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City of Aurora v. Spectra Communications Group, LLC

Supreme Court of Missouri, En Banc

December 24, 2019

CITY OF AURORA, MISSOURI, et al., Respondents/Cross-Appellants,
v.
SPECTRA COMMUNICATIONS GROUP, LLC, d/b/a/ CENTURYLINK, et al., Appellants/Cross-Respondents.

          APPEAL FROM THE CIRCUIT COURT OF ST. LOUIS COUNTY THE HONORABLE TOM W. DEPRIEST, JR., JUDGE.

          Patricia Breckenridge, Judge.

         The cities of Aurora, Cameron, Oak Grove, and Wentzville (collectively, "the Cities")[1] filed an action for declaratory judgment and injunctive relief against CenturyLink, Inc. f/k/a CenturyTel, Inc., and its subsidiaries.[2] In their petition, the Cities alleged CenturyLink failed to pay all license taxes owed under the Cities' respective ordinances since 2000. The Cities also alleged CenturyLink failed to enter into right-of-way user agreements under Cameron's and Wentzville's respective ordinances and failed to pay Cameron's linear foot fees. The trial court entered two partial summary judgments in favor of the Cities on the issue of liability, and the case proceeded to trial on the limited issue of damages resulting from CenturyLink's delinquent and unpaid taxes to the Cities. After trial, the court entered a final judgment for the Cities and awarded damages for unpaid license taxes. The trial court also awarded the Cities attorney fees, prejudgment interest, and postjudgment interest.

         CenturyLink and the Cities filed cross-appeals. CenturyLink raises nine points on appeal. The Cities raise eight points on cross-appeal. The trial court's judgment is affirmed in all respects except for the following:

         The trial court erred in awarding prejudgment interest to Aurora, Cameron, and Oak Grove pursuant to section 408.020[3] because the more specific provisions in sections 71.625.2, RSMo 2012, 144.170, and 32.065 govern interest on the delinquent payment of license taxes. The trial court further erred in awarding prejudgment interest to Wentzville pursuant to its municipal ordinance because the rate of interest in its ordinance conflicts with the rate of interest provided by statutes. The trial court also erred in awarding attorney fees to Aurora, Cameron, and Oak Grove. The record does not support the trial court's finding that CenturyLink's failure to pay the Cities' license taxes was willful pursuant to sections 392.350 and 488.472. Likewise, the record does not reflect any special or unusual circumstances justifying an award of attorney fees pursuant to section 527.100 or the trial court's equitable powers. Accordingly, the award of attorney fees to Aurora, Cameron, and Oak Grove is reversed. CenturyLink, however, did not challenge the trial court's award of attorney fees pursuant to Wentzville's municipal code. Consequently, the attorney fees awarded to Wentzville must be affirmed.

         The cause is remanded. On remand, the trial court must calculate prejudgment interest in accordance with this opinion, determine what portion it's attorney fee award may be properly apportioned to Wentzville, and determine Wentzville's attorney fees on appeal.

         I. Factual and Procedural Background

         In 2012, the Cities brought a declaratory judgment action against CenturyLink alleging it had failed to pay all of the required license taxes owed under the Cities' respective ordinances. The Cities further alleged CenturyLink failed to enter into right-of-way user agreements with Cameron and Wentzville and failed to pay Cameron linear foot fees under Cameron's right-of-way ordinance.

         CenturyLink denied failing to pay all taxes and linear foot fees due under the Cities' respective ordinances. CenturyLink also denied being required to enter into right-of-way user agreements with Cameron and Wentzville. In its answer, CenturyLink asserted several affirmative defenses, including that the Cities' claims were barred to the extent they sought to collect tax on certain services and revenue streams beyond those permitted by the Cities' respective ordinances. CenturyLink further asserted that the grandfathered political subdivision provision under section 67.1846.1 permitting linear foot fee ordinances existing prior to May 1, 2001, was a constitutionally invalid special law and that Cameron's and Wentzville's user permits or agreements created impermissible mandatory franchises for use of the public rights-of-way.[4]

         The Cities subsequently filed a motion for partial summary judgment alleging all sources of revenue received by CenturyLink constituted gross receipts for purposes of calculating license taxes. The motion further alleged CenturyLink was required to comply with Cameron's and Wentzville's right-of-way ordinances. In opposing the motion, CenturyLink asserted the Cities were attempting to tax telecommunication services beyond those derived from the Cities. CenturyLink further contended Cameron and Wentzville were prohibited from requiring telecommunication companies such as CenturyLink to enter into right-of-way agreements, which it asserted were constituted mandatory franchise agreements prohibited under section 67.1842.

