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

In the

United States Court of Appeals

For the Seventh Circuit

____________________

No. 15-2760

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.

____________________

Appeal from the United States District Court for the

Central District of Illinois.

No. 13-3144 — Richard Mills, Judge.

____________________

ARGUED APRIL 5, 2016 — DECIDED AUGUST 3, 2016

____________________

Before WOOD, Chief Judge, and BAUER and WILLIAMS, Cir-

cuit 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

2 No. 15-2760

Norfolk Southern Railway Company (“Norfolk”) both oper-

ate main line railways over the Mississippi River Flood Plain

in the District. The District is permitted under state law to as-

sess properties within its territory in order to maintain the

levees. The Railroads have now sued the District for the sec-

ond time, alleging, as they did in the earlier case, that the Dis-

trict used an assessment calculation formula that discrimi-

nated 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 dis-

trict: “original assessments,” “annual maintenance assess-

ments,” and “additional assessments.” 70 ILCS 605/5-1. Orig-

inal 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 construc-

tion of its original levees; there are approved periodic in-

creases. The annual assessment has been based on a per-acre

formula since its establishment in 1961; it is adjusted for infla-

tion. 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

No. 15-2760 3

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 as-

sessment discriminatory because the District maintained per-

acre taxes for most types of property, reserving the benefit ba-

sis 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 esti-

mated benefits for the railroads, pipelines, and utilities at $280

per acre, to be unreliable. They assumed property values

without any supporting evidence, implemented an unex-

plained 8% “capitalization rate,” made different assumptions

about flooding when calculating railroad benefits than pipe-

line 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 an-

nual assessment, which we found to be a tax within the mean-

ing 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 acknowl-

edged that reasonable distinctions between different types of

property, such as improved and unimproved land, could sup-

port a taxation rate that reflects the difference, we also cau-

tioned that a discriminatory assessment is one that “imposes

a proportionately heavier tax on railroading than other activ-

4 No. 15-2760

ities.” Id. at 510–11 (quoting Burlington N. R. Co. v. City of Su-

perior, Wis., 932 F.2d 1185, 1187 (7th Cir. 1991)). The District

had not taxed other commercial and industrial properties pro-

portionally 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 commission-

ers] 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-rail-

road 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 his-

torically has approved, occasional “additional assessments”

in accordance with the Drainage Code, for things such as ex-

tra repair work, construction, enlargement or repair of pump-

ing 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 as-

sessment roll. But this time, the engineers spent a full year cal-

culating the benefit amount for every property in the District.

Sny filed an assessment roll based on the new benefit calcula-

tions that distributed the assessment according to the benefit

No. 15-2760 5

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 com-

peting expert evidence from the Railroads and the District, ul-

timately finding that the Railroads had not shown that the

District’s methodology was discriminatory. Kansas City S. Ry.

Co. v. Sny Island Levee Drainage Dist., 117 F. Supp. 3d 1036

(C.D. Ill. 2015).

The Klingner engineers used five categories of property

for their benefit calculations: agricultural, residential, wet-

lands/recreational, not-for-profit, and commercial and indus-

trial. The latter included electric utilities, pipelines, railroads,

and other commercial structures. They adopted a software

program used by the Army Corps of Engineers called the Hy-

drologic Engineering Center Flood Damage Reduction Anal-

ysis (HEC-FDA), which predicts expected annual flood dam-

age to different types of properties. The program uses the

“Monte Carlo” simulation, which analyzes water flow

throughout a 50-year simulation period, based on historical

information, to determine the likelihood that different in-

stances and degrees of flooding will occur. Both the Army

Corps and the Federal Emergency Management Agency

(FEMA) use the Monte Carlo simulation for estimating flood

6 No. 15-2760

damage. Klingner used replacement cost estimates that took

into account depreciation for structures that would be dam-

aged in flooding. They used water-surface profiles from a

2004 Army Corps study to estimate flood levels.

Klingner engineers used depth-damage curves, which

chart damage in relation to water depth, to predict property

damage. For some categories of property, Klingner was able

to use published depth-damage curves, including for residen-

tial and some types of commercial properties. Its engineers

developed their own depth-damage curves for railroads,

pipelines, and utilities, even though there are published

curves for pipelines, and those curves indicate that floods do

not cause pipeline damage. The Klingner engineers knew

from personal experience during the 1993 levee breach that

flooding does cause pipeline damage. They did not calculate

any damage to local and municipal pipelines, however, find-

ing that those pipelines were far enough away from the river

that no damage would occur in a breach scenario. Their cal-

culations for agricultural properties focused on crops and did

not include structures, based on an assumption (backed by

testimony) that structures could be moved before a flood.

