Denver Street LLC v. Town of Saugus

Citations: 462 Mass. 651; 970 N.E.2d 273; 2012 WL 2432592; 2012 Mass. LEXIS 586

Court: Massachusetts Supreme Judicial Court; June 29, 2012; Massachusetts; State Supreme Court

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The Supreme Judicial Court of Massachusetts reviewed the town of Saugus's application regarding a monetary charge imposed on developers for access to the town's sewer system, determining whether it constituted a lawful fee or an unlawful tax. A Superior Court judge originally ruled the charge an unlawful tax, a decision affirmed by the Appeals Court. However, the Supreme Judicial Court concluded that the charge had the characteristics of a lawful fee and reversed the previous judgments, ruling in favor of the town.

Key legal principles outlined include that municipalities can only levy taxes if explicitly granted authority by the Legislature. In contrast, fees can be lawfully charged and fall into two categories: user fees and regulatory fees. The court emphasized that the nature of a monetary exaction should be assessed based on its operational characteristics rather than its label. Three distinguishing traits of fees were identified: they are charged for specific government services benefiting the payer, they are optional (the payer can choose not to use the service), and they serve to cover the costs incurred by the government entity rather than to generate revenue.

The burden of proof lies with the party challenging the fee to demonstrate its unlawfulness. Even if the only way to avoid a fee is to forgo property development, it does not render the charge a tax. 

Background facts reveal that Saugus has struggled with a deteriorating sewer system since at least 1986, leading to issues such as inflow and infiltration during wet weather, which overwhelmed the system and caused sanitary sewer overflows. These overflows resulted in the release of untreated wastewater, posing significant public health and environmental risks, particularly affecting local water bodies and wetlands.

In 2005, the town entered into an administrative consent order (ACO) with the Department of Environmental Protection due to significant deficiencies in its sewer system identified in a 1997 evaluation. Deficiencies included leaking manholes, blocked pipes, and illegal connections, which violated the Clean Water Act and relevant Massachusetts regulations. The town was fined $25,000 and faced additional fines for non-compliance until violations were corrected. The ACO mandated the implementation of a ten-year, $27 million plan to reduce inflow and infiltration (I/I), primarily funded by ratepayers. By 2009, approximately $6.5 million had been spent to remove 450,000 gallons of I/I. The ACO allowed the establishment of a sewer bank to manage new connections, contingent upon demonstrating the town's technical, financial, and managerial capacity. A formula dictated the ratio of I/I removed to new flow added, requiring a net decrease in flow. The Department retained the authority to disapprove flow additions, and the town had to adjust the sewer bank balance accordingly. New connections required an I/I reduction contribution, calculated by multiplying the proposed new flow by a diminishing factor, which decreased over time as I/I reductions were achieved.

The ACO mandated that the town prove its financial capability to operate the sewer bank, which facilitated new connections to the sewer system. However, it did not stipulate the use of an I/I charge specifically for financing I/I reduction credits. Developers paid a total of $670,460 in I/I charges to connect their residential projects to the sewer system and subsequently filed lawsuits claiming the charge constituted an illegal tax. These cases were consolidated for trial, where it was established that the I/I charge is proprietary, not regulatory. The town argued that the developers benefited from expedited access to the sewer system due to their payment of the I/I charge. 

The judge, in her ruling, analyzed whether the I/I charge was a fee or a tax, applying the three factors from Emerson College and referencing Berry v. Danvers, which indicated that the charge did not provide a specific benefit to the developers, as the public also benefited from the I/I reduction. She found the charge excessive relative to regulatory costs and ruled it as a tax, ordering the town to refund the I/I charges with interest and costs, while denying the town’s post-trial motions.

The role of the AGO was noted as significant; it imposed a moratorium on new connections until sewer system repairs were completed, which would take about ten years. The town's creation of the sewer bank was necessary to allow new connections and prevent the moratorium from halting development. The judge rejected the town's claims that the developers received a particularized benefit from the I/I charges. She concluded that the overall purpose of the new connection policy was to reduce I/I for the benefit of the community at large, rather than providing a specific service to the developers. The town contested the judge's ruling, arguing that the developers received a reasonable benefit for their payments, but the judge maintained her findings based on the broader community benefits derived from the I/I reduction.

