Opinion ID: 1407452
Heading Depth: 2
Heading Rank: 1

Heading: Substantial justification under the state action statute.

Text: The State and the Retirement System argue that the circuit judge erred in finding that counsel were entitled to an award of attorneys' fees under the state action statute. We disagree. The state action statute provides in relevant part: In any civil action brought by the State, any political subdivision of the State or any party who is contesting state action, unless the prevailing party is the State or any political subdivision of the State, the court may allow the prevailing party to recover reasonable attorney's fees to be taxed as court costs against the appropriate agency if: (1) The court finds that the agency acted without substantial justification in pressing its claim against the party; and (2) The court finds that there are no special circumstances that would make the award of attorney's fees unjust. S.C.Code Ann. § 15-77-300. In the instant case, the State and the Retirement System argue that the circuit judge abused his discretion in finding that they acted without substantial justification in pressing their claim and that the circuit judge therefore erred in awarding attorneys' fees under the state action statute. Substantial justification for purposes of the state action statute means justified to a degree that could satisfy a reasonable person. Heath v. County of Aiken, 302 S.C. 178, 183, 394 S.E.2d 709, 712 (1990) (quoting Pierce v. Underwood, 487 U.S. 552, 564, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988)). Therefore, in deciding whether a state agency acted with substantial justification, the relevant question is whether the agency's position in litigating the case had a reasonable basis in law and in fact. McDowell v. S.C. Dept. of Soc. Servs., 304 S.C. 539, 542, 405 S.E.2d 830, 832 (1991). Although an agency's loss on the merits does not create a presumption that its position was not substantially justified, Video Gaming Consultants, Inc. v. S.C. Dept. of Revenue, 358 S.C. 647, 650, 595 S.E.2d 890, 892 (Ct.App.2004), the substance and outcome of the matter litigated is nevertheless relevant to the determination of whether there was substantial justification in pressing a claim. Heath, 302 S.C. at 183, 394 S.E.2d at 712. The State and the Retirement System initially argue that the state action statute does not apply because the TERI plaintiffs brought this suit against the State of South Carolina, with the state agency (the Retirement System) included merely as a stakeholder. The State and the Retirement System contend that under this procedural framework, the actions of the Retirement System are irrelevant. From this premise, the State and the Retirement System argue that the State's actions (through the General Assembly) in adopting Act 153 may not be scrutinized under a statute that references agency action, and furthermore, that an award of attorneys' fees based on a finding that the General Assembly acted without substantial justification in taking a particular legislative action violates separation of powers principles. Accordingly, the State and the Retirement System argue that the terms of the state action statute prevent either of them from being liable for attorneys' fees. We disagree. We first find the characterization of the Retirement System as merely a stakeholder in this litigation to be wholly inaccurate. While it is true that early in the litigation, counsel for TERI plaintiffs stated to the trial court that the only reason for including the Retirement System as a party to the suit was because the agency was a stakeholder with respect to the employee contributions at issue, and that their clients' substantive claims were with the State alone, the central focus of the litigation has been the actions of both the State and the Retirement System, with the Court referring to these entities jointly as the State. See Layman, 368 S.C. 631, 630 S.E.2d 265. The Retirement System is a named party in the caption of this case, and moreover, the Court specified that both entities would be liable when it directed the circuit judge to determine the issue of whether attorneys' fees were to be taxed as court costs against the State of South Carolina and the South Carolina Retirement System under the state action statute. Layman v. State, S.C. Sup.Ct. Order dated June 1, 2006 (368 S.C. at 648, 630 S.E.2d at 274). In our view, separating the liability of the State and the Retirement System is simply an attempt by these parties to bar any potential for a fee award, and this Court refuses to compartmentalize the actions of the State and the Retirement System in this manner. Instead, we believe the overriding principle of the state action statute is that as a state agency, the Retirement System is obligated to carry out the instructions of the State. Furthermore, as a governing body, the State is ultimately responsible for the actions of its agencies. That the statute plainly recognizes this principle is exhibited by the language purporting to apply to cases in which a party is contesting state action. S.C.Code Ann. § 15-77-300. For this reason, we find the attempt to parse the actions of the State and the Retirement System unpersuasive, and therefore hold that either the State or the