Opinion
No. 1 CA-CV 11-0618
05-30-2013
NICK COONS; RED SEVEN COMPUTERS; JACK GIBSON; CHUCK KIRKHUFF and INTERIOR CONCEPTS, Plaintiffs/Appellees, v. HUGH L. HALLMAN; SHANA ELLIS; BEN ARREDONDO; MARK MITCHELL; JOEL NAVARRO; ONNIE SHEKERJIAN; COREY WOODS all in their capacity as members of the Tempe City Council; and CITY OF TEMPE, a political sub-division of the State of Arizona, Defendants/Appellants.
Goldwater Institute By Clint Bolick Carrie Ann Sitren Taylor Earl Attorneys for Plaintiffs/Appellees Tempe City Attorney's Office By Andrew B. Ching Clarence E. Matherson Catherine M. Bowman Attorneys for Defendants/Appellants
NOTICE: THIS DECISION DOES NOT CREATE LEGAL PRECEDENT AND MAY NOT BE CITED
EXCEPT AS AUTHORIZED BY APPLICABLE RULES.
See Ariz. R. Supreme Court 111(c); ARCAP 28(c);
Ariz. R. Crim. P. 31.24
MEMORANDUM DECISION
(Not for Publication -
Rule 28, Arizona Rules of
Civil Appellate Procedure)
Appeal from the Superior Court in Maricopa County
Cause No. CV2009-036734
The Honorable Eileen S. Willett, Judge
VACATED
Goldwater Institute
By Clint Bolick
Carrie Ann Sitren
Taylor Earl
Attorneys for Plaintiffs/Appellees
Phoenix Tempe City Attorney's Office
By Andrew B. Ching
Tempe
Clarence E. Matherson
Catherine M. Bowman
Attorneys for Defendants/Appellants
HALL, Judge ¶1 The City of Tempe and its council members (collectively, Tempe or City) appeal from the superior court's order awarding Plaintiffs their attorneys' fees. Tempe argues that the fee award was improper under the private attorney general doctrine because the court erred in concluding this lawsuit compelled Tempe to amend a development agreement to comply with the Arizona Constitution's Gift Clause. For the reasons set forth below, we agree. Consequently, we vacate the fee award.
BACKGROUND
¶2 On August 20, 2009, Tempe entered into a development agreement (Development Agreement) with Sea Life US, Inc. (Sea Life or Developer) regarding the construction of an aquarium project (Project) at Arizona Mills Mall. To make the Project "economically feasible," the Development Agreement contained various incentives to Sea Life in the form of tax rebates and waivers. Sea Life also agreed to provide reduced admission rates to organized groups of Tempe school children. On September 24, 2009, Plaintiffs' counsel notified Tempe by letter that the Development Agreement may violate various state constitutional and statutory provisions. ¶3 On November 23, 2009, Plaintiffs, who are individuals and businesses in Tempe, filed a complaint and application to show cause seeking to declare the Development Agreement unconstitutional and enjoin its enforcement. Plaintiffs alleged the Development Agreement violated Arizona's Constitution Article 2, Section 13 (Equal Privileges and Immunities Clause); Article 9, Section 7 (Gift Clause); Article 4, Part 2 Sections 19(9), (13) and (20) (Special Law Clause). Plaintiffs also alleged violations of Arizona Revised Statutes (A.R.S.) sections 9-500.11 (2008) (requiring city to make specific findings before entering into a retail development tax incentive agreement) and 42-6010 (2013) (prohibiting cities, such as Tempe, from offering tax incentives to certain "retail business facilit[ies]"). ¶4 In their prayer for relief, Plaintiffs requested that the court: (1) declare that the City of Tempe resolution authorizing Tempe's mayor to execute the Development Agreement is unconstitutional and enjoin its further effect; (2) declare that the terms of the Development Agreement "exceeds Defendants' powers and violate[s] Plaintiffs' constitutional and statutory rights, and enjoin its enforcement;" (3) enter preliminary and permanent injunctions enjoining Defendants' performance under the Development Agreement; (4) award damages and costs "according to proof at trial;" and (5) award costs and attorneys' fees pursuant to various statutes and the private attorney general doctrine. ¶5 On October 8, 2009, before Plaintiffs filed their complaint and in apparent response to the Plaintiffs' letter alleging a violation of A.R.S. § 9-500.11, the City adopted a notice of intent to enter the Sea Life Aquarium Agreement. By letter dated December 8, 2009, Gruen Gruen and Associates (Gruen) provided Tempe with its independent analysis of the Development Agreement's terms in conjunction with the Project's estimated economic impact in Tempe, and Gruen concluded: "It is [Gruen's] professional opinion that the proposed tax incentives will raise substantially more revenue than the amount of the incentive within the duration of the Agreement." On December 10, 2009, Tempe's