         On April 17, 2014, the trial court entered partial summary judgment in the Cities' favor. The trial court found CenturyLink failed to pay taxes as required under the Cities' respective license tax ordinances on four types of revenue: (1) license tax pass through; (2) vertical and optional calling services; (3) end-user common-line charge and subscriber line charge; and (4) federal and state universal service funds. The trial court then awarded the damages from such revenues as were calculable and ordered an accounting as to the other identified revenues.

         The trial court also concluded that Cameron's right-of-way code is valid and enforceable and ordered CenturyLink to enter into a use permit agreement with Cameron. It further ordered CenturyLink to pay $138, 914.04 in linear foot fees plus interest. The trial court similarly concluded Wentzville's right-of-way code is valid and enforceable and ordered CenturyLink to enter into a right-of-way use agreement with Wentzville.

         Finally, the trial court concluded the Cities were entitled to summary judgment on their claims that CenturyLink's failure to fully report all of its gross receipts was unlawful and subjected the Cities to undue and unreasonable prejudice under section 392.200, RSMo Supp. 2012. The trial court further found CenturyLink's "unlawful actions" were willful under section 392.350 and ordered CenturyLink to pay attorney fees pursuant to sections 392.350, 488.472, and 527.100.

         In 2015, the Cities filed their second motion for partial summary judgment in which they alleged their respective ordinances required CenturyLink to pay license taxes on all gross receipts. The Cities further alleged they were entitled to back taxes, interest, and penalties from CenturyLink for delinquent or underpaid taxes. In response, CenturyLink asserted the Cities' interpretation of their ordinances was unconstitutional because the Cities could not recover taxes for services furnished beyond their municipal boundaries. CenturyLink also contended the Cities failed to establish, as a matter of law, that their ordinances applied to the disputed types of revenue in the Cities.

         On April 6, 2016, the trial court entered an order granting partial summary judgment in the Cities' favor. It found CenturyLink was liable for license taxes to each city for all revenue it received "in that City." It further concluded CenturyLink was in the business of furnishing exchange telephone service in Aurora and Cameron and supplying telephone service in Oak Grove and Wentzville. The order stated CenturyLink "must pay license taxes in each City on all revenues in such City specified in the Court's Order June 2, 2014 and all other revenue in such City."

         The June 2, 2014 order was entered after the Cities filed a motion to compel CenturyLink to disclose documentation pertaining to revenues received by CenturyLink from business or operations in each city. The trial court ordered CenturyLink to disclose all attributable revenue relating to each city and listed 29 different categories of revenue, including carrier access and interstate services.

         In 2016, the case proceeded to trial on the limited issue of damages. The Cities called their expert witness to testify about his damages calculations, which included all types of the disputed forms of revenue. CenturyLink called several witnesses to testify about which revenue sources were derived from services furnished in the Cities. CenturyLink also introduced exhibit U2, which summarized the various revenue streams but excluded carrier access revenues from all the Cities and interstate service revenue from Wentzville. Exhibit U2 also credited CenturyLink for payments it had made under protest pursuant to section 139.031, RSMo Supp. 2012. CenturyLink began paying the Cities their license taxes under protest after the Cities filed suit. Those protest actions remained pending at the time of trial.

         The Cities objected to testimony from CenturyLink's witnesses regarding which revenue streams were derived from services in the Cities on grounds that the April 6, 2016 partial grant of summary judgment had already determined that all revenue sources were taxable under the Cities' respective ordinances. The Cities further objected to exhibit U2 on the ground CenturyLink had failed to provide them with the underlying documentation allegedly summarized in the exhibit. The trial court overruled the Cities' objections.