The case of Berry addresses sewerage overflows in Danvers due to inflow and infiltration (I/I) and involves a charge imposed on new sewer connections. This charge is based on expected discharge into the sewer, aimed at removing two gallons of I/I for every new gallon added. The Appeals Court found that while I/I removal benefits new users by increasing system capacity, the benefit is not sufficiently distinct when compared to the advantages it provides current users. The court distinguished Berry from Bertone v. Department of Pub. Utils., noting that in Bertone, the electrical system could meet existing demand and maintenance was funded through user rates, whereas in Berry, funds were directed to address existing system issues. The court referenced Bertone in its consideration of whether fees were discriminatory under a specific statute, not to evaluate the particularized benefit as required under Emerson College standards.

In contrast, in Nuclear Metals, Inc. v. Low-Level Radioactive Waste Mgt. Bd., the court affirmed that a fee levied on low-level nuclear waste generators was valid because the service—disposal in compliance with federal law—was specific to the plaintiffs, despite a general public benefit. Similarly, in Silva v. Attleboro, a burial permit fee was deemed valid due to its specific benefit of regulating human remains disposal, even as it acknowledged public health benefits. The Appeals Court has also ruled on proprietary fees like the I/I charge, recognizing public benefits without detailing them against particularized benefits. In Morton v. Hanover, a water rate surcharge for constructing a new water main was validated as it provided abutters with specific benefits of improved water flow and pressure. In Commonwealth v. Caldwell, a slip fee for mooring boats was upheld, with the specific benefit being safety provided by the harbormaster, despite overall public benefits from the harbormaster’s role.

Berry's interpretation that courts must compare a particularized benefit to a public benefit when applying the first Emerson College factor is not adopted. Instead, the focus remains on whether the benefits to a limited group are sufficiently specific to justify cost distribution among them. In this case, developers paying the I/I charge gained immediate access to the sewer system, which was crucial given the town's obligation to reduce inflow and infiltration (I/I) under the Administrative Consent Order (ACO). The new connection policy was designed specifically to manage the sewer bank, which allowed new flow into the system, rather than serving a broader town purpose. The benefit of access was exclusive to those paying the I/I charge, countering the judge's view that the policy aimed at overall town benefit.

The third Emerson College factor examines whether the I/I charge was intended to compensate the town for expenses rather than generate revenue. The court assesses whether the charges reasonably align with anticipated costs. The judge recognized that the I/I charge reimbursed the town for prior expenditures related to I/I reduction, though she deemed the ten-to-one payment ratio excessive. The developers acknowledged that the three dollars per gallon charge was reasonable, given that remediation costs exceeded this amount. Additionally, a portion of the I/I account was transferred to the sewer enterprise fund for a pump upgrade, which, while not directly contributing to I/I credits, helped manage existing system flow and reduce the need for sewer overflows.

The judge determined that the $100,000 payment indicated the I/I charge functioned as a tax, noting its substantial nature in relation to the $440,000 paid by developers, as it was used for general sewer repairs rather than direct I/I remediation. Although the funds collected from developers were generally for I/I reduction, any repairs to the Saugus system could also be deemed as such. The developers argued that it was unreasonable for them to pay for the removal of ten gallons of I/I for each gallon of new flow they introduced, asserting they should only cover the flow they added. They contended that only costs directly related to accessing the sewer bank should be included. However, the judge found the ten-to-one removal requirement reasonable, as it was stipulated by the ACO, and deemed it fair for developers to bear the costs of adding new flow to an already burdened system for immediate sewer access. 

The developers also claimed the judge correctly identified the $100,000 spent on a new pump as indicative of the I/I charge being a tax, but this was contested. The judge concluded that the I/I charge reimbursed the town for prior I/I removal expenditures necessary for activating the sewer bank. The analysis should have stopped at this reimbursement finding, rather than assessing the direct I/I removal results of the $100,000 expenditure. While the $100,000 was significant compared to the developers' total payment, it was minor against the $6.5 million spent by the town on I/I removal to facilitate access to the sewer system. The developers did not claim that the new pump installation hindered their access to the sewer or failed to manage I/I flow from other areas. Additionally, the developers argued that the town should have reduced the I/I removal ratio from ten to six gallons sooner, but evidence of board decisions on this matter was lacking in the record, and the judge did not make explicit findings regarding the timing of any potential ratio adjustments.

