# Lisa Kragnes v. City of Des Moines, Iowa

> Supreme Court of Iowa · March 2, 2012 · 810 N.W.2d 492

URL: https://www.frixlaw.com/law-library/cases/4249612

## Case

- **Full name:** Lisa KRAGNES, Et Al., Appellees, v. CITY OF DES MOINES, Iowa, Appellant
- **Court:** Supreme Court of Iowa
- **Decided:** March 2, 2012
- **Citations:** 810 N.W.2d 492; 2012 Iowa Sup. LEXIS 18; 2012 WL 676990
- **Precedential status:** Published
- **Opinion:** Opinion
- **Judges:** Hecht, Cady, Waterman, Mansfield
- **Cited by:** 21 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4249612

## Opinion text

IN THE SUPREME COURT OF IOWA

No. 09–1473

Filed March 2, 2012

LISA KRAGNES, et al.,

Appellees,

vs.

CITY OF DES MOINES, IOWA,

Appellant.

Appeal from the Iowa District Court for Polk County, Joel D.

Novak, Judge.

City and plaintiff seek interlocutory appeal of district court’s

decision certifying a class and entering judgment in favor of plaintiff

class. AFFIRMED AS MODIFIED AND REMANDED.

Mark McCormick and Margaret C. Callahan of Belin McCormick,

P.C., Des Moines, and Bruce E. Bergman, Des Moines, and Mark
Godwin, Des Moines, for appellant.

Brad P. Schroeder of Hartung & Schroeder, Des Moines, and

Bruce H. Stoltze of Stoltze & Updegraff, P.C., Des Moines, for appellees.
2

HECHT, Justice.

This case was remanded to the district court for determination of

whether a class should be certified and for determination of what, if any,

part of the City’s franchise fees for gas and electricity services are related

to its administrative expenses in exercising its police power. Kragnes v.

City of Des Moines, 714 N.W.2d 632, 643 (Iowa 2006) (Kragnes I). The

district court certified a class, found the franchise fees cannot exceed

$1,575,194 per year for the electric utility and $1,574,046 for the gas

utility, entered judgment in favor of the certified class against the City in

the amount by which such fees exceeded that amount for the period from

July 27, 1999, to May 26, 2009, and retained jurisdiction to determine

the amount of money to be refunded to members of the class, the

manner in which the refunds must be made, the fees to be paid to

counsel for the plaintiff class, and the costs of this action. The City

appeals and Kragnes cross-appeals. We affirm the judgment as modified

and remand for further proceedings.

I. Background Facts and Proceedings.

The background facts of this case are fully described in Kragnes I,

714 N.W.2d at 633–37. In 2004, the City of Des Moines considered

raising property taxes to hire more police and firefighters, maintain the

library’s hours, and rehabilitate certain deteriorating neighborhoods.

The City realized the state was phasing out sales and use taxes on

residential gas and electric services and determined that it would be

possible to increase the franchise fees on these services to raise revenue.

After deciding this source of revenue was preferable to an increase in

property taxes, the City renegotiated the franchise agreements with

MidAmerican Energy (MEC), which provided gas and electric service for

the city, and increased the franchise fee from 1% to 3% for both gas and
3

electric services effective September 2004. Effective June 2005, the

franchise fees were increased to 5% for each utility.

Lisa Kragnes promptly filed a petition in equity on behalf of herself

and all others similarly situated challenging the franchise fees as illegal

taxes. She sought reimbursement for all illegal taxes paid through the

allowable statute of limitations and sought an injunction prohibiting the

City from charging such franchise fees in the future. The district court

granted Kragnes’s motion for summary judgment and the City appealed.

We concluded in Kragnes I that
a city has the authority to assess a franchise fee expressed
as a percentage of the gross receipts derived from the utility’s
sale of its services to the public, so long as the charge is
reasonably related to the reasonable costs of inspecting,
licensing, supervising, or otherwise regulating the activity
that is being franchised.
Id. at 642–43. Because there was a genuine issue of material fact as to

whether all or part of the franchise fees were reasonably related to the

City’s administrative expenses in exercising its police power, we

remanded to the district court for the determination of whether a class

should be certified and for a trial on the merits. Id. at 643.

On remand, the district court certified a class consisting of all City

of Des Moines utilities customers who paid the electricity or gas

franchise fee from July 27, 1999, forward. The City filed three motions

to decertify the class, all of which were denied. After trial, the district

court determined that a portion of the franchise fee collected was

excessive. The court held the City must refund to the class, with

interest, the amount by which the franchise fees exceeded $1,575,194

per year for the electric utility and $1,574,046 for the gas utility. The

court retained jurisdiction to determine the details of how the refund

would be calculated and refunded to class members. The court also
4

concluded injunctive relief was unnecessary because the legislature had

amended Iowa Code section 364.2(4)(f) to allow municipalities to impose

franchise fees in excess of the reasonable cost of inspecting, licensing,

supervising, or otherwise regulating utilities’ activities. See 2009 Iowa

Acts ch. 179, § 228 (codified at Iowa Code section 364.2(4)(f) (Supp.

2009)).

Both the City and Kragnes sought, and we granted, interlocutory

appeal. The City contends the district court should have granted its

motion to decertify the class for two reasons: (1) a fundamental conflict

exists between members of the class, and (2) class members are not

permitted to “opt out” of the litigation. In the alternative, if this litigation

is allowed to proceed as a class action and a remedy is owed, the City

contends the class should be divided into subclasses. The parties

disagree as to the categories and amounts of expenses that may be

counted as “reasonably related” to the administration of electric and gas

franchises during the relevant time period. The City contends the

district court erred in failing to include as proper components of the

franchise fee the lost value of its trees and certain indirect operating

costs attributable to the utility franchises and in undervaluing as fee

components certain “non-annual unpredictable expenses attendant to

the City’s police power responsibilities.” Kragnes contends in her cross-

appeal that the district court erred in allowing as franchise fee

components construction and engineering costs funded by federal and

state government appropriations or the Wastewater Reclamation

Authority, construction and overhead costs covered by sewer treatment

fees paid by users of the City’s sanitary sewer system, administrative

overhead in the amount of 12.78% added to construction and
5

engineering expenses charged by contractors, and interest on

construction and engineering expenses.

The parties also hotly dispute the parameters of the remedy in this

appeal. The City contends the district court erred in concluding the

plaintiff class is entitled to a refund, while Kragnes contends a full

refund must be ordered and injunctive relief should be granted requiring

the City to amend its ordinances in compliance with the amended

legislation found in sections 364.2(4)(f) and 384.3A, including providing

public notice and identifying the City’s costs of regulating the franchises

and what amounts it seeks in excess of its regulation costs.

II. Scope of Review.

The parties agree as to the scope of review for the various issues

raised. We will review a district court’s rulings regarding the certification

of a class for an abuse of discretion. Vos v. Farm Bureau Life Ins. Co.,

667 N.W.2d 36, 44 (Iowa 2003). “This discretion has been characterized

as ‘broad.’ ” Vignaroli v. Blue Cross of Iowa, 360 N.W.2d 741, 744 (Iowa

1985) (quoting 7A Charles Alan Wright & Arthur R. Miller, Federal

Practice and Procedure § 1785, at 134 (1972)). Because the case was

tried in equity, we will review de novo the district court’s conclusions

regarding which of the City’s claimed expenses were reasonably related to

the administration of the gas and electric franchises. Iowa R. App. P.

6.907; Fencl v. City of Harpers Ferry, 620 N.W.2d 808, 811 (Iowa 2000).

We may give weight to the findings of the district court, but we are not

bound by them. Fencl, 620 N.W.2d at 811. Our review of the district

court’s decision to grant Kragnes and the class a full refund is also

de novo. We will review the district court’s application and interpretation

of statutes for errors at law. Beganovic v. Muxfeldt, 775 N.W.2d 313,

317–18 (Iowa 2009). To the extent the City’s argument that members of
6

the plaintiff class must be allowed to opt out of the class raises a

constitutional claim, our review is de novo. Simmons v. State Pub.

Defender, 791 N.W.2d 69, 73 (Iowa 2010).