         On February 23, 2017, the trial court entered its final judgment in which it found a five-year statute of limitations applied to the Cities' claims and declared the tax base under Aurora's, Cameron's, and Oak Grove's respective license tax ordinances was all revenue, other than carrier access revenue, received in each city. It also declared the tax base under Wentzville's license tax ordinance was all revenue, other than carrier access revenue and revenue derived from interstate telephone calls, received in Wentzville. The trial court then awarded the Cities damages using the amounts in exhibit U2 as the basis for its damages calculations. The trial court also credited CenturyLink for payments made under protest pursuant to section 139.031, RSMo Supp. 2012, and ordered CenturyLink to dismiss the protest actions currently pending with prejudice within 10 days of the judgment becoming final. The trial court further awarded Aurora, Cameron, and Oak Grove prejudgment interest at a rate of nine percent per annum under section 408.020 and awarded Wentzville prejudgment interest at a rate of two percent per month, not to exceed 18 percent per annum, pursuant to Wentzville's municipal code. Likewise, the trial court awarded Aurora, Cameron, and Oak Grove post-judgment interest at a rate of nine percent per annum pursuant to section 408.040 and awarded Wentzville post-judgment interest at a rate of two percent per month, not to exceed 18 percent per annum.

         The trial court also found the Cities were not entitled to any penalties under their respective ordinances but awarded the Cities attorney fees pursuant to sections 392.350, 488.472, and 527.100, as well as Wentzville's municipal code.

         The parties cross-appealed. Because CenturyLink challenged the constitutional validity of section 67.1846, this Court has exclusive jurisdiction over the appeal. Mo. Const. art. V, sec. 3.

         II. CenturyLink's Appeal

         A. Facially Special Law

         In its first point, CenturyLink asserts the trial court erred by awarding Cameron damages for unpaid linear foot fees under the city's right-of-way ordinance because such fees are prohibited by statute and the grandfathered political subdivision exemption under section 67.1846.1 is a constitutionally invalid special law.[5] This Court reviews challenges to the constitutional validity of a statute de novo. Earth Island Inst. v. Union Elec. Co., 456 S.W.3d 27, 32 (Mo. banc 2015).

         CenturyLink asserts section 67.1846.1 created a closed-ended class based on an immutable, historical fact and, thereby is, an unconstitutional special law. See City of St. Louis v. State, 382 S.W.3d 905, 914 (Mo. banc 2012). The Cities argue section 67.1846.1 is not a special law and, even if it is, the grandfathered political subdivision provision is substantially justified.

         Because recent cases have generated complex and confusing criteria for application of the provisions in article III, section 40 of the Missouri Constitution, this Court must revisit its analysis of local or special law challenges under article III, section 40. Sections 40 through 42 provide:

Section 40. The general assembly shall not pass any local or special law:
(1) authorizing the creation, extension or impairment of liens;
(2) granting divorces;
(3) changing the venue in civil or criminal cases;
(4) regulating the practice or jurisdiction of, or changing the rules of evidence in any judicial proceeding or inquiry before courts, sheriffs, commissioners, arbitrators or other tribunals, or providing or changing methods for the collection of debts, or the enforcing of judgments, or prescribing the effect of judicial sales of real estate;
(5) summoning or empaneling grand or petit juries;
(6) for limitation of civil actions;
(7) remitting fines, penalties and forfeitures or refunding money legally paid into the treasury;
(8) extending the time for the assessment or collection of taxes, or otherwise relieving any assessor or collector of taxes from the due performance of their duties, or their securities from liability;
(9) changing the law of descent or succession;
(10) giving effect to informal or invalid wills or deeds;
(11) affecting the estates of minors or persons under disability;
(12) authorizing the adoption or legitimation of children;
(13) declaring any named person of age;
(14) changing the names of persons or places;
(15) vacating town plats, roads, streets or alleys;
(16) relating to cemeteries, graveyards or public grounds not of the state;
(17) authorizing the laying out, opening, altering or maintaining roads, highways, streets or alleys;
(18) for opening and conducting elections, or fixing or changing the place of voting;
(19) locating or changing county seats;
(20) creating new townships or changing the boundaries of townships or school districts;
(21) creating offices, prescribing the powers and duties of officers in, or regulating the affairs of counties, cities, townships, election or school districts;
(22) incorporating cities, towns, or villages or changing their charters;
(23) regulating the fees or extending the powers of aldermen, magistrates or constables;
(24) regulating the management of public schools, the building or repairing of schoolhouses, and the raising of money for such purposes;
(25) legalizing the unauthorized or invalid acts of any officer or agent of the state or of any county or municipality;
(26) fixing the rate of interest;
(27) regulating labor, trade, mining or manufacturing;
(28) granting to any corporation, association or individual any special or exclusive right, privilege or immunity, or to any corporation, association or individual the right to lay down a railroad track;
(29) relating to ferries or bridges, except for the erection of bridges crossing streams which form the boundary between this and any other state;
(30) where a general law can be made applicable, and whether a general law could have been made applicable is a judicial question to be judicially determined without regard to any legislative assertion on that subject.
Section 41. The general assembly shall not indirectly enact a special or local law by the partial repeal of a general law; but laws repealing local or special acts may be passed.
Section 42. No local or special law shall be passed unless a notice, setting forth the intention to apply therefor and the substance of the contemplated law, shall have been published in the locality where the matter or thing to be affected is situated at least thirty days prior to the introduction of the bill into the general assembly and in the manner provided by law. Proof of publication shall be filed with the general assembly before the act shall be passed and the notice shall be recited in the act.

