CITY OF GILROY, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.
This appeal presents the first impression issue whether a public entity can recover attorney fees under the equitable common fund and substantial benefit doctrines despite the fact that the codified private attorney general theory 1 prohibits allowances in favor of public entities. We conclude section 1021.5 is no bar and that under suitable circumstances the equitable doctrines are available to public agencies that secure a fund, or obtain substantial benefits, inuring to the welfare of others. We further determine that appellant City of Gilroy (Gilroy) has met the threshold issue of entitlement; accordingly, we reverse and remand for further proceedings concerning the appropriate amount of fees.
In 1985 the California State Lottery Commission (Lottery Commission) entered into a contract with Scientific Games, Inc., (Scientific Games) for the printing of instant game lottery tickets. Scientific Games opened a plant in Gilroy to manufacture the tickets. The underlying lawsuit which Gilroy prosecuted against the Board and Scientific Games centered on whether the manufacturer's sale of printed tickets to the Lottery Commission was exempt from taxation under the Lottery Act.2
Initially, respondent State Board of Equalization (Board) advised the parties that the sales transactions were subject to tax and requested Scientific Games to set up a sales and use tax account. Scientific Games paid the assessments and then filed refund claims for $3,729,054 in taxes paid through January 1987. The Board voted to grant the refund upon a hearing before the full Board. The Board also informed Gilroy it would have to repay its share.
This lawsuit followed wherein Gilroy sought a writ of mandate directing the Board to collect and transmit to it all sales tax revenues due on the sale of printed matter from Scientific Games to the Lottery Commission. On appeal from the trial court's denial of extraordinary relief, we resolved that the sales transactions were not exempt from state or local taxation under Government Code section 8880.68. (City of Gilroy v. State Bd. of Equalization (1989) 212 Cal.App.3d 589, 593–594, 260 Cal.Rptr. 723.) We remanded with directions to issue a writ commanding the Board to resolve the two remaining issues pending before the Board, and then decide, consistently with that decision and our opinion, whether to tax Scientific Games' gross receipts from the sale of printed tickets to the Lottery Commission. (Ibid.)
On remand the trial court issued the writ and thereafter the Board held hearings). The Board concluded that the transactions in question (1) were not exempt sales for resale and (2) were subject to a sales tax, not a use tax.
Meanwhile, the State Controller filed a complaint to recover from Scientific Games the $4,200,568.63 tax refund which the Board had paid. In September 1990 the State Controller, the Board, Scientific Games and the Lottery Commission entered a settlement agreement resolving the State Controller's lawsuit wherein Scientific Games agreed to pay $2,295,797.70 to the Board and stipulated that its sale of lottery tickets to the Lottery Commission is taxable under presently existing sales and use tax law. The Board waived any penalties applicable to assessments against Scientific Games. The Lottery Commission in turn agreed to pay the sales tax due on post-January 31, 1987, sales of instant game tickets from Scientific Games to the Lottery Commission, pursuant to their existing contract.
Thereafter, the Board issued two notices of determination to Scientific Games covering the period February 1, 1987, through June 30, 1990, indicating that $3,498,802.07 was due in sales tax plus interest for that period. Arguing that its successful litigation created a new fund of tax revenues, Gilroy petitioned the court for an award of attorney fees under the common fund and substantial benefit doctrines. The Board opposed on grounds the matter was governed by the section 1021.5 prohibition against an award of attorney fees to public entities.3 The trial court agreed and declined to rule on anything beyond the threshold issue of whether section 1021.5 governed and, therefore, precluded attorney fees in this case.4
The general “American” rule respecting attorney fees, codified at section 1021, denies such an allowance to a victorious party except as provided by statute or contract. Section 1021, however, does not tell the whole story. California courts have fashioned several nonstatutory exceptions to the “American” rule based on the judiciary's inherent equitable authority. (D'Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1, 25, 112 Cal.Rptr. 786, 520 P.2d 10; Serrano v. Priest (1977) 20 Cal.3d 25, 34, 43, 46–47, 141 Cal.Rptr. 315, 569 P.2d 1303.) These exceptions include the common fund principle, the substantial benefit rule and the private attorney general theory. (Ibid.)
