Justices reverse award of $18M in attorney fees

LR firm helped taxpayers sue state over road projects

The Arkansas Supreme Court ruled Thursday that attorneys are not authorized to receive payment in an illegal-exaction lawsuit brought against multiple state agencies, calling into question the future of filing accountability lawsuits against the state.

The state’s highest court reversed a circuit court decision that required the Arkansas Department of Transportation to pay more than $18 million in attorneys’ fees to the law firm Denton & Zachary PLLC. The fees were related to a lawsuit filed earlier this year by a group of taxpayers who successfully challenged the agency’s spending on two major road construction projects.

Also included in the lawsuit are the Arkansas State Highway Commission, Gov. Asa Hutchinson, the Arkansas Department of Finance and Administration, the state auditor and the state treasurer.

On cross-appeal, the high court also affirmed the circuit court’s denial of the law firm’s motion for contempt against the Department of Transportation.

“In sum, we hold that, in the absence of express statutory authority, the circuit court abused its discretion in awarding $18.16 million in attorneys’ fees and costs to Denton & Zachary,” Chief Justice John Dan Kemp wrote in the court’s opinion. “While we commend the attorneys at Denton & Zachary for bringing an illegal-exaction suit to correct the Department’s allocation of funds, we nevertheless hold that no basis exists for the award of $18.16 million in attorneys’ fees and costs. Accordingly, we reverse on this point.”

Supreme Court justices Courtney Hudson, Robin Wynne and Karen Baker dissented.

Attorney General Leslie Rutledge told the Arkansas Democrat-Gazette the decision results in an $18.1 million savings for the state’s taxpayers.

“Thanks to the great work of our Assistant Attorney General Vincent France, today’s win in the Arkansas Supreme Court enables us to reinforce the protection of state funds for the citizens of Arkansas from private attorneys who seek financial windfall from the state,” Rutledge said.

Justin Zachary and Joe Denton of Denton & Zachary PLLC in a statement expressed disappointment in the state Supreme Court’s decision to reverse the lower court ruling.

“This challenge was about far more than attorney fees,” the statement said. “The right of Arkansas taxpayers to challenge improper use of state tax dollars is enshrined in the Arkansas constitution, but the high court here has affirmed the government’s arguments practically eliminating a citizen’s constitutional right to challenge the state in cases such as this. The implications of this decision are already having far-reaching implications for other challenges.”

The Little Rock attorneys said the decision is even more stinging because the Department of Transportation spent taxpayer dollars to hire private counsel to represent them before the Supreme Court.

“The importance of ensuring that all Arkansas citizens have access to attorneys for prosecuting illegal exaction cases is paramount to protecting the constitutional right of citizens,” the statement said. “Every citizen should have the right and ability to stand up and make their voice heard when they recognize a problem, even when that problem has to do with a state agency’s actions.”

Justice Shawn Womack, in a concurring opinion, said illegal-exaction lawsuits are the cornerstone of accountability, but Arkansas law doesn’t authorize attorney fees to be paid in cases like this one.

“By representing taxpayers and ensuring that governmental entities act appropriately when spending taxpayer funds, the attorneys in these cases do a great service to our state and it seems only right that they be compensated for that service,” Womack said. “Therefore, I call upon the General Assembly to visit this situation to determine if they, in their policy making role, believe attorneys in future actions of this nature should be authorized to receive compensation. It is the legislature that possesses the power to do so, not the courts.”

Baker, who wrote the dissenting opinion, called the court’s decision “absurd” and said it makes it seem like recovering $448,191,448 worth of funds for taxpayers is meaningless.

“The constitution provides for illegal exaction suits, the plurality and concurring opinion have ensured that as a practical matter there will be no illegal exaction cases in the future,” Baker wrote. “This interpretation is a sleight of hand that effectively invalidates and annuls Article 16, section 13 of the Arkansas Constitution.”

Bakers also addressed the concurring opinion.

