Opinion
No. 11,0792.
2015-02-27
In the Matter of the Equalization Appeal of CHRYSLER BUILDING, L.L .C., for Tax Year 2012 in Johnson County, et al.
Appeal from Court of Tax Appeals.R. Scott Beeler and Carrie E. Josserand, of Lathrop & Gage LLP, of Overland Park, and Linda Terrill, of Property Tax Law Group, LLC, of Leawood, for appellants.No appearance by appellee.
Appeal from Court of Tax Appeals.
R. Scott Beeler and Carrie E. Josserand, of Lathrop & Gage LLP, of Overland Park, and Linda Terrill, of Property Tax Law Group, LLC, of Leawood, for appellants. No appearance by appellee.
Before POWELL, P.J., HILL and SCHROEDER, JJ.
MEMORANDUM OPINION
POWELL, J.
Twenty-two taxpayers (the Taxpayers) appeal the Court of Tax Appeals' (COTA) dismissal of their cases which challenged the tax assessments imposed against their respective properties in Johnson County, Kansas. At COTA's own initiative, it conducted an investigation of the Taxpayers' counsel and tax representative, and then ordered the Taxpayers either to replace their attorney with an attorney unassociated with their current attorney or tax representative or to proceed pro se. The Taxpayers did neither, so COTA dismissed their cases for failure to prosecute. On appeal, the Taxpayers argue COTA improperly made findings on matters beyond its statutory jurisdiction, exceeded its authority by dismissing their cases, and erred by denying the Taxpayers' motion for recusal of the COTA judges who heard their cases and conducted the improper investigation.
We find COTA had no statutory authority to determine the validity of the contractual arrangements between the Taxpayers and their representatives, which resulted in the wrongful dismissals of the Taxpayers' cases. We also find the COTA judges hearing the Taxpayers' cases wrongfully refused to recuse themselves. Accordingly, we vacate COTA's final orders and remand for further proceedings.
Factual and Procedural Background
This tax appeal concerns the consolidated cases of 22 taxpayers: Chrysler Building, L.L.C.; Ranch Mart North, L.L.C.; Ranch Mart South, L.L.C.; U.S. Bank National Association; First National Bank of Kansas; CP Holmes Corporate Centre, L.L.C.; Everest Stone Ridge, L.L.C.; Metcalf Bank; Privitera Realty Holdings, L.L.C.; Kings Court/Terrace Acquisition, L.L.C.; Robert L. & Magda L. Cummins—Trustees; Robert L. & Magda L. Cummins Revocable Trust; Southcreek XIV Associates, L.L.C.; Bear & Bear Associates, L.P.; City of Olathe; 2004 Property D, L.L.C.; 10551 Barkley, L.L.C.; Nall Valley, L.L.C.; Marshall & Ilsley Bank; M & I Marshall & Ilsley Bank; Kansas City Country Club; and Southcreek VIII Associates, L.P.
The Taxpayers each filed timely petitions in the regular division of COTA, challenging the tax assessments imposed against their real estate by Johnson County, Kansas. Each of the Taxpayers engaged the services of a tax consultant, J.W. Chatam & Associates, Inc. (Chatam), and each was represented by attorney Linda Terrill (Terrill). Terrill signed each case's equalization/protest form, which listed the name of the owner of the property but also listed the name and address of Chatam under the “appellant information” section.
On August 1, 2012, Terrill filed motions to withdraw in the Taxpayers' cases, stating the Taxpayers' tax representative, Chatam, had retained alternate counsel. The motions were served on Johnson County and Chatam, but apparently not upon the Taxpayers as the certificate of service did not indicate they were sent directly to each individual taxpayer. On August 8, 2012, Ashley Mulcahy filed her entry of appearance as counsel in each case. However, on August 23, 2012, COTA denied Terrill's motion to withdraw on the grounds the motions had not been served on each of the Taxpayers.
