Appeals Court Rules Osceola Taxpayers Have Standing to Challenge Establishment of TIF District

by Eric Christianson

Brueggeman vs. Osceola
(Iowa Court of Appeals, June 7, 2017)

In the spring of 2015, the City of Harris was ordered by the Iowa Department of Natural Resources to update its aging sewer system and lagoon. Harris, population 170, lacked adequate resources for the project, so the city sent a letter to the Osceola County Board of Supervisors, “asking for help with possibly doing a TIF [Tax Increment Financing district] on the windmills for infrastructure within the City.” The county agreed to help establish an urban renewal area including new windmills located in the county and the sewage lagoon in the City of Harris.

In a meeting on October 20, the board of supervisors passed a resolution to establish the urban renewal area and approve the urban renewal plan. At the same meeting, the board also introduced Ordinance No. 47, which was to establish the TIF district, for its first consideration. On October 27, the board of supervisors gave Ordinance No. 47 its second consideration.

On November 3, the plaintiffs in this case, filed a petition for writ of certiorari and declaratory judgment. The plaintiffs, who are resident taxpayers of Osceola County, alleged that the city and county had “adopted a Resolution that created an urban renewal area that includes the City of Harris and wind energy conversion property […] located outside of the City of Harris[… The] resolution is unlawful because it violates Iowa Code Chapter 403 and the Iowa Constitution.”

On November 10, the board of supervisors held the final consideration of Ordinance No. 47 and adopted it. Then on November 30 the board held a special session and entered into a written urban renewal joint agreement with the City of Harris, “confirming prior verbal agreement and understanding.”

In February 2016 the plaintiffs filed a motion for summary judgment. They alleged that the county had acted illegally in establishing the urban renewal area before the joint agreement had been signed. Additionally, they alleged that the urban renewal area was not an “area” because the wind energy conversion property is not connected to the sewage project in Harris. They claimed that they had standing to sue because they were harmed as taxpayers in Osceola County.

Osceola County and the City of Harris filed a motion for summary judgment, and the district court granted it, finding the plaintiffs lacked standing to challenge the resolution and their claims involving the ordinance were untimely. The final passage of the ordinance took place after the plaintiffs filed their petition. The plaintiffs’ petition was dismissed. On appeal, the plaintiffs challenged the district court’s ruling and maintain that the merits of their motion for summary judgment should have been granted instead.

On June 7 the Iowa Court of Appeals considered the issues of the timeliness of the petition as well as the standing of the plaintiffs.

The taxpayers argued that each of the considerations of the ordinance was a challengeable action. Here, the Iowa Court of Appeals agreed that the plaintiffs’ challenge to the ordinance was untimely. Iowa case law provides that the challengeable action occurs “when the underlying proceeding becomes final.”

With regards to standing, the Court of Appeals agreed with the plaintiffs that as residents and taxpayers of Osceola county they stood to be harmed citing an earlier case that stated: “by its nature, TIF diverts property tax revenue that would otherwise be available to the regular taxing district.” Further the court of appleals found that although the plantiffs were untimely with their challenge to the passage of the ordinance, the plaintiffs did have standing to challenge the earlier resolution. It is reasonable to assume that the passage of the resolution meant that the ordinance would be passed as well.

The Court of Appeals remanded the case back to district court for further proceedings.

Liquidated damages not a “tax” for purposes of determining priority of lien in mortgage foreclosure

by Victoria Heldt

Baylake Bank v. Fairway Properties of Wisconsin, LLC
(Wisconsin Court of Appeals, September 15, 2011)

Fairway Properties of Wisconsin, LLC (Fairway) planned to develop a single-family housing complex on a piece of property located in the City of Waupaca.  The property was in a “tax increment district,” which is a mechanism used to allow municipalities to fund public improvement projects by diverting the property taxes to pay for those improvements.  The company entered into a mortgage agreement with Baylake Bank to procure financing for the development.

Fairway also signed a development agreement with the City, in which it agreed to meet certain goals each year for eleven years to ultimately build a housing complex with a minimum value of $4,500,000.  In exchange, the City agreed to provide improvements to the property such as sidewalks, wells, and driveway approaches.  The contract contained a clause that required Fairway to pay a “liquidated damages penalty” if it did not meet the specified goal each year.  The fine amounted to the difference between the actual property tax levied for the year and the property tax that would have been levied had the project goal been met (increasing the value of the property.)  This clause ensured that the City would be reimbursed for the funds it used in making the improvements.

Fairway eventually defaulted on its mortgage, prompting the Bank to bring a foreclosure action into district court naming Fairway and the City in the case.  The City answered, alleging Fairway owed over $150,000 in delinquent property taxes and over $80,000 in fines resulting from the violation of the liquidated damages clause.  The Bank agreed that the delinquent taxes took priority over the Bank’s mortgage interests, however claimed the charges under the development agreement’s liquidated damages provision were subordinate to the Bank’s interests.

The issue hinges on whether or not the liquidated damages penalty is considered a tax which, therefore, takes priority over the Bank’s position as mortgagee in a foreclosure action.  In a summary judgment, the district court concluded the damages were “real estate taxes,” relying on the language of the contract which read:  “the payment due is a special charge which may be entered in the tax roll as a charge against the real property identified in Exhibit A then owned by the developer and collected in the same manner as real estate taxes.  The amount due is a lien upon the property superior to all other liens.”  Since the court classified the damages as a tax, they ruled that the Bank’s interests as mortgagee were subordinated to the City’s interests.  The bank appealed.

The Court of Appeals noted that cities have no inherent power to tax and that it may only tax in such cases where statutory or constitutional language authorizes a tax for that specific purpose.  In this case, the court relied solely on language in a contract for the authority to tax.  This is insufficient to give the City the right to classify fines from the liquidated damages clause as a tax.

Next the Court addressed whether the City provided any alternative basis for authority to classify the damages as a tax.  The City relied on the tax increment law (Wis. Stat. §66.1105) for authority to levy the tax.  The language of the law grants the power to create tax incremental districts, prepare projects in the districts, and enter into contracts necessary to proceed with the plan.  The statute is silent, however, regarding a city’s authority to impose taxes on the entities in the district.

The Court concluded that the development agreement’s liquidated damages do not have priority as a property tax.  The district court decision was reversed.





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