III. Discussion.

A. Should the Class Have Been Decertified Because of a

Conflict Among the Members? The City argues the district court

should have granted its motion to decertify the class because a conflict of

interest exists between Kragnes, as the class representative, and other

members of the class who will suffer economically as a result of a

judgment in favor of the class. Specifically, the City contends it imposed

the franchise fees in lieu of raising property taxes. The franchise fees

were paid by anyone in the city who utilized gas and electric service,

whether or not they owned property. Further, if the City is required to

refund the roughly $40 million in excess tax that was collected from

2004 until 2009, it will need to raise the revenue for this payment. The

City contends the most likely result of a refund is an increase of property

taxes. Because the burden of any prospective tax increase imposed to

finance the refund will be borne only by current property owners, the

City contends property owners will be required to pay a larger proportion

of the refund than they paid when the illegal tax was collected from all

utilities customers in the city. In other words, the City contends a

fundamental conflict exists between Kragnes and class members who are

property owners and who would tend to oppose Kragnes’s refund

objective because they benefitted from the collection of the excessive

franchise fees from payors who were not property owners. The district

court concluded the claimed conflict was speculative and denied the

City’s motion.
7

One of the prerequisites for class certification is that the class

representative will “fairly and adequately . . . protect the interests of the

class.” Iowa R. Civ. P. 1.262(2)(c). The City contends Kragnes cannot

protect the interests of the certified class because she has a conflict of

interest in the maintenance of the class action. See id. r. 1.263(2)(b)

(providing assessment of whether the class representative “fairly and

adequately will protect the interests of the class” turns inter alia on a

finding that the representative has no conflict of interest). However,

“[n]ot every disagreement between a representative and other class

members will stand in the way of a class action suit. The conflict must

be fundamental, going to the specific issues and controversies.”

Vignaroli, 360 N.W.2d at 746 (citation omitted).

The City relies on two opinions from the Eleventh Circuit Court of

Appeals to support its argument that the intraclass conflict in this case

is so fundamental as to preclude certification or require decertification.

In Pickett v. Iowa Beef Processors, a group of cattle producers filed an

antitrust suit against Iowa Beef Processors (IBP), a meat packer. 209

F.3d 1276, 1277 (11th Cir. 2000). The plaintiffs alleged IBP had used

forward contracts 1 and marketing agreements 2 to coerce producers

selling cattle on the spot markets to accept lower prices in violation of the

Packers and Stockyards Act. Id. at 1278. The plaintiffs specifically

asserted IBP had used the forward contracts and marketing agreements

1A “forward contract” is an agreement between a packer and a producer
establishing the price to be paid for the cattle weeks or months before the animals are
ready for slaughter. Pickett, 209 F.3d at 1278.
2“Marketing agreements” are “more extended versions of forward contracts.”

Under such agreements, the producer “promises to sell most of its cattle to a packer at
prices determined by a negotiated formula, which can be adjusted after slaughter
according to the quality of the beef.” Id.
8

to create a “captive supply,” depress the market price at strategic times,

and force producers selling on the spot market to accept artificially low

prices for their fattened cattle. Id. The relief sought by the plaintiffs for

the class included damages and an injunction prohibiting IBP from using

such purchasing arrangements in the future. Id. at 1280. The district

court certified a class of all cattle producers who sold cattle directly to

IBP from February 1994 through and including the date of certification—

a class of at least 15,000 members including both producers who sold

cattle on the spot market and those who sold cattle under forward

contracts or marketing agreements. Id. at 1279. On appeal, the

Eleventh Circuit Court of Appeals reversed, holding that the plaintiffs

could not adequately represent a class consisting of both producers who

sold on the spot market and those who sold under forward contracts and

marketing agreements. Id. at 1280–81. The court reasoned that the

class could not include both the spot market producers who had

allegedly been harmed by the forward contracts and marketing

agreements and the producers who had benefitted from such marketing

vehicles and wished to continue doing so. Id. at 1280 (noting the

certified class “includes those who claim harm from the very same acts

from which other members of the class have benefitted”).

In Valley Drug Co. v. Geneva Pharmaceuticals, Inc., a group of

pharmaceuticals wholesalers filed an antitrust action alleging the

defendant Abbott Laboratories made agreements with other defendant

drug manufacturers preserving Abbott’s monopoly position in the market

for the drug Hytrin (terazosin hydrochloride) and keeping less expensive

generic alternatives off the market. 350 F.3d 1181, 1183–84 (11th Cir.

2003). The district court certified a class including all entities who

purchased Hytrin from Abbott at any time during the periods
9

commencing March 31, 1998, through August 13, 1999. Id. at 1186.

On appeal, the Eleventh Circuit Court of Appeals reversed, concluding

the plaintiffs had failed to prove they could adequately represent the

class that included some wholesalers who resold Hytrin on a cost-plus

basis and other wholesalers who utilized other pricing formulas. Id. at

1190. The court reasoned that a potential, significant conflict among the

class members was suggested by the disparate pricing schemes of the

class members. 3 Id. at 1190–91. Because the record on appeal

suggested those wholesalers who sold on a cost-plus basis would, unlike

other wholesalers in the class, lose both margin and volume from generic

competition preferred by other class members, the court reversed the

class certification order and remanded for development of the evidentiary

record as to the potential conflict. 4 Id. at 1192.

The City contends the economic conflict of interest among the class

members in this case is as fundamental as the conflicts perceived by the

courts in Pickett and Valley Drug. Suggesting many of the members of

the class are hostile to the refund because, as property taxpayers, they

will be adversely affected by it, the City asserts the district court abused

its discretion in certifying and refusing to decertify the class.
Kragnes denies the alleged intraclass conflict is fundamental.

First, she notes that the fact that some members of the class do not favor

the lawsuit is not sufficient to defeat certification of the class. Vignaroli,

3The defendants alleged that three national wholesaler class members whose
transactions with Abbot constituted over 50% of the class claims were among those who
sold Hytrin on a cost-plus basis and likely derived more profit from sales of branded
products than from sales of generic drugs. Valley Drug, 350 F.3d 1190–91.
4The need for the development of the evidentiary record was the result of the

district court’s ruling precluding “downstream discovery” on the subject of the
wholesalers’ sales practices bearing upon whether the cost-plus sellers achieved a net
gain as a consequence of the unavailability of the competing generics. Id. at 1192.
10

360 N.W.2d at 747. She argues the “crux” of the case against the City is

the illegality of the franchise fee and there is no conflict among the

members as to that issue. She argues the nature and extent of the

refund of the illegal franchise fees collected by the City are secondary to

the liability issue. Because it is unknown how the City will choose to

fund the judgment against it in this case, Kragnes contends the fear that

some members of the class will suffer a loss as a result of any refund is

based on speculation. She points out that as of the time of trial, the City

had not decided how it was going to cover the cost of any refund and that

it had considered options other than raising property tax, such as

reducing administrative expenses, cutting or deferring capital

improvements, or obtaining funding through long-term debt. As a

property owner in Des Moines, Kragnes contends she is in the perfect

position to represent the interests of other property-owning class

members as she weighs the benefits of a refund against the potential

consequences.

We find no abuse of the district court’s broad discretion in

certifying and refusing to decertify the class. The heart of this case is the

illegality of the franchise fee imposed by the City, and we agree with

Kragnes that there is no fundamental conflict among the class members

as to that issue. See Vignaroli, 360 N.W.2d at 746–47. Each of the class

members paid fees that the City should not have collected and in this

fundamental respect their claims are identical, consistent, and

compatible.

Although the City claims an economic conflict exists among class

members, the district court did not abuse its discretion in reaching a

contrary conclusion. To the extent the City contends this lawsuit will

cause adverse consequences for property owners, we again note Kragnes
11

herself is a property owner sharing that status with other property

owners in the city. 5 The City seeks to neutralize the significance of this

status shared by Kragnes and the other property-owning members of the

class with a retrospective and a prospective analysis of the alleged

economic conflict. In each of these analyses, however, the assertion of a

fundamental conflict is substantially based on speculation.

In its retrospective analysis of the claimed conflict, the City

contends the property owners would have preferred the City generate

revenue through franchise fees paid by both property owners and

nonowners alike rather than impose a property tax increase not directly

shared by nonowners. 6 But this contention is infused with speculation

as to whether and how much the City would have chosen to increase

property taxes if it had not imposed the illegal franchise fees. Although

the record indicates the City considered increasing property taxes to

raise funds for certain expenditures, it is impossible to know how much,

if at all, the City’s elected leaders would have increased property taxes

had they not chosen instead to utilize the illegal franchise fees to raise

revenue. Viewed from the precollection vantage point, the City’s conflict

argument assumes the City would have raised property taxes and would
have raised them in such an amount that at least some property owners

would have paid more in increased property taxes than they ultimately

5The federal cases cited by the City for the proposition that class certification is

improper when some members of the class benefited from the same conduct that
harmed other members do not involve a named representative who arguably benefited
from the conduct and thus shares the interest of the other class members who
benefited.
6The City’s contention that the interests of property owners and nonowners
conflict fundamentally because owners bear the burden of real estate taxes and
therefore have an aversion to tax increases not shared by nonowners is tinged with
speculation to the extent owners pass along property tax increases to nonowners
through rents.
12

paid in franchise fees. We decline to engage in the retrospective

speculation undergirding the City’s assumption that the singular fiscal

alternative to increasing franchise fees was an increase in property taxes.

Other feasible precollection alternatives—including a decision against

raising additional revenue—were available to the City. Thus, from the

precollection vantage point, the contention that the interests of Kragnes

are misaligned or fundamentally in conflict with those of other class

members is speculative at best.

