Legal Lode: Annexation Anxiety

When a municipality, after annexing territory being served by a waste hauling company, takes over collection service to residents of the area, the company is not entitled to compensation for lost business, according to a ruling by a Tennessee appeals court.

For nine years, the city of Memphis battled with opponents in court over the annexation of the Berryhill area. The litigation was finally resolved by a consent order setting Jan. 1, 2007, as the effective date for the area becoming part of the city.

Long before the annexation, the city had contracted with Allied Waste Services for garbage collection within certain Memphis neighborhoods and, at the city's direction, within any annexed areas. Tennessee state law allows a city to exclusively perform or provide waste collection service to annexed territory.

Express Disposal LLC is a hauling firm that had been doing business in Berryhill since 2005. In October 2006, the city notified Express about a change in collection service beginning on Jan. 1, 2007. Under the transition, Allied would be the sole waste collector in Berryhill until the city could put its own trucks and crews on the streets.

In late January 2007, Express filed suit against the city in state court, arguing that it had “a reasonable expectation that its customers would continue to retain and pay [Express] to pick up their garbage” and claiming 10 years' lost revenue totaling $267,000. Express claimed that the city violated the state constitution by taking Express' property without just compensation.

The city filed a motion to dismiss the case for failing to state a valid legal claim. Following a hearing, the trial court threw out the lawsuit, finding that Express did not have any property right subject to constitutional protection.

In particular, the judge noted that Express knew about the pending annexation before it began servicing the area and knew what the city planned for solid waste collection after the annexation became effective. “Express chose to operate its business in the area … at its own peril,” the judge said.

On appeal, Express conceded that the city had the exclusive right to provide garbage collection, but demanded that Memphis provide compensation for “taking” the company's customers and contracts. A three-judge appellate panel, however, affirmed the lower court decision.

“Not every destruction or injury to property by government action constitutes a ‘taking’ in the constitutional sense,” the opinion said. Tennessee courts recognize only two types of takings: physical occupation (a direct and continuing physical invasion as when real property is appropriated) and nuisance (repeated interference with an owner's beneficial use and enjoyment of his property).

The appeals court could not be convinced to view Express' lost customers in the same light as a highway being built on a person's property. “We do not find that [the] claim qualifies as either a physical occupation or nuisance-type taking.” Simply put, waste haulers in Tennessee have no right to compensation for a “taking” of their ability to conduct business in a certain area.

[Express Disposal, LLC v. City of Memphis, No. W2007-02081-COA-R3-CV (Tenn.App. Dec. 29, 2008)]

BARRY SHANOFF is a Rockville, Md., attorney and general counsel of the Solid Waste Association of North America.

The legal editor welcomes comments from readers. Contact Barry Shanoff via e-mail: [email protected].