Retirement System may be liable for attorneys' fees under the statute. Turning to the State's and the Retirement System's separation of powers argument, we find that although a judicial holding that the legislature failed in some legislative capacity might give rise to separation of powers concerns, this is not what we held in Layman. Instead, this Court held that the collective actions of the State and the Retirement System breached a contract with certain TERI participants. In light of this holding, the relevant question in a substantial justification inquiry in this case does not lie with the wisdom behind the State's enactment of Act 153 in and of itself, nor does it lie with the authority of the Retirement System to enforce the statute. Rather, the substantial justification inquiry in this case is based solely on the State's and the Retirement System's maintenance of litigation in which they defended a breach of their contract with the TERI participants. Accordingly, separation of powers concerns are not implicated by an assessment of liability for attorneys' fees in this case. The State and the Retirement System next argue that the state action statute does not allow an award of attorneys' fees because they were substantially justified in pressing their claim. We disagree. The State and the Retirement System contend that their actions in Layman were substantially justified under Video Gaming Consultants, Inc. v. S.C. Dept. of Revenue, 358 S.C. 647, 595 S.E.2d 890 (Ct.App.2004). In that case, a video gaming business sought attorneys' fees under the state action statute after this Court ruled in the underlying litigation that a state statute prohibiting the advertising of video poker machines was an unconstitutional restriction on commercial speech. See id. at 649, 595 S.E.2d at 891. The court of appeals found no evidence that the Department of Revenue acted without substantial justification in pressing its claim against the gaming business, reasoning that [a]s an administrative agency, the Department `must follow the law as written until its constitutionality is judicially determined.' Id. at 652, 595 S.E.2d at 892 (quoting Beaufort County Bd. of Educ. v. Lighthouse Charter Sch. Comm., 335 S.C. 230, 241, 516 S.E.2d 655, 660-61 (1999)). The court of appeals determined that the Department of Revenue was substantially justified in maintaining its action against the gaming business because the Department was merely enforcing [the statute] as it was obligated to do until a proper court determined the statute to be unconstitutional. Id. Therefore, the court of appeals held that the video gaming business could not recover attorneys' fees under the statute. We find the instant case distinguishable from Video Gaming. Although the separation of powers principles articulated by the court of appeals in Video Gaming were correctly applied in light of the issue of the video poker statute's constitutionality in that case, these same principles are not equally applicable to a finding of substantial justification in this case, in which this Court declined to address the constitutionality of Act 153, but instead decided Layman solely on whether Act 153 constituted a breach of contract. [5] In other words, the State and the Retirement System in Layman were not defending the validity of an unconstitutional statute, but rather, were defending the validity of a statute that constituted a breach of contract. Accordingly, although separation of powers principles may substantially justify a state agency's defense of an unconstitutional statute, these same principles will not substantially justify the State's and the Retirement System's defense of what we held to be an illegal act. Instead, we find Heath v. County of Aiken to be instructive in this matter. 302 S.C. 178, 394 S.E.2d 709 (1990). In Heath, this Court determined in the underlying litigation that the local county council violated a state statute prohibiting county governing bodies from developing personnel polices and procedures for employees under the direction of an elected official. Id. at 181, 394 S.E.2d at 710. In reviewing whether county council was substantially justified in pressing its claim, this Court examined the substance and outcome of the matter eventually litigated, and found that the statute construed in the underlying case was unambiguous. Id. at 184, 394 S.E.2d at 712. The Court reasoned that when coupled with the relevant precedent, this clearly established that the County's claims did not have a reasonable basis in law or in fact. Accordingly, the Court held that an award of attorneys' fees was appropriate under the state action statute. Id. Turning to the instant case, this Court held in Layman that the language in the TERI statute created an unambiguous contract between the State and TERI participants who entered the program prior to the enactment of Act 153, and that the State's unilateral alteration of this agreement by applying the requirements of Act 153 to this class of TERI participants constituted a breach of contract. 