When the alleged conflict between the interests of Kragnes and

other property-owning members of the class is viewed prospectively from

the postcollection or “refund” vantage point, we again find an abundance

of speculation. Here the City’s conflict analysis assumes any refund will

be financed through a property tax increase in such an amount as will

cause at least some property owners to pay more in increased property

taxes than they will receive in refunded franchise fees. Although this

prospect cannot be ruled out, the district court did not abuse its

discretion in failing to assume the refund will be financed solely through

a property tax increase. 7

In the last analysis, the City’s characterization of the conflict
between the interests of Kragnes and other class members is rife with

speculation—beginning with speculation about what City leaders would

have done in the past and ending with predictions about what City

7As we have already noted, the general assembly recently adopted legislation
untethering the amount of franchise fees from the municipality’s cost of inspecting and
maintaining the utility. See Iowa Code § 364.2(4)(f). Under the new regime, the amount
of franchise fees is instead limited prospectively to a maximum of 5% of the customer’s
utility bills. Id. We decline to speculate about whether the City will finance the refund
through this (or any other) revenue stream, through prospective budgetary and fiscal
alternatives, or from a combination of such policy choices. The district court will on
remand take evidence informing its decision on the appropriate structure of the refund
mechanism.
13

leaders will do in the future. And in between is speculation about the

effect of hypothetical decisions on property owners. Did they pay less in

franchise fees than they would have paid in property taxes had the

franchise fees not been increased? Did some nonproperty-owning class

members pay more in increased franchise fees than they would have paid

through rent increases occasioned by property tax increases had the

franchise fees not been increased? How, if at all, will property tax rates

be affected by the refund remedy ultimately fashioned in this case? 8 See

Hispanics United of DuPage Cnty. v. Vill. of Addison, 160 F.R.D. 681, 690

(N.D. Ill. 1995) (claimed conflict of interest between class members whose

property would be destroyed by village’s redevelopment plan and class

members whose property would not be destroyed and might increase in

value was “dependent on myriad factors that cannot be forecast with any

degree of certainty” and did not defeat request for certification of class).

Furthermore, even if we assume without deciding that some

members of the class prefer to leave their right to a refund unremedied,

this does not mandate a determination that the district court abused its

discretion in certifying a class in this case. Probe v. State Teachers’ Ret.

Sys., 780 F.2d 776, 781 (9th Cir. 1986) (no abuse of discretion in

certifying class including retired teachers and teachers presently working

in action challenging use of sex-segregated actuarial tables in calculating

retirement benefits notwithstanding the prospect that if the suit were to

8Just as it is possible the City’s elected leaders who made the decision to collect
the fees in question might have chosen not to provide certain services instead of
collecting the fees had they understood their collection was illegal, we cannot know how
the current and future City leaders will choose to finance any refund that might be
required. We will not speculate whether the refund will be financed through spending
reductions, tax increases, fee enhancements, or some combination of these and other
alternatives, nor do we express an opinion as to how the refund should be structured in
view of the alternatives shown by the evidence on remand to be available under the
circumstances.
14

result in higher benefits for some class members, larger contributions

would be required of presently working teachers); Lockwood Motors, Inc.

v. Gen. Motors Corp., 162 F.R.D. 569, 578 (D. Minn. 1995) (in action

brought by dealer challenging manufacturer’s imposition of an

advertising charge as unfair business practice, impermissible conflict

precluding class certification not shown by evidence that some class

members benefit from or prefer the marketing program); Martino v.

McDonald’s Sys., Inc., 81 F.R.D. 81, 85–86 (N.D. Ill. 1979) (concluding

defendant-franchisor’s assertion that most McDonalds’ franchisees were

content with the franchisor’s systems, saw no merit in plaintiff’s

antitrust claims, or preferred to leave the violation of their rights

unremedied did not preclude certification of a class of franchisees). We

acknowledge that other courts have declined requests for class

certification or affirmed such rulings on appeal in some cases based on

evidence tending to establish a strong opposition of some class members

to the objectives of the suit filed by the named plaintiffs. See, e.g., Gilpin

v. Am. Fed. of State, Cnty., and Mun. Emps., 875 F.2d 1310, 1313 (7th

Cir. 1989) (affirming denial of certification of a class of all nonunion

employees in an action seeking restitution of agency fees on the ground

that one segment of the class wished to weaken or destroy the union and

the other segment of “free-riders” wished merely to shift as much of the

cost of union representation as possible to the union members); Alston v.

Va. High Sch. League, Inc., 184 F.R.D. 574, 579–80 (W.D. Va. 1999)

(declining request for certification of class in action seeking injunctive

relief where majority of members of the purported class opposed

disruption of the status quo that would result from the injunctive relief

sought by plaintiffs). As the applicable standard of review accords broad

discretion to the district court in this matter, however, we find no
15

reversible error in the district court’s determination that no fundamental

conflict of interest between Kragnes and other class members precluded

certification or mandated decertification in this case. 9

As we have described in the past, our class action rules “are

remedial in nature and should be liberally construed to favor the

maintenance of class actions.” Comes v. Microsoft Corp., 696 N.W.2d

318, 320 (Iowa 2005). The goal of the class action rule is the
“efficient resolution of the claims . . . of many individuals in
a single action, the elimination of repetitious litigation and
possibly inconsistent adjudications involving common
questions, related events, or requests for similar relief, and
the establishment of an effective procedure for those whose
economic position is such that it is unrealistic to expect
them to seek to vindicate their rights in separate lawsuits.”
Id. (citation omitted).

The litigation of this case has resulted in two Supreme Court

opinions, a forty-nine page district court decision after a fourteen-day

bench trial involving the testimony of twenty-eight witnesses, including

eight experts—three for the City and five for Kragnes. The record fills five

bankers’ boxes. However, Kragnes’s claim standing alone would likely

fall within the jurisdictional limit of the small claims court. We think

this case demonstrates the very necessity and importance of class action

litigation both for the plaintiffs and for the City. The likelihood of a

plaintiff bringing such a complex suit requiring substantial resources to

litigate in small claims is highly unlikely. And if she, and scores of

thousands of others like her, did bring their claims individually, it could

easily overwhelm the legal department of the City and the resources of

9We express no opinion at this juncture whether further proceedings in this
matter will justify the division of the class into subclasses. See Iowa Rs. Civ. P.
1.262(3)(c), 1.265(1)(a).
16

the Polk County district court, and would likely result in inconsistent

adjudications. We affirm on this issue.

B. Must Members be Allowed to Opt Out of the Class? Rule

1.263(1) provides a list of factors to be considered by the district court

when determining whether a class action should be permitted for the fair

and efficient adjudication of the controversy, including:
a. Whether a joint or common interest exists among
members of the class.
b. Whether the prosecution of separate actions by or
against individual members of the class would create a risk
of inconsistent or varying adjudications with respect to
individual members of the class that would establish
incompatible standards of conduct for a party opposing the
class.
c. Whether adjudications with respect to individual
members of the class as a practical matter would be
dispositive of the interests of other members not parties to
the adjudication or substantially impair or impede their
ability to protect their interests.
Iowa R. Civ. P. 1.263(1). The district court specifically found that

multiple lawsuits over the subject matter of this case could cause

substantial harm to the rights of different class members because

different results might occur in the thousands of potential cases. The

court also noted this large number of claims could, if pursued
individually, overwhelm the City’s legal department. These findings have

special significance in the court’s determination of whether class

members may opt out of the class under rule 1.267(1).

Rule 1.267(1) provides that a member may not elect to be excluded

from the action if “[t]he certification order contains an affirmative finding

under rule 1.263(1)(a), (b), or (c).” Iowa R. Civ. P. 1.267(1).

Notwithstanding the district court’s affirmative findings under each of

the subsections of rule 1.263(1), the City relies on Phillips Petroleum Co.

v. Shutts, 472 U.S. 797, 105 S. Ct. 2965, 86 L. Ed. 2d 628 (1985), for the
17

proposition that individual members of a class have a due process right

to opt out of class litigation. Shutts involved a class action lawsuit

against Phillips Petroleum, a company that produced natural gas from

leased land in eleven different states. 472 U.S. at 799, 105 S. Ct. at

2967, 86 L. Ed. 2d at 633. The plaintiffs brought suit in Kansas

claiming to represent a class of 28,000 royalty owners from all fifty states

and several foreign countries with ownership interests in the leased

properties. Id. Phillips challenged the inclusion of nonresidents within

the class, contending “that unless out-of-state plaintiffs affirmatively

consent, the Kansas courts may not exert jurisdiction over their claims.”

