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McCafferty v. Oxford American Literary Project, Inc.

Supreme Court of Arkansas

February 25, 2016

JAMES MCCAFFERTY, APPELLANT
v.
THE OXFORD AMERICAN LITERARY PROJECT, INC., APPELLEE

          APPEAL FROM THE PULASKI COUNTY CIRCUIT COURT. 60CV-14-1066. HONORABLE MORGAN E. WELCH, JUDGE.

         G. Ben Bancroft, P.A., by: G. Ben Bancroft, for appellant.

         Wright, Lindsey & Jennings LLP, by: Kyle R. Wilson and Michael A. Thompson, for appellee.

         COURTNEY HUDSON GOODSON, Associate Justice. BRILL, C.J., and BAKER, J., join. HART, J., concurs. BRILL, CI, and BAKER and WYNNE, JJ., dissent.

          OPINION

          COURTNEY HUDSON GOODSON, Associate Justice

         Appellant James McCafferty appeals the circuit court's grant of summary judgment on his illegal-exaction claim against appellee The Oxford American Literary Project, Inc. (" Oxford American" ). McCafferty's suit arises from a loan made to Oxford American from the University of Central Arkansas (" UCA" ) out of its cash funds. The circuit court found that McCafferty's illegal-exaction claim failed as a matter of law because the funds at issue were not derived from taxes. We agree and affirm the circuit court.

         McCafferty filed an illegal-exaction lawsuit against Oxford American asserting that UCA loaned $700,000 to Oxford American out of its cash funds and that the loan was an improper use of public funds. Oxford American filed a motion for summary judgment, arguing that the cash funds at issue were not generated by taxes and could not support a claim for illegal exaction. In support of its motion, Oxford American attached an affidavit from Diane Newton, the vice president of Finance and Administration for UCA, who averred that the funds at issue were drawn from UCA's Board of Trustees Fund and its auxiliary funds, which were " comprised of money from profits UCA has earned from housing, bookstore, food-services, and other auxiliary operation" as well as investment income. Newton also averred that no money at issue came from any appropriations authorized by the General Assembly. McCafferty responded that he was not required to prove that the money came directly from taxes to prevail on his illegal-exaction claim. Rather, he argued that the illegal-exaction lawsuit was appropriate because the money was public money that was generated from the assets of a tax-supported public institution. The circuit court held a hearing on the issue. During the hearing, McCafferty conceded that the issue before the court was an issue of law, and he did not identify any disputed issues of material fact. McCafferty also did not challenge that the funds at issue were " cash funds" but instead argued that cash funds were public funds that supported an illegal-exaction lawsuit. The circuit court granted Oxford American's motion for summary judgment, concluding that the funds were not subject to an illegal-exaction suit because they were not finds derived from taxes. McCafferty has filed this appeal.

         The only issue for this court to decide is whether McCafferty can maintain an illegal-exaction lawsuit to challenge an allegedly improper expenditure from UCA's " cash fund." Illegal-exaction lawsuits in Arkansas are authorized under article 16, section 13 of the Arkansas Constitution which provides, " Any citizen of any county, city, or town may institute suit in behalf of himself and all others interested, to protect the inhabitants thereof against the enforcement of any illegal exactions whatever." An illegal exaction is defined as any exaction that either is not authorized by law or is contrary to law. Brewer v. Carter, 365 Ark. 531, 231 S.W.3d 707 (2006). Two types of illegal-exaction cases can arise under article 16, section 13: " public funds" cases, where the plaintiff contends that public funds generated from tax dollars are being misapplied or illegally spent, and " illegal-tax" cases, where the plaintiff asserts that the tax itself is illegal. Sullins v. Cent. Ark. Water, 2015 Ark. 29, 454 S.W.3d 727. The parties agree that the instant case is a " public funds" case rather than an " illegal-tax" case. It is axiomatic that, before a public-funds type of illegal-exaction case will be allowed to proceed, there must be facts showing that monies generated from tax dollars or arising from taxation are being misapplied or illegally spent. Dockery v. Morgan, 2011 Ark. 94, 380 S.W.3d 377.

