Appeals Court rules against Raleigh in $16M developer fee dispute

The North Carolina Court of Appeals has upheld a trial judge’s ruling against Raleigh in a dispute over $16 million in water and sewer fees developers paid between 2016 and 2018.

Wednesday’s unanimous decision arrived almost four months after the state Supreme Court ruled that the case Wardson Construction v. City of Raleigh could proceed as a class-action lawsuit.

The Appeals Court agreed Wednesday with Superior Court Judge Bryan Collins’ 2024 ruling that Raleigh did not have authority at the time of the disputed payments to assess “capital facility fees” for future water and sewer services.

“[T]he undisputed evidence of record shows Defendant’s CFFs were not charged for contemporaneous use of the water and/or sewer system,” wrote Appeals Court Judge Toby Hampson. “Therefore, because Defendant’s Charter does not authorize it to charge for services to be furnished, the trial court did not err in concluding Defendant’s actions were ultra vires. Consequently, in light of controlling authority, the trial court properly granted Plaintiffs’ Motion for Summary Judgment.”

“Ultra vires” means Raleigh lacked authority to charge its fees.

The Appeals Court rejected Raleigh’s argument that its city charter authorized the fees.

“Defendant argues ‘a charter need not have any magic words to effectuate its intent,’” Hampson wrote. “While this may be true, there is simply no language in the Charter which grants Defendant prospective charging power. In fact, in each of the cases to which Defendant attempts to liken the present case, the municipalities were governed by statutes or ordinances which expressly granted authority to charge for services ‘to be furnished.’”

Raleigh also failed to show that the fees related to current water and sewer services, rather than future services, Hampson explained. “Importantly, Defendant has not produced any specific evidence (1) the fees originated from contemporaneous use or (2) were used to cover services already furnished — a showing of either of which might create a genuine issue of material fact for trial.”

Chief Judge Chris Dillon and Judge Thomas Murry joined Hampson’s opinion. As an  unpublished opinion, it has limited value as a precedent for future court cases.

The state Supreme Court issued a March 20 decision in the case targeting city water and sewer impact fees charged to as many as 735 potential plaintiffs. The case carries a potential price tag of $16 million.

“Wardson Construction and other home builders allege that Raleigh unlawfully required them to pay these fees as a condition of development, and they seek return of those payments under state law,” wrote Justice Anita Earls for the 6-0 majority. Justice Tamara Barringer was recused from the case.

“The trial court certified a class consisting of builders who paid the fees, allowing the claims to be resolved in a single proceeding,” Earls explained. “Raleigh appeals that decision, arguing that some builders passed the costs of the fees on to home purchasers and therefore cannot pursue relief together as a class.”

“We affirm the certification order. North Carolina law directs that any fee unlawfully collected by a local government be returned to the person who made the payment,” Earls added. “Because the right to seek repayment turns on payment itself — not on who may ultimately have borne the cost — the possibility that some builders later incorporated the fees into home prices does not prevent class treatment.”

“The question of whether the fees were lawful is for another day; today’s decision addresses only whether the case may proceed on behalf of all affected home builders as certified in one action,” Earls wrote. “We hold that the trial court did not err in its analysis of the legal criteria for class certification and did not abuse its discretion when it concluded that a class action is the superior method of adjudicating the claim.”

During oral arguments in October, lawyer Robin Tatum represented Raleigh. She argued the case did not meet the criteria for a class action.  

“We know at least one person is going to get paid twice, and probably a lot more,” Tatum said. “That is just not a class action.” 

Tatum emphasized that refunds should go only to those who actually suffered financial harm. 

“The City of Raleigh has no desire to keep money it is not entitled to,” she argued. “However, under the class action statutes and [N.C.G.S § 160-D] 106, that does not mean you give it to whoever shows up and has carried some money to the city. You want to get it to all the people who have been improperly injured.” 

Tatum argued that the class-action dispute involved a public policy question, not one for the judiciary to decide.  

“There should not be a decision that this basic language made this gigantic change to class-action law, without anybody really knowing that they did it,” she said. “I think any change to this should be a legislative one.”  

The key point of contention focused on the statutory language in NC Gen. Stat. 160D-106, which requires local governments to reimburse “the person who made the payment” when the government illegally charges a fee.  

Tatum argued that the law should prioritize the party who ultimately bore the financial burden, using an analogy: The situation is like a co-worker ordering and delivering Uber Eats for lunch. The colleague pays for the meal, but someone else reimburses them, making the colleague just a vehicle for the payment. 

Chief Justice Paul Newby pushed back on the analogy, questioning the different impact depending on whether the payment is viewed from the perspective of the restaurants or of the colleague. 

“Let’s say it was pointed out by you or one of your colleagues that the person was actually charged too much; they were charged an illegal amount for what had been given,” Newby said. “Could you go to the restaurant and get the refund? Only the person who paid too much could go get the refund, correct?” 

Representing the developers, lawyer Jim DeMay argued that the statute’s plain language and legislative intent support a class action refund to the original payors. 

“The legislature wants these fees to be refunded,” he said. “They don’t want the city to keep them, and a class action here furthers that intent.” 

DeMay added that the statute provides a clear mechanism for refunding the fees. 

“[The statute] ensures that the cities pay back illegal fees by providing a certain, identifiable refund recipient,” DeMay argued. “[The city’s] own expert says the fee is passed on each time the home is sold. So are you going to look at the second purchaser, third purchaser, fourth purchaser?” 

“Here we have a known class of specific parties, the parties that are identified by the General Assembly in 160D-106 who paid the fees, have a common interest in having the fees refunded under the statute, and the trial court was manifestly correct in certifying the class in this case,” he concluded.  

Justice Richard Dietz repeatedly focused on the statutory wording, asking Tatum why the ordinary meaning of “person who made the payment” should not govern. He reiterated the makeup of the court, saying there were several textualists, or those who focus on the plain meaning of words when legally interpreting cases. 

“In [160-D] subsection 106, when it says that the refund of the fee goes to the person who made the payment, why wouldn’t we just take the ordinary meaning of that term, even if you passed the cost down the line to someone else?” Dietz said. “The person who actually is the one who shows up and says ‘here’s the money’ is the one who made the payment, and then these other people had it passed along to them.” 

“Appeals Court rules against Raleigh in $16M developer fee dispute” was originally published on www.carolinajournal.com.