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Depot Square Pizzeria, LLC v. Department of Taxes

Supreme Court of Vermont

May 19, 2017

Depot Square Pizzeria, LLC
v.
Department of Taxes

         On Appeal from Superior Court, Washington Unit, Civil Division May Term, 2016

          Timothy B. Tomasi, J. Charles L. Merriman of Merriman Smart, PLC, Montpelier, for Appellant.

          William H. Sorrell, Attorney General, and Suzanne M. Monte, Assistant Attorney General, Montpelier, for Appellee.

          PRESENT: Reiber, C.J., Dooley, Skoglund, Robinson and Eaton, JJ.

          REIBER, C.J.

         ¶ 1. Taxpayer-a limited liability company that operates a pizzeria in Northfield-appeals the denial of its motion for attorney's fees arising from an underlying case regarding the state meals tax. Taxpayer argues that the trial court erred in finding that the doctrine of sovereign immunity and the American Rule regarding attorney's fees prevent the court from awarding equitable relief to taxpayer. Specifically, taxpayer argues that (1) 32 V.S.A. § 9275-the state law regarding appeals of meals tax assessments-presents an exception to these two doctrines and (2) equity calls for the court to award relief in the form of attorney's fees. We disagree and therefore affirm.

         ¶ 2. Taxpayer operated a snack bar and a food truck at Norwich University football and hockey games from March 2011 through January 2014. It did not collect meals tax from customers and it did not remit meals tax to the Department of Taxes. In April 2014, an auditor determined that taxpayer owed $27, 810 in meals tax, interest, and penalties to the Department because taxpayer should have been collecting and remitting the meals tax. Taxpayer responded that the food and beverages it sold at Norwich were not "taxable meals" within the meaning of the statute concerning meals tax. See 32 V.S.A. § 9202(10)(D)(ii)(I) (stating that taxable meal does not include food or drink "served or furnished on the premises of a school"). However, the Department and its Commissioner concluded that the items were taxable and assessed meals tax, interest, and penalties against taxpayer. Taxpayer appealed to the Commissioner for reconsideration, and the Commissioner affirmed the assessment. Taxpayer then appealed to the trial court. The Department moved to dismiss the appeal on the grounds that it was undertaking a review of the meals tax and the exemption claimed by taxpayer and it had therefore abated the tax at issue. Taxpayer did not oppose the motion to dismiss, but it did move for an award of attorney's fees under 32 V.S.A. § 9275.

         ¶ 3. The trial court denied taxpayer's motion for attorney's fees for three reasons: (1) "sovereign immunity generally protects the State of Vermont against claims for damages, costs, or attorney's fees" and "there has been no express waiver" of sovereign immunity in the context of the meals tax regarding the award of attorney's fees against the state; (2) there was no exception in this case to the "American Rule that each side is to bear its own legal fees" because, again, the statute regarding meals tax does not "provide[] clear authority for the award of attorney's fees"; and (3) it could not invoke its powers of equity to award attorney's fees because taxpayer had not established that the Department "acted in bad faith or vexatiously" in its "litigation tactics."

         ¶ 4. Conceding that the court was correct in its third holding, taxpayer now appeals the court's denial of attorney's fees. In doing so, taxpayer (1) primarily argues that 32 V.S.A. § 9275 calls for attorney's fees in this circumstance and so is an exception to both sovereign immunity and the American Rule and (2) secondarily argues that equity also calls for attorney's fees in this circumstance, even though the Department did not act in bad faith. We conduct a nondeferential and plenary review of the court's holdings because whether a court may award attorney's fees is a question of law. See Rhoades Salvage/ABC Metals v. Town of Milton Selectboard, 2010 VT 82, ¶ 6, 188 Vt. 629, 9 A.3d 685 (mem.).

         ¶ 5. Before directly addressing taxpayer's arguments, we first describe the basics of sovereign immunity and the American Rule. Sovereign immunity generally prevents courts from ordering the government to pay attorney's fees to adverse parties. See Joe v. United States, 772 F.2d 1535, 1536 (11th Cir. 1985) ("The doctrine of sovereign immunity bars an award of attorneys' fees against the United States unless there is express statutory authorization for such an award."). When this doctrine is expressly waived by statute, it does not apply. LaShay v. Dep't of Soc. & Rehab. Servs., 160 Vt. 60, 67, 625 A.2d 224, 228 (1993) ("Sovereign immunity protects the [s]tate from suit unless immunity is expressly waived by statute."). But if a statute is silent regarding a waiver of sovereign immunity, then no such waiver exists. In re Williams, 166 Vt. 21, 24-25, 686 A.2d 964, 966 (1996) (declining to imply waiver of immunity from silence). And in analyzing potential waivers of sovereign immunity, the waiver is construed as minimally as the words of the statute allow. Library of Congress v. Shaw, 478 U.S. 310, 318 (1986) ("[W]e must construe waivers strictly in favor of the sovereign and not enlarge the waiver beyond what the statute requires." (citation and quotation omitted)) superseded on other grounds by statute, 42 U.S.C. 114, as recognized in Landsgraf v. USI Film Products, 511 U.S. 244 (1994))). We construe a statute narrowly and neither create a waiver by replacing silence with policy nor expand a partial waiver. See State v. Fuller, 163 Vt. 523, 528, 660 A.2d 302, 305 (1995) (noting that it is inappropriate to expand statute by implication by replacing legislative silence with policy).

         ¶ 6. The Legislature has expressly waived sovereign immunity on several occasions by specifically mentioning the availability of recovering attorney's fees from the government. See, e.g., 1 V.S.A. § 319(d)(2) ("The court may, in its discretion, assess against a public agency reasonable attorney's fees and other litigation costs reasonably incurred in a case under this section . . . ." (emphasis added)); 8 V.S.A. § 10404(h) ("A borrower aggrieved by a violation of the provisions of this section, or a rule adopted by the Commissioner in connection with this section, may bring an action for . . . reasonable attorneys' fees." (emphasis added)); 9 V.S.A. § 4007(c) ("Notwithstanding any contrary agreement, the substantially prevailing party in any proceeding to recover any payment within the scope of this chapter shall be awarded reasonable attorney's fees . . . ." (emphasis added)).

         ¶ 7. To a lesser extent, the American Rule, which requires each party to bear its own litigation expenses, also generally prevents courts from ordering the government to pay attorney's fees to adverse parties. Vermont follows this rule. Bruntaeger v. Zeller, 147 Vt. 247, 255, 515 A.2d 123, 128 (1986) ("Absent special legal authority or as a matter of contract, attorney's fees are not awarded as part of recovery in American practice."); State v. Whitingham Sch. Bd., 140 Vt. 405, 405, 438 A.2d 394, 396 (1981) ("Vermont follows the 'American' rule on litigation expenses, which requires each party to bear his [or her] general litigation expenses."). We have consistently found that "[o]ur standard for departing from [the American Rule] is demanding." Knappmiller v. Bove, 2012 VT 38, ¶ 4, 191 Vt. 629, 48 A.3d 607 (mem.). Namely, an exception to the American Rule may occur when one of the litigants has acted in bad faith. In re Gadhue, 149 Vt. 322, 328-29, 544 A.2d 1151, 1154-55 (1987).

         ¶ 8. Having described the basics of sovereign immunity, the American Rule, and the general exceptions to each, we now address taxpayer's arguments on appeal: (1) his primary argument that 32 V.S.A. § 9275 calls for attorney's fees in this circumstance and so is an exception to both sovereign immunity and the American Rule and (2) his secondary argument that equity ...


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