McCroskey v. Gustafson

• Decision Date: 27 March 1980
• Docket Number: No. 79CA0360,79CA0360
• Citation: 44 Colo.App. 149,611 P.2d 984
• Parties: Jack McCROSKEY, Martha F. Radetsky, Harold Dahlen, Helen Hopkins and Jeannine Atchison, Individually and on behalf of the Taxpayers and Citizens of the City and County of Denver, Colorado, Plaintiffs-Appellants, v. Carl H. GUSTAFSON, Quinn & Co., Inc., a New Mexico Corporation, and The City and County of Denver, a Municipal Corporation, Defendants-Appellees. . II
• Court: Colorado Court of Appeals

Page 984

611 P.2d 984

44 Colo.App. 149

Jack McCROSKEY, Martha F. Radetsky, Harold Dahlen, Helen Hopkins and Jeannine Atchison, Individually and on behalf of the Taxpayers and Citizens of the City and County of Denver Colorado, Plaintiffs-Appellants, v. Carl H. GUSTAFSON, Quinn & Co., Inc., a New Mexico Corporation, and The City and County of Denver, a Municipal Corporation, Defendants-Appellees.

No. 79CA0360.

Colorado Court of Appeals, Div. II.

March 27, 1980.

Rehearing Denied April 17, 1980.

Certiorari Granted May 27, 1980.

Isaacson, Rosenbaum, Spiegleman & Friedman, P. C., Stanton D. Rosenbaum, Denver, Kelly, Haglund, Garnsey, Kahn & Donnell, Edwin S. Kahn, Denver, for plaintiffs-appellants.

Tallmadge, Tallmadge, Wallace & Hahn, P. C., David J. Hahn, Denver, Rodey, Dickason, Sloan, Akin & Robb, P. A., Albuquerque, N. M., for Carl H. Gustafson, Quinn & Co., Inc., defendants-appellees.

Max P. Zall, City Atty., Robert M. Kelly, John L. Stoffel, Jr., Asst. City Attys., Denver, for The City and County of Denver, defendant-appellee.

BERMAN, Judge.

Plaintiffs appeal from the judgment of the district court granting defendants' motion for summary judgment. We affirm.

Carl Gustafson and Quinn & Co., Inc., (defendants) were bond consultants for the City and County of Denver (City) and in that fiduciary capacity assisted the City in numerous bond issues from 1971 through 1974. In November of 1975, Gustafson wrote to the Mayor proposing that the City take advantage of the strong municipal bond market. Essentially, Gustafson proposed that, because of the strength of the municipal bond market, the City issue tax-exempt bonds at a low interest rate which Quinn & Co. would purchase from the City. The City would then use the proceeds of the bond issue to purchase from Quinn & Co. federal securities which would yield a higher rate of interest. Gustafson represented that the interest differential would result in an arbitrage profit to the City which might be as high as $2,500,000 to $3,750,000. In his initial proposal to the Mayor, and in the formal contract that was signed and accepted by the Manager of Revenue, on behalf of the City on December 18, 1975, Gustafson expressly stated that he and his firm would be acting as principals and not as fiduciaries, and that they intended to make a profit on the sale of the federal securities to the City.

The transaction was complicated by Internal Revenue regulations which governed transactions of this nature. The I.R.S. recognized that arbitrage bond transactions permitted cities to realize profits at the expense of the U. S. Treasury, and, therefore, placed maximum ceilings on the amount of arbitrage profits a city could realize. To keep within the federal limits and thereby retain the federal tax-exempt status of the issued municipal bonds, the City and defendants agreed that the arbitrage profit was to be lowered by decreasing the effective interest rate on the federal securities by the City purchasing the securities from the defendants above par value. This over-payment represented the profit that the defendants had informed the City that they intended to make on the transaction. As a result of the subsequent transactions, the City refunded a 1974 Stadium bond issue and saved approximately.$1.8 million. The defendants made a profit of.$2.7 million on the sale of the federal securities to the City.

