On The Road

March 2nd, 2012

Iowa Supreme Court Rules Against City of Des Moines – City Now 0-8 in Defending Its Franchise Fee

DES MOINES, Iowa (March 2, 2012)—The Iowa Supreme Court today found in favor of the class in the matter of Lisa Kragnes v. City of Des Moines. The court ruling comes more than two years after the city of Des Moines appealed the decision of Polk County District Court Judge Joel Novak. The lawsuit, which dates back to July 2004, has been to the Iowa Supreme Court twice, and the class attorneys have successfully fought the city’s five attempts to decertify the class and throw out the case.

“We are pleased with the decision, and ready to move on to the next steps in righting the wrong the City of Des Moines perpetrated against its citizens,” said Brad Schroeder, an attorney for the class. “The city has fought this case tooth and nail, and we have prevailed at every challenge, including twice at the high court.

“This case is about citizens being able to stand up to their government and say what you’re doing is illegal. Lisa Kragnes did just that when she questioned a new charge on her MidAmerican bill back in July 2004,” he added.

The court opinion not only finds for the class, but points out why class actions of this type are necessary and beneficial:

“The litigation of this case has resulted in two [Iowa] Supreme Court opinions, a forty- nine page district court decision after a fourteen-day bench trial involving the testimony of twenty-eight witnesses, including eight experts—three for the City and five for Kragnes. The record fills five bankers’ boxes. However, Kragnes’s claim standing alone would likely fall within the jurisdictional limit of the small claims court. We think this case demonstrates the very necessity and importance of class action litigation both for the plaintiffs and for the City.”

After Judge Novak found in 2009 that the City had overcharged the citizens and businesses in Des Moines by millions of dollars and ordered refunds to be made to anyone who has paid energy bills in Des Moines since September 2004, the City appealed to the Supreme Court asking to:

  • decertify class
  • allow class members to opt out
  • modify the amounts and types of costs to be included in the franchise fee.

The high court denied decertification and opt-outs. It also categorically denied the City’s attempt to use unspecified costs—also known as opportunity costs—as rationale for the franchise fee.

“We also conclude the City shall not, based on this record, recoup any amount for unpredictable, acute costs.”

In its analysis, the court estimated the annual collection of the franchise fee to be slightly more than $3.5 million for regulating the gas and electric utility rights of way (the area from the sidewalk to the street.) This amount is approximately $400,000 more than awarded by Judge Novak.

Since mid‐2005, the City had been collecting the tax at the rate of $12.6 million per year, overcharging its residents, businesses and organizations nearly $9 million annually.

“I never thought the case would last nearly eight years—when it started my children were in grade school and now one is in high school, ” said Lisa Kragnes, a working mother of two who lives in Des Moines. A lot has changed in my life, but I have never regretted standing up and pointing out that the City of Des Moines acted without regard for the law or its own citizens when it hijacked the franchise fee and turned it into a tax without representation.”

Attorneys estimate the refunds at approximately $40 million, which includes actual damages, interests and costs.

“Ordering refunds is the only way to make the City accountable not only in this case but with respect to any decisions it might make in the future regarding how it raises revenues,” Schroeder explained. “This decision hopefully underscores for this City and other cities that if they if they make these kinds of choices, to circumvent the law and take advantage of their citizens, there will be consequences.”

The City argued during the trial that it should be exempted from refunding the overcharge because the fee was used to benefit the taxpayers and the community, but Novak disagreed. In his ruling Novak wrote:

“The court disagrees with the City’s position that equity mandates there be no refund to the class. If the court was to accept the City’s position no refund under the City’s benefit/no detriment argument the court would be sending a message to all cities in Iowa that as long as cities use funds from the illegal taxation for the good and honorable purposes, the taxpayers don’t have anything to complain about and have no right to a refund of the funds illegally collected. The City’s position in this regard is not supported by any just, fair or equitable principle. The court should not and will not send such a message.”

The case now goes back to the district court to determine the exact amount and process for franchise fee refunds for approximately 100,000 residents and businesses.

History of the Case

At issue in the case is the 5‐percent franchise fee the City of Des Moines charges its residents, businesses and organizations via their MidAmerican Energy bills. Back in 2004, Kragnes noticed an extra fee on her MidAmerican Energy bill and began asking questions. She learned that a franchise fee is supposed to be collected to compensate the City for its administration and regulation of gas and electric utilities. She also learned that the City, which had a budget shortfall, had decided to raise the fee from 1 to 3 percent and use it like a tax to boost revenues for things other than regulating utilities. In June 2005, the council increased the fee to 5 percent.

In January 2006, a Polk County District Court judge said the fee constituted an illegal tax. The City appealed. The Supreme Court of Iowa agreed with Kragnes’ theory that to the extent the fee cannot be justified by costs incurred by the City, it is an illegal tax. In May 2006, the high court remanded the case back to district court for trial, where Novak ruled in favor of the Plaintiff in June 2009.

Enhanced by Zemanta

About the Author

The Iowa Republican

blog comments powered by Disqus