Kerr v. Killian

• Decision Date: 27 January 2000
• Docket Number: No. 1 CA-TX 98-0014.,1 CA-TX 98-0014.
• Citation: 3 P.3d 1133,197 Ariz. 213
• Parties: Clark J. KERR and Billie Sue Kerr, husband and wife, Susan Moran, Steve Allen and John Udall, individually and as representatives of the class comprised of federal employees who paid Arizona income taxes on federal retirement contributions during one or more of the years 1984 to date, Plaintiffs-Appellees, v. Mark J. KILLIAN, in his capacity as Director of the Arizona Department of Revenue, the Arizona Department of Revenue of the State of Arizona, Defendants-Appellants. State of Arizona, ex rel., the Arizona Department of Revenue, Plaintiffs-Appellants, v. Clark J. Kerr and Billie Sue Kerr, husband and wife, Defendants-Appellees. Clark J. Kerr and Billie Sue Kerr, husband and wife; and their attorneys, Bonn, Luscher, Padden & Wilkins, Chartered and O'Neil, Cannon & Hollman, S.C., Counterclaimants-Appellees, v. State of Arizona, ex rel., the Arizona Department of Revenue, Counterdefendants-Appellants.
• Court: Arizona Court of Appeals

3 P.3d 1133

197 Ariz. 213

Clark J. KERR and Billie Sue Kerr, husband and wife, Susan Moran, Steve Allen and John Udall, individually and as representatives of the class comprised of federal employees who paid Arizona income taxes on federal retirement contributions during one or more of the years 1984 to date, Plaintiffs-Appellees, v. Mark J. KILLIAN, in his capacity as Director of the Arizona Department of Revenue, the Arizona Department of Revenue of the State of Arizona, Defendants-Appellants.

State of Arizona, ex rel., the Arizona Department of Revenue, Plaintiffs-Appellants, v. Clark J. Kerr and Billie Sue Kerr, husband and wife, Defendants-Appellees.

Clark J. Kerr and Billie Sue Kerr, husband and wife; and their attorneys, Bonn, Luscher, Padden & Wilkins, Chartered and O'Neil, Cannon & Hollman, S.C., Counterclaimants-Appellees, v. State of Arizona, ex rel., the Arizona Department of Revenue, Counterdefendants-Appellants.

No. -0014.

Court of Appeals of Arizona, Division 1, Department T.

January 27, 2000.

As Amended April 13, 2000.

Janet A. Napolitano, The Attorney General by Patrick Irvine, Assistant Attorney General, Phoenix, for Appellants.

Bonn, Luscher, Padden & Wilkins, Chartered by Paul V. Bonn, Randall D. Wilkins, John H. Cassidy, D. Michael Hall, Phoenix, and O'Neil, Cannon & Hollman, S.C. by Eugene O. Duffy, Milwaukee, WI, for Appellees.

Marikay Lee-Martinez, Phoenix, Amicus Curiae.

J. Robert Cuatto, Phoenix, Amicus Curiae.

OPINION

KLEINSCHMIDT, Judge.

¶ 1 This is an appeal by the Arizona Department of Revenue from an award of fees to attorneys who successfully represented taxpayers on a refund claim. We affirm.

¶ 2 Before 1991, Arizona exempted from state income tax the amount of money state and local government employees paid into retirement plans. In Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989), the United States Supreme Court invalidated a similar tax provision because no exemption was afforded federal employees. The court ruled that the exemption was not in accord with the Intergovernmental Tax Immunity Doctrine codified in 4 U.S.C. section 111.

¶ 3 In November 1989 the five taxpayers, who are or were federal employees and who are the appellees in this case, sued the Arizona Department of Revenue in the tax court in a case styled Kerr v. Waddell. They brought the action on behalf of themselves and all similarly situated persons, and they sought a declaration that the Arizona tax scheme violated the federal statute, and asked for injunctive relief, damages, and refunds. While the action was pending, the tax court directed the Department to include a notice in its tax instruction booklets about the pendency of the litigation, as well as a form that current and former federal employees could file to preserve any right to refunds that might be due them if the taxpayers prevailed. This was done in the 1990 instruction booklets and in instruction booklets from 1994 through 1998. The tax court later declared the Department's refusal to exempt contributions to federal retirement plans invalid, but declined other relief.

¶ 4 The decision was appealed, and in Kerr v. Waddell, 183 Ariz. 1, 899 P.2d 162 (App. 1994) ("Kerr I") we held that the taxpayers' failure to invoke their administrative remedies before the Department and the State Board of Tax Appeals had deprived the tax court of jurisdiction over their state law claims for declaratory relief and refunds. We also held that the failure to invoke administrative remedies did not affect the viability of the taxpayers' claims for declaratory and injunctive relief and damages under 42 U.S.C. section 1983. We further held that the exemption scheme violated 4 U.S.C. section 111.

¶ 5 On review, the Arizona Supreme Court returned the case to us for reconsideration in light of the intervening decision in National Private Truck Council v. Oklahoma Tax Com'n., 515 U.S. 582, 115 S.Ct. 2351, 132 L.Ed.2d 509 (1995). On reconsideration we vacated Kerr I and held that the taxpayers' failure to invoke their administrative remedies foreclosed the tax court from affording them any relief. We remanded to the tax court with directions to dismiss the action in its entirety. See Kerr v. Waddell, 185 Ariz. 457, 916 P.2d 1173 (App.1996)

("Kerr II").

