MS 2020-07-M-PopeIII-June-26-2020-Refund-of-Initialization-Fee June 26, 2020

Can a Mississippi city refund a contract fee to a developer if the developer never actually used the service the city was paid for?

Short answer: The AG concluded that returning a $10,000 contract fee to a developer who never connected to Hattiesburg's wastewater system would not violate Section 66 of the Mississippi Constitution. A refund of consideration the city did not earn is not a donation or gratuity.

Disclaimer: This is an official Mississippi Attorney General opinion. AG opinions are persuasive authority but not binding precedent. This summary is for informational purposes only and is not legal advice. Consult a licensed Mississippi attorney for advice on your specific situation.

Plain-English summary

A limited liability company paid the City of Hattiesburg $10,000 as an "initialization and start-up fee" to connect a planned subdivision to the city's wastewater system. The contract did not include a refund clause. The subdivision was outside city limits, and the developer never sent any wastewater into the system. The city wanted to return the money but worried that doing so would amount to a "donation or gratuity" forbidden by Article 4, Section 66 of the Mississippi Constitution.

The AG concluded that the refund would not be an unconstitutional donation. Section 66 only blocks transfers from the public treasury for which the government receives no consideration. Here, the $10,000 was contract consideration paid in exchange for a service the city never delivered. Returning unearned consideration is the opposite of a gift. The AG also noted two limits on the answer: the office cannot interpret a contract (Section 7-5-25 limits opinions to questions of state law for prospective guidance), and a copy of the agreement was not provided, so the AG was working only from the facts described in the request.

Currency note

This opinion was issued in 2020. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What is Section 66 and why does it come up here?

Article 4, Section 66 of the Mississippi Constitution forbids the legislature from granting "a donation or gratuity in favor of any person or object" except by a two-thirds vote, and never for sectarian purposes. Mississippi courts and the AG have read Section 66 broadly: it applies any time a public body considers handing money to a private party for nothing in return.

Why does refunding $10,000 not count as a donation?

A donation is, by definition, a transfer with no consideration. Here the $10,000 originally moved in the opposite direction, from the developer to the city, and was earmarked as consideration for connecting the subdivision to the city's wastewater system. The city never made the connection useful for the developer's project, and no wastewater went into the system. Returning that consideration is unwinding a contract, not making a gift.

Did the AG actually look at the contract?

No. The AG specifically said the office cannot interpret contracts and that no copy of the agreement was provided. The opinion is written on the facts in the request: that the LLC paid the fee, that the contract had no refund clause, and that the city did not provide the service. If the contract said something different, the result might also differ.

Does the city have to refund the fee?

The AG did not order it. The opinion just clears one obstacle: the city may make the refund without it being treated as an unconstitutional donation. Whether the city's contract law obligations require a refund is a different question that the AG could not answer.

Background and statutory framework

The opinion arises from a public-private utility deal outside Hattiesburg's city limits. An LLC and the City of Hattiesburg signed a contract for the development of a subdivision, with the LLC paying a $10,000 initialization and start-up fee for connection to the city's wastewater system. The contract was silent on what happened to the fee if no wastewater was ever sent through.

The AG framed the constitutional question through Article 4, Section 66:

No law granting a donation or gratuity in favor of any person or object shall be enacted except by the concurrence of two-thirds of the members elect of each branch of the Legislature, nor by any vote for a sectarian purpose or use.

The Mississippi Supreme Court defined "donation or gratuity" in Craig v. Mercy Hosp. -Street Mem'l, 45 So.2d 809, 814 (Miss. 1950): the term "implies absence of consideration, the transfer of money or other things of value from the owner to another without any consideration." The Court added that "if there is no 'donation or gratuity' involved in the instant case, then Section 66 has no application at all."

The AG applied that to Hattiesburg's facts: the $10,000 was consideration paid to the city in exchange for promised wastewater service. The city did not provide the service. The AG had been clear that public funds may be paid out only when the entity receives adequate consideration for what it gives away. Returning consideration the city did not earn does not flip that arithmetic into a gift.

