Watson v. City of Blytheville

2020 Ark. 51

593 S.W.3d 18

Lanina WATSON, Individually and as a Representative of a Class of Persons Similarly Situated, Appellant

v.CITY OF BLYTHEVILLE, Arkansas and its Sewer Department, Appellee

No. CV-19-416

Supreme Court of Arkansas.

Opinion Delivered: February 6, 2020

Law Office of Harris & Morrison, by: James W. Harris and Zachary Morrison, Blytheville, for appellant.

M. Keith Wren, Little Rock, for appellee.

JOHN DAN KEMP, Chief Justice Lanina Watson, individually and as a representative of a class of persons similarly situated, appeals the dismissal of her illegal-exaction suit against the City of Blytheville and its Sewer Department ("City"). For reversal, Watson argues that the circuit court erred in rejecting her claim that a $5 fee for sewer-system repairs and upgrades, imposed pursuant to a city ordinance, was a tax and constituted an illegal exaction in violation of the Arkansas Constitution. We affirm.

I. Facts

On August 6, 2008, the City entered into a Consent Administrative Order ("CAO") with the Arkansas Department of Environmental Quality ("ADEQ") in which ADEQ found many National Pollutant Discharge Elimination System Program ("NPDES") permit violations at the City’s three wastewater-treatment facilities. ADEQ mandated numerous repairs and upgrades to the City’s sewer system. Failure to comply with the improvements required by ADEQ would subject the City to severe financial penalties and "any other remedies or sanctions which may be available to ADEQ[.]" The City’s projections indicated that the cost of the improvements would be approximately $2,500,000.

On January 19, 2010, the City passed Ordinance 1701 to raise the funds necessary to comply with the CAO. Ordinance 1701 stated,

AN ORDINANCE TO AMEND ORDINANCE NO. 1686 SETTING THE RATES FOR BLYTHEVILLE WASTEWATER SYSTEM, DECLARING AN EMERGENCY, AND FOR OTHER PURPOSES.

WHEREAS, the City Council of Blytheville, Arkansas passed Ordinance No. 1686 setting the rates of the Blytheville Wastewater System, and

WHEREAS, it has been brought to the attention of the City Council of Blytheville that certain changes to this Ordinance are necessary due to revenue shortfall, and

WHEREAS, the City Council of the City of Blytheville, Arkansas recognizes the need to collect additional funds to meet the ADEQ Milestone Schedule for the repairs to the Blytheville Wastewater System, and

WHEREAS, the City of Blytheville has exhausted all other sources of revenue.

NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF BLYTHEVILLE, ARKANSAS THAT ORDINANCE NO. 1686 BE AMENDED AS FOLLOWS:

SECTION I. A five dollar ($5.00) charge will be levied each month per user for a period not to exceed five years, which shall be an additional charge on each monthly statement for water and other services.

SECTION II. This amendment will automatically sunset at the end of five (5) years from its passage if not terminated sooner by the City Council.

SECTION III. All other provisions of Ordinance No. 1686 will remain in full force and effect except as amended herein.

SECTION IV. It being hereby found and determined by the City Council that in order to insure the safety and welfare of the city and persons affected hereby and to comply with the ADEQ requirements, an emergency is hereby declared to exist and this Ordinance shall take effect and be in force from and after its publication.

Blytheville, Ark., Ordinance 1701 (Jan. 19, 2010). The project, which included the $5 monthly fee, those funds collected, and any repairs and updates pursuant to the CAO, were referred to as the "Milestone Study."

Realizing that the $5 monthly fee would not provide the funds necessary to complete the repairs, Blytheville Mayor James Sanders approached ADEQ with the difficulties that the City faced in funding the Milestone Study. Through negotiations with ADEQ, the City reduced the repair requirements so that $1,500,000 would be required for compliance with the CAO. Although Ordinance 1701 contained a sunset provision that automatically terminated the $5 fee after five years, the City determined that the goals of the fee were met in February 2014. As a result, on February 18, 2014, the Blytheville city council enacted Ordinance 1758, which repealed Ordinance 1701. The City exceeded its goal by $7,971, raising a total of $1,507,971.