Plaintiffs, individual citizens and taxpayers residing in the City and County of Denver, made a demand upon the City to sue defendants to recover what plaintiffs characterized as "windfall profits" received by the defendants. The City declined to bring suit. Thereafter, plaintiffs brought this action alleging that Gustafson and Quinn & Co. were in a fiduciary relationship with the City which could not be unilaterally severed, and that they breached their fiduciary duty by failing to disclose the following material facts: that the City would receive less than $3,000,000 in arbitrage profit; that the defendants would receive.$2.7 million in profit; and that there was an alternate method of complying with the I.R.S. arbitrage regulations whereby the federal government would receive the.$2.7 million "windfall profit" instead of the defendants. Plaintiffs further alleged that Quinn & Co. had a duty as a broker-dealer to disclose the above material facts, and finally that Gustafson, as a member of the General Assembly, had a duty not to be unjustly enriched at the expense of plaintiffs-taxpayers.

When the case was at issue, defendants moved for summary judgment. The district court assumed that the plaintiffs had standing and reached the merits of the case. The court granted defendants' motion on the grounds that the City realized the maximum arbitrage profit that it was entitled to under the then existing federal regulations, that there was no fiduciary relationship between the defendants and the City, and that, in any event, defendants had provided documents which fully disclosed the amount of profit that they expected to make on the transaction. Further, the court held that Gustafson's position as a state representative did not create a fiduciary relationship with the City.

Plaintiffs have appealed, again asserting the existence of a fiduciary duty, and the breach of that duty by defendants' failure to disclose material facts. Our affirmance is premised solely on the fatal jurisdictional infirmity caused by plaintiffs' lack of standing to bring this action as taxpayers on behalf of the City, and thus, we do not reach the substantive issues of the case. And, since the trial court rendered a correct judgment, a remand is not required. Metropolitan Industrial Bank v. Great Western Products Corp., 158 Colo. 198, 405 P.2d 944 (1965).

Initially, we note that defendants challenged plaintiffs' standing to sue as taxpayers on behalf of the City in their answer, in their motion for summary judgment, and in their answer brief on appeal. Further, standing is a jurisdictional question, Flast v. Cohen, 392 U.S. 83, 88 S.Ct. 1942, 20 L.Ed.2d 947 (1968), and may be raised at any stage of an action. Peaker v. Southeastern Colorado Water Conservancy District, 174 Colo. 210, 483 P.2d 232 (1971); Baker v. Denver Tramway Co., 72 Colo. 233, 210 P. 845 (1922). Therefore, this issue is properly before this court.

Colorado has long recognized the validity and necessity of taxpayers' suits on behalf of a municipality. Ferch v. Hansen, 115 Colo. 366, 174 P.2d 719 (1946); McIntyre v. Board of County Commissioners, 15 Colo.App. 78, 61 P. 237 (1900). In adopting this doctrine, however, the courts in Colorado have not articulated the prerequisites that a taxpayer must demonstrate in order to have standing to bring a suit on behalf of a municipal corporation.

Our Supreme Court has set forth the requirements for taxpayer standing to bring suit against the state. Dodge v. Dept. of Social Services, Colo., 600 P.2d 70 (1979); see Wimberly v. Ettenberg, 194 Colo. 163, 570 P.2d 535 (1977). Those requirements consist of a two-part test which requires that taxpayer-plaintiffs allege: 1) injury to themselves in fact; and 2) that the injury was to a legal interest of the taxpayer which is protected by statutory or constitutional provisions.

The first part of the test was derived from the Colo.Const., Art. III, which prohibits one branch of government from usurping the powers of another branch. Wimberly, supra. As stated in Wimberly, supra, "(c)ourts cannot, under the pretense of an actual case, assume powers vested in either the executive or the legislative branches of government." Thus, a taxpayer-plaintiff must allege injury in fact to himself to assure both that the court is dealing with a case that is suitable for judicial resolution and that the court is not intruding into the executive or legislative domain.

The second part of the test is a "prudential rule of standing based on judicial self-restraint." Wimberly, supra. This part of the test requires that, even where a taxpayer has alleged injury in...