Also on August 23, 2012, COTA issued an order to show cause as to why each case should not be dismissed for lack of subject matter jurisdiction. The order stated the signatures on the initial protest form made it unclear which party was actually bringing the appeal and it was unclear who the appellant was because Mulcahy filed her entry of appearance as general counsel for Chatam. COTA ordered Chatam, Terrill, Mulcahy, and a member of each of the Taxpayers to appear for a hearing on September 6, 2012. Mulcahy subsequently withdrew from each case, so Terrill continued to represent the Taxpayers through the show cause hearing.
In response to COTA's show cause order, the Taxpayers offered to provide COTA with existing declarations of representative and contracts between each of the Taxpayers and Chatam. COTA allowed Terrill to submit these documents. On September 18, 2012, COTA conducted an evidentiary hearing on the business and financial relationships between Terrill, Chatam, and the Taxpayers.
On October 11, 2012 (the October 11 ruling), COTA issued a 77–page opinion, finding it had subject matter jurisdiction because the cases were properly filed by each of the Taxpayers, who were the “real parties in interest,” or by their attorney. However, COTA's order went beyond merely deciding whether it had subject matter jurisdiction. First, it discussed whether each of the Taxpayers had assigned its rights to Chatam, which would deprive COTA of subject matter jurisdiction, because Chatam, not the taxpayer, would be the real party in interest. COTA resolved this question in the negative and found the Taxpayers had not fully assigned their rights to Chatam. It also found Chatam had a contingency fee agreement with the Taxpayers which could be considered a partial assignment of rights, but found this was acceptable because the Taxpayers maintained their status as the real parties in interest.
Second, COTA examined whether the theory of champerty applied and destroyed its subject matter jurisdiction: “[A] champertous situation is the functional equivalent of assigning a tax appeal claim from a taxpayer to a third party who is otherwise a stranger to the claim. If the taxpayer is not the one pursuing the tax appeal, then there may not be subject matter jurisdiction.” COTA considered the Kansas Rules of Professional Conduct (KRPC) Rule 1.8 (2014 Kan. Ct. R. Annot. 542) that prohibits conduct by a lawyer that would traditionally be classified as champerty, i.e., paying expenses of litigation without reimbursement by the client or acquiring a proprietary interest in a cause of action, and ruled Chatam had engaged in improper champertous conduct in which Terrill had assisted. It also ruled that Terrill herself, by direct association and by business relationship, might have engaged in champerty and thus in activity that violated KRPC Rules 1.8(e) and 1 .8(j). Additionally, COTA found the policy prohibiting lawyers from obtaining an ownership interest in a case should apply to nonlawyers involved in tax appeals.
Because of Chatam's and Terrill's alleged champertous conduct, COTA imposed a stay on any tax appeal case which involved Chatam or Terrill. It declared Chatam's agreements with the Taxpayers as void against public policy and ordered a stay on any case involving Chatam until either (1) an attorney unassociated with Terrill or Chatam entered his or her appearance for the taxpayer or (2) the taxpayer filed a notification indicating it would proceed pro se; otherwise, the case would be dismissed. COTA also held that because it was removing the champertous parties—Chatam and Terrill—from these cases, each of the Taxpayers remained the real party in interest, giving COTA subject matter jurisdiction.
Third, COTA ruled Chatam had engaged in the unauthorized practice of law and Terrill had violated multiple provisions of the KRPC. COTA ordered that each case would be dismissed for lack of prosecution 60 days from the October 11 ruling unless the Taxpayers hired new counsel or proceeded pro se. Additionally, COTA specifically questioned the credibility of Chatam's and Terrill's testimony about their business relationship and decisions regarding the withdrawal of Terrill as the attorney for the Taxpayers.
