Kragnes v. City of Des Moines

• Decision Date: 06 April 2012
• Docket Number: No. 09-1473.,09-1473.
• Citation: 810 N.W.2d 492
• Parties: Lisa KRAGNES, et al., Appellees, v. CITY OF DES MOINES, Iowa, Appellant.
• Court: Iowa Supreme Court

810 N.W.2d 492

Lisa KRAGNES, et al., Appellees,

v.CITY OF DES MOINES, Iowa, Appellant.

No. 09-1473.

Supreme Court of Iowa.

March 2, 2012.Rehearing Denied April 6, 2012.

Mark McCormick and Margaret C. Callahan of Belin McCormick, P.C., Des Moines, and Bruce E. Bergman, Des Moines, and Mark Godwin, Des Moines, for appellant.

Brad P. Schroeder of Hartung & Schroeder, Des Moines, and Bruce H. Stoltze of Stoltze & Updegraff, P.C., Des Moines, for appellees.

HECHT, Justice.

This case was remanded to the district court for determination of whether a class should be certified and for determination of what, if any, part of the City's franchise fees for gas and electricity services are related to its administrative expenses in exercising its police power. Kragnes v. City of Des Moines, 714 N.W.2d 632, 643 (Iowa 2006) ( Kragnes I ). The district court certified a class, found the franchise fees cannot exceed $1,575,194 per year for the electric utility and $1,574,046 for the gas utility, entered judgment in favor of the certified class against the City in the amount by which such fees exceeded that amount for the period from July 27, 1999, to May 26, 2009, and retained jurisdiction to determine the amount of money to be refunded to members of the class, the manner in which the refunds must be made, the fees to be paid to counsel for the plaintiff class, and the costs of this action. The City appeals and Kragnes cross-appeals. We affirm the judgment as modified and remand for further proceedings.

I. Background Facts and Proceedings.

The background facts of this case are fully described in Kragnes I, 714 N.W.2d at 633–37. In 2004, the City of Des Moines considered raising property taxes to hire more police and firefighters, maintain the library's hours, and rehabilitate certain deteriorating neighborhoods. The City realized the state was phasing out sales and use taxes on residential gas and electric services and determined that it would be possible to increase the franchise fees on these services to raise revenue. After deciding this source of revenue was preferable to an increase in property taxes, the City renegotiated the franchise agreements with MidAmerican Energy (MEC), which provided gas and electric service for the city, and increased the franchise fee from 1% to 3% for both gas and electric services effective September 2004. Effective June 2005, the franchise fees were increased to 5% for each utility.

Lisa Kragnes promptly filed a petition in equity on behalf of herself and all others similarly situated challenging the franchise fees as illegal taxes. She sought reimbursement for all illegal taxes paid through the allowable statute of limitations and sought an injunction prohibiting the City from charging such franchise fees in the future. The district court granted Kragnes's motion for summary judgment and the City appealed. We concluded in Kragnes I that

a city has the authority to assess a franchise fee expressed as a percentage of the gross receipts derived from the utility's sale of its services to the public, so long as the charge is reasonably related to the reasonable costs of inspecting, licensing, supervising, or otherwise regulating the activity that is being franchised.

Id. at 642–43. Because there was a genuine issue of material fact as to whether all or part of the franchise fees were reasonably related to the City's administrative expenses in exercising its police power, we remanded to the district court for the determination of whether a class should be certified and for a trial on the merits. Id. at 643.

On remand, the district court certified a class consisting of all City of Des Moines utilities customers who paid the electricity or gas franchise fee from July 27, 1999, forward. The City filed three motions to decertify the class, all of which were denied. After trial, the district court determined that a portion of the franchise fee collected was excessive. The court held the City must refund to the class, with interest, the amount by which the franchise fees exceeded $1,575,194 per year for the electric utility and $1,574,046 for the gas utility. The court retained jurisdiction to determine the details of how the refund would be calculated and refunded to class members. The court also concluded injunctive relief was unnecessary because the legislature had amended Iowa Code section 364.2(4)( f ) to allow municipalities to impose franchise fees in excess of the reasonable cost of inspecting, licensing, supervising, or otherwise regulating utilities' activities. See 2009 Iowa Acts ch. 179, § 228 (codified at Iowa Code section 364.2(4)( f ) (Supp.2009)).

