Kan. City Southern Ry. Co. v. Koeller

• Decision Date: 27 July 2011
• Docket Number: No. 10–2333.,10–2333.
• Citation: 653 F.3d 496
• Parties: KANSAS CITY SOUTHERN RAILWAY CO. and Norfolk Southern Railway Co., Plaintiffs–Appellants,v.Russell E. KOELLER, et al., Defendants–Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

653 F.3d 496

KANSAS CITY SOUTHERN RAILWAY CO. and Norfolk Southern Railway Co., Plaintiffs–Appellants,

v.Russell E. KOELLER, et al., Defendants–Appellees.

No. 10–2333.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 29, 2010.Decided July 27, 2011.

Paul M. Brown (argued), Attorney, Thompson Coburn LLP, St. Louis, MO, Everett B. Gibson, Attorney, Bateman Gibson, Memphis, TN, for Plaintiffs–Appellants.Mark G. Arnold (argued), Attorney, Husch Blackwell LLP, St. Louis, MO, for Defendants–Appellees.

Before BAUER, WOOD, and WILLIAMS, Circuit Judges.WOOD, Circuit Judge.

The Railroad Revitalization and Regulatory Reform Act (“4–R Act”) prevents states and their subdivisions from imposing discriminatory taxes against railroad carriers. 49 U.S.C. § 11501. In 2008, the Sny Island Levee Drainage District (“Sny Island” or “District”), a subdivision of Illinois, changed its long-standing method for calculating assessments due from railroads and other properties within its system. Two rail carriers—Kansas City Southern Railway Company and Norfolk Southern Railway Company (collectively “Railroads”)—brought suit under the residual clause of the 4–R Act, which prevents imposition of “another tax that discriminates against a rail carrier.” Id. § 11501(b)(4). After the district court held that the assessment qualifies as “another tax” actionable under subsection (b)(4), the Railroads sought a preliminary injunction. The case proceeded to a bench trial, after which the district court entered judgment for Sny Island on the ground that it was powerless to enjoin the tax. While we agree with the district court that Sny Island's assessment should be characterized as a “tax” for purposes of the 4–R Act, we conclude that the court erred in its assessment of its authority to enjoin the tax as discriminatory. Accordingly, we reverse and remand.

I

For over a hundred years, Sny Island has operated in central Illinois a levee and drainage system that is designed to prevent the Mississippi River from flooding a 60–mile, 114,000–acre area. (For an interesting account of the checkered history of such efforts all along the Mississippi, see John M. Barry, Rising Tide: The Great Mississippi Flood of 1927 and How It Changed America (1997).) The overwhelming majority of the protected land, some 99.5 percent, is used for agricultural purposes. The remaining fraction of a percent includes residential, commercial, utility, and railroad lands. The Railroads are two of 700 landowners within the District. Overall, their holdings are quite small: 210 acres belongs to Kansas City Southern, and just over 145 acres to Norfolk Southern.

To enable Sny Island to fund its general operations, the Illinois Drainage Code empowers the District's commissioners to “levy assessments upon the lands and other property benefitted” by the levee system. 70 ILCS 605/4–18. The Drainage Code provides for annual levies, and historically the District took advantage of this authority. 70 ILCS 605/5–1, 5–19. In order to increase an existing “annual maintenance assessment,” Sny Island commissioners must petition the Pike County Court for authorization. 70 ILCS 605/4–19. In evaluating a petition, the county court considers whether a proposed assessment is “necessary or advisable” and whether “the cost thereof to the lands and other property in the district will exceed the benefits thereto.” 70 ILCS 605/4–24. If the proposal is not necessary or advisable or its costs outweigh its benefits, “the court shall dismiss the petition.” Id. Whenever the commissioners file a petition, they are required to send out notices of the proposed assessment and advise property owners when the court will conduct its hearing so that objections, if any, can be considered. 70 ILCS 605/4–20 to 24.

For decades, Sny Island collected a uniform annual maintenance assessment from all its landowners. To calculate the amounts due, Sny Island simply divided its operating budget by the total number of benefited acres and assessed a per-acre fee to each landowner based upon the number of acres owned. These rates were also adjusted, in small measure, to account for the elevation of each tract. On average, landowners paid $8.50 per acre. This rate had been in place since 1987 and, by all accounts, it provided sufficient funding for the District. After severe floods in 2008, coupled with a sharp increase in the price of diesel fuel (which is used to operate the drainage pumps), however, the District's operating funds and its emergency coffers ran dry. Accordingly, in February 2008 Sny Island's commissioners decided they needed to increase the annual maintenance assessment for 2009.

