Locality Cannot Pay Contingent Fee to Attorney to Litigate for Increased Property Value
The Texas Supreme Court held that, while permitted in certain limited circumstances, a school district cannot pay a contingent fee to an attorney to litigate its challenge to increase the appraised value of property. Pecos Cnty Appraisal Dist and Kinder Morgan Prod. Co. v. Iraan-Sheffield Indep. Sch. Dist., No. 22-0313 (May 19, 2023).
The Facts: A school district in Pecos County, Texas, retained an attorney to pursue claims regarding whether the Pecos County Appraisal District had undervalued Kinder Morgan’s mineral interests in the school district. The school district agreed to pay the attorney 20 percent of any additional amounts received.
Kinder Morgan filed a motion alleging that the attorney lacked the authority to represent the school district because the school district had no power to hire an attorney on a contingent fee basis for the appraisal litigation.
The Decision: While noting Kinder Morgan’s reference to the lawyer as a “tax ferret” (a fury mammal that was a beloved pet of Queen Elizabeth I) and the attorney’s reference to the company as a “tax cheat” and “the progeny of Enron,” the Court analyzed the statute relied upon by the school district to support its contingent fee, Tex. Tax Code Section 6.30(c). That statute provides that a governing body may pay an attorney a contingent fee “to enforce the collection of delinquent taxes.”
The Court found the statute inapplicable for several reasons. First, there were no “delinquent taxes” as the school district was asserting that the appraisal for the property should be higher and there had been no such finding: “But the taxes at issue in this litigation have yet to be assessed or imposed. They cannot possibly be ‘delinquent.’” Moreover, there could be no “collection” of the taxes at issue because those taxes had not been assessed. Similarly, there could be no “enforcement” of a payment obligation that had not yet arisen.
While finding that the school district could not pay the attorney a contingent fee, the Court did not dismiss the school district’s case seeking to increase the appraised value. Instead, it remanded the case to allow the school district to either modify its agreement with the attorney or retain other counsel on terms that are lawful.
Clearly, the use of contingent fee auditors and/or attorneys should be limited only to collection activities. When an amount of taxes has become due and payable and there is no question that it is properly due, it is not improper for a jurisdiction to retain someone to assist in the collection of such amounts and to pay a contingent fee for those services. It is never proper, however, for an auditor, appraiser or attorney representing a jurisdiction to be paid a contingent fee to audit, appraise property, or litigate for the jurisdiction in a case involving the amount due. As the Court noted, “[t]he law has long acknowledged that contingent-fee arrangements creating a personal profit motive to maximize taxation may be ‘unfair and unjust to the public.’”
This update is one in a series of updates written for the June 2023 edition of The BR State + Local Tax Spotlight.