4501 NORTHPOINT LP v. Maricopa County

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

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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

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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

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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

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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

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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).

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(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

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