Introduction

On April 8, 2016, we posted a blog regarding the case of Quality Built Homes, Inc. v. Town of Carthage, ___N.C. App. ___, 766  S.E. 2d 897 (2015)(unpublished).  In this case, the Court of Appeals had held that the Town of Carthage (Town) possessed authority to charge “impact fees” for water and sewer services.

In our April blog post (see here) we noted that the North Carolina Supreme Court had accepted Quality Homes case for review.  In our view, Quality Homes was different from prior zoning and subdivision cases where the North Carolina Supreme Court had affirmed the North Carolina Court of Appeals’ decisions finding that local governments did not possess authority to impose school impact fees.  We noted that the case involved the business of water service, an activity very different from regulatory activities and suggested that this distinction should make a difference.  We were wrong.

On August 16, 2016, the North Carolina Supreme Court reversed the North Carolina Court of Appeals’ decision and held that the Town did not possess authority to charge impact fees for water and sewer services.  ­Quality Homes v. Town Carthage, 2016WL 4410716 (August 19, 2016).

Quality Homes v. Town of Carthage

Facts

When a landowner sought and obtained final approval of a subdivision plat in the town, the landowner was required to pay water and sewer impact fees.  If the landowner failed to pay these fees, the Town refused to issue building permits.  These fees were due regardless whether this landowner ever connected to the Town’s utility systems.

The plaintiffs were companies engaged in residential homebuilding and had paid $123,000 in water and sewer impact fees to the Town.  These homebuilders contended that the General Assembly had not authorized the Town to charge water and sewer impact fees.  These homebuilders sought a refund, interest, reimbursement of attorney  fees and costs, monetary damages, and asserted equal protection and due process claims against the Town.

The Town contended that the General Assembly had authorized it to charge water and sewer impact fees through the public enterprise statutes.  These statutes authorized the Town to establish water and sewer systems in the Town’s discretion and to charge fees for these systems.

The Superior Court entered summary judgment in favor of the Town and the Court of Appeals affirmed the Superior Court.  The North Carolina Supreme Court, in its discretion, accepted the case for review.

The North Carolina Supreme Court’s Decision

The North Carolina Supreme Court reasoned that “[f]rom the very formation of our State government, municipalities, in their various forms, have been considered ‘creatures of the legislative will, and are subject to its control.” p. 2.  The General Assembly granted powers to municipalities by adopting statutes and these statutes included “implied powers essential to the exercise” of express powers granted. p. 3.   The plain language of a statute determined the extent of legislative power conferred upon a municipality, and when the statute was clear and unambiguous, no room for judicial construction existed.  But when the statute is ambiguous, it was construed broadly.

After reading the public enterprise statutes, the North Carolina Supreme Court found that these statutes empowered the Town to charge fees only “for the contemporaneous use of its water and sewer systems.”  p. 3.  Because the statute had not expressly authorized the Town to charge fees for future use of these systems, the North Carolina Supreme Court concluded that the Town lacked “the power to charge for prospective services.” p. 4.  Accordingly, the Town’s impact fee ordinances were unauthorized by the General Assembly and invalid.

The North Carolina Supreme Court bolstered its conclusion by noting that (1) the statutes enabling counties to establish and operate public enterprises included language “to be furnished” but this language was absent in the statutes enabling municipalities to establish and operate public enterprises and (2) the Town could have sought local legislation to authorize charging impact fees.

Finally, the Court reasoned that the General Assembly had granted the Town authority “to charge tap fees and to establish water and sewer rates to fund necessary improvements…to its inhabitants, which [was] sufficient to address its expansion needs.” p. 4.   

The North Carolina Supreme Court reversed the Court of Appeals and held that the Town’s impact fee ordinances were “invalid” and remanded the case  to the Court of Appeals “for consideration of the unresolved issues.” p. 5.

Comments

1. Based upon the North Carolina Supreme Court’s reasoning in Quality Built, the fundamental distinction between municipal governmental/regulatory activities and proprietary activities is irrelevant to the question as to whether a statute authorizes charging impact fees.  In fact, the North Carolina Supreme Court never mentioned the distinction in its decision.

2. Unlike zoning statutes, the public enterprise statutes authorized municipalities to establish “rents, rates, fees, charges and penalties for the use of or the services furnished by any public enterprise.” p. 3. (emphasis added).  Although the public enterprise statutes lacked an express limitation on charging impact fees, their broadness was insufficient to authorize impact fees.

Quality Built follows recent North Carolina Supreme Court decisions that address fees typically paid by the homebuilding industry for the impact of development on scarce public resources.  In these cases, the North Carolina Supreme Court has not found a general or local statute authorizing such impact fees.

3. The North Carolina Supreme Court relied upon Town of Spring Hope v. Bissette, 305 N.C. 248 (1982).  In Bissette, the North Carolina Supreme Court stated that a municipality’s “rate-making function is a proprietary function rather than a governmental one, limited only by statute or contractual agreement.”  p. 250

The plaintiff in Bissette was an individual consumer of sewer services who had complained that the rate charged by the Town of Spring Hope included charges associated with construction of a new sewer treatment facility that was not serving him at the time he paid these fees.  The Supreme Court, in a divided decision, rejected the consumer’s claim because he was receiving sewer services.

The difference between Bissette and Quality Built is that the homebuilders were not receiving utility services when the fees were due.   In other words, General Assembly intended, when it selected the words “the use of or the services furnished”, to unambiguously authorize municipalities to charge only existing utility customers the costs for new utility system facilities and expansions and not charge non-customer landowners who benefit from the presence or availability of these services.  In short, the North Carolina Supreme Court must have concluded that “the use of or the services furnished” was unambiguous and meant only physical connection to utility systems.

4.  The North Carolina Supreme Court stated that the Town’s impact fee ordinances “on their face exceed the powers delegated to the Town by the General Assembly.” p. 4. (emphasis added).  This is puzzling. The public enterprise statutes do not contain an express prohibition against charging impact fees. Four other members of the North Carolina Judiciary - a Superior Court Judge and three judges at the North Carolina Court of Appeals - found that the Town had authority to charge impact fees.  

The North Carolina Supreme Court remanded the case for consideration of “unresolved issues.” The Court identified some outstanding issues as being the Town’s defenses of statute of limitations and estoppel.  Other issues identified by the North Carolina Supreme Court were the homebuilders’ requests that the Town pay their attorney fees and legal costs, pay a refund of the impact fees plus interest and pay monetary damages for violation of equal protection and due process.