Missouri Supreme Court has scheduled oral arguments for Wednesday, Dec. 15, in a utility rate case, transferred from the Appellate Court, on behalf of a group of Hermann business owners and citizens.
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DOCKET SUMMARIES
SUPREME COURT OF MISSOURI
9:30 a.m. Wednesday, Dec. 15, 2010
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SC91109
Arbor Investment Company, LLC, et al. v. City of Hermann
Gasconade County
Hancock Amendment challenge to city utility charges
In December 2006, a group of Hermann utility customers brought a class action lawsuit against the city of Hermann, alleging the city charged utility customers “grossly excessive amounts” for utilities, thereby violating the Hancock Amendment of the state constitution by subsidizing city operations through a “hidden tax.” The city is the sole provider of utilities for its taxpayers. The trial court granted summary judgment in favor of the city. The utility customers appeal.
The utility customers argue the trial court erred in entering summary judgment in the city’s favor. They contend that the undisputed facts show – or, alternatively, that there is a disputed material fact whether – the city increased utility fees and violated article x, section 22 of the Missouri Constitution (part of the Hancock Amendment) by setting utility charges at a level to increase the city’s general revenue and subsidize general governmental expenditures. The customers assert this is tantamount to raising taxes without a vote of the people.
The city responds that the trial court did not err in entering summary judgment in its favor. It argues the facts are undisputed and show the city’s utility charges are not subject to the Hancock Amendment because: the utility charges are not a tax; the trial court properly applied the correct legal test in determining the charges are not a tax; the test produces “consistent results;” and municipally owned utilities are not required to be operated at “cost.”
The attorney general and state auditor argue, as friends of the Court, that when a municipal utility that is the sole provider of essential services sets rates to fund non-utility expenses, it adds “user fees” taxes that are subject to the Hancock Amendment. They contend that although the Hancock Amendment does not bar a municipal utility from continuing to collect fees for general revenue as a portion of its existing rate, it requires a public vote if the utility seeks to increase the portion of the rate that is not being collected to pay the costs of the service.
The Missouri Municipal League argues, as a friend of the Court, that the trial court properly held the city’s utility charges were not subject to the Hancock Amendment. It contends applying the Hancock Amendment to any contractual service generating revenue is unsupported by law and violates public policy, thereby depriving the public of fair compensation for use of public property and services. It asserts the attorney general and state auditor’s arguments improperly distinguish sole providers of utilities.
The Missouri Public Utility Alliance, the Missouri Joint Municipal Electric Utility Commission and the Municipal Gas Commission of Missouri argue, as friends of the Court, that the city’s transfer of utility funds to general revenue funds is not a tax or a fee. They contend the utility customers consent to the city providing them utilities and are free to discontinue their use of the city’s services. Finally, they assert the attorney general and state auditor’s arguments fail to consider that utility revenues may increase or decrease based on external economic factors.
PLEASE NOTE: It has been reported elsewhere that
some powerful organizations in Missouri have also sided with Hermann in their own "friends of the court" briefs, including the Mo. Public Utility Alliance, the Mo. Joint Municipal Electric Utility Commission and the
Municipal Gas Commission of Mo
WHEN IN FACT ONLY ONE BRIEF WAS SUBMITTED BY THE ABOVE AS STATED BELOW:
Missouri Public Utility Alliance (MPUA), the Missouri Joint
Municipal Electric Utility Commission (MJMEUC), and the Municipal Gas Commission of Missouri (MGCM),
collectively referred to as the
Missouri Public Utility Alliance (MPUA)
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IN THE SUPREME COURT OF MISSOURI AL 1 1 9 ) n in
APPLICATION FOR TRANSFER Is transfer sought prior to opinion or after opinion X
The date the record on appeal was filed: August 3, 2009 The date the Court of Appeals opinion was filed: June 22, 2010 The date the motion for rehearing was filed: None The date the application for transfer was filed in the Court of Appeals: July 7, 2010 and ruled on: July 28, 2010
List every party involved in the case, indicate the position of the party in the circuit court (e.g., Plaintiff, Defendant, Intervenor) and in the court of appeals (e.g., Appellant or Respondent), and indicate the name and address of the attorney of record for each party. List first the parties applying for transfer and place a check mark in the space following to indicate each party applying for transfer.
