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Kansas City Southern Railway Co. v. Sny Island Levee Drainage District

United States Court of Appeals, Seventh Circuit

August 3, 2016

Kansas City Southern Railway Company, et al., Plaintiffs-Appellants,
v.
Sny Island Levee Drainage District, a political subdivision of the State of Illinois, Defendant-Appellee.

          Argued April 5, 2016

         Appeal from the United States District Court for the Central District of Illinois. No. 13-3144 - Richard Mills, Judge.

          Before Wood, Chief Judge, and Bauer and Williams, Circuit Judges.

          WOOD, Chief Judge.

         The Sny Island Levee Drainage District ("the District" or "Sny") was organized in 1880 in the Circuit Court of Pike County, Illinois, to protect the District from flooding and surface water runoff from the Mississippi River. The Kansas City Southern Railway Company ("KC") and the Norfolk Southern Railway Company ("Norfolk") both operate main line railways over the Mississippi River Flood Plain in the District. The District is permitted under state law to assess properties within its territory in order to maintain the levees. The Railroads have now sued the District for the second time, alleging, as they did in the earlier case, that the District used an assessment calculation formula that discriminated against them in violation of the Railroad Revitalization and Regulatory Reform Act (the "4-R Act"), 49 U.S.C. § 11501. After a 12-day bench trial, the district court found for Sny. Its finding was supported by the evidence, and so we affirm.

         I

         The Illinois Drainage Code allows drainage districts to levy three different types of taxes on entities within the district: "original assessments, " "annual maintenance assessments, " and "additional assessments." 70 ILCS 605/5-1. Original assessments are used for construction of new levees. The District has had in place an annual maintenance assessment, authorized by the Pike County Circuit Court, since construction of its original levees; there are approved periodic increases. The annual assessment has been based on a per-acre formula since its establishment in 1961; it is adjusted for inflation. Additional assessments are permitted for maintenance projects that exceed the annual maintenance assessment budget.

         A

         In 2009, facing a budget shortage, the District adopted a new methodology-not based on acreage-for calculating the annual assessment to be levied on interstate properties owned by railroads, pipelines, and utilities. The new methodology was developed by Sny attorney David Human and Klingner & Associates engineer James Powell. It purported to calculate assessments based on the benefits the District conferred on each property. The Railroads sued over the 2009 change, and the case made its way to this court. We found the annual assessment discriminatory because the District maintained per-acre taxes for most types of property, reserving the benefit basis only for the railroads, pipelines, and utilities. Kansas City S. Ry. v. Koeller, 653 F.3d 496 (7th Cir. 2011). The latter group accounted for only 8 out of the 700 properties in the District.

         We found Human's and Klingner's numbers, which estimated benefits for the railroads, pipelines, and utilities at $280 per acre, to be unreliable. They assumed property values without any supporting evidence, implemented an unexplained 8% "capitalization rate, " made different assumptions about flooding when calculating railroad benefits than pipeline and utility benefits, and ultimately "refined" the numbers when they came out too high. Id. at 502.

         As a result, we enjoined the District from collecting the annual assessment, which we found to be a tax within the meaning of subsection (b)(4) of the 4-R Act, pursuant to the new formula. 49 U.S.C. § 11501(b)(4). The relevant comparison class, we found, was a "functional" one that included other commercial and industrial properties but not agricultural or residential ones. Koeller, 653 F.3d at 509. While we acknowledged that reasonable distinctions between different types of property, such as improved and unimproved land, could support a taxation rate that reflects the difference, we also cautioned that a discriminatory assessment is one that "imposes a proportionately heavier tax on railroading than other activities." Id. at 510-11 (quoting Burlington N. R. Co. v. City of Superior, Wis., 932 F.2d 1185, 1187 (7th Cir. 1991)). The District had not taxed other commercial and industrial properties proportionally to the Railroads. To the contrary, it was charging eight of the other entities in the comparison class nothing and treating six as though they were agricultural properties. We stated, "[i]f ... the Drainage Code requires [the commissioners] to assess all property on a 'benefit basis' then [the] entire scheme should reflect that." Id. at 512.

         Since our July 2011 decision, the District has chosen not to collect annual assessments from the Railroads at all, rather than revert back to collection under the per-acre formula. It has continued to collect its annual assessment from non-railroad and non-interstate properties in the District on a per-acre basis.

         B

         In 2011, with the 2009 case pending, the District began the process for a one-time additional assessment. The Pike County Circuit Court has the authority to approve, and historically has approved, occasional "additional assessments" in accordance with the Drainage Code, for things such as extra repair work, construction, enlargement or repair of pumping plants, and the payment of legal obligations incurred by the District. 70 ILCS 605/5-1. The circuit court approved an additional assessment of $5, 853, 162 in December 2011, and asked Sny to file an assessment roll showing how it would be distributed. Sny again relied on Klingner to develop the assessment roll. But this time, the engineers spent a full year calculating the benefit amount for every property in the District. Sny filed an assessment roll based on the new benefit calculations that distributed the assessment according to the benefit that each property obtained from the existence of the levee and drainage works. After the Railroads and the Illinois Rural Electric Cooperative filed objections, the circuit court denied the Cooperative's objection and approved the assessment roll in July 2013 as to all properties except the Railroads, reserving the question of the Railroads for the federal district court to determine. The roll identified the tax on KC as $91, 084.59 if paid in one installment or $103, 612.52 if paid in five annual installments, and on Norfolk as $102, 976.18 in one installment or $117, 139.71 in five.

         The federal district court took 12 days to evaluate the competing expert evidence from the Railroads and the District, ultimately finding that the Railroads had not shown that the District's methodology was discriminatory. Kansas City S. Ry. ...


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