STATE OF MICHIGAN IN THE CIRCUIT COURT FOR THE COUNTY OF WAYNE LEONARD S. BOHN, individually and as representative of a class of similarly-situated persons and entities, v. Plaintiff, CITY OF TAYLOR, a municipal corporation, Case No. 15-013727-CZ 15-013727-CZ Hon. David J. Allen FILED IN MY OFFICE WAYNE COUNTY CLERK 6/8/2017 11:03:43 AM CATHY M. GARRETT Defendant. KICKHAM HANLEY PLLC By: Gregory D. Hanley (P51204) Jamie K. Warrow (P61521) Edward F. Kickham Jr. (P70332) 32121 Woodward Avenue, Suite 300 Royal Oak, MI 48073 (248) 544-1500 Attorneys for Plaintiff FOLEY & ROBINETTE, P.C. By: Dean C. Robinette (P54197) 13349 Reeck Court Southgate, MI 48195 (734) 283-4000 Co-counsel for Plaintiff HOWARD & HOWARD ATTORNEYS PLLC By: Gustaf R. Andreasen (P40956) Michael F. Wais (P45482) Brandon J. Wilson (P73042) 450 West Fourth Street Royal Oak, MI 48-067-2557 (248) 645-1483; (248) 645-1568 (facsimile) Attorneys for Defendant /s/ Roderick Byrd Page 1
OPINION This case is before the Court on cross-motions for summary disposition. For the reasons stated below, the Court GRANTS summary disposition in favor of Defendant City of Taylor, DENIES Plaintiff Leonard Bohn s motion for summary disposition, and DISMISSES the case. 1. Background This is a certified class action against the City of Taylor challenging certain aspects of its water and sewer rates. Plaintiff argues that the City set sewer rates at a level in excess of rates necessary to finance the actual costs of providing sewage disposal services (Sewer Rate Overcharge). Plaintiff additionally argues that the City improperly includes in its water rate an amount sufficient to cover the costs the City incurs for fire protection services (PFP Charge). Plaintiff s Complaint contains ten counts: Count I: Unjust Enrichment- Violation of MCL 123.141(3) (water rates) Count II: Violation of the Headlee Amendment (water and sewer rates) Count III: Unjust Enrichment- Unreasonable Water and Sewer Rates (water and sewer rates) Count IV: Unjust Enrichment- Violation of MCL 129.91 et seq (loans from water and sewer funds to general fund) Count V: Unjust Enrichment- Violation of MCL 141.91 (water and sewer rates) Count VI: Unjust Enrichment- Charter Violation (water and sewer rates) Count VII: Unjust Enrichment- Ordinance Violation (water and sewer rates) Count VIII: Unjust Enrichment- Ordinance Violation (fire protection charge) Page 2
Count IX: Unjust Enrichment- Violation of MCL 141.118 (fire protection charge) Count X: Assumpsit- Money Had and Received (water and sewer rates) 1 2. Standard of Review The parties are seeking summary disposition under MCR 2.110(C)(10). In reviewing a motion under MCR 2.116(C)(10), this Court considers the pleadings, admissions, affidavits, and other relevant documentary evidence of record in the light most favorable to the nonmoving party to determine whether any genuine issue of material fact exists to warrant a trial. Walsh v Taylor, 263 Mich App 618, 621; 689 NW2d 506 (2004). Summary disposition is appropriate if there is no genuine issue regarding any material fact and the moving party is entitled to judgment as a matter of law. Latham v Barton Malow Co, 480 Mich 105, 111; 746 NW2d 686 (2008). A genuine issue of material fact exists when the record, giving the benefit of reasonable doubt to the opposing party, leaves open an issue upon which reasonable minds might differ. West v Gen Motors Corp, 469 Mich 177, 183; 665 NW2d 468 (2003). 3. Analysis A. Sewer Fund Plaintiff first argues that since at least 2009 the City has set its sewer rates at a level far in excess of the rates that were necessary to finance the actual costs of providing sewage disposal services, and that the excessive rates resulted in the creation of cash reserves far in excess of those necessary to support the City s sewer function. In 2009, the Sewer Fund had $6.2 million in unrestricted cash and investments and on June 30, 2016, it had over $12.8 million in unrestricted cash and investments. 1 It appears that Plaintiff has abandoned his claim regarding the water rate overcharges. Page 3
