March 18, 2016

Vermont Adopts "Bad Faith" Standard for Liability of Public Official

Vermont Supreme Court absolves city official of personal liability for Burlington Telecom expenditures.

On March 11, 2016 the Vermont Supreme Court issued a unanimous decision absolving the City of Burlington’s former Chief Administrative Officer, Jonathan Leopold, of personal liability for authorizing the expenditure of City funds to build Burlington Telecom (BT), in violation of the City’s Charter and its Certificate of Public Good. Osier, et al. v. Burlington Telecom, et al., 2016 VT 34 (March 11, 2016). The taxpayer lawsuit was brought against the City and Mr. Leopold, alleging that both the City and Mr. Leopold had wrongfully used taxpayer funds to build BT. The plaintiff-taxpayers sought (amongst other things) an accounting of all BT expenditures and a judgment against Mr. Leopold in the amount of $17 million. The trial court dismissed the claims against the City in 2012. Following a four day bench trial, the trial court entered judgment in favor of Mr. Leopold. Affirming, the Supreme Court held that evidence of bad faith must be shown before an official can be held personally liable for misuse of public funds.

There were two issues on appeal: (1) whether the trial court abused its discretion in denying the taxpayers’ request for an “accounting” from the City of all funds disbursed on behalf of Burlington Telecom, and (2) whether a public official can be held personally liable for improper disbursements of funds from a public account, and, if so, under what circumstances.

This case stems from the build-out and operation of BT, a City-owned and operated television, telephone, and Internet service provider. In order to build and operate BT, the City had to obtain a Certificate of Public Good (CPG) from the state Public Service Board (Vermont’s public utilities commission). The City obtained the necessary CPG, which contained a condition (Condition 60) prohibiting it from using City taxpayer funds to pay for BT’s construction and development costs. Although BT was a department of the City, it could not be built or operated using public funds, per Condition 60. These expenses were to be funded with outside financing and operating revenues. In 2007, while construction was underway, BT ran out of funds. Mr. Leopold, who was unaware of Condition 60, authorized the expenditure of funds totalling $17 million from the City’s “pooled cash account” to pay for the ongoing construction of BT, while he sought additional financing. The pooled cash account is a common account holding funds for many of the City’s departments – essentially the City’s General Fund – and is therefore taxpayer monies. The economic crash of 2008, however, prevented Mr. Leopold from securing the additional outside financing he had counted on to pay back the pooled cash account.

The trial court found that Mr. Leopold was not authorized to withdraw funds from the pooled cash account to pay BT’s bills, but that in doing so he did not engage in bad faith, corruption, or personal benefit. The funds that were improperly withdrawn from the pooled cash account were used only for BT expenses. They were not used for any other purpose, and were not used for the personal benefit of Mr. Leopold. The taxpayers appealed.

On appeal, the Vermont Supreme Court affirmed the trial court’s denial of the taxpayers’ request for an accounting, finding no error in the court’s decision. The taxpayers had requested a full accounting of all money spent by the City on BT’s development over a four-year period. The taxpayers sought to determine whether money had been misappropriated or diverted in some way. They further sought to have the City pay for the accounting. Noting that the City had “disclosed extensive information to taxpayers” already, including all of its financial records, independent audit reports, and monthly status reports, the Vermont Supreme Court concluded that the trial court did not abuse its discretion in denying the request for an accounting. The Court further agreed that the taxpayers had not articulated a valid reason to force the City to incur the additional and significant expense and inconvenience of an accounting. Rather, the trial court had “reasonably rejected” the taxpayers’ effort to force the City to fund a “very expensive and time-consuming fishing expedition,” given the extensive discovery that they had engaged in and the lack of any credible evidence that the City’s funds were spent, albeit wrongfully, on anything other than BT-related expenses.

The Court next addressed the issue of Mr. Leopold’s personal liability for the misused funds from the pooled cash account. In reaching its holding the Court relied upon McQuillan’s “The Law of Municipal Corporations,” a prominent authority on the subject of municipal liability. McQuillan’s provides that a taxpayer action against a municipal official seeking recovery of public funds spent without authorization is only justified if some improper motive, or bad faith, is present; mere bad judgment, or even gross incompetence, does not satisfy the standard. The Court agreed, noting that many other states similarly require a showing of bad faith, and went on to clarify that bad faith is “evidence of spending or misappropriation of funds for the personal benefit of the official or for the purpose of causing harm to the municipality.” Although Mr. Leopold had directed City funds from the pooled cash account to be used to pay BT-related expenses in violation of the CPG, there was no evidence that those funds were used for any other purpose. Further, Mr. Leopold thought that by authorizing the use of the funds he was acting in the best interest of the City – to allow BT to survive while he sought outside financing.

The Court went on to address the public policy concerns raised by this case. It stated that if it were to rule otherwise then few responsible persons would be willing to serve as public officers. The Court therefore affirmed the judgment of the trial court denying recovery to the taxpayers, adopting and applying this new standard for municipal officer liability that includes an element of bad faith.

In sum, the Vermont Supreme Court held that for a taxpayer to succeed in such a case (i.e., obtain an order requiring the municipal official to personally repay the improperly used public funds), he/she must show that: (1) the official authorized the expenditure of public funds in violation of statutory or regulatory law; (2) acted in bad faith, defined as intending to benefit himself or others financially, or to cause harm to the municipality; and (3) the funds or property of the municipality were paid to the official or other person and not repaid to the municipality. Since there was no evidence of bad faith or self-dealing, the taxpayers in this case failed to prove the second element of their claim. Accordingly, the dismissal judgment of the trial court was affirmed.


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