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City Did Not Violate Equal Protection Clause By Canceling Future Payments Of Lot Owners Who Owed Assessments While Refusing Refunds To Those Who Already Paid
August 13, 2012 | Bulletin No. 1001757.1
The United States Supreme Court held that a city did not violate the Equal Protection Clause when it forgave future payments of lot owners for sewer-related assessments but refused to provide refunds to lot owners who had previously paid for the assessments in one lump sum. The Court concluded that administrative concerns and costs provide a rational basis to justify the distinction between those lot owners who already paid and those who had not. (Armour v. City of Indianapolis (--- S.Ct. ----, U.S., June 4, 2012).
An Indiana law, known as the “Barrett Law,” allowed cities in Indiana to impose the cost of sewer improvement projects on benefited lot owners, who could pay either immediately by making a lump sum payment or over time in installment payments. Installment payments could be spread over 10, 20, or 30 years.
In 2004, the City of Indianapolis (“City”) completed the Brisbane/Manning Sanitary Sewers Project, (“Brisbane/Manning Project”) which affected about 180 homes. After the project was finished, City sent notices to each owner affected by the project and informed them that they could pay the entire $9,278 assessment in a lump sum or in installments, which would be subject to interest at an annual rate of 3.5%. Thirty-eight homeowners chose to pay the lump sum, 47 chose the 10-year-plan, 27 chose the 20-year plan, and 68 chose the 30-year plan.
In 2005, the City chose to abandon the method of financing provided by the Barrett Law because it was too burdensome for some homeowners to pay for the assessments and this discouraged “changes from less healthy septic tanks to healthier sewer systems.” The City adopted the Septic Tank Elimination Program (“STEP”), which financed sewer projects in part through bonds to lower lot owners’ sewer connection costs. Prior to the adoption of STEP, City constructed more than 40 projects under the Barrett Law and lot owners paying in installments still owed for 24 of those projects. Pursuant to STEP, City will charge a flat fee of $2,500 to each connecting lot owner “and make up the difference by floating bonds eventually paid for by all lot owners citywide.”
In connection with the adoption of STEP, City’s Board of Public Works enacted a resolution under which it would forgive all assessment amounts for projects financed through the Barrett Law that are due and owing from November 1, 2005, forward. The effect of the resolution is that those owners who still owe Barrett Law assessments do not have to make further payments but those who already paid for their assessment will not receive refunds. In the context of the Brisbane/Manning Project, the homeowners who paid the full $9,278 just one year prior to the resolution would receive no refund. However, those who elected installment payments were under no further obligation to make payments.
The 38 homeowners who paid the lump sum asked the City for a partial refund but it denied their request. Thirty-one of these homeowners (“Homeowners”) brought a lawsuit against the City in Indiana state court seeking approximately $8,000 each in refunds. They asserted the City’s refusal to award them refunds while it forgave the outstanding debt of others violated the Equal Protection Clause of the United States Constitution. The trial court granted summary judgment in favor of the Homeowners. The Indiana Supreme Court reversed that decision and held that “the City’s distinction between those who had already paid their Barrett Law assessments and those who had not was ‘rationally related to its legitimate interests in reducing its administrative costs, providing relief for property owners experiencing financial hardship, establishing a clear transition from [the] Barrett Law to STEP, and preserving its limited resources.’”
Supreme Court Decision
The United States Supreme Court affirmed the decision of the Indiana Supreme Court finding no violation of the Equal Protection Clause. The Court found that the classification of those who had already paid and those who had not does not involve either a “fundamental right” or a “suspect classification.” The City, according to the Court, made a tax classification. As such, the City’s classification survives constitutional scrutiny if “there is any reasonably conceivable state of facts that could provide a rational basis for the classification.”
The Court found the City’s classification has a rational basis. Tax-related distinctions can be justified by administrative considerations. After the switch to the STEP system, collection of the unpaid debt from the Barrett Law system would have been complex and expensive. The City would have to maintain an administrative system to collect debts for years to come that arose from over 20 different construction projects. Some of the monthly payments would be as low as $25 per household and the City could possibly “need to maintain credibility by tracking down defaulting debtors and bringing legal action.” The City would have to maintain an office, keep old files, and keep its computer system current to track the debt. These collection costs would have to be spread over a declining number of debtors meaning the per-debtor cost of collection would be continuously increasing. If the City added refunds to its forgiveness program, it would create more administrative costs to process refunds.
Also, “the line that City drew—distinguishing past payments from future obligations—is a line well known to the law.” Examples of this line are amnesty programs involving taxes, parking tickets, or mortgage payments. The line drawn by the City “is consistent with the distinction that the law often makes between actions previously taken and those yet to come.” Even if the Homeowners proposed a system superior to the one implemented by the City, they failed to show a violation of the Constitution. The City was not required to draw a perfect or superior line but only a rational one. It was rational for the City to draw a line that avoids the burden of collecting small sums for years to come.
If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.
Jeffrey L. Massey | 916.321.4500