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City of Memphis v. Shelby County

Court of Appeals of Tennessee, Jackson

February 20, 2015

CITY OF MEMPHIS
v.
SHELBY COUNTY, TENNESSEE

Session November 13, 2014

Page 532

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed and Remanded. Direct Appeal from the Chancery Court for Shelby County. No. CH-11-1817-2. Arnold B. Goldin, Chancellor.

Allan Jerome Wade and Brandy S. Parrish, Memphis, Tennessee, for the appellant, City of Memphis.

Kirk A. Caraway, John R. Hensley, II, Marcy Ingram, and Virginia P. Bozeman, Assistant Shelby County Attorney, Memphis, Tennessee, for the appellee, Shelby County, Tennessee.

BRANDON O. GIBSON, J., delivered the opinion of the Court, in which J. STEVEN STAFFORD, P.J., W.S., and ROGER A. PAGE, SP. J., joined.

OPINION

Page 533

BRANDON O. GIBSON, JUDGE

The ultimate issue in this lawsuit is how much of the electric and gas tax equivalent payments made by MLGW to the City of Memphis must be shared with Shelby County. The City claimed that it overpaid Shelby County in electric tax equivalents in recent years, while Shelby County claimed that it was underpaid in gas tax equivalents. The trial court found that the City paid the correct amount of electric tax equivalent payments for the years in question and rejected the City's claim for damages for alleged overpayment. The trial court found that Shelby County was not entitled to a share of the gas tax equivalent payments for the years in dispute and rejected its claim for alleged underpayment. Accordingly, the trial court denied both parties' claims for monetary damages. The trial court resolved the parties' requests for declaratory and injunctive relief by declaring the manner and method of payment of the tax equivalents in the future. Both parties raise issues on appeal. For the following reasons, we affirm and remand for further proceedings.

OPINION

I. FACTS & PROCEDURAL HISTORY

The City of Memphis is a municipal corporation that exists pursuant to a home rule charter. Since at least 1935, the City of Memphis has been authorized to operate and maintain an electric system and a gas system within the corporate limits of the City of Memphis and elsewhere in Shelby County. The City's charter was amended by private act in 1939 to establish the Memphis Light, Gas and Water Division (" MLGW" ) as a division of the City to control and manage the manufacture, production, distribution, and sale of electricity, natural gas, and water. Tenn. Priv. Acts 1939, c.381, § 1, pp.1072-73. MLGW now operates a public utility that provides gas, electric, and water services within the boundaries of Shelby County. MLGW is subject to the fiscal control of the Memphis City Council.

Tennessee Code Annotated section 7-34-116(a) provides that, " [s]o long as a municipality owns any public works, the

Page 534

property and revenue of such public works shall be exempt from all state, county, and municipal taxation." Accordingly, the Memphis City Charter requires MLGW to make payments in lieu of taxes, also known as " PILOTs" or " tax equivalents," to the City's general fund from the revenue MLGW receives from operating the electric and gas divisions. Specifically, the Charter requires MLGW to annually pay " a sum equal in amount to what would be the City taxes on the properties of the gas [and electric] division[s] within the City limits of the City of Memphis if said properties were privately owned." [1] This provision of the City Charter was adopted by private act of the General Assembly in 1939. Tenn. Priv. Acts 1939, c.381, § 22, pp.1091-92. For decades, MLGW paid tax equivalents to the City in accordance with the City Charter and various resolutions of the Memphis City Council.

In 1971, the Memphis City Council adopted a resolution providing that the tax equivalents from MLGW would be " shared" with Shelby County. According to the resolution, the Memphis City Council recognized the " inequity" in MLGW making tax equivalent payments to the City but not to Shelby County, even though MLGW maintained substantial utility property in the county and would pay property taxes to both the City and the County if it were a privately-owned utility. The City and County subsequently entered into a contract with respect to the Memphis and Shelby County Hospital Authority that provided, among other things, that the City would " continue sharing its annual in lieu of tax payments received by the City from [MLGW] with the County." Thus, since the 1970s, Shelby County has received a portion of the tax equivalents paid annually by MLGW.