Plaintiffs/Appellants Arbor Investment X Company, LLC, CFV Plastics, LLC,
Buzz Manley, and Donna Austin
Defendant/Respondent City of Hermann,
#37724 #42825 #29176
Party Attorney
James E. Mello Jeffery T. McPherson Thomas B. Weaver ARMSTRONG TEASDALE LLP 7700 Forsyth Blvd., Suite 1800 St. Louis, MO 63105 314-621-5070 FAX 314-621-5065 tweaver@armstrongteasdale.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it jmello@armstrongteasdale.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it jmcpherson@armstrongteasdale.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it ATTORNEYS FOR APPELLANTS
Kenneth Heinz, Esq. Curtis, Heinz, Garrett and O'Keefe, P.C.
130 S. Bemiston Avenue, Suite 200 Clayton, MO 63105
David Politte, Esq. 438 West Front Street P.O. Box 2114 Washington, MO 63090
ATTORNEYS FOR RESPONDENT
1. This Court may grant transfer because of the general interest or importance of a question involved in the case, for the purpose of reexamining existing law, or for the reason that the opinion filed is contrary to a previous decision of an appellate court of this state. Rule 83.04; Rule 83.02. This appeal should be transferred to the Supreme Court of Missouri for resolution of the following issues:
(a) Whether the factors set forth in footnote 10 of Keller v. Marion County Ambulance Dist., 820 S.W.2d 301 (Mo. banc 1991), are controlling in determining whether the charges at issue in this case are subject to the Hancock Amendment (Mo. Const. art. X, § 22).
(b) Whether the factors set forth in footnote 10 of the Keller case are controlling in all cases in which the Court determines whether a charge is subject to section 22 of the Hancock Amendment.
(c) Whether the opinion of the Court of Appeals conflicts with Keller and Beatty v. Metropolitan St. Louis Sewer Dist., 867 S.W.2d 217 (Mo. banc 1993), in declaring that the determination of whether the charges at issue in this case were subject to section 22 of the Hancock Amendment.
(d) Whether the fundamental question in determining whether a fee increase is subject to section 22 of the Hancock Amendment is whether the increase is paying for ordinary governmental expenditures
(e) Whether a municipality violates section 22 of the Hancock Amendment by increasing utility charges in order to transfer funds to general revenue.
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(f) Whether section 22 of the Hancock Amendment forbids fee increases without voter approval where the fee payers have no real choice but to pay the fee.
(g) Whether the Keller factors are controlling in a case where the undisputed facts shown that the fee increase is calculated to yield a surplus for the purpose of funding ordinary governmental expenditures.
(h) Whether the Keller footnote factors are inconclusive, vague, subject to manipulation, or unworkable.
(i) Whether first Keller factor ("When is the fee paid?") is concerned only with
timing.
2. While the opinion of the Court of Appeals reaches the correct result in reversing the erroneous judgment of the circuit court, this appeal should be transferred to the Supreme Court to resolve important issues arising from Keller v. Marion County Ambulance Dist., 820 S.W.2d 301 (Mo. bane 1991).
3. This case involves a massive abuse of the public trust. The State Auditor investigated the City of Hermann and discovered that the City had raised its utility fees without a vote of the people to generate millions of dollars in surplus funds, which it was using to pay for ordinary governmental operations in violation of Article X, Section 22(a) of the Missouri Constitution (commonly known as the "Hancock Amendment").
4. The City ignored the Auditor's report. It did not lower its utility rates. Indeed, it raised some of those rates without a vote of the people soon thereafter. (Hermann is not alone in this kind of activity. The Auditor has identified other cities that
have padded their general revenue by unconstitutionally increasing utility charges without a vote of the people.)2
5. After Hermann failed to respond to the Auditor's report, the plaintiffs brought this action on behalf of a class of City utility customers, seeking a declaration that the City's utility fee increases violated the Hancock Amendment. The plaintiffs also sought an injunction to prevent the City from collecting the unlawful fee increases and a refund of the unlawfully collected increased fees. The trial court certified this matter as a class action, with the plaintiffs representing a class of Hermann citizens and businesses subject to the unconstitutional charges imposed by the City without a vote of the people.
6. The people of Hermann are being burdened by utility rates that are, in some instances, nearly twice what most of the state pays. The City's captive utility customers must pay whatever the City charges because they have no choice -- there are no other utility providers in Hermann. The City intentionally uses utility charges to fund ordinary governmental operations, as shown by the fact that it budgets for large transfers from the utility accounts into the general revenue fund.
