tag: North Carolina Land Use Litigator: August 2016

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Thursday, August 25, 2016, 4:34 PM

A Distinction without a Difference

On April 8, 2016, we posted a blog regarding the case of Quality Built Homes, Inc. v. Town of Carthage, ___N.C. App. ___, 766  S.E. 2d 897 (2015)(unpublished).  In this case, the Court of Appeals had held that the Town of Carthage (Town) possessed authority to charge “impact fees” for water and sewer services.

In our April blog post (see here) we noted that the North Carolina Supreme Court had accepted Quality Homes case for review.  In our view, Quality Homes was different from prior zoning and subdivision cases where the North Carolina Supreme Court had affirmed the North Carolina Court of Appeals’ decisions finding that local governments did not possess authority to impose school impact fees.  We noted that the case involved the business of water service, an activity very different from regulatory activities and suggested that this distinction should make a difference.  We were wrong.

On August 16, 2016, the North Carolina Supreme Court reversed the North Carolina Court of Appeals’ decision and held that the Town did not possess authority to charge impact fees for water and sewer services.  ­Quality Homes v. Town Carthage, 2016WL 4410716 (August 19, 2016).

Quality Homes v. Town of Carthage

When a landowner sought and obtained final approval of a subdivision plat in the town, the landowner was required to pay water and sewer impact fees.  If the landowner failed to pay these fees, the Town refused to issue building permits.  These fees were due regardless whether this landowner ever connected to the Town’s utility systems. 

The plaintiffs were companies engaged in residential homebuilding and had paid $123,000 in water and sewer impact fees to the Town.  These homebuilders contended that the General Assembly had not authorized the Town to charge water and sewer impact fees.  These homebuilders sought a refund, interest, reimbursement of attorney  fees and costs, monetary damages, and asserted equal protection and due process claims against the Town. 

The Town contended that the General Assembly had authorized it to charge water and sewer impact fees through the public enterprise statutes.  These statutes authorized the Town to establish water and sewer systems in the Town’s discretion and to charge fees for these systems. 

The Superior Court entered summary judgment in favor of the Town and the Court of Appeals affirmed the Superior Court.  The North Carolina Supreme Court, in its discretion, accepted the case for review. 

The North Carolina Supreme Court’s Decision
The North Carolina Supreme Court reasoned that “[f]rom the very formation of our State government, municipalities, in their various forms, have been considered ‘creatures of the legislative will, and are subject to its control.” p. 2.  The General Assembly granted powers to municipalities by adopting statutes and these statutes included “implied powers essential to the exercise” of express powers granted. p. 3.   The plain language of a statute determined the extent of legislative power conferred upon a municipality, and when the statute was clear and unambiguous, no room for judicial construction existed.  But when the statute is ambiguous, it was construed broadly.

After reading the public enterprise statutes, the North Carolina Supreme Court found that these statutes empowered the Town to charge fees only “for the contemporaneous use of its water and sewer systems.”  p. 3.  Because the statute had not expressly authorized the Town to charge fees for future use of these systems, the North Carolina Supreme Court concluded that the Town lacked “the power to charge for prospective services.” p. 4.  Accordingly, the Town’s impact fee ordinances were unauthorized by the General Assembly and invalid.

The North Carolina Supreme Court bolstered its conclusion by noting that (1) the statutes enabling counties to establish and operate public enterprises included language “to be furnished” but this language was absent in the statutes enabling municipalities to establish and operate public enterprises and (2) the Town could have sought local legislation to authorize charging impact fees. 

Finally, the Court reasoned that the General Assembly had granted the Town authority “to charge tap fees and to establish water and sewer rates to fund necessary improvements…to its inhabitants, which [was] sufficient to address its expansion needs.” p. 4.    

The North Carolina Supreme Court reversed the Court of Appeals and held that the Town’s impact fee ordinances were “invalid” and remanded the case  to the Court of Appeals “for consideration of the unresolved issues.” p. 5.