On December 5, 2012, Watson filed a class-action complaint against the City, and she filed an amended complaint on January 17, 2014, alleging that the $5 monthly fee constituted an illegal exaction in violation of article 16, section 13 of the Arkansas Constitution. She alleged that the revenue shortfall in Ordinance 1701 "was due to the City of Blytheville using its general fund revenue to maintain and upkeep a city owned golf course, making donations to civic organizations, and mismanaging city funds, all while neglecting to upgrade, maintain, and service the city-wide sewer system." She alleged that the ordinance was passed for the sole purpose of increasing general revenue, that the fee was being used to maintain traditional government functions, and that it did not bear a "rational relationship to the costs and expenses the sewer department actually incurs" or to customer usage. Watson claimed the fee was a tax and sought a declaratory judgment that the fee was an illegal exaction, damages in the amount of all money collected prior to and during the pendency of the litigation, and an accounting. She argued alternatively that, if the circuit court determined that the $5 fee was not an illegal exaction, any amount collected in excess of $1,500,000 should have been refunded.

On May 5, 2015, the City moved for summary judgment, arguing that Watson failed to state a legal basis for her assertion that the fee constituted an illegal exaction or that she was entitled to an accounting of the funds obtained pursuant to the ordinance. The City attached affidavits from Melissa Beth Connell, the finance clerk for the Blytheville Sewer Department, and Mayor Sanders, as well as an Affidavit and Expert Opinion of Dan V. Jackson. In her affidavit, Connell attested that

[t]he $5 fee established by City of Blytheville Ordinance 1701 is referred to as the "Milestone Study." It was separately accounted for in all of the accounting documents for the City of Blytheville Sewer Department. Two items were included in the accounting for the Sewer Department related to the Milestone Study. Item number 399 in the monthly budget was labeled "Revenue Milestone Study," and item number 695 was labeled "Expenditures Milestone Study." The City of Blytheville also maintains audited reports detailing all of its financial expenditures for each prior fiscal year.

Additionally, both Connell and Mayor Sanders attested that Milestone Study funds were designated for improvements to the sewer system required by the CAO and "[r]evenue collected from the Milestone Study was only used to fund improvements to the City of Blytheville’s sewer system." The City’s expert, Dan V. Jackson, stated that in recent years, the City’s sewer department had experienced severe financial distress; the adoption of the $5 fee represented reasonable and prudent utility financial management; the fee was directly related to the funding requirements of the CAO and was used for no other purpose; the fee was only assessed to those who actually use the City’s sewer service; and that "under generally accepted ratemaking principles the fee can be considered to be just, reasonable and appropriate." Ultimately, Jackson opined that the fee "confers a benefit to those receiving the service by enabling the City to fund its state-mandated obligations, which will improve both the environment and the quality of sewer service[,]" and that the fee was not a tax.

Watson filed a countermotion for partial summary judgment and attached portions of depositions from City board members, Mayor Sanders, and the head of the Sewer Department, as well as several documents, including a statement of revenue and expenses, Ordinance 1701, the CAO, and a "Milestone Schedule."

The circuit court conducted a hearing on February 6, 2019, and ruled the $5 fee was not a tax. That same day, the circuit court entered an order granting the City’s summary-judgment motion and dismissing all of Watson’s claims with prejudice. Watson timely appealed the dismissal of her lawsuit.

II. Illegal Exaction

On appeal, Watson argues that, despite its designation, the exaction in this case is a tax instead of a fee. Specifically, she argues that contrary to the language of the ordinance, the $5 fee was unnecessary because the Sewer Department operated with a cash-flow surplus through 2012, that the fee was not fair and reasonable, and that the funds collected from the $5 fee were deposited into general revenue accounts and were used for purposes other than the Milestone Study.

Generally, on appeal from a summary-judgment disposition, the evidence is viewed in the light most favorable to the party resisting the motion, and any doubts and inferences are resolved against the moving party. See Hobbs v. Jones , 2012 Ark. 293, at 7–8, 412 S.W.3d 844, 850. But when the parties agree on the...