         The circuit court dismissed McCafferty's illegal-exaction claim as not involving public funds generated from tax dollars, citing our decision in Gipson v. Ingram, 215 Ark. 812, 223 S.W.2d 595 (1949). In that case, we held that funds " derived from such sources as students' fees, sale of farm produce, dormitory charges, etc." were not derived from taxes. Id. at 816, 223 S.W.2d at 597. Although Gipson did not involve a claim for illegal exaction, we have subsequently confirmed that the type of funds at issue in Gipson are not sufficient to support a claim for illegal exaction because they are not derived from taxes. See Chapman v. Bevilacqua, 344 Ark. 262, 271, 42 S.W.3d 378, 384 (2001) (" As this court noted in Gipson v. Ingram, 215 Ark. 812, 223 S.W.2d 595 (1949), a governmental subdivision use of funds not derived from state taxpayer monies is not subject to a challenge for unlawful disbursement." ); Mackey v. McDonald, 255 Ark. 978, 504 S.W.2d 726 (1974)(noting that the funds at issue in Gipson could not support an illegal-exaction claim because the funds were not derived from taxes and did not reach the state treasury).

          McCafferty argues that the circuit court erred because the funds at issue are public funds arising out of the operation of a tax-supported public institution. In support of his argument, he cites cases designating the cash funds of public institutions as " public monies." See, e.g., Sebastian Cty. Chapt. American Red Cross v. Weatherford, 311 Ark. 656, 846 S.W.2d 641 (1993); Parker v. Ark. Real Estate Comm'n, 256 Ark. 149, 506 S.W.2d 125 (1974). However, these cases do not indicate that a fund merely qualifying as " public money" or a " public fund" is sufficient to support an illegal-exaction claim. Rather, these cases denote that cash funds and public monies are subject to some governmental regulation and oversight even though they are not comprised of tax-generated dollars.[1] For example, at issue in Parker was a pension plan established by the Arkansas Real Estate Commission. The Commission argued that the plaintiff had no right to any funds from the plan because the Commission had created the plan without proper statutory authority and was void ab initio. The plaintiffs argued that the pension plan was valid because it was formed out of the cash funds of the Commission, which were not deposited with the general treasury, and accordingly, the Commission could utilize the funds in whatever way it chose. In ruling for the Commission, this court held that the cash funds were " public monies" and that the Commission was constrained in its expenditures of such money by statute. Notably, however, Parker did not involve a claim for illegal exaction, and the fact that the legislature can place restrictions on the spending of cash funds does not mean that such finds are " public funds generated from tax dollars," as required for an illegal-exaction lawsuit.

         McCafferty further argues that the funds at issue arose from taxation because they were the result of the operation of a tax-supported institution. Under McCafferty's theory, the funds at issue would not have been possible but for the fact that UCA received tax dollars and, accordingly, the funds should be considered as " arising from" taxes. We disagree. Although this court has used various terms in defining the type of public funds necessary to support an illegal-exaction lawsuit such as " generated from tax dollars," " derived from taxes," and " arising from taxation," we have consistently required that the funds at issue come from taxes or implicate the state or local treasury.[2] See Mackey v. McDonald, 255 Ark. at 983, 504 S.W.2d at 731 (distinguishing Gipson, supra, by stating, " It is also significant that in Gipson, none of the funds ever reached the public treasury" ); Fort Smith Sch. Dist. v. Beebe, 2009 Ark. 333, at 6, 322 S.W.3d 1, 4 (stating, " This is a public funds case, and to prevail on their claim, Appellants must show that the State misapplied or illegally spent money that was lawfully collected pursuant to ad valorem property taxes" ). This is because a citizen's standing to bring a public-funds case is tied to his vested interest in ensuring that the tax money he has contributed to a state or local government treasury is lawfully spent. Ghegan & Ghegan, Inc. v. Weiss, 338 Ark. 9, 991 S.W.2d 536 (1999). Accordingly, " a misapplication by a public official of funds arising from taxation constitutes an exaction from the taxpayers and empowers any citizen to maintain a suit to prevent such misapplication of funds." Farrell v. Oliver, 146 Ark. 599, 602, 226 S.W. 529, 530 (1921). Such a rationale does not extend to this case, however, where the parties agree that the funds at issue did not come from the state treasury and that taxpayers are not required to replenish funds from UCA's cash funds. See, e.g. Chapman v. Bevilacqua, 344 Ark. 262, 42 S.W.3d 378 (2001) (holding that a plaintiff did not have standing to challenge the expenditure of federal funds because the funds were strictly derived from federal taxes, were not comingled with funds from the state treasury, and the plaintiff did not have an obligation to replenish any improperly-spent funds).

