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Arbor Investment Company, LLC, et al v. City of Hermann

May 31, 2011


Appeal from the Circuit Court of Gasconade County The Honorable Gael D. Wood, Judge

The opinion of the court was delivered by: Laura Denvir Stith,judge

en banc

Arbor Investment Company LLC, CFV Plastics LLC, Buzz Manley and Donna Austin (collectively, "Arbor") appeal from the entry of summary judgment in favor of the city of Hermann in Arbor's action for damages, an injunction and a declaratory judgment stemming from Hermann's alleged violation of the Hancock Amendment. Arbor argues that the trial court erred in ruling that, under what is sometimes referred to as the "five-factor test" set out in footnote 10 of Keller v. Marion County Ambulance District, 820 S.W.2d 301 (Mo. banc 1991),Hermann's utility charges are a fee rather than a hidden tax and, therefore, do not run afoul of the Hancock Amendment, Mo Const. art. X, sec. 22(a).

For the reasons set out below, this Court finds that four of the Keller factors favor finding that the utility service charges are fees for services, not taxes, and the final factor favors finding that the charges are a tax. The trial court did not err in holding that, under Keller, the utility charges are user fees, not taxes.

Arbor alternatively argues this Court should reject the five Keller factors as the relevant test and should find that the utility service charges are taxes, not fees, because Hermann is the sole provider of these utilities. It says this fact is dispositive, at least when the issue is not the initial establishment of a service but the raising of rates for that service. This Court declines Arbor's invitation. Keller itself involved raising the rate for existing ambulance services. Here, as there, the Keller factors provide useful and usually determinative criteria for gauging whether a charge is a fee or a tax. Moreover, those criteria already permit consideration of the fact that Hermann is the sole provider of the services in question; indeed, that was true in Keller.

To the extent that cases such as Missouri Growth Association v. Metropolitan St. Louis Sewer District, 941 S.W.2d 615 (Mo. App. 1997), suggested that only the five Keller factors can be considered, however, this Court agrees that they have overread Keller. Keller lists these factors as useful aids, which they are. But the post-Keller decision by this Court in Beatty v. Metropolitan St. Louis Sewer District, 867 S.W.2d 217 (Mo. banc 1993), itself considered other relevant facts in making the ultimate determination of whether a charge nominally called a "user fee" really was a hidden tax when it found the application of the Keller factors inconclusive. Here, however, the five Keller factors clearly demonstrate that the charges are user fees for the provision of utility services, not taxes.

Arbor's real objection is that it thinks that the rates Hermann charges for its utility services are too high, noting that a report of the state auditor for the year 2003 showed that approximately 10 percent of utility revenues were transferred to the city's general fund account in the form of a gross receipts tax or surcharge and the city transferred substantial but varying additional sums from 2000 to 2006 to city general accounts, principally from city electric utility accounts.

But it was the utilities themselves, not their customers, who paid the gross receipts charges. Moreover, Arbor concedes in its brief that all the accounts are city accounts and that there is no law barring such transfers. It uses the transfers only to show that the charges were in excess of costs to run the utility and argues this is improper because the city is the only provider of these services. Again, however, Arbor cites no authority to support this assertion. To the contrary, in Pacev. City of Hannibal, 680 S.W.2d 944, 948 (1984), this Court recognized a municipality's right to recover overhead, wear and tear, and related city expenses caused by the utility as well as revenue lost when the municipality took over the running of the utility, without turning the charge into a tax.

Keller itself involved an ambulance service that raised its rates substantially beyond the costs of actually providing the service, in some instances doubling its charges. Although there, too, it was the sole provider of most ambulance services, Keller rejected the argument that this made the charge a tax, stating that "how much to charge users is for those elected to run the organization" and that if bad decisions are made, then the voters can turn the decision-makers out of office. 820 S.W.2d at 304.

While in a particular case the excess charge may be so substantial that it no longer can be considered a fee for service, because it does not bear a reasonable relationship to the services provided under Keller factor number 4, there is no such evidence here. Accordingly, the judgment is affirmed.


The controlling facts are not in dispute. Hermann is the exclusive provider of utility services for electricity, natural gas, public water and sewer, and refuse in Hermann. Hermann established natural gas lines in 1966; prior to this, there was no natural gas service in the city. Hermann has provided exclusive electric service to its citizens since 1958, public water and sewer service since the 1940s, and exclusive trash or refuse service for at least the last 30 years.