These three data points were put into the HEC-FDA system

to come up with benefit numbers.

Klingner then reduced its original estimates of damage to

the Railroads by 75%, explaining that it was being “conserva-

tive” with the estimate because of the inherent uncertainties

of flood prediction. It maintains that 25% to 30% is the “mini-

mum” amount of damage that would occur to the Railroads

from flooding. Sny then assessed each property at 25.3% of its

theoretical benefit level by category.

No. 15-2760 7

The Railroads’ experts chose a different methodology for

assessing benefits. They used FEMA’s loss estimation soft-

ware, known as “Hazus-MH,” to estimate flood damage for

all types of property except the railroads. Hazus-MH esti-

mates loss based on flood depth, property location, property

value, property type, and accepted depth-damage curves. The

Railroads’ experts used county assessor fair-market values for

residential and commercial properties, and Hazus-MH de-

faults for pipelines and utilities. For flood depth, the Rail-

roads’ experts employed hydraulic modeling software from

the Netherlands Delft Institute of Hydraulics. Because Hazus-

MH has no established depth-damage curves for railroads,

the Railroads’ expert David Brookings walked the length of

the railroad and estimated damages using the hydraulic-

model estimated flood depths, based on his own experience

with water damage to railroad lines.

The Railroads’ experts calculated the estimated hypothet-

ical flood damage to District properties from flooding if there

were no levees, minus the loss to the properties from flooding

with the levees present in the event of levee breach, times the

probability of such a breach. (One might say P (NL-WL) = B,

where P is the probability of a breach, NL is damage with no

levee, WL is damage with a levee, and B is the benefit of hav-

ing a levee.) This gave them what they considered a net ben-

efit. Ultimately, they came up with negative numbers for the

Railroads’ properties, suggesting that the presence of the lev-

ees would actually lead to more damage to the Railroads dur-

ing a flood than they would experience if there were no lev-

ees. This is because, in Brookings’s experience, floodwater

that rises at the same level on both sides of an embankment

(as he said it would from a flood absent any levees) causes

8 No. 15-2760

less damage than floodwater rising on one side of an embank-

ment (as it would if there were a levee breach). The Railroads’

experts’ calculation of hypothetical benefits to agricultural

and residential properties contained an assumption that

farmers would continue to plant crops each year, even if

flooding occurred every year, and that residential property

owners would also continue to remain at their homes and re-

build every year.

The district court found problems with the methodology

used by the Railroads’ experts. Given those problems, and its

positive findings about the credibility and reliability of the

District’s expert witnesses, it ruled that the additional assess-

ment was not discriminatory.

II

The Railroads raise four arguments on appeal: (1) that the

district court did not properly apply the burden-shifting

framework from section 11501(b)(4); (2) that the court erred in

finding the assessment not discriminatory; (3) that the court

erred by admitting testimony from Sny’s engineers; and (4)

that the court erred by limiting the comparison class to other

commercial and industrial properties.

