SUPREME COURT OF ARIZONA
En Banc
4501 NORTHPOINT LP, a limited )
partnership, ) Arizona Supreme Court
) No. CV-05-0124-PR
Plaintiff-Appellant, )
) Court of Appeals
v. ) Division One
) No. 1 CA-TX 02-0027
MARICOPA COUNTY, )
) Arizona Tax Court
Defendant-Appellee. ) No. TX99-000408
)
__________________________________) O P I N I O N
Appeal from the Arizona Tax Court
The Honorable Paul A. Katz, Judge
REMANDED
Opinion of the Court of Appeals, Division One
209 Ariz. 569, 105 P.3d 1188 (App. 2005)
VACATED
FENNEMORE CRAIG, P.C. Phoenix
By Paul J. Mooney
Jim L. Wright
Paul Moore
Attorneys for 4501 Northpoint LP
ANDREW THOMAS, MARICOPA COUNTY ATTORNEY Phoenix
By Richard W. Garnett
Attorneys for Maricopa County
B A L E S, Justice
¶1 Section 12-348(B) of the Arizona Revised Statutes
(“A.R.S.”) (2003) authorizes an award of attorneys’ fees to a
taxpayer who “prevails by an adjudication on the merits” in an
action challenging the assessment or collection of taxes. In
this case, we hold that a taxpayer who accepts an offer of
judgment in the taxpayer’s favor under Rule 68 of the Arizona
Rules of Civil Procedure has prevailed by an adjudication on the
merits and is therefore eligible for a fee award under § 12-
348(B).
I.
¶2 For purposes of property tax valuation, Maricopa
County set the full cash value of a theater complex owned by
4501 Northpoint LP (“Northpoint”) at $13,597,923 for the 2000
tax year. Northpoint challenged this assessment by filing an
action in the tax court. Less than two months before the
scheduled trial, the County made a settlement offer to reduce
the valuation to $12,000,000, but Northpoint rejected this
offer. The parties continued pre-trial discovery.
¶3 When the trial was slightly more than a month away,
the County made Northpoint an offer of judgment pursuant to Rule
68. The County offered to reduce the full cash value to
$12,000,000 and to pay Northpoint’s costs but not attorneys’
fees.
¶4 Rule 68 allows either party to serve upon the adverse
party an offer to allow judgment to be entered in accordance
with the terms of the offer. Ariz. R. Civ. P. 68(a). If the
offeree accepts the offer, the court will subsequently enter a
2
corresponding judgment. Id. 68(b). If the offeree rejects the
offer and does not later obtain a more favorable judgment in the
case, the offeree must pay sanctions to the offeror. Id. 68(d).
These sanctions include reasonable expert witness fees and
double the taxable costs incurred by the offeror after making
the offer, as well as post-offer prejudgment interest on
unliquidated claims. Id.
¶5 Special procedures apply if, as in this case, the
action involves a claim for attorneys’ fees. In that event,
Rule 68(c)(1) directs that the offer shall set forth separately
the amount of any monetary award to be made on the asserted
causes of action and the amount of attorneys’ fees to be awarded
if the offer is accepted. The offeree then has three options:
1) reject the offer, 2) fully accept the offer, or 3) partially
accept the offer as it concerns the monetary award on the causes
of action while reserving the right to apply to the court for a
determination of the amount of attorneys’ fees, if any, to be
awarded. Id. 68(c)(2), (3). After the court determines the fee
issue, judgment is entered reflecting that determination along
with the parties’ agreed upon monetary award. Id. 68(c)(3).
¶6 Pursuant to Rule 68(c)(3), Northpoint partially
accepted the County’s offer of judgment. Northpoint accepted
the offer insofar as the County agreed to reduce the full cash
value of the property to $12,000,000, and Northpoint applied to
3
the court for attorneys’ fees under A.R.S. §§ 12-348(B) and 12-
349 (providing for fee awards for unjustified actions). The
County opposed any award to Northpoint and also sought an award
of fees it incurred after its initial settlement offer or,
alternatively, an award under § 12-349 for fees incurred in
responding to Northpoint’s fee request.