Parenthetically, we note that on October 4, 2012, before COTA issued its October 11 ruling, Judges Sam H. Sheldon and Trevor C. Wohlford sent a memorandum to the Office of the Disciplinary Administrator discussing how Terrill had committed multiple ethical violations. The Taxpayers' brief states the investigator for the Disciplinary Administrator found no ethical violations and dismissed the complaint against Terrill, but our review of the record has failed to locate documentation of this fact.
The Taxpayers subsequently filed a motion for reconsideration and a motion to strike the order in whole or in part, challenging COTA's reasoning in finding it had subject matter jurisdiction and its choice to rule on issues outside its authorized scope of authority. The Taxpayers also filed a motion seeking the recusal of COTA Judges Sheldon, Wohlford, James Cooper, and if applicable, Janis Lee. The Taxpayers argued COTA's decision demonstrated an obvious animus and bias against Terrill and the Taxpayers and also asked for a transfer of the case to suitable judges, or in the alternative, that the Governor be requested to appoint pro tern judges under K.S.A. 74–2433. COTA denied the recusal request.
On November 19, 2012, COTA granted the Taxpayers' motion for reconsideration of its October 11 ruling; on February 20, 2013, COTA issued a 158–page order which replaced, yet reaffirmed, its October 11 ruling. COTA upheld its previous decisions without amendment and added a section discussing its power and authority to address and regulate its operations and court proceedings. COTA also shortened the timeframe to 30 days for the Taxpayers to either obtain new counsel or to proceed pro se; otherwise, the appeals would be dismissed for lack of prosecution. Judge Wohlford dissented in part, explaining he did not agree with the majority's conclusion that the real parties in interest were the Taxpayers who hired Chatam; his view was that Chatam was the actual party in interest and the panel should have dismissed the cases for lack of jurisdiction.
The Taxpayers attempted to immediately appeal this ruling to the Court of Appeals, but this court remanded it to COTA, finding the controversy was not yet ripe. Once COTA found more than 30 days had passed since its order of reconsideration and the Taxpayers each had failed to hire new counsel or elected to proceed pro se, COTA dismissed each case. The Taxpayers filed a motion to reconsider COTA's dismissal order, which was denied.
The Taxpayers now appeal.
Did COTA Exceed its Authority by Dismissing the Taxpayers' Appeals and Making Findings on Issues Outside its Statutory Jurisdiction?
The Taxpayers argue COTA had no authority to make inquiries into and rulings on the various contracts and business agreements between Chatam, Terrill, and the Taxpayers; the unauthorized practice of law by taxpayer representatives; and attorney ethical violations.
Judicial review of COTA's actions is governed by the Kansas Judicial Review Act (KJRA), K.S.A. 77–601 et seq. We may modify an agency's decision if “the agency has acted beyond the jurisdiction conferred by any provision of law.” K.S.A.2014 Supp. 77–621(c)(2). Fortunately, another panel of our court thoroughly addressed the same thorny issues raised in this appeal in In re Tax Appeal of Lyerla Living Trust, 50 Kan.App.2d 1012, 336 P.3d 882 (2014). In that case, the taxpayers were part of the same investigatory hearing conducted by COTA in the present case, and the panel found COTA exceeded its authority when it considered and made rulings on the “validity of the contracts between the taxpayer and their representatives, whether the taxpayers' representatives had engaged in (or assisted in) the unauthorized practice of law, and whether the taxpayers' attorney had violated attorney-ethics rules.” 336 P.3d at 887. After our independent review of the facts in the current case, we adopt the following reasoning and conclusions:
“Administrative agencies are created by statute, so they have only the powers granted to them by statute. See Ft. Hays St. Univ. v. University Ch., Am. Ass'n of Univ. Profs., 290 Kan. 446, Syl. ¶ 1,228 P.3d 403 (2010). The powers of the Court of Tax Appeals are set forth in K.S.A.2011 Supp. 74–2437, which authorizes it to hear tax appeals and to make the rules needed for handling those appeals:
The state court of tax appeals shall have the following powers and duties:
‘(a) To hear appeals from the director of taxation and the director of property valuation on rulings and interpretations by said directors, except where different provision is made by law;
‘(b) to hear appeals from the director of property valuation on the assessment of state assessed property;
‘(c) to adopt rules and regulations relating to the performance of its duties and particularly with reference to procedure before it on hearings and appeals; and
‘(d) such other powers as may be prescribed by law.’
