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Shaw v. City of Dearborn

Court of Appeals of Michigan

September 19, 2019

THERESE SHAW, Individually and as Representative of a Class of Similarly Situated Persons, Plaintiff-Appellant,
v.
CITY OF DEARBORN, Defendant-Appellee. and GARISSON PLACE OFFICE CENTER LLC, and THINK FRESH-FAIRLANE LLC, Plaintiffs,

          Wayne Circuit Court LC No. 13-014215-CB.

          Before: Gadola, P.J., and Boonstra and Swartzle, JJ.

          Swartzle, J.

         Voters approved the Headlee Amendment to ensure that local taxpayers would have ultimate control over spending on local public works. The purpose of the amendment would be thwarted if a local authority could charge higher utility rates to raise revenue and then use some of the excess funds to finance a public-works project. This is what plaintiff Therese Shaw argues happened when the city of Dearborn sought to modernize its sewer system. The record, however, belies plaintiff's argument-instead, the city performed ancillary repair and replacement utility work at the same time as its more extensive modernization work to save time and money, surely a worthwhile goal for any local authority. Finding no other basis for reversal, we affirm summary disposition in favor of the city.

          I. BACKGROUND

         A. THE CITY'S WATER AND SEWER PROJECTS

         Like many suburban-Detroit communities, the city of Dearborn has historically purchased water on a wholesale basis from the Detroit Water and Sewerage Department, and then passed on that water to its retail customers. Following the city of Detroit's bankruptcy, a new entity called the Great Lakes Water Authority was created that, as of January 2016, provides water and sewer services to suburban-wholesale customers such as Dearborn. The parties took the deposition testimony in this case before the creation of the Great Lakes Water Authority. Therefore, we will refer to the Detroit Water and Sewerage Department in this opinion, rather than the Great Lakes Water Authority, to maintain consistency with the deposition testimony. The newer entity's assumption of the other entity's role with respect to suburban communities makes no practical difference to the legal analysis of this case.

         Historically, Dearborn has operated a "combined" sewer system. Raw sewage discharged from homes and businesses entered the same pipes as stormwater, i.e., rainwater and snowmelt, that flowed into those pipes through catch basins or infiltration. Once stormwater mixed with sewage, the mixture was deemed to constitute combined sewage, and it was required to be sent to the Detroit Water and Sewerage Department for treatment before it could be released back into the environment. On some occasions, a heavy rainstorm created what is known as a combined-sewage-overflow event. During such an event, the combined-sewer system became overloaded, causing the release of combined sewage into a natural waterway without treatment.

         Increasingly stringent federal and state regulations obligated Dearborn to plan and implement measures to reduce combined-sewage-overflow events. In an August 2004 election, Dearborn voters approved a property-tax millage of $314.12 million to pay for federally mandated measures to abate combined-sewage-overflow events. The millage authorized the city to incur debt, including both bonds and low-interest loans from the State Revolving Fund (SRF), to use for abatement measures. The funds obtained from the increased millage rate were dedicated to service the debt.

         Dearborn's initial plan was to construct 12 retention facilities that could store combined sewage, called caissons. During times of heavy rainfall or snowmelt, the city could store combined sewage in the caissons and then either treat the combined sewage before releasing it into the environment or send the combined sewage to the Detroit Water and Sewerage Department once that entity was able to handle the flow volume. Because of difficulties that arose in constructing the planned caissons, including legal battles with contractors and bonding companies in connection with construction, only 4 of the 12 planned caissons are currently operational. These four operational caissons serve only a portion of the city, and the sewer system remains a combined system in that portion of the city served by the caissons. Although the city funded the construction of the caissons through the millage, it currently pays the cost of operating and maintaining the caissons with revenue generated by sewer rates charged to the city's sewer customers. In other words, taxpayers built the four caissons, ratepayers operate and maintain them.

          In areas of the city not served by the caissons, Dearborn is now undertaking a different abatement plan to address combined-sewage-overflow events. In these areas, the city is separating the sewer system, i.e., providing separate pipes for sewage and stormwater. In some areas, the system has already been separated, meaning that stormwater is no longer combined with sewage, and stormwater can therefore be released untreated into natural waterways, while the sewage flows to the treatment facility in a dedicated pipe. For those remaining areas where the system has not been separated, the city is either installing a new pipe for stormwater and using the existing one for sewage or vice versa.

         Also, coincident with the construction project required to separate the sewer system, Dearborn has chosen to repair and replace some existing underground infrastructure. This includes replacing old or deteriorated water and sewer lines with new lines in certain areas, even when this work is not required by the sewer-separation project itself. Dearborn has scheduled this ancillary work to save time and money, given that the city was already excavating the streets under which the water and sewer lines are located, to construct the sewer-separation project. On some occasions, the city is replacing water and sewer lines because the street has already been torn up; on other occasions, the city is replacing water and sewer lines because the sewer-separation project creates a risk of damaging the infrastructure already in place.