¶7 The tax court ruled that Northpoint’s acceptance of
the County’s Rule 68 offer of judgment was not an adjudication
on the merits. Accordingly, Northpoint could not recover fees
under § 12-348(B). The tax court also denied each party’s
request for a fee award under § 12-349.
¶8 Northpoint appealed the denial of fees under § 12-
348(B). A divided panel of the court of appeals affirmed,
stating that entry of a judgment pursuant to Rule 68 does not
reflect any substantive determination of issues by the trial
court and therefore is not an adjudication on the merits that
allows a fee award under § 12-348(B). 4501 Northpoint LP v.
Maricopa County, 209 Ariz. 569, 574, ¶ 17, 105 P.3d 1188, 1193
(App. 2005). In dissent, Judge Winthrop noted that Northpoint
had achieved substantive relief in its favor through the Rule 68
judgment, which sufficed to make Northpoint eligible for a
discretionary fee award under § 12-348(B). Id. at 574-76, ¶¶
20-27, 105 P.3d at 1193-95.
¶9 Because the meaning of the phrase “prevails by an
4
adjudication on the merits” as used in § 12-348(B) is an issue
of statewide importance and “no Arizona decision controls the
point of law in question,” we granted Northpoint’s petition for
review. ARCAP 23(c)(3). We have jurisdiction pursuant to
Article 6, Section 5(3), of the Arizona Constitution and A.R.S.
§ 12-102. The issue is one of statutory construction and is
reviewed de novo. City of Tucson v. Clear Channel Outdoor, Inc.,
209 Ariz. 544, 547, ¶ 8, 105 P.3d 1163, 1166 (2005).
II.
¶10 In A.R.S. § 12-348, the legislature has authorized
courts to award attorneys’ fees and other expenses to certain
parties who prevail by an adjudication on the merits in
specified proceedings against the State or a city, town, or
county. At issue here is § 12-348(B)(1), which provides as
follows:
In addition to any costs which are awarded
as prescribed by statute, a court may award
fees and other expenses to any party, other
than this state or a city, town or county,
which prevails by an adjudication on the
merits in an action brought by the party
against this state or a city, town or county
challenging:
1. The assessment or collection of taxes or
in an action brought by this state or a
city, town or county against the party to
enforce the assessment or collection of
taxes.
¶11 Another subsection of § 12-348 provides that courts
5
shall award fees and expenses to non-governmental parties who
prevail “by an adjudication on the merits” in particular actions
involving public entities. See A.R.S. § 12-348(A)(1)-(6).1
¶12 The phrase “prevails by an adjudication on the merits”
is not defined in § 12-348. Nor is it defined in other statutes
in which it is used. See, e.g., A.R.S. §§ 6-131 (authorizing
fee awards to state banking department), 12-2030 (authorizing
fee awards to prevailing non-governmental parties in mandamus
actions), 49-471.01 (authorizing fee awards to persons who
prevail in court actions against counties regarding air
pollution regulations).
¶13 Our prior decisions, however, offer some guidance on
the proper interpretation of § 12-348. We have recognized that
the statute reflects an express legislative intent “to reduce
the economic deterrents individuals faced in contesting
government actions, magnified by the disparity between the
resources and expertise of the government and individuals.”
Wilderness World, Inc. v. Dep’t of Revenue, 182 Ariz. 196, 202,
895 P.2d 108, 114 (1995) (quoting Ariz. Tax Research Ass’n v.
Dep’t of Revenue, 163 Ariz. 255, 258, 787 P.2d 1051, 1054
1
Such actions include the defense of civil actions, court
proceedings to review state agency decisions, declaratory
judgment actions regarding state rulemaking, special actions
brought to challenge an action by the State against the party,
judicial appeals by the State from personnel board decisions, and
civil actions brought by the party to challenge the seizure of
personal property. A.R.S. § 12-348(A)(1)-(6).
6
(1989)). Accordingly, “[c]ompelling policy reasons” indicate
that fees generally should be awarded under § 12-348(B) when
taxpayers successfully challenge the government’s wrongful
imposition of taxes. Id.