In addition to that statute, K.S.A.2011 Supp. 79–1609 and K.S.A. 79–2005 provide for an aggrieved taxpayer to appeal the appraised value of real property for real-estate tax purposes to the Court of Tax Appeals.
“The issue for the Court of Tax Appeals to decide in each of these cases was whether the taxpayer's property value had been correctly assessed. In a property-valuation appeal, the determination of the proper assessed value is the only issue the Court of Tax Appeals is authorized to determine—with one exception.
“That exception applies to any administrative agency exercising quasi-judicial authority. Such a body, like the Court of Tax Appeals, may also question its own authority, or jurisdiction, to hear a matter. See Board of Meade County Comm'rs v. State Director of Property Valuation, 18 Kan.App.2d 719, 726–28, 861 P .2d 1348, rev. denied 253 Kan. 856 (1993). Because the Court of Tax Appeals in cases like these has jurisdiction only over appeals brought by taxpayers, it could properly investigate whether the taxpayers on whose behalf these appeals were filed were, in fact, the real parties in interest. See 18 Kan.App.2d at 726–28.” Lyerla, 336 P.3d at 887–88.
The Lyerla court went on to find:
“Nothing in the Court of Tax Appeals' statutory authority provides that it may determine the validity of contracts between taxpayers and third parties (tax representatives or attorneys) who are not even parties to the tax appeal.
“Nothing in the Court of Tax Appeals' statutory authority provides that it may determine whether someone is practicing law without a license or whether an attorney has violated attorney-ethics rules. The Kansas Supreme Court has the sole power to regulate the practice of law, and it has cautioned that its authority will not be ceded to other branches of government. See State ex rel. Stephan v. Smith, 242 Kan. 336, Syl. ¶ 12, 747 P .2d 816 (1987). The Court of Tax Appeals is an agency of the Executive Branch, K.S.A.2011 Supp. 74–2433a, and it has no statutory authority over these matters.
“None of these matters—even if true—would deprive the Court of Tax Appeals of jurisdiction over these appeals. Thus there was no basis for the Court of Tax Appeals to issue rulings about them.” 336 P.3d at 888.
We agree with the Lyerla panel's conclusion that COTA's
“authority did not extend to the validity of the arrangements between the taxpayers and their representatives (and attorney) or to attorney-ethics compliance. Accordingly, we reverse and vacate its findings and rulings on these subjects, including the ruling that in the event these appeals were to proceed, the taxpayers would have to be represented by different counsel, representatives, or both.” 336 P.3d at 889.
COTA exceeded its authority here by dismissing the appeals because it cannot inquire into or rule on the validity of the contracts between these taxpayers and their representatives.
Did COTA Improperly Deny the Taxpayers' Motion for Recusal?
The Taxpayers also argue that the COTA judges who heard their tax appeals should have disqualified themselves from further hearing the Taxpayers' appeals because they were personally biased against the Taxpayers. Again, Lyerla, 336 P.3d at 889–90, directly addressed this issue, and we adopt its reasoning:
“Judges of the Court of Tax Appeals are required to follow the Kansas Code of Judicial Conduct. K.S.A.2011 Supp. 74–2433(a); see Rule 601B (2013 Kan. Ct. R. Annot. 725). It requires that a judge be disqualified if the judge's ‘impartiality might reasonably be questioned’ or when the judge ‘has a personal bias or prejudice concerning the party or the party's lawyer.’ Rule 2.11(A)(1) (2013 Kan. Ct. R. Annot. 741). Personal bias does not include views held by a judge based on matters that arise during litigation or views on legal issues. State v. Foy, 227 Kan. 405, 411, 607 P.2d 481 (1980). But a hostile feeling, antagonism, or animosity toward one of the litigants or their attorney is a personal bias requiring disqualification. 227 Kan. at 411; see State v. Reed, 282 Kan. 272, Syl. ¶ 3, 144 P.3d 677 (2006). Merely reporting an attorney to disciplinary authorities for an apparent violation of attorney-ethics rules normally does not constitute personal bias; judges have a duty to report such issues in appropriate cases. See United States v. Mendoza, 468 F.3d 1256, 1261–63 (10th Cir.2006).
