By Andrew Delaney
When is a public official personally liable for cost overruns? Let’s find out.
Burlington Telecom (BT) is a city-owned telecommunications project. It’s had some issues, arguably the most significant one of which is a $16.9-million-dollar cost overrun. A couple taxpayers sued the City and the City’s former chief administrative officer (CAO) to reimburse the city’s general fund for that overrun.
In a nutshell, the City’s charter allows for the City to fund BT but BT has to be able to pay it back in the short term (60 days) according to a specific condition in BT’s certificate of public good (CPG). By January 2008, BT was in violation of that condition. This continued until 2012 at which point there was a $16.9M deficit.
The CAO wrote checks to BT from the City’s general fund when he probably shouldn’t have. The markets crashed, and everything got messy and expensive—hence, as mentioned, the nearly $17M deficit. The CAO in a deposition said he didn’t know about the no-funding-unless-it-can-be-paid-back-in-60-days condition and that he was just using his best judgment and business sense. There was no evidence that the funds were used to the CAO’s personal benefit or for any other improper purpose.
Taxpayers sued alleging that the use of “City funds was unauthorized and occurred in obvious violation of the charter and the CPG.” They also raised claims of fraud and deceit. They sought a declaratory judgment that the CAO had violated his duty of faithful performance and his fiduciary duty. They sought an accounting and an injunction against any more spending on BT (well, even broader than that, but that seems the most pressing concern).
In February 2010, the trial court issued a stipulated interim order prohibiting using City funds to pay BT loans (unless approved by the public service board (PSB)) or payments to BT in violation of the condition mentioned above. Taxpayers were entitled to monthly documentation regarding BT’s financial standing.
Various summary judgment motions and motions to dismiss were filed. The City made a PSB-has-jurisdiction-here-and-there’s-already-a-case-pending-there argument. The trial court agreed and tossed the claims against the City, with leave to refile once the PSB docket was closed.
The trial court also denied taxpayers’ request for an accounting from the City. The court noted that, in general, the court has jurisdiction to order an accounting when: (1) there’s a fiduciary relationship and the defendant has a duty to give an account; (2) there are mutual accounts or the single-side account is complicated; and (3) there’s a need for discovery. The City pointed to all the stuff it had provided. The trial court found that there was ample discovery and taxpayers didn’t specify what more was needed so it denied the accounting request.
The taxpayers filed a motion to reconsider and the trial court revisited the issue. Basically, the trial court found that the taxpayers wanted an open-ended-paid-for-by-the-City investigation and that because it had discretion whether to order an accounting, for various reasons, it declined to do so here. “In reaching its decision, the court noted that it had found no case where a taxpayer's suit resulted in an open-ended audit of an entire city department in response to a generalized concern that money was mishandled.”
Taxpayers tried to get summary judgment against the former CAO on their recovery-of-taxpayer-funds claim, arguing for a “strict liability rule for public officials who spend money without legal authorization.” The trial court wasn’t convinced. It quoted a prominent authority on the subject, and explained that some improper motive of an officer is essential.
The former CAO also moved for summary judgment, “arguing that he was entitled to qualified official immunity from taxpayers’ claims.” The court declined this invitation as well, noting that facts remained in dispute—and that the lack of an apparent improper motive wasn’t quite akin to the “good faith” element required for qualified immunity. The court noted that the CAO could argue at trial that “he had an objectively reasonable belief that his actions in overdrawing the pooled cash account were lawful” and that defense had nothing to do with qualified immunity.
Taxpayers also claimed that the former CAO breached his duty of “faithful performance” by authorizing taxpayer funds to be paid to BT in violation of the CPG condition and the city charter. Taxpayers argued that they could look to the former CAO’s surety for reimbursement. This claim followed the bonding statute’s language. The trial court noted that this was premature because the CAO’s liability first has to be established.