Between March and June 2008, the commissioners debated how much of an increase in the annual assessment was needed. Initially they considered a $5–per–acre increase, but when their projected needs doubled (primarily because of the still-rising cost of diesel), they settled on a $10–per–acre increase; the 2009 assessment was therefore expected to average $18.50 an acre. In a break from tradition, however, the commissioners chose not to apply this rate uniformly. Instead, they opted to differentiate by property type.

Most significantly for our purposes, the commissioners decided that land owned by railroads, pipelines, and utilities (to which everyone in this case refers as the “RPU” properties) would not be assessed on a per-acre formula. This change was proposed only for the RPU properties; all other landowners—that is, 692 of the 700 landowners within the District—would continue to be charged on a per-acre basis. Of those 692 owners, the vast majority are engaged in agriculture, 14 conduct commercial and industrial operations, and a handful represent residential uses. The RPU properties are easy to identify: the two Railroads involved in this case, four pipelines, and two utilities—an electric company and a telephone provider. The commissioners took the position that the per-acre formula “underassessed” RPU lands—especially Railroad lands—and so they decided to calculate their 2009 assessment for this small group on a “benefit” basis. (We discuss below what they meant by that.) The commissioners also asserted that the Drainage Code, which requires the commissioners to prepare an “assessment roll of benefits, damages and compensation” for each property in the district, supported this shift. 70 ILCS 605/5–2 (emphasis added).

From July through early August 2008, the commissioners set out to determine (1) what benefit Sny Island's levee system conferred upon RPU properties and (2) how much of that benefit should be subject to a fee. For assistance, Sny Island hired David Human, an attorney specializing in flood protection projects. Taking the second determination first, Human testified that he wanted to “make sure that the assessments were equitable and proportionate” between agricultural and RPU properties. He began by figuring out an “assessment ratio” based upon the $18.50 fee for non-RPU land that the commissioners had already decided to levy. Human estimated that the agricultural lands received a $280–per–acre benefit from the levees and, dividing $18.50 by $280, arrived at an “assessment ratio” of 6.6%.

The source of this $280 “benefit” figure for the agricultural lands is, to put it charitably, unclear. Human claims to have taken three primary factors into account: the difference in value between land within the District and the land outside the levees; the annual crop rentals being paid to landowners; and the agricultural production of lands within the District. Based solely upon their personal experiences, the commissioners assumed that land inside their levees was worth $6,000 per acre, while unprotected ground was worth approximately $2,500 an acre. (The record does not reveal how far this “unprotected” ground was from the river.) This showed, Human thought, that the benefit from Sny Island was $3,500 per acre. He did not, as far as we can tell, take any other criteria, such as proximity to transportation, quality of soil, or topography, into account. Human applied an unexplained 8% “capitalization rate” to that figure, which came to $280. He then looked at a March 2008 report describing the crop production records and budgets published by the Department of Agricultural and Consumer Economics at the University of Illinois. Looking at the reported “operator and land return values,” which he thought averaged $560, Human divided the production average in half on the assumption that owners engage in a 50/50 crop share—which is the cash rental value—and would thereby have a $280 return per acre. Once again, there was no hard data to support those numbers. Crop returns in central Illinois (where Sny Island is located), for example, averaged $418 for high productivity farmland and $358 for low productivity farmland, nowhere near $560. Northern and Southern Illinois land averages are even lower. Nonetheless, Human thought in the end that “all the numbers were tending towards $280 an acre,” and so that is the number he and the commissioners decided to use.

For measuring the benefit to RPU properties, Human's basic goal was to find a uniform system. He assumed a hypothetical flood without the benefit of drainage levees, and then determined what costs are typically saved by the existence of levees. Here, too, his methodology was sorely lacking. Human looked to (1) “decreased maintenance costs” (by which he meant the costs of repairing any structural damage caused by a flood) and (2) “increased physical efficiency costs” (the financial loss caused by not being able to operate due to a flood) attributable to the District's services. Human's estimate of the increased physical efficiency was curious: he assumed “that the value of the physical efficiency of having the [property] is at least equal to the costs of [the property].” This prompted him to use the estimated cost of replacing property as a basis for...