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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,

         Submitted June 4, 2019, at Detroit.

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

          Kickham Hanley PLLC (by Gregory D. Hanley, Jamie K. Warrow, and Edward F. Kickham, Jr. ) for Therese Shaw.

         Zausmer, August & Caldwell, PC (by Gary K. August and Richard A. Patton ) for defendant.

         Miller, Canfield, Paddock and Stone, PLC (by Sonal Hope Mithani ) Amicus Curiae for Michigan Municipal League, Michigan Townships Association, and the Government Law Section of the State Bar of Michigan.

         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

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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, 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 the 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

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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, § § 6, 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 ...


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