Id. at 806, 105 S. Ct. at 2971, 86 L. Ed. 2d at 638. Phillips argued that

many of the members of the proposed class lacked minimum contacts

with Kansas and could not be bound, consistent with the due process

clause, by a judgment of the Kansas court. Id. After a discussion of the

development of and rationales for class action litigation, the Supreme

Court “reject[ed the] contention that the Due Process Clause of the

Fourteenth Amendment requires that absent plaintiffs affirmatively ‘opt

in’ to the class, rather than be deemed members of the class if they do

not ‘opt out.’ ” Id. at 812, 105 S. Ct. at 2974–75, 86 L. Ed. 2d at 642.

The Court concluded that the “procedure followed by Kansas, where a

fully descriptive notice is sent first-class mail to each class member, with

an explanation of the right to ‘opt out,’ satisfie[d] due process.” Id. at

812, 105 S. Ct. at 2975, 86 L. Ed. 2d at 642. Contrary to the City’s

understanding of the case, Shutts does not stand for the proposition that

the Due Process Clause mandates that all class members must have the

opportunity to opt out of a class action case.

In a subsequent case, the Supreme Court granted certiorari to

determine whether an Alabama court’s certification of a class and
18

approval of a settlement agreement resolving the claims of class members

violated the Due Process Clause of the Fourteenth Amendment because

all class members were not afforded the right to exclude themselves from

the class or the agreement. Adams v. Robertson, 520 U.S. 83, 85, 117

S. Ct. 1028, 1029, 137 L. Ed. 2d 203, 207 (1997). However, the Court

did not decide the issue as it determined certiorari was improvidently

granted because the parties did not raise the federal issue below. Id.

The Court noted that its decision in Shutts was limited to the

determination of whether the Kansas court had jurisdiction over out-of-

state class members. Id. at 88–89, 117 S. Ct. at 1030, 137 L. Ed. 2d at

209.

The Iowa rules regarding class actions were adopted in 1980 and

were based on the Model Class Actions Act. See Unif. Class Actions Act,

12 U.L.A. 93 (2008). The commissioners’ comment to section 8 of the

Model Act, which corresponds to Iowa rule 1.267(1), provides:
Under some circumstances members of a plaintiff
class cannot elect to be excluded because they are
indispensible parties. This would be determined by the
court in ruling on certification considering the criteria of
Section 3(a) [Iowa rule 1.263(1)]. Such situations might arise
in actions comparable to those under Federal Rule 23(b)(1);
see 3B Moore’s Federal Practice, ¶23.35. In most situations
members of a plaintiff class will be permitted to elect to be
excluded.
A class member aggrieved by an affirmative finding
under Section 3(a)(1), (2) or (3) might seek relief through one
of the extraordinary writs or through an interlocutory appeal
if authorized by the state practice.
Id. § 8 cmt., 12 U.L.A. 109. Similarly, class actions certified pursuant to

Federal Rule 23(b)(1) do not permit members of a plaintiff class to opt out

of the litigation. Certification pursuant to Federal Rule 23(b)(1) requires

the court to make findings nearly identical to the findings required by
19

Iowa rule 1.263(1).10 Members of a class certified pursuant to Federal

Rule 23(b)(1) are not provided an opportunity by the rule to exclude

themselves from the action. 7AA Charles Alan Wright, Arthur R. Miller &

Mary Kay Kane, Federal Practice and Procedure § 1786, at 496–97 (3d ed.

2005). Rather, “it is reasonably certain that the named representatives

will protect the absent members and give them the functional equivalent

of a day in court.” Id. at 496.

We believe the procedural safeguards in our rules of civil procedure

regarding class actions take into account due process concerns of all

parties involved—both the plaintiff class members as well as the

defendants. Accordingly, we reject the City’s contention that the district

court’s application of rule 1.267(1) violates due process because class

members are not given the option of excluding themselves from the

plaintiff class under the circumstances of this case.

C. Did the District Court Properly Determine What Costs Were

Allowable as Regulation of the Franchises? The district court

concluded that an annual amount of $1,575,194 should be allocated to

the City’s administrative expenses in maintaining and managing the

10Federal Rule 23 provides, in relevant part
(b) Types of Class Actions. A class action may be maintained if Rule
23(a) is satisfied and if:
(1) prosecuting separate actions by or against individual class members would
create a risk of:
(A) inconsistent or varying adjudications with respect to individual class
members that would establish incompatible standards of conduct for the
party opposing the class; or
(B) adjudications with respect to individual class member that, as a
practical matter, would be dispositive of the interests of the other class
members not parties to the individual adjudications or would
substantially impair or impede their ability to protect their interests[.]
Fed. R. Civ. P. 23.
20

electric utility and $1,574,046 should be allocated for the City’s

maintenance and management of the gas utility. These amounts

included increased construction costs due to the presence of utilities,

increased operating costs due to the presence of utilities, degradation

costs, disruption costs, the cost of the franchise fee study, and one-time,

unexpected acute costs. Both parties take issue with several of the costs

allowed, or not allowed, by the district court.

Our decision in Kragnes I directed the district court to “determine

what, if any, part of the franchise fees are related to the City’s

administrative expenses in exercising its police power, including the

costs associated with any incidental consequences of the franchised

services.” Kragnes I, 714 N.W.2d at 643. This does not require the City

to calculate its administrative expenses to a mathematical certainty. Id.

at 642. The district court concluded that Kragnes, as the plaintiff, bore

the burden of showing what, if any part of the franchise fees are not

related to the City’s administrative expenses and neither party challenges

on appeal this allocation of the burden. However, the parties disagree

with several specific costs the district court found the City should or

should not be able to recover through the franchise fee.

1. Lost value of trees. The district court did not include the lost

value of the City’s trees due to trimming and removal to accommodate

the utilities as an allowable incidental cost of the franchise. The City

contends this was error.

Both the City and Kragnes offered expert testimony appraising the

value of the trees located in the right-of-way which are trimmed or
21

removed by MEC 11 to accommodate electric lines. The City’s expert,

Keith Majors, conducted a survey of a portion of the City’s right-of-way,

attempting to count and value the trees that had been trimmed or

removed. Majors opined the City’s trees suffered approximately $5.2

million in damage each year due to MEC’s trimming. Although Kragnes

contends the loss of value of the trees in the right-of-way is not the type

of cost that should be considered part of the City’s administration of the

franchise, Kragnes also provided expert testimony from Jim Rock as to

the value of the trimmed and removed trees. Rock attempted to recreate

Majors’ survey and testified he was unable to verify Majors’ calculations

of the number, type, and size of private and public trees affecting the

right-of-way. Although Rock identified more trees affecting the right-of-

way than did Majors, his appraisal of the value of the damage sustained

by the City’s trees was significantly less than Majors’ estimate. He

concluded the annual loss of value was $622,981. Rock opined that

Majors’ calculations failed to account for the fact that the trees are only

trimmed, on average, once every five years and that the damage assessed

in Majors’ report was cumulative rather than annual.

The district court concluded the lost tree value was not the type of

incidental consequence that should be considered by the court in

calculating an appropriate franchise fee because it is “nothing more than

a theoretical concept.” The district court further noted if it were to

consider tree damage a cost related to the administration of the

franchise, it would accept Rock’s valuation of the damage.

11Trial testimony established that MEC did not perform the trimming itself
during the years at issue but contracted with Wright Tree Service for the maintenance
of all trees, publicly and privately owned, interfering with the electric lines.
22

The City contends the damage to the trees is analogous to the

damage done to sidewalks and streets as a consequence of the

maintenance of the utility, a degradation cost which was allowed by the

district court as a component of the franchise fee. As the City argues,

trees are valuable assets which are damaged when they are trimmed to

accommodate electric lines, no matter how carefully the trimming is

done. Although trees may be pruned to promote growth and health,

trees that are trimmed to accommodate electric lines are trimmed

without regard to the utility, function, and beauty of the tree. They are

trimmed only to provide sufficient clearance for the electric lines. Rock

agreed that the trees are damaged when they are trimmed but disagreed

that the City suffers a loss when the trees are trimmed because the City,

or any owner, also receives a benefit from the trimming of the trees—the

safe and reliable delivery of electrical service. This benefit offsets any

loss, argues Kragnes. 12

Our review of the record leads us to agree with the City that the

trees in the right-of-way are valuable assets and even when the trimming

done by the utility is done correctly and in accordance with the best

trimming practices, the trees are damaged in a quantifiable manner.
However, we find Rock’s valuation of the tree damage to be more credible

and conclude the amount of $622,981 should be allocated to the

maintenance of the electric utility.

2. Indirect operating costs. The City contends the district court

undervalued the indirect operating costs associated with maintaining

12Kragnes also elicited testimony at trial and argues in her brief that MEC enjoys
immunity for any damage sustained by the tree due to its trimming as long as the
trimming was in accordance with best practices. Kragnes, however, cites no authority
for its immunity argument and accordingly, we deem the argument waived. Iowa R.
App. P. 6.903(2)(g)(3).
23

and managing the right-of-way in which the gas and electric utilities are

located. Kragnes and the City agree that a portion of the City’s operating

costs are appropriately included in the franchise fees. Specifically,

Kragnes agrees that to the extent the City’s costs to maintain the right-

of-way are increased because of the presence of the utilities, those

increased costs are appropriately included as a component of the

franchise fee. However, the City seeks to recover 6% of the total costs of

the general maintenance of the right-of-way—costs that would be

incurred whether or not the utilities were present in the right-of-way.