Plaintiff s claims center around two issues, whether the sewer rate constitutes an unlawful tax, and whether the sewer rate is unreasonable. i. Unlawful Tax Plaintiff argues that if the sewer rate constitutes a tax, it violates the Headlee Amendment to the Michigan Constitution, which precludes municipalities from imposing new taxes without voter approval. Plaintiff also alleges that the alleged tax violates MCL 141.91, which prohibits a city from imposing any tax, other than an ad valorem property tax, unless the tax was being imposed by the city as of January 1, 1964. As an initial matter, before it can be determined whether the alleged overcharge is a tax, Plaintiff must first establish that there is, in fact, a rate overcharge. Municipal utility rates are presumptively reasonable. Trahey v City of Inkster, 311 Mich 582, 594; 876 NW2d 582 (2015). This presumption exists because courts of law are ill-equipped to deal with the complex, technical processes required to evaluate the various cost factors and various methods of weighing those factors required in rate-making. Id. Plaintiff has the burden of proof of establishing that the sewer rate is unreasonable. Id. Plaintiff argues that there is no evidence that the City accumulated cash in the sewer fund pursuant to a plan to finance future capital improvements. In support of this assertion, Plaintiff references the deposition testimony of the City s Finance Director, Jason Couture, who testified that he was not aware of any plans for sewer repair, and David Mackie, the Executive director of Public Service for 15 months between 2010 and 2012, who testified that there wasn t any conscious effort to say, okay, we have this many millions in reserves; we want to have this many in reserves. Page 4
As the City points out, just because Mr. Couture was not aware of any plans, does not mean that there are no such plans in place by the Water and Sewer Department. The City argues that the $12.8 million in unrestricted cash and investments is for future capital improvements to the City s sewer system. The City s expert in this case, Eric Rothstein, testified that a capital improvement plan for the sewer is currently being developed by the City s engineering consultant, Hennessey, and that the City s accumulation of reserves for sewer work is appropriate. He testified that he expects the costs for repairs and upgrades to the sewer system to be similar in scope to a plan to upgrade the City s water system, which is $12 million dollars. Further, Plaintiff s expert in this case, Kerry Heid, testified that he does not know what work needs to be done to the sewer system, does not know how much the City needs in its reserves for sewer replacements, does not know what a reasonable rate for sewer services would be, and will not testify at trial that the City has too much money in its sewer fund to make needed repairs to the sewer system. Given the available evidence, Plaintiff cannot meet his burden of establishing that the sewer rate was unreasonable and amounts to an overcharge. Plaintiff also cannot establish that the alleged overcharge is an unlawful tax subject to the Headlee amendment or prohibited under MCL 141.91. The Headlee Amendment provides in pertinent part: Units of Local Government are hereby prohibited from levying any tax not authorized by law or charter when this section is ratified or from increasing the rate of an existing tax above that rate authorized by law or charter when this section is ratified, without the approval of a majority of the qualified electors of that unit of Local Government voting thereon. Plaintiff relies heavily on Bolt v City of Lansing, 459 Mich 152; 587 NW2d 264 (1998), for his assertion that the overcharge is an unlawful tax. In Bolt, supra at 154-155, the Court Page 5
considered whether a particular storm water service charge, imposed on each parcel of real property located in Lansing, was a user fee as opposed to a tax levied in violation of the Headlee Amendment, Const 1963, art 9, 31. Lansing enacted an ordinance for imposition of an annual storm water service charge. The charge was to be imposed over thirty years to partially pay for a project to separate the city s combined storm and sanitary sewer lines. Lansing was seeking to limit the polluting of local rivers that resulted when heavy precipitation caused the city s combined storm water and sanitary sewer systems to overflow and discharge into those rivers. Id at 154-155. The charge was imposed on each parcel of property located in the city using a formula that attempted to estimate each parcel s storm water runoff. The Bolt Court articulated three primary criteria to be considered when distinguishing between a fee and a tax. Id at 161. First, a