A

We review de novo whether the district court erred in its

allocation of the burdens of production and persuasion. Ka-

wasaki Kisen Kaisha, Ltd. v. Plano Molding Co., 782 F.3d 353, 361

(7th Cir. 2015), cert. denied, 136 S. Ct. 480 (2015). Subsection

(b)(4) of the 4-R Act, the catch-all provision, prohibits a state

from “[i]mpos[ing] another tax that discriminates against a

rail carrier providing transportation subject to the jurisdiction

No. 15-2760 9

of the Board under this part.” 49 U.S.C. § 11501(b)(4). The Su-

preme Court has identified a two-step burden-shifting in-

quiry for determining whether conduct is discriminatory un-

der subsection (b)(4). See BNSF Ry. Co. v. Tennessee Dep’t of

Revenue, 800 F.3d 262, 271 (6th Cir. 2015) (citing CSX Transp.,

Inc. v. Alabama Dep’t of Revenue, 562 U.S. 277, 288 n.8 (2011))

(“CSX I”). The first step involves the plaintiff’s “establishing

a prima facie case of discriminatory tax treatment.” Id. The bur-

den then shifts to the defendant to offer a sufficient justifica-

tion. Id.

The Railroads contend that the district court failed to fol-

low the two-step analysis. They are wrong. Because the dis-

trict court found that the Railroads did not demonstrate a

prima facie case of discriminatory tax treatment, there was no

need to move to step two. Even if the Railroads presented

enough evidence to suggest that discrimination was plausi-

ble, the district court was entitled to weigh the evidence how-

ever it deemed appropriate. This was a suit for an injunction,

not a matter that was eligible for a jury trial. Evidence tending

to show that discrimination is plausible does not automati-

cally constitute a prima facie case of discrimination.

Even if the district court had explicitly considered the ev-

idence of discrimination first, as the Railroads think it should

have, and then considered the evidence from the District, the

outcome would have been the same. The court found that the

assessments were not discriminatory, and it would have

found so at the second step of the two-step process even if the

Railroads are correct that it failed separately to analyze the

first step. The court’s findings indicate that had it considered

the methodology discriminatory for any reason, it would

have found any such discrimination justified by the testimony

10 No. 15-2760

and evidence presented that described the Railroads’ benefits.

We find no error of law.

B

The Railroads also attack the court’s conclusion that the

assessment was not discriminatory. We review the interpre-

tation of the law de novo, but the question whether discrimi-

nation exists is a factual one on which our review is for clear

error. See, e.g., Breneisen v. Motorola, Inc., 656 F.3d 701, 704 (7th

Cir. 2011) (noting that “[a] district court’s interpretation of a

federal statute such as the FMLA is a question of law which

we review de novo”); United States v. P.H. Glatfelter Co., 768

F.3d 662, 676 (7th Cir. 2014) (factual findings reviewed for

clear error). See generally Pullman-Standard v. Swint, 456 U.S.

273, 287–88 (1982) (question whether discrimination existed is

a pure question of fact subject to clear-error review).

The Railroads would like us to characterize the central

question in the case—whether the District’s methodology for

calculating the benefit to the Railroads and other properties

was valid—as a legal one, but it is not. We outlined the rele-

vant legal principles in Koeller, 653 F.3d 496, where we held

that a per-benefit assessment system is acceptable under the

4-R Act as long as it is proportional and the system for calcu-

lating benefits is grounded in evidence. The only debate in the

present case is how that rule applies to the new facts.

Where a lower court makes “detailed findings” based on

a choice between the testimony of conflicting experts, “[i]f

they find support in the evidence we are bound thereby” even

if the record would support contrary findings. Wahl v. Carrier

Mfg. Co., 358 F.2d 1, 3 (7th Cir. 1966). That rule applies here.

The district court had to choose between Sny’s experts and the

No. 15-2760 11

Railroads’, and it found Sny’s experts to be more credible and

accurate. There is ample support in the record for this finding.

The Railroads would like us to find discrimination inher-

ent in the change from the per-acre to the benefit method and

the fact that the Railroads make up 0.3 percent of the land in

the district and paid 6 percent of the benefit assessment. At

oral argument, counsel for the Railroads stated, “our claim is

that we were discriminated against on a per-acre basis.” But

there is no reason to think that benefits bear a direct relation

to acreage, regardless of the use to which the land is put. And

we already have held that Sny is not obligated to conduct a

per-acre assessment. If the Railroads’ only claim of discrimi-

nation is that the District assessed properties within its pur-

view on a basis other than acreage, their claim fails. A benefits

assessment is discriminatory only if it does not assess all enti-

ties in the class in a proportionate manner according to benefit

obtained. The Railroads claim that Sny used the same meth-

odology as the one we enjoined from 2009. But Sny presented

evidence to the contrary, which the district court credited.