The Tennessee General Assembly adopted (effective July 1, 1987) the Municipal Electric System Tax Equivalent Law of 1987, Tenn. Code Ann. § 7-52-301, et seq., (sometimes hereinafter, " the Electric Law" ), and the Municipal Gas System Tax Equivalent Law of 1987, Tenn. Code Ann. § 7-39-401, et seq. (sometimes hereinafter, " the Gas Law" ). By separate resolutions, adopted in 1987 and 1988, the Memphis City Council required MLGW to compute the tax equivalent payments from its electric division using the formula in the Electric Law for calculating the maximum permissible in lieu of tax payment by a municipal electric utility. Likewise, the Memphis City Council required MLGW to compute the tax equivalent payments to be paid by its gas division using the formula in the Gas Law for calculating the maximum permissible in lieu of tax payment by a municipal gas utility. Accordingly, beginning with fiscal year 2000, MLGW computed the tax equivalent payments according to the formulas set forth in the Electric Law and the Gas Law.

In 2008, the Shelby County Finance Director sent an email to the City Finance Director claiming that the tax equivalent payments made to Shelby County in recent years were incorrectly calculated.[2]

Page 535

He contended that the City owed the County an additional $788,215. Weeks later, the City tendered a check to the County for that amount. However, additional disputes ensued between the City and the County regarding the formula to be used when distributing Shelby County its share of the electric and gas tax equivalents paid by MLGW for fiscal years 2006 through 2009.

On November 4, 2011, the City of Memphis filed a complaint for declaratory judgment in the Chancery Court of Shelby County, naming Shelby County as a defendant. The City claimed that it had overpaid Shelby County's share of the tax equivalents " in excess of that required by the [Electric] Law" by mutual mistake of the parties. The City claimed that its City Charter allowed the City to exclude certain sums from the statutory formula for calculating the share of the tax equivalent payment attributable to Shelby County, although it had not done so.[3] Aside from monetary damages, the City also sought a " declaration of the authority of the governing body of the City to allocate MLGW PILOT payments to the County under the Electric Equivalency Law and under the Gas Equivalency Law," and it sought a declaration that the City was entitled to exclude certain sums from the statutory formula for determining the share to be distributed to Shelby County.

Shelby County filed an answer to the complaint in addition to a counterclaim and " cross-complaint" for damages, declaratory and injunctive relief. The County named MLGW as a " cross-defendant." Shelby County disputed the City's allegation that the County was overpaid with respect to electric tax equivalents; the County claimed that the City collected tax equivalents for MLGW's electric services and distributed Shelby County its share of those payments in accordance with the Electric Law during the relevant time period. However, Shelby County alleged that the City was wrongfully withholding the County's share of other tax equivalents paid to the City by MLGW. Specifically, Shelby County asserted that the City impermissibly collected tax equivalents for MLGW's gas services in recent years by using the Shelby County tax rate in its calculation of the payment and retaining the entire tax equivalent payment rather than distributing a share to Shelby County. The County claimed that " [t]he City is not authorized to use Shelby County's tax rate to calculate a tax equivalency payment for gas services and retain any or all of such payment." In addition to monetary damages,[4] Shelby County asked the court to enter a declaratory judgment that " MLGW's tax equivalent payments are subject to the provisions of the Electric Law and Gas Law," that the City was unlawfully withholding tax equivalents belonging to Shelby County, and that state law requires MLGW to pay the tax equivalent payments for electric and gas services directly to Shelby County (rather than paying Shelby County's share to the City for distribution by the City). The County asked the court to impose a constructive trust on the payments improperly held by

Page 536

the City and to order the City to immediately pay the withheld funds to Shelby County. In addition, Shelby County sought a permanent injunction directing the City of Memphis to continue paying Shelby County a specified share of the total tax equivalent payment for MLGW's electric services (without first deducting the sums claimed by the City) " for so long as the City of Memphis collects such payments from MLGW in accordance with the [Electric Law]." Shelby County also sought a permanent injunction directing the City of Memphis to pay Shelby County the entire portion of the tax equivalent payments calculated using Shelby County's tax rate for MLGW's gas services, " for so long as the City collects such payments from MLGW in accordance with the [Gas Law]." Finally, it sought a permanent injunction directing MLGW to make payments directly to Shelby County for its portion of the tax equivalent payments.

The City and MLGW filed separate motions to dismiss Shelby County's cross-complaint against MLGW, asserting that the cross-complaint was both procedurally and substantively improper. Shelby County then filed a motion to add MLGW as a party. Following a hearing, the trial court denied the County's motion to add MLGW as a party and granted the motions filed by the City and MLGW to dismiss and/or strike the cross-complaint filed by the County against MLGW. The County filed an amended counterclaim deleting references to MLGW as a party.