The City contends a portion of the total cost of maintaining the right-of-

way is nonetheless appropriately included as a component of the

franchise fees because the City incurs the cost of maintaining the right-

of-way through which the utilities run for the benefit of the general

public. The City contends all users of the right-of-way benefit from the

City’s maintenance and management of the right-of-way, including the

utility providers, so it is appropriate to recoup a portion of the cost of

maintaining and managing the right-of-way through the franchise fees.

We agree with Kragnes that the cost of maintaining the right-of-

way that would be incurred whether or not the utilities were present is

not appropriately included in the franchise fee amount. The costs the

City would incur to maintain the right-of-way even if the utilities were

not located there are not an incidental consequence of inspecting,

licensing, supervising, or otherwise regulating the franchised activity.

We agree with the district court’s conclusion that the allowable indirect

operating costs are $107,824 per year per utility.

3. Other/acute costs. The City argued that it is appropriate to

include an annual amount intended to cover the cost of unexpected,

acute costs related to managing or administering the franchise and
24

sought an allocation of $250,000 per year per utility. The City’s expert,

Nick Dragisich, conducted a study of the City’s expenses incurred due to

the management and maintenance of the gas and electric utility

franchises. Dragisich noted that study did not include or consider

“unforeseen and/or emergency costs” related to the franchise

management. The study noted that such unpredictable events did not

occur in the time frame covered by the study, from 2001 through 2006,

but cited as examples of such events “the ice storm [in] 1991 and the

snow storm of 1998” which caused “considerable damage” and resulted

in “considerable costs” to the City in cleaning the debris from the right-

of-way. The City also offered testimony of other one-time acute costs

including $1.625 million to bury electric lines at the City’s expense to

promote development and the City’s $1.6 million settlement of a tort

lawsuit for a pedestrian injured on a City grate providing access to a gas

line.

The district court concluded the franchise fee can recover

unexpected acute costs, but concluded $100,000 per year per utility was

an appropriate amount. Both the City and Kragnes appeal the district

court’s valuation of this component of the franchise fee. The City

contends the full $250,000 it requested for each utility should be

counted. Kragnes asserts no amount should be counted for unexpected

acute costs. In the alternative, Kragnes argues that even if it is

reasonable to count some amount for unexpected acute costs, the City

has failed to present evidence to support either the amount it requested

or the amount included in the franchise fee by the district court.

Although we agree the category of unexpected “acute” costs could

be counted as a component of a franchise fee in an appropriate case, we

conclude the record in this case provides inadequate support for its
25

inclusion here. The City offered general testimony tending to prove it

spent $1.6 million to bury electric lines, but we find such costs are in the

nature of capital expenses rather than acute costs. We further conclude

the settlement of the tort claim was not reasonably related to the cost of

inspecting, licensing, supervising, or otherwise regulating the activity

that is being franchised, and therefore the district court correctly

declined to count the item as a component of the franchise fee. Lastly,

the City produced testimony that various storms cost “hundreds of

thousands of dollars” to clean up. Although the City is not required to

account for its franchise-related administrative expenses to a

mathematical certainty, we conclude the evidence as to the cost of the

storm clean-up was not in sufficient detail to allocate a value to it.

Accordingly, we conclude the district court should not have included any

value to the claimed acute costs in the computation of the franchise fees.

4. Construction costs paid by the federal and state government.

Kragnes contends the district court erred in counting as a franchise fee

component an amount for certain increased construction costs.

Kragnes’s expert, Charles Finch, opined that to the extent some

construction projects receive funding from the state or federal

government, such construction costs are not actually incurred by the

city. Kragnes accordingly contends this component of the franchise fee

must be reduced by 35%, an amount calculated by Finch to account for

the portion of construction costs offset by state and federal funds. The

City, however, asserts Finch’s calculations do not bear out. The City’s

expert, Dragisich, testified that even if it is assumed that 35% of the cost

of a construction project affecting the right-of-way is offset by federal or

state funds, it does not necessarily follow that the state/federal funds are

actually allocated to the portion of the contract that accounts for the
26

increase in construction costs attributable to the presence of utilities in

the right-of-way. Further, the City argues that once state or federal

funds are received by the City, they become the City’s funds without

regard to their source. Simply put, the City contends the court must

focus on whether the City proved its construction costs attributable to

the presence of the utilities in the right-of-way are increased, and it

matters not in calculating the appropriate franchise fee what revenue

stream the City used to pay them. We agree. The source of the funds

used to pay for the increased construction costs attributable to the

utilities is not relevant to the determination of whether such costs are a

proper component of the franchise fee.

5. Construction costs paid by WRA/sewer users on WRA/sewer

projects. Kragnes contends the district court erred in including as

franchise fee components any increased construction costs resulting

from projects related to the Wastewater Reclamation Authority (WRA) 13

and sanitary sewer. Kragnes argues such costs should not be counted

because they are recouped by the City from the WRA and consumers of

sewer services.

However, the City’s expert explained that the method proposed by
Kragnes’s expert to “back out” the construction costs of WRA and sewer

projects shifts the increased cost of construction due to the presence of

gas and electric utilities almost entirely to the WRA and sewer users. He

instead opined it is more appropriate to require the customers of utilities

to bear their fair proportion of the increased costs and require the City to

13The WRA is a consortium of cities which provides waste treatment facilities
and services to the member municipalities, including the City of Des Moines. The cities
each maintain their own sanitary sewer systems for waste collection and connect their
systems to WRA facilities for treatment. As the operating contractor for the WRA, the
City of Des Moines manages the construction projects for the WRA.
27

in turn reimburse the WRA and sewer utility to avoid “double-dipping” by

the City. The district court credited the City’s expert. It did not reduce

this component of the franchise fee by the amount the City’s

construction costs are increased as a consequence of WRA and sewer

construction projects and it required the City to “negotiate some method

of reimbursement with the enterprise entities to avoid any double

recovery.”

We also find the City’s expert’s testimony on this issue credible

and agree with the resolution adopted by the district court.

6. Administrative overhead fee on construction and engineering

project bills. Kragnes asserts the district court erred in counting a

12.78% administrative fee as a component of the franchise fee. She

argues this is inappropriate because any increase in administration costs

incurred by the contractor due to the presence of utilities are accounted

for in the construction contract price. Kragnes further contends that to

the extent the 12.78% fee represents additional City personnel cost

attributable to administering payment of the construction contracts, it

has already been accounted for in the operating expense portion of the

district court’s calculation of the franchise fee. The City disagrees,

contending the administrative fee does not purport to cover additional

costs incurred by the construction company but rather addresses the

City’s additional administrative overhead. The City’s expert, Dragisich,

was questioned on this precise point and explained that he had taken

care to insure that costs were not double counted and that the

administrative fee on third-party contracts did not overlap with the

operating expenses calculated separately. Dragisich also described the

types of additional administrative costs incurred by the City on third-

party construction contracts due to the presence of utilities in the right-
28

of-way. He noted this cost component might include the time required to

notify the police and fire departments of the timing and location of road

closures and how to reroute emergency vehicles. This component might

also include the administrative costs associated with posting notices on

the City’s website or placing placards on properties informing the public

about road closures or temporary utility interruptions attributable to

construction.

We find credible Dragisich’s testimony that the City does incur

some additional administrative overhead in connection with construction

projects as a consequence of the presence of utilities. We find such

administrative costs have not been counted twice and were therefore

correctly included by the district court as a component of the franchise

fee.

7. Interest on the construction costs. Kragnes contends the district

court erred in counting bond expense/interest as an element of the

increased construction and engineering costs. She argues that because

franchise fees are received quarterly, the City does not need to borrow

money to pay construction costs. However, the City’s expert testified

that while Kragnes’s logic might work “in a perfect world,” it did not

necessarily work in reality. Even if it is assumed the City receives

franchise fees quarterly, it does not necessarily follow that the City will

always have funds in hand to pay construction contract payments when

they are due. The timing of construction projects and the payments due

on construction contracts are not necessarily aligned with the City’s

receipt of franchise fees. Further, as the City’s expert noted, the City’s

construction costs fluctuate greatly from year to year and franchise fee

receipts are not necessarily sufficient to cover this category of costs.
29

Accordingly, we conclude the district court committed no error in

counting this category of cost as part of the franchise fee.

8. Increased construction costs. Kragnes and the City disagreed as

to the amount of increased construction and engineering costs incurred

by the City for the accommodation of the gas and electric utilities.

