Cost-Justified Sewer Connection Fees: Inflow/Infiltration Mitigation May Be Required, but the Per-Unit Amount Must Be Proven

1. Introduction

Matter of Schermerhorn Residential Holdings, L.P. v Washington County Sewer Dist. II (3d Dept, June 11, 2026) addresses when a county sewer district may impose a “connection charge” on out-of-district property owners seeking to connect to the district’s wastewater system, and what evidentiary showing is required to sustain such a charge against an “unauthorized tax/impact fee” challenge.

Petitioners, the owners and developers of a substantially completed 252-unit apartment project in the Town of Kingsbury, sought to connect through Kingsbury Sewer District No. 2 (“KSD2”) into Washington County Sewer District II (“WCSDII”). WCSDII and Washington County demanded a per-unit out-of-district connection fee of $2,500, producing a total in excess of $500,000. Petitioners contended the per-unit approach was unlawful and that any lawful “connection fee” would be a single $2,500 charge for the project’s single physical tie-in.

Supreme Court largely agreed with petitioners—invalidating the per-unit fee under Local Law No. 2024-01 and directing respondents to accept a flat $2,500 fee. The Appellate Division, Third Department reversed, holding that key factual questions remained regarding whether the fee reasonably approximated the cost/burden attributable to the new connection.

Key legal issues

  • Whether the Town of Kingsbury and/or KSD2 were necessary parties under CPLR 1001(a).
  • Whether the challenged “connection fee” is a permissible regulatory fee or an impermissible tax/impact fee.
  • Whether inflow and infiltration (“I/I”) mitigation may lawfully be treated as part of the cost of approving a new connection.
  • Whether the record established, as a matter of law, that the $2,500 per unit amount was reasonably related to cost.
  • What remedy is proper if the fee is ultimately found unlawful.

2. Summary of the Opinion

The Third Department:

  • Rejected respondents’ nonjoinder defense (CPLR 1001[a]) as to the validity of WCSDII’s fee, because the principal dispute concerned respondents’ conduct and the requested relief would not inequitably affect the Town of Kingsbury on the record presented.
  • Clarified that the case turns on municipal fee doctrine (regulatory fee vs. unauthorized tax), not on contract rights or a “true field preemption” theory.
  • Held that, given WCSDII’s SPDES permit obligations and combined sewer overflow constraints, I/I mitigation can rationally be treated as a condition precedent to approving a new connection—so the purpose of the fee was not inherently inconsistent with a “connection charge.”
  • Found the record insufficient to decide, as a matter of law, whether the specific $2,500 per-unit fee bears a reasonable relationship to the costs imposed by petitioners’ connection.
  • Remitted for a hearing to resolve factual questions concerning cost-justification.
  • Noted that if the fee is struck down after remittal, the remedy is annulment of the fee provision—not judicial selection of a replacement fee amount.

3. Analysis

3.1 Precedents Cited

The court’s reasoning is built from two main lines of cases: (i) necessary-party doctrine and (ii) the tax-versus-fee framework for municipal charges, including the evidentiary need for a hearing where the cost relationship is disputed.

A. Necessary parties (CPLR 1001[a])

  • Matter of 27th St. Block Assn. v Dormitory Auth. of State of N.Y., 302 AD2d 155 (1st Dept 2002): cited for the general CPLR 1001(a) framework; the Third Department applied that framework to conclude that adjudicating WCSDII’s fee does not inherently require joinder of other municipalities.
  • Matter of Coney Is. Preparatory Pub. Charter Sch. v New York State Educ. Dept., 241 AD3d 57 (3d Dept 2025), lv denied 44 NY3d 911 (2026), and Matter of DeWolf v Wirenius, 229 AD3d 929 (3d Dept 2024): cited for the principle that where the determination concerns the validity of the named respondents’ actions only, nonparties are not necessarily required.
  • Matter of A & F Scaccia Realty Corp. v New York City Dept. of Envtl. Protection, 200 AD3d 875 (2d Dept 2021): used as a contrast (the “compare”) to illustrate circumstances where the nonparty’s interests may be more directly implicated.
  • Matter of Mid Is. Therapy Assoc., LLC v New York State Dept. of Educ., 99 AD3d 1082 (3d Dept 2012), and Arrigo v DiNapoli, 204 AD3d 1339 (3d Dept 2022): support the court’s conclusion that there was no demonstrated risk of inequitable effect on the Town of Kingsbury from a judgment on this record.