The trial court entered a consent order reflecting the parties' agreement that both parties would be precluded from recovering any damages that were allegedly incurred before November 4, 2005 (six years before the complaint was filed on November 4, 2011). A subsequent consent order reflected the parties' agreement to dismiss each party's claims for monetary damages concerning electric and gas PILOTs for fiscal years 2010 and 2011. Accordingly, the only remaining claims for monetary relief were the City's claim that it overpaid the County when distributing the County a share of the electric tax equivalents for fiscal years 2006 through 2009, and the County's claim that the City wrongfully failed to pay it any portion of the gas tax equivalents for fiscal years 2006 through 2009. The claims for declaratory and injunctive relief also remained pending.

The City and the County filed motions for summary judgment and partial summary judgment with respect to numerous issues. Thereafter, the parties entered a document entitled " Joint Stipulations," which contained fifty-nine paragraphs and several charts containing facts and mathematical calculations that were undisputed. On January 22, 2014, the " trial" of this matter was held in chancery court. However, no additional proof was entered beyond the stipulations of the parties. According to the trial court's order, " [t]he trial itself involved no formal proof, but rather, consisted largely of legal argument and explanatory exposition, in addition to the parties' stipulations." The parties also stipulated to the " authenticity and admissibility of the materials attached to their respective Motions for Summary Judgment, the responses thereto, their Statement of Undisputed Facts and responses thereto and Exhibits attached to the City's Complaint and Shelby County's Counter-Claim." However, the trial court's order did not analyze the issues in the context of the motions for summary judgment and partial summary judgment filed by the parties. Instead, the court addressed the parties' claims for damages and declaratory and injunctive relief with findings of fact and conclusions of law from the January 2014 " trial hearing."

Page 537

In its findings of fact and conclusions of law, the trial court summarized this case as follows:

At issue in this case is the proper allocation of Memphis Light, Gas & Water (" MLGW[" ]) gas and electric payments in lieu of taxes (" PILOTs" ) between the City of Memphis (" the City" ) and Shelby County (" the County" ). Although the specific disagreements between the parties are both varied and complex, in general, the dispute is a simple one: the parties contend that PILOTs have not been properly shared in the past and they differ in opinion as to the manner in which PILOTs are to be shared going forward. In addition to each asking for monetary relief, the parties have requested that the Court issue a declaration as to their respective rights and obligations. (Footnote omitted.)

The trial court summarized the issues that are relevant for purposes of this appeal[5] as: " [w]hether the City is entitled to reimbursement for alleged overpayment of electric PILOTs for fiscal years 2006 through 2009," " [w]hether the County is entitled to compensation for gas PILOTs alleged to have been wrongfully withheld for fiscal years 2006 through 2009," and " [t]he rights and obligations of the parties going forward." For reasons that will be discussed in greater detail below, the trial court denied the City's claim for alleged overpayments of electric PILOTs because the trial court concluded that " the City paid exactly what was required" under the Electric Law. The court rejected the City's argument that it was authorized to exclude certain sums from the statutory formula for the tax equivalents before distributing Shelby County its share. The trial court denied the County's counterclaim for recovery of unpaid gas PILOTs upon concluding that the Gas Law did not require the City to distribute a share of the gas PILOTs to Shelby County during the years at issue. Moving then to the requests for declaratory relief, the trial court ruled that a 2012 amendment to the Gas Law requires the City to share gas PILOTs with the County going forward. As for the manner of payment, the court concluded that the Electric Law and the Gas Law require the City " to determine by resolution the amount of tax equivalent payments due to each taxing jurisdiction, whereas MLGW is the entity actually directed to make such payments to the taxing jurisdictions." In sum, the trial court found that neither the City nor the County was entitled to monetary compensation with regard to the PILOTs for fiscal years 2006 to 2009. The trial court declared that the PILOTs would " [h]enceforth" be calculated in the manner set forth in the trial court's order, and the PILOTs would be paid directly to Shelby County by MLGW in accordance with the Electric Law and the Gas Law. The City of Memphis timely filed a notice of appeal.