Kragnes argues that construction costs were increased by 5% and

engineering costs were increased by 3.5% as a consequence of the

presence of utility structures and equipment in the right-of-way. The

City, however, offered testimony suggesting construction costs are

increased by 15% and engineering costs are increased by 20%. The

district court found the City’s evidence on this issue more persuasive.

The main issue of dispute involves a survey created and

implemented by the City’s expert. City employees were asked whether

their work was affected or increased due to the presence of utilities in the

right-of-way. Each employee was also asked how much his or her work

increased due to each utility (including gas, water, electric, cable, etc.).

The survey respondents assigned a percentage value for each factor. The

City’s expert, Dragisich, added the values of the increased work and

came up with a total increase in work, and concluded engineering costs

were increased by 20% and construction costs were increased by 15%.

Kragnes’s expert, Finch, concluded it was more appropriate to average

the increased work for all the utilities, producing a 3.5% increase in

engineering costs and 5% increased construction costs.

We note the City’s expert had extensive construction experience,

including the bidding of construction projects conducted in the right-of-

way. He is also a licensed engineer. Although this is a close issue, we

credit Dragisich’s opinion based on his relevant experience. We agree

with the district court’s findings that the increased engineering costs
30

should be valued at 20% and the increased construction costs should be

valued at 15%, and adopt them as our own.

D. Did the District Court Err in Ordering a Refund to all Class

Members? As we have already noted, the district court found the

appropriate annual franchise fee is $1,575,194 for the electric utility and

$1,574,046 for the gas utility and declared the plaintiff should have a

judgment against the City in the amount by which the franchise fees

collected during the period commencing July 27, 1999, and ending

May 26, 2009, exceeded the annual franchise fee. Citing McKesson Corp.

v. Division of Alcoholic Beverages and Tobacco, 496 U.S. 18, 110 S. Ct.

2238, 110 L. Ed. 2d 17 (1990), the district court concluded the Due

Process Clause affords the plaintiff class members a meaningful

opportunity to secure postpayment relief for their overpayment of

franchise fees. The court further reasoned there must be financial

consequences from the illegal taxation of the City’s residents

notwithstanding that the funds received from the illegal taxation of the

City’s residents were used wisely, legally, and with the best intentions for

the residents.

The court ordered relief in the form of a refund of the franchise fee

overpayments in an amount to be determined by the court based on

evidence adduced in further proceedings of the actual amount of

franchise fees collected during the subject period reduced by the annual

franchise fee determined by the court. The City contends that, even if it

did charge an excessive franchise fee, the district court erred in

concluding the class members are entitled to a refund of any amount

they were overcharged.

The City contends McKesson and Hagge v. Iowa Department of

Revenue and Finance, 504 N.W.2d 448 (Iowa 1993), are distinguishable
31

and provide no legal basis for ordering a refund in this case. We

acknowledge the City’s contention that the plaintiffs in those cases

claimed deprivation of a federal constitutional right (Commerce Clause

violation in McKesson and intergovernmental tax immunity in Hagge) in

addition to their due process claims. See McKesson, 496 U.S. at 22, 110

S. Ct. at 2242, 110 L. Ed. 2d at 26; Hagge, 504 N.W.2d at 449. While it

is true that the excessive fees in this case were not found to violate any

federal constitutional right, we conclude the reasoning stated in

McKesson and Hagge is compelling, and we therefore apply it in this

case.

Meaningful backward-looking relief is especially appropriate to

rectify the class members’ overpayments under the circumstances

presented in this case. “Because exaction of a tax constitutes a

deprivation of property,” procedural safeguards are generally required to

protect against “unlawful exactions in order to satisfy the commands of

the Due Process Clause.” McKesson, 496 U.S. at 36, 110 S. Ct. at 2250,

110 L. Ed. 2d at 35–36. However, because “[a]llowing taxpayers to

litigate their tax liabilities prior to payment might threaten a

government’s financial security,” states have been permitted to restrict

the ability of the taxpayer to challenge the lawfulness of the tax before it

is paid. Id. at 37, 110 S. Ct. at 2250, 110 L. Ed. 2d at 36. That was the

case here—Kragnes and the other members of the class had no

predeprivation remedy. Instead they were required to raise their

objections to fees in a postdeprivation refund action.

To satisfy the requirements of the Due Process Clause,
therefore, in this refund action the State must provide
taxpayers with, not only a fair opportunity to challenge the
accuracy and legal validity of their tax obligation, but also a
“clear and certain remedy,” for any erroneous or unlawful
32
tax collection to ensure that the opportunity to contest the
tax is a meaningful one.

Id. at 39, 110 S. Ct. at 2251, 110 L. Ed. 2d at 37 (footnote and internal
citation omitted).

We further note that Kragnes filed this action soon after the City

decided to commence collecting the franchise fees at issue here. On

notice of Kragnes’s claim that the franchise fees were excessive in

amount and therefore illegal, the City nonetheless collected them and,

during the pendency of this action, even increased the amount of the fees

collected. The failure of the City to respond differently after it was on

notice of Kragnes’s claim does not mitigate in favor of depriving Kragnes

and the class of a remedy for the unlawful taxation. See id. at 45, 110

S. Ct. at 2254–55, 110 L. Ed. 2d at 41 (noting State has available a range

of procedures to limit the financial impact of refunding taxes, including

refraining from collecting a tax which has been declared illegal during the

pendency of an appeal or placing disputed funds into an escrow account

or utilizing “other accounting devices such that the State can predict

with greater accuracy the availability of undisputed treasury funds”).

“[The City’s] failure to avail itself of certain of these methods of self-

protection weakens any ‘equitable’ justification for avoiding its

constitutional obligation to provide relief.” Id. at 45, 110 S. Ct. at 2255,

110 L. Ed. 2d at 41.

The City cites the Restatement (Third) of Restitution in support of

its contention that no refund of any overpayment should be ordered

under the circumstances presented here. Section 19(1) of the

Restatement states the general rule that a taxpayer who pays an illegally

assessed or collected tax, fee, or charge has a claim in restitution against

the government to prevent unjust enrichment in the absence of a
33

different rule imposed by statute. Restatement (Third) of Restitution and

Unjust Enrichment § 19(1), at 259 (2011). As has already been noted,

this court has ordered a refund when a taxpayer overpaid taxes to the

Iowa Department of Revenue and Finance. Hagge, 504 N.W.2d at 452.

The City contends the district court erred, however, in this case in failing

to apply section 19(2) of the Restatement allowing the court to consider

whether, under the circumstances of a particular case, a restitutionary

remedy should be denied on the ground it would “disrupt orderly fiscal

administration or result in severe public hardship.” Restatement (Third)

of Restitution § 19(2), at 259. Subject to constitutional limitations, the

rule stated in section 19(2) authorizes the court to limit relief to the

claimant to avoid either adverse governmental consequence. Id. § 19

cmt. b, at 260. The City directs us specifically to illustration 17:

City assesses a property tax on a nondiscriminatory basis.
The tax is subsequently determined to be improperly
authorized and void. In response to Taxpayers’ suit against
City to recover the tax collected from them, City
demonstrates that the revenues illegally collected were spent
exclusively on ordinary municipal services benefitting
Taxpayers among other residents. Under the circumstances,
the court may find that neither City nor its residents have
been unjustly enriched at Taxpayers’ expense.

Id. § 19 cmt. f, illus. 17, at 267.

This court rejected an equity-based argument opposing a tax

refund in Hagge. In that case, the State urged a refund should be denied

because such relief would impose an onerous fiscal burden. We

concluded, however, that “equity cannot override the clear commands of

the Due Process Clause.” Hagge, 504 N.W.2d at 452. As in Hagge, we

are not convinced that a properly structured refund in this case will

create an onerous fiscal burden on the City or create such disruption
34

and instability as to give rise to countervailing public interests weighing

against a refund.

