Payments Clause in City Contract Deemed Unconstitutional When it Suspends the City’s Ability to Tax

by Low, Ball & Lynch
Contact

Russell City Energy Co. LLC v. City of Hayward

Court of Appeal, First District (August 7, 2017)

In Russell City Energy Co. LLC v. City of Hayward, the California Court of Appeals held that a payments clause in a contract between the City and an electric company was unconstitutional because it suspended the City’s ability to tax.

Article VIII, section 6 of the 1879 California Constitution provided, “The power of taxation shall never be surrendered or suspended by any grant or contract to which the State shall be a party.” In 1974, section 6 was replaced with Section 31, which provides “[t]he power to tax may not be surrendered or suspended by grant or contract.” Section 31 applies to local governments, including cities. It expresses the principle that governments cannot divest themselves by contract of the right to exert their governmental authority. To restrain its exercise by contract would be a renunciation of power to legislate for the preservation of society or to secure the performance of essential governmental duties. The power to tax is a sovereign power, and wherever it exists may be exercised at the will and discretion of the sovereign.

Section 31 does not define the terms “surrendered” or “suspended,” and therefore those terms have been interpreted in their ordinary and usual meaning, to be “to give up completely or agree to forgo especially in favor of another.” (Merriam-Webster’s Collegiate Dict. (11th Ed. 2014) p. 1258.) There is no question that a contract that surrenders or impairs a governmental power is invalid, but the question of whether a contract actually surrenders or impairs a governmental power largely depends on the language and intent of the contract.

In October, 2005, Russell City Energy Co. and the City of Hayward entered into a Cooperation and Option Agreement (“Agreement”). The purpose of the agreement was to facilitate Russell’s construction and operation of an Energy facility in the City. In the agreement, the City granted Russell an option to purchase 12.5 acres of City-owned land as the site for the facility. The Payments Clause provides in relevant part: “In the interest of clarity, the Parties acknowledge that payments to be made by [Russell] as contemplated in this Agreement comprise all payments to be made to the City by [Russell], its parents or affiliates in connection with the development, construction, ownership and operation of [the facility] and the City shall not impose any other levies, fees, taxes, contributions, or charges on [Russell], its parents or affiliates other than such levies, fees, taxes, contributions, or charges generally applicable to similarly situated owners of real property located in the City.” The agreement also contained a severability provision.

Four years later, in June, 2009, City of Hayward voters approved a utility tax on the usage of electricity and gas, which imposed a tax upon every person using electricity in the City at the rate of five and one-half percent (5.5%) of the charges made for such electricity, to be collected from the service user. The utility tax also included a provision regarding gas usage which is substantially similar. Russell filed suit against the City, and the City demurred. The trial court granted the demurrer without leave to amend.

The trial court found that the Payments Clause violated Section 31, and the Appellate Court agreed. Russell’s interpretation of the Payments Clause – that the City contractually promised not to impose any taxes other than real property related taxes – violated Section 31 because it surrenders and suspends the City’s power to tax the power plant. The Appellate Court held that the trial court properly determined the Payments Clause was unenforceable. In its holding, the appellate court rejected Russell’s argument that the Payments Clause was an exercise of the City’s taxing power, rather than a surrender. The Court did not agree that the language of the Payments Clause provided for an upfront payment in lieu of future taxes (which is also known as a PILOT agreement). The appellate court noted that by the language of the Payments Clause, the City unquestionably suspended its power to tax. The Payments Clause rendered the City’s power to tax “‘temporarily inactive’” for the life of the facility. The Appellate Court sustained the trial courts grant of demurrer, but reversed the order in order to allow Russell leave to amend to state a claim on any other grounds.

COMMENT

Russell City Energy Co. LLC v. City of Hayward is unambiguous that a municipality’s sovereign right to tax cannot be diminished by contract terms, regardless of the intention of the parties at the time of contracting. Parties to contracts with a public entities, and their counsel, must use explicit and clear contract language to address prospective issues, and must anticipate future conditions which may lead to contract terms running afoul of the entities superseding rights. Similarly, public entities that want to provide attractive contract terms to private parties in order to encourage growth and productivity, will need to be mindful of the concerns of private parties and emerging case law on prospective issues to provide meaningful incentives to contract.

For a copy of the complete decision, see: Russell v. City of Hayward

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Low, Ball & Lynch | Attorney Advertising

Written by:

Low, Ball & Lynch
Contact
more
less

Low, Ball & Lynch on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.