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Scalise v. Sewell-Scheuermann

Supreme Court of Kentucky

November 1, 2018

MICHAEL SCALISE, ANNE BRAUN, AL HUBER, JONATHAN LEACHMAN, STEVE MILLER, JUDY SCHWENKER, MARK STEVENS, AND GARY VOGEL APPELLANTS
v.
SUZETTE SEWELL-SCHEUERMANN APPELLEE

          ON REVIEW FROM COURT OF APPEALS CASE NO. 2014-CA-000915-MR JEFFERSON CIRCUIT COURT NO. 13-CI-006719

          COUNSEL FOR APPELLANTS: Jason B. Bell Matthew C. Hess BELL, HESS 8& VAN ZANT, P.L.C.

          COUNSEL FOR APPELLEE: C. Dean Furman, Jr. FURMAN 8& NILSEN, PLLC

          COUNSEL FOR AMICUS CURIAE, KENTUCKY LEAGUE OF CITIES ("KLC"): Morgain Mary Sprague Jessica Miller MEMBER LEGAL SERVICES

          COUNSEL FOR AMICUS CURIAE, BLUEGRASS INSTITUTE FOR PUBLIC POLICY SOLUTIONS, INC.: Erica Lynn Horn Timothy Joseph Eifler STOLL KEENON OGDEN PLLC

          OPINION

          HUGHES, JUSTICE

         The City of Audubon Park (City) is a small city located in Jefferson County, Kentucky. Beginning in fiscal year 2007-2008 and continuing through fiscal year 2012-2013, the City's Mayor and City Council approved annual ordinances setting out a monthly assessment for the stated purpose of paying for sanitation services, including trash collection and recycling. However, the assessment generated more revenue than the cost of the City's contract with a private company for trash collection and recycling. The City diverted this surplus revenue into its general fund and subsequently used it for other City expenditures.

         In 2013, Suzette Sewell-Scheuermann, acting "as a taxpayer for the use and benefit of the City," brought this action pursuant to Section 180 of the Kentucky Constitution and, more specifically, Kentucky Revised Statutes (KRS) 92.330 and 92.340 seeking to recover the surplus sanitation revenue that was not devoted to trash collection and recycling. The cited constitutional provision and the statutes prohibit cities from collecting taxes for one purpose and spending them for another. The circuit court dismissed the action for failure to state a cause of action due to lack of injury to the City, but the Court of Appeals reversed, concluding that pursuant to the statutes cited, the former Mayor and individual members of the City Council were personally liable for the excess sanitation funds, even though those funds had been spent for other municipal purposes.

         This case requires us to consider for the first time the import of KRS 92.330 and 92.340, statutes adopted some seventy-five years ago but having their origins in statutory provisions from the late nineteenth century. While there is an initial question as to whether the assessment qualifies as a tax or a user fee, that is easily disposed of and takes us to the more pertinent issues of whether a cause of action was stated and whether in these circumstances individual liability is absolute. We conclude that the complaint states a cause of action, but liability is not absolute in this case if the individuals who acted on behalf of the City can establish that the tax revenue was spent for valid City obligations. Accordingly, we affirm in part and reverse in part the Court of Appeals' opinion and remand the case to the circuit court for further proceedings. We further hold that going forward the offset defense which has been judicially recognized in these circumstances will no longer apply. Prospectively, the statutes will be followed as written by our legislature, with an accommodation or defense, if any, for city officials who act in good faith a matter left entirely to the discretion of the General Assembly.

         FACTS

         Audubon Park is a former fifth-class city.[1] Sewell-Scheuermann, "as a taxpayer for the use and benefit of the City," filed a complaint against Mayor Michael Scalise and the following members of the City Council: Anne Braun, Al Huber, Jonathan Leachman, Steve Miller, Judy Schwenker, Mark Stevens, and Gary Vogel.[2] The complaint alleges that the Mayor and City Council members (hereafter collectively referred to as "Defendants") violated Kentucky Constitution Section 180 and KRS 92.330 and 92.340 through their improper use of sanitation assessment funds from 2007 through 2013. Sewell-Scheuermann claims that, as a taxpayer, she has the right to recover the excess sanitation assessment revenue, totaling over $773, 000, [3] for the benefit of the City.

