Kerr v. Killian

• Citation: 955 P.2d 49,191 Ariz. 293
• Decision Date: 03 March 1998
• Docket Number: Nos. TX,s. TX
• Parties: , 264 Ariz. Adv. Rep. 49 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, 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, Defendant. 97-00119, TX 97-00131, TX 97-00150.
• Court: Tax Court of Arizona

Page 49

955 P.2d 49

191 Ariz. 293, 264 Ariz. Adv. Rep. 49

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, 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, Defendant.

Nos. TX 97-00119, TX 97-00131, TX 97-00150.

Tax Court of Arizona.

March 3, 1998.

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

Grant Woods, Attorney General by Patrick Irvine and Scott Keiper, Assistant Attorney General, Phoenix, for defendant.

CATES, Judge.

1. The matter at issue arises from both an appeal from the Arizona Board of Tax Appeals and the Tax Court case of Kerr v. Waddell. The underlying case was brought by four named plaintiffs, former and current employees of various federal government agencies, who undertook to represent all similarly situated federal employees subject to Arizona's state income tax on federal retirement contributions. ¹ During the tax years 1985 through 1990, the State of Arizona, as directed by the Arizona Department of Revenue, imposed state income taxes upon the federal employees' mandatory federal retirement contributions. Although Arizona state and local employees pay mandatory state retirement contributions, the State did not tax these contributions.

2. The complaint in Kerr alleged that federal employees had been discriminated against with respect to the taxation of their mandatory retirement contributions in violation of the federal constitutional doctrine of intergovernmental tax immunity, codified in 4 U.S.C. § 111, because state and local employees were not taxed similarly. Years of litigation and administrative action, in which the plaintiff class was represented by the two law firms who now seek fees, resulted in a Court of Appeals decision which concluded that Arizona's taxation of federal employees' mandatory retirement contributions was illegal and in violation of federal law. These efforts also resulted in a Board of Tax Appeals decision that the federal employees were entitled to a refund of the illegally collected taxes, which created a fund in the amount of approximately $28 million.

3. In the present action, plaintiffs' attorneys' motion for partial summary judgment argues that they are entitled to an award of reasonable attorneys' fees under the "common fund doctrine." They assert that because the $28 million fund was created through their efforts, allowing nearly 42,000 federal employees to receive tax refunds and interest, an award of attorneys' fees is necessary to prevent unjust enrichment. Defendant's cross-motion for summary judgment argues that plaintiffs' attorneys are not entitled to attorneys' fees for the following reasons: (1) such fees are available only pursuant to statute in tax cases, (2) there is no common fund against which their fees can be claimed, and (3) an award would violate the taxpayers' right to a full refund.

4. The common fund doctrine was articulated by the United States Supreme Court over a century ago in Trustees of the Internal Improvement Fund v. Greenough, 105 U.S. 527, 26 L.Ed. 1157 (1881). The doctrine provides that "a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney's fee from the fund as a whole." Boeing Co. v. Van Gemert, 444 U.S. 472, 478, 100 S.Ct. 745, 749, 62 L.Ed.2d 676 (1980). A common fund case usually arises where a successful suit, brought by an individual or representative plaintiff, results in the creation of a monetary fund that benefits a limited and identifiable group situated similarly to the plaintiff. Kuhn v. State, 924 P.2d 1053, 1057 (Colo.1996); Edwards v. Alaska Pulp Corp., 920 P.2d 751, 754 (Alaska 1996). Therefore, it is the creation of the fund that triggers the common fund doctrine. Kuhn at 1059.

5. The purpose of the common fund doctrine is to "avoid the unjust enrichment of those who benefit from the fund that is created, protected, or increased by the litigation and who otherwise would bear none of the litigation costs." Court Awarded Attorney Fees, 108 F.R.D. 237, 250 (1985). Put another way, the common fund doctrine is a fee spreading device which avoids inequitable results by spreading the costs of litigation amongst those benefitted by the efforts and expenses incurred by the representative plaintiff and his counsel. Id. An attorney's right to recover fees in a common fund case derives from principles of equity and fairness. Kuhn at 1059. Attorneys who undertake collection suits such as the current case, and whose efforts result in the creation of a common fund, do not provide their services to the absentee plaintiffs as a gift. Id. (citing Charles Silver, A Restitutionary Theory of Attorneys' Fees in Class Actions, 76 Cornell L.Rev. 656 (1991)). Accordingly, in order to prevent unjust enrichment of common fund beneficiaries, the attorneys responsible for its creation must be compensated for the reasonable value of their services. Id.

6. In Matter of Estate of Brown, 137 Ariz. 309, 670 P.2d 414 (App.1983), the Arizona Court of Appeals stated that "the so-called common fund theory of recovery is a recognized exception to the rule that attorney's fees in Arizona are allowed pursuant only to statute or contract." Id. at 312, 670 P.2d at 417. The court stated further that "it is a general rule of equity in Arizona that a person or persons who employ attorneys for the preservation of a common fund may be entitled to have their attorney's fees paid out of that fund." Id. (citing Steinfeld v. Zeckendorf, 15 Ariz. 335, 138 P. 1044 (1914) affirmed, 239 U.S. 26, ...