user fee serves a regulatory purpose rather than a revenue-raising purpose. Id. Second, user fees must be proportionate to the necessary costs of the service. Id at 161-162. Third, a user fee is voluntary, paid only by those who use the service in question. Id. The first two criteria are closely related and will be analyzed together. While a fee must serve a primary regulatory purpose, it can also raise money as long as it is in support of the underlying purpose. Merril v St Clair Shores, 355 Mich 575, 583; 96 NW2d 144 (1959). A fee also confers benefits upon only the particular people who pay the fee, not the general public or even a portion of the public who do not pay the fee. Bolt, supra, at 164-165. Thus, revenue derived from regulation, i.e., a fee, must be proportionate to the cost of the regulation, although it is presumed that the amount of the fee is reasonable unless the contrary is established. Vernor Secretary of State, 179 Mich 157, 167; 146 NW 338 (1914). In contrast, a tax is designed to Page 6
raise revenue for general public purposes. Bray v Dep t of State, 418 Mich 149, 162; 341 NW2d 92 (1983). In Bolt, the Supreme Court found that the service charge failed to satisfy the first and second criteria because the charges imposed did not correspond to the benefits conferred. Bolt, supra at 165. That is, seventy-five percent of the property owners in Lansing were already served by a separate storm and sanitary sewer system. Those property owners would be charged the same amount for storm water service as the twenty-five percent of property owners who would enjoy the full benefits of the new construction. Id. The Supreme Court further noted that the goal of the ordinance was improved water quality in two local rivers and avoidance of federal penalties for discharge violations. These goals benefit everyone in Lansing, not just property owners. Id at 166. In the present case, Plaintiff has failed to establish that any funds used toward repairs and upgrades to the sewer system would benefit the City at large and not just property owners who used the sewer system. The remaining cases Plaintiff relies on also do not support a finding that the sewer rates are a tax, as each of these cases can be distinguished from the facts in the present case. For example, Grunow v Frankenmuth Twp, unpublished opinion per curiam of the Court of Appeals, decided October 22, 2002 (Docket No. 226094), In Re Foreclosure of Certain Parcels of Property, unpublished opinion per curiam of the Court of Appeals, entered May 27, 2014 (Docket No. 309229), and Jackson County v City of Jackson, 302 Mich App 90; 836 NW2d 903 (2013), all involved a distinct fee, and not a sewer rate. In fact, the Court in Jackson, supra at 110, acknowledged that a permissible utility charge may include a capital investment component. Page 7
As the City points out, Plaintiff has failed to site any cases in which a Michigan court has held that a sewer rate was an illegal tax. Plaintiff also argues that the sewer charge is not voluntary and therefore is a tax. However, there is no support for this assertion in the record. The City contends that it only charges residents for their actual use of the sewer system, and Plaintiff has presented no evidence to the contrary. Nevertheless, Plaintiff argues that the sewer rate is involuntary because the City requires all dwellings to be connected to the public sewer system. In support of this assertion, Plaintiff sites Meadows Valley, LLC v Village of Reese, unpublished opinion per curiam of the Court of Appeals, entered June 11, 2013 (Docket No. 309549); 2013 WL 2494994. However, Meadows Valley does not support Plaintiff s position. In that case, the Court determined that a ready to serve charge for sewer usage was not a tax. In analyzing the Bolt factors, the Court of Appeals held that the ready to serve charge satisfied the first two Bolt factors. Id at *5. In addressing the third factor, the Court noted that even thought a village ordinance required all homeowners to connect to the public sewer system; this voluntariness factor was not dispositive in light of the clear satisfaction of the first two Bolt factors. Id at *6. In this case, the sewer rate satisfies the first two Bolt factors. Accordingly, the voluntariness factor is not dispositive here, and the sewer rate is not an illegal tax. Because Plaintiff has not shown that there was, in fact, an overcharge, and because the sewer rate at issue here is not an impermissible tax subject to the Headlee Amendment and MCL 141.91, Plaintiff s claims as to the sewer rate should be dismissed. Page 8