         The revenue in question was collected pursuant to a series of annual ordinances entitled "An Ordinance Adopting the Garbage Recycling Collection Assessment for the City of Audubon Park, Kentucky for [Appropriate Fiscal Year from 2007-2008 through 2012-2013] and Providing for the Collection of Same." Each annual ordinance provided for a monthly assessment based on the classification of the City resident. In the initial ordinance, single family residences paid $34 monthly as did duplexes and apartments (on a per unit basis) as well as commercial entities. Churches were not assessed any liability. By the sixth and final ordinance, all residences (but not churches) were paying $45 monthly. The ordinances further provided: "The foregoing assessment shall be a part of the tax bill of the City of Audubon Park and shall be due and payable at the same time and place with the same discounts, interest and penalties as real estate taxes in the City of Audubon Park."

         In their answer to the complaint, the Defendants asserted numerous defenses, including laches, the statute of limitations, unjust enrichment, setoff, and that the fee charged for sanitation services was a "user fee," not a tax. If the "user fee" characterization is accurate, KRS 92.330 and 92.340 would not apply.

         The Defendants then moved to dismiss the complaint under Kentucky Rule of Civil Procedure (CR) 12.02 for failure to state a claim because the diverted funds were used for the City's benefit and therefore the City suffered no harm. The trial court granted the motion to dismiss, holding that since the diverted funds were used to pay for the City's financial obligations Sewell-Scheuermann was not entitled to any relief on behalf of the City.

         On appeal, the Court of Appeals found that KRS 92.330 and 92.340 are clear and unambiguous and that Sewell-Scheuermann had satisfied all elements of the statutes. In that court's view, the use of excess funds solely for the City's benefit was no defense, and the Defendants are thus jointly and severally liable to the City. The Court of Appeals concluded that the "object to be attained" by the sanitation assessment has not been accomplished at any given time because the tax is levied for ongoing waste disposal and that the City should have used any surplus funds for sanitation in the next fiscal year instead of diverting them to another purpose. Highlighting that the statutes at issue serve to prevent a city from levying a tax at a rate higher than necessary to accomplish its stated purpose, the Court of Appeals reversed the trial court's decision and remanded for further proceedings.

         On review by this Court, the Defendants argue that the Court of Appeals' opinion should be reversed for the following reasons: (1) this Court's decision in Klein v. Flanery, 439 S.W.3d 107 (Ky. 2014), and interpretation of Kentucky Constitution Section 180 compel reversal; (2) the case was properly dismissed at the trial court for lack of damages and due to an offset defense; (3) the imposition of personal liability on the City officials leads to an "absurd result" and creates a "chilling effect" on the willingness of citizens to serve in local government; and (4) the Court of Appeals' decision exceeded the scope of review under Kentucky law.

         We granted discretionary review to determine whether Sewell-Scheuermann has stated a cause of action and whether the Defendants are personally liable for the expenditure of the excess funds. Because the cited statutes are not relevant unless a tax is involved, we begin with the threshold issue of whether the Audubon Park assessment is a user fee rather than a tax.

         ANALYSIS

         I. The Sanitation Assessment Is Not a User Fee.

         Section 180 of the Kentucky Constitution provides:

Every act enacted by the General Assembly, and every ordinance and resolution passed by any county, city, town or municipal board or local legislative body, levying a tax, shall specify distinctly the purpose for which said tax is levied, and no tax levied and collected for one purpose shall ever be devoted to another purpose.

         This provision has existed since the adoption of the 1891 Kentucky Constitution.[4] KRS 92.330 and 92.340, discussed in detail below, expand on this central proposition regarding city taxes and provide the "recovery right" asserted on behalf of the City in this case.[5]

         Beginning in 2007 and continuing throughout the period at issue, the City referred to the monetary obligation in the Audubon Park sanitation ordinances as an "assessment." Clearly, the cited constitutional and statutory provisions are relevant to "taxes" so the proper characterization of the monies paid into the City's coffers is highly relevant. The Defendants asserted in their answer to the complaint that the assessment was a "fee and/or tax" and they continued that same indefinite characterization of the sanitation assessment in the motion to dismiss. The proper characterization was not part of the trial court's disposition of the case because, referring to the assessment as a "sanitation tax," that court concluded Sewell-Scheuermann had failed to prove any damages incurred by the City. In that court's view, "'there must be a juncture of wrong and damage to give rise to a cause of action."' (quoting City of Newport v. Rawlings, 289 Ky. 203, 158 S.W.2d 12, 14 (1941)).