Finally, in amongst all this summary judgin’, the trial court tried to clarify the elements of taxpayers’ claims against the former CAO. The court noted that there was no allegation that money was spent for any purpose other than to build BT and to cover its operating losses. The court determined that taxpayers’ claims should be limited to those involving bad faith. The court proposed the following elements for the taxpayers’ cause of action: “(1) the official authorized the expenditure of city funds in violation of law, including regulatory conditions; (2) the official acted in bad faith, which is defined as intending to benefit himself or others financially or to cause harm to the city; and (3) funds or property of the city were paid to the official or other persons and not repaid to the city.”
The trial court concluded that “this cause of action [was] a form of equitable restitution” and noted that it solved a number of problems—it didn’t create a new cause of action not previously recognized in Vermont; it fixed the problem of “double recovery” (noting that the money spent on BT was not truly “missing” and taxpayers’ proposal that the CAO simply reimburse the fund created the potential for a double recovery); and it didn’t impose liability on public officials who violated state law without malicious intent. The court invited the parties to submit additional motions for summary judgment, but nobody did.
Taxpayers asked for a jury trial, but a new judge denied their request on the grounds that this was an equitable proceeding and jury trials aren’t for equitable relief.
After a bench trial, the court granted judgment to the former CAO. The court didn’t rely on the form-of-equitable-restitution claim elements outlined above (which makes me a little annoyed that I bothered including them), but instead construed taxpayers’ claims as a “breach-of-fiduciary-duty claim as well as claim for a special sort of breach of fiduciary duty by a government employee.”
The trial court found that taxpayers had to show: “(1) the existence of a fiduciary duty; (2) knowing breach of that duty; and (3) damages from that breach.”
The court found that the former CAO had a fiduciary duty to the City in that role. It also concluded that he acted without any bad faith and that he had the City’s best interests in mind. The court did agree with the taxpayers that a bad motive wasn’t the only way to breach a fiduciary duty, however—it notes that an official might act in good faith, but still fail to use “the care an ordinarily prudent person in a like position would exercise under similar circumstances.”
Because a prudent CAO wouldn’t have withheld significant financial info “from the Mayor, the Board of Finance, and the City Council for the five-to-six-month period that” the former CAO did so, the court found that the former CAO did breach a fiduciary duty.
Turning to damages, the court noted that while the money owed by BT to the pooled cash fund “increased by several million dollars between November 2008 and May 2009” but there was no proof that wouldn’t have happened anyway. The City had repeatedly approved ongoing BT expenditures while other financing was being sought. BT was supposed to bring in $70-$80M between 2009 and 2022, and become profitable by 2013. In light of this, the trial court found that an earlier disclosure by the former CAO would’ve been micturating in the ocean, so to speak. Even the PSB declined to do anything, the court noted.
Taxpayers’ apparent separate and unique claim “against government employees with responsibility for public funds” didn’t go very far. There wasn’t any law to back it up and the trial court didn’t find any cause of action beyond breach of fiduciary duty. Given its ruling on that claim, the court didn’t address the other defenses raised by the former CAO, and entered judgment in his favor.
And so . . . here we are.
The SCOV begins with taxpayers’ we-should’ve-gotten-an-accounting claim. First there’s a disagreement about how the trial court classified its decision. Taxpayers claim that there were two different grounds and both were wrong. The SCOV says despite any other stuff the trial court might’ve said, at base level it’s a discretionary ruling and that’s how we’re going to review it. The SCOV opines that taxpayers fail to show an abuse of discretion.
The SCOV notes that “an equitable accounting is generally invoked where there is a need for discovery, the accounts at issue are complicated, there is a fiduciary or trust relationship, and legal remedies are inadequate.” Extensive information was disclosed to the taxpayers. The SCOV distinguishes between payments that violated the CPG and the City’s charter and how all the payments were used over the past four years, concluding that the latter are not relevant to the claims here.