“In this case, however, we conclude that the impartiality of these judges might reasonably be questioned. Although the Court of Tax Appeals immediately signaled that it might lack the authority to consider the taxpayers' appeals at all, it launched an inquisition into matters well beyond the limited question of whether the real parties in interest were before it. More significantly, the judges unanimously concluded that the sworn testimony of Chatham and the representations of attorney Terrill lacked credibility. The taxpayers would reasonably wonder whether these judges could give them a fair hearing while Chatham and Terrill continued to provide the taxpayers representation on remand.
“In most cases, a judge's findings in the course of a lawsuit—even credibility findings—are not cause for disqualification. See Foy, 227 Kan. 405, Syl. ¶ 3. Here, however, the findings were that the chosen attorney and tax representative for these taxpayers lacked credibility—and the findings came in an inquiry initiated solely by the court itself that went far beyond its statutory authority. Under these facts, a reasonable person would question the ability of these judges to continue impartially in this case on remand. We therefore conclude that their disqualification should be ordered under K.S.A.2013 Supp. 77–621(c)(8) on the ground that their failure to recuse under these circumstances was unreasonable.
“A reasonable person, considering this situation, would look at whether the parties to this appeal—the taxpayers—could have confidence that the judges were, in fact, impartial. It is important that those appearing in our courts have confidence that they will receive a fair hearing. See In re Marriage of Underwood, No. 104,315, 2011 WL 6942931, at *5 (Kan.App.2011) (unpublished opinion); State v. Bennett, No. 96,591, 2008 WL 588138, at *2 (Kan.App.2008) (unpublished opinion); Tyler, Why People Obey the Law (2d ed.2006). We do not know that the judges in this case could not set aside their previous findings to provide a fair hearing on remand. We simply conclude that a reasonable person would justifiably lack confidence in their impartiality, and that's sufficient to make their failure to recuse unreasonable.
“We should note that the judges refused to disqualify themselves in part based on the rule of necessity. Under that rule, a judge who otherwise would be disqualified may be required to continue because otherwise no judge would be available. See Geyh, Alfini, Lubet & Shaman, Judicial Conduct & Ethics § 4.04 (5th ed.2013). The judges assumed for the purpose of their ruling that there was no authority to provide replacement judges in the event of their disqualification.
“In the present posture of this appeal, however, we need not determine whether the rule of necessity precluded the disqualification of these judges. Since the court's original ruling, one of its members has been replaced, and the court also has a chief hearing officer who is authorized by statute to act as a pro tern judge. See K.S.A.2011 Supp. 74–2433; L.2014, ch. 141, sec. 2. While the court must act with the vote of at least two members, it has one regular member and one pro tern member available who did not participate in the original proceedings. Thus, it now has the ability to act on these appeals without the participation of any of the judges whose disqualification was sought by the taxpayers.” Lyerla, 336 P.3d at 889–90.
We conclude that a reasonable person would question the impartiality of the COTA judges who conducted these out-of-bounds inquiries. The only proper issue before them was whether each Taxpayers' property value had been correctly determined. After the actions taken here, we find the COTA judges' failure to recuse unreasonable. Upon remand of these cases, other judges must decide these issues.
The final order of the Court of Tax Appeals in each of the 22 cases is vacated, and the cases are remanded for further proceedings consistent with this opinion.