Staff recommends Council approve the settlement agreement to resolve the litigation in Houser et al. vs. City of Billings, DV-18-0778 and McDaniel vs. City of Billings, DV-19-1444.  These cases are collectively known as the "franchise fee" cases. 

Franchise fees were formally adopted by the Council on April 13, 1992, after a suggestion from a council member during a council retreat in February 1992.  Resolution 92-16531 applied only to water and wastewater, beginning July 1, 1992.  However, the 4% franchise fees were also charged on solid waste disposal services.  

The fees (on water and wastewater) were adopted pursuant to Section 69-7-101, MCA, which provided: The franchise fees were considered “charges” to be included in the cost of service. It is not clear why the Council Resolution called it a franchise fee.  Part of the intent behind the franchise fees was to require non-profits who paid no City taxes to pay something towards public safety.  The franchise fees went into the general fund to support public safety and other services.

Prior to July 2012, the franchise fees for solid waste disposal were collected by Yellowstone County with real estate taxes.  In 2004, the franchise fees on solid waste disposal were raised to 5%.

Before any complaint was filed, Matthew Monforton wrote a letter to City Attorney Brent Brooks on August 3, 2017, regarding the franchise fees.  On March 26, 2018, Kristin Juras sent the City a purported “Settlement Agreement” asking the City to eliminate the franchise fees by July 1, 2018, and to pay them $20,000 for their attorney fees and costs.  However, this “Settlement Agreement” did not include a release of all claims from the Plaintiffs.  Perhaps even more importantly, there was no class action so the “settlement” would not have been binding upon the vast majority of people and entities who paid franchise fees.  The purported “settlement” would have permitted the filing of other lawsuits against the City over the franchise fees. 

The Council made the decision to eliminate the franchise fees on May 14, 2018, through Resolution No. 18-10718. The franchise fees were eliminated effective June 30, 2018.

On May 16, 2018 (two days after the City formally decided to eliminate the franchise fees), Terry Houser, Terry Odegard, Roger Webb, Mae Woo, Kathryn Zurbuchen, and Thomas Zurbuchen filed a class action complaint against the City.  On September 20, 2018, Clayton Fiscus was added as a plaintiff. Plaintiffs asserted five counts against the City: (1) Declaratory Judgment that the franchise fees were an illegal sales tax under 7-1-112(1) and an injunction; (2) breach of contract and bad faith; (3) restitution; (4) violations of Due Process under the U.S. Constitution; and (5) violations of Due Process under the Montana Constitution.  Plaintiffs sought the refund of all franchise fees paid from April 1992 through June 2018, plus interest and attorney fees. Plaintiffs were seeking in excess of $100 million from the City. 

While conducting extensive discovery, the parties participated in settlement negotiations and an unsuccessful mediation conference in May 2020. The City then filed several motions for summary judgment and the Plaintiffs filed several motions as well.
  
The Court ruled in favor of the City's motion regarding who were members of the class action and excluded those customers who paid franchise fees pursuant to a Subdivision Improvements Agreement.  On October 9, 2019, Gary and Susan McDaniel filed a separate class action complaint against the City on behalf of all customers who paid franchise fees pursuant to a Subdivision Improvements Agreement.  The Court subsequently dismissed Gary McDaniel because he did not have an account with the City and had not paid the franchise fees. 

The parties filed various, similar motions in both the Houser and McDaniel cases, and the Court made several rulings:

• The Court agreed with the City, to a limited extent, and excluded entities who had written contracts with the City for water, wastewater, or solid waste disposal services. 
• The following decisions were entered in the McDaniel case.  Similar motions were made and remain pending in the Houser case, but have not been decided by the Court because of the status of the Houser case. The Court entered partial summary judgment in favor of the City and against the Plaintiffs on the following:

1. Water Claims.  The Court dismissed all of Plaintiffs’ water claims based upon their failure to comply with the Uniform Commercial Code, § 30-2-607.  Generally, if someone accepts the goods (water) and retains the goods, their only option is to pay for them.  If the Buyer discovers a breach, the Buyer must notify the Seller within a reasonable time or be barred from any remedy.  
2. Breach of Contract Claims & Restitution Claims. The Court dismissed all of Plaintiffs’ claims for breach of contract and for violating the covenant of good faith and fair dealing and for Restitution.  The Court held that Plaintiffs failed to comply with Montana’s Claim Presentation Statute for Claims against Municipalities.  Montana Code Annotated § 7-6-4301(1) provides that all accounts and demands against a city must be presented to the council in an itemized format within 1 year from the date the claims accrued.  Because Plaintiffs failed to present an itemized claim to the City Council within one year of when their claims accrued, their claims were barred.  
3. Gary McDaniel Claims.  The Court dismissed all the claims asserted by Gary McDaniel because he had never had an account with the Public Works Department.  The account was only in the name of his wife. 
4. Breach of the Covenant of Good Faith and Fair Dealing.  The Court dismissed all of Plaintiffs’ claims for Breach of the Covenant of Good Faith and Fair Dealing because Plaintiffs did not establish that the City wrongfully exercised discretion in the performance of the contract to deprive Plaintiffs of their benefit.  The Court held that "Plaintiffs cannot establish that as a result of dishonesty, commercially unreasonable conduct, or abuse of discretion on the part of the City in performing the terms of the contracts, they were deprived of either a benefit or a justified expectation created by the contract."
5. Due Process Claims.  The Court granted partial summary judgment in favor of the City, limiting Plaintiffs’ claims to those that arguably accrued in the three years before they filed suit. This had the effect of limiting their claims to February 2, 2015, to June 30, 2018, in Houser and August 2, 2015, to June 30, 2018, in McDaniel. Claims that accrued prior to those dates were barred by the statute of limitations.  

