City ordered to refund $80 million within 60 days

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Posted October 11, 2021 | By Jennifer Hunt Murty

Editors note: This story was updated on October 13th add additional information.

On October 11^th, after eight years of litigation, Circuit Judge Robert William Hodges ordered the City of Ocala to refund approximately $80 million in a class-action suit that challenged fees added to Ocala Electric Utility bills for fire services.

Hodges’s ruling, in response to an appellate Court’s mandate by the 5th District Court of Appeals, found that the City of Ocala’s fire service fee was an unconstitutional tax. The case was remanded back to Hodges’s courtroom for the establishment of a common fund to refund the illegally collected taxes.

In 2006, the collection of fire fees began when the city added a monthly fee to every city resident’s Ocala Electric Utility bill. It was collected until the start of this year.

Every city resident who had electric service paid approximately $15 per month to pay for fire services in the City of Ocala. The fees were not challenged until 2014.

Even after the mandate from the appellate court, attorneys for the city maintained that they were entitled to another trial to present evidence in support of their set-off defense, which would reduce how much they had to refund citizens. The set-off defense argues the city should get a credit to set-off the damages the court awarded if the fund was used for services of value to citizens. Hodges rejected that argument in his ruling.

“I do agree that the 5^th DCA’s mandate was the final judgment in this case,” he noted in his ruling. “I think you start from the idea that [the] government can’t raise money from people other than from a constitutional tax. [I]f that tax is unconstitutional, then the government doesn’t have a right to that money and has to return it. That is the law in Florida, and, of course, I am bound to follow the law in Florida.”

“I am also bound to follow the mandate of the 5^th DCA. I simply have no choice in the matter,” he added. “The 5^th DCA found that the tax was unconstitutional, and essentially, found that the city did not have the right to take that tax in the manner that they did, so they had no right to the money. Thus, it must be returned.”

“I think that is consistent with their [appellate court] opinion. When they remanded it to us, that was the important language to me. It wasn’t remanded for a new trial. It wasn’t remanded to determine any defenses that were not mentioned in the opinion it wasn’t prepared for any sort of evidentiary hearings in any sense. It was only remanded to fund the refund. As I said back then [January 2021 order], the refund is the total amount paid minus whatever amounts are waived by people.”

Some citizens who paid the fees opted out of the class-action suit. Hodges said those citizens waived their refund. According to the plaintiff’s attorney, Derek Schroth, the credit against the city’s liability, as a result of citizens who opted out of refunds, totals $2,141,941.56.

“Essentially, that becomes a voluntary payment of the tax or donation to the city,” Hodges said.

Hodges responded to the city’s argument that the citizens were getting a windfall through these refunds because they received the benefit of the services.

“Collectively, you can’t separate citizens from their city,” he said, “so collectively, the same citizens who are getting the refund are paying for the refund. They are, in fact, paying for those fire services they’ve received. It just needs to be done through a lawful, constitutional tax.”

Hodges’s ruling requires the city pay refunds into a common fund within 60 days.

The city would not comment on whether they were going to appeal the final order.

Attorney’s fees

The next issues to be addressed by Judge Hodges are awarding attorney’s fees and costs for the firm, Bowen, Radson, & Schroth, for their representation of the named plaintiffs and class members.

Since the legal fees and costs of the plaintiffs’ class-action suit are paid from the same pot of money that the city pays into for refunds, there likely won’t be a significant fight about the amount of those fees because they aren’t a liability of the city.

Instead, the fees are owed by the named plaintiffs and class-action members to the attorneys at Bowen, Radson, & Schroth, for representing the class in litigation over the past eight years. Schroth said the firm was still reviewing “all the expenses, expert fees, attorney’s fees and costs since September 2013,” and would not provide an estimate of what those would be.

Schroth said that they “plan to file the motion in the next 30 to 60 days. The motion will include a multiplier request and class representative service award fees pursuant to Florida law.”

The Florida Bar explained in the 2019 publication, Business Litigation in Florida, how attorney’s fees and the multiplier are calculated.

First, the court determines a reasonable number of hours, and then, the court determines a reasonable hourly rate.

Because the plantiffs’ attorneys undertook the case based on a contingency fee agreement, which only entitles them to compensation if they are successful in their efforts for the plaintiffs, the court can also consider a “contingency risk factor” that would provide for a multiplier of the attorney’s fees.