         Although the city estimated the original cost of the abatement project at $314 million when the voters approved the original property-tax millage, the cost of the entire project as designed, including both the sewer-separation work and the ancillary work, is now expected to exceed $400 million. Dearborn is paying most of this cost with the bonds and low-interest loans authorized as part of the millage, but the city is paying the costs of the ancillary work through various revenue streams, including water and sewer rates, street funds, grants, and interest earnings. To pay for the ancillary work, Dearborn is using $63 million from the sewer fund (i.e., money generated by sewer rates) and $21 million from the water fund (i.e., money generated by water rates), as a component of the anticipated $400 million overall cost of the project. The water fund is used to make repairs related to the water-supply system and the sewer fund is used to make repairs related to the sewer system. Dearborn has yet to spend about $57 million of the amount authorized by the original millage. The city anticipates that the overall project will be completed by 2022.

         During discovery, several witnesses, including the city's finance director, James O'Connor, and the city's engineer, Mohmedyunus Patel, testified regarding the city's decision to perform the ancillary work on the water and sewer lines at the same time that it performed the sewer-separation work. O'Connor explained that the city chose to complete the ancillary work at the same time as the sewer-separation work because the impacted roads were already being excavated as part of the sewer-separation work, and performing the two projects simultaneously was a cost-effective measure because the roads did not have to be excavated twice. Meanwhile, Patel testified that the city paid for some of the ancillary work with millage funds because it was sometimes necessary to disturb the water lines to service the underlying sewer lines that required separation. Yet, because the sewer-separation work and the ancillary work occurred at the same time, witnesses sometimes referred to both the mandatory sewer-separation work and the ancillary work as part of a single construction project, known as the combined-sewage-overflow (CSO) project. Although the terminology used by the witnesses was sometimes imprecise, the testimony made clear in context that the city performed the two different types of work simultaneously for reasons of efficiency and cost savings.

         B. PLAINTIFF'S LAWSUIT

         Because the other plaintiffs in this case were dismissed by stipulation of the parties and are not part of this appeal, we refer to Therese Shaw as "plaintiff." Plaintiff filed this lawsuit against Dearborn in 2013 and subsequently filed an amended complaint in 2014. In her amended complaint, plaintiff alleged that the city's water and sewer rates contained hidden charges that qualified as unlawful taxes because they were imposed without authorization by Dearborn's voters, in violation of Const 1963, art 9, §§ 25-34, popularly known as the Headlee Amendment. See Taxpayers Allied for Constitutional Taxation v Wayne Co, 450 Mich. 119, 121 n 2; 537 N.W.2d 596 (1995). In addition, plaintiff argued that Dearborn's water and sewer rates unjustly enriched the city. Plaintiff sought to pursue this matter as a class action and requested a refund, on behalf of herself and the purported class, of all amounts to which she alleged entitlement.

         Specifically, as relevant to this appeal, plaintiff argued that the water and sewer rates that Dearborn charged the users of its water and sewer systems unlawfully included the capital infrastructure costs of separating its sewer system, and plaintiff called this purported charge the "CSO-capital charge." In addition, although plaintiff conceded that Dearborn did not use funds from its water and sewer rates to construct the combined-sewage caissons, she argued that those rates unlawfully funded the operation and maintenance of the caissons, and plaintiff called this the "CSO-O&M charge." As discussed in more detail later, it is important to note at the outset that these "charges" are terms created by plaintiff rather than terms used by Dearborn in calculating or levying its water and sewer rates. We use the terms solely for the sake of simplicity in addressing plaintiff's arguments; this is not meant to express agreement with plaintiff's assertion that these purported charges actually exist as stand-alone charges or components of the actual rates charged.

         Dearborn moved for summary disposition under MCR 2.116(C)(8) and (10). The city argued that: (1) plaintiff's complaint contained no factual allegations regarding how the city's actual costs of providing water and sewer services are or should be determined; (2) the city's water and sewer rates were not a tax, but instead represented the price paid for a commodity; (3) plaintiff presented no basis to overcome the presumption that the city's water and sewer rates were reasonable; (4) the city did not create a new utility fee to pay for the construction and operation of a new stormwater-utility system, but merely modified and reconfigured an existing sewer system, and the voter-approved millage funded the cost of separating the sewer system; (5) the city's replacement of aging or compromised water mains constituted merely repair and maintenance of the existing system to avoid disruption of service; and (6) the city's water and sewer rates were compulsory only for those customers who used the services and chose how much of the services to use, and those customers were directly benefited by the city's efforts to keep the water and sewer systems in good working order and in compliance with regulatory requirements.

         Plaintiff filed her own motion for summary disposition, limited to her Headlee-Amendment claim. Plaintiff argued that what she calls the CSO-capital charge qualified as a disguised tax because it financed an investment in public infrastructure and was not a fee designed merely to defray the costs of a regulatory activity. Plaintiff also argued that what she calls the CSO-O&M charge qualified as a disguised tax because it forced all water and sewer ratepayers to pay the costs of operating and maintaining the caissons, even though the caissons served ratepayers in only certain parts of the city, and even though the caissons benefitted the general public in the form of better environmental conditions, rather than serving only ratepayers. Plaintiff argued that the two purported charges were designed to raise revenue for the city rather than serve a regulatory purpose; the charges were disproportionate to the city's actual costs of providing water and sewer service; and payment of the charges was not voluntary because the charges were hidden in water and sewer rates and not approved by Dearborn voters. Based on this, plaintiff argued that the purported charges qualified as disguised taxes that violate the Headlee Amendment.

