Court Opinion

ID: 3184675
Source: CourtListenerOpinion
Date Created: 2016-03-11 15:49:42.517624+00
Date Added: 2024-06-11T12:57:54.005267
License: Public Domain

NOTICE: This opinion is subject to motions for reargument under V.R.A.P. 40 as well as formal
revision before publication in the Vermont Reports. Readers are requested to notify the Reporter
of Decisions by email at: JUD.Reporter@state.vt.us or by mail at: Vermont Supreme Court, 109
State Street, Montpelier, Vermont 05609-0801, of any errors in order that corrections may be
made before this opinion goes to press.

                                         2016 VT 34

                                        No. 2014-260

Fred Osier and Eugene H. Shaver                              Supreme Court

                                                             On Appeal from
   v.                                                        Superior Court, Chittenden Unit,
                                                             Civil Division

Burlington Telecom, City of Burlington and                   March Term, 2015
Jonathan Leopold

Helen M. Toor, J.

Norman Williams, Robert B. Hemley and David A. Boyd of Gravel & Shea PC, Burlington, for
 Plaintiffs-Appellants/Cross-Appellees.

Marc B. Heath and Jennifer E. McDonald of Downs Rachlin Martin PLLC, Burlington, for
 Defendant-Appellee City of Burlington.

Robin Ober Cooley, Ryan B. Gardner and Richard H. Wadhams, Jr. of Pierson Wadhams Quinn
 Yates & Coffrin, LLP, Burlington, for Defendant-Appellee/Cross-Appellant Leopold.

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

        ¶ 1.   REIBER, C.J.       Plaintiff-taxpayers Fred Osier and Eugene H. Shaver sued

defendants to recover and restore to the City of Burlington’s general fund $16.9 million in cost

overruns incurred by the City in connection with the operation of Burlington Telecom (BT). BT

is a City-owned enterprise that provides an optical fiber-to-the-home network to Burlington

residents and businesses. The trial court granted judgment to defendants City of Burlington and

the City’s former Chief Administrative Officer (CAO) Jonathan Leopold. Taxpayers appeal,

challenging the court’s denial of their request for an accounting from the City and its denial of
their request to hold Leopold personally liable for the $16.9 million in City funds used for BT.

Leopold cross-appeals, offering additional reasons why he should not be held liable.

       ¶ 2.    As set forth below, we conclude that the trial court acted within its discretion in

denying taxpayers’ request for an accounting. We also agree that Leopold is not personally

liable for the $16.9 million in cost overruns. In reaching this conclusion, we adopt the standard

identified by the court in its pretrial ruling and hold that any claim against Leopold must include

an element of bad faith. That critical element is lacking here. We thus affirm the trial court’s

decision as to Leopold’s liability on this basis.

                                           I. Background

       ¶ 3.    We begin with an overview of the BT controversy, relying on undisputed facts

identified by the trial court in response to a pretrial motion. The Burlington City Charter allows

the City to own, operate, and use “cable television, fiber optic cable and other

telecommunications within the corporate limits of the city.” 1995, No. M-17 (Adj. Sess.), § 23

(codified as amended at 24 V.S.A. App. Ch. 3 § 431(4) (City of Burlington)). The charter

requires that any City-owned utility obtain a certificate of public good from the Public Service

Board (PSB).

       ¶ 4.    The charter also addresses funding for such projects, stating that:

               If the city [elects to build a cable system], the Public Service
               Board, in considering any application for a certificate of public
               good, shall ensure that any and all losses from these businesses,
               and, in the event these businesses are abandoned or curtailed, any
               and all costs associated with investment in cable television, fiber
               optic, and telecommunications network and telecommunications
               business-related facilities, are borne by the investors in such
               business, and in no event are borne by the city’s taxpayers, the
               state of Vermont, or are recovered in rates from electric ratepayers.

24 V.S.A. App. Ch. 3 § 438(c)(1).

                                                    2
       ¶ 5.    In September 2005, the PSB issued a certificate of public good (CPG). Condition

60 of the CPG prohibited the use of public money to pay for BT’s “build-out” or construction

costs. Condition 60 specifically states:

               The City shall make payments on behalf of [BT’s build-out] only
               when and to the extent that BT has cash reserves, revenues
               receivable, or other payments receivable that, collectively, equal or
               exceed the sum of the payments to be made by the City plus the
               balance of any other current payments owed to the City. BT may
               participate in the City’s pooled cash management system provided,
               however, that BT shall reimburse the City within two months of
               the City’s expenditure for any expenses incurred or payments
               made by the City in support of services that BT provides to non-
               City entities. The City shall obtain Board approval prior to
               appropriating any funds other than as described above in the
               support of BT’s [build-out] activities.