In 1990, the Florida Supreme Court, in the case of Standard Guaranty Insurance Co. v. Quanstrom, described appropriate risk multipliers in range of 1 to 2.5 times the basic fees. The multiplier could be approved after the judge factored, among other things, the likelihood of the litigation’s success, the time and labor required, and the novelty and difficulty of the case.

When it comes to the cost of attorney’s fees incurred by the city during this suit, the city has had help offsetting those expenses.

Attorney Rob Batsel, Jr., for the firm Gilligan, Gooding, Batsel, Anderson, & Phelan, P.A., explained that, although the city was self-insured, it maintained excess coverage with Chubb North American Financial Lines Claims when an applicable insured event triggered more than $75,000 in attorney’s fees and costs.

According to Batsel, Jr., the firm invoiced the city directly for work on the case when it was initiated in December 2013.

Then, in 2017, the city surpassed the $75,000 threshold, and the firm started submitting its invoices to Chubb for reimbursement.

According to Batsel, Jr., as of April 2021, the city’s attorney’s fees were around half a million with approximately 70% of those fees having been reimbursed, or waiting to be reimbursed, by the carrier, Chubb.

In response to the appellate court mandate that initiated the recent order by Hodges, the city filed a Petition for Writ of Certiorari (a court process to seek judicial review of a decision of a lower court or government agency) with the Florida Supreme Court. The Supreme Court denied hearing it.

For that petition, they hired another firm, Brannock, Humphries, & Berman, and as of June, that firm’s fees and costs were already up to $91,421.93. However, the city was also expecting reimbursement from Chubb for those fees and costs.

Earlier this year, management of the case was shifted from the city’s usual attorneys at the Gilligan, Gooding, Batsel, Anderson, & Phelan, P.A., firm to special counsel in the firm of GrayRobinson. According to Batsel, Jr., Chubb would “pay 100% of the associated attorney’s fees and costs moving forward,” and “rather than billing the city subject to reimbursement, they [GrayRobinson] will be sending their invoices directly to the excess carrier for payment.”

An update on the amount of attorney’s fees paid by Chubb on the city’s behalf to the new firm, GrayRobinson, has been requested.

Events that led to litigation

In 2006, the city began exploring how to fund an estimated $5 to $8 million budget shortfall to fund fire services.

At the time, city council was made up of Daniel Owen, Mary Sue Rich, Kent Guinn, Kyle Kay, Charles Ruse, Jr., and Randall Ewers was mayor.

The city manager was Paul K. Nugent, and the city attorney was Patrick G. Gilligan.

The council commissioned a fire service fee study from Burton & Associates to explore funding fire services through fire service fees and fire service impact fees, rather than the customary way of ad valorem taxes or special assessments.

Included in the study, dated January 8, 2007, was a legal opinion from Terry E. Lewis of the firm of Lewis, Longman, & Walker.

Lewis tested the validity of the city’s fire service fees against eight factors established by the Florida Supreme Court to determine whether a specific charge was a “user fee” or a “special assessment.”

While many of the factors were met, his report cautioned that two of the eight factors were problematic: namely “whether the charge is for a traditional utility, and whether the charge is statutorily authorized as a fee.”

As to whether fire fees could be charged as traditional utilities, Lewis explained, “The term, ‘traditional utility,’ is usually defined by examples [such] as the provision of electricity, natural gas, water, trash disposal, and sewer services, and [an] argument may be made that fire protection falls within the category of municipal services.”

As to whether statutes gave the city authority to impose a fee, he found “no specific grant of statutory authority to the city to impose a fee for fire protection services. The city must rely on its general constitutional grant of home rule powers and Section 166.201, Florida Statutes (which is a broad, general grant of authority, which doesn’t mention fire service fees), to adopt the fee.”

Lewis expressed concern that the charge could be considered an assessment, or a tax, based on whether it was considered a voluntary charge or not. Lewis plainly cautioned, “The fire service fee proposed by the city appears to be mandatory.”

In Lewis’s opinion, the firm interpreted the city’s proposed fire fee “a valid user fee”; however, “we have found no case law specifically validating such a scheme by a municipality or county. The fire service fee can be challenged with a claim [that] it is actually a special assessment or tax, which must be adopted by the city through the procedures outlined in Chapter 197, Florida Statutes, or by referendum approval. While we believe the analysis above and case law support a favorable result for the city, if a legal challenge arises, we reiterate that no Florida court has directly addressed this issue of whether a fee may be charged or provide municipal fire services, and such a case would be one of first impression.”