7. The opinion of the Court of Appeals correctly reverses the trial court's erroneous entry of summary judgment in favor of the City. In doing so, however, the opinion declares that the factors set forth in footnote 10 of the Keller case "are controlling in our determination of whether the charges at issue in this case constituted a
3. tax subject to the Hancock Amendment." Opinion at 6. Further, contrary to prior decisions, the opinion erroneously states that some of these factors should be found against the appellants.
8. The Court should grant transfer of this appeal for a determination of whether the Keller issues were properly decided. The issues raised in this application are of widespread and growing importance.
9. The purpose of the Hancock Amendment is to limit taxes by establishing tax and revenue limits and expenditure limits that may not be exceeded without voter approval. Mo. Const. art. X, sec. 16-24; Rohrer v. Emmons, 289 S.W.3d 600, 603 (Mo. App. 2009). To achieve the Hancock Amendment's purpose of reining in governmental taxation and spending, Section 22(a) imposes limitations on a political subdivision's ability to increase a tax or fee: "Counties and other political subdivisions are hereby prohibited from ... increasing the current levy of an existing tax, license or fees, above that current levy authorized by law or charter when this section is adopted without the approval of the required majority of the qualified voters of that county or other political subdivision voting thereon." Mo. Const. art. X, § 22(a)
10. Section 22(a) of the Hancock Amendment requires a vote of the people for municipal increases in taxes, licenses or fees after November 4, 1980. Green v. Lebanon R-III School Dist., 13 S.W.3d 278, 281 (Mo. banc 2000). It is undisputed that the City increased its electric, natural gas, water/sewer, and refuse/waste fees after November 4,
1980. It is undisputed that the City did so without a vote of the people.
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11. The fundamental question in determining whether a fee increase is subject to the Hancock Amendment is whether it is paying for ordinary governmental expenditures or simply covering a municipality's costs to provide the service. See Keller v. Marion County Ambulance Dist., 820 S.W.2d 301 (Mo. banc 1991) (fees that raise revenue to be paid into the general fund to defray customary governmental expenditures, rather than to compensate public officers for particular services rendered, are effectively taxes); see also Zahner v. City of Perryville, 813 S.W.2d 855 (Mo. banc 1991) (finding no Hancock violation where there was no payment into the city's general fund); cf. President Riverboat Casino-Missouri v. Missouri Gaming Comm'n, 13 S.W.3d 635, 628
(Mo. banc 2000) (drawing same distinction in a non-Hancock Amendment case). 12. Generally, if the fee increase funds government expenditures that have
nothing to do with the service for which the fee is charged, then the fee increase is doing what the Hancock Amendment prohibits. See Roberts v. McNary, 636 S.W.2d 332 (Mo. banc 1982). Roberts explains that the words "license or fees" were added to "tax" in section 22(a) to prevent the government from generating general revenue to compensate for the funds lost through the tax-limiting aspect of the Hancock Amendment. Although Roberts was later overruled in part on an unrelated issue, the statement regarding the addition of the words "license or fees" remains good law.
13. Missouri courts have consistently applied the Hancock Amendment to strike fee increases without voter approval where the fee payers have no real choice but to pay the fee. See Ring v. Metropolitan St. Louis Sewer Dist., 969 S.W.2d 716 (Mo. banc 1998) (wastewater fee); Beatty v. Metropolitan St. Louis Sewer Dist., 867 S.W.2d
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217 (Mo. banc 1993) (wastewater fee); Roberts v. McNary, 636 S.W.2d 332 (Mo. banc 1982) (building inspection fees) (overruled to extent it suggested all revenue increases are subject to Hancock Amendment by Keller v. Marion County Ambulance Dist., 820 S.W.2d 301 (Mo. banc 1991)); Building Owners & Managers Ass 'n of Greater Kansas City v. City of Kansas City, 231 S.W.3d 208 (Mo. App. 2007) (fire inspection fees);
Avanti Petroleum, Inc. v. St. Louis County, 974 S.W.2d 506 (Mo. App. 1998) (license fee); Feese v. City of Lake Ozark, 893 S.W.2d 810 (Mo. banc 1995) (sewer charges).