On December 29, 2006, Arbor filed this action, later certified as a class action, against Hermann. Arbor's petition alleged that Hermann was imposing utility charges that were grossly in excess of its costs of providing the services and moving over a portion of the resulting revenue from the city's utility accounts into the city's general fund account to help finance non-utility-related city operations. It alleged that this makes the utility charges a hidden tax and, so, violates article X, section 22(a) of the Missouri Constitution, which requires a vote of the people before taxes can be increased. Article X, section 22(a) is part of a group of constitutional provisions commonly known as the "Hancock Amendment."*fn1

The plaintiffs own property in Hermann, are utility customers and, for several years, have paid one or more of Hermann's utility charges for gas, electricity, water and sewer, and refuse or waste. Since November 4, 1980, the city has increased its utility rates numerous times without a vote of the people. If a resident fails to pay for gas, electricity or other city-provided utility services, then, like a private utility service provider, Hermann may shut off that customer's utility services. There is no evidence in the record that Hermann has authority to place a lien on a non-paying customer's property for non-payment of utility charges, as is customary for non-payment of property taxes.

Arbor notes that Hermann charges in excess of the costs of providing utility services. For 2003, the state auditor issued a report finding that, in the aggregate, Hermann transfers hundreds of thousands of dollars of this excess from its utility accounts to its general fund accounts. This includes a quarterly 10-percent gross receipts tax or gross receipts surcharge that the water and sewer, electric, and gas utilities themselves paid on their own gross receipts, as well as additional substantial sums transferred principally from the charges collected from electric utility customers, but to a lesser degree from some other utility customers also in varying amounts.*fn2 In addition,beginning in approximately 2003, the city has imposed a quarterly "communications fee" on some utility accounts to defray the cost of constructing and operating a 911 call center. The center provides 911 service to residents of the city, including Hermann utilities customers.

There is no claim that Hermann's transfer of any of these funds was improper per se. To the contrary, Arbor noted in its motion for summary judgment and concedes here that all the funds involved are city funds and that Hermann was entitled to make these internal transfers of city monies. Arbor's claim is based on its assertion that these transfers and charges are evidence of excessive utility fees. It argues that to the extent that utility charges exceed the comparable charge at the time the Hancock Amendment was adopted, they should have been submitted for a vote of the people but were not. Arbor's petition is not entirely specific as to the period covered, but it appears to seek recovery of unstated damages for the charges made by the of utilities in violation of the Hancock Amendment for the years 2000 to the date of suit in 2006, as well as injunctive and declaratory judgment relief and attorney's fees under the Hancock Amendment's enforcement provision, article X, section 23.

After discovery and certification of the plaintiff class, both parties filed cross motions for summary judgment in which they alleged that the uncontroverted facts supported summary judgment in their respective favors.*fn3 The trial court granted Hermann's motion for summary judgment based on its determination that factors 1, 2, 3 and 4 of the Keller test favored a finding that the charges were fees, not a tax, and that, therefore, the utility charges were not subject to the Hancock Amendment. Arbor appealed. After decision by the court of appeals, this Court granted transfer. Mo. Const. art V, sec. 10.


This Court's review on an appeal from summary judgment "is essentially de novo." ITT Commercial Fin. Corp. v. Mid-America Marine Supply Corp., 854 S.W.2d 371, 376 (Mo. banc 1993). Summary judgment is proper only if the moving party establishes that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. Rule 74.04(c)(6). This Court will review the record in the light most favorable to the party against whom judgment was entered and accords the non-movant the benefit of all reasonable inferences from the record. ITT Commercial Fin. Corp., 854 S.W.2d at 376.


A. History of Hancock Amendment Jurisprudence

Arbor argues that the utility charges at issue in this case were not user fees paid in exchange for services. As noted, Arbor concedes that there is no impropriety in transferring money from one city account to another. It argues, however, that the fact that the utilities have sufficient funds to make these transfers and that they collect the gross receipts charges and the communications fees show that the charges made by the utilities are more than user fees and should be held to constitute hidden taxes. Alternatively, even if they are fees rather than taxes, Arbor contends, they should be found to run afoul of the Hancock Amendment, specifically, article X, section 22(a) of the Missouri Constitution, because they can be used by the city to help defray customary governmental expenditures without a public vote.

1.Keller Clarifies that the Hancock Amendment Bars Only Increases in Taxes, Not Increases in User Fees, without a Public Vote

Article X, section 22(a) provides:

Counties and other political subdivisions are hereby prohibited . from increasing the current levy of an existing tax, license or fees . without the approval of the required majority of the qualified voters of that . political subdivision voting thereon.

In Roberts v. McNary, 636 S.W.2d 332, 336 (Mo. banc 1982), this Court initially interpreted the "tax, license or fees" language of section 22(a) to include virtually any pecuniary exaction by a political subdivision. Keller overruled this aspect of Roberts and held that raising fees paid for municipally provided services or goods do not need to be submitted to the voters each time they are raised, because revenue measures that operate to compensate a ...

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