Both the City and Kragnes sought, and we granted, interlocutory appeal. The City contends the district court should have granted its motion to decertify the class for two reasons: (1) a fundamental conflict exists between members of the class, and (2) class members are not permitted to “opt out” of the litigation. In the alternative, if this litigation is allowed to proceed as a class action and a remedy is owed, the City contends the class should be divided into subclasses. The parties disagree as to the categories and amounts of expenses that may be counted as “reasonably related” to the administration of electric and gas franchises during the relevant time period. The City contends the district court erred in failing to include as proper components of the franchise fee the lost value of its trees and certain indirect operating costs attributable to the utility franchises and in undervaluing as fee components certain “non-annual unpredictable expenses attendant to the City's police power responsibilities.” Kragnes contends in her cross-appeal that the district court erred in allowing as franchise fee components construction and engineering costs funded by federal and state government appropriations or the Wastewater Reclamation Authority, construction and overhead costs covered by sewer treatment fees paid by users of the City's sanitary sewer system, administrative overhead in the amount of 12.78% added to construction and engineering expenses charged by contractors, and interest on construction and engineering expenses.

The parties also hotly dispute the parameters of the remedy in this appeal. The City contends the district court erred in concluding the plaintiff class is entitled to a refund, while Kragnes contends a full refund must be ordered and injunctive relief should be granted requiring the City to amend its ordinances in compliance with the amended legislation found in sections 364.2(4)( f ) and 384.3A, including providing public notice and identifying the City's costs of regulating the franchises and what amounts it seeks in excess of its regulation costs.

II. Scope of Review.

The parties agree as to the scope of review for the various issues raised. We will review a district court's rulings regarding the certification of a class for an abuse of discretion. Vos v. Farm Bureau Life Ins. Co., 667 N.W.2d 36, 44 (Iowa 2003). “This discretion has been characterized as ‘broad.’ ” Vignaroli v. Blue Cross of Iowa, 360 N.W.2d 741, 744 (Iowa 1985) (quoting 7A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1785, at 134 (1972)). Because the case was tried in equity, we will review de novo the district court's conclusions regarding which of the City's claimed expenses were reasonably related to the administration of the gas and electric franchises. Iowa R.App. P. 6.907; Fencl v. City of Harpers Ferry, 620 N.W.2d 808, 811 (Iowa 2000). We may give weight to the findings of the district court, but we are not bound by them. Fencl, 620 N.W.2d at 811. Our review of the district court's decision to grant Kragnes and the class a full refund is also de novo. We will review the district court's application and interpretation of statutes for errors at law. Beganovic v. Muxfeldt, 775 N.W.2d 313, 317–18 (Iowa 2009). To the extent the City's argument that members of the plaintiff class must be allowed to opt out of the class raises a constitutional claim, our review is de novo. Simmons v. State Pub. Defender, 791 N.W.2d 69, 73 (Iowa 2010).

III. Discussion.

A. Should the Class Have Been Decertified Because of a Conflict Among the Members? The City argues the district court should have granted its motion to decertify the class because a conflict of interest exists between Kragnes, as the class representative, and other members of the class who will suffer economically as a result of a judgment in favor of the class. Specifically, the City contends it imposed the franchise fees in lieu of raising property taxes. The franchise fees were paid by anyone in the city who utilized gas and electric service, whether or not they owned property. Further, if the City is required to refund the roughly $40 million in excess tax that was collected from 2004 until 2009, it will need to raise the revenue for this payment. The City contends the most likely result of a refund is an increase of property taxes. Because the burden of any prospective tax increase imposed to finance the refund will be borne only by current property owners, the City contends property owners will be required to pay a larger proportion of the refund than they paid when the illegal tax was collected from all utilities customers in the city. In other words, the City contends a fundamental conflict exists between Kragnes and class members who are property owners and who would tend to oppose Kragnes's refund objective because they benefitted from the collection of the excessive franchise fees from payors who were not property owners. The district court concluded the claimed conflict was speculative and denied the City's motion.

One of the prerequisites for class certification is that the class representative will “fairly and adequately ... protect the interests of the class.” Iowa R. Civ. P. 1.262(2)( c ). The City contends Kragnes cannot protect the...