U.S. District Court Judge Edward J. Lodge re-affirmed on Monday a ruling made by a federal bankruptcy court last year that the city of Hailey illegally charged Old Cutters LLC fees associated with the annexation of Old Cutters subdivision.
As a result, Old Cutters developer John Campbell will not be required to pay $2.5 million in fees the city said it was owed under a 2006 annexation agreement. The developer will also not have to build 20 affordable-housing units in the partly built 108-unit subdivision in east Hailey.
“I am very happy about it,” Campbell said.
He said he expects to be reimbursed about $100,000 in legal fees he has incurred during the last two years.
“Naturally, we are disappointed by the decision.”
“This expense could have been avoided if the city did not appeal,” he said.
Campbell’s attorney, Erin Clark, said the ruling would likely not impact cities’ abilities to proceed with land annexations.
“Cities have much else to benefit from annexations than annexation fees,” including the tax revenues from future residents, Clark said.
The ruling upholds a decision made by federal bankruptcy court Judge Jim D. Pappas on Dec. 31, 2012, that Hailey’s annexation fees of $3.8 million were “unquestionably in excess of” that required to compensate the city for actual costs resulting from the annexation. He also ruled that the city lacked the authority to enforce an affordable-housing requirement on the developer.
Hailey Attorney Keith Roark was hired in February 2013 to appeal the bankruptcy court ruling, on the basis that the court should not have overturned a legislative decision made by the city, and that the annexation fee was in accordance with the impacts associated with the development of Old Cutters subdivision. “Naturally, we are disappointed by the decision,” said Mayor Fritz Haemmerle.
Haemmerle would not say whether the city would make a further appeal of the decision.
Lodge cited in his decision a process of negotiations from 2003-2006 between the city of Hailey and Campbell, during which time the annexation fees rose from $350,000, based on a study by Tischler and Associates study, to $3,787,500, based on subsequent studies.
Old Cutters has paid $1.3 million in annexation fees to the city already, none of which the developer sought to be refunded.
Lodge cited in his decision “inconsistent positions” taken in testimony by then-City Clerk and Treasurer Heather Dawson regarding the purpose of Management Partners’ studies that increased the annexation fees to nearly $3.8 million. Lodge stated that the final fee included money for a “wish list” of capital improvements, many of which have never been made.
Lodge stated that the developer was encouraged by former Mayor Rick Davis to apply to the city for annexation, thereby avoiding a one-year delay in the county application process. Former County Commissioner Sarah Michael said the delay would take place due to a “backlog” of county applications in 2003, Lodge stated.
“It is thus unclear whether Old Cutters actually voluntarily consented, or was in fact financially compelled to consent, to the annexation agreement,” Lodge wrote. “Under these circumstances, the court respectfully disagrees with Hailey’s suggestion that the annexation fee was equitable simply because the parties agreed to it.”
Lodge pointed out that Hailey’s affordable-housing ordinance was activated during the negotiation process with Campbell, and later deemed unconstitutional.
“Because Hailey did not have the power to collect the annexation fee and impose the community housing provisions it required of Old Cutters, the Bankruptcy Court did not improperly interfere with a legislative decision when it invalidated such portions of the annexation agreement,” the decision states. “ … the Bankruptcy Court did not substitute its judgment for that of Hailey’s city council, and instead appropriately interpreted and applied the law.”
Court records state that Old Cutters LLC bought the land for Old Cutters subdivision in 2003 and 2005 for a total purchase price of $6.2 million, using $4.4 million in bank loans. To finance Old Cutters’ development of the property, Old Cutters obtained $13,133,000 by 2008 in credit from Mountain West Bank.
Old Cutters filed a petition for Chapter 11 bankruptcy on Aug. 1, 2011, citing the delays and costs it incurred in the annexation process, and its corresponding inability to take advantage of a favorable real estate market proceeding the recession, as the primary reasons for the bankruptcy filing.