14. In this case, the undisputed facts show that the citizens have no choice but to pay the City's utility fee increases if they want to have electricity, natural gas, public water, or public sewer services. It is undisputed that the City has a monopoly on utility services. It is undisputed that no Hermann citizens are allowed to obtain their natural gas, electricity, public water or public sewer services from any provider except the city. The undisputed facts show that the City raised utility fees after the Hancock Amendment was passed for the purpose of generating millions of dollars in surplus for ordinary governmental expenditures. This is a clear violation of the Hancock Amendment.
15. In Keller v. Marion County Ambulance Dist., 820 S.W.2d 301 (Mo. banc 1991), the Court considered whether an ambulance district's increased ambulance service
fee was subject to the Hancock Amendment. The Court explained that the crucial inquiry was whether the fee increase would raise revenue to be paid into the general fund to defray customary expenditures rather than compensation of public officers for particular services rendered. Id. at 303-04. In Keller, the answer was obvious because the ambulance district was not a government. Instead, it was, at most, a "quasi-governmental
organization" that collected revenue for the sole purpose of providing services for subscribers to its services. Id. at 304. It could never transfer money into a general fund because it was not in the general business of governing.
16. In Keller, the Court noted that fee increases, in the context of the Hancock Amendment, are "fee increases that are taxes in everything but name." Id. at 303. The lesson from Keller is that if the fee increase is obviously generating money to be paid into the general fund, it is subject to the Hancock Amendment.
17. Although Keller was resolving a fairly easy question, it nevertheless envisioned more difficult cases on the horizon. In an effort to answer future questions for cases where the result was less obvious, the Keller Court set forth in a footnote some factors to help determine whether a fee increase was subject to the Hancock Amendment. The footnote questions are intended to help answer the fundamental question of whether a fee increase is funding ordinary government operations (and thus functioning as a tax increase). If it is obvious (as it is here) that the fee increase does just that, there is no need to ask the Keller footnote questions. Indeed, the Court did not even apply those factors to decide Keller.
18. There is no need to consider the Keller factors in a case (such as this one) where the undisputed facts shown that the fee increase is calculated to yield a surplus for the very purpose of funding ordinary governmental expenditures. Despite these facts, the opinion of the Court of Appeals states the Keller footnote factors "are controlling in our determination of whether the charges at issue in this case constituted a tax subject to the Hancock Amendment." Opinion at 6.
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19. This Court has never held or even suggested that the Keller test must be used in all fee cases. It has only listed the factors without applying them (Keller), applied them to a sewer district's charge (Beatty v. Metropolitan St. Louis Sewer Dist., 867 S.W.2d 217 (Mo. banc 1993)), and relied on the holding in Beatty to declare without analysis that a city's sewer charge was subject to the Hancock Amendment (Feese v. City of Lake Ozark, 893 S.W.2d 810 (Mo. banc 1995)). This Court has never elevated the Keller footnote to a blanket rule that the opinion of the Court of Appeals and other cases of the Court of Appeals have declared it to be.
20. The reason that the Court has not glorified Keller is plain. The footnote factors are inconclusive and frequently provide no clear answer. See Beatty, 867 S.W.2d at 221. The factors are vague, subject to manipulation, and unworkable. Id. at 222 (Holstein, J., concurring in result).
21. The factors set forth in footnote 10 of the Keller case are not controlling. Transfer should be granted to address this issue.
22. Even if they were applicable, the Keller footnote factors demonstrate that the City's fee increases violate the Hancock Amendment. The opinion of the Court of Appeals is correct in holding that summary judgment for the City should be reversed because there is at least a fact issue as to three of the factors. However, the opinion is incorrect in declaring that two factors should be found in favor of the City. These factors, if relevant, should be found in favor of the appellants
23. The first Keller factor asks, "When is the fee paid?" The utility fees at issue in this case are paid periodically, at regular monthly intervals. L.F. at 1607. This
factor asks not whether the entity provides a service, but whether the fee is paid regularly. Ashworth v. Moberly, 53 S.W.3d 564, 575 (Mo. App. 2001). In Beatty, the Court made it clear that the question is not whether the political subdivision provides a service but the regularity with which the fee is paid. 867 S.W.2d at 220. This Keller factor "concerns
itself only with timing." Id. According to Keller and Beatty, application of this factor to this case demonstrates that the fees are "probably subject to the Hancock Amendment."