368 S.C. at 640, 630 S.E.2d at 270. In our view, the State's and the Retirement System's breach of an unambiguous contract with the TERI participants is analogous to the County's violation of an unambiguous statute in Heath. In other words, we find that the State and the Retirement System had no reasonable basis in law or in fact on which to defend the breach of an unambiguous contract with certain TERI participants. Accordingly, we hold that the State and the Retirement System were not substantially justified in pressing their claim, and therefore, the circuit judge correctly concluded that counsel for TERI plaintiffs were entitled to attorneys' fees under the state action statute. See also McDowell, 304 S.C. at 543, 405 S.E.2d at 833 (finding that in relying on an erroneous legal conclusion, DSS's litigation position was not substantially justified because it had no reasonable basis in law and fact). Although we hold that the State and the Retirement System were not substantially justified in pressing their claim in Layman, at the same time, we agree with the State's and the Retirement System's assertion that the circuit judge erred in his findings regarding substantial justification. Specifically, the circuit judge ruled that the State's failure to investigate the legality of Act 153 before its enactment and the subsequent passing of Act 153 into law had no reasonable basis in law or in fact. We find that the circuit judge's reasoning is flawed in several respects. In deciding whether a state agency acted with substantial justification, courts must only determine whether the agency's position in litigating the case has a reasonable basis in law and in fact. Id. at 542, 405 S.E.2d at 832. For this reason, the factual circumstances surrounding the enactment of Act 153 are irrelevant in deciding whether substantial justification existed for the State's and the Retirement System's defense of Act 153's contractual validity in the underlying litigation. The circuit judge's finding that the State's enactment of Act 153 lacked substantial justification was not only completely unrelated to the relevant inquiry in this case, it also unnecessarily implicated separation of powers principles which recognize that the authority to carry out the legislative process rests exclusively with the legislature. Although a court may issue the final judgment with regard to the constitutionality or enforceability of a law currently in effect, there is no similar judicial authority for reviewing the basis for the legislature's enactment of a law in the first instance. See Keyserling v. Beasley, 322 S.C. 83, 86, 470 S.E.2d 100, 101 (1996) (We do not sit as a super legislature to second guess the wisdom or folly of decisions of the General Assembly.). For these reasons, the actions of the General Assembly in passing Act 153 into law was an incorrect basis on which to find a lack of substantial justification. The circuit judge's finding that the Retirement System should have challenged the enactment and enforcement of Act 153 is flawed for similar reasons. On this matter, the circuit judge grossly misstated the separation of powers doctrine as it operates in our system of government by reasoning that our system of government is a triangle of checks and balances and does not require one branch to unwaveringly yield to the directive of another while it waits for the third branch to referee in the form of judicial determination. To the contrary, our courts have clearly established that under separation of powers principles, executive agencies are obligated to comply with the General Assembly's enactment of a law until it has been otherwise declared invalid. See, e.g., Video Gaming, 358 S.C. at 652, 595 S.E.2d at 892. To imply that the Retirement System would have been substantially justified under the state action statute had it refused to enforce Act 153 infringes on the legislative authority and burdens executive agencies with the duty of making their own assessment of legislation while already harboring the responsibility of administering legislation. Under our system of government, state agencies are not saddled with such burdens, and therefore, this was an incorrect basis on which to find a lack of substantial justification. Finally, the circuit judge reasoned that the continued enforcement of Act 153 had no reasonable basis in law or in fact once the Layman circuit court issued a temporary restraining order prohibiting the Retirement System from collecting further contributions from the named plaintiffs. We find that because the State and the Retirement System fully complied with the terms of the temporary restraining order (i.e., they stopped collecting further contributions from only the named plaintiffs), this was also an improper basis on which to make a finding of substantial justification. For these reasons, we vacate the circuit judge's findings on the issue of substantial justification. The circuit judge's findings misinterpret the existing law and unnecessarily extend the inquiry beyond the issue of whether the State and the Retirement System were substantially justified in pressing their claim against the TERI plaintiffs. Clarifying the relevant inquiry in this matter, we hold that the State and the Retirement System were not substantially justified in breaching an unambiguous contract with certain TERI participants. Accordingly, we hold that the circuit judge did not err in his ultimate conclusion that counsel for the TERI plaintiffs are entitled to attorneys' fees under the state action statute.