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Kansas City Southern Railway Co. v. Borrowman

May 22, 2009


The opinion of the court was delivered by: Jeanne E. Scott, U.S. District Judge


This cause is before the Court on Defendants' Motion to Dismiss (d/e 6) and Plaintiffs' Request for Oral Argument on Defendants' Motion to Dismiss (d/e 15). For the reasons stated below, both Motions are denied.


According to the Amended Complaint (d/e 18), Plaintiffs Kansas City Southern Railway Company (Kansas City Southern) and Norfolk Southern Railway Corporation (Norfolk Southern) operate interstate railroads that cross through Illinois. Defendants Brady Lee Borrowman, Russell E. Koeller, and Dan Lundberg serve as commissioners of Defendant Sny Island Levee Drainage District (Sny Island), which is a subdivision of the State of Illinois organized to construct and operate a system to provide surface water control to certain areas of land. Defendant Michael H. Reed serves as Sny Island's superintendent and treasurer.

Illinois granted Sny Island the power to tax land owners within its boundaries to fund operations, and a recent tax increase forms the basis of this suit. For all tax years preceding 2009, Sny Island taxed Kansas City Southern and Norfolk Southern on a per acre basis in line with all other landowners for their proportionate shares of the operation costs for the surface water control system. For tax year 2009, however, Sny Island changed its assessment method.

For 2009, Sny Island assessed taxes against all landowners other than currently operating railroads and utilities on the customary per acre basis, with a $10.00 per acre increase over the prior year's assessment. Sny Island also hired a firm of consulting engineers, however, to estimate the amount of benefit Kansas City Southern, Norfolk Southern, and any other currently operating railroad or utility company received from Sny Island's surface water control system. Based on this assessment, Sny Island imposed a substantially higher tax increase on Kansas City Southern and Norfolk Southern. Had these companies received tax assessments under the same method as non-railroads and non-utilities, Kansas City Southern would have been obligated to pay $3,897.14 in taxes. Instead, Sny Island imposed a tax of $85,544.26. Similarly, Norfolk Southern would have been obligated to pay $2,578.26 in taxes. Instead, Sny Island imposed a tax of $93,917.34. These figures represent thousand-fold increases over the prior year: Kansas City Southern's tax rate increased 4,700 percent, and Norfolk Southern's tax rate increased 8,000 percent.

Before Sny Island could impose the new tax rates, under the statute it had to petition the Circuit Court for Pike County, Illinois, for approval. On August 22, 2008, Sny Island filed the required petition and asked the court to confirm an assessment roll for 2009. The court scheduled hearings on the proposed new assessments for September 25, 2008. and October 9, 2008. Sny Island published hearing notices in three local newspapers and mailed hearing notices to every property owner listed in the assessment roll, including Kansas City Southern and Norfolk Southern.

In late August or early September of 2008, Sny Island mailed a letter to landowners in the district explaining that it was increasing the tax assessment for 2009. The letter included a notice setting forth the total amount of the new assessment to be imposed on all landowners collectively; it did not state how the total assessment would be allocated to any landowner specifically. Instead, it stated that the increased assessments "'would generally result in a maximum $10.00 per acre increase in annual drainage assessments to benefited [sic] agricultural land in the District.'" Plaintiff's Memorandum in Opposition to Defendants' Motion to Dismiss Under Rule 12(B)(1) (d/e 13), Exhibit 1, Affidavit of Michael Kearney (Kearney Affidavit), ¶ 10 (quoting letter). The letter did not state that Sny Island had used different methods to calculate the amount of taxes owed by different landowners.

After receiving their letters and hearings notices, several property owners filed objections to the assessment increase. The objectors and Sny Island then engaged in discovery. Neither Kansas City Southern nor Norfolk Southern filed objections. Kansas City Southern avers that it received the letter, but because it believed its assessment would increase only $10.00 per acre (from $8.36 to $18.36), it took no action. Norfolk Southern avers that it did not receive the letter discussing the planned increase and was not aware of it.

The Pike County court held the scheduled hearings September 25, 2008, and October 9, 2008. At these hearings, Sny Island presented evidence and testimony in support of its proposed assessment increase and explained the manner in which the increase was apportioned. The objectors had the opportunity to cross-examine witnesses and present their own testimony and evidence. Kansas City Southern and Norfolk Southern did not attend or participate in these hearings. Nothing in the pleadings before the Pike County court or the transcripts of proceedings indicates that the court either heard argument regarding or considered the question of whether the method used to allocate the tax increase violated the Railroad Revitalization and Regulatory Reform Act of 1976, 49 U.S.C. § 11501, which prohibits discriminatory taxing of interstate railroads.

On October 9, 2008, the Pike County court entered its judgment. It found that Sny Island complied with all notice requirements and that the proceedings took place according to law. The court found it necessary and advisable to increase the annual assessment, starting with tax year 2009. The court then ordered the clerk of court to certify the assessment roll and deliver it to all covered county clerks and those acting as county collectors. No one appealed the court's ruling. Kansas City Southern and Norfolk Southern aver that they did not become aware of the court's judgment until January of 2009, when they received their 2009 tax bills from Sny Island.

On April 9, 2009, Kansas City Southern and Norfolk Southern filed suit in this Court. They allege that Defendants violated the Railroad Revitalization and Regulatory Reform Act, which prohibits state and local governments from discriminating against railroads in assessing property taxes. 49 U.S.C. § 11501. They ask the Court to enjoin the collection of the approved assessment. Defendants have filed a Motion to Dismiss.


Defendants have moved to dismiss this case under Federal Rule of Civil Procedure 12(b)(1), for lack of subject matter jurisdiction. Generally, the Court must accept as true all well-pleaded factual allegations and draw reasonable inferences in favor of the party that filed the complaint. Ezekiel v. Michel, 66 F.3d 894, 897 (7th Cir. 1995). In deciding a 12(b)(1) issue, however, the Court also may consider evidence outside the complaint. Capitol Leasing Co. v. F.D.I.C., 999 F.2d 188, 191 (7th Cir. 1993). Here, the Court has relied on affidavits and evidence submitted by both parties in discussing the factual background of this case. Additionally, where defendants question the jurisdictional allegations, plaintiffs must prove that the jurisdictional ...

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