Thomas Zurbuchen of Billings, one of the plaintiffs in a class action suit testifies in Yellowstone District Court before Judge Mike Salvagni on April 27, 2021 (Darrell Ehrlick of the Daily Montanan).
A case pitting Montana’s largest city against itself has been resolved after the City of Billings and a group of residents suing it for billing practices on water bills has announced a settlement after four-and-a-half years of litigation.
The class-action suit centers on fees the city charged to residential users of its water and sewer service. The residents proved that the additional fees, which the city called “franchise fees,” were an illegal sales tax.
A new filing in Yellowstone County District Court on Monday shows that after two failed mediation attempts, a third try by the mediator found a solution that will work for both the city and the ratepayers, which includes most of the city’s residential property owners.
The city has agreed to pay $3.6 million to settle the franchise fees suit. As part of the settlement, the class attorneys will turn in a settlement fee, which is expected to be around 25% or $900,000. The rest will be applied to rebating residents who were charged the fees, which the court ruled were illegal sales taxes and had already been outlawed by the state’s Supreme Court.
In the case, the City of Billings and attorneys argued that charging an additional “franchise fee” paid for services that the city incurred but could not quantify on a monthly bill, including items like providing police services for the city’s utility department. Billings also argued that it had the right to charge residents for using the right-of-way, like other providers, for example, a telecommunications company.
However, attorney Matthew Monforton, who represented the residents, argued that Montana had already established that cities cannot charge franchise fees to residents for using the right-of-way residents already own. Furthermore, it cannot charge fees to residents without specifically tying that cost back to an expense the city incurs.
For years, the city fought against citizens who said the fees were illegal. However, it dropped the practice in 2018, shortly after the lawsuit was filed. The lawsuit took 4.5 years, generated 87,000 pages of documentation in discovery, and more than 200 requests for documents.
The decision also involved retired district court judge Michael Salvagni, who served Gallatin County, because every member of the Yellowstone County judicial district was a ratepayer of the City of Billings and thus had a conflict of interest.
The residents in the class-action will be anyone who paid a Billings water or wastewater bill for residential service from 2015 through 2018. That time period is determined by analyzing when the City of Billings stopped the practice of charging for franchise fees, and looking back three years from the point, the maximum allowed by the state’s statute of limitations.
From here, the proposed settlement will head to the Billings City Council for approval. Monforton, along with Doug James and Bryce Burke of Moulton Bellingham, who represented the city, have agreed on the terms of the settlement, but the council will need to approve it.
The settlement of $3.6 million will come out of the city’s general fund, and will not come out of the city’s enterprise funds, which support the water and wastewater service. The filing on Monday acknowledges the odd position: Those who will likely get money back will actually be paying into city coffers to cover the settlement.
The settlement proposal also outlines how residents will be notified.
Former customers who have already been identified as property owners will be sent postcard notices. Those will include a tear-off claim form that can be sent back. All current rate owners who were not identified will be sent a claim form. A one-page summary notice will be included on monthly bill invoices.
The company that will notify customers will also send notices to those who have email addresses, and those who have an street address.
Charging franchise fees brought in approximately $2.5 million per year, according to documents in the lawsuit. The practice continued for more than a decade. However, because of the statute of limitations, the city was only liable for three years’ worth.
“As other courts have noted, a cash settlement that is only a fraction of the potential recovery does not per se render a settlement inadequate or unfair,” the proposed settlement noted. “In discussing the amount of the settlement, it is also important to note that the settlement will be paid out of the general fund of the City of Billings. Essentially, this means that the settlement will be paid by funds primarily collected from the Billings taxpayers. The settlement will not be paid by the Public Works Department and will not be paid with revenue derived from the provision of water, wastewater, and solid waste disposal services.”
The court filing also notes that because Montana law is not extensive on the subject of rates and franchise fees, the cost of trial, including depositions and expert witnesses, could have driven costs of litigation much higher, and the settlement also means that decision will not go to the state Supreme Court, which could add expenses on top of that.
“The settlement agreement eliminates the city’s ability to appeal and challenging the ruling on the legality of franchise fees,” the court document said.
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