Eagle Harbor v. Isle of Wight County

• Decision Date: 21 April 2006
• Docket Number: No. 051543.,051543.
• Citation: 628 S.E.2d 298
• Parties: EAGLE HARBOR, L.L.C., et al. v. ISLE OF WIGHT COUNTY
• Court: Virginia Supreme Court

Page 298

628 S.E.2d 298

EAGLE HARBOR, L.L.C., et al. v. ISLE OF WIGHT COUNTY

No. 051543.

Supreme Court of Virginia.

April 21, 2006.

John R. Walk (Christopher E. Gatewood; Hirschler Fleischer, on briefs), Richmond, for appellants.

Kevin J. Cosgrove, Norfolk (Carl D. Gray, Brent L. VanNorman, Norfolk; Jacob P. Stroman, IV, County Atty.; Hutton & Williams, on brief), Norfolk, for appellee.

Present: All the Justices.

G. STEVEN AGEE, Justice.

Eagle Harbor, L.L.C. and Founders Pointe, L.L.C. ("the Developers")¹ appeal from the judgment of the Circuit Court of Isle of Wight County which sustained the demurrer of the County of Isle of Wight ("the County") to a bill for declaratory and other relief filed by the Developers, as well as an amended bill, and dismissed the case with prejudice. For the reasons set forth below, we will affirm the judgment of the trial court.

I. BACKGROUND AND PROCEEDINGS BELOW

The Developers own several hundred acres of land in the County, part of which is zoned "for development of a mixed-use community" including residential units, and the remainder is "zoned for single-family residential . . . units." Combined, the Developers have approximately 1,850 residential unit sites, all of which are located in the County's Northern Development Service District ("NDSD"). The County has three separate utility service districts: the NDSD, the Windsor Service District ("WSD"), and the Southern Development Service District ("SDSD").

In 1996, the County's Board of Supervisors ("the Board") enacted ordinances ("the 1996 Ordinances") setting water and sewer connection fees for each residential unit of $3,000 to connect to the County's water system and $3,000 to connect to the County's sewer system. The 1996 Ordinances also provided that "when application for service is made for single family houses in a system totally installed by the developer and conveyed to the County at no cost, the connection fees [would] be reduced by sixty percent (60%)" ("the developer credit"). In 2000, the Board repealed the developer credit.

In 1997, the County issued 25-year General Obligation Water and Sewer Bonds in the amount of $14,250,000 in order to finance improvements to its water and sewer system. Specifically, 45% of the bond proceeds financed improvements to the County's water system in the NDSD and the remainder went to improvements to the County's sewer system in the other two service districts. There were no sewer improvements in the NDSD and no water improvements undertaken in the WSD or the SDSD from the proceeds of the bond issue.

In April 2001 the Board commissioned an "internal study of existing water and sewer rates" and utility connection fees. The results of the study ("the County Report") noted that under the 1996 Ordinances, including the repeal of the developer credit, payments on "[t]he average yearly sewer debt of $554,246 would require an average of 185 new sewer connections per year," and "[t]he average yearly water debt of $461,063 would require an average of 154 new water connections per year." The County Report also found that only "100 new water connections and 90 new sewer connections are projected next fiscal year," and concluded that "[b]ased on [the] assumption . . . that there would be the same number of connections per year in the next 25 years, the existing water and sewer connection fees would need to be increased to $4,610 and $6,158 respectively to totally support the existing debt." In September 2001, the Board passed new ordinances increasing the residential water and sewer connection fees to $4,000 each. ("the 2001 Ordinances"). These fees applied to any new residential connection to either system anywhere in the County.

By letter to the County dated August 14, 2003, Eagle Harbor contested the legality of the 2001 Ordinances. Specifically, Eagle Harbor contended that the connection fees were not "fair and reasonable" as required by statute because there was "no reasonable correlation" between the benefits derived from the water and sewer improvement projects funded by the bond proceeds and the fees charged. The letter noted that any new customer connecting to the County systems during the life of the bond issue would be required to pay the fees regardless of whether that customer derived benefit from the improvement projects financed by the bond proceeds. Further, Eagle Harbor pointed out that though "the useful life of the improvements . . . materially exceeds the term of the [b]onds, customers benefiting from those [p]rojects after the [b]onds have been retired bear none of the capital costs associated with them." Eagle Harbor suggested alternative methods of computing the fees that would require connecting customers to pay fees based on the benefit received from the bond issue projects in their utility service district. Eagle Harbor contended that it should pay only a nominal sewer connection fee as it had "paid all the costs of extending sewer" to its property.

