Counties, cities, state unite: protect our Arkansas Constitution and public funds

During the 2023 Regular Session, HB1530 was filed seeking to amend Ark. Code Ann. § 2635-902. This section of the code was adopted in 1993. It authorizes the award of attorney’s fees to successful plaintiffs in illegal exaction cases from the refunds to members of a class action. The law is currently limited to cities and counties. The attorney’s fees under the law currently are from the funds declared to be returned or refunded to the member of the class action (the attorney’s fees awarded come out of the tax refunds that are being returned to the taxpayer).

Fortunately, HB1530 was not successful before the General Assembly. Even so, a similar bill is almost certain to resurface in future sessions. It would direct an award of attorney’s fees as costs and apply to instances in which there is no illegal tax but a misdirection of funds. Such an amendment would be in direct conflict with the Arkansas Constitution and would circumvent sovereign immunity and separation of powers. Furthermore, it would mire the cities, counties, and the state in litigation over misallocation cases. Also, the attorney’s fees under HB1530 would not come from escrowed funds or refunds to the taxpayers. They are in addition to the funds recovered.

If HB1530 had passed, it would have added unknown costs to operations of the state, city and counties. Furthermore, it would violate the Arkansas Constitution.

Under current law, most misallocation of funds are detected when audits are performed on county governments by the Arkansas Legislative Audit Department. Corrections are made at the time of the audit exit. In essence, HB1530 would have had the state, city and county be subject to lawsuits and award of attorney’s fees for misallocation of funds. For example, if a sheriff used funds from the communication and equipment fund to purchase a K-9 unit for law enforcement officers (considering a K-9 unit as equipment), and it was later determined the use of those funds for that purpose was improper, under HB1530 the county would be subjected to lawsuits and award of attorney’s fees for this human error.

To best illustrate, during the 2023 Regular Session, Rep. Lanny Fite and Sen. Kim Hammer, sponsored HB1031, now Act 127 of 2023. This Act and Ark Code § 27-70-207 simply direct that cities that misallocate and expend dedicated road funds for an improper use repay those funds to the proper fund. That is a valid solution without the extraordinary expenses to the public of litigation and award of attorney’s fees.

To better understand the extraordinary adverse impact and violations of the Arkansas Constitution set into motion by HB530 one needs to better understand Arkansas law. An illegal exaction is exactly what it sounds like — it’s an exaction unauthorized or contrary to law. The Arkansas Supreme

Court has recognized two types of illegal exaction cases. These cases involve either: (1) a public fund or (2) an illegal tax. A public fund involves the prevention of misapplication of public funds. In these cases, the public funds are being generated from a lawful tax, but then subsequently are misallocated. In cases where the funds have already been spent, the lawsuit seeks to recover the misspent funds back into the coffers of the city, county or state entity. An illegal tax involves a taxpayer who seeks to prevent the government from imposing an illegal tax upon him. Those lawsuits seek a declaration of the tax as illegal and a refund of the tax funds escrowed by the court. Pledger v. Featherlite Precast Corp., 308 Ark. 124, 128, 823 S.W.2d 852, 856 (1992).

Arkansas follows the “American Rule,” which is the default legal rule in the United States. It provides that each party will be responsible for paying its own attorney fees unless they are expressly authorized by statute or rule. This is no less true when the defendant is the sovereign State of Arkansas and its political subdivision — the 75 counties in Arkansas. Under Arkansas law attorneys are not generally awarded attorney’s fees against the city, county or state. The General Assembly’s general silence on the award of attorney’s fees reflects the state’s public policy on the subject. Also, the General Assembly and the Arkansas Supreme Court have traditionally recognized the mandate of sovereign immunity afforded the State of Arkansas and Separation of Powers Doctrine in Article 4 of the Arkansas Constitution.

The Arkansas Supreme Court has determined that there are two narrow exceptions in which attorney fees may be awarded in illegal exaction cases. The first exception is the “common fund” doctrine. The common-fund exception permits the granting of attorney’s fees and other costs of litigation when a plaintiff is successful in creating, increasing, or preserving a public fund that benefits an ascertainable class. The Court reasoned that allowing others to obtain the full benefit from the plaintiff’s efforts without requiring contribution or charging the common fund for attorney fees would be to enrich the others unjustly at the expense of the plaintiff. Walther v. Wilson, 2019 Ark. 105, at 5, 571 S.W.3d 897, 900 (Wilson II).

The second exception is known as the “substantial benefit” rule. Under this exception, the court is permitted to award attorney’s fees from a defendant if the plaintiff’s action results in a substantial benefit to the class or a business corporation.