BOARD OF CALVERY COUNTY COMMISSIONERS v. East Prince Frederick Corp.

ROSALYN B. BELL, Judge. The Board of County Commissioners of Calvert County (County) appeal a ruling of the Circuit Court for Calvert County. On November 11, 1984, the trial court held that ⁸⁰ the application of a two-year time limit or minimum user fees to the East Prince Frederick Corporation (appellee) would violate appellee’s right under the contract clause contained in the federal constitution. 1 The Board presents two issues for our consideration: —Did the County’s action in imposing a “use-it-or-lose-it” policy after entering into a contract with appellee for a water and sewer reservation violate appellee’s rights under the contract clause of the federal constitution? —Did appellee meet its burden of proof? In July of 1978, appellee’s predecessors in title reserved 4,400 gallons of sewage and water usage capacity from the County, paying $11,000.

At that time, there was no restriction as to when appellee had to begin to use that capacity, and the. parties understood that the 4,400-gallon allocation would be reserved until appellee, which was seeking to develop a small shopping strip, was ready to use it. At the time of the transaction, appellee had received all necessary approvals and a building permit had been issued. Construction was begun on the site, thus preserving the zoning status and the building permit, but a sewer moratorium imposed by the State health department prevented use of the sewer capacity, and construction was suspended. . The ⁸¹ moratorium was lifted in 1982, but appellee did not resume construction.

In 1983, the County imposed a “use it or lose it” policy. The new policy required that the allocated capacity must be used within two years. The allocation is cancelled if the holder does not use the allocation within two years; alternatively, the holder may avoid cancellation by paying minimum user fees. In accordance with that provision, appellee was billed approximately $2,000 in 1985.

Appellee denied that it was subject to these fees because of its prior contract with the County, and requested a hearing before the County Commissioners, who determined that the new policy did apply to appellee’s property. Appellee filed a complaint seeking, inter alia, declaratory judgment and an injunction at the circuit court level. The circuit court concluded that the County’s “use it or lose it” policy violated appellee’s rights under the contract clause of the federal constitution. 2 Specifically, the circuit court found that the policy substantially impaired the 1978 contract between appellee and the County. The circuit court also found that, although the limited sewer capacity in Calvert County was a good reason for limiting new allocations, there was no evidence indicating that it was either necessary or reasonable to limit appellee’s rights under the original agreement.

We disagree and explain after setting forth the relevant law. —The Contract Clause— The contract clause limits the power of the States to modify their own contracts, as well as to regulate those between private parties. For nearly a century after the ⁸² Constitution was adopted, it was one of the few express limitations on State power. Over the last century, however, the Fourteenth Amendment has assumed a larger place in constitutional adjudication. United States Trust Co. v. New Jersey, 431 U.S. 1, 15 , 97 S.Ct. 1505, 1514 , 52 L.Ed.2d 92 (1977).

The prohibition against impairment of the obligation of contract is not an absolute one, however, and “is not to be read with literal exactness like a mathematical formula.” Home Building & Loan Assn. v. Blaisdell, 290 U.S. 398, 428 , 54 S.Ct. 231, 236 , 78 L.Ed. 413 (1934). In El Paso v. Simmons, 379 U.S. 497, 508-09 , 85 S.Ct. 577, 583-84 , 13 L.Ed.2d 446 , reh’g denied, 380 U.S. 926 , 85 S.Ct. 879 , 13 L.Ed.2d 813 (1965), the Court reviewed its prior holdings to illustrate the balance between the contract clause and state interest in enacting laws to safeguard its people’s interests: “ ‘It does not matter that legislation appropriate to that end “has the result of modifying or abrogating contracts already in effect.” Not only are existing laws read into contracts in order to fix obligations as between the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal order. ... This principle of harmonizing the constitutional prohibition with the necessary residuum of state power has had progressive recognition in the decisions of this Court.’ Moreover, the “economic interests of the State may justify the exercise of its continuing and dominant protective power notwithstanding interference with contracts.” The State has the “sovereign right ... to protect the ... general welfare of the people____ Once we are in this domain of the reserve power of a State we must respect the ‘wide discretion on the part of the legislature in determining what is and what is not necessary.’ ” As Mr. Justice Johnson said in Ogden v. Saunders, ‘[i]t is the motive, the policy, the object, that must characterize the legislative act, to affect it with the imputation of violating the obligation of contracts.’ ” (Citations omitted.) (Ellipses in original.) ⁸³ As Justice Holmes stated in Hudson County Water v. McCarter, 209 U.S. 349, 357 , 28 S.Ct. 529, 531 , 52 L.Ed. 828 (1908), “One whose rights, such as they are, are subject to state restriction, cannot remove them from the power of the State by making a contract about them.” In United States Trust Co. v. New Jersey, 431 U.S. 1, 21 , 97 S.Ct. 1505, 1517 , 52 L.Ed.2d 92 (1977), the leading and most recent case on state impairment of contract, the Supreme Court held that New Jersey had impaired the rights of certain holders of Port authority bonds by repealing a 1962 statutory covenant which had limited the ability of the Port Authority to subsidize mass transit from its own revenues and reserves. The Court stated, at 25-26, 97 S.Ct. at 1519 -1520 “The Contract Clause is not an absolute bar to subsequent modification of a State’s own financial obligations.

As with laws impairing the obligations of private contracts, an impairment may be constitutional if it is reasonable and necessary to serve an important public purpose. In applying this standard, however, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State’s self-interest is at stake. A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.” (Footnotes omitted.) (Emphasis added.) It is thus apparent that a heightened standard of review is applied when the State is a party to a contract, especially where the only purpose of the legislative act is to raise money.

In United States Trust, 431 U.S. at 31 , 97 S.Ct. at 1522 , the Court stated that the extent of the contractual impairment is relevant in determining whether the State action was reasonable and necessary to serve an important public interest. In this context, the Court remarked that “a State ⁸⁴ is not free to impose a drastic impairment when an evident and more moderate course would serve its purposes equally well.” The Court conceded in United States Trust that the State’s interests in mass transportation and energy conservation were important and legitimate interests. The Court held, however, that the State’s action in repealing the 1962 covenant, which had until repeal served to protect Port Authority bondholders’ interests, was unreasonable and unnecessary to achieve the State’s plan to encourage private automobile users to shift to public transportation. Simply put, the Court found that the State could find other ways to raise funds to promote mass transit.

United States Trust, 431 U.S. at 28-32 , 97 S.Ct. at 1520-1523 . In United States Trust, 431 U.S. at 23 , 97 S.Ct. at 1518 , the Court noted that, when a State impairs the obligation of its own contract, the reserved-powers doctrine comes into play: “The initial inquiry concerns the ability of the State to enter into an agreement that limits its power to act in the future. As early as Fletcher v. Peck, [ 10 U.S. 87 (6 Cranch) 3 L.Ed. 162 (1800)] the Court considered the argument that ‘one legislature cannot abridge the powers of a succeeding legislature.’ 6 Cranch, [10 U.S.] at 135. It is often stated that ‘the legislature cannot bargain away the police power of a State.’ This doctrine requires a determination of the State’s power to create irrevocable contract rights in the first place, rather than an inquiry into the purpose or reasonableness of the subsequent impairment.

In short, the Contract Clause does not require a State to adhere to a contract that surrenders an essential attribute of its sovereignty.” (Citation omitted.) (Footnote omitted.) (Emphasis added.) We look, then, at the contract in the instant case. Both parties agree that appellee paid consideration for a water and sewer reservation. At the time the agreement was entered into, there was no restriction on when appellee could begin to use the 4,400-gallon allocation.