Bainbridge flinches, settles lawsuit over building permit fees

The City Council agreed Wednesday to pay $495,000 to settle an eight-year-old class-action lawsuit over the cost of building permit fees.

The settlement is one of the largest the city has had to pay out.

"We rarely lose cases and when we do settle they are usually minor," said City Manager Mark Dombroski. "This is a pretty significant settlement, I haven't seen something of this magnitude in my time here."

Dombroski said the city currently has sufficient funds in the bank to cover the settlement, adding that the city's insurance company, Washington Cities Insurance Authority (WICA), will not cover the claim.

Dombroski said the city is on track to end the year with roughly $1.8 million in tax-supported funds and reserves. But that number depends on several factors, including a stabilization of the economy and the sale of more than $800,000 in surplus city land.

Approximately one-third ($165,000) of the settlement will pay for the plaintiffs' legal fees, with the rest being given to the hundreds of permit-holders who were involved in the class-action suit. The exact date of the city's payment depends on the outcome of two court hearings, Dombroski said, but it is expected to be made on approximately Aug. 1.

The lawsuit was filed in 2001 by the Home Builders Association of Kitsap County, and three local development companies owned by Andy Mueller, Richard Allen and Philip Werdal.

The plaintiffs contended that building service fees that were increased (by 10 percent) in 1999 were used, in part, to support the city's Affordable Housing Trust fund. And since those fees were not used entirely to cover the cost of processing building permits and services, they constituted an illegal tax.

The plaintiffs agreed in the settlement that "they will not challenge, in court or otherwise, the validity or enforceability" of the original resolution that increased the fees or a more recent ordinance that updated and increased the permit fee schedule. The city ended building fee allocations to the affordable housing fund in 2007.

"We're glad it's finally being resolved," said Art Castle, executive vice president of the Kitsap Homebuilders Association. "They added a surcharge for affordable housing and no matter how noble or well intentioned it is, it was an illegal tax."

The city initially won the case in 2005, after plaintiffs failed to provide proof of their allegations. However, an appeal filed later that year with the Kitsap County Superior Court, found that the lower court failed to place the burden of proof on the city.

Since that decision the lawsuit had been tied up in the courts, with the plaintiffs reportedly seeking damages that exceeded a million dollars.

"If this had gone to trial and the city had lost it probably would have been worth two to three or more millions," Castle said. "So the settlement is not as much as it potentially could have been had they lost."

Last month, the city and plaintiffs were ordered by the Kitsap County Supreme Court to participate in a settlement conference. A preliminary settlement with the plaintiffs was announced last week.

Some council members said they are worried about how to cover the potential settlement costs in light of the city's financial situation.

"Given our present cash-flow problems, I am very concerned about how we're going to pay for this, and that is the honest truth," said council member Bill Knobloch.

In the past, WICA has covered some settlement costs, but Dombroski said it won't cover any payments relating to the HBA settlement.

Prior to the council voting unanimously for the settlement, Lew Leigh, director of the WICA, said: "No one is going to cover a lawsuit that only involves fees. That is not what insurance covers."

Even without the settlement, the HBA lawsuit has cost the city a great deal of money. In the past 12 months alone, the city spent more than $110,000 on legal fees relating to the case.

"The question is, do you pay $495,000 and cut your losses, or see if you can win in court" Dombroski said before the council approved the settlement. "Even if you have the best case in the world you still have to pay your lawyers."

The settlement also comes at a time when the city is looking to increase building fees.

Earlier this year the council directed the city to raise building service fees to bring them more in line to cover staff overhead relating to processing those services. The city has long contended that it subsidizes building services from the tax-supported general fund.

While the settlement would protect the city from further litigation over building fees leveraged between 2001 and 2007, an increase now in the building fees could spark a lawsuit down the line.

"Most jurisdictions have been raising their permit fees lately," Castle said. "We have great concerns about that."

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