         The trial court held multiple hearings between 2014 and 2017 on the parties' motions for summary disposition. It appears from the record that the delay in resolving the dispositive motions was due to various attempts to resolve the case, including facilitation, mediation, and settlement conferences, all of which proved unsuccessful.

         In December 2017, the trial court issued a 37-page opinion and order granting Dearborn's motion for summary disposition and denying plaintiff's motion for partial summary disposition. The trial court concluded that the primary purposes of the purported charges described by plaintiff were not to raise revenue, but to maintain the city's water and sewer systems and to pay the Detroit Water and Sewerage Department for the provision of water and the disposal of sewage. The trial court held that the city's upgrade of water lines qualified as maintenance rather than an investment in infrastructure. Further, the trial court concluded that the city was engaged in a regulatory activity, rather than a revenue-raising activity, when it maintained and repaired the water lines. The trial court noted that the city imposed water and sewer charges only on users, and it concluded that the charges based on metered-water usage were reasonable and proportionate. The trial court further concluded that the burden of sewer separation was borne in large part by funds approved in the August 2004 election. For these reasons, the trial court concluded that the purported charges described by plaintiff were user fees rather than taxes and granted the city summary disposition on plaintiff's Headlee-Amendment claim. The trial court likewise dismissed plaintiff's unjust-enrichment claim, ruling that plaintiff failed to present evidence that an overcharge or tax existed.

         After plaintiff filed a claim of appeal with this Court, the city moved to expand the record on appeal. The city sought to add to the record evidence of a millage election held in August 2018 in which Dearborn's voters approved $60 million of additional property taxes to pay for the sewer-separation project. This Court denied the city's motion to expand the record on appeal. Shaw v Dearborn, unpublished order of the Court of Appeals, entered February 22, 2019 (Docket No. 341701).

         II. ANALYSIS

         A. STANDARD OF REVIEW

         Before the trial court, Dearborn moved for summary disposition under MCR 2.116(C)(8) and (10). "Where a motion for summary disposition is brought under both MCR 2.116(C)(8) and (C)(10), but the parties and the trial court relied on matters outside the pleadings, as is the case here, MCR 2.116(C)(10) is the appropriate basis for review." Silberstein v Pro-Golf of America, Inc, 278 Mich.App. 446, 457; 750 N.W.2d 615 (2008). We review de novo a trial court's decision to grant or deny summary disposition under MCR 2.116(C)(10). Pace v Edel-Harrelson, 499 Mich. 1, 5; 878 N.W.2d 784 (2016). A mere promise or possibility that a claim might be supported by evidence produced at trial is insufficient to avoid summary disposition. Bennett v Detroit Police Chief, 274 Mich.App. 307, 317; 732 N.W.2d 164 (2007), citing Maiden v Rozwood, 461 Mich. 109, 121; 597 N.W.2d 817 (1999). Whether a charge imposed by a city is a tax or a user fee is a question of law that we review de novo. Bolt v Lansing, 459 Mich. 152, 158; 587 N.W.2d 264 (1998).

         B. HEADLEE-AMENDMENT CLAIMS

         The Headlee Amendment was adopted by referendum effective December 23, 1978. American Axle & Mfg, Inc v Hamtramck, 461 Mich. 352, 355; 604 N.W.2d 330 (2000). Under the amendment, a local governmental unit is "prohibited from levying any tax not authorized by law or charter . . . or from increasing the rate of an existing tax above that rate authorized by law or charter" when the amendment was ratified, unless a majority of voters have approved the levying of a new tax or increasing the rate of an existing one. Const 1963, art 9, § 31. In ratifying the amendment, it was clear that voters " 'were . . . concerned with ensuring control of local funding and taxation by the people most affected, the local taxpayers. The Headlee Amendment is the voters' effort to link funding, taxes, and control.' " Macomb Co Taxpayers Ass'n v L'Anse Creuse Pub Sch, 455 Mich. 1, 7; 564 N.W.2d 457 (1997), quoting Durant v State Bd of Ed, 424 Mich. 364, 383; 381 N.W.2d 662 (1985). "The ultimate purpose [of the Headlee Amendment] was to place public spending under direct popular control." Waterford Sch Dist v State Bd of Ed, 98 Mich.App. 658, 663; 296 N.W.2d 328 (1980). The amendment "grew out of the spirit of 'tax revolt' and was designed to place specific limitations on state and local revenues." Id.

         Application of § 31 of the Headlee Amendment "is triggered by the levying of a tax." Jackson Co v City of Jackson, 302 Mich.App. 90, 98; 836 N.W.2d 903 (2013), citing Bolt, 459 Mich. at 158-159. Although the levying of a new tax without voter approval violates the Headlee Amendment, a charge that constitutes a user fee does not. Id. In a case alleging a violation of the Headlee Amendment, the ...


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