Mo. Const. art. III, sec. 40-42 (emphasis added).[6]

         Under these provisions, the legislature may enact local or special laws if it complies with the notice and publication requirements in section 42. Section 40, however, prohibits 30 types of local or special laws in all circumstances. Exceptions (1) through (29) are identified by the subject matter or effect of the law in question. Exception (30) forbids any local or special law "where a general law can be made applicable[.]" As a result, a plain reading of the constitutional language at issue shows that any party seeking to challenge the constitutional validity of a statute under article III, section 40(30), must demonstrate: (a) the statute is a local or special law and (b) a general law can be made applicable.

         The first element, that the statute is a local or special law, is a threshold requirement common to article III, sections 40 through 42. If a statute is not a local or special law, neither the notice and publication requirements in section 42 nor the specific prohibitions in subdivisions (1) through (30) of section 40 apply. The test for identifying local or special laws has received significant attention in this Court since these provisions were first added to the Missouri Constitution in 1865. In one of the earliest cases, this Court noted "a statute which relates to persons or things as a class is a general law, while a statute which relates to particular persons or things of a class is special, and that classification does not depend upon numbers." State ex rel. Lionberger v. Tolle, 71 Mo. 645, 650 (1880) (emphasis added) (internal quotations omitted). A few years later, this Court noted, "Class legislation is not necessarily obnoxious to the constitution. It is a settled construction of similar constitutional provisions that a legislative act which applies to and embraces all persons who are or who may come into like situations and circumstances is not partial." Humes v. Mo. Pac. Ry. Co., 82 Mo. 221, 231 (1884) (internal quotations omitted).

         Parties attacking a statute as a constitutionally invalid local or special law "inevitably . . . argu[e] that the statute treats some members of the class differently than others." Blaske v. Smith & Entzeroth, Inc., 821 S.W.2d 822, 831 (Mo. banc 1991). Historically, this Court has held, however, if the criteria for a class in a statute is supported by a reasonable basis, then the statute is not a local or special law and the analysis should stop there. See Ross v. Kan. City Gen. Hosp. & Med. Ctr., 608 S.W.2d 397, 400 (Mo. banc 1980) ("A law which includes less than all who are similarly situated is special, but a law is not special if it applies to all of a given class alike and the classification is made on a reasonable basis."). This Court adopted the reasonable basis test in Miners' Bank v. Clark, 158 S.W. 597, 599 (Mo. 1913), holding "[a] statute is not special or class legislation if it appl[ies] to all alike of a given class, provided the classification thus made is not arbitrary or without a reasonable basis."

