March 2018, presided over by Tammy Palmer, Westminster's Director of Finance and Administrative Services. Penguin's two witnesses testified that the warehouse addition would replace off-site storage and would use fewer employees than an ordinary warehouse. They testified that the "realistic number" of employees in the warehouse at any given time would be around eight and that their actual water use would most likely be less than the projected 15 gallons per day per full-time employee.

In April 2018, Ms. Palmer issued a written denial of the refund request. In explaining the basis for her conclusion that the special assessment was valid, Ms. Palmer stated that she believed that "the [Westminster Common Council] made a reasonable legislative judgment about the total costs of water and sewer related capital projects overtime," and that the costs imposed upon Penguin and others were "based on a definite and just plan." Ms. Palmer's letter included an extensive discussion of the evidence presented at the hearing and Maryland case law concerning special assessments.

Penguin timely appealed to the Maryland Tax Court, which held a hearing in January 2019. Westminster called three witnesses. Ms. Palmer testified that Ordinance 795 was lawfully enacted and that it applied to all new construction to which Westminster provides water and sewer service. Edward J. Donahue, III, president of the consulting firm Westminster had retained in setting the applicable rates, testified as an expert in municipal rate setting. He testified that the special assessment was intended to "recover the capital costs related to the amount of capacity built to handle new customers"; that the special assessment charges were not related to the amount of water consumed by individual users; and that, in his opinion, the square-footage methodology was not an unreasonable or arbitrary way to assess the benefits of the system. Eric Callocchia, a senior manager at the same consulting firm, testified as an expert in water and sewer rate setting. Mr. Callocchia opined that Westminster's method for calculating assessments was a reasonable way to apply the costs of the water and sewer system to the eventual benefits of that system. He also explained that the study underlying the calculation of water and sewer assessments assumed that a warehouse of the size Penguin proposed "would have 450 some employees." Penguin elected not to call any witnesses.

In March 2019, the Tax Court affirmed Westminster's denial of Penguin's refund claim. Penguin Random House, LLC v. Westminster, No. 18-MI-00-0346, 2019 WL 1752585 (Md. Tax Ct. Mar. 7, 2019). The Tax Court summarized Penguin's argument as"that the assessments are grossly disproportionate to the amount of sewer and water that will be used in the expanded warehouse facility," and the "central issue" as "whether Westminster could or should have imposed an alternate assessment in response to [Penguin's] fairness argument." Id. at *2. The Tax Court concluded that Westminster "made a reasonable legislative judgment about the total costs of water and sewer related capital projects over time and imposed those costs on the public generally based on a definite and just plan," which was extrapolated from the calculations of the 2008 cost-of-service study. Id....