Judge's ruling favors contractors in suit against Hayden

Association pursuing refunds for those who paid ‘illegal fees’

HAYDEN — A longstanding lawsuit against the city of Hayden for its sewer capitalization fees has been resolved in favor of the North Idaho Building Contractors Association.

The association will now pursue refunds on behalf of those who paid the “illegal fees.”

The ruling on the lawsuit, which has been in the state legal system since 2012, was made last week by District Court Judge Cynthia K.C. Meyer.

The complex suit called into question the legality of Hayden’s sewer capitalization fees after they were raised in 2007 to cover the cost of Hayden’s wastewater disposal system. The building contractors contended the fee was illegal because it paid for city services that are available to all residents of Hayden.

To date, the city has collected a little more that $7 million in sewer capitalization fees since they were imposed in 2007. The city retained $1,745,127 and remitted the remaining $5,271,685 to the Hayden Area Regional Sewer Board, which operates the wastewater system for the cities of Hayden, Hayden Lake Recreational Water and Sewer District and Kootenai County.

Contractors argued fees could only be charged for the portion of the city’s existing sewer plant at the time the fee is paid, and not for the future expansion of the sewer plant, which is why the city collected the fees.

Mike Ragusa, owner of Termac Construction Inc., was named as a plaintiff in the suit alongside NIBCA. Ragusa said he took exception to the city’s sewer capitalization increase in 2007, after they raised the fee from $750 per residential hookup to the city’s sewer system to $2,230 per hookup.

He questioned how the city could raise the fee, when the fee was supposed to be calculated on the value of the existing system. At that time, he said, there was no way the value of the existing system correllated with a hike of $1,500 per hookup over the course of the year.

While the city of Hayden prevailed initially in the lawsuit, it was appealed all the way to the Idaho Supreme Court, where NIBCA prevailed. The higher court remanded it back to district court for further proceedings.

At the time, NIBCA argued the Supreme Court upheld NIBCA’s claim that the fee was illegal, and the city of Hayden argued the Supreme Court affirmed the use of the fees for the expansion of the sewer, but said the method of collecting the fees was “flawed.”

Judge Meyer sided with NIBCA, saying her analysis of the case proved the city of Hayden’s sewer capitalization fees were in fact an “impermissible tax,” which the city levied without the proper authority.

She explained in her summary judgment that Idaho courts use the two-stage “Loomis test,” to determine if fees are legal. The first part is to determine if the fee is charging the payer for a portion of a service that is being consumed by the fee payer or if the fee charged is going to be used to benefit the public as a whole.

Meyer determined Hayden’s fee was for the benefit of all city residents, and therefore was considered an impermissible tax. She stated in the judgment the second tier of the Loomis test is to determine if the fee was reasonable, but that portion of the test is only done if the fee is determined to be legal.

The city conceded it had based its fee on the expansion of the sewer plant rather than the existing value of the existing sewer plant, but said it was an honest mistake it has since tried to rectify.

In fact, the city argued the new formula for calculating the fee — which was given to it by the court — showed the city had only been charging about half of what it should have been charging legally.

The city argued the “standard review of a lawful user fee is reasonableness,” and because it was charging less than the proper formula requires the city to charge, the fee was essentially reasonable and therefore lawful.

"The city claims the error was made in good faith and the amount can now be justified by a survey conducted eight years after the fee was imposed," the judge wrote in her summary judgment. “Were this court to engage in an analysis of the fee, it could potentially allow the defendant to retain the revenue of an unconstitutional tax. The court is not so inclined.

“As much as the city would like to make this case about valuation, it is not such a case,” she continued. “The defendant in 2007 imposed an impermissible tax. If the court entertained the defendant's current argument, it would be complicit in that conduct. Whether the city made an honest mistake in good faith is immaterial. Good faith is not a defense for the imposition of an impermissible tax.”

Hayden’s newly elected mayor, Steve Griffitts, said he has been in touch with the Idaho Attorney General’s Office to determine what the ramifications of the ruling could be, and what the city’s options are at this point.

“We are working with the attorney general to help the city find a sense of direction on this,” Griffitts said on Tuesday, adding he wants to determine all of the city’s options before taking any further steps. “That’s why I have the AG’s office trying to figure out what this all means for us.”

Griffitts said the city has already spent more than $600,000 fighting the lawsuit, and he wants to make sure the city has explored all of its options before prolonging the lawsuit with another appeal.

He said he has been in contact with NIBCA to discuss potential solutions as well, and once he has a grip on all the options, he wants to hold a town hall meeting to discuss them with the residents of Hayden.

NIBCA issued a press release earlier this week announcing the outcome of the trial, and executive officer Shelly Donovan said her organization is open to negotiating the damages portion of the lawsuit with the city before returning to court.

“We will pursue a refund on behalf of all those who paid the illegal fee,” she said in an email response to some follow up questions. “We hope that this can be resolved through negotiations with the city. Ultimately, if negotiations are not successful, a court will decide that issue.

“Simply put, the ruling ends the debate (again) about whether or not the fee imposed was legal; it was not,” she continued. “We believe the Supreme Court clearly stated as much and now the district court has confirmed what we have been saying since last February. The case now moves into the damages phase to talk about what Hayden has to do about the illegally collected monies. To us it seems obvious that they should be refunded to the citizens.”