Just days before Serrano was filed, the 1977 Legislature enacted section 1021.5, now referred to as the “codification” of California's private attorney general theory. (Woodland Hills Residents Assn., Inc. v. City Council (1979) 23 Cal.3d 917, 933–934, 154 Cal.Rptr. 503, 593 P.2d 200.) Since this codification, California courts have continued to honor awards under the substantial benefit and the common fund theories. (See, e.g., Friends of “B” Street v. City of Hayward (1980) 106 Cal.App.3d 988, 165 Cal.Rptr. 514; Bank of America v. Cory (1985) 164 Cal.App.3d 66, 210 Cal.Rptr. 351.)
The well-established common fund exception is founded on the principle “ ‘that one who expends attorneys' fees in winning a suit which creates a fund from which others derive benefits, may require those passive beneficiaries to bear a fair share of the litigation costs.’ ” (Serrano v. Priest, supra, 20 Cal.3d at p. 35, 141 Cal.Rptr. 315, 569 P.2d 1303.) This exception derives from “ ‘the historic power of equity to permit the trustee of a fund or property, or a party preserving or recovering a fund for the benefit of others in addition to himself, to recover his costs, including his attorneys' fees, from the fund of property itself or directly from the other parties enjoying the benefit.’ ” (Ibid.)
Similarly, the substantial benefit theory, which is an outgrowth of the common fund doctrine, permits the award of fees when the litigant, proceeding in a representative capacity, obtains a decision that confers on others a substantial benefit of a pecuniary or nonpecuniary nature. (Serrano v. Priest, supra, 20 Cal.3d at p. 38, 141 Cal.Rptr. 315, 569 P.2d 1303; Woodland Hills Residents Assn., Inc., supra, 23 Cal.3d at p. 943, 154 Cal.Rptr. 503, 593 P.2d 200.) Under these circumstances a court can exercise its equitable discretion to decree, in the interest of justice, that those receiving the benefit should contribute to the cost of its production. (Ibid.)
A. Section 1021.5 Does Not Govern Gilroy's Request
In this case the court did not consider the equitable exceptions, but instead ruled that section 1021.5 controlled, and forbade, an award of fees to Gilroy. This decision was incorrect for several reasons.
The first reason is simple. Gilroy sought fees under the equitable common fund and substantial benefit doctrines, not section 1021.5, but the court gave no reason why those theories were unavailable to Gilroy. Indeed, Gilroy could never come within the codified private attorney general rationale because that rationale pertains only to private enforcement actions under circumstances where fees should not be paid out of the recovery. Here Gilroy, a public entity, prosecuted the underlying action and seeks its fees out of the recovery.
The second reason is also simple. By its unambiguous terms the statute precludes an award of attorney fees in favor of a public entity, but only when the award is made pursuant to its own provisions: “With respect to actions involving public entities, this section applies to allowances against, but not in favor of, public entities․” (§ 1021.5, emphasis added.) Examining this sentence, the reviewing court in City of Carmel–By–The–Sea v. Board of Supervisors (1986) 183 Cal.App.3d 229, 227 Cal.Rptr. 899 also found no ambiguity or uncertainty. This being the case, the Legislature is held to have meant what it said, namely, that “a public entity is not to receive attorney's fees under the private attorney general theory.” (Id., at p. 255, 227 Cal.Rptr. 899, emphasis added.)
The Board counters that “a more reasonable interpretation” of the words “this section” would be as follows: the Legislature simply meant to recognize the right of public entities to recover attorney fees under the many other statutes which permit such awards. This argument assumes an ambiguity patently lacking in the statute; there is no ambiguity.
Third, it follows that section 1021.5 does not purport to govern fee awards made on any other basis. Thus it cannot be construed as abrogating the common fund and substantial benefit doctrines; these still remain viable predicates for fee awards under the appropriate circumstances.