         Later, this Court explicitly analogized the special law test to the rational basis test contained in equal protection jurisprudence, [7] concluding "the test for 'special legislation' . . . involves the same principles and considerations that are involved in determining whether the statute violates equal protection in a situation where neither a fundamental right nor a suspect class is involved, i.e., where a rational basis test applies." Blaske, 821 S.W.2d at 832 (emphasis added).[8]

         The rational basis analysis served the Court and the language of the constitution well for more than a century. See, e.g., State v. Gilley, 785 S.W.2d 538, 540-41 (Mo. banc 1990) ("The state concludes that these substantial burdens on the state serve as a rational basis for the legislative enactment of § 508.355. The Court agrees. Section 508.355 is, therefore, neither a local nor special law."); Menorah Med. Ctr. v. Health & Educ. Facilities Auth., 584 S.W.2d 73, 81 (Mo. banc 1979) ("[A prior case] illustrates the criteria by which it is determined whether a law is local or special. The classification must be reasonable, not arbitrary, and the privilege created by the law must be available to all entities within the classification."); Marshall v. Kan. City, 355 S.W.2d 877, 884 (Mo. banc 1962) ("[A] law is not special in the constitutional sense if it applies alike to all of a given class provided the classification thus made is not arbitrary or without a reasonable basis."); ABC Liquidators, Inc. v. Kan. City, 322 S.W.2d 876, 885 (Mo. 1959) ("It is well established in this state that a law is not a special law if it appl[ies] to all alike of a given class, provided the classification thus made is not arbitrary or without reasonable basis." (internal quotations omitted)); McKaig v. Kan. City, 256 S.W.2d 815, 818 (Mo. banc 1953) ("A law may not include less than all who are similarly situated. If it does, it is special, and therefore invalid, because it omits a part of those which in the nature of things the reason of the law includes."); City of Springfield v. Stevens, 216 S.W.2d 450, 455 (Mo. banc 1949) ("If the ordinance includes all who are similarly situated and there is a reasonable basis for the classification, the ordinance is not a special law that violates the constitutional provision relied upon."); Thompson v. St. Louis-S.F. Ry. Co., 69 S.W.2d 936, 943 (Mo. 1933) ("A statute is not special or class legislation if it appl[ies] to all alike of a given class, provided the classification thus made is not arbitrary or without a reasonable basis.").

         The rational basis analysis, however, has been diminished in recent years. This Court incorrectly has distinquished between classifications drawn using open-ended criteria (sometimes, but not always, [9] the population of the affected and excluded areas) and classifications drawn using closed-ended or immutable criteria (for example, geography, actions taken prior to the statute's passage, or simply the names of affected and excluded persons or places). See, e.g., City of Normandy, 518 S.W.3d at 191 ("The test employed to determine if a statute is a special law is whether the statute's applicability is based on open-ended or closed-ended characteristics."); City of DeSoto v. Nixon, 476 S.W.3d 282, 287 (Mo. banc 2016) ("The most often applied test for determining whether a law qualifies as a special law is whether the law is based on open-ended or closed-ended characteristics."). Additionally, this Court recently held that if a law's application is based on closed-ended criteria, it is "facially" a local or special law and is presumptively constitutionally invalid, see City of Normandy, 518 S.W.3d at 191, unless the party defending the constitutionality of the statute shows a "substantial justification" for the legislature's decision to use a local or special law. See, e.g., City of DeSoto, 476 S.W.3d at 287 ("If a law is facially special, the party defending the facially special law must demonstrate a substantial justification for the failure to adopt a general law instead."); Treadway v. State, 988 S.W.2d 508, 511 (Mo. banc 1999) ("Unconstitutionality of a special law is presumed and there must be 'substantial justification' for excluding other political subdivisions." (internal citations omitted)); Harris v. Mo. Gaming Comm'n, 869 S.W.2d 58, 65 (Mo. banc 1994) ("The party defending the facially special statute must demonstrate a 'substantial justification' for the special treatment.").

         The term "substantial justification" appears to have originated in a tax case more than 50 years ago. In Airway Drive-In Theatre Co. v. City of St. Ann, 354 S.W.2d 858, 859 (Mo. banc 1962), this Court analyzed an annual license tax of $1.50 per speaker for drive-in theaters, compared with a flat tax rate of $50 per year for indoor theaters. The Court reviewed the license tax in accordance with article X, section 3 of the Missouri Constitution, which provides taxes "shall be uniform upon the same class of subjects within the territorial limits of the authority levying tax." Id. at 860. After finding the tax was imposed to raise revenue rather than to regulate, the Court held:

[T]he ordinance imposing the tax is contrary to what we consider to be the correct and sound rule that "although a subclassification for license purposes may be justified on substantial grounds, the taxing power cannot unjustly discriminate, such as in the amount of the tax imposed, between the subdivisions so made." . . . This is but another way of saying that the resulting subclassification is arbitrary, unreasonable and without substantial justification.