The city’s attorney, Patrick G. Gilligan, issued an opinion on the fire protection service user fee on July 14, 2006, to then-city manager, Paul Nugent, echoing agreement with Lewis for the most part, but taking one exception to his “analysis of the mandatory nature of the fee.”

Gilligan felt the concern was mitigated by how caselaw defined the word “mandatory.”

He explained, “Property owners can avoid the fee either by not developing the property or renting out the property-making the fee arguably voluntary.”

There were a few changes to the ordinance through the years, but in December 2013, Gilligan received a letter from Schroth’s firm, notifying the city of their representation of Discount Sleep of Ocala, LLC, d/b/a Mattress Warehouse, and all other City of Ocala water utility customers. The letter requested city records and demanded the city “rescind the ordinance, and any amendments thereto, and refund all fire user fees paid by the putative class within 45 days.”

The letter from Schroth offered to work out the dispute in pre-suit mediation “in an effort to avoid the time and expense of litigation.”

On February 2, 2014, Schroth filed a lawsuit against the City of Ocala for a declaratory judgment, challenging the basis for the city’s home rule authority to collect the mandatory fire fees and asking for a common fund to be established for paying refunds and attorney’s fees.

At the time the litigation was filed, John McLeod, Jay Musleh, James Hilty, Brent Malever, and Mary Sue Rich made up the council, and Kent Guinn had transitioned to his role as mayor.

The city manager was Matthew Brower, and Gilligan was still the city’s attorney.

In June 2020, after years of litigation, the initial concern was that the fire fee did not qualify as a “user fee,” and thus, an invalid tax was confirmed by the appellate court.

Also, the court found that the fee was mandatory since “the only options to avoid payment were to forgo the city’s water, sewer, and electric services-all unrelated to fire service-or to move outside of the city. Neither presents a real choice.”

The named class-action plaintiffs

There were two named plaintiffs that began the lawsuit that eventually became a class-action inclusive of every person or entity that paid fire fees on Ocala Electric Utility bills: Discount Sleep of Ocala, LLC, and Dale Birch.

Although the named class-action plaintiffs were not available for interview, Ocala Gazette reviewed their trial testimony to glean what led them to file suit.

Both testified that they were solicited by lawyers to bring this action against the city.

Dale Birch testified that he was a lifelong Ocala resident and a small business owner that paid the City of Ocala for utilities at his home and business.

Michel Woeber, who owned a mattress retail chain store in Ocala, Discount Sleep, testified that although he did not object to the fees when the ordinance first passed, he was troubled by the increase to his City of Ocala utility bills.

“All I know is that for me to do business in Ocala, it’s a two thousand dollar a month turnkey with taxes and electric bill and everything else they charge,” he said.

Woeber said Discount Sleep was not provided notice that its utility bill would increase when the fire fee ordinance was passed.

On cross-examination of both plaintiffs, the city attorneys led them down a line of questioning that implied that plaintiffs had a choice in whether they paid the fee since they arguably could have moved from their homes and businesses outside city limits.

Birch rebuffed the implication that he had an option to avoid the fee by moving and said, “My family goes all the way back to before the Civil War in this city; I’m not going anywhere. My grandfather laid the bricks-some of the original bricks done on the Brick City Road. I’m not going anywhere. I don’t care what fees you’re going to enact; this is where I live.”

What happens now?

The city would not comment on whether they intended to appeal Hodges’s order.

However, if the city does not appeal and the matter of attorney’s fees have been ruled on, a decision will have to be made about who will handle the administration of distributing the money to the members.

Derek Schroth, attorney for the class-action suit, explained that “payment of refunds could be handled through the city or a third-party administrator as the court directs.”

When it comes time for those disbursements, Schroth said, “We will request class members receive refund checks without the burden of filing a claim for a refund.”

Schroth also anticipates that members should expect to recoup “90% or more” of what they paid for fire fees through their electric bills.

Except in the case of the named plaintiffs who represented the case, Schroth says they “are entitled to and should receive an additional award over and above their refunds. They worked very hard on the case and remain undeterred despite many obstacles over the years.”