For example, in Friends of “B” Street v. City of Hayward, supra, 106 Cal.App.3d at p. 996, 165 Cal.Rptr. 514 this court held that independent of the codified private attorney general theory, plaintiffs were entitled to an attorney fee award under the substantial benefit rule because their litigation against the city resulted in preparation of an environmental impact report and also prevented an illegal expenditure of public funds.
So, too, in Bank of America v. Cory, supra, 164 Cal.App.3d at pp. 90–91, 210 Cal.Rptr. 351 the reviewing court approved an award of fees pursuant to the common fund theory, even though appellant taxpayers did not qualify for recovery of fees under section 1021.5.
We conclude section 1021.5 has no applicability to the present case and does not forbid the award of attorney fees to Gilroy. Two questions remain for decision: (1) whether the substantial benefit and common fund theories are viable options for awarding attorney fees to public entities; and (2) the scope of our remand order, including what remains for factual determination.
B. There Are No Policy Reasons to Limit the Equitable Exceptions to Private Litigants
Gilroy argues persuasively that unlike the private attorney general doctrine, the intrinsic policies underlying the substantial benefit and common fund doctrines are not at cross-purposes with an award of attorney fees to a public entity. As explained in Woodland Hills, the private attorney general concept “rests upon the recognition that privately initiated lawsuits are often essential to the effectuation of the fundamental public policies embodied in constitutional or statutory provisions, and that, without some mechanism authorizing the award of attorney fees, private actions to enforce such important public policies will as a practical matter frequently be infeasible.” (Woodland Hills Residents Assn., Inc. v. City Council, supra, 23 Cal.3d at p. 933, 154 Cal.Rptr. 503, 593 P.2d 200.) Thus the primary purpose of the doctrine is to encourage citizens to bring actions which vindicate important public policies by affording substantial attorney fees to successful litigants. (Maria P. v. Riles (1987) 43 Cal.3d 1281, 1289, 240 Cal.Rptr. 872, 743 P.2d 932.) This rationale can never apply to legal action instituted by a public entity or official whose duty it is to represent and protect the very interests of its citizens that are at stake in the lawsuit. (See People ex rel. Cooper v. Mitchell Brothers' Santa Ana Theater (1985) 165 Cal.App.3d 378, 386, 211 Cal.Rptr. 501.)
On the other hand, “the ‘substantial benefit’ doctrine—like the ‘common fund’ doctrine from which it emerged—rests on the principle that those who have been ‘unjustly enriched’ at another's expense should under some circumstances bear their fair share of the costs entailed in producing the benefits they have obtained.” (Woodland Hills Residents Assn., Inc. v. City Council, supra, 23 Cal.3d at p. 943, 154 Cal.Rptr. 503, 593 P.2d 200.) This cost-spreading solution emphasizes fairness to the successful litigant who spearheaded the action. Any apprehension that the third persons benefitting from the newly created fund or economic windfall might become “involuntary clients” of the attorneys whose actual client taps this source for their fees is easily dispelled: if costs are reasonably related to benefits, the involuntary client who retains a substantial gain from the suit generally will not have reason to complain. (Id., at pp. 943–945, 154 Cal.Rptr. 503, 593 P.2d 200.)
We perceive no policy justification for a bright line legal rule that would prevent a public entity from ever receiving fees under a common fund or substantial benefit theory solely because of its public status. The Board argues that where both parties are public entities, cost-spreading is pointless because it is just a matter of shuffling funds from one agency to another while the burden on the taxpayer remains the same. An affirmance, it advises, would avoid future interagency arm wrestling.
