In a decision with important implications for taxpayers, the Texas Supreme Court has reversed an El Paso Court of Appeals decision permitting a school district’s appeal of an ARB denial of the district’s challenge of the valuation of certain mineral interests to go forward under a contingent fee contract with a private attorney.
In Pecos County Appraisal District and Kinder Morgan Production Co., LLC v. Iraan-Sheffield Independent School District (No. 22-0313), the district entered into a contract with attorney Brent Lemon to investigate and pursue claims against Kinder Morgan for inaccurate valuation or omission of certain mineral property. The contract set Lemon’s compensation at 20% of gross recoveries received by the district. Lemon filed a challenge with the Pecos CAD contesting valuations for tax years 2013-2018 and 2019, which the ARB denied. The district appealed to district court. Kinder and the CAD filed a Rule 12 motion to show authority and a plea to the jurisdiction, alleging that the district’s contract with Lemon constituted an unlawful tax ferret contract on a contingent fee basis. After a hearing, the trial court agreed with Kinder and dismissed the district’s appeal. The district appealed.
The district alleged that the trial court abused its discretion in finding its contract with Lemon void and impermissible. The court of appeals agreed, reversed, and remanded to the trial court for further proceedings. In its analysis, the court traced the development of Texas law from an initial SCOTX opinion in 1938 to the contemporary version of § 6.30, Tax Code, which permits taxing units to contract with private attorneys for delinquent tax collection on a contingency fee basis up to 20%. The early precedent, White v. McGill, 114 S.W.2d 860 (Tex. 1938), held that a county’s contract with a tax ferret to find personal property that had escaped taxation (both state and local taxes) was void. Under the predecessor statute to § 6.30 at the time, the Attorney General and Comptroller had approval authority over contingency fee contracts to collect delinquent state taxes, which had not been granted in this case.
The court of appeals held that § 6.30 authorized the tax ferret contract at issue. Kinder argued that the statute did not apply because the underlying lawsuit did not involve the collection of delinquent taxes, as the statute provides. Relying on White, the court declined to interpret “delinquent taxes” in technical terms but according to its common meaning as “being overdue in payment.” The gravamen of the district’s claim is that Kinder fraudulently caused property to be excluded from the tax roll and is aware that taxes are due and owing. It is these taxes the district hired Lemon to pursue at the statutory maximum fee of 20%. Even if Lemon was also hired to investigate and identify property on which additional claims may be made, the contract does not agree to pay an unauthorized contingent fee. The court concluded that the contract was not void and that Lemon had sustained his burden under Rule 12 to show authority to prosecute the underlying lawsuit. Finally, in response to Kinder’s argument that Lemon’s contract should be governed by § 2254.1038, Government Code, which requires the attorney general to approve contingent fee contracts for local governmental entities, the court held that the approval requirement does not apply to § 6.30 agreements.
In an opinion by Justice Blacklock, SCOTX reversed and remanded to the trial court. In a nutshell, the Court held that §6.30 did not apply to the contract because the ISD’s action had nothing to do with the collection of “delinquent taxes.” Contrary to the court of appeals’ reasoning that the term “delinquent” should be taken in its general sense, Justice Blacklock responded that “the Tax Code does not use the labels ‘delinquent’ or ‘delinquency’ casually or colloquially. These are carefully defined terms of art, and various legal consequences attach when unpaid taxes become correctly described as ‘delinquent’” (citing §§ 33.01, .07, Tax Code). He distinguished § 6.03’s predecessor statute, which was at issue in White, by pointing out that it was enacted decades before the Legislature overhauled the property tax system in the late 1970s. The new law limited the conditions under which a taxing unit could enter into a contingent fee contract for delinquent tax collection and established an independent appraisal, appeal, assessment, and collection process before delinquency even triggered. “[T]he taxes at issue in this litigation have yet to be assessed or imposed,” Justice Blacklock concluded. “They cannot possibly be ‘delinquent.’”
The school district further argued that its authority to contract with Mr. Lemon could be implied from the general authority of governmental units to retain outside counsel for litigation. The Court rejected this argument, observing that “[b]oth the Legislature and this Court have long been cognizant that the government’s use of contingent-fee agreements in the taxation context can be ‘unfair and unjust to the public’” (citing White). Noting a 2000 attorney general opinion concluding that a taxing unit has no express or implied authority to enter into tax ferret contracts (Tex. Att’y Gen. Op. No. JC-0290), Justice Blacklock cautioned against courts “lightly disregard[ing] concerns—which have a lengthy pedigree in Texas law—that contingent-fee contracts such as this one create ‘incentives to maximize recovery in ways that may be abusive, coercive, or harassing” (citation omitted). Such “incentives to maximize recovery” undermine the purpose of the Texas Constitution’s mandate that “[t]axation shall be equal and uniform” (Art. VIII, § 1-(a)). Moreover, the Property Tax Code contains a number of other provisions establishing an independent appraisal process as free as possible from them. Thus, the “best inference from the Legislature’s silence [about contingent-fee contracts to chase omitted or undervalued property] is that the law-maki
ng branch has not authorized taxing units to pursue appraisal litigation by engaging attorneys on a contingent-fee basis—not that the Legislature has impliedly authorized such controversial contracts without saying so.”
Finally, the Court remanded to the trial court with instructions to permit the school district either to retain other counsel or reform its agreement with Mr. Lemon to conform to the law, as required by Rule 12. The trial court had dismissed the school district’s claims with prejudice, but the Court noted that since the school district acted ultra vires, that is, without authority to enter in the tax ferret contract to begin with, it never “actually vest[ed] an attorney with the ‘authority to act,’ as contemplated by Rule 12… We are mindful of the potential that Rule 12 may be abused, and we have previously cautioned that attorney disqualification is a severe remedy that ‘can result in immediate and palpable harm, disrupt trial court proceedings, and deprive a party of the right to have counsel of choice’” (citation omitted).
This is an enormously important decision for taxpayers. We hope that it puts the tax ferret issue to rest, at least until the firms that collect delinquent taxes turn to the Legislature for express authority. The Court’s rationale for prohibiting such agreements is exactly correct, both in terms of the statute and the case authority frowning on the bad public policy they represent. Both the Pecos County Appraisal District and Kinder Morgan deserve praise for taking this case up and securing a just result that protects the property tax system and individual taxpayers alike.