  1. Based upon the North Carolina Supreme Court’s reasoning in Quality Built, the fundamental distinction between municipal governmental/regulatory activities and proprietary activities is irrelevant to the question as to whether a statute authorizes charging impact fees.  In fact, the North Carolina Supreme Court never mentioned the distinction in its decision.
  2. Unlike zoning statutes, the public enterprise statutes authorized municipalities to establish “rents, rates, fees, charges and penalties for the use of or the services furnished by any public enterprise.” p. 3. (emphasis added).  Although the public enterprise statutes lacked an express limitation on charging impact fees, their broadness was insufficient to authorize impact fees.

Quality Built follows recent North Carolina Supreme Court decisions that address fees typically paid by the homebuilding industry for the impact of development on scarce public resources.  In these cases, the North Carolina Supreme Court has not found a general or local statute authorizing such impact fees. 

  3. The North Carolina Supreme Court relied upon Town of Spring Hope v. Bissette, 305 N.C. 248 (1982).  In Bissette, the North Carolina Supreme Court stated that a municipality’s “rate-making function is a proprietary function rather than a governmental one, limited only by statute or contractual agreement.”  p. 250

The plaintiff in Bissette was an individual consumer of sewer services who had complained that the rate charged by the Town of Spring Hope included charges associated with construction of a new sewer treatment facility that was not serving him at the time he paid these fees.  The Supreme Court, in a divided decision, rejected the consumer’s claim because he was receiving sewer services.

The difference between Bissette and Quality Built is that the homebuilders were not receiving utility services when the fees were due.   In other words, General Assembly intended, when it selected the words “the use of or the services furnished”, to unambiguously authorize municipalities to charge only existing utility customers the costs for new utility system facilities and expansions and not charge non-customer landowners who benefit from the presence or availability of these services.  In short, the North Carolina Supreme Court must have concluded that “the use of or the services furnished” was unambiguous and meant only physical connection to utility systems.

   4.  The North Carolina Supreme Court stated that the Town’s impact fee ordinances “on their face exceed the powers delegated to the Town by the General Assembly.” p. 4. (emphasis added).  This is puzzling. The public enterprise statutes do not contain an express prohibition against charging impact fees. Four other members of the North Carolina Judiciary - a Superior Court Judge and three judges at the North Carolina Court of Appeals - found that the Town had authority to charge impact fees.   

The North Carolina Supreme Court remanded the case for consideration of “unresolved issues.” The Court identified some outstanding issues as being the Town’s defenses of statute of limitations and estoppel.  Other issues identified by the North Carolina Supreme Court were the homebuilders’ requests that the Town pay their attorney fees and legal costs, pay a refund of the impact fees plus interest and pay monetary damages for violation of equal protection and due process. 

Wednesday, August 17, 2016, 11:19 AM

Ninth Circuit Weighs In: Nevada "Superpriority" Law for HOA Liens Violates Due Process

In October 2014, we blogged HERE about cases from Nevada and D.C. giving priority of so-called HOA "superliens" over first position mortgages.

In a 2-1 decision, the United States Court of Appeals for the Ninth Circuit overruled the 2014 decision from the Nevada Supreme Court about which we previously blogged.  In Bourne Valley Court Trust v. Wells Fargo Bank, N.A., (August 12, 2016), the federal appellate court holds that the non-judicial foreclosure of a Nevada HOA superlien cannot constitutionally extinguish a mortgage lender's security interest. 

In 2014, the Nevada Supreme Court held that, as a matter of lien priority, the foreclosure of a superlien for HOA assessments can extinguish a first mortgage. However, the Nevada Supreme Court did not address whether the provisions of Nevada state law governing notice to purported junior lienholders, including mortgagees, were constitutional. 

In Bourne Valley, the home in question had a mortgage loan for $174,000 from Plaza Home Mortgage. The beneficial interest in the noted and deed was subsequently assigned to Wells Fargo, N.A. in 2011.  After the homeowner fell behind on her HOA payments, the HOA recorded a notice of delinquent assessment lien for $1,298.57 in August 2011.  In October 2011, the HOA recorded a notice of default and election to sell the home. Then, on April 9, 2012, the HOA recorded a notice of trustee/foreclosure sale against the property.  The Horse Pointe Avenue Trust then paid $4,145 for the home at a foreclosure sale, before conveying its interest in the property to the Bourne Valley Court Trust, which then filed an action to quiet title and extinguish any other junior liens.