II. Issues Presented

On appeal, the City of Memphis presents the following issues, which we have slightly restated, for review:

1. Whether the trial court erred in its interpretation of the Municipal Electric System Tax Equivalent Law of 1987 by finding that Subsection 693(4) of the Charter of the City of Memphis was repealed by the Electric Law and that Subsection 693(6) of the Charter of the City of Memphis was not to be considered in relation to the calculation and distribution of tax equivalents under the Electric Law;

Page 538

2. Whether the trial court erred by ordering MLGW, a non-party, to make payments due under both the electric and gas tax equivalency laws directly to Shelby County;
3. Whether the trial court erred in holding and ordering that " [h]enceforth, the gas PILOTs due to Shelby County by the City of Memphis shall be determined in accordance with Tennessee Code Annotated section 7-39-405" of the Gas Law in light of the fact that the only issue properly before the Court was payment of gas PILOTs for the years 2006 through 2009;
4. Whether the trial court erred in holding and ordering that " [h]enceforth, the gas PILOTs due to Shelby County by the City of Memphis shall be determined in accordance with Tennessee Code Annotated section 7-39-405" of the Gas Law without addressing the constitutionality of section 7-39-405 as amended in 2012; and
5. Whether the trial court's holding regarding the City's future duty to pay Shelby County a portion of gas PILOTs operates as an adjudication of the proper construction and constitutionality of section 7-39-405 as amended in 2012.

Shelby County has responded to each of these issues in its posture as appellee and presents the following additional issue for review:

6. Whether the trial court erred in finding that the County is not entitled to any monetary compensation related to gas PILOTs for fiscal years 2006 through 2009.

In response to the issue raised by Shelby County, the City of Memphis raises the following additional issues, as slightly restated:

7. Whether Shelby County's claims for monetary damages are barred in whole or in part by the applicable statutes of limitation;
8. Whether the City waived the right to challenge Shelby County's claims for liquidated monetary damages;
9. Whether Shelby County and the City are immune from each other's claims for monetary damages for alleged overpayments or underpayments of electric and gas tax equivalency payments in their respective declaratory judgment actions in the absence of a contract between the parties;
10. Whether the Memphis City Council's gas PILOT resolutions directing MLGW to distribute gas PILOTs only to the City violated the provisions of the Gas Law; and
11. Whether any provisions of the Gas Law, the Revenue Bond Law, or the City's Charter required the City to distribute or to pay a specific amount or portion of the PILOTs to Shelby County or any other taxing jurisdiction.

For the following reasons, we affirm the trial court's decision and remand for further proceedings.

III. Standard of Review and Statutory Interpretation

" The construction of a statute and its application to the facts of a particular case present questions of law that we review de novo without a presumption of correctness." Womack v. Corrections Corp. of America, 448 S.W.3d 362, 366 (Tenn. 2014) (citing Baker v. State, 417 S.W.3d 428, 433 (Tenn. 2013); Keen v. State, 398 S.W.3d 594, 599 (Tenn. 2012)). Certain " well-defined precepts" apply when dealing with statutory interpretation:

Page 539

Our primary objective is to carry out legislative intent without broadening or restricting the statute beyond its intended scope. Houghton v. Aramark Educ. Res., Inc., 90 S.W.3d 676, 678 (Tenn. 2002). In construing legislative enactments, we presume that every word in a statute has meaning and purpose and should be given full effect if the obvious intention of the General Assembly is not violated by so doing. In re C.K.G., 173 S.W.3d 714, 722 (Tenn. 2005). When a statute is clear, we apply the plain meaning without complicating the task. Eastman Chem. Co. v. Johnson, 151 S.W.3d 503, 507 (Tenn.2004). Our obligation is simply to enforce the written language. Abels ex rel. Hunt v. Genie Indus., Inc., 202 S.W.3d 99, 102 (Tenn. 2006). When a statute is ambiguous, however, we may refer to the broader statutory scheme, the history of the legislation, or other sources to discern its meaning. Colonial Pipeline v. Morgan, 263 S.W.3d 827, 836 (Tenn. 2008). Courts must presume that a legislative body was aware of its prior enactments and knew the state of the law at the time it passed the legislation. Owens v. State, 908 S.W.2d 923, 926 (Tenn. 1995).

Estate of French v. Stratford House, 333 S.W.3d 546, 554 (Tenn. 2011).

IV. DISCUSSION

This case requires a close examination of the Municipal Electric System Tax Equivalent Law of 1987, Tenn. Code Ann. § 7-52-301, et seq., and the Municipal Gas System Tax Equivalent Law of 1987, Tenn. Code Ann. § 7-39-401, et seq. These Laws became effective on the same date and are similarly structured, but they do contain some material differences, so we will discuss them separately for clarity. We will also discuss the parties' claims for damages before their issues pertaining to declaratory relief.