       ¶ 6.    Since 2007, BT has been unable to meet its construction costs and other expenses

from operating revenues. Beginning in January 2007, it withdrew more money from the City’s

pooled cash account than it paid in. The pooled cash account is the equivalent of a common

checking account maintained for the use of all City departments. By March 2007, BT had run a

deficit in the account for more than sixty days in violation of Condition 60. According to

defendants, BT repaid its initial overdraft in August 2007 when it obtained financing from

CitiCapital. By November 2007, however, BT was again drawing more money out of the pooled

cash account than it put in. By January 2008, BT was again in violation of Condition 60 because

the deficit had lasted more than sixty days. The deficit continued and as of September 2012, it

was approximately $16.9 million.

       ¶ 7.    Defendant Jonathan Leopold was the City’s CAO from April 2006 until July 1,

2011. As CAO, Leopold had direct supervisory authority over BT’s finances and the use of the

pooled cash account. In his deposition, Leopold stated that he was unaware of Condition 60 and

the restriction on the account’s use until November 2008, when an attorney for the City informed

him about the condition. Leopold characterized his decision to allow BT to run a large deficit in

violation of the charter amendments and the CPG as a pragmatic decision to borrow money in
                                                3
the short-term until refinancing was in place. He stated that refinancing became unavailable in

2008 when credit markets entered a state of crisis.

       ¶ 8.    The trial court found no evidence that any funds withdrawn from the pooled cash

account were used for any purpose other than BT’s construction costs and other normal business

expenses. There was no evidence—and no allegation whatsoever—of corruption or personal

benefit to Leopold or any other City employee. Taxpayers alleged only that the use of the City

funds was unauthorized and occurred in obvious violation of the charter and the CPG.

                                       II. Pre-Trial Rulings

       ¶ 9.    Plaintiff-taxpayers sued defendants in December 2009. In their fourth amended

complaint, taxpayers raised a claim against the City and Leopold seeking “recovery of taxpayer

funds paid to [BT] in violation of law.” Taxpayers also raised claims of fraud and deceit, and

breach of duty of faithful performance, against Leopold.1 In addition to equitable relief with

respect to their first claim, taxpayers sought a declaratory judgment that Leopold breached his

duty of faithful performance and his fiduciary duty; an accounting concerning, among other

things, payments made to BT and the amount that BT owed to the City; and an order

permanently enjoining the City from taking any further actions that violated BT’s CPG or the

Burlington City Charter, or which were likely to place Burlington taxpayers at further risk as a

legal or practical matter.

       ¶ 10.   In February 2010, the court issued an interim stipulated order prohibiting the City

from using any City money to make any payment to CitiCapital unless authorized by the PSB, or

using City money to make any other payments in violation of Condition 60 of the CPG. Each

month, the City was also required to provide taxpayers with documentation of BT’s ability to

reimburse the City pooled cash management system out of current revenues within sixty days,

including a daily statement of City accounts; a statement of due to/due from BT; a statement of

       1
         The trial court granted summary judgment to Leopold on the fraud and deceit claim,
and taxpayers do not challenge this ruling on appeal.
                                                4
BT receivables; a statement of BT accounts payable; BT’s anticipated balance due to the City;

and BT’s cash actual/forecast.

                                 A. Dismissal of Claims against City

       ¶ 11.   The parties filed various pretrial motions for summary judgment and motions to

dismiss. As relevant here, the City moved to dismiss the count against it, arguing in part that the

court should apply the doctrine of primary jurisdiction and decline to exercise jurisdiction in

favor of the PSB. The City explained that its violation of Condition 60 was the subject of PSB

Docket No. 7044, and that the PSB would address the remedy for that violation. In a similar

vein, the City argued that taxpayers’ claim was not ripe for review because the PSB was

addressing the same issues and the City’s cure period was ongoing. The court agreed with the

City in a September 2012 decision, finding it better to defer to the PSB process. The court thus

dismissed taxpayers’ claim against the City without prejudice to it being re-filed upon the closing

of PSB Docket No. 7044. Taxpayers do not appeal this ruling.

