Lower Court Erred in Considering Detriments to Other Class of Persons and In Denying Fees to Well-Heeled Litigants Whose Fees Outstripped Amount of Refund.
Earlier, a litigant had won on appeal in a tax refund case where a certain tax was held unconstitutional with respect to a class of taxpayers who invest in small businesses. Although the “net” result was in doubt based on retroactive assessments, the Legislature actually vindicated the overall benefit by eliminating any retro assessments by statute as a result of this decision.
Then, litigant moved to recoup fees of $685,868 under California’s private attorney general statute.
The lower court’s fee denial was reversed in Cutler v. Franchise Tax Bd., Case No. B248270 (2d Dist., Div. 8 Sept. 2, 2014) (Cutler II) (published).
The lower court found that no significant benefit was conferred because there seemed to be a detriment to other classes of persons (subject to retroactive tax assessments) such that no “net” benefit inured to taxpayers. This was the wrong analysis, said the reviewing court, since nothing in the statute directed courts to look at detriments to other classes of persons negatively impacted. In fact, the legislative subsequent action due to the Cutler I decision resulted in a benefit to a large class of taxpayers.
The lower court also erred in finding that the burden of private enforcement element was missing. In this instance, the undisputed facts demonstrated that the requested attorney’s fees of over $685,000 well exceeded the $442,000 refund to be gained by successful litigant. This easily satisfied the Whitley costs/benefit equation, with nothing in section 1021.5 suggesting that well-heeled litigants were to subsidize public litigation by being treated differently.
Finally, the “interest of justice” prong was present because the litigation was risky (a constitutional challenge to a tax statute is usually “an uphill battle”) and the winning litigant should not have to pay his fees out of a recovery that was well below what litigant actually spent on attorneys in the tax refund battle.