Scalise v. Sewell-Scheuermann, 2016-SC-000246-DG
| Decision Date | 01 November 2018 |
| Docket Number | 2016-SC-000246-DG |
| Citation | 566 S.W.3d 539 |
| Parties | Michael SCALISE, Anne Braun, Al Huber, Jonathan Leachman, Steve Miller, Judy Schwenker, Mark Stevens, and Gary Vogel, Appellants v. Suzette SEWELL-SCHEUERMANN, Appellee |
| Court | United States State Supreme Court — District of Kentucky |
COUNSEL FOR APPELLANTS: Jason B. Bell, Matthew C. Hess, BELL, HESS & VAN ZANT, P.L.C.
COUNSEL FOR APPELLEE: C. Dean Furman, Jr., Louisville, FURMAN & NILSEN, PLLC.
COUNSEL FOR AMICUS CURIAE, KENTUCKY LEAGUE OF CITIES ("KLC"): Morgain Mary Sprague, Frankfort, Jessica Miller, MEMBER LEGAL SERVICES.
COUNSEL FOR AMICUS CURIAE, BLUEGRASS INSTITUTE FOR PUBLIC POLICY SOLUTIONS, INC.: Erica Lynn Horn, Timothy Joseph Eifler, Louisville, STOLL KEENON OGDEN PLLC.
The City of Audubon Park (City) is a small city located in Jefferson County, Kentucky. Beginning in fiscal year 2007-2008 and continuing through fiscal year 2012-2013, the City’s Mayor and City Council approved annual ordinances setting out a monthly assessment for the stated purpose of paying for sanitation services, including trash collection and recycling. However, the assessment generated more revenue than the cost of the City’s contract with a private company for trash collection and recycling. The City diverted this surplus revenue into its general fund and subsequently used it for other City expenditures.
In 2013, Suzette Sewell-Scheuermann, acting "as a taxpayer for the use and benefit of the City," brought this action pursuant to Section 180 of the Kentucky Constitution and, more specifically, Kentucky Revised Statutes (KRS) 92.330 and 92.340 seeking to recover the surplus sanitation revenue that was not devoted to trash collection and recycling. The cited constitutional provision and the statutes prohibit cities from collecting taxes for one purpose and spending them for another. The circuit court dismissed the action for failure to state a cause of action due to lack of injury to the City, but the Court of Appeals reversed, concluding that pursuant to the statutes cited, the former Mayor and individual members of the City Council were personally liable for the excess sanitation funds, even though those funds had been spent for other municipal purposes.
This case requires us to consider for the first time the import of KRS 92.330 and 92.340, statutes adopted some seventy-five years ago but having their origins in statutory provisions from the late nineteenth century. While there is an initial question as to whether the assessment qualifies as a tax or a user fee, that is easily disposed of and takes us to the more pertinent issues of whether a cause of action was stated and whether in these circumstances individual liability is absolute. We conclude that the complaint states a cause of action, but liability is not absolute in this case if the individuals who acted on behalf of the City can establish that the tax revenue was spent for valid City obligations. Accordingly, we affirm in part and reverse in part the Court of Appeals' opinion and remand the case to the circuit court for further proceedings. We further hold that going forward the offset defense which has been judicially recognized in these circumstances will no longer apply. Prospectively, the statutes will be followed as written by our legislature, with an accommodation or defense, if any, for city officials who act in good faith a matter left entirely to the discretion of the General Assembly.
Audubon Park is a former fifth-class city.1 Sewell-Scheuermann, "as a taxpayer for the use and benefit of the City," filed a complaint against Mayor Michael Scalise and the following members of the City Council: Anne Braun, Al Huber, Jonathan Leachman, Steve Miller, Judy Schwenker, Mark Stevens, and Gary Vogel.2 The complaint alleges that the Mayor and City Council members (hereafter collectively referred to as "Defendants") violated Kentucky Constitution Section 180 and KRS 92.330 and 92.340 through their improper use of sanitation assessment funds from 2007 through 2013. Sewell-Scheuermann claims that, as a taxpayer, she has the right to recover the excess sanitation assessment revenue, totaling over $773,000,3 for the benefit of the City.
The revenue in question was collected pursuant to a series of annual ordinances entitled "An Ordinance Adopting the Garbage Recycling Collection Assessment for the City of Audubon Park, Kentucky for [Appropriate Fiscal Year from 2007-2008 through 2012-2013] and Providing for the Collection of Same." Each annual ordinance provided for a monthly assessment based on the classification of the City resident. In the initial ordinance, single family residences paid $34 monthly as did duplexes and apartments (on a per unit basis) as well as commercial entities. Churches were not assessed any liability. By the sixth and final ordinance, all residences (but not churches) were paying $45 monthly. The ordinances further provided: "The foregoing assessment shall be a part of the tax bill of the City of Audubon Park and shall be due and payable at the same time and place with the same discounts, interest and penalties as real estate taxes in the City of Audubon Park."