In Bourne Valleythe Ninth Circuit panel notes that Nevada state law requires a purported junior lienholder to "opt in" before receiving notice of an HOA foreclosure sale, which the Court calls a “peculiar scheme” for providing mortgage lenders with information about when an HOA intended to foreclose on a property.  “Even though such foreclosure forever extinguished the mortgage lenders’ property rights, the [Nevada] statute contained “opt in” provisions requiring that notice be given only when it had already been requested,” the Court noted.  “Thus, despite that only the homeowners’ association knew when and to what extent a homeowner had defaulted on her dues, the burden was on the mortgage lender to ask the homeowners’ association to please keep it in the loop regarding the homeowners’ association’s foreclosure plans,” the Court continued. “How the mortgage lender, which likely had no relationship with the homeowners’ association, should have known to ask is anybody’s guess.”

Therefore, the Court concludes, Nevada's laws violate the Due Process Clause of the U.S. Constitution.  From the Court's decision:
Nevada Revised Statutes section 116.3116 et seq. strips a mortgage lender of its first deed of trust when a homeowners’ association forecloses on the property based on delinquent HOA dues. Before it was amended, it did so without regard for whether the first deed of trust was recorded before the HOA dues became delinquent, and critically, without requiring actual notice to the lender that the homeowners’ association intends to foreclose.
We hold that the Statute’s “opt-in” notice scheme, which required a homeowners’ association to alert a mortgage lender that it intended to foreclose only if the lender had affirmatively requested notice, facially violated the lender’s constitutional due process rights under the Fourteenth Amendment to the Federal Constitution. We therefore vacate the district court’s judgment and remand for proceedings consistent with this opinion.
The Court gets specific:
But that the foreclosure sale itself is a private action is irrelevant to Wells Fargo’s due process argument. Rather than complaining about the foreclosure specifically, Wells Fargo contends—and we agree—that the enactment of the statute unconstitutionally degraded its interest in the property. Absent operation of the statute, Wells Fargo would have had a fully secured interest in the property. A foreclosure by a homeowners’ association would not have extinguished Wells Fargo’s interest. But with the statute in place, Wells Fargo’s interest was not secured. Instead, if a homeowners’ association foreclosed on a lien for unpaid dues, Wells Fargo would forfeit all of its rights in the property. 
For now, the Bourne Valley opinion is binding on all Nevada federal courts. It will also serve as strong persuasive authority (at the very least) in actions pending in Nevada state court, as well as throughout the U.S. in states with similar paradigms.

"HOA liens, the elderly, and those with military service may now board."

Mike Thelen practices in Womble Carlyle's Real Estate Practice Group out of the Firm's Raleigh office. He regularly represents a wide variety of clients, from local governments to businesses, in land use and real estate development litigations and transactions in state and federal venues throughout North Carolina.

Follow the North Carolina Land Use Litigator on Twitter at @nclanduselaw here.

Thursday, August 11, 2016, 4:16 PM

Sometimes, Finding Justice is Subtle


Justice delayed is Justice denied is a favorite aphorism.  Most times, the aphorism criticizes the deliberative process of our judicial system.  But, in fact, the aphorism is broader - the mere passage of time - regardless of its cause, results in a denial of justice for many reasons.  Parties rely upon prior actions and reorder their future behavior, memories fade, witnesses become unavailable and evidence is lost.

In the recent case of Acts Ret.-Life Cmtys., Inc.  v. Town of Columbus, 2016WL4087669(August 2, 2016), the North Carolina Court of Appeals grappled with a delay arising from a property owner filing a case in 2011 involving an alleged injustice first perpetrated by the Town of Columbus (“Town”) in 2002.  As the Court of Appeals noted, finding justice in these situations involves discerning the distinction between on-going violations and continuing effects of an initial violation and this distinction is “subtle.” p. 3.

Acts Ret-Life Cmtys., Inc. v. Town of Columbus

    1.    Facts
In 2002, the Town reclassified two water meters serving a retirement facility owned by Acts Retirement-Life Communities, Inc. (“Acts”) from commercial to residential.  Thereafter, the Town sent monthly water and sewer bills to Acts calculated at the rates charged to residential customers.    