ii. Reasonableness Plaintiff also argues that, at the very least, there remains a question of fact as to whether the sewer rates are reasonable. However, as discussed above, municipal utility rates are presumptively reasonable, and Plaintiff has failed to establish that the rates charged are unreasonable. B. Fire Protection Charge The City operates and maintains a water system through the City s Water and Sewer Department (WSD), which distributes drinking water to residential and business customers in the City. According to Plaintiff, included in water rates is a public fire protection charge, which is charged to all users of the public water supply system. Plaintiff alleges that this charge for fire protection is unlawful because such charges should be paid for out of the City s general fund and not paid through water rates. According to Plaintiff s expert, Reid, the City should be paying $479,000 a year for fire protection services out of the general fund. However, Reid does not know how much of the fire protection charge, if any, is being paid for from water rates. In order to prove its claims, Plaintiff must first establish that money is being collected via the water rates to pay for so-called fire protection services. In his brief, Plaintiff repeatedly states that it is undisputed that the City does not pay for public fire protection through the general fund, but instead recovers theses costs exclusively from its water rate payers. However, Plaintiff presents no evidence to support this assertion, and the City argues that Plaintiff cannot meet its burden of establishing that such a charge is part of the water rates. Plaintiff s expert, Heid, testified at his deposition that he has no idea what amount is allegedly being charged residents for fire protection on their water bills and he further stated that Page 9
whether retail customers are actually paying for that charge is highly questionable because there is no cost of service study in existence to demonstrate that. Although Plaintiff, in his reply brief, now states that Mr. Heid meant that customers might be paying more than the amount of public fire protection charges that should be borne by the General Fund, Plaintiff has provided no evidence to support his assertion. It should also be noted that the only specific argument Plaintiff has made regarding the public fire protection charge involves 2,014 fire hydrants in the City. Apparently, before 2010, the City s General Fund paid the WSD $22.00 per year, per hydrant ($44,000 total), to cover the cost of maintaining the hydrants. The City s expert in this case testified that the City no longer pays the hydrant rentals. However, Plaintiff has failed to point to evidence that money to maintain the hydrants is now coming from the water rates, other than noting that the money is not coming from the City s General Fund. In this case, Plaintiff, as the moving party, has failed to meet his initial burden of establishing that a fire protection charge exists, and the City is not required to go beyond showing the insufficiency of Plaintiff s evidence. See Lowrey v LMPS & LMPJ, Inc, 500 Mich 1, 9; 890 NW2d 344 (2016). That is, the City has no duty to proffer evidence that residents are not being charged for fire protection services in their water rates. Id. Accordingly, the Court hereby DENIES Plaintiff s motion for summary disposition and GRANTS summary disposition to the City on the grounds that Plaintiff cannot establish that the water rate includes a charge for fire protection services. Page 10
4. Conclusion It appears that Plaintiff has abandoned his claims related to any water rate overcharges. Accordingly those claims should be dismissed. Plaintiff s claim for sewer rate overcharges should also be dismissed because there is no evidence that this rate is an unlawful tax or that the sewer rate is unreasonable. Further, all of Plaintiff s claims related to an alleged public fire protection charge as part of water rates should be dismissed because Plaintiff has not met his burden of establishing that such a charge even exists. IT IS SO ORDERED. Dated: June 8, 2017 /s/ David J. Allen HONORABLE DAVID J. ALLEN CIRCUIT COURT JUDGE Dated: June 7, 2017 Page 11