“Our constitution requires justices of this court to faithfully discharge the duties of a supreme court justice and uphold the Arkansas Constitution,” she said. “However, the concurring opinion’s explanation that ‘the attorneys are not entitled to fees because fees are not authorized in this matter by any provision in a statute or our state’s constitution’ is misplaced.”

Baker said the judicially created exception to the statutory requirement to award fees is the law and commands an award of fees. She said the American rule, as cited by the concurring opinion, likewise is judicially created.

“Yet here, the plurality holds not only that taxpayers received no benefit and that $0 is an appropriate fee, but effectively holds that there can be no illegal exactions cases in the future, and that the taxpayers no longer have this constitutional protection,” she said.

The Department of Transportation argued in a brief earlier this year that “winning an illegal exaction lawsuit should not be the equivalent of winning the lottery for the taxpayers’ lawyers.”

Pulaski County Circuit Judge Chip Welch ruled from the bench in May that the legal team, led by Denton and Zachary, should receive 15% — or $18,160,000 — of the $121,109,391.84 the Department of Transportation was required to return to the Amendment 91 fund.

Denton & Zachary PLLC sued the department and other defendants in November 2018 for wrongfully spending proceeds from a 0.05% sales tax. The tax was authorized by Amendment 91 to the Arkansas Constitution, which was approved by voters in 2012 and included a four-lane limit on projects the tax would fund. The two projects in question exceeded that limit.

Attorneys for the state argued the circuit court erred in awarding attorney’s fees. Specifically, they said sovereign immunity bars the award of attorneys’ fees; no statutory authority exists for awarding fees; and appellees are not entitled to attorneys’ fees because the American rule exceptions do not apply.

Attorneys for the Highway Department also agreed and argued the circuit court abused its discretion by calculating the fees awarded using a percentage-contingency-fee method.

“Thus, based on the arguments before this court, the sole question before us is whether the circuit court abused its discretion in awarding a flat 15 percent attorneys’ fee award of $18,160,000 to Denton and Zachary from the court-mandated amount of $121,109,391.84 reimbursement,” Kemp, chief justice for the state Supreme Court, said in court documents.

Denton and Zachary argued the Amendment 91 litigation increased funds in the Amendment 91 account; the circuit court’s judgment protected and preserved funds in the Amendment 91 account; and the Amendment 91 litigation provided a substantial benefit to Arkansas taxpayers.

Kemp said the court has held that when attorneys’ fees are not expressly authorized by law, they may be permissible under the two exceptions to the American rule: the “common fund” doctrine and the “substantial benefit” rule.

The state Supreme Court determined that Arkansas follows the American rule, which requires every litigant to bear his or her attorneys’ fees, absent a state statute to the contrary.

Under the common fund exception, a plaintiff has created or augmented a common fund or assets have been salvaged for the benefit of others as well as himself or her. In such a situation, to allow the others to obtain the full benefit from the plaintiff’s efforts without requiring contribution or charging the common fund for attorneys’ fees would be to enrich the others unjustly at the expense of the plaintiff.

“Here, contrary to the circuit court’s findings, no common fund was created, and no new pool of money was created,” Kemp said. “Thus, the record does not support a common-fund exception.”

The state’s high court determined the substantial-benefit exception didn’t apply to the case because the Amendment 91 funds remain in the department’s control, no new funds have been created, and the state treasury has not received any direct financial compensation.

“The decision to allow attorneys’ fees in scenarios like this one rests with the General Assembly, the branch of government tasked with implementing public policy,” Kemp said. “Thus, we continue to follow the American rule and leave to the legislative branch policy decisions on whether to allow attorneys’ fees.”

Court documents state on cross-appeal Denton and Zachary argued that the circuit court erred in denying their motion for contempt against appellants.

The lawyers had filed a motion for civil contempt against the state and the Department of Transportation, arguing they had failed to reimburse the Amendment 91 fund pursuant to the court’s decision, and that the use of Amendment 91 funds for the CA0602 and CA0608 projects constituted an illegal exaction.

The law states civil contempt can only be established when there is willful disobedience of a valid court order.

The Arkansas Supreme Court determined the circuit court properly denied appellees’ contempt motion and affirmed the decision.