A. The Municipal Electric System Tax Equivalent Law of 1987

The Municipal Electric System Tax Equivalent Law of 1987 (" the Electric Law" ) is codified at Tennessee Code Annotated sections 7-52-301 through-310. It has been analyzed in only one appellate opinion since its passage in 1987. The Tennessee Supreme Court extensively discussed the Electric Law in Knox County ex rel. Kessel v. Lenoir City, Tennessee, 837 S.W.2d 382 (Tenn. 1992). Accordingly, we will discuss the Supreme Court's interpretation of the Electric Law at length. The Electric Law is certainly not a model of clarity, and it has been described as " ambiguous in that some of its parts seem to be in conflict with others." Knox County, 837 S.W.2d at 387 (O'Brien, J., dissenting).[6]

According to the Tennessee Supreme Court, the Electric Law was passed because " the Tennessee General Assembly had apparently decided that there should be some degree of uniformity created with regard to tax-equivalent payments." Knox County, 837 S.W.2d at 383. The stated purpose of the Electric Law is found in Tennessee Code Annotated section 7-52-302, which states:

(a) The purpose of this part is to provide the complete law of this state with respect to payments in lieu of taxes on the property and operations of all electric systems owned and operated by incorporated cities or towns, by counties,

Page 540

and by metropolitan governments, and to repeal the specific provisions of any private act, home rule charter or metropolitan government charter, or any part thereof, relating to payments in lieu of taxes, including certain provisions relating to the distribution of any such payments, but not to repeal any other provisions of such private acts or charters or parts of private acts or charters.
(b) This part is remedial in nature and this part shall be liberally construed to effectuate the purpose of this part.

In Knox County, the Supreme Court considered whether a private act governing the distribution of tax equivalent payments on property owned by the Lenoir City Utilities Board impermissibly conflicted with the Electric Law. Id. at 383-84. The appellant argued that the Electric Law was a general law intended to have mandatory, statewide application. Id. at 383. The Supreme Court conceded that " [s]uperficially, at least, this argument appears to have merit." Id. at 384. The Court recognized that the stated purpose of the Electric Law, quoted above, was " 'to provide the complete law of this state with respect to payments in lieu of taxes on the property and operations of all [municipal] electric systems'" and to " 'repeal the specific provisions of any private act or home rule charter or metropolitan government charter . . . relating to payments in lieu of taxes.'" Id. (quoting Tenn. Code Ann. § 7-52-302(a)). However, the Court explained that " a close reading of the full provision reveals that the term 'complete law' does not preclude the validity of all private acts affecting distribution of payments." Id. (emphasis added). Instead, the Court explained, the legislature's intent to repeal private acts was " qualified" by the italicized portion of the statute below:

(a) The purpose of this part is to provide the complete law of this State with respect to payments in lieu of taxes on the property and operations of all electric systems owned and operated by incorporated cities or towns, by counties, and by metropolitan governments, and to repeal the specific provisions of any private act or home rule charter or metropolitan government charter, or any part thereof, relating to payments in lieu of taxes including certain provisions relating to the distribution of any such payments, but not to repeal any other provisions of such private acts or charters or parts thereof.

Id. (quoting Tenn. Code Ann. § 7-52-302(a)).

The Court explained that after the sections of the Electric Law setting forth its purpose and applicable definitions, the remaining statutory provisions basically " address two questions: how much is to be paid in lieu of taxes (calculation of payments) and to whom the payments must be distributed when more than one taxing jurisdiction is involved (allocation of payments)." Knox County, 837 S.W.2d at 384. The method of calculating the amount of tax equivalents is found at section 7-52-304, which provides, in relevant part:

Notwithstanding any provision to the contrary appearing in § 7-34-115 or in the provisions of any private act, home rule or metropolitan government charter, every municipality may pay or cause to be paid from its electric system revenues for each fiscal year an amount for payments in lieu of taxes, called " tax equivalents" in this part, on its electric system and electric operations, which, in the judgment of the municipality's governing body after consultation with the supervisory body, shall represent the fair share of the cost of government

Page 541

properly to be borne by the municipality, subject, however, to the following conditions and limitations:
(1) The total amount so paid as tax equivalents for each fiscal year shall not exceed a maximum amount equal ...

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