Pickering v. Langston Law Firm, P.A.

• Decision Date: 24 May 2012
• Docket Number: No. 2010–CA–00362–SCT.,2010–CA–00362–SCT.
• Citation: 88 So.3d 1269
• Court: Mississippi Supreme Court
• Parties: Stacey PICKERING, in his Capacity as Auditor for the State of Mississippi v. LANGSTON LAW FIRM, P.A.; Joseph C. Langston; State of Mississippi; Lundy & Davis; And Aylstock, Witkin, Kreis & Overholtz.

88 So.3d 1269

Stacey PICKERING, in his Capacity as Auditor for the State of Mississippi

v.LANGSTON LAW FIRM, P.A.; Joseph C. Langston; State of Mississippi; Lundy & Davis; And Aylstock, Witkin, Kreis & Overholtz.

No. 2010–CA–00362–SCT.

Supreme Court of Mississippi.

May 24, 2012.

Arthur F. Jernigan, Jr., Craig M. Geno, Ridgeland, Samuel E.L. Anderson, attorneys for appellant.

Fred Krutz, C. York Craig, III, Jackson, Office of the Attorney General by Jim Hood, Geoffrey C. Morgan, Harold Edward Pizzetta, III, Justin L. Matheny, attorneys for appellees.

EN BANC.

DICKINSON, Presiding Justice, for the Court:

¶ 1. A corporation settled its delinquent tax liability to the State of Mississippi by paying $100 million to the State, $4.2 million to a private charity, and $14 million to a private law firm hired by the Attorney General to pursue the claim. Mississippi's Auditor demanded that, because the $18.2 million paid to the private charity and the law firm constituted public funds, it must be turned over to the State. The charity complied; but the law firm refused, claiming the payment of its fees was not made with public funds and, in any case, the Auditor had waived the State's claim. The Auditor filed suit and the trial court granted summary judgment to the law firm. We reverse.

¶ 2. When the Attorney General pays special assistants, Mississippi statutory law requires that they be paid from the Attorney General's contingent fund or from other funds appropriated to the Attorney General's office by the Legislature.¹ Also, our constitution requires obligations and liabilities to the State (for instance, a tax liability) to be paid “into the proper treasury.” ² Neither of these requirements was met in this case.

BACKGROUND FACTS AND PROCEEDINGS

¶ 3. After several years of aggressive acquisitions and market growth, WorldCom—a Mississippi corporation located primarily in Clinton, Mississippi—became the second-largest provider of long-distance telephone service in America; but a series of accounting and securities scandals culminated in WorldCom's July 21, 2002, petition for Chapter 11 bankruptcy protection. When WorldCom's reorganization plan became effective, it merged into MCI Communications, Inc. (“MCI”).

¶ 4. The State of Mississippi—through its Attorney General, Jim Hood-filed a proof of claim in the bankruptcy, alleging WorldCom owed the State of Mississippi more than $1 billion for delinquent taxes, interest, and penalties. To assist in collecting the taxes, he signed a contingent-fee contract (“Retention Agreement”) with the Langston Law Firm, a Mississippi law firm.

¶ 5. The Langston Law Firm entered into a separate contract to divide attorney fees with the law firm of Lundy & Davis, LLP, which likewise agreed to split its fees with the law firm of Aylstock, Witkin, Kreis & Overholtz. These three law firms, together with the Langston Law Firm's then-principals—Joseph C. Langston and Timothy R. Balducci—are the appellees, and we refer to them herein collectively as “Langston,” “the Langston Firm,” or “Retained Counsel.”

¶ 6. Settlement discussions resulted in a written settlement agreement (“Settlement Agreement”) dated May 6, 2005, signed by MCI, Inc., on behalf of itself and the reorganized debtors, and by the State of Mississippi through Attorney General Hood. According to the terms, MCI settled its tax liability in exchange for some real property and payment “to or on behalf of the State,” the total sum of $118.2 million, divided as follows: The State received $100 million, Langston received $14 million, and the Children's Justice Center of Mississippi (“Justice Center”) received $4.2 million.

¶ 7. State Representative Joey Fillingane—on behalf of the Mississippi Legislative Conservative Coalition, representing twenty-four members of the Mississippi House of Representatives—formally requested then-Auditor Phil Bryant to conduct a performance review and audit of the settlement. Auditor Bryant conducted the audit and issued three draft reports before issuing his final findings. The first draft, issued in September 2005, included four recommendations, two of which were that

[t]he Mississippi Legislature should clarify the Attorney General's authority for the contengency fees for private attorneys retained by the Attorney General, ... [and] [t]he State Legislature should clearly determine the status of all fees received by private attorneys retained by the State Attorney General to act on the State's behalf, even if those fees were not paid directly by the State of Mississippi.