¶ 6 When the taxpayers filed their lawsuit they also filed administrative claims with the Department on behalf of themselves and the putative class requesting refunds on the same grounds asserted in the cases they filed in the tax court in Kerr v. Waddell. In 1993, a hearing officer for the Department held that the Department had no legal authority to pass on the legality of the statutory scheme or to recognize a class refund claim.

¶ 7 The taxpayers appealed the hearing officer's ruling. The Board of Tax Appeals heard the matter in 1994 and ruled on it in 1997, holding that neither the Department nor the Board could entertain a class refund claim. It also held that the taxpayers who were parties to the administrative proceeding were entitled to refunds for 1985 through 1990. ¶ 8 The taxpayers then began this action in the tax court to appeal the Board's ruling. Two months later, the Governor of Arizona directed the Department to make refunds for the tax years 1985 through 1990 to all taxpayers who had filed timely refund claims, whether they were parties to the administrative action or not.

¶ 9 The taxpayers asked that their attorneys be awarded 20% of the total refunds that the Department had paid and would pay pursuant to the governor's direction. Over the Department's opposition, the court ruled that the common fund doctrine applied and that the taxpayers' attorneys were entitled to an award of reasonable fees. This was subsequently confirmed at 20% of the refunds. The fee will be approximately $3.2 million which includes costs and expenses. The Department brought this appeal.

THE DEPARTMENT IS AGGRIEVED BY THE JUDGMENT

¶ 10 The taxpayers argue that this appeal should be dismissed on the grounds that the Department is not aggrieved by the fee award. A party is "aggrieved" by a judgment if it denies that party some personal or property right or imposes on that party some substantial burden or obligation. See Matter of Gubser, 126 Ariz. 303, 306, 614 P.2d 845, 848 (1980)

. The denial or imposition must flow directly from the judgment, and not merely from applying the legal principle established in the judgment to another proceeding. See In re Roseman's Estate, 68 Ariz. 198, 200, 203 P.2d 867, 868 (1949).

¶ 11 Aggrievement by all or part of a judgment does not remove all limitations on the scope of a party's appeal. A party who is aggrieved by a judgment may nevertheless lack standing to assert particular arguments in attempting to secure a reversal of a judgment. See Goglia v. Bodnar, 156 Ariz. 12, 18, 749 P.2d 921, 927 (App.1987)

. Lack of aggrievement is a jurisdictional defect, but lack of standing to urge a particular argument is not. See Matter of Strobel, 149 Ariz. 213, 216, 717 P.2d 892, 895 (1986). Since Arizona has no analog to the "case or controversy" provision in its constitution, our reluctance to consider issues raised where there is no standing is a rule of judicial restraint. See State v. B Bar Enterprises, Inc., 133 Ariz. 99, 101 n. 2, 649 P.2d 978, 980 n. 2 (1982).

¶ 12 After this appeal was filed, the taxpayers moved to dismiss it on the grounds that the Department was not an aggrieved party. Another panel of this court considered the motion and denied it, concluding that the taxpayers had failed to show that the Department was not aggrieved but had shown at most that the Department might not have standing to make one or more of the arguments included in the opening brief.

¶ 13 The taxpayers now contend that the only way in which the Department could possibly be aggrieved is because it will be required to pay from its own funds 20% of the 26 refunds that it paid in full before the court ordered it to withhold 20% of each refund. They go on to argue that because the Department did not address the issue of these 26 refunds in its opening brief, it has waived that issue on appeal and with that waiver, the Department's aggrieved status evaporates.

¶ 14 The problem with the taxpayers' argument is that the issue was not waived. While the Department did not refer to the 26 refunds in its opening brief, it did raise them as a response to a motion to dismiss which was filed by the taxpayers. The Department prevailed on that motion. If that were not enough, the question whether the Department must pay the fees as to the 26 refunds is subsumed in the Department's general attack on the applicability of the common fund doctrine to tax refund cases. In other words, if the Department were to prevail on its argument that the common fund doctrine does not apply in this case, it would not have to pay the fees for the 26 refunds.

¶ 15 We believe that the Department has carried its burden of demonstrating that it is aggrieved by the judgment. First, there is the matter of having to pay 20% of 26 refunds out of the Department's own funds. Then, as the Department pointed out in its response to the motion to dismiss, the judgment required it to undertake multiple mailings that cost between $10,000 and $15,000 more than it would have otherwise had to pay. Finally, the Department must undertake the administrative task of withholding part of each refund and periodically accounting for and remitting the amounts withheld to the taxpayer's counsel.

THE DEPARTMENT DOES NOT HAVE STANDING TO ASSERT THE DUE PROCESS RIGHTS OF THE NON-PARTY TAXPAYERS

¶ 16 The Department challenges the award on the theory that the procedure used to arrive at the award violated the process of law due non-party taxpayers because those taxpayers did not receive adequate notice that a common fund award would be sought. The Department lacks standing to seek reversal on the basis of this...