          Our case law has consistently required that the funds at issue in an illegal-exaction lawsuit implicate the state or local treasury and not merely be traceable to the general treasury through a " but-for" analysis. Indeed, we have rejected illegal-exaction suits under such circumstances in at least three previous cases. First, in Brewer, supra, the plaintiff attempted to bring an illegal-exaction lawsuit for the alleged misspending of insurance proceeds following the destruction of a county building. Although the building at issue belonged to the county and the insurance proceeds were paid to the county, we held that the plaintiff lacked standing because the Rinds were not generated or arising from taxation. Second, in Dockery, supra, the plaintiff brought an illegal-exaction lawsuit challenging funds derived from certain gas leases for mineral exploration on land belonging to the Arkansas Game and Fish Commission. Despite the fact that the leases were on Commission land, we held that the money generated from those leases was not subject to an illegal-exaction lawsuit because it did not arise from taxation. Finally, in McGhee v. Arkansas State Board of Collection Agencies, 368 Ark. 60, 243 S.W.3d 278 (2006), the plaintiffs brought an illegal-exaction claim against the Arkansas State Board of Collection Agencies, arguing that the board was improperly licensing payday lenders. To support their illegal-exaction claim, the plaintiffs argued that the monies received by the board were public funds and that the board had two full-time employees receiving salaries and benefits. On appeal, this court affirmed the circuit court's grant of summary judgment in favor of the board, holding that it had demonstrated that the funds at issue could not support an illegal-exaction claim because the board introduced unrefined evidence that it did not receive revenue from the state treasuries and that the funds at issue were not generated from tax dollars. Additionally, the board averred that no tax revenue was used to pay for employee benefits of board employees. Thus, in Brewer, Dockery, and McGhee, we rejected the notion that funds could arise from taxation merely because they existed as a byproduct of tax funds.[3]

         In this case, the circuit court properly granted summary judgment against McCafferty because the undisputed facts show that the cash funds at issue were not generated or arising from taxation. On this point, Oxford American introduced an affidavit from Diane Newton, who averred that the funds were not appropriated by the legislature but instead were made up of " money from profits UCA has earned from housing, bookstore, food-services, and other auxiliary operations" as well as investment income. McCafferty presented no proof in response to this affidavit and did not challenge its factual accuracy. Additionally, as was the case in Brewer, Dockery, and McGhee, the fact that the funds may have been generated as a byproduct of facilities supported by tax dollars is not sufficient to support a claim for illegal exaction.

         Finally, McCafferty argues on appeal that our decision in Gipson supports his illegal-exaction claim because that case implicitly recognized that a citizen has legal recourse for the alleged improper spending of cash funds. We disagree. In Gipson, the plaintiff argued that various state institutions were improperly using their cash funds to supplement the salary of paid employees, so that the employees were receiving compensation in excess of the amount fixed by the legislature. The plaintiff sought an injunction prohibiting the defendants from using the cash funds in this way. This court held that the use of cash funds to increase a salary fixed by the legislature was illegal, and a state institution using the funds in such a way could be enjoined. Id. In the instant case, however, McCafferty does not seek an injunction; rather, he seeks money damages under ...


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