We do not see it quite this way. Gilroy prosecuted this action to recover the 1 percent sales tax due to the municipality from the retail sales of printed lottery tickets within its borders. It succeeded in tumbling the Lottery Act hurdle which Scientific Games erected against taxability. When the Board then determined that the remaining defenses to taxability did not apply, its charter was to resume assessing and collecting the local as well as state taxes stemming from the sales transactions, and remit to Gilroy and the local county their shares due under the Bradley–Burns Act,5 the remainder going to the state treasury for the benefit of all. True, it was Gilroy's duty to ensure that its citizens received the full taxing measure available to them under the Bradley–Burns Act. Therefore it could never claim fees under section 1021.5. Nevertheless, because constituents of other public entities stood to benefit from Gilroy's efforts as a matter of course, it makes perfect sense under the common fund or substantial benefit theory to spread the cost of attorney fees among these entities.
We have found one case in which a public entity applied for fees under the substantial benefit exception. (County of Inyo v. City of Los Angeles (1978) 78 Cal.App.3d 82, 144 Cal.Rptr. 71.) After winning its California Environmental Quality Act action against the city, the county petitioned for fees. The court turned down the county's request not because of its public status, but because the county's interests in waging the lawsuit were adverse to the interests of the city, the party now asked to fund the litigation. The main objective of the lawsuit was to delay and limit the city's extraction and export of groundwater. The reviewing court underscored that this objective was hostile to the city's interest in unimpeded utilization of its groundwater resources. (Id., at p. 91, 144 Cal.Rptr. 71.) “The possibility of a fee award under these circumstances would arouse a conflict between the attorney's interest in the fee and the litigational interest of [the] client. Legal services on behalf of an openly or covertly hostile interest are invariably barred.” (Ibid.) No such adverse interests exist here.
We finally note that while no reported California decision has authorized a discretionary, equitable award of fees to a public entity from a common public fund, federal cases have. For example, an Alaskan city's litigation to acquire title to certain vacant lots resulted in a net gain of 319 lots and a public policy change which would benefit many native towns. The reviewing court held that the city had an equitable claim to a reasonable fee and could look to the vacant lots, as constituting a common fund, to satisfy the claim. (City of Klawock v. Gustafson (9th Cir.1978) 585 F.2d 428, 431.)
We conclude there is no absolute bar to the awarding of fees to public entities under the common fund and substantial benefit doctrines.
Where does this decision leave us? Gilroy urges that it has proven entitlement under these doctrines, and since the Board made no factual showing, relying only on its section 1021.5 defense, we should remand solely for a determination of the amount of the fee award. The Board urges that if we reverse, we should also require an evidentiary hearing on whether (1) Gilroy's efforts resulted in a common fund or substantial benefit to third parties; and (2) it can claim fees for work performed in connection with postjudgment administrative proceedings. Indeed, the Board asked the court to bifurcate the section 1021.5 issue from these concerns. The court's decision that section 1021.5 governed, and precluded, Gilroy's request for fees of course temporarily defeated all Gilbert's claims to entitlement and made resolution of the remaining issues unnecessary. The court's written statement that it did not resolve these questions was superfluous and, contrary to the Board's hope, did not amount to reserving these issues for future evidentiary hearing.
In any event, from the record before us it is apparent there is no need for further evidence on the threshold issue of Gilroy's entitlement to fees or the propriety of seeking fees for its postjudgment efforts. Without question, Gilroy's labors in the underlying lawsuit ultimately produced a common fund and a substantial economic benefit to third parties in the form of new tax revenues generated from the sale of printed lottery tickets. The Board questions the existence of the fund, arguing that since in most cases the Lottery Commission has agreed to indemnify ticket vendors for any sales tax liability, the advent of taxability in fact reduced revenues which otherwise would be available under the Lottery Act for public education to the extent of this indemnification. We are not persuaded.
First, the Lottery Commission did not contractually commit to pay sales tax on the tickets for the first eight games. The sale of these tickets comprised the bulk of the $4,200,568.63 in assessments plus interest levied against Scientific Games through January 31, 1987. The Board erroneously refunded this amount and the State Controller later sought to recoup it via a statutory complaint, finally settling for $2,295,797.70.6
Second, what has been a matter of contract after the first 8 games is of course the product of negotiations and subject to modification, amendment and termination. In any event, that by present agreement Scientific Games collects this tax from the Lottery Commission does not alter the fact that it is the retail seller, not the Lottery Commission that owes the gross receipts tax. (City of Gilroy v. State Bd. of Equalization, supra, 212 Cal.App.3d 589, 260 Cal.Rptr. 723.)