         While the trial court sidestepped the issue and the Court of Appeals did not address it, amicus curiae Kentucky League of Cities insists the ordinance imposes a user fee, rendering KRS 92.330 and 92.340 irrelevant. Although this Court does not typically address issues not fully developed in the lower courts, and propounded in this Court primarily by an amicus, this threshold consideration deserves our attention because if the sanitation assessment is indeed a user fee the premise of this entire lawsuit - improperly spent tax revenues - dissolves.

         Fortunately, the General Assembly has provided the definition of a "user fee" in KRS 91A.510. It is defined as "the fee or charge imposed by a local government on the user of a public service for the use of any particular service not also available from a nongovernmental provider." (Emphasis supplied.)[6] While trash collection and recycling may be deemed a "service," it is plainly not one that is "not also available from a nongovernmental provider" because in this very case the City contracted with a nongovernmental provider - a private trash collection company - to provide the service. The sanitation assessment is, thus, not a user fee under Kentucky law.

         Recently, in Greater Cincinnati/Northern Kentucky Apartment Association v. Campbell County Fiscal Court, 479 S.W.3d 603 (Ky. 2015), this Court addressed a local assessment and the tax vis-a-vis user fee distinction. That case involved the levy of an annual $45 service fee upon each occupied individual residential and commercial unit within Campbell County to defray the costs of the local emergency 911 service. The Association maintained that the fee was an impermissible user fee that violated KRS 91 A.510 because it was not based on actual use of the benefit received, i.e., there was no correlation between use of the 911 service and the individual residences and businesses. Id. at 605. This Court concluded that the emergency 911 service was authorized by the legislature in 1984 two years prior to the adoption of the user fee statutes in KRS 91A.510-.530, and the fees referred to in that 1984 emergency 911 service statute, KRS 65.760, were authorized without regard to the later user fee strictures. The Court held that there had to be a reasonable relationship between the fee and the benefit received, and finding one, upheld the 911 service fee as "a constitutional and statutorily valid exercise" of the County's authority. Id. at 607.

         Here, there is no specific statute, as there was in Greater Cincinnati/Northern Kentucky Apartment Association for 911 service, regarding fees for trash/recycling services in a former fifth-class city. There was and is a statute authorizing a rate variation in local ad valorem taxes in cities of the first- through sixth-class (now applicable to cities of any class) specifically addressed to nonrevenue-producing governmental services including but not limited to "police protection, fire protection, streets, street lighting, sidewalks, water service, and sewer facilities." KRS 82.085. However, the statute refers to services and benefits "which are available in one (1) or several areas of a taxing district in contrast to other areas of the same taxing district in which those services and benefits are not available." KRS 82.085(1). Assuming trash/recycling services could be governmental services under this statute, the statute would still be inapplicable because those services were apparently available throughout the City of Audubon Park. Now, effective January 1, 2015 (and therefore after the time periods at issue in this case), there is a specific statute authorizing cities to impose a "supplemental tax" for services such as "garbage collection." KRS 82.095. The supplemental tax is not to exceed the cost of the services and is only required to be apportioned in a reasonable manner based on services "actually received," KRS 82.095(3), but the statute only applies to cities with a population of 3, 000 to 19, 999. This statute thus post-dates the ordinances at issue here and would not apply, in any event, because Audubon Park does not meet the population threshold.

