In Michigan Association of Home Builders v. City of Troy, issued July 11, 2019 (No. 156737), the Michigan Supreme Court held that the building inspection fees assessed by Defendant City of Troy were not intended to bear a reasonable relation to the cost of services provided.
In July 2010, after operating the Building Department with a yearly deficit, Defendant privatized the department by entering into a contract with SAFEbuilt Michigan, under which SAFEbuilt assumed the duties of the Building Department. Under the terms of the contract, SAFEbuilt would receive 80% of the building inspection fees, and Defendant would retain the remaining 20%. Since 2011, Defendant has retained over $250,000 in fees every year, and by 2016, had retained a total of $2,326,061.
On December 15, 2010, Plaintiffs filed a three-count complaint against Defendant, alleging violations of the CCA and the Headlee Amendment, and seeking declaratory and injunctive relief. Following discovery, both the Plaintiffs and Defendant sought summary disposition. After conducting a hearing, the trial court granted summary disposition in favor of the Defendant, ruling that the court did not have jurisdiction over Plaintiffs’ lawsuit. The Court of Appeals agreed and affirmed the judgment, while the Supreme Court reversed and remanded the case to the trial court for further proceedings.
After additional discovery was granted on remand, the parties filed cross-motions for summary disposition. The court again granted the Defendant’s motion and determined that the Defendant’s practice of depositing the fees it had retained into the general fund did not violate MCL 125.1522(1).
According to MCL 125.1522(1), there are three restrictions on a municipality’s authority to establish fees under the CCA: (1) the amount of the fee shall be reasonable; (2) the amount of the fee shall be reasonably related to the cost of providing the service; and (3) the fees collected shall only be used for the operation of the enforcing agency or the construction board of appeals and shall not be used for any other purpose.
In the Court of Appeals’ opinion, the majority acknowledged that according to MCL 125.1522(1), there exists an implication that the fees should cover the cost of the services received in exchange for the fee being paid. Additionally, if the fees for a particular service consistently generate revenue exceeding the costs for service, the reasonableness of the fee for that service would be suspect. However, after an analysis of the facts presented, the Court of Appeals concluded that this had not been demonstrated.
In remanding the lower court’s opinion, the Supreme Court held that the Defendant’s use of building inspection fees for the purpose of satisfying a historical deficit violated the second restriction in MCL 125.1522(1). While payments made to restore the historical deficit may arguably have been for the operation of the enforcing agency or the construction board of appeals, this does not mean that those fees were related to the costs of the governmental subdivision. Because there was no way that the provisions of the contract could be squared with the requirement of reasonable fees related to the cost of service, the Supreme Court determined that the fees were completely unrelated.
The Supreme Court also addressed the evidence presented by the Defendant regarding direct and indirect costs that may be related to the services performed and overhead. After analyzing the evidence presented, the Supreme Court held that the Defendant was justified in retaining revenue to cover the direct and indirect costs of the services it provides. However, because there was conflicting evidence in regard to the amount of indirect costs incurred by the Building Department, the Supreme Court remanded the case to the trial court for further proceedings.
A link to the opinion can be found here: https://law.justia.com/cases/michigan/supreme-court/2019/156737.html
This article was written by Emily Honet, Law Clerk
