The city of Hamilton has settled a federal lawsuit with International Paper and SMART Papers over an outstanding termination fee for wastewater treatment services at the former SMART Papers plant.

The city, which originally filed suit for $3.2 million, has received a settlement from both papermakers for a total of $2.76 million, according to Doug Childs manager of energy management and utility business services. Of that amount, $2.6 million will be paid by International Paper and $250,000 has already been paid by SMART Papers. The funds, minus about $80,000 for legal and other miscellaneous fees, will be deposited into the city’s wastewater treatment fund.

“This will prevent a huge annual base rate increase of 5 to 8 percent,” he said.

However, the city’s ratepayers will be seeing a rate increase to ratepayer over the next several years as the city completes $30 million in various improvements that it agreed to in a consent decree with the state and federal governments. Childs said the SMART/International Papers settlement funds will help cover a $600,000 shortfall between revenues and expenses for 2013 as well as keeping the city from having to borrow money to cover the costs of the consent decree.

“This definitely softened the blow,” he said. “This was good for the city, but it’s still terrible they left.”

In late August, International Paper Co. filed a lawsuit against SMART Papers Holding LLC in the U.S. District Court in Cincinnati over the termination fee for wastewater services. The lawsuit is related to the user agreement signed in 1997 between the city and Champion International Corp., which was later acquired by International Paper.

SMART Papers bought the Hamilton mill from International Paper in December 2000. SMART Papers ended its paper making operations last March.

The user agreement listed a schedule of termination fees over the 25-year agreement.

However, a 2001 consent agreement between the city and Champion to sell the Hamilton mill to SMART Papers did not release Champion — later International Paper — from its obligations under the user agreement, according to court documents.

According to a letter sent to International Paper, the city claims it was owed $3.24 million plus interest as of May 31, 2012.

The city said if it did not receive payment by Aug. 15, 2012, it would begin legal action.

International Paper then sent a letter saying it would collect from SMART Papers for the termination fee, claiming that SMART had assumed responsibility for the termination fee in the sale agreement.

The city then purchased the site of the Hamilton mill on North B Street to control future redevelopment. The portion of the site on the west side of North B Street was sold to a Pennsylvania-based entrepreneur in December.

Hamilton then filed a lawsuit in Butler County Common Pleas Court in late August, but that case was transferred to federal court on Aug. 30 as International Paper wanted to consolidate both cases, city officials said at the time.