State officials say the city failed to file necessary reports to the Alabama Department of Environmental Management regarding violations at the lagoon and nearby pump stations.
Environmental officials say waste water was being discharged into creeks and into a neighborhood.
The lawsuit says the city owes $30,000 in fines.
Mayor Glenda DuBose says she was only made of the problems Tuesday night.
"(It) was the first time that I'm aware from Miss Jones that we are being placed in litigation," said DuBose. "At one time the city manager, Tim Sweezey, he did mention to me he had a conversation with ADEM and he had been talking and getting everything handled. "
Reports to ADEM have apparently not been filed since 2009.