In their answer to the complaint, the Defendants asserted numerous defenses, including laches, the statute of limitations, unjust enrichment, set-off, and that the fee charged for sanitation services was a "user fee," not a tax. If the "user fee" characterization is accurate, KRS 92.330 and 92.340 would not apply.
The Defendants then moved to dismiss the complaint under Kentucky Rule of Civil Procedure (CR) 12.02 for failure to state a claim because the diverted funds were used for the City’s benefit and therefore the City suffered no harm. The trial court granted the motion to dismiss, holding that since the diverted funds were used to pay for the City’s financial obligations Sewell-Scheuermann was not entitled to any relief on behalf of the City.
On appeal, the Court of Appeals found that KRS 92.330 and 92.340 are clear and unambiguous and that Sewell-Scheuermann had satisfied all elements of the statutes. In that court’s view, the use of excess funds solely for the City’s benefit was no defense, and the Defendants are thus jointly and severally liable to the City. The Court of Appeals concluded that the "object to be attained" by the sanitation assessment has not been accomplished at any given time because the tax is levied for ongoing waste disposal and that the City should have used any surplus funds for sanitation in the next fiscal year instead of diverting them to another purpose. Highlighting that the statutes at issue serve to prevent a city from levying a tax at a rate higher than necessary to accomplish its stated purpose, the Court of Appeals reversed the trial court’s decision and remanded for further proceedings.
On review by this Court, the Defendants argue that the Court of Appeals' opinion should be reversed for the following reasons: (1) this Court’s decision in Klein v. Flanery, 439 S.W.3d 107 (Ky. 2014), and interpretation of Kentucky Constitution Section 180 compel reversal; (2) the case was properly dismissed at the trial court for lack of damages and due to an offset defense; (3) the imposition of personal liability on the City officials leads to an "absurd result" and creates a "chilling effect" on the willingness of citizens to serve in local government; and (4) the Court of Appeals' decision exceeded the scope of review under Kentucky law.
We granted discretionary review to determine whether Sewell-Scheuermann has stated a cause of action and whether the Defendants are personally liable for the expenditure of the excess funds. Because the cited statutes are not relevant unless a tax is involved, we begin with the threshold issue of whether the Audubon Park assessment is a user fee rather than a tax.
Section 180 of the Kentucky Constitution provides:
Every act enacted by the General Assembly, and every ordinance and resolution passed by any county, city, town or municipal board or local legislative body, levying a tax, shall specify distinctly the purpose for which said tax is levied, and no tax levied and collected for one purpose shall ever be devoted to another purpose.
This provision has existed since the adoption of the 1891 Kentucky Constitution.4 KRS 92.330 and 92.340, discussed in detail below, expand on this central proposition regarding city taxes and provide the "recovery right" asserted on behalf of the City in this case.5
Beginning in 2007 and continuing throughout the period at issue, the City referred to the monetary obligation in the Audubon Park sanitation ordinances as an "assessment." Clearly, the cited constitutional and statutory provisions are relevant to "taxes" so the proper characterization of the monies paid into the City’s coffers is highly relevant. The Defendants asserted in their answer to the complaint that the assessment was a "fee and/or tax" and they continued that same indefinite characterization of the sanitation assessment in the motion to dismiss. The proper characterization was not part of the trial court’s disposition of the case because, referring to the assessment as a "sanitation tax," that court concluded Sewell-Scheuermann had failed to prove any damages incurred by the City. In that court’s view, " ‘there must be a juncture of wrong and damage to give rise to a cause of action." ’ (quoting City of Newport v. Rawlings, 289 Ky. 203, 158 S.W.2d 12, 14 (1941) ).
While the trial court sidestepped the issue and the Court of Appeals did not address it, amicus curiae Kentucky League of Cities insists the ordinance imposes a user fee, rendering KRS 92.330 and 92.340 irrelevant. Although this Court does not typically address issues not fully developed in the lower courts, and propounded in this Court primarily by an amicus, this threshold consideration deserves our attention because...
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Ky. Emps. Ret. Sys. v. Seven Counties Servs., Inc.
...such as a tax or fine, according to an established rate." BLACK'S LAW DICTIONARY (11th ed. 2019). See, e.g., Scalise v. Sewell-Scheuermann , 566 S.W.3d 539 (Ky. 2018) (addressing "sanitation assessment" imposed monthly per household by a former fifth-class city). Although assessments are of......