24. The opinion of the Court of Appeals is incorrect in declaring that "this factor must be resolved in favor of the City." Opinion at 8. The opinion states, "While the fees in this case are periodic in nature, we find the fees are based on the amount of services received and are only charged after the services are provided." Id. The conclusion that billing after services rendered this factor in favor of the City is directly contrary to the dictates of Keller and Beatty, which make it clear that this factor is concerned only with whether the payments are periodic. This conflict with controlling authority merits transfer.
25. The second Keller factor asks, "Who pays the fee?" Keller states that a fee subject to the Hancock Amendment is likely to be blanket billed to all or almost all of the residents of the political subdivision. 820 S.W.2d at 304. In this case, the City Clerk, who was also the City's designated witness, clearly stated that all Hermann citizens are City utility customers. L.F. at 1595, 1012-1015.
26. According to Keller, application of this factor to this case demonstrates that the fees are probably subject to the Hancock Amendment, but the opinion of the Court of
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Appeals finds this issue in favor of the City. This is a summary judgment case. It is improper to find this issue in favor of the City in light of the City Clerk's testimony.
WHEREFORE, the appellants respectfully request transfer to the Supreme Court. Respectfully submitted,
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es . Mello #37724' jmello @armstrongteasdale.com Jeffery T. McPherson #42825
tweaver@armstrongteasdale.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it ARMSTRONG TEASDALE LLP 7700 Forsyth Blvd., Suite 1800 St. Louis, MO 63105 314-621-5070 FAX 314-621-5065
ATTORNEYS FOR APPELLANTS
CERTIFICATE OF SERVICE
A copy of this document was mailed, first-class postage prepaid, on August 12, 2010, to:
Kenneth Heinz, Esq. Curtis, Heinz, Garrett and O'Keefe, P.C.
130 S. Bemiston Avenue, Suite 200 Clayton, MO 63105
David Politte, Esq. 438 West Front Street P.O. Box 2114 Washington, MO 63090
Laura Thielmeier Roy, Clerk Missouri Court of Appeals, Eastern District One Post Office Square, Third Floor 815 Olive Street St. Louis, MO 63101
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Missouri’s Supreme Court has scheduled oral arguments for Wednesday, Dec. 15, in a utility rate case, transferred from the Appellate Court, on behalf of a group of Hermann business owners and citizens.
November 10, 2010, The Linn County released excerpts from legal briefs that have been filed for that case:
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In a legal brief filed by Missouri Attorney General Chris Koster a couple of days before last week’s mid-term election, the State’s chief prosecutor advised the Missouri Supreme Court he believes the City of Hermann is violating the Missouri Constitution. Koster filed the brief on behalf on Missouri Auditor Susan Montee. The City of Hermann...is presently being sued for violating the Missouri Constitution’s Hancock Amendment. The Hancock Amendment, which has been in force since 1980, states, “Counties and other political subdivisions are hereby prohibited from levying any tax, license or fees not authorized by law...without the approval of the required majority of qualified voters or other political subdivision voting thereon.” Put more simply, the Hancock Amendment prohibits levying a tax without voter consent. Koster charges that attorneys representing the City of Hermann are wrongly implying that “regardless of what costs a political subdivision incurs in providing a good or service, so long as the charge is tied to receipt of the good or service, the charge entirely escapes Hancock Amendment scrutiny.”
Koster asks the MO. Supreme Court to reject that premise, arguing that when a “user fee” imposed upon ratepayers for provision of a particular utility exceeds what it costs the City of Hermann to provide that utility, and the excess revenue is transferred into the City’s general fund to be used for other purposes, the City has, in effect, levied a tax without voter consent. Koster further draws a distinction between a “user fee,” which is voluntary payment for a private good or service (i.e., ratepayers choose to pay the light bill each month) and a tax, which is mandatory or legally required for funding of public services such as street maintenance and police and fire protection. Missouri’s chief prosecutor further argues that to qualify as a “user fee,” a charge imposed would have to result from the purchase of “a good or service that the political subdivision offers in an open marketplace, where...the purchaser can choose among competitive alternatives.”
Koster elaborates, “But where the political subdivision is the only legal or practical provider of an essential service—as with a utility that has an exclusive territory—the real ‘user fee’ is limited to the charge that covers costs of providing the service. When a municipal utility that is the sole provider of an essential service sets rates to fund non-utility expenses, it adds to ‘user fees’ taxes that are subject to the Hancock Amendment.”Click Here for more info.
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Reciprocal links:
http://HermannHearsay.blogspot.com/(Hermann Area News, Commentary & Discussion)