The Court ruled against the City and in favor of the Plaintiffs in the McDaniel case on the following matters:

1. Voluntary Payment Doctrine.  The Voluntary Payment Doctrine requires a party who wishes to challenge the validity or legality of a bill to make a challenge either before voluntarily making the payment, or at the time of making the payment. The rule provides that “one who makes a payment voluntarily cannot recover it on the ground that he was under no legal obligation to make the payment.”  The City argued that the Voluntary Payment Doctrine barred Plaintiffs’ claims for a return of the franchise fees.  The Court held that the Voluntary Payment Doctrine did not bar Plaintiffs’ claims for violations of Due Process under the Montana and United States Constitutions. 
2. Declaratory Judgment on the Franchise Fees.  On January 19, 2022, the Court entered a judgment declaring that the franchise fees were unlawful, finding that provisions in the City Subdivision Improvements Agreements obligating the Plaintiffs in the McDaniel case to pay franchise fees were unenforceable.  The Court enjoined the City from imposing sales taxes in the future upon the Plaintiffs. 

Following the Court's rulings of some of the above motions, including the declaration that the franchise fees were unlawful, the City again attempted to initiate settlement negotiations and requested an additional mediation conference, to which the Plaintiff's refused. The City then asked the Court to order Plaintiffs to mediate.  The Court granted this request and another unsuccessful mediation conference was held in September 2022.  Following the mediation conference, the parties continued to discuss settlement with the assistance of the mediator and came to a tentative agreement in October 2022.

The Court has preliminarily approved the Settlement but it will conduct a fairness hearing in November and will consider any objections to the Settlement prior to any final approval.  The Settlement Agreement is attached and the general terms include:

• Settlement amount: $3.6 million
• Claim period: February 2, 2015, through June 30, 2018
• Class members: 

1. The Water Class. All persons or entities who paid monthly metered water charges and were charged franchise fees under Section 16-2 and 16-11 of the City of Billings Rules and Regulations Governing Water and Wastewater Service since February 2, 2015, through June 30, 2018. 
2. The Wastewater Class. All persons or entities who paid monthly metered wastewater charges and were charged franchise fees under Section 16-2 and 16-11 of the City of Billings Rules and Regulations Governing Water and Wastewater Service since February 2.
3. The Solid Waste Disposal Class.  All persons or entities who paid solid waste disposal charges and who were charged franchise fees under Section 21-226 of the City of Billings Solid Waste Collection Code and City Resolutions 15-10460, 16-10560, and 17-10635 since February 2, 2015, through June 30, 2018.

• Release and Bar Order: The Class Representatives will execute a Release of All Claims on behalf of themselves and all Class Members who have not opted-out of the Class Action. The Release is to be construed to fully and finally and forever settle and compromise all of the Class Members’ claims against the City related to the Franchise Fees. Additionally, the Settlement Agreement provides that the Court shall enter a “Bar Order” which shall permanently bar and enjoin all Participating Class Members from prosecuting any of the Released Claims.  The Bar Order is separate from the Release and will be included in the Final Judgment entered by the Court
• Rebate Fund: The portion of the Settlement Amount that the Public Works Department will rebate to Current Customer Class Members.  The rebate will be a one-time rebate and reduction of the customer’s Public Works Department invoice.
• Claim Fund: The Class Administrator will manage the fund and pay a portion of the Settlement Amount to Class Members who are Former Customers or who were Excluded Current Customers. In order for Former Customers or Excluded Customers to receive a payment, they must file a Claim Form with the Class Administrator by August 31st.
• Expenses: The amount of the Settlement Amount that will be paid to Class Members will be reduced by the amount of expenses approved by the Court.  The estimated expenses at this point are:

• Opt-Out: Class Members have the option to Opt-Out of the Settlement.  If they opt-out, they will not receive a settlement payment. Class Members who Opt-Out will not be bound by the release of all claims or the Bar Order.

Class members and all taxpayers of the City of Billings.

City Council may:

• Approve; or,
• Not Approve

The settlement amount will be paid out of the General Fund.  This has not been budgeted in FY23 or included in the FY24 proposed budget. The Council will ultimately need to determine if the payment will be made through short-term borrowing or through a one-time increase in property taxes if capacity in the tax base exists. The settlement cannot be funded by water, wastewater, or solid waste departments because revenue from those departments must be used for those services.  The City cannot raise rates for water, wastewater, or solid waste disposal because of the settlement.