Undaunted by our rejection of an equitable argument in Hagge, the

City offers up other equity-based reasons for denying a refund of the

excessive franchise fees. Among these reasons are the notion that

restitution of the excess fees should not be ordered when the excess fees

were paid by a broad-based group and the plaintiff class would

essentially recover from itself, and the equitable principle that no refund

will be ordered when the improper tax was collected from a broad

constituency and the funds were used for the general benefit of a similar

public constituency. We conclude the district court correctly declined

these equity-based entreaties to forego altogether a refund remedy in this

case. This conclusion is strongly influenced by the fact that the City

continued and increased its collection of the franchise fees after being

put on notice of the claim in this litigation that the fees exceeded the

amount authorized by law. Under these circumstances, equitable

principles will not shield the City from a refund. 14

14We note that although the general assembly ratified the City’s collection

of electric and gas franchise fees in excess of the cost of regulating the utilities,
the legislature declined to retroactively authorize the excessive fees although it
clearly knew how. In 2007, the general assembly enacted similar legislation
ratifying the imposition of franchise fees for cable television services. See Iowa
Code § 477A.7(5) (Supp. 2007); Zaber v. City of Dubuque, 789 N.W.2d 634, 637
(Iowa 2010). The general assembly explicitly provided that the ratification was
retroactive. Iowa Code § 477A.7(5); Zaber, 789 N.W.2d at 637. However, in this
instance, the legislature decided not to enact a retroactive ratification of
franchise fees, but instead made the ratification prospective only. In fact, an
early draft of the bill contained a retroactive provision, but that portion was
stricken in a vote on the floor of the House. See Senate Amendment 3328 to
S.F. 478, 83 G.A., 1st Sess. (Iowa 2009) (providing in § 202 that any amount of
electric or gas franchise fees previously assessed that exceeds the city’s cost of
regulating the franchise is “declared to be authorized and legally assessed by
and paid to the city”); Journal of the House, Saturday, April 25, 2009, at pages
2072–2075 (motion by Oldson, offering amendment H–1780, which, among
other things, struck the ratification language then found in § 221); 2009 Iowa
35

The City next contends that if a refund is to be required, it should

be limited to those class members who can show they would have paid

less if the City had raised the same amount of revenue through property

taxes. We disagree. We cannot assume the City would have chosen to

increase real estate taxes by an equivalent amount if the excessive

franchise fees had not been conceived and collected. In the last analysis,

the determination of what would have occurred had the excessive

franchise fees not been collected would require speculation in which the

court will not engage. We conclude the most fair remedy in this case is

the refund which will, to the extent possible, refund to members of the

plaintiff class the excess fees extracted from them and restore the parties

to the status quo ante. We also note the City has available to it the full

range of legal tax and fee options, budgetary measures, and spending

policy choices to cover the refund and its ongoing future expenses.

Comment f to section 19 makes clear that while “[s]ignificant

disruption and hardship are grounds to limit restitution . . . the mere

fact that relief will be expensive is not.” Restatement (Third) of

Restitution § 19 cmt. f, at 266. It further notes that a restitutionary

remedy may be fashioned in a way that minimizes the disruption to the

taxing authority, “such as by allowing refunds in the form of credits

against future assessments.” Id. § 19 cmt. f, at 267. Our disposition of

this appeal will allow the district court to structure the refund in a way

that balances the respective interests of the City and the members of the

plaintiff class.

________________________
Acts ch. 179 (amending Iowa Code ch. 364 regarding franchise fees without
provision for retroactive ratification of franchise fees). Such retroactive
ratification has been approved by this court. Zaber, 789 N.W.2d at 656. Thus,
the legislature also declined to shield the City from the financial impact of this
litigation.
36

E. Should the District Court Have Divided the Class Into

Subclasses for the Remaining Proceedings? The City argues that the

district court abused its discretion in not dividing the class into

subclasses for remedial purposes. Specifically, the City contends that

while the class members interests may be sufficiently alike for purposes

of the resolution of the legal issue in this case, they have significantly

different interests and preferences with regard to the determination of an

appropriate remedy. These different interests, the City contends,

requires the division of the class into subclasses. The district court

concluded the conflict perceived by the City was speculative and declined

to divide the class.

The City contends that as a remedial plan is put together, someone

must represent the interests of those class members that have an

interest in minimizing the amount of the refund. For example, the City

contends that the implementation of a remedy must be preceded by an

initial determination of whether or not potential class members must

submit a claim. The City also contends decisions must be made with

regard to the types of notice and information that are to be included with

any refund checks or claim forms because these should vary depending

on whether the class member favors or opposes the collection of

franchise fees as a source of revenue for the City. The City favors the

creation of subclasses because it harbors doubts that Kragnes “will

vigorously pursue the positions on these issues that are of greatest

advantage to those class members who benefit from revenue generation

through the franchise fee.”

Kragnes contends that to the extent that no conflict exists

warranting the decertification of the class, no conflict exists warranting

the creation of subclasses. She notes she is a property owner and thus a
37

member of the group the City contends would likely favor the generation

of revenue through franchise fees rather than real estate taxes. However,

clearly she does not favor the refund outcome the City predicts for her as

a property owner.

We conclude the City’s arguments for the creation of subclasses

are speculative on this record. We affirm the district court’s certification

of the class. As administration of this action proceeds on remand, the

district court shall exercise its discretion in ruling on motions, if any,

requesting the establishment of subclasses. Iowa R. Civ. P. 1.262(3)(c).

F. Did the District Court Correctly Decline to Order the City

to Amend its Franchise Ordinances? Kragnes asserts the district

court erred in holding amendments of Iowa Code sections 384.3A and

364.2 do not require the City to amend its franchise fee ordinances.

Kragnes contends the City should be enjoined from collecting franchise

fees pursuant to the ordinances in effect at the time of this lawsuit until

the City enacts a new ordinance in compliance with sections 384.3A and

364.2, which became effective May 26, 2009.

A franchise fee assessed by a city may be based upon a
percentage of gross revenues generated from sales of the
franchisee within the city not to exceed five percent, without
regard to the city’s cost of inspecting, supervising, and
otherwise regulating the franchise. Franchise fees collected
pursuant to an ordinance in effect on May 26, 2009, shall be
deposited in the city’s general fund and such fees collected
in excess of the amounts necessary to inspect, supervise,
and otherwise regulate the franchise may be used by the city
for any other purpose authorized by law. Franchise fees
collected pursuant to an ordinance that is adopted or
amended on or after May 26, 2009, to increase the
percentage rate at which franchise fees are assessed shall be
credited to the franchise fee account within the city’s general
fund and used pursuant to section 384.3A. If a city franchise
fee is assessed to customers of a franchise, the fee shall not
be assessed to the city as a customer. Before a city adopts or
amends a franchise fee rate ordinance or franchise
ordinance to increase the percentage rate at which franchise
38
fees are assessed, a revenue purpose statement shall be
prepared specifying the purpose or purposes for which the
revenue collected from the increased rate will be expended. If
property tax relief is listed as a purpose, the revenue
purpose statement shall also include information regarding
the amount of the property tax relief to be provided with
revenue collected from the increased rate. The revenue
purpose statement shall be published as provided in section
362.3.

Iowa Code § 364.2(4)(f) (Supp. 2009).

The City’s ordinances currently in effect authorize the City to

collect franchise fees of 5%. However, Kragnes asserts the effect of this

lawsuit is “to lower the allowed percentage rate of franchise fee under the

City ordinances to the costs of regulation, which is less than 5%.”

According to Kragnes, if the City wishes to collect a 5% franchise fee, it

must enact a new ordinance “to increase the percentage rate at which

franchise fees are collected” and comply with the notice and revenue

statement requirements of section 364.2(4)(f) as well as the spending

limitations of section 384.3A for ordinances enacted after May 26, 2009.

The City contends the plain language of section 362.2(4)(f) allows it

to continue to collect a 5% franchise fee pursuant to its ordinances

which were in effect on May 26, 2009. The City points out that the

statute explicitly addresses how funds collected pursuant to ordinances

in effect on May 26, 2009, may be spent, clearly evidencing an intent to

“grandfather in” existing ordinances. The statute further distinguishes

between existing ordinances and ordinances enacted or amended after

May 26, 2009, and requires cities seeking to amend or enact ordinances

after May 2009 to comply with certain requirements.

We are not persuaded by Kragnes’s argument that the effect of this

lawsuit and our decision in Kragnes I is to rewrite the City’s franchise fee

ordinance. Our decisions simply render the ordinance unenforceable for

the designated time frame in excess of the costs to maintain and regulate
39

the franchise. We agree that the plain language of section 364.2(4)(f)

grandfathers in franchise fee ordinances in effect on May 26, 2009, and

authorizes the collection of up to a 5% franchise fee pursuant to those

existing ordinances. The district court correctly declined Kragnes’s

invitation to order the City to adopt a new franchise fee ordinance.

IV. Conclusion.

We conclude the district court did not abuse its discretion in

certifying and denying the City’s motions to decertify the class. We also

conclude the members of the plaintiff class have no due process right to

opt out of the class and the failure of the rules of civil procedure to allow

them to do so is not unconstitutional.

After our de novo review of the record, we conclude certain

amounts allocated or not allocated by the district court as proper

components of the franchise fees should be modified. Specifically, we

conclude the City should be able to include the lost value of trees due to

trimming and removal to accommodate electrical lines in the amount of

$622,981 each year for the electric utility franchise. We also conclude

the City shall not, based on this record, recoup any amount for

unpredictable, acute costs. We affirm in all other respects the district

court’s determination of the allowable amount of franchise fees. For ease

of reference, the franchise fees allowed are as follows.

