HBA Loses Challenge to Wildwood's Ordinance on Construction and Maintenance Deposits

by James R. Keller

This article appeared in St. Louis Construction News & Review, p. 18, July-August, 2003.

After years of litigation, the Supreme Court of Missouri upheld on June 17 the validity of legislation by the City of Wildwood, Missouri that requires developers to post a construction deposit of 110 percent and a separate maintenance deposit of 10 of estimated costs for construction, completion and installation of improvements. The case is Home Builders Association of Greater St. Louis, Inc. (HBA) v. City of Wildwood, Missouri, Case No. SC84647.

The HBA had sued the City of Wildwood seeking a court declaration that the City's Ordinance (No. 675) was unenforceable because it conflicted with a Missouri statute (Sec. 89.410 R.S.Mo.). Since each municipality can enact its own legislation on the size of construction and maintenance deposits, this decision will allow other cities to fashion similar or perhaps even more stringent requirements on developers.

The dispute started in 1999 when the City of Wildwood first enacted the ordinance requiring developers to post the deposits based on estimates from Wildwood's Department of Public Works. Developers will receive all but 5 percent of the deposit upon completion of all improvements within a particular category of improvements. The City will release the last 5 percent upon completion of all improvements in the subdivision.

The ordinance also provides that the City will hold the developer's 10 percent maintenance deposit until the shorter of 18 months after acceptance for public dedication of the specific improvement or 18 months after occupancy permits are issued on 95 percent of all lots in the subdivision.

The HBA argued that this ordinance directly conflicted with Missouri statute Sec. 89.410. This section provides that a city council may accept a bond "in an amount and with surety and other reasonable conditions, providing for and securing the actual construction and installation of the improvements...". HBA's contention was that the City's requirements exceeded the amounts for actual construction, since the deposits were more than 100 percent of the estimates.

Before considering this position, the trial court initially decided in late 1999 or early 2000 (the record is unclear) that HBA did not have standing to bring the lawsuit because, as an association, it lacked a personal stake in the application of Wildwood's ordinance. The HBA is a not-for-profit Missouri corporation with more than 1,100 members comprised of builders, developers and others associated with the "shelter industry" in the St. Louis metropolitan area.

Therefore, the trial court dismissed HBA's lawsuit. HBA appealed and the Eastern District Court of Appeals in 2000 reversed the trial court, finding that HBA could sue because its members have a "legally protectable interest" in the City's ordinance. The case went back to the trial judge to consider the merits of HBA's lawsuit.

The trial court granted summary judgment before trial in favor of the HBA. The judge found that the City's ordinance conflicted with the Missouri statute, a statute that the judge interpreted to limit deposits to the actual costs of construction, thereby making illegal the extra 10 percent. The City then appealed and once again the appellate court-this time the Supreme Court-reversed the trial judge and ruled in favor of the City.

Sec. 89.410 R.S.Mo. provides a means for the City to protect itself should the developer default or abandon the project, forcing the City to complete the subdivision improvements. Unfortunately, this does happen from time to time. The Supreme Court noted that the cost to the City to complete often is higher than the developer's estimated costs due to inflation, the passage of several years and prevailing wage requirements, among other reasons.

Thus, the Court found that the "statute enables the city to use a reasonable estimate so that the actual construction is provided for and secured in the event the actual construction costs are higher than the original estimate." Given this interpretation of the Missouri statute, the Supreme Court of Missouri decided that the City of Wildwood's ordinance did not conflict with the statute but rather was consistent.

As for the required 10 percent maintenance bond, the Supreme Court of Missouri held that subsection 5 of Sec. 89.410 expressly exempted subdivision-related maintenance bonds from the statute's requirements. The City of Wildwood could and can enact such a law since there is no Missouri statute to prohibit such municipal legislation. Obviously, other cities can as well.

James R. Keller is a partner at Herzog, Crebs & McGhee, LLP, St. Louis, MO, where he concentrates on business litigation, construction law and ADR. He also is a neutral/arbitrator with the American Arbitration Association and a mediator.