The SCOV puts it thusly: “Taxpayers essentially proposed a very expensive and time-consuming fishing expedition, one that the court, in its broad discretion, reasonably rejected.” Here, the SCOV concludes that there was no error in denying the taxpayers’ request for accounting.”
The SCOV next turns to the former CAO’s liability. Taxpayers take issue with the trial court’s “breach-of-fiduciary-duty analysis, particularly its conclusion that no harm resulted from [the former CAO]’s actions.”
Taxpayers contend that “there was evidence to show that the City Council would have cut off payments to BT if [the former CAO] had disclosed the CPG violation in November 2008 when he learned of it.” Taxpayers also contend that the former CAO had the burden of showing that the harm would’ve happened without his breaches and that he failed to do so. As far as proximate cause being an issue, taxpayers argue that they were entitled to a jury on that question.
The SCOV notes that “[t]axpayers also appear to reiterate their argument that there is some sort of separate special duty applicable to municipal employees.”
The former CAO cross appeals. He argues that the court erred in finding that he’d breached a fiduciary duty because taxpayers never pled that claim (shout out to the SCOV for using “pled” as opposed to “pleaded”—you know, like normal people talk), and “because he acted with the City's best interests in mind and without bad faith.” He also argues that without a finding of improper motive, there is no breach of fiduciary duty, and here the trial court found he acted in good faith. Finally, he maintains his immunity defenses.
The SCOV starts off “by considering the precise nature of taxpayers’ claims.” This is a somewhat complicated task in this case because, as noted by the trial court in its pretrial ruling “taxpayers' causes of action are not easily defined and neither party attempted to identify any particular elements of these broadly stated claims.” Taxpayer suits are derivative. Essentially, it’s a suit based on some illegality that the municipality would have a right to recover for.
The SCOV notes that the improper-motive element is really important here. There has to be some motive foreign to the municipality’s interests. There’s got to be something like fraud present. The SCOV concludes “that the breach-of-fiduciary-duty test used by the trial court encompasses too wide a range of discretionary behavior and it is not the appropriate standard here.” The SCOV also rejects the two-applicable-standards pitch (one for breach-of-fiduciary duty and a special standard for public officials). When a taxpayer can recover funds from a public official and hold him or her personally responsible requires a “distinct test and one set of factors.”
The SCOV agrees with the trial court’s pretrial ruling that taxpayers’ cause of action must include an element of bad faith. And now, we’re going to repeat those elements above that I was annoyed at having included earlier. This is a process, folks—and it’s starting to come together. The SCOV holds that to recover, the taxpayers must show that “(1) the official authorized the expenditure of city funds in violation of law, including regulatory conditions; (2) the official acted in bad faith, defined as intending to benefit himself or others financially, or to cause harm to the city; and (3) funds or property of the city were paid to the official or other persons and not repaid to the city.”
The SCOV notes that other courts require a bad-faith showing, and cites an Arizona case, a West Virginia case, and an Oklahoma case (sorry, couldn’t find a link for that one) to prove the point.
Even though the trial court didn’t use the test that the SCOV now adopts, the SCOV concludes that the undisputed facts and post-trial findings allow it to affirm the judgment in the former CAO’s favor. There just wasn’t enough bad faith for the claim to have legs. The CAO was trying to do the right thing, even if he did it the wrong way.
Finally, the SCOV rejects taxpayers’ argument that they had a right to a declaratory judgment that the former CAO violated his “duty of faithful performance.” The SCOV notes that the purpose of a declaratory judgment is to have a court say what the rights of the parties are. Here, there wasn’t evidence that the former CAO breached any duty of performance, and so the taxpayers had no right to a declaratory judgment. His liability is controlled by the SCOV’s conclusions on the other claim and that takes care of that.
Because the SCOV has worked things out, it doesn’t need to bother with the former CAO’s immunity defenses or other arguments. Likewise, it’s not going to dig into taxpayers’ the-jury-gets-the-proximate-cause-question issue.
And that’s the long (mostly long) and short of it.
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