The United States District Court for the District of Arizona recently ruled that a developer “had a duty under the Subdivision Reporting Act to disclose that homebuyers would bear the costs of improvements and facilities through future rate increases.”

In Grimmelmann, et. al. v. Pulte Home Corporation, et. al., case no. CV-08-1878-PHX-FJM, four homeowners (“Plaintiffs”) in Anthem filed a lawsuit against Del Webb Corporation, its parent Pulte Home Corporation (collectively “Developer”) and Arizona American Water Company as the successor to Citizens Water Company (collectively “Utility”), seeking damages for the alleged failure to disclose to Anthem home buyers that the costs of installing necessary water and wastewater facilities for the Anthem development were not included in the purchase price of Anthem homes, but instead would be paid by Anthem homeowners through future utility rate increases. Developer and Plaintiffs had filed competing motions for summary judgment. The District Court granted Plaintiffs’ motion for summary judgment. Developer has filed a notice of appeal and the Order could be overturned or modified on appeal. Also, the Order is unpublished, but still may be cited as precedent by Federal rule.

In the case, Developer entered into an Infrastructure Agreement with Utility to advance the Utility between $80-100 million for the construction of water and wastewater facilities to serve the Anthem development. The Agreement provided that Utility would reimburse Developer for the construction advances from utility revenues. Utility refunded approximately $87 million to Developer from 2002-2005. In 2006, Utility then filed for a rate increase with the Arizona Corporation Commission (ACC), which included the refunds made by Utility to Developer in Utility’s rate base. The ACC ultimately approved rate increases for Utility’s water and wastewater divisions.

As found in the Order, Developer did not disclose the existence of the Infrastructure Agreement to Anthem homebuyers or the fact that homeowners would bear the burden of repaying Developer through utility rate increases. Instead, homeowners believed and some were even told by Developer that all costs related to utility facilities were included in the purchase price of the homes. Starting in June 2008, however, Anthem homeowners began paying increased water and sewer rates to the Utility, based, in part, on refunds paid by Developer to Utility. Plaintiffs filed suit under Arizona’s Consumer Fraud Act and for negligent misrepresentation, claiming that Developer violated Arizona’s Subdivision Reporting Act (Ariz. Rev. Stat. § 32-2181) by failing to disclose to Anthem homebuyers that they would bear the cost of utility facilities through future utility rate increases.

In the Order, the District Court rendered a broad interpretation of a developer’s disclosure obligations under the Subdivision Reporting Act relating to utility service. The Court ruled that “Pulte was required to disclose that, by virtue of an agreement between Pulte and the Water Company, purchasers would bear the burden of paying for infrastructure costs of up to $100 million through utility rate increases.” Order at 7-8. The Court found that Developer was required to disclose the “estimated costs related to the improvement [and facilities] that will be borne by purchasers.” Order at 7.

This decision has significant practical and legal impacts on new or existing developments involving water and/or wastewater service from a private utility. The impact of this decision on utility agreements with municipalities remains to be seen. To the extent a developer or property owner is developing or has developed any projects that involve this kind of utility agreement, the developer or owner should consider the impact of the Grimmelmann Order on a project’s public report and disclosures to buyers. Developers and owners should evaluate whether the public report satisfies the broad disclosure requirements under the Grimmelmann order relating to utility service. Many public reports, for example, contain a generic disclaimer relating to the utility service provider and the initial costs for establishing service. Many public reports also notify buyers that utility costs are subject to change by the service provider, and advise buyers to contact the utility regarding service connections and costs involved. Grimmelmann arguably requires a broader disclosure relating to estimated costs of the utility facilities, the existence of any agreements between developer and utility and potential rate increases that may be payable by homeowners in the future relating to the utility facilities. As stated in the Order, “the fact that Pulte could not accurately predict the cost that each purchaser would bear did not relieve Pulte of its obligation to tell home buyers that they would bear the costs, whatever they were.” Order at 7.

As a practical matter, a developer may need to investigate the utility’s plans for filing a rate case relating to the project and its impact on customer utility rates. Developer also could try and negotiate additional protections in the agreement with the utility. Developers or owners should consider the impacts of this decision on representations and statements by sales personnel to buyers. Finally, the extent to which this decision impacts potential lawsuits is unclear, but developers and owners should be wary of potential claims. In Grimmelmann, the Plaintiffs did seek to certify a class action, which was denied by the Court.