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Quality Built Homes Revisited: The Court of Appeals Weighs In On Critical Issues

1.3.2017

If you happen to work in local government, are a developer who has worked with a local government, or simply have an interest in the world of municipal water and sewer services, you are no doubt aware of the North Carolina Supreme Court’s August 2016 decision in Quality Built Homes, Inc. v. Town of Carthage, 789 S.E.2d 454 (2016). In that decision, the Supreme Court considered the scope of a municipality’s authority to charge “impact fees” for the future use or development of its public enterprise systems under N.C. Gen. Stat. § 160A-314(a).

After closely examining the language of that section, other provisions of the Public Enterprise Statutes, and grants of authority to other entities operating public enterprise systems, the court concluded that a municipality was only entitled to charge fees for the “contemporaneous use” of its facilities. As a result, the impact fees charged by the Town of Carthage, which were specifically linked to future development of the town’s water and sewer systems, exceeded the town’s authority to charge fees under the Public Enterprise Statutes.

Based on this conclusion, the Supreme Court reversed the decision of the Court of Appeals, which concluded that the municipal Public Enterprise Statutes did authorize these fees, and remanded for further consideration of two critical issues: a determination of the proper limitations period to apply to a claim for a return of unauthorized fees, and whether such a claim would be barred by the doctrine of estoppel-by-benefit.

On the limitations issue, the plaintiffs in Quality Built Homes argued their claim for a refund of improper impact fees was directed at an ultra vires act, and was therefore grounded in the North Carolina Constitution. They further contended that no North Carolina statute sets forth a statute of limitations period to govern these claims. As a result, the 10-year limitations period set forth in N.C. Gen. Stat. § 1-56 controlled their claims.

The town, on the other hand, argued the claim for return of impact fees improperly charged is an action “[u]pon liability created by statute, either state or federal,” and noted that no other limitations period is provided in that statute. The town contended that, because the plaintiffs alleged the town exceeded its authority under N.C. Gen. Stat. § 160A-314, it was that section that gave rise to any liability for assessing these fees. Thus, the town argued the three-year limitations period set out in N.C. Gen. Stat. § 1-52(2) should apply.

The town also argued that, regardless of the applicable limitations period, the plaintiffs’ claims were barred by the estoppel-by-benefit doctrine. Plaintiffs, the town argued, paid these fees in exchange for receiving building permits and proceeding with their development. Having accepted these benefits, the plaintiffs should be estopped from contesting those fees. The plaintiffs, however, argued that but for the illegal impact fees, they would otherwise be entitled to receive development approval. Because they were otherwise entitled to receive development approval, the estoppel-by-benefit doctrine should not apply.

On December 30, 2016, the Court of Appeals addressed these critical issues. In an unpublished, unanimous decision, the Court of Appeals held that these claims were subject to a 10-year statute of limitations, and that the doctrine of estoppel-by-benefit was not applicable. In doing so, the Court of Appeals has more clearly defined the potential scope of liability for these fees—potentially many millions of dollars statewide—and has provided some guidance to local governments and developers alike. Although its decision is unpublished, the Court of Appeals’ opinion has clearly paved the way for developers to pursue claims for these fees in potentially massive amounts.

Given the significant exposure of many local governments, as well as the significant incentive for developers to pursue these fees, however, it is not likely that the Court of Appeals’ opinion will be the last word on this issue. Should the town petition the Supreme Court for discretionary review, we could be many more months from a definitive ruling on these critical issues. During that time, Poyner Spruill will continue to follow this case and will provide updates as needed.

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