B. Statutory framing / preemption lens

  • Consolidated Edison Co. of N.Y. v Town of Red Hook, 60 NY2d 99 (1983): invoked to orient the inquiry—petitioners’ argument was treated as whether Local Law No. 2024-01 violates the County Law’s authorized funding mechanisms, rather than a broad field-preemption challenge.
  • Young Men's Christian Assn. v Rochester Pure Waters Dist., 37 NY2d 371 (1975): cited for the statutory landscape of sewer district financing and the distinction among funding mechanisms (user charges, ad valorem levies, special benefit assessments).

C. The “fee vs. tax” test and the cost-relationship requirement

  • Albany Area Bldrs. Assn. v Town of Guilderland, 141 AD2d 293 (3d Dept 1988), affd 74 NY2d 372 (1989), and New York Tel. Co. v City of Amsterdam, 200 AD2d 315 (3d Dept 1994): anchor the doctrinal distinction—taxes fund government generally; fees allocate the cost of a special service/benefit to the user.
  • Matter of Phillips v Town of Clifton Park Water Auth., 286 AD2d 834 (3d Dept 2001), lv denied 97 NY2d 613 (2002), relying on Matter of Torsoe Bros. Constr. Corp. v Board of Trustees of Inc. Vil. of Monroe, 49 AD2d 461 (2d Dept 1975), and citing Matter of 201 C-Town LLC v City of Ithaca, N.Y., 206 AD3d 1398 (3d Dept 2022): supply the key invalidity principle—if charges are exacted for revenue purposes or to offset general governmental functions, they are an unauthorized tax.
  • Watergate II Apts. v. Buffalo Sewer Auth., 46 NY2d 52 (1978), Matter of Valentino v County of Tompkins, 45 AD3d 1235 (3d Dept 2007), Mark IV Constr. Co. v County of Monroe, 187 AD2d 985 (4th Dept 1992), and Coconato v Town of Esopus, 152 AD2d 39 (3d Dept 1989), lv denied 76 NY2d 701 (1990): collectively establish the operative metric—fees must bear a reasonable relationship to the actual cost of the service regulated.
  • Jewish Reconstructionist Synagogue of N. Shore v Incorporated Vil. of Roslyn Harbor, 40 NY2d 158 (1976), and Watergate II Apts. v. Buffalo Sewer Auth. again: support the court’s acceptance that municipalities may use standardized methodologies and reasonable proxies, rather than individualized accounting for each applicant.
  • Matter of Torsoe Bros. Constr. Corp. v Board of Trustees of Inc. Vil. of Monroe, 49 AD2d 461 (2d Dept 1975): also supplies the procedural consequence applied here—where the cost relationship is factually disputed and not resolvable on papers, a hearing is warranted.

3.2 Legal Reasoning

A. Contracts did not supply the rule of decision

Respondents pointed to prior agreements (including a 2006 agreement with petitioners’ predecessor and a 2021 intermunicipal agreement), but the court treated them as largely irrelevant to the legality of the challenged charge because the fee was imposed by a “generally applicable local law.” The court emphasized that the relevant agreements were “silent” on the material point—charges for “not yet connected” users—and thus could not displace municipal fee doctrine.

B. Not “field preemption,” but statutory authorization plus municipal fee limits

The court reframed petitioners’ preemption rhetoric as a simpler question: whether Local Law No. 2024-01 conflicts with the County Law’s sewer district financing scheme (County Law article 5-A, including County Law § 266). Yet even if County Law § 266 principally targets in-district allocations, the court held the dispute ultimately rests on broader limits: municipalities cannot disguise revenue-raising measures as “fees.”

C. I/I mitigation can be treated as a “connection” cost—given SPDES constraints

A pivotal feature of the opinion is its acceptance of WCSDII’s operational reality: where a combined sewer system is regulated under a DEC SPDES permit, new sanitary flow may be unlawful unless offset by inflow and infiltration reductions (or other mitigation). The court credited respondents’ explanation that “the act of connecting carries an obligation to create corresponding capacity,” making mitigation a rational condition precedent to approval.