¶ 8. The second draft audit, issued in October 2005, included four recommendations, two of which were that

[t]he Mississippi Legislature should clarify the conditions under which the Attorney General has the authority to determine the contengency fees for private attorneys retained by the Attorney General, ... [and] [t]he State Legislature or the Courts should clearly determine the status of all fees received by private attorneys retained by the State Attorney General to act on the State's behalf, even if those fees were not paid directly by the State of Mississippi.

¶ 9. In his third draft, issued in September 2006, the Auditor made the following finding as to the $14 million:

The $14 million paid in attorney's fee is ... part of the settlement “as payment of tax and interest to or on behalf of the State of Mississippi.” Initially, such payment should have been deposited into the State General Fund with all other MCI settlement funds. Then, there would have been the opportunity through the legislative process, to set aside funds in an amount the Legislature found to be appropriate to pay outside counsel hired by the Attorney General to represent the people of the State of Mississippi. In such cases where the Attorney General has a contract with a private law firm, it is the Legislature's prerogative to always determine proper payment and appropriate that amount to the Attorney General's Contingency Fund. These funds may then be audited as part of the financial statement of the State. (§ 7–5–7).

¶ 10. The draft went on to recommend that [b]ecause the legislative process was bypassed in the appropriation of these funds, any portions of the settlement not authorized by the Legislature should be returned to the General Fund. The State Auditor's office with the assistance of the Mississippi Attorney General should recover these public funds on behalf of the taxpayers of the State.

¶ 11. In his October 2006 official audit, Auditor Bryant stated that the Attorney General had lacked authority to enter into the settlement agreement because “he may only pay private attorneys out of contingency funds in his budget or from other funds appropriated to the office of the Attorney General by the Legislature.”

¶ 12. In his official Findings, the Auditor stated that the $14 million in attorney fees was part of the settlement “as payment of tax and interest to or on behalf of the State of Mississippi,” which should have been deposited into the State General Fund.... Based on this finding, the Auditor recommended that “[t]he State Auditor's office with the assistance of the Mississippi Attorney General should recover these public funds on behalf of the taxpayers of the State.”

¶ 13. In November 2006, the Auditor formally demanded that Langston and the Justice Center turn over to the State the $18.2 million they received from the MCI settlement proceeds. The Justice Center complied, but Langston refused, claiming the $14 million it was paid was not public funds. He did, however, offer a compromise, to which the Auditor responded that he would delay action “until a thorough review” of Langston's offer of compromise could be completed.

¶ 14. On September 10, 2007, the Auditor posted a letter to the Attorney General, attaching a draft complaint, and demanding that he file suit to recover the $14 million. Eleven days later, Langston filed an adversary proceeding (a lawsuit in a bankruptcy court, related to a particular bankruptcy proceeding) in the MCI bankruptcy, seeking a declaratory judgment that the $14 million attorney-fee payment was proper under Mississippi law, and that the Auditor had waived, or was estopped from, challenging the settlement agreement.

¶ 15. On December 20, 2007, Auditor Bryant—both in his capacity as Auditor, and on behalf of the State of Mississippi—sued the Langston Firm in Hinds County Circuit Court, seeking recovery of the $14 million. The next day, two things happened in the bankruptcy court: The Auditor asked the bankruptcy court to abstain and to allow the matter to be settled in Mississippi state court; and the Langston Firm filed a motion for summary judgment.

¶ 16. In January 2008, Stacey Pickering became Mississippi's Auditor, and was substituted for former Auditor Bryant in both the Mississippi litigation and in the bankruptcy proceedings.

¶ 17. The bankruptcy court ruled against Langston, holding that the Auditor's claim was not a collateral attack on the settlement agreement, and that the issues related to the Auditor's claim “were not before the [bankruptcy] Court in connection with approving the settlement of the Debtors' tax obligations to the State, nor could they have been raised.” ³ The court further stated that the Auditor would have lacked standing to pursue the matter in the bankruptcy court, and that the issues raised by the Auditor were unique to Mississippi nondebtor parties and unrelated to the Debtors' settlement with the State. The Langston Firm appealedthe bankruptcy judge's order, but the United States District Court affirmed the bankruptcy judge, stating in its order that “any decision on the merits of the claim is left to the Mississippi state court.” ⁴

¶ 18. Meanwhile, back in the Mississippi litigation—after the suit had been removed to federal court and then remanded—all parties filed motions for summary judgment. The trial court denied the Auditor's motion and granted summary...