¶14 We also have held that a party, in order to “prevail”
by an adjudication on the merits, must secure a final resolution
of the case in the party’s favor. Scottsdale Healthcare, Inc.
v. Ariz. Health Care Cost Containment Sys. Admin., 206 Ariz. 1,
8-9, ¶ 29, 75 P.3d 91, 98-99 (2003) (denying fee request as
premature under § 12-348(A)(2) for parties who obtained remand
for further trial court proceedings). A party does not prevail
in this sense merely by obtaining interim or interlocutory
relief in a case in which further proceedings are necessary.
See id.
¶15 The County does not dispute that Northpoint has
obtained a favorable final judgment, but nevertheless argues
that it has not prevailed “by an adjudication on the merits.”
The term “adjudication” is generally used to refer both to the
legal process of resolving a case and to a judgment. Black’s
Law Dictionary 45 (8th ed. 2004). The term “adjudication” thus
encompasses the entry of a judgment that determines claims in a
case, but “adjudication” does not necessarily mean that this
determination must follow a trial or even a hearing. Cf. Ariz.
R. Civ. P. 54(b) (noting that an order or decree that
7
“adjudicates fewer than all of the claims or the rights and
liabilities of fewer than all the parties” is subject to
revision absent Rule 54(b) certification).
¶16 Outside of the context of § 12-348, courts often
describe a judgment as being “on the merits” if it finally
resolves an action in a manner that precludes later relitigation
of the claims involved. See, e.g., Gould v. Soto, 14 Ariz. 558,
561-62, 133 P. 410, 411-12 (1913); Restatement (Second) of
Judgments (“Restatement”) § 19 cmt. a (1982). Such a judgment
may result from an actual trial on the substantive issues but it
need not do so. Restatement § 19 cmt. a.2
¶17 A judgment may also be “on the merits” and thus have
claim preclusive effect when it results from the stipulation of
the parties, see Suttle v. Seely, 94 Ariz. 161, 163-64, 382 P.2d
570, 572 (1963), or various pre-trial rulings. E.g., Union
Interchange, Inc. v. Van Aalsburg, 102 Ariz. 461, 464, 432 P.2d
589, 592 (1967) (noting that summary judgment is a judgment on
the merits and a bar to a later suit on the same cause of
action); Roden v. Roden, 29 Ariz. 549, 553, 243 P. 413, 415
(1926) (observing that “[a] judgment of dismissal ‘with
2
The Restatement (First) of Judgments §§ 48, 49 (1942)
provided that judgments rendered “on the merits” would have claim
preclusive effect and identified such judgments as based on
substantive law rather than merely on rules of procedure.
Because the phrase “on the merits” now may refer to judgments
that bar the relitigation of a claim while not directly passing
on its substance, the Restatement has abandoned the phrase as
“possibly misleading.” Restatement § 19 cmt. a.
8
prejudice’ is the same as a judgment for defendant upon the
merits, and, of course, is res judicata as to every matter
litigated”) (citation omitted); In re Forfeiture of $3,000.00
U.S. Currency, 164 Ariz. 120, 121, 791 P.2d 646, 647 (App. 1990)
(holding that involuntary dismissal on substantive grounds was
“on the merits” for purposes of A.R.S. § 12-504).
¶18 It makes sense to interpret “adjudication on the
merits” as used in § 12-348 to similarly include judgments that
finally determine the claims involved. After all, a party that
obtains a judgment in its favor that bars relitigation by an
opposing governmental party has, in substance, won on the merits,
whether or not the judgment has followed a full trial. Reading
“adjudication on the merits” more narrowly would, by denying
fees to taxpayers who have successfully challenged the
imposition of taxes, unduly “penalize[] [the taxpayer] for
winning.” Wilderness World, Inc., 182 Ariz. at 202, 895 P.2d at
114.
III.
¶19 We next consider if a judgment entered pursuant to
Rule 68 is an “adjudication on the merits.” By making a Rule 68
offer, the County agreed to allow judgment to be entered against
it determining that the cash valuation of the property was
$12,000,000 for the 2000 tax year and that the taxpayer was
entitled to a refund of excess taxes paid on the challenged
9
higher valuation. The judgment entered after Northpoint
accepted the offer would, under ordinary principles of claim
preclusion, prevent either Northpoint or the County from
relitigating the claims involved. See Restatement § 18
(discussing how plaintiff’s original claim “merges” into
judgment in his favor and defendant cannot later avail himself
of defenses that might have been raised in original action); see
also Hanley v. Mazda Motor Corp., 609 N.W.2d 203, 208 (Mich. Ct.