Gas Utility Electric Utility
Degradation Costs $35,030.00/year $37,373.00/year
Construction Costs $1,314,563.00/year $1,314,563.00/year
Operating Costs $107,824.00/year $107,824.00/year
Disruption Costs $2,038.00/year $843.00/year
Franchise Fee Study $14,591.00/year $14,591.00/year
Lost Tree Value $0.00/year $622,981.00/year
Acute Costs $0.00/year $0.00/year
Total $1,474,046.00/year $2,098,175.00/year
40

We further conclude the district court properly ordered a refund of

fees in excess of the totals itemized above. We remand for further

proceedings consistent with this opinion, for findings as to the amounts

to be distributed to the members of the class, and for a determination of

the appropriate restitutionary arrangement by which such amounts shall

be paid. And, finally, we conclude the district court correctly denied

Kragnes’s request for an injunction preventing the City from collecting

franchise fees pursuant to the ordinances in effect on May 26, 2009.

AFFIRMED AS MODIFIED AND REMANDED.

All justices concur except Cady, C.J., who dissents and Waterman

and Mansfield, JJ., who take no part.
41

#09–1473, Kragnes v. City of Des Moines

CADY, Chief Justice (dissenting).

I respectfully dissent. A basic and fundamental conflict exists

between the members of the class. This conflict is inimical to the

fundamental purpose of class actions and, under the law, does not

permit Kragnes to pursue her claim as a class action. I would hold the

district court erred in failing to decertify the class.

Several requirements must be met before our law permits class

certification. One basic prerequisite is the class representative must

“fairly and adequately” protect the interest of the class. Iowa R. Civ. P.

1.262(2)(c). This requirement relates to the associated rule that the

claim of the class representative be typical of that of the other class

members. When a conflict exists between class members that relates to

the issues and is fundamental to the case, class certification is improper.

Valley Drug Co. v. Geneva Pharm., Inc., 350 F.3d 1181, 1189 (11th Cir.

2003).

The fundamental conflict in this case can be traced to the

fundamental economic reality of the relationship between a city and its

people. A city is its people, and a government is established by the

people to govern and provide public services and protection for the

benefit of the people. In turn, the people provide revenue to the

government so it can operate to carry out its vital public mission. Thus,

the public mission pursued by government is, one way or the other, paid

by the people.

In this case, the City of Des Moines sought to raise additional

revenue for the purpose of providing more public services in the form of

additional police and fire protection, enhanced public library access, and
42

needed repairs to deteriorating neighborhoods. A city is authorized to

raise revenue for such purposes. However, the particular means utilized

by the City to raise the revenue was ultimately found in this case to be

contrary to the law, but not until the revenue had been collected and

spent on the needed services that have been enjoyed by the public.

The representative plaintiff brought this lawsuit not only to force

the City to utilize a lawful means to collect its needed revenue, but also

to obtain a judgment on behalf of all people who paid the fee equal to the

total amount of the revenue that had been collected through the illegal

fee. Class certification allowed her to lump together all residents who

had paid the illegal tax to elevate the amount of the claim into a

substantial judgment. The judgment is so large that the City will now

need to raise additional revenue or reduce City services to refund the

improper fee to all the residents who paid it. This inevitable result is not

speculative. It is logic. It is also economic reality based on sound

economic principle. To pay the judgment to the class, the City will need

to use existing revenue belonging to the class, tax the class, or cut

services provided to the class. These consequences necessarily divide the

class and render its members antagonistic. There is little utility in suing

yourself, especially when the associated attorney fees and litigation

expenses of suing yourself will run into the millions of dollars. Most

people would be unwilling to pursue litigation under such

circumstances.

Accordingly, this case could not present a more basic conflict

between a representative plaintiff and those members of the class who

would not want to force city government to find additional revenue to pay

the judgment that will inevitably adversely affect most members of the

class. In other words, the lawsuit is a microcosm of the larger tension in
43

society between those who focus on immediate gratification and those

who seek to make decisions today with future consequences in mind.

This case forces the latter to join in the approach of the former. In this

case, the remedy seeks an immediate perceived benefit at a future cost

that makes the benefit an illusion. This sleight of hand is found at the

heart of the case and presents a most basic conflict that pits the

representative plaintiff, who advocates for a refund, against those class

members who understand the futility of a refund and would advocate

against it. It is simply unfair for our class action law to be used as a

vehicle to grow a judgment into an amount that will force the City to take

action adverse to the class. A plaintiff who pursues such a goal cannot

possibly represent the interest of the remaining class members.

This type of inherent conflict in a class is inconsistent with the use

of class action and is not permitted by our law. An analogous case that

best illustrates this point is Ihrke v. Northern States Power Co., 459 F.2d

566 (8th Cir.), vacated as moot, 409 U.S. 815, 93 S. Ct. 66, 34 L. Ed. 2d

72 (1972). Like this case, Ihrke involved an action brought by a utility

customer on behalf of all utility customers. 459 F.2d at 567. The legal

claim alleged the regulations governing the termination of utility service

were unconstitutional because customers had been deprived of adequate

prior notice and a fair and impartial hearing prior to the termination of

utility services. Id. The court found the class was inherently

antagonistic because not all customers would be in support of a

pretermination hearing. Id. at 572. Instead, some customers would

“likely . . . feel” that the additional expense of providing a termination

hearing would “conceivably result in a rate increase to all customers.”

Id. at 572–73. As with the utility customers in Ihrke, many Des Moines

taxpayers would be reluctant for government to make expenditures when
44

they realize those expenditures come from their pocket, one way or the

other.

Other courts have expressed a slightly different principle that a

class action cannot be maintained when people in the class would

oppose the claim or the remedy sought. In Mayfield v. Dalton, 109 F.3d

1423, 1424 (9th Cir. 1997), two members of the Marine Corp. sought to

certify a class consisting of all members of the armed forces to challenge

the constitutionality of a Department of Defense requirement that all

soldiers provide a DNA sample for future analysis. The court found the

class to be antagonistic because there were “undoubtedly” people in the

class who would not oppose the DNA repository and who would want the

requirement enforced. Mayfield, 109 F.3d at 1427. In this case, there

are undoubtedly people in the class who do not oppose the illegal fee

used to enhance City operations.

Antagonism also exists in a class when the class consists of people

who utilize limited resources from a common pool, and named members

of the class seek a remedy that will result in a shift of these limited

resources. See Miller v. Univ. of Cincinnati, 241 F.R.D. 285, 290 (S.D.

Ohio 2006) (finding an inherent conflict precluding class certification

when female members of a university rowing team claimed the university

was violating Title IX and sought to establish a class consisting of all

female participants in university athletic programs because the remedy

of compliance with Title IX would not be amenable to all class members

because compliance would likely only be achieved by shifting resources

from one sport to another); see also Cherokee Nation of Okla. v. United

States, 199 F.R.D. 357, 364–65 (E.D. Okla. 2001) (finding named

plaintiffs’ interests were antagonistic because the agency would be

required to reimburse money from limited appropriations in order to
45

make the required refund). There are undoubtedly many people in

Des Moines who would oppose a rather insignificant individual refund

that will only result in a substantial reallocation of resources or

additional taxation.

The conflict in this case is as fundamental as the legal principles

that demand the class to be decertified. Class actions are institutions of

representation, not opposition. They are institutions of social value and

public good, not personal gain. The class needs to have a sense of

mission so that all interests are represented. See Hansberry v. Lee, 311

U.S. 32, 44, 61 S. Ct. 115, 119, 85 L. Ed. 22, 28 (1940) (holding plaintiff

seeking to enforce an agreement cannot represent class members who do

not want it enforced); see also 7A Charles Alan Wright, Arthur R. Miller &

Mary Kay Kane, Federal Practice and Procedure § 1768, at 389 (3d ed.

2005). This case is as far from a class action as a case could be. A

single plaintiff should not be permitted to drag nearly an entire

community into a lawsuit that seeks a remedy akin to suing yourself.

Kragnes certainly had a right to challenge the government action.

She had a right to turn to the courts to force the City to use the proper

channels to raise city revenue. She was free as well to seek her own

refund. At times, the pursuit of principle alone might be worth the cost,

but a class action nevertheless requires the pursuit to be shared by the

class. When public monies or public sacrifice will be used to pay for a

public interest lawsuit, the representative class requirement for class

certification ensures that the public actually supports the effort.

Considering the marginal utility of the remedy sought, considering the

subsequent legislative adoption of the challenged fee, considering the

public benefit provided by the challenged government action, and

considering the substantial public expense of litigation, it is doubtful
46

many class members would share in Kragnes’s enthusiasm for her

lawsuit. One of the benefits of a class action is that it allows a plaintiff to

pursue a claim by giving an attorney a financial incentive to provide

representation. It also allows the court to dispose of a multiplicity of

identical individual claims in an economical manner. In this case,

however, there was no evidence that similar claims were filed or even the

fear of a multitude of similar claims. Moreover, while it is important to

provide a financial incentive for legal representation in meritorious

litigation, it should not, in the end, become the only benefit of a class

action.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4249612. Public record. Not legal advice.