                                       B. Accounting Ruling

       ¶ 12.   In its September 2012 decision, the court also denied taxpayers’ request for an

accounting from the City. The court explained that equitable jurisdiction for an accounting was

usually invoked where: (1) there is a fiduciary relationship between the parties, accompanied by

a duty on the defendant’s part to render an account; (2) there are mutual accounts, or, if the

account is all on one side, the account is complicated; and (3) there is a need for discovery. The

City explained that it had produced tens of thousands of pages of documents in discovery, and

also provided monthly reports, copies of status reports to the PSB, and actual printouts from the

City’s accounting and financial management program. The court agreed that there had been

ample discovery, and found that taxpayers did not explain with specificity what more they

needed. It thus declined to order an accounting.

                                                   5
       ¶ 13.   The court revisited the accounting issue on a motion for reconsideration. It found

that taxpayers sought an open-ended comprehensive accounting by an independent accountant,

acting under the auspices of the court, of all money spent by the City on BT’s development over

the course of four years. Through this process, they sought to determine if taxpayer money was

diverted or misspent in some way. The total amount involved exceeded $30 million. Taxpayers

sought to have the City pay for the cost of this investigation. The court explained that it had

discretion in deciding whether an accounting was appropriate, and for various reasons, it

declined to order an accounting here. In reaching its decision, the court noted that it had found

no case where a taxpayer’s suit resulted in an open-ended audit of an entire city department in

response to a generalized concern that money was mishandled.

     C. Taxpayers’ Claims Against Leopold and Leopold’s Motion for Summary Judgment

       ¶ 14.   The court also considered pretrial motions relating to taxpayers’ claims against

Leopold for “recovery of taxpayer funds paid to BT in violation of law” and “breach of the duty

of faithful performance.” Under each theory, taxpayers sought a judgment requiring Leopold to

repay the $16.9 million in cost overruns.

       ¶ 15.   Taxpayers moved for summary judgment against Leopold on their claim for

“recovery of taxpayer funds,” urging a strict liability rule for public officials who spend money

without legal authorization. The court rejected this approach. Quoting a prominent authority on

the subject, the court explained that:

                 To justify the bringing of a taxpayer’s action some improper
               motive of an officer is essential. The act complained of need not
               be corrupt in the sense of not being induced by a desire for
               pecuniary gain; but it must be done to accomplish some purpose
               foreign to the interest of the municipality which is tantamount to
               fraud. Bad judgment, even gross incompetency, is not bad faith.

18 E. McQuillin, The Law of Municipal Corporations § 52.07, at 14 (3d ed. rev. 2003). The

court concluded that a strict-liability approach “imposes an overly harsh sanction on well-

                                               6
motivated public officials.” Stanson v. Mott, 551 P.2d 1, 15 (Cal. 1976). The court therefore

denied taxpayers’ motion for summary judgment.

       ¶ 16.   Leopold also moved for summary judgment, arguing that he was entitled to

qualified official immunity from taxpayers’ claims.2 The court rejected this argument as well,

finding material facts in dispute. The court determined that the absence of malice, corruption,

personal gain, or similar improper motive was not sufficient to establish the “good faith” element

of the qualified immunity defense.         Instead, the analysis must focus on “the objective

reasonableness of the official’s conduct in relation to settled, clearly-established law.” Hoffer v.

Ancel, 2004 VT 38, ¶ 12, 176 Vt. 630, 852 A.2d 592 (mem.) (quotation omitted). The court

observed that Leopold remained free to prove at trial that he had an objectively reasonable belief

that his actions in overdrawing the pooled cash account were lawful, and this defense was

independent of the substantive elements of the claim against him, and independent of any

immunity conferred by 24 V.S.A. § 903.

       ¶ 17.   Taxpayers also claimed that Leopold violated his duty of “faithful performance”

by authorizing taxpayer funds to be paid to BT in violation of Condition 60 of the CPG and the

city charter. Taxpayers sought a declaratory judgment to this effect, and argued that they were

entitled to look to Leopold’s surety for repayment. As the court noted, this claim followed the

language of the bonding statute. See 24 V.S.A. § 832 (providing that before town officer, who is

authorized to receive or disburse town