The Railroads next say that the judge erred in accepting

Sny’s experts, because of five asserted flaws: (1) that the

Klingner engineers did not include damages to agricultural

structures; (2) that the engineers used original cost of con-

struction as the basis of calculating the value of such struc-

tures; (3) that the engineers used recent construction costs in-

stead of original construction costs for the Railroads; (4) that

the engineers made “assumptions of catastrophic damages

that were unsupported by hydraulic modeling, their personal

experience, or information or documentation from the 1993

flood”; and (5) that the engineers calculated projected flood

damage to the railroad right-of-way “as a percentage of the

12 No. 15-2760

entire length of each rail line in the district instead of specify-

ing locations where damage might be expected.” Addition-

ally, they presented evidence that they believe indicated dis-

criminatory intent, including the similarity between the num-

bers arrived at in this assessment and the 2009 one. These sim-

ilarities, they say, suggest that the numbers were manipulated

to reach a “pre-conceived result.” Finally, they complain that

Sny treated local and municipal water and sewer facilities dif-

ferently from interstate pipelines.

The Railroads charge that Klingner improperly alternated

between using original cost-to-construct values and adding

30 percent to those values as of the date of a remodel where

applicable, and that it used “different years of cost-to-con-

struct data for different categories of property.” They com-

plain that the engineers did not sufficiently show how they

arrived at their railroad damage estimates, and did not break

down unit costs by number of laborers, hours of labor, type

of equipment, or milepost locations where work would be

performed. And they contend that the 75 percent “discount”

and Sny’s acknowledgement about the uncertainties inherent

in predicting hypothetical flood damage reveal that Sny was

working backwards to desired numbers rather than accu-

rately calculating benefits.

Sny responds that (1) Klingner did not include value of

agricultural structures because those structures would be re-

moved prior to a flood; (2) it used the original cost of construc-

tion because the structures were mostly old and in disrepair,

and this number was a reasonable estimate of replacement

cost; (3) it used more recent numbers for the Railroads be-

cause they undergo constant improvements pursuant to strict

No. 15-2760 13

maintenance requirements and federal regulation; (4) the cal-

culated damage was based on reliable software that predicts

water events, combined with analysis from the 1993 flood (alt-

hough it appears that Sny included the estimates from the

Norfolk damages but did not weight the fact that the KC line

suffered no damages in 1993); and (5) their depth-damage

curve for estimating Railroad damages was reasonable.

Sny defends the 30 percent for remodels as necessary to

get an accurate estimate of the value of updated structures.

Sny notes that it checked the replacement costs against the

Railroads’ own cost estimates. And it claims that the 75 per-

cent reduction was used to arrive at a “minimum” number.

Sny also points out that the district court had many valid rea-

sons for discounting the Railroads’ experts, who maintained

that the Railroads incurred a negative benefit from the levees.

The district court heard and evaluated all of these points.

It concluded that although “there might be other ways of as-

sessing properties that are as good or better,” the approach of

the District’s engineers was “reasonable” and they were “gen-

erally credible in discussing [the] process.” Kansas City S. Ry.

Co., 117 F. Supp. 3d at 1063. The court was “unable to con-

clude there was any discriminatory impact upon the Rail-

roads ... [t]he District used an appropriate method to deter-

mine that the Railroads’ assessments reflected a proportion-

ate and just share of the District’s levee protection costs.” Id.

We find no clear error in the district court’s assessment of this

battle of the experts. Its accompanying conclusion that the

Railroads had not demonstrated discrimination was therefore

also not error.