The AG attached two limits to the conclusion. First, under Miss. Code Ann. Section 7-5-25, AG opinions are limited to prospective state-law questions for officials, and the office cannot interpret a contract. Second, the analysis was based solely on the facts as recited by the city's attorney; the contract itself was not in front of the AG.

The opinion is signed by Assistant Attorney General Kim P. Turner on behalf of Attorney General Lynn Fitch.

Citations

Mississippi Constitution Article 4, Section 66
Craig v. Mercy Hosp.-Street Mem'l, 45 So.2d 809, 814 (Miss. 1950)

Source

Original opinion text

June 26, 2020

Moran M. Pope, III, Esq.
Attorney for the City of Hattiesburg
Post Office Box 17527
Hattiesburg, Mississippi 39404-7527

Re: Refund of "Initialization Fee"

Dear Mr. Pope:

The Office of the Attorney General is in receipt of your request for the issuance of an official opinion.

Question Presented

Would the refund of an "initialization and startup fee" by the City of Hattiesburg, initially paid to the City by a limited liability company pursuant to a contract, constitute a donation in violation of Article 4, Section 66 of the Mississippi Constitution?

Background Facts

A limited liability company entered into a contract with the City of Hattiesburg for the development of a subdivision to be located outside of the city limits. Pursuant to the contract, the LLC paid to the City an "initialization and start-up fee" of $10,000.00 for the purpose of connecting the subdivision to the City's wastewater system. No provision is made in the contract for the refund of this fee if no wastewater is sent into the City's system.

A copy of the referenced contract was not provided to the Office of the Attorney General. Thus, our background facts are based solely upon the recitation of facts as set forth in your written request submitted for the issuance of an official opinion.

Brief Response

Your request is predicated upon a contract, such that the money was paid by an LLC to the City and services were to be provided by the City for the benefit of the LLC in exchange therefore, pursuant to a written contract. The Office of the Attorney General may not issue an official opinion which requires an interpretation of a contract.

However, based upon basic contract principles, the City of Hattiesburg may refund money paid to it pursuant to a contract if the City is not providing the service for which the money was paid. Such a refund would not constitute an illegal donation in violation of Section 66 of the Mississippi Constitution.

Applicable Law and Discussion

By virtue of a telephone conversation subsequent to our receipt of your written request for an official opinion, it is our understanding that it is the City's concern that should it refund the "initialization and start-up fee," such payment may constitute a donation in violation of Section 66 of the Mississippi Constitution.

Article 4, Section 66 states:

No law granting a donation or gratuity in favor of any person or object shall be enacted except by the concurrence of two-thirds of the members elect of each branch of the Legislature, nor by any vote for a sectarian purpose or use.

"The term 'donation or gratuity' implies absence of consideration, the transfer of money or other things of value from the owner to another without any consideration." Craig v. Mercy Hosp.-Street Mem'l, 45 So.2d 809, 814 (Miss. 1950). Of course, "[i]f there is no 'donation or gratuity' involved in the instant case, then Section 66 has no application at all." Id.

The premise of Section 66 is the governmental entity must receive adequate consideration for something it gives to another individual or entity. In the current scenario, the funds in question are consideration paid by the LLC to the City pursuant to the terms of the contract for the purpose of connecting a residential development to the City's wastewater system. Based upon the facts set forth in your request, the development has not utilized the City's wastewater system, meaning the City is not providing the contracted services for which the LLC paid $10,000.00. Based upon these facts, it is the opinion of this office that the return of those funds by the City to the LLC would not constitute a donation in violation of Section 66 of the Mississippi Constitution.

If this office may be of any further assistance to you, please do not hesitate to contact us.

Sincerely,
LYNN FITCH, ATTORNEY GENERAL

By: /s/ Kim P. Turner
Kim P. Turner
Assistant Attorney General