City of Little Rock v. Cash

• Decision Date: 06 December 1982
• Docket Number: No. 82-143,82-143
• Citation: 277 Ark. 494,644 S.W.2d 229
• Parties: CITY OF LITTLE ROCK, Arkansas, Appellant and Cross-Appellee, v. Ann CASH, T. Smith, C.S. Robinson, Wilson Webber, Charles Watson and G. Johnson, Appellees and Cross-Appellants.
• Court: Arkansas Supreme Court

Page 229

644 S.W.2d 229

277 Ark. 494

CITY OF LITTLE ROCK, Arkansas, Appellant and Cross-Appellee, v. Ann CASH, T. Smith, C.S. Robinson, Wilson Webber, Charles

Watson and G. Johnson, Appellees and Cross-Appellants.

No. 82-143.

Supreme Court of Arkansas.

Dec. 6, 1982.

Rehearing Denied Jan. 17, 1983.

R. Jack Magruder, III, City Atty., and Wright, Lindsey & Jennings by Patrick J. Goss, Little Rock, for appellant and cross-appellee.

David Henry, Henry & Duckett, Little Rock, for appellees and cross-appellants.

DUDLEY, Justice.

This interesting case presents many questions about illegal exactions and an attorney's conflict of interests.

Ark.Stat.Ann. § 19-4201 through 19-4218 (Repl.1980) authorized cities to purchase or construct waterworks systems. In 1937 Ark.Stat.Ann. § 19-4219 (Repl.1980) was enacted which authorized first and second class cities to create commissions to operate and manage their waterworks systems. That same year the City of Little Rock by ordinance created the Little Rock Waterworks Commission which operates and manages the system. The Board of Directors of the City, pursuant to § 19-4208, retained the authority to sell and encumber In 1965, the General Assembly, by Act 50, gave to the operating authority of any waterworks system the discretion to make voluntary contributions to the general fund of the municipality in lieu of taxes in return for police, fire and health protection. Ark.Stat.Ann. §§ 19-4273 through 19-4276 (Repl.1980). The municipality cannot force payments to be made to it pursuant to this statute as the payments in lieu of taxes are discretionary with the operating authority.

the property as well as to set rates. The same statute, § 19-4208, provides that the operating authority can pay surplus funds over to the city only after taking into account the cost of operations and maintenance, allowing for replacement costs and depreciation, providing for interest redemption and purchasing all outstanding bonds.

In October, 1969, the City of Little Rock, by ordinance, levied a privilege tax on the waterworks commission. The tax was in the amount of $10,417 for the period of December 1, 1969 through December 31, 1969, and $125,000 for the year 1970. The ordinance contains the following provisions:

SECTION 3. The taxes hereby levied shall be paid in addition to any sums paid by the Little Rock Municipal Water Works under the provisions of Act 50 of 1965.

SECTION 4. The Little Rock Municipal Water Works is hereby authorized to pass on said taxes by levying an additional charge of twenty-five (25cents) a month per meter upon resident consumers. The Water Works may terminate the services of any consumer who fails to pay such charge when due.

An identical ordinance was passed for the years 1971, 1972 and 1973. Beginning in 1973, the ordinances authorized the waterworks to levy a charge in the amount necessary to collect the amount of the tax, which was $167,652 in 1974; $144,000 in 1975; $145,000 in 1976; $146,500 in 1977; $148,500 in 1978; $156,822 in 1979; $322,500 in 1980; $339,066 in 1981 and $340,000 in 1982. The taxes have been paid to the city on a monthly basis at the rate of 1/12th of the yearly levy.

On August 25, 1981, six residents of the city who were water users filed suit in the chancery court against the City of Little Rock alleging that the privilege tax was an illegal exaction prohibited by Article 16, § 13 of the Arkansas Constitution. The six taxpayers were represented by David Henry, a former assistant city attorney, who, at the time he filed this suit against the city, also was defending the city in another case for a fee. The city filed a motion asking that David Henry be disqualified because of his conflict of interests. The trial court refused to disqualify the attorney, found an illegal exaction, gave judgment against the city in the amount of $1,264,761.30 through March, 1982, plus interest at the rate of ten percent per annum until paid, and awarded David Henry an attorney's fee in the amount of $316,190.00. We affirm the holding that the privilege tax is an illegal exaction, modify the amount of the judgment and disallow the attorney's fee.

The illegal exaction. Municipalities have only those powers that have been delegated to them by statutes or by the Constitution, and any substantial doubt about the existence of a power in a municipal corporation must be resolved against it. Town of Dyess v. Williams, 247 Ark. 155, 444 S.W.2d 701 (1969), citing City of Little Rock v. Raines, 241 Ark. 1071, 411 S.W.2d 486 (1967) and Yancey v. City of Searcy, 213 Ark. 673, 212 S.W.2d 546 (1948). A city tax which is not authorized by a delegated power of taxation is an illegal exaction. Schuman v. Ouachita County, 218 Ark. 46, 234 S.W.2d 42 (1950), citing Waters Pierce Oil Co. v. Little Rock, 39 Ark. 412 (1882).

