A recent Law 360 story by Rose Krebs, “Del. Justices Clarify Fee-Shifting in Public Interest Cases”, reports that, in a decision offering guidance on attorney fee-shifting in public interest cases, Delaware's Supreme Court reversed a decision that awarded fees to nonprofit organizations that successfully challenged the use of outdated tax assessments in determining funding for the state's public schools.
In a 49-page ruling, the state's high court undid a Chancery Court order from last year that awarded roughly $1.5 million in fees to Delawareans for Educational Opportunity and the NAACP Delaware State Conference of Branches. Left in place was the award of roughly $73,000 in legal expenses to the two groups, which hadn't been contested by the litigation parties. "The parties in this appeal raise important questions regarding fee-shifting in the public interest litigation context," Justice Karen L. Valihura wrote for the court.
At issue were legal fees awarded after the two nonprofit organizations brought several lawsuits "that sought increased funding for Delaware's public schools," the Supreme Court said. "The suits were brought against multiple Delaware public officials in their official capacities, some of whom were responsible for tax collection in Delaware's three counties," Justice Valihura wrote.
In a May 2020 opinion, Vice Chancellor J. Travis Laster ruled in favor of the two organizations, agreeing that the counties' tax assessment methods, which had relied on values from as far back as 46 years ago, treated owners of similar properties unequally. "Appellees filed suit against the defendants because they believed that Delaware public schools were not providing an adequate education to disadvantaged students," the Supreme Court ruling said. "Appellees pointed to a broken system for funding public schools as one of the reasons why Delaware's public schools have fallen short." The Supreme Court decision explained that in the state, "approximately one-third of funding for public schools is derived from local taxes levied by individual school districts."
"When school districts in Delaware levy local taxes, they use the county assessment rolls prepared by New Castle County, Kent County, and Sussex County," the ruling said. "If there are deficiencies or problems with the counties' tax assessment rolls, those deficiencies or problems will affect the school districts' ability to levy taxes." In his ruling, Vice Chancellor Laster said that "owners whose properties have appreciated more pay a lower effective rate than owners whose properties have appreciated less."
"The counties' outdated assessments conceal a reality of non-uniformity beneath a cloak of uniformity," the vice chancellor said. His ruling came after the Chancery Court had bifurcated the litigation into a "County Track" to handle claims against county defendants, and a "State Track" to adjudicate claims against state officials, according to the Supreme Court opinion.
The "County Track" litigation was further divided, the Supreme Court said, including a "merits" phase that went to trial in 2019, leading to the vice chancellor's post-trial decision. As proceedings continued following Vice Chancellor's Laster's ruling, an agreement was reached by the parties "pursuant to which each county agreed to conduct a general tax reassessment," according to the Supreme Court's decision. The two nonprofit organizations sought an award of attorney fees and expenses in May 2021, and in two separate decisions, the Chancery Court first determined that the groups were entitled to the costs and then subsequently awarded the amounts to be paid by the defendants, the Supreme Court said.
In its ruling, the Supreme Court relied on two of its prior decisions, in Dover Historical Society v. Dover Planning Commission, in 2006, and Korn v. New Castle County, in 2007. In the Dover decision, the Supreme Court "rejected fee-shifting in a non-taxpayer, public interest suit that ultimately caused a government entity to 'perform properly,'" the opinion said. "In Korn, fees were awarded under the 'common benefit exception' to the American Rule because the plaintiffs created for all taxpayers a tangible benefit that was both 'substantial' and 'quantifiable,'" the Supreme Court said.
The American Rule, which originated in the U.S. Supreme Court's 1796 decision in Arcambel v. Wiseman, provides that "litigants are generally responsible for paying their own legal fees absent certain limited exceptions," the Supreme Court said. Exceptions for which fees can be shifted include cases in which a litigation party has acted in bad faith or the litigation "creates a common benefit," the high court's opinion said.
The two nonprofit organizations had argued in a filing that the Chancery Court had correctly determined they were entitled to fees and expenses for obtaining benefits "beyond the social good of making the government comply with the law." Among those benefits were increasing annual tax benefits for school districts due to the agreement to perform updated tax reassessments, as well as "fixing deficiencies in the state equalization funding system," the groups asserted.
In an opening brief, the public officials argued that the Chancery Court had "ignored" Dover and incorrectly applied Korn, and that the court had ordered "defendants to pay fees for benefitting parties with whom those defendants have no identity of interest, which is both unprecedented and unwarranted." The Chancery Court's "expansion of fee-shifting in public interest litigation should be curtailed," they argued.
In an amicus brief, the Delaware League of Local Governments urged the Supreme Court to reverse the Chancery Court's decision, arguing that it "improperly created a newfound common law exception to the American Rule by allowing fee-shifting ... for 'public benefit' litigation," the Supreme Court said. On its website, the league describes itself as "a non-partisan, non-profit organization comprised of local government leaders."
The league had argued that a "mere social benefit does not justify an exception to the American Rule and it is up to the legislature, not the courts, to determine whether fee-shifting is appropriate in public interest litigation," the Supreme Court's decision said. In its ruling, the justices agreed with the public officials and the league, saying the Chancery Court's decision exceeded "the bounds of Dover." The Chancery Court's decision "omits any discussion of the guidance we offered in Dover as to the narrow parameters of the exception in the public interest context," the court ruled.
"Viewing this litigation through the prism of Dover's guidance, we conclude that the benefits achieved fall within Dover's 'perform properly' bounds," the Supreme Court said. "Accordingly, we hold that the trial court erred in determining that the common benefit doctrine applied." The high court said it was "not persuaded that the other benefits identified" warranted an award of fees and called some of the purported benefits "speculative."
The Chancery Court also erred by determining that the Korn decision "was not limited to taxpayer suits, but rather, it applied more broadly to public interest suits," the Supreme Court's ruling said. "We decline to extend Korn beyond taxpayer suits that confer a quantifiable, non-speculative benefit to all taxpayers," the justices said.
New Castle County Executive Matt Meyer said in a statement: "We are proud that we just saved taxpayers $1.48 million, a substantial portion of which would have been paid to out of state New York lawyers. This decision, from Delaware's highest court, means countless public funds will be at considerably less risk in future lawsuits against towns, cities, counties and local governments across Delaware."