city council passed a resolution complying with A.R.S. § 9-500.11 and specifying the amounts of the incentives and projected revenue associated with the Project as set forth in Gruen's letter. The resolution also approved an Amended and Restated Development Agreement (Restated Agreement). ¶6 Meanwhile, Tempe responded to the application to show cause and answered the complaint on, respectively, December 8, and 14, 2009. As the parties attempted settlement, the court repeatedly granted requests to extend discovery. Pursuant to stipulation by the parties, the court, on February 5, 2010, dismissed with prejudice all counts except for the allegation of a Gift Clause violation and the request for attorneys' fees. According to Plaintiffs, they "volunteered to dismiss their claims except as to the Gift Clause" because of the "remedial actions" taken by Tempe's city council on December 10, 2009. The court ordered dispositive motions to be filed by December 3, 2010. ¶7 On that date, Tempe moved for summary judgment and Plaintiffs sought dismissal of the remaining Gift Clause claim. Plaintiffs also requested an award of $21,449.50 in attorneys' fees under the private attorney general doctrine. Plaintiffs argued dismissal was proper because Tempe "took several steps [after Plaintiffs filed the lawsuit] to remedy the legal deficiencies in the [Development Agreement.]" Specifically, Plaintiffs pointed to a letter of understanding between Tempe and Sea Life dated August 30, 2010 (Letter), which Plaintiffs characterized as a "new agreement [that] effectively capped the taxpayer expense under the contract and guaranteed a public benefit." ¶8 In response, Tempe did not oppose dismissing the case subject to the court's denying Plaintiffs' fee request. Tempe argued a fee award to Plaintiffs would be improper because the case lacked "substantial merit," and Tempe "would likely prevail on the merits if the case were to go forward[.]" Disputing Plaintiffs' assertion that this litigation caused Tempe to remedy the Development Agreement's purported noncompliance with the Gift Clause, Tempe argued the Development Agreement complied with the Gift Clause, was unaffected by the Letter, and was still in effect. Thus, Tempe insisted an award of fees under the private attorney general doctrine was not warranted because Plaintiffs did not vindicate any rights on behalf of Tempe's citizens. ¶9 The superior court granted Plaintiffs' motion and dismissed this case with prejudice. The court also awarded Plaintiffs their requested $21,449.50 in attorneys' fees. The court found:
Plaintiffs filed suit to effect the result achieved: a fair contract between the government and private business which did not violate the gift clause of the Arizona Constitution and other statutory provisions. . . . Plaintiffs were successful in securing the relief requested. . . . Plaintiffs' efforts resulted in [Tempe's] remedial measures and¶10 Tempe moved for reconsideration arguing, in part, that it was at least entitled to an evidentiary hearing to show the Development Agreement was not in violation of the Gift Clause, and that the Development Agreement was "still in effect;" i.e., that Tempe and Sea Life did not make any agreement subsequent to the Development Agreement regarding their respective obligations pertaining to the Project's development incentives. The court denied Tempe's motion and awarded Plaintiffs an additional $18,713.00 in attorneys' fees. Tempe timely appealed.
required the assistance of counsel. Counsel's efforts ultimately resulted in a benefit to the greater public good. Important rights have been vindicated on behalf of Arizona tax payers.
The Gift Clause states, in relevant part:
Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation.Ariz. Const. art. 9, § 7.
In relevant part, A.R.S. § 9-500.11(D) states: "Before entering into a retail development tax incentive agreement, a city . . . shall make a finding . . . [t]hat the proposed tax incentive is anticipated to raise more revenue than the amount of the incentive within the duration of the agreement."
Tempe also moved on December 8, 2009 to stay proceedings, noting this court's opinion in Turken v. Gordon, 220 Ariz. 456, 207 P.3d 709 (App. 2008) (Turken I) was pending review in the Arizona supreme court and arguing the resolution of that case would likely affect the applicable analysis for determining the Gift Clause allegation. At the hearing on the order to show cause, the court did not address the motion for stay and instead ordered the parties to prepare a joint proposed scheduling order.