Appellant city tacitly concedes that there is no constitutional or statutory authority delegating to it the authority to levy this privilege tax. However, it argues that, although its ordinance labeled the assessment a privilege tax, it is not really a tax. It contends that the terms franchise fee, franchise tax, rate, assessments, charges, privilege tax and privilege fee are interchangeable, and the use of one term instead of another does not necessarily invalidate a legislative enactment. See Eaton v The appellant's argument fails for a number of reasons. First, the assessment obviously is not a charge for services rendered to the waterworks. Those services are paid for in lieu of taxes pursuant to statutes, §§ 19-4274 and 19-4275, and are discretionary with the operating authority. Conversely, the tax before us is mandatory, in a set amount, and the ordinances provide that "the taxes hereby levied shall be paid in addition to any sums paid by the Little Rock Municipal Waterworks under the provisions of Act 50 of 1965." Second, all other payments by the waterworks to the municipality which come from water rates must come from surplus accumulated in the operation fund only after taking into account the cost of operations and maintenance, allowing for replacement costs and depreciation, providing for interest redemption and the purchasing of all outstanding bonds. § 19-4208. Here the tax, originally at 25 cents per meter, was levied on the waterworks and passed on to the customer and then paid by the customer and passed directly back to the city without regard to the cost of operations, maintenance, depreciation and debt as set out above. Thus, it was not a part of the water rate. Third, the assessment was designated a privilege tax by the ordinances. It was clearly a tax, an unauthorized tax, and therefore an illegal exaction. We affirm the chancellor in so holding.

McCuen, 273 Ark. 154, 617 S.W.2d 341 (1981); Holman v. City of Dierks, 217 Ark. 677, 233 S.W.2d 392 (1950). The city then inductively reasons that the assessment or charge or rate imposed by the ordinances should be treated as a part of the rate for water validly set by the municipality pursuant to § 19-4208.

Contrary to appellant's argument, Section 9 of Act 23 of the 1981 Extraordinary Session of the General Assembly does not authorize the imposition of the privilege tax challenged in this case. We affirm the chancellor's granting of injunctive relief.

The amount of the illegal exaction to be recovered. The appellees argue, on cross-appeal, that no statute of limitations should have been applied and that they should be allowed to recover all money illegally exacted, over $2,000,000. The appellant contends the following in the alternative: that no refund is due, that the three year statute of limitations applies, or that the five year limitation should be applied and the recovery should be limited accordingly.

We do not find it necessary to decide the issues concerning statutes of limitation because we have always followed the common law rule prohibiting the recovery of voluntarily paid taxes. See, e.g., Searcy County v. Stephenson, 244 Ark. 54, 424 S.W.2d 369 (1968); Thompson, Comm'r. v. Continental Southern Lines, Inc., 222 Ark. 108, 257 S.W.2d 375 (1953).

In Thompson, supra, this Court stated the general rule as follows:

Appellee seeks to recover voluntary payments made of taxes. This can not be done. Cooley in The Law of Taxation, Ch. 20, § 1282, gives this rule: "It is well settled that if the payment of a tax is a voluntary payment, it cannot be recovered back, except where a recovery is authorized by the provisions of a governing statute regardless of whether the payment is voluntary or compulsory" (Vol. 3 at p. 2561); and further: "Where voluntary payments are not recoverable, it is immaterial that the tax or assessment has been illegally laid, or even that the law under which it was laid was unconstitutional. The principle is an ancient one in the common law, and is of general application. Every man is supposed to know the law, and if he voluntarily makes a payment which the law would not compel him to make, he cannot afterwards assign his ignorance of the law as a reason why the State should furnish him with legal remedies to recover it back. Ignorance or mistake of law by one who voluntarily pays a tax illegally assessed furnishes no ground of recovery." (Vol. 3 at page 2564).

This Court, one paragraph later, noted that Arkansas had no statute on the subject and that we follow the common law rule:

In Brunson v. Board of Directors of Crawford County Levee Dist., 107 Ark. 24, 153 S.W. 828, 829, 44 L.R.A., N.S., 293, Mr. Justice Hart, speaking for the Court, said: "In some of the states the right to recover illegal taxes paid under protest is given by statute. In this state, however, there is no statute regulating the matter, and if any recovery is had it must be under the rules of the common law. The common-law rule governing cases of this kind is laid down in the following cases: Lamborn v. County Commissioners, 97 U.S. 181, 24 L.Ed. 926; Union Pacific R.R....