The saga of plan check and building inspection fees in Orange County continues, as an appellate court has ruled that the county must reduce fees by $4.5 million and pay nearly $1.4 million in attorney fees and court costs.

From 1992 to 1999, the county accumulated $18.5 million in excess plan check and building inspection fee revenue. To retire the excess, the county reduced fees and provided refunds to builders who had not received final inspections. It also dedicated some of the excess revenue to fee-related improvements and services. However, a trial court ruled — and the Fourth District Court of Appeal agreed — that $4.5 million of expenditures were not "reasonable and necessary." The court ordered the county to reduce fees by $4.5 million until the excess is burned off.

The fee controversy dates back nearly a decade, when builders complained that Orange County plan check and building inspection fees did not correlate to the level of service. A report prepared for the county by consultant DMG Maximus in 1999 identified the $18.5 million surplus in a plan check and building inspection account known as Fund 113. Over the next three years, the county eliminated the entire surplus and in late 2002 laid off dozens of planners and building inspectors because of what had become a $500,000-a-month deficit. The mess cost both the county executive officer and the community development director their jobs (see CP&DR In Brief, March 2003, February 2003, January 2003).

Developer Barratt American, which has challenged similar fees in numerous jurisdictions, filed a lawsuit in September 1999. That litigation went forward in three different phases. The Orange County Superior Court appointed a special master to identify revenue and costs, and the court later appointed an expert under a provision of the evidence code to do more investigation. Ultimately, in January 2005, the trial court found that the county had properly spent $14 million of the Fund 113 surplus by buying a new computer system, increasing staff levels, reducing fees and providing refunds. However, the court determined that the county could not show how $4.5 million in various overhead and service-related charges were reasonably necessary. The court ordered a future fee reduction in that amount and awarded Barratt American attorney Walter McNeill (who has filed many similar lawsuits on the developer's behalf) fees enhanced by 250% because of the unique issues and McNeill's capability.

Both sides appealed. Barratt American argued that the Mitigation Fee Act (Government Code § 66000 et seq.) prohibited the county from spending any of the surplus fee revenue and the county should instead lower fees by the amount of the excess. The county argued that the trial court misconstrued what expenses were reasonably and necessarily related to providing services, and that the award of fees was erroneous. Neither side got anywhere with the Fourth District.

To Barratt American's contention, the court said: "Using surplus fee revenue to cover the reasonable and necessary costs of the services rather than merely lowering the fees until the surplus is dissipated has the effect of ‘reducing' the future fees. This construction comports with common sense by allowing the county flexibility in managing Fund 113 as long as those costs are reasonable and necessary."

To the county's argument, the court said: "There is ample evidence to support the trial court's conclusion that the county did not carry its burden to show $4.5 million of surplus expenditures were applied to reasonable and necessary costs of the fee-related services. Both the special master and [appointed expert Professor William] Holder reported that the county failed to explain the startling increase in overhead — ‘a 206% increase in three years.'"

The Fourth District also found the fee award appropriate under the private attorney general statute (Code of Civil Procedure § 1021.5) because, "Ensuring that the county fulfill its statutory duty to use the fee revenue surplus vindicates an important public right."

The county has asked the state Supreme Court to review the case. Less than two years ago, the state high court in Barratt American, Inc. v. City of Rancho Cucamonga, (2005) 37 Cal. 685, rejected most – but not all – arguments the developer advanced in an unrelated but somewhat similar lawsuit (see CP&DR Legal Digest, January 2006).

The Case:
County of Orange v. Barratt American, Inc., No. G035627, 07 C.D.O.S. 4781, 2007 DJDAR 6090. Filed April 30, 2007.
The Lawyers:
For the county: Jeffrey Dunn, Best, Best & Krieger, (949) 263-2600.
For Barratt American: Walter McNeill, (530) 222-8992.