On January 25, 2010, the Arizona supreme court issued its opinion in Turken v. Gordon, 223 Ariz. 342, 224 P.3d 158 (2010) (Turken II). In that opinion, the supreme court reiterated the applicability of a "straightforward approach" to analyses of purported Gift Clause violations. Id. at 348, ¶¶ 21-22, 224 P.3d at 164. The court described that approach as follows:
When a public entity purchases something from a private entity, the most objective and reliable way to determine whether the private party has received a forbidden subsidy is to compare the public expenditure to what the government receives under the contract. When government payment is grossly disproportionate to what is received in return, the payment violates the Gift Clause.
DISCUSSION
¶11 We review the court's dismissal under Arizona Rule of Civil Procedure 41(a)(2) for an abuse of discretion. Cheney v. Ariz. Superior Court for Maricopa County, 144 Ariz. 446, 448, 698 P.2d 691, 693 (1985); Goodman v. Gordon, 103 Ariz. 538, 540, 447 P.2d 230, 232 (1968); State ex rel. Corbin v. Portland Cement Ass'n, 142 Ariz. 421, 424, 690 P.2d 140, 143 (App. 1984). "In dismissing a case under Rule 41(a)(2), the court should weigh the equities and make a decision which seems fairest under all the circumstances." Portland Cement Ass'n, 142 Ariz. at 424, 690 P.2d at 143. ¶12 Similarly, we review a fee award under the private attorney doctrine for abuse of discretion. Arnold v. Ariz. Dep't of Health Services, 160 Ariz. 593, 609, 775 P.2d 521, 537 (1989); Kadish v. Ariz. State Land Dep't, 177 Ariz. 322, 326, 868 P.2d 335, 339 (App. 1993). An award of attorneys' fees under the private attorney doctrine is available to "a party who has vindicated a right that: (1) benefits a large number of people; (2) requires private enforcement; and (3) is of societal importance." Arnold, 160 Ariz. at 609, 775 P.2d at 537. "The purpose of the doctrine is to promote vindication of important public rights." Id. (internal quotation omitted). ¶13 We initially note that Tempe had begun the process of rectifying its non-compliance with A.R.S. § 9-500.11 by October 8, 2009, forty-five days before Plaintiffs filed their complaint, which, in any event, did not seek to compel Tempe to comply with the statute. We are aware of no authority extending the reach of the private attorney general doctrine to remedial action voluntarily undertaken before the filing of a lawsuit. ¶14 Nor can we agree with Plaintiffs that the Letter ameliorated any purported Gift Clause violations in the Development Agreement. The Development Agreement provides, in relevant part:
3.1.1 Construction Sales Tax Rebate.
City hereby grants Developer a Construction Sales Tax rebate in the amount of 100% of
Construction Sales Taxes (currently 1.2% . . .) generated and paid by Developer, . . . and received by City in relation to the construction of the Project Improvements[.] The Developer Improvements are estimated to cost $9 Million ("Estimated Project Costs"). City is not required to remit Construction Sales Taxes levied against costs in an amount in excess of . . . [10%] of the Estimated Developer Improvement Costs. The Construction Sales Taxes rebate shall be remitted to the Developer within . . . [90] days after the issuance of a certificate of occupancy . . . for the Developer Improvements. The Construction Sales Taxes rebate is based upon the demonstrated need identified by the Developer and agreed to by the City.[]
3.1.2 Reimbursement of Transaction Privilege Tax. City imposes a transaction privilege tax on rental revenues, and City hereby grants Developer a Transaction Privilege Tax rebate on transaction privilege taxes actually paid by Owner [of the Arizona Mills Mall] . . . with respect to rent paid by Developer to obtain and retain possession of the Property and which taxes are received by City during the Rebate Period . . . in an amount not to exceed $78,000 in the aggregate[.]
3.2 Development Fee Credit. Developer asserts that the Project is economically feasible only by the commitment of the City to waive fees for all planning, engineering, and building safety processing, . . . and to rebate any such fees paid by Developer with
respect to the Project after January 1, 2009. Any rebate shall be paid within . . . [60] days after City receives a written request from Developer[.] The aggregate amount of the waiver and rebate shall not exceed $70,000.00. [] (Emphasis added.)