App. 2000) (holding that Rule 68 judgment functions as an
adjudication on the merits for purposes of claim preclusion).
¶20 We hold that because a Rule 68 judgment in the
taxpayer’s favor is a final resolution that is binding on the
County, it is an “adjudication on the merits” for purposes of
§ 12-348. The court of appeals, however, interpreted § 12-348
as allowing a fee award only if the court enters a judgment
based on the court’s consideration of evidence or the substance
of the claims involved. In reaching this conclusion, the court
of appeals noted that § 12-348 allows fees for taxpayers who
prevail by an adjudication and this statute, unlike A.R.S. § 12-
341.01, does not allow a fee award merely because a party is
“successful.” 4501 Northpoint, 209 Ariz. at 571-72, ¶¶ 7-8, 105
P.3d at 1190-91.
¶21 The cases principally relied on by the court of
appeals, however, simply recognize that a party is not eligible
10
for a fee award under § 12-348 merely because the party has
prevailed in obtaining interim or interlocutory relief. See
Columbia Parcar Corp. v. Ariz. Dep’t of Transp., 193 Ariz. 181,
185, ¶¶ 20-21, 971 P.2d 1042, 1046 (App. 1999) (holding
plaintiff ineligible for fee award based on trial court ruling
that remanded matter for further administrative hearings); State
ex rel. Corbin v. Challenge, Inc., 151 Ariz. 20, 28, 725 P.2d
727, 735 (App. 1986) (denying fee request as premature where
party obtained reversal of summary judgment on appeal and case
was remanded for further proceedings). In this respect, § 12-
348 differs from § 12-341.01, which allows, in some
circumstances, fee awards to parties that are “successful” in
obtaining interim relief. Wagenseller v. Scottsdale Mem’l
Hosp., 147 Ariz. 370, 393-94, 710 P.2d 1025, 1048-49 (1985)
(allowing fee award under § 12-341.01 for interlocutory appeal
that “finally determine[d] an issue of law sufficiently
significant that the appeal may be considered as a separate
unit”).
¶22 The Columbia Parcar and Challenge, Inc. opinions
illustrate that fees should not be allowed under § 12-348(B)
based on an interim decision because either party could still
ultimately prevail on the merits. This proposition is not
inconsistent, however, with reading § 12-348(B) to allow fees
based on a Rule 68 judgment, which is a final resolution of the
11
merits of the action, not an interim decision.
¶23 The County, like the court of appeals, also notes that
entry of a Rule 68 judgment does not reflect any determination
by the court on the substance of issues, but instead simply
reflects the court’s perfunctory act performed pursuant to the
parties’ agreement. The fact that a Rule 68 judgment is entered
as a result of the parties’ agreement, however, does not make it
any less of an adjudication on the merits.
¶24 A Rule 68 judgment is entered by the court; it ends
the case on its merits and represents a legally enforceable
change in the parties’ relationship. See Hanley, 609 N.W.2d at
208 (“[A]n offer of judgment more nearly emulates a judgment
after trial rather than a form of settlement.”); see also
Wimbledon Townhouse Condo. I Ass’n v. Kessler, 425 So. 2d 29, 30
(Fla. Dist. Ct. App. 1983) (a Rule 68 judgment “end[s] the
dispute on the merits”); Fleet v. Sanguine, Ltd., 854 P.2d 892,
898 & n.32 (Okla. 1993) (“[T]he offer of judgment removes from
judicial consideration all fact issues whose resolution is
necessary to the judgment’s pronouncement. . . . The judgment
that results is considered to be equivalent to a jury
verdict.”).
¶25 In this regard, the court of appeals erred in relying
on Chaney Building Co. v. City of Tucson, 148 Ariz. 571, 716
P.2d 28 (1986). That case held that the stipulated dismissal of
12
one defendant from a lawsuit did not preclude the plaintiff from
asserting, in the continuing litigation against another
defendant, that the dismissed defendant had acted negligently.
Id. at 573-74, 716 P.2d at 30-31. In noting that “nothing is
adjudicated between parties to a stipulated dismissal,” Chaney
merely recognized that issue preclusion applies only to issues
that are actually litigated. Id. at 573, 716 P.2d at 30.