Id. at 861 (emphasis added) (internal citation omitted).

         Citing Airway Drive-In Theatre, the dissenting opinion in Associated Industries of Missouri v. State Tax Commission of Missouri, 722 S.W.2d 916, 925 (Mo. banc 1987) (Rendlen, J., dissenting), grafted the "substantial justification" language onto an equal protection and due process case, equating it with a "rational basis." Next, in O'Reilly v. City of Hazelwood, 850 S.W.2d 96, 99 (Mo. banc 1993), this Court adopted a new "substantial justification" test for special laws, holding: "Because the St. Louis County Boundary Commission Act is not open-ended, the respondents must do more: they must demonstrate a substantial justification to include other counties." Id. The final misdirection occurred in City of Normandy, when this Court placed the burden of presenting evidence of substantial justification on the party defending the statute. 518 S.W.3d at 196-97. The Court noted prior cases upheld special laws when the party defending them presented evidence of substantial justification for the special treatment. Id. at 196. It went on to say, "By presenting no evidence of substantial justification for the presumed special laws, the State failed to overcome the presumption of constitutional invalidity." Id. at 197.

         The expansion of the analysis to encompass whether a statute's application is based on open-ended or closed-ended criteria and to require evidence of substantial justification does not comport with the plain language of article III, section 40. Particularly, article III, section 40 suggests neither that certain special laws are presumptively constitutionally invalid[10] nor that such a presumption may be overcome if the limitation of the law's application is supported by a "substantial justification." Rather, every law is entitled to a presumption of constitutional validity in this Court, and if the line drawn by the legislature is supported by a rational basis, the law is not local or special and the analysis ends. If the classification is not supported by a rational basis, the threshold requirement for a special law in section 40 is met and the party challenging the statute must then proceed to show the second element: either that the law offends one of the specific subject matter prohibitions in subdivisions (1) through (29) of section 40, or that the law is one "where a general law can be made applicable" under subdivision (30).[11] Of course, subdivision (30) states that "whether a general law could have been made applicable is a judicial question to be judicially determined without regard to any legislative assertion on that subject." But this requirement does not change the fact the law will be presumed constitutional and the burden of showing both elements ordinarily resides with the party challenging a statute under article III, section 40. See State ex rel. Bunker Res. Recycling & Reclamation, Inc. v. Mehan, 782 S.W.2d 381, 385 (Mo. banc 1990) ("One who assails the classification must carry the burden of showing that it is essentially arbitrary and unreasonable.").

         In shifting the burden of proof to the party defending the constitutional validity of the law to offer a "substantial justification, "[12] this Court has converted the burden of persuasion that ordinarily applies to a party charged with showing a lack of rational basis in a constitutional context, into a mandatory requirement for the production of evidence necessary to defeat summary judgment. See City of Normandy, 518 S.W.3d at 197 ("By presenting no evidence of substantial justification for the presumed special laws, the State failed to overcome the presumption of constitutional invalidity."); City of Springfield v. Sprint Spectrum, L.P., 203 S.W.3d 177, 186 (Mo. banc 2006) ("The burden, therefore, shifts to . . . the party defending the statute[] to show that it is constitutional. To meet this standard, the mere existence of a rational or reasonable basis for the classification is insufficient."). This burden-shifting and the substantial justification test have no basis in article III, sections 40 through 42, and should no longer be followed.

         It may be that, in the 15 decades since the prohibition against certain local or special laws first was added to the Missouri Constitution, this Court's analysis began to conflate the absence of a rational basis with the absence of a "substantial justification" for such a law. And it also may be that, at some point, this Court began to conflate the question of whether the local or special law at issue was one "where a general law could be made applicable" under section 40(30) with the question of whether that local or special law was substantially justified. The former error unnecessarily heightens the level of scrutiny employed in the threshold determination whether a statute is a local or special law. The latter error unnecessarily blurs the line between this threshold element in section 40 and the second element - that one of the 30 specific prohibitions against such law has been violated. The resulting confusion from these ...


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