What Next, Now That Transportation Fees Have Been Ruled Illegal in Minnesota?

The Minnesota Supreme Court’s ruling in Harstad v. City of Woodbury, that cities do not have authority to charge transportation fees for future road improvements, has answered one big question for developers, but others remain. Can a city demand payment of transportation fees if the developer agreed to pay them before Harstad was decided? Is a transportation fees provision in a fully executed city development contract still enforceable after Harstad under contract law? Can a developer that has paid transportation fees to a city force their refund?

In Harstad, the Court affirmed lower court rulings, striking down a transportation fee of almost $1.4 million that the City of Woodbury sought to charge a developer for future area transportation improvements. Woodbury asserted that Harstad’s 183-unit residential development would burden area roads and eventually lead to the need to improve them. Woodbury argued that its statutory authority to exact a cash payment from Harstad fell within the city’s authority to condition subdivision approval upon either (a) the construction or installation of infrastructure improvements for the proposed subdivision, or (b) the developer providing some form of “financial security” that is sufficient to ensure the construction or installation of the subdivision improvements.

The Supreme Court rejected the notion that a city can exact a transportation fee at the time of subdivision approval purporting to pay for area transportation improvements that may be needed sometime in the future. The Court said, “The forms of ‘financial security’ that are listed in the statute are all contemporary security measures that protect a city’s interest in covering the costs of completing the infrastructure or improvement in the event that a developer fails to finish a project.” (Emphasis added). In short, a city’s attempt to exact fees to pay for future transportation improvements is not authorized by state statute.

Woodbury also argued that statutory authority given to cities to enter into development contracts allows cities to negotiate “voluntary” payment of transportation fees with developers. The Court rejected this argument because developers seeking subdivision approval from cities have little bargaining power: “[T]he pearl of great price here is approval of the subdivision agreement,” the Court said, recognizing the hard reality that, “a developer who fails to make a ‘voluntary’ payment in an amount Woodbury finds acceptable faces the prospect of denial of the subdivision application.” The Court’s reasoning led to the conclusion that, “The infrastructure charge is thus a requirement and Harstad is correct that there is nothing voluntary about it.”

With this backdrop, what is a developer to do after Harstad if it is in the midst of the development process in a city that exacts transportation fees? Here are some thoughts on several post-Harstad questions and scenarios:

• If there is a signed development contract requiring payment of a transportation fee, but the fee has not been paid, is that contract provision enforceable after Harstad?

It should be considered void and unenforceable under Harstad. Most development contracts have a boilerplate provision that allows for “severability” of contract provisions that are later found to be void or illegal. This is a proper circumstance for application of the severability clause. Even without a severability clause, a transportation fee provision in a development contract should be considered unenforceable after Harstad.

• What if the development contract states that the developer is obligated to pay all fees—including a transportation fee—and that the developer waives any right to challenge the fees?

The Harstad decision should be recognized to be a changed circumstance excusing the developer from paying the illegal fee. Public policy ought to dictate that a waiver provision is unenforceable with respect to a contract provision that has been declared to be illegal by the Minnesota Supreme Court.

• What if the developer has already paid the fee, can the city be forced to return it?

This is less clear. In a 1997 fees case, the Minnesota Supreme Court invalidated a “road unit connection charge” levied against building contractors seeking building permits from the City of Eagan as an illegal tax. Country Joe v. City of Eagan, 560 N.W.2d 681, 686 (Minn. 1997). When the contractors later sued the city for refunds, both the trial court and the Minnesota Court of Appeals said “no.” The courts said that because there was no statutory remedy for the refund of an unauthorized tax, the contractors had no remedy. The court of appeals also said that while payment of an illegal tax under duress may entitle a party to a refund, duress had not been shown. The court said that the contractors should have sought judicial relief before paying the fee through either a writ of mandamus or a declaratory judgment. Since the contractors did not attempt such judicial action before paying the fee, they had no grounds for relief in the form of a refund.

The outcome in Country Joe was driven by the court’s conclusion that Eagan’s fee was an illegal tax. The Supreme Court in Harstad did not hold the transportation fee to be an illegal tax.  This allows for the the possibility that Country Joe’s rejection of a refund remedy does not apply to transportation fees which have been invalidated for other reasons following suit with Harstad. All the same, a developer seeking relief from a court before paying a transportation fee would be in a far better position than one seeking relief from a court in the form of a refund after paying the fee.

While the answers to some of these questions ought to be fairly clear and obvious, the answers to others, unfortunately, may only become clear after further litigation.