         While there is no specific statute requiring the Audubon Park sanitation assessment to be deemed a tax, Sewell-Scheuermann notes that even if the assessment is some type of fee, historically this Court and its predecessor have treated excess fees as taxes. Martin v. City of Greenville, 227 S.W.2d 435, 437 (Ky. 1950) (excess license fee on apartment houses "would fall into the revenue class"); City of Henderson v. Lockett, 163 S.W. 199, 201 (Ky. 1914) (local license fee on automobiles is valid exercise of police power but any excess over cost of issuing license and regulating "amounts to a tax for revenue"). Most recently, in Klein we noted that any exaction by a governmental entity can be thought of as a tax of sorts but in the strict sense a tax is "levied to meet the general expenses of government" and is distinguishable from particularized exactions such as fines, user fees, infrastructure fees and regulatory fees. 439 S.W.3d at 114 n.6. Regulatory fees cease to be fees and become taxes when "the amount exacted becomes disproportionate to the amount expended for regulatory purposes." Id.

         Given the foregoing, it is clear that the Audubon Park sanitation assessment is not properly designated a "user fee" but to the extent it was a fee/assessment for a local governmental service the excess revenues generated may properly be deemed taxes. This classification issue requires further consideration of Klein v. Flanery, a case relied on by the Defendants.

         II. Klein v. Flanery Does Not Compel a Ruling in Favor of the Defendants.

         In Klein v. Flanery, two groups of plaintiffs who had paid regulatory fees to the state challenged the General Assembly's transfer of excess funds in those regulatory agency accounts to the General Fund for use in the annual state budget. Licensed building contractors who had paid licensing, permit and inspection fees to the Department of Housing, Buildings and Construction, and non-profit organizations who had paid license fees to the Department of Charitable Gaming alleged in part that the transfers to the General Fund violated Section 180 of the Kentucky Constitution. Their theory was if the monies collected were taxes then Section 180 prohibited their transfer for a different purpose than that for which they were collected but even if they were regulatory fees any excess over the amounts needed for regulatory functions would amount to "a tax for revenue" and thus still violate Section 180. 439 S.W.3d at 113-14 (citing City of Henderson, 163 S.W. at 201). Upholding the transfers, this Court first noted that Kentucky has long recognized that because it is difficult to "fix accurately a tax rate to meet exactly a liability[, ]" when the object of a tax levy is met any excess funds can be transferred to a general fund because otherwise those excess funds would be "entirely unavailable for any public purpose." Id. at 115 (citing Whaley v. Commonwealth, 61 S.W. 35, 39 (Ky. 1901)). The Court similarly focused on "the impossibility for any given fiscal period of precisely matching income and expense" as a rationale for concluding that the lapse or transfer of regulatory fees to the state's General Fund did not transform them into an unlawful tax. Id. "Where the amount exacted does not exceed what is reasonably necessary for regulatory purposes, the fact that, in a given fiscal period, the amount actually collected turns out to be somewhat more than the amount actually expended, . . . does not, without more, convert a valid fee into an invalid tax." Id. at 115-16. In that case, the regulatory fees were not so disproportionate to the expenses for regulation of building and construction trades or charitable gaming that the annual surpluses could be deemed taxes.

         While the Defendants maintain that Klein underscores the propriety of their use of excess sanitation assessment revenues for other valid city expenditures and fully refutes Sewell-Scheuermann's claims, she aptly notes that the cases are distinguishable. First, Klein involved state funds and thus only addressed Section 180 and not the statutes relied on in this case, KRS 92.330 and 92.340, which are specifically applicable to city taxes. Second, the general principle allowing use of surplus tax revenues (or surplus fees that "become" taxes) for other purposes presumes that there was a reasonable correlation between the assessment and the object to be accomplished, e.g., the regulatory purposes of the Department of Charitable Gaming or the Department of Housing, Buildings and Construction. Here, the City contracted with a private company for trash collection and recycling so there was a specific amount owed; it was not impossible to "precisely match[] income and expense." Klein, 439 S.W.3d at 115. On that score alone, the general premise recognized in Klein appears to be missing. When the annual sanitation assessment ordinances were passed and the monies collected, it was abundantly clear that excess funds would be generated. So even if the sanitation assessment was a service fee of some sort, the predictable excess regularly devoted to the City's general expenditures is properly viewed as a tax. With that conclusion, we turn to KRS 92.330 and 92.340 and Sewell- Scheuermann's claim that she is entitled to recover on behalf of the City over $773, 000 from the individual Defendants.