Gilroy also has a right to ask for reasonable fees in connection with its participation in the Board's administrative proceedings conducted after issuance of the peremptory writ in the underlying action. Certainly our complex remand order in City of Gilroy necessitated Gilroy's continued involvement. The Board's point that since these proceedings ended in settlement, arguably Gilroy is not a “prevailing party” is not persuasive. Gilroy was victorious in prompting the collection of sales taxes within its borders. The crucial fact is the impact of the action, not the manner of its resolution. (See Folsom v. Butte County Assn. of Governments (1982) 32 Cal.3d 668, 685, 186 Cal.Rptr. 589, 652 P.2d 437, regarding the “prevailing party” element of section 1021.5; see also 7 Witkin, Cal.Procedure (3rd ed. 1985) Judgment, § 177, pp. 612–614.)
We also reject the Board's belated complaint that Gilroy's motion for fees might have been untimely. The Board never mentioned timeliness below and, therefore, waives this issue on appeal.
On remand the trial court should further proceed as appropriate to determine (1) the precise amount of the common fund of tax revenues generated by Gilroy's efforts; and (2) the amount of reasonable attorney fees to be paid from this fund, keeping in mind that fees must bear a reasonable relation to the benefits conferred. (Woodland Hills Residents Assn., Inc. v. City Council, supra, 23 Cal.3d at p. 945, 154 Cal.Rptr. 503, 593 P.2d 200.) In connection with the second question, the trial court must also resolve whether Gilroy is entitled to a multiplier. The order denying fees is reversed and the cause is remanded in accordance with these directions.
1. Code of Civil Procedure section 1021.5.Unless otherwise indicated, all statutory references are to the Code of Civil Procedure.
2. Government Code section 8880 et seq. The provision in question was Government Code section 8880.68, which provides: “No State or local taxes shall be imposed upon the sale of lottery tickets or shares of the California State Lottery or any prize awarded by the California State Lottery.”In addition to the Lottery Act defense, Scientific Games also argued the transaction was an exempt sale for resale or, if deemed a taxable transaction, that the appropriate tax was a use tax upon the Lottery Commission.
3. Section 1021.5 reads: “Upon motion, a court may award attorneys' fees to a successful party against one or more opposing parties in any action which has resulted in the enforcement of an important right affecting the public interest if: (a) a significant benefit, whether pecuniary or nonpecuniary, has been conferred on the general public or a large class of persons, (b) the necessity and financial burden of private enforcement are such as to make the award appropriate, and (c) such fees should not in the interest of justice be paid out of the recovery, if any. With respect to actions involving public entities, this section applies to allowances against, but not in favor of, public entities, and no claim shall be required to be filed therefor.” (Emphasis added.)
4. Specifically, the trial court declined to rule on the following issues: (1) whether Gilroy's efforts resulted in creation of a common fund or substantial benefit to third parties; (2) whether Gilroy could claim fees for work performed after entry of judgment in its action; (3) are the requested fees excessive; and (4) is Gilroy entitled to a multiplier.
5. Revenue and Taxation Code section 7200 et seq.
6. According to the declaration of the accounting officer for the Lottery Commission, the commission paid Scientific Games $52,426,197 for the printed tickets for games 1–8. These sales occurred from August 1985 through May 1986. The next two games, covering the period September 1986 through February 10, 1987, generated only $6,846,916 in sales. Thus, the lion's share of taxes which Scientific Games was assessed and ultimately settled was attributed to games 1–8, for which the Lottery Commission did not pay a dime.
ANDERSON, Presiding Justice.
POCHÉ and PERLEY, JJ., concur.