In 2011, Acts filed a complaint alleging that the 2002 reclassification was arbitrary, capricious, unreasonable and unreasonably discriminatory in violation of statutory law.  Acts asserted that the reclassification violated (1) the Town’s Charter, (2) the equal protection guarantee of the North Carolina Constitution, (3) the North Carolina Constitution as a discriminatory tax, and (4) equal protection and was a taking of property without due process.  Additionally, Acts claimed that the extra money paid to the Town as a residential customer unjustly enriched the Town.  Acts sought declaratory judgment relief and a permanent injunction requiring the Town to treat Acts’ facility as a single commercial user for water and sewer charges. 

After conducting a bench trial, the Superior Court concluded that each monthly billing was an additional wrongful act taken by the Town and the statute of limitations did not bar Acts’ claims.  The Superior Court found that the 2002 reclassification was unreasonably discriminatory, arbitrary, capricious and unreasonable. Specifically, the Superior Court found that the reclassification was in direct violation of the Town’s stated goal of fairness and state statutory law.  Consequently, the Superior Court ruled that the reclassification was void ab initio.  The Superior Court entered a judgment in favor of Acts in the amount $947,813.27, the total amount of overpayments.  The Town appealed.

    2.    The North Carolina Court of Appeals 
The North Carolina Court of Appeals reversed the Superior Court’s decision, holding that the statute of limitations barred Acts’ claims. 

The Court of Appeals reasoned that the parties had not disputed that the applicable statute of limitations was 3 years and Acts had filed its claims more than 3 years from the date the Town reclassified Acts’ meters.  Therefore, unless an exception applied, the statute of limitations barred Acts’ claims. 

Acts contended that the exception of a continuing wrong or violation applied.  Acts asserted that each time the Town transmitted a monthly invoice for water and sewer charges calculated at the rate charged residential customers, the Town had engaged in a separate wrong.  Therefore, the statute of limitations began again each time the Town sent a monthly invoice.  Because Acts filed its claims within 3 years of the last invoice transmitted by the Town, its claims were not barred.

To determine whether each monthly bill for water and sewer services was a continuing wrong or violation, the Court of Appeals considered “the policies of the statute of limitations and the nature of the wrongful conduct and the harm alleged. ” p. 3.    The “actual wrongdoing” alleged by Acts was the Town’s decision to reclassify Acts’ meters from commercial to residential in 2002. p. 4. 

The Court of Appeals, explained that there was not a continuing violation, occasioned by continual unlawful acts, but only continual ill effects from an original violation.  Because continual ill effects from an original violation were insufficient to satisfy the continuing wrong or violation doctrine, Acts’ claims were time barred.


  1. Justice delayed is Justice denied.  The longer a wrong continues the harder it is to discern justice.  In a postmodern world, parties adjust their behavior to economic changes rapidly.  While Acts may not have passed its increased water and sewer charges to its residents, Acts continues to operate its facility for eight and one-half years.  If Acts had prevailed and had passed these increased costs to its residents, is Acts intending to grant a refund to the residents or their estates?   

Similarly, the Town orders its behavior assuming that the charges are lawful.  If Acts had timely challenged the rate schedule, the Town could have established an entirely new schedule.

  2. The core of Acts’ claims is that the Town violated a statute authorizing the Town to fix a schedule of utility rates.  The statute authorizes the Town to vary rates according to classes of service.  The Court of Appeals’ opinion concludes that the single unlawful act occurred when the Town reclassified Acts’ meters in 2002.  The facts in the opinion are unclear whether the Town adopted a different schedule from time to time from 2002 to 2011, even if the schedule did not change the 2002 classification.

   3.  Acts is a good example of the subtlety and complexity of law.  While justice involves a “middle ground” frequently, some legal questions require stark “yes/no” answers.  In the area of statutes of limitations, the answer is stark because the purpose of statutes of limitations is certainty.

   4.  In a world of negative interest rates and slow growth, all entities and enterprises are seeking ways to minimize expenses.  It seems likely that companies seeking refunds will increase. 

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