¶26 Chaney illustrates an important difference between
claim preclusion and issue preclusion. Under claim preclusion,
a prior judgment “on the merits” bars a second suit on the same
claim. Id. As noted above, a judgment can be “on the merits”
for purposes of claim preclusion even if it results from the
parties’ stipulation or certain pre-trial rulings by the court.
See Suttle, 94 Ariz. at 163-64, 382 P.2d at 572 (holding that
stipulated dismissal was claim preclusive). Issue preclusion,
in contrast, applies only as to issues that have in fact been
litigated and were essential to a prior judgment. Chaney, 148
Ariz. at 573, 716 P.2d at 30; see also Restatement § 27. Chaney
is thus consistent with our conclusion that a judgment entered
pursuant to Rule 68 has claim preclusive effect and reflects an
“adjudication on the merits” for purposes of § 12-348(B).
¶27 The County also argues that construing § 12-348(B) to
allow fee awards based on a Rule 68 judgment would be contrary
to public policy. This interpretation, the County argues, would
13
both discourage taxing entities from making offers of judgment
under Rule 68 and would encourage private parties to reject
early settlement offers in the hope of recovering subsequently
incurred fees. We do not find these arguments persuasive.
¶28 When the County made its Rule 68 offer, it obviously
sought to obtain the advantage of possibly recovering sanctions
if Northpoint rejected the offer and did not do better at trial.
By making the Rule 68 offer, the County also had to accept the
downside of its possible acceptance: the entry of judgment in
favor of the taxpayer. That a judgment entered under Rule 68
has negative consequences for the offeror, including the
assessment of costs under A.R.S. § 12-341 or potential exposure
to a fee award under § 12-348, is not, in itself, inconsistent
with the policies underlying Rule 68. If the County desired to
avoid the potential downsides of a Rule 68 judgment, it could
have made a settlement offer that excluded any fees rather than
an offer of judgment.
¶29 Accepting the County’s interpretation could, in fact,
undercut the policies underlying both Rule 68 and § 12-348. If,
as the County urges, a public entity is insulated from a fee
award when it makes a Rule 68 offer, the taxpayer faces two
options: 1) accept the offer and thereby forgo any potential fee
recovery, a result that would be contrary to the “compelling
policy” of generally awarding fees under § 12-348 to taxpayers
14
who successfully challenge the wrongful imposition of taxes, or
2) reject the offer in order to preserve the opportunity to
recover fees and expenses after trial, a result that would be
contrary to Rule 68’s goal of encouraging pre-trial settlement.
¶30 Finally, we note that § 12-348 itself contains
provisions that mitigate concerns that potential fee awards will
either unduly discourage public entities from making Rule 68
offers of judgment or encourage private parties to reject early
settlements. A court may deny or reduce a fee award if, among
other things, it finds that the prevailing party has unduly and
unreasonably protracted the final resolution of the matter or
has refused a settlement offer that is at least as favorable to
the party as the relief ultimately granted. A.R.S. § 12-
348(C)(1), (3). Fee awards under § 12-348 are also subject to
monetary limits, including the restriction that an award under
§ 12-348(B) not exceed $30,000 for fees incurred at each level
of judicial appeal. A.R.S. § 12-348(E)(5).
III.
¶31 Because we hold that a taxpayer who accepts a Rule 68
offer of judgment in the taxpayer’s favor is eligible for a fee
award under A.R.S. § 12-348(B), we vacate the opinion of the
court of appeals and remand this case to the tax court for
further proceedings consistent with this opinion. The tax court
shall determine the extent, if any, to which Northpoint should
15
be awarded fees and other expenses under A.R.S. § 12-348(B),
(C), and (E) for proceedings before that court. Pursuant to
ARCAP 21, we also grant Northpoint’s request for an award of
attorneys’ fees incurred in this Court and the court of appeals.
________________________________
W. Scott Bales, Justice
CONCURRING:
_______________________________________
Ruth V. McGregor, Chief Justice
_______________________________________
Rebecca White Berch, Vice Chief Justice
_______________________________________
Michael D. Ryan, Justice
_______________________________________
Andrew D. Hurwitz, Justice
16