Thus, under § 3.1.1 of the Development Agreement, Tempe and Sea Life understood that the exact amount of the construction sales tax rebate was unknown at the time, but it was estimated to be $108,000 (1.2% of $9 Million), and in any event the rebate amount would not exceed $118,800 (1.2% of $9.9 Million). Section 3.1.1 also specifically contemplated that Sea Life would submit to Tempe the amount of the tax rebate it was requesting. ¶15 The Letter states, in relevant part:
1. This will confirm that Tempe has received your submittal of a request for a Construction Sales Tax Rebate pursuant to Section 3.1.1 of the Development Agreement, in the approximate amount of $34,209.98; your submittal indicates that approximately 90% of construction costs have been reported. We understand you believe this amount represents the total rebate Sea Life will be requesting based on construction sales taxes paid by Sea Life, and agree that the total rebate request shall not in any event exceed $105,000.¶16 Thus, the Letter merely memorialized the amount of the Construction Sales Tax Rebate Sea Life was requesting, $34,209.98, which was significantly less than the amounts of the rebate estimated by Gruen and the parties as set forth in § 3.1.1 of the Development Agreement. The Letter also repeated the $78,000 cap on the transaction privilege tax rebate and the $70,000 cap on the development fee waiver/rebate as found, respectively, in §§ 3.1.2 and 3.2 of the Development Agreement. We thus construe the Letter as not supplanting the Development Agreement and thereby rendering it ineffective. Rather, we conclude that the Letter set forth Tempe's and Sea Life's understanding as to the specific amounts of the incentives Sea Life was entitled to collect and the amounts already paid by Tempe; calculations that could not be determined with any specificity at the time Sea Life and Tempe entered into the Development Agreement. ¶17 More importantly, Plaintiffs achieved none of the relief set forth in their prayer for relief. The trial court made no determination that Tempe violated any of the constitutional or statutory provisions referenced in the complaint. Tempe was neither preliminarily nor permanently enjoined from performing under the Development Agreement. Indeed, the litigation concluded with the complaint (with the exception of the request for attorneys' fees) being dismissed with prejudice. ¶18 Under these circumstances, Plaintiffs did not through their lawsuit vindicate any rights of Tempe's residents, let alone important public rights. Accordingly, the trial court abused its discretion in awarding Plaintiffs attorneys' fees pursuant to the private attorney general doctrine.
2. You will also be periodically entitled to a rebate of Transaction Privilege Taxes pursuant to Section 3.1.2 of the Development Agreement, the cumulative amount of which over the term of the Development Agreement is capped at $78,000.
3. Sea Life also is entitled to a credit or reimbursement of certain fees as described in Section 3.2 of the Development Agreement. The amount of the waiver or reimbursement is capped at $70,000; however, to date the City has waived $17,040.80 in fees and an additional $10,553.52 . . . will be rebated.
This paragraph is the source of confusion by Plaintiffs; they appear to believe it imposed a cap of $900,000 on the Construction Sales Tax Rebate benefit to Sea Life. This is incorrect. Rather, if the total amount of project costs on which Sea Life paid a Construction Sales Tax exceeds $9.9 million, Tempe was not required to rebate the tax it collected on that excess amount.
The Restated Agreement did not materially change these sections of the Development Agreement.
This paragraph is the source of confusion by Plaintiffs; they appear to believe it imposed a cap of $900,000 on the Construction Sales Tax Rebate benefit to Sea Life. This is incorrect. Rather, if the total amount of project costs on which Sea Life paid a Construction Sales Tax exceeds $9.9 million, Tempe was not required to rebate the tax it collected on that excess amount.
The Restated Agreement did not materially change these sections of the Development Agreement.
Gruen applied a provision from the Tempe Municipal Code and estimated $70,200 as the amount of the construction sales tax rebate Sea Life would receive based on construction costs of $9 million.
In any event, the Development Agreement does not violate the Gift Clause. A Gift Clause violation occurs when the "government payment is grossly disproportionate to what is received in return[.]" Turken (II), 223 Ariz. at 348, ¶ 22, 24 P.3d at 164. Gruen clearly opined that, based on the Development Agreement's terms, Tempe would receive a benefit from the Project's operation substantially larger than the total amount of incentives extended to Sea Life.
In view of our conclusion that the record demonstrates that Plaintiffs did not qualify for fees pursuant to the private attorney general doctrine, we need not consider Tempe's additional argument that the court abused its discretion in granting Plaintiffs' motion to dismiss and awarding them their requested attorneys' fees without affording Tempe an evidentiary hearing.
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CONCLUSION
¶19 We vacate the court's award of attorneys' fees to Plaintiffs.
_____________________
PHILIP HALL, Presiding Judge
CONCURRING: _____________________
PETER B. SWANN, Judge
_____________________
SAMUEL A. THUMMA, Judge
Id. at ¶ 22. Thus, the court in Turken II disapproved of this court's adoption in Turken I of a "'primary/incidental benefit' Gift Clause test, [which] forbid[s] transactions in which the private entity is the primary beneficiary." Id. at ¶ 21.