The town achieved a reduction of 250,000 gallons of inflow and infiltration (I/I) in August 2005 and 500,000 gallons in early 2006. Developers paid their I/I charges during 2005 and 2006, with the town reducing its ratio from ten-to-one to six-to-one on January 30, 2007, and to four-to-one on December 11, 2007. The town contends that the delay in lowering the ratio was due to challenges in accurately estimating I/I removal and that it acted cautiously to avoid financial penalties under the Administrative Consent Order (ACO). The conclusion reached is that the town should have reasonably lowered its ratio after achieving the first 250,000 gallons of removal, making charges before August 2005 reasonable. For charges in October and November 2005, developers failed to prove that the town's delay was unreasonable, as the town had only met the minimum I/I removal necessary to access the sewer bank. The town's requirement of ten gallons of I/I removal for every gallon of new flow from developers was deemed rational to prevent exceeding the initial 250,000-gallon threshold. 

The remaining issue is whether the eighteen-month delays in reducing the ratios after achieving 250,000 and 500,000 gallons of I/I removal were reasonable. Evidence indicates that the $3 per gallon charge was only a standard estimate of I/I removal costs, which could vary significantly, with actual costs potentially reaching $14 per gallon. The professional engineer's testimony highlighted issues with estimating I/I removal due to groundwater migration, which could cause previously repaired defects to reintroduce I/I. This reinforced the perception that the ten-to-one ratio included a safety factor. Additionally, disputes arose between the town and regulatory department over the reported I/I removal amounts, contributing to uncertainties in accurately assessing the town's compliance with the ACO.

The town's decision to postpone reducing the ten-to-one ratio for approximately eighteen months was deemed reasonable given the potential financial consequences of violating the administrative consent order (ACO). The developers could have delayed connecting their properties until after the ratio was reduced if they found it burdensome. Consequently, the judgments in favor of the plaintiff developers are vacated, and judgments are entered for the town across all four cases. 

Infiltration refers to groundwater leaking into a sewer system through defective infrastructure, while inflow is extraneous water entering from public and private sources, both of which can lead to system overloads. The judge's assertion that the ten-to-one ratio was freely negotiated contradicts evidence indicating it was imposed by the department due to the severity of the problem. The ACO allowed the town to maintain the ten-to-one ratio, which was justified by the town's efforts to remove inflow and infiltration (I/I) prior to the agreement, achieving significant reductions by late 2007.

The estimated repair cost for I/I was initially set at three dollars per gallon, but the actual costs were found to be much higher. The I/I charge was voluntarily paid by developers, who could have waited for system repairs to avoid this charge. The relevance of voluntariness in distinguishing between a fee and a tax was noted, with references to prior cases indicating that voluntariness is less significant for regulatory fees. The financing for the town’s I/I reduction plan primarily came from ratepayers, with substantial funding through bonds and loans. The case of Emerson College v. Boston was referenced regarding the nature of charges imposed by municipalities, reaffirming that the charge in question was neither a tax nor a fee.

The court found that the charge related to fire fighting capacity was insufficiently specific, as it encompassed costs for protecting both the building and its occupants, as well as preventing fire spread to adjacent structures. The charge was deemed compelled under the Administrative Consent Order (ACO), which mandated the town to formulate plans to address inflow and infiltration (I/I), although these plans were not presented during the trial. Certain entities were exempt from the sewer bank under the ACO. The judge highlighted the relevance of specific facts when determining if a particularized service was exchanged for the I/I charge, which the developers underscored on appeal. These facts included the absence of new infrastructure, the developers not being responsible for the sewer system's disrepair, and no administrative costs incurred by the town. The developers' argument conflated case-specific facts with the standards set in Emerson College and related cases. The town manager's deposition, indicating the sewer commissioners' decision against reducing the ratio was to save taxpayer money, was not given explicit weight by the judge. Testimony from two sewer commission members revealed additional reasons for opposing the ratio reduction. Payment details were provided for various entities, with no evidence on when the Vinegar Hill Estates Trust made its payment, although it was acknowledged to have benefited from reduced ratios. The town employed an engineering firm to estimate I/I removal consistent with the ACO, and trial testimony indicated approximately 450,000 gallons of I/I had been removed, while the judge noted 500,000 gallons were removed in early 2006. A sewer commission member expressed concerns about the accuracy of the I/I removal estimates, indicating that the volume of I/I had increased significantly, and thus, only a small percentage had been removed relative to expectations. Another member echoed these concerns, emphasizing the need for better understanding the scale of the problem before considering a rate reduction.