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April 1 2022

Foreclosing Governmental Units Remain Liable for Drainage and Stormwater Charges

By: Dominic T. Clolinger

Determining what entities are subject to municipal utility charges is not always a straightforward analysis. Recently, the Michigan Court of Appeals reiterated that, under the Revenue Bond Act (“RBA”), municipalities are prohibited from providing free services to public corporations. The RBA defines public corporations to include counties, cities, and other entities that exist for the benefit of the public and are devoted to a public purpose. This definition includes authorities created pursuant to the Land Bank Fast Track Act.

In City of Highland Park v State Land Bank Authority (“Highland Park”), the Defendant Michigan State Land Bank Authority (the “State Authority”) owned 464 parcels of land within the City of Highland Park’s jurisdiction. However, only five of the properties were not tax-reverted. The properties were transferred to the State Authority after they were foreclosed on by the State of Michigan or the Wayne County Treasurer. These lands were serviced by the City of Highland Park’s (the “City”) combined sewer system which transported stormwater runoff and sanitary sewage to a regional wastewater treatment facility. The State Authority’s foreclosed properties generated a substantial amount of drainage and stormwater runoff that entered the City’s combined sewer system. Therefore, pursuant to the City’s Drainage and Stormwater Billing Ordinance, the City claimed that the State Authority must pay its stormwater fees. Fees were determined on the basis of the parcel’s size and its “amount of pavement, building, vegetative cover and other general landscaping.”

The dispute arose when the State Authority refused to pay its monthly bills on the basis that it, as a “foreclosing entity,” 1) involuntarily received the land and 2) retained immunity to such charges. The State Authority is a public body corporate and politic within the Michigan Department of Labor and Economic Opportunity. The State Authority was created pursuant to the Land Bank Fast Track Act, Public Act 258 of 2003 (the “Act”). The State Authority often partners with county foreclosing governmental units also created pursuant to the Act. This “partnership” is fostered through an intergovernmental agreement between the State Authority and its local counterpart, whose membership includes the county treasurer. In short, these authorities are created to efficiently acquire, assemble, manage, dispose of, and quiet title to tax foreclosed properties.

As the State Authority was an involuntary owner of the parcels at issue, it claimed that it was entitled to “immunity” provided to state and foreclosing governmental units. The Government Tort Liability Act holds governmental agencies immune from tort liability while engaging in the exercise or discharge of governmental functions. However, the Court noted that the Government Tort Liability Act does not bar a claim based in contract. “The general rule is that services furnished by one municipality to another municipality are on a contractual basis and the acceptance of services implies a promise to pay therefor at the established rate.”

The State Authority also attempted to cite an analogous case, Harbor Watch Condo Ass’n v Emmit Co Treasurer, for support. In Harbor, a county treasurer was sued as a “foreclosing governmental unit” under the General Property Tax Act. The treasurer was the temporary owner of multiple tax-reverted condominium properties. The condominium association filed a lawsuit against the treasurer to recover condominium fees as required by the condominium bylaws. Ultimately, the condominium association in Harbor lost, with the court finding that the treasurer did not have the legal authority under the General Property Tax Act to pay condominium assessments and that an executory contract of a municipal corporation made without authority may not be enforced.

The Highland Park Court distinguished Harbor, pointing out that Harbor involved condominium fees that the treasurer never agreed to pay. However, under the facts in Highland Park, the utility service charges were based upon a municipal ordinance.

Further, while the treasurer in Harbor lacked the legal authority to pay, foreclosing governmental entities are not prohibited by the Act from paying utility charges. Rather, land bank authorities are authorized to take actions necessary to preserve the value of their properties. As the State Authority accepted the drain and sewer services at issue, a promise to pay may be implied.

The State Authority argued that such an implied contract thwarts the purpose of the Act because paying local charges limits its discretion to dispose of the foreclosed properties. However, the Highland Park Court determined that such a reading is inconsistent with the text of the Act. It is true that the Act specifically exempts land bank authorities from taxes and special assessments, but it does not exempt it from laws generally applicable to other persons or entities. This includes laws relating to the operation of and payment for sewer and stormwater systems. The State Authority had the authority to enter into an agreement for utility services, and therefore should be bound to pay for them. This finding was compounded with the fact that under the RBA municipalities are barred from providing free services for stormwater charges to a public corporation such as the State Authority. The Highland Park Court expressly found that foreclosing governmental entities are considered public corporations under the RBA.

The lessons from Highland Park are twofold: 1) disputes between municipalities for the collection of utility fees are generally considered to be contractual in nature, and are therefore not subject to governmental immunity claims, and 2) foreclosed properties held by governmental units are likely subject to sewer and stormwater charges. Accordingly, we recommend that our municipal clients with questions of who is subject to drain and stormwater charges consult with legal counsel at Mika Meyers to discuss applicable legal requirements and implications.