This reasoning narrows petitioners’ categorical argument that I/I mitigation is necessarily “system-wide” and therefore never a connection-related cost. The court held that “incidental system-wide benefits” do not negate the connection-related character where mitigation is required to lawfully approve the specific new connection.

D. The per-unit structure is not inherently invalid; the missing link is evidentiary

The court did not hold that per-unit charges are unlawful in principle. It accepted that municipalities may use “reasonable proxies” and standardize charges, and it acknowledged that respondents’ submissions suggested substantial accommodation costs.

The failure was foundational and factual: the record did not show how the $2,500 amount (first imposed years earlier) was determined or whether it “reasonably approximates” the cost of the mitigation obligation. That gap prevented judgment as a matter of law for either side, necessitating a hearing to determine whether the fee bears the required relationship to cost.

E. Remedy discipline: courts annul; agencies set fees

The Third Department corrected Supreme Court’s remedial approach. Even if the fee is ultimately invalid, the court explained that the judiciary should not “fix the amount to be charged in its place”; it may annul the invalid fee, leaving the administrative body to determine a lawful charge in the first instance.

3.3 Impact

  • Operational constraints can define “connection” costs. Sewer districts operating under SPDES permit limitations may argue—successfully in principle—that capacity-creation or mitigation obligations are part of the cost of approving new connections, not merely generalized maintenance.
  • But historical numbers need present justification. Even where the purpose is regulatory and legitimate, a fixed fee (especially one set long ago) is vulnerable unless the municipality can show how it was derived and why it remains a reasonable approximation of cost.
  • In fee challenges, expect hearings. Where parties present competing technical accounts (engineering standards, recent project costs, system demands), courts may require evidentiary development rather than resolve legality on affidavits alone.
  • Limits on judicial remedies. The decision reinforces that courts generally do not re-rate or reprice municipal fees; they invalidate unlawful enactments and remit, preserving administrative primacy over rate-setting.

4. Complex Concepts Simplified

  • Regulatory fee vs. tax: A fee charges the recipient of a particular service or benefit and must roughly track the cost of providing it. A tax raises money for government generally. If a “fee” functions like general revenue, it is an unauthorized tax unless properly enacted as such.
  • Inflow and infiltration (I/I): “Inflow” is stormwater entering sewer pipes (often in combined systems). “Infiltration” is groundwater entering through cracks or defects. Both can overload sewers and treatment plants.
  • Combined sewer overflow (CSO): In combined systems, heavy wet-weather flows can force mixed stormwater/sewage to discharge at designated overflow points (here, largely along the Hudson River) to prevent backups and system failure.
  • SPDES permit: A DEC-issued permit regulating discharges to waters of the state. Permit conditions can effectively cap or condition new connections if additional flows would worsen overflows or discharges.
  • “Per-unit” fee: A charge based on dwelling units/equivalent domestic units rather than a single physical tap. The opinion allows this structure in principle, but only if it reasonably approximates connection-related costs.
  • Necessary party (CPLR 1001[a]): A person/entity that must be joined if complete relief cannot be granted without them or if the judgment would unfairly affect them. Here, the court found the validity of WCSDII’s fee could be litigated without joining the Town/KSD2 on this record.

5. Conclusion

Matter of Schermerhorn Residential Holdings, L.P. v Washington County Sewer Dist. II tightens the evidentiary discipline around sewer “connection fees.” The Third Department accepted that, under SPDES-driven capacity constraints, inflow/infiltration mitigation can be treated as a legitimate connection-related cost—even if it produces system-wide benefits. But it also held that a municipality must be able to show that the specific dollar figure (here, $2,500 per unit) is a reasonable approximation of the cost of accommodating the new connection.

The practical takeaway is twofold: sewer districts may justify connection charges by linking them to regulatory compliance and capacity-creation burdens, yet they must be prepared to prove the relationship between the charge and cost—often through a hearing—rather than rely on legacy numbers or historical practice. If a fee fails that test, courts annul; they do not rewrite the rate schedule.