         III. KRS 92.330 and 92.340 Preclude Using Sanitation Revenue for Other Purposes but Current Kentucky Law Does Not Preclude an Offset Defense Where That Revenue Has Been Spent on Other Valid City Obligations.

         Although Sewell-Scheuermann cites Section 180 and the general principle of not using taxes assessed for one purpose for another, different purpose, her claim is more narrowly focused on two statutes that were contained in the 1942 statute revision. These statutes now provide:[7]

All taxes and license fees levied or imposed by cities of the home rule class shall be levied or imposed by ordinance. The purpose for which each tax is levied or license fee imposed shall be specified in the ordinance, and the revenue therefrom shall be expended for no other purpose than that for which the tax was levied or the license fee imposed. Failure to specify the purpose of the tax or license fee shall render the ordinance invalid.

KRS 92.330.

If, in any city of the home rule class, any city tax revenue is expended for a purpose other than that for which the tax was levied or the license fee imposed, each officer, agent or employee who, by a refusal to act, could have prevented the expenditure, and the members of the city legislative body who voted for the expenditure, shall be jointly and severally liable to the city for the amount so expended. The amount may be recovered of them in an action upon their bonds, or personally. The city attorney shall prosecute to recovery all such actions. If he fails to do so for six (6) months after the money has been expended, any taxpayer may prosecute such action for the use and benefit of the city. A recovery under this subsection shall not bar a criminal prosecution. Any indebtedness contracted by a city of the home rule class in violation of this subsection or of KRS 92.330 and 91A.030(13) shall be void, the contract shall not be enforceable by the person with whom made, the city shall never assume the same, and money paid under any such contract may be recovered back by the city.

KRS 92.340.

         These statutes were preceded by somewhat similar statutes in the 1894 Laws of Kentucky. Chapter 100, Article VIII, Section 2 of the 1894 Laws required a municipal tax ordinance to state its purpose and, if that purpose was omitted, the ordinance was invalid, rendering the members of the city council jointly and severally liable for any expenditures of the revenues collected pursuant to the ordinance. The city solicitor was charged with pursuing the recovery but if he failed to do so for six months then any person could institute the action and retain one-half of the recovery. The statute noted that it did not "militate against [a] criminal prosecution." Id. A revision of the statutes in 1898 resulted in the same statute being renumbered as Ky. Stat. § 3175, the statute cited in two of the older cases pertinent to the matter before us.[8]

         In City of Newport v. McLane, 256 Ky. 803, 77 S.W.2d 27, 29 (1934), the Newport mayor and council members, who were also members of the board of commissioners of the sinking fund, "transferred temporarily" monies from the sinking fund to various sub-funds of the city's general fund, leaving a deficiency of slightly over $79, 000 when all of their terms expired. In an action by the city against the former mayor and council members, numerous statutes, including Ky. Stat. § 3175, and Section 180 of the Kentucky Constitution were cited for the proposition that those individuals were personally liable for the revenues collected for one purpose and "diverted" to other city purposes, i.e., the sinking fund monies used for other city purposes such as the departments of public safety and public works. This Court's predecessor held that the language of Section 180 and Ky. Stat. § 3175 was "too plain, simple, and free from ambiguity and doubt to be misunderstood . . . ." Id. at 31. "The measure of the recovery as to the members of the board [the mayor and city council members] is the sum diverted, and as to the sureties, not exceeding the amount of their several bonds." Id. at 33. However, the Court further held that the individuals were not personally liable (nor the sureties) for the amounts so expended to the extent they could show the monies were spent on other valid city debts. Id. As the Defendants in this case correctly note, the statute and the offset defense were employed in McLane with respect to a valid ordinance - one that stated a particular purpose - illustrating that the precedent established in that case and followed in several others was not dependent upon an invalid ordinance, i.e., an ordinance failing to specify the purpose of the tax.

         Seven years later, in City of Newport v. Rawlings, 158 S.W.2d at 12, Newport was once again at the center of a lawsuit citing Section 180 of the Kentucky Constitution and Ky. Stat. ยง 3175 among other statutes. On this occasion, Rawlings, the city manager, and other city officers were charged with having failed to pay into the sinking fund, the education fund, the teachers' annuity fund, and the police and ...


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