14 No. 15-2760

C

Another arrow in the Railroads’ quiver is an attack on the

court’s decision to admit the testimony of the District’s ex-

perts in the first place. They contend that it failed to use the

correct legal standard in doing so, and thus that the whole

case must be re-done. The Railroads claim legal error in the

district court’s failure to make an explicit statement on each

Daubert criterion (although more properly they should have

paid more attention to Federal Rule of Evidence 702, which

superseded Daubert many years ago): that the proffered ex-

pert testimony (1) be relevant and reliable, (2) be offered by a

qualified witness, (3) be based in a scientifically reliable meth-

odology, and (4) assist the trier of fact in understanding the

facts in issue. Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579,

589 (1993).

But the district court was not required to make these ex-

plicit findings before allowing the testimony, and so his fail-

ure to do so does not require us to review de novo his decision

on admissibility. Where a trial judge conducts a bench trial,

the judge need not conduct a Daubert (or Rule 702) analysis

before presentation of the evidence, even though he must de-

termine admissibility at some point. Metavante Corp. v. Emi-

grant Sav. Bank, 619 F.3d 748, 760 (7th Cir. 2010). The Railroads

moved to exclude the District’s expert testimony, and the

court entered an order stating that it would defer considera-

tion of admissibility. In the end, it never issued a separate rul-

ing on the motion, but its opinion makes clear that it consid-

ered the admissibility of the expert testimony and ruled that

it could come in. The district court described all of the wit-

nesses’ qualifications in detail, and explained that their meth-

odology was consistent with FEMA and the Army Corps of

No. 15-2760 15

Engineers. The district court did not commit legal error, nor

did it abuse its discretion, in admitting the testimony of Sny’s

experts.

D

Last, the Railroads contend that the comparison class

against which their assessment should be measured is all

other properties in the District, instead of the narrower class

of commercial and industrial properties used by the district

court. They argue that Alabama Dep't of Revenue v. CSX

Transp., Inc., 135 S. Ct. 1136 (2015) (“CSX II”), is inconsistent

with our 2012 decision in Koeller, which held that the appro-

priate comparison class for the Railroads was other RPU and

commercial and industrial properties. In CSX II, the Court

found that competitors with the plaintiff railroad were the ap-

propriate comparison class for a (b)(4) claim because the com-

parison class should be “based on the theory of discrimination

alleged in the claim.” Id. at 1138. It also stated that “all general

and commercial taxpayers is an appropriate comparison

class,” but “not the only one,” and that “all the world, or at

least all the world within the taxing jurisdiction, is [a rail-

road’s] comparison-class oyster” under (b)(4). Id. at 1141. The

Court clarified that the “similarly situated” requirement is not

as narrow in the 4-R Act as for tax claims under the Equal

Protection Clause. Id. at 1142. And the Court noted that rail-

roads cannot easily “hand-pick” their comparison class based

on CSX II, because “it is not easy to establish that the selected

class is ‘similarly situated’ for purposes of discrimination in

taxation.” Id. at 1143.

We read CSX II as emphasizing the importance of the

“similarly situated” requirement for subsection (b)(4) claims;

so understood, it is consistent with our “functional approach”

16 No. 15-2760

in Koeller. Although Koeller’s holding is no longer sound to the

extent that it rejects all universal classes, the appropriate class

for the Railroads’ claim here is one that includes only other

“similarly situated” entities: the railroads, pipeline, and utili-

ties, plus commercial and industrial properties, excluding ag-

ricultural properties. CSX II does not allow the Railroads to

define their class as “all taxpayers in the district” simply by

alleging that they were discriminated against as compared to

all taxpayers in the district.

The Railroads argue that because Sny takes the position

that it has assessed all types of property on the same basis, all

types of property are therefore similarly situated. But that

renders the “similarly situated” language meaningless: by

that logic, the class would always be all taxpayers, not simi-

larly situated taxpayers.

The Railroads conceded at oral argument that they cannot

prove their discrimination claim other than by referring to a

universal class. Even that would not help them on this record.

The district court found, as a matter of fact, that the calcula-

tion of benefits to all types of properties was appropriate and

acceptable. We find no clear error in that assessment, and

thus no violation of the 4-R Act.

III

Because the Railroads have not identified any legal error,

abuse of discretion, or clearly erroneous factual finding on the

part of the district court, that court’s judgment is AFFIRMED.