By letter of November 20, 2003, Eagle Harbor made a demand pursuant to Code § 15.2-1248, that the County pay $3,848,500, "representing the sum by which land sales within Eagle Harbor, LLC have been impacted by the challenged fees."² Founders Pointe made a separate demand on September 10, 2004, for $569,500 in damages for the "imposition of improper and excessive water and sewer connection fees" upon the same basis previously set forth by Eagle Harbor.

Receiving no response from the County, the Developers filed a bill of complaint for declaratory and other relief on September 17, 2004, seeking a determination that the connection fees under the 2001 Ordinances were "unreasonable and contrary to law." They also sought compensation for the difference between the connection fees they paid under the 2001 Ordinances and the level of fees the Developers contended were reasonable and lawful. The Developers did not allege in this pleading, or in the later filed amended bill for declaratory and other relief, that the 2001 Ordinances were actually an improper revenue raising device amounting to an illegal tax, impact fee, or special assessment so as to be void.

In the alternative, the Developers asked the trial court to enter "an injunction requiring the County to refund all water and sewer connection fees illegally charged since September 20, 2001." The Developers appended to their bill of complaint a copy of the County Report and a study conducted by their own expert, Robert C. Dolecki, P.E., evaluating the County's methodology in setting connection fees ("the Dolecki Report").

The County filed a demurrer and a hearing was held by the trial court. By letter opinion dated March 22, 2005, the trial court found that a "presumption of legislative validity" and therefore, a "presumption of reasonableness" attached to the 2001 Ordinances. The trial court noted that the standard of review for such an ordinance was whether it was "fairly debatable." The trial court then opined that under the standard of review "only irrational, arbitrary or capricious action falls outside the `fairly debatable' standard." The trial court then concluded that the Developers did not "state[] facts, which if considered true, would establish unreasonableness." Consequently, the trial court ruled the 2001 Ordinances met the "fairly debatable" standard and were thus valid.

As to the Developers' claim under Code § 15.2-2119, the trial court opined that this statute authorizes localities to collect fees from property owners connecting to County utility systems, and the Developers' contention that the 2001 Ordinances were "contrary to law" was without merit. The trial court's opinion did not specifically address the requirement under Code § 15.2-2119 that sewer and water connection fees must be "fair and reasonable." The trial court concluded that it would sustain the County's demurrer and dismiss the Developers' bill of complaint.

On April 1, 2005, the Developers moved the trial court for leave to file an amended bill of complaint for declaratory judgment and attached their proposed amended bill to the motion. The facts alleged in the amended bill were essentially the same as in the prior pleading. The Developers alleged they were required as a condition of zoning to connect to County utilities, and they consequently paid over $1,700,000 to extend public water and sewer lines to their developments, which lines have been or will be turned over to the County without charge.

The 2001 Ordinances, along with the repeal of the developer credit, increased the Developers' connection fees per lot from $2,400 to $8,000, and "the imposition of excessive connection fees . . . diminished the value of the [Developers' properties]". While the bond issue financed the NDSD Water Project, the Windsor Sewer Project, the Windsor Boulevard Extension, and the SDSD Sewer Project, approximately 90% of the proceeds were used to extend service to specific areas where County water or sewer service did not previously reach.

The Developers admitted they derived a limited benefit from the NDSD Water Project but contended they received no benefit in return for the sewer connection fee charged by the County. The Developers further alleged that under the 2001 Ordinances the County did not assess capital costs of the bond issue against those customers benefiting from such projects in proportion to benefits derived, nor did it treat the improvements as enhancements to the system generally and recover the capital costs of the bond issue through regular monthly charges for water and sewer service.

By Order of April 25, 2005, the trial court granted the motion for leave to amend but found that the additional facts alleged in the amended bill had been previously argued by the parties and considered by the court.³ The trial court sustained the demurrer to the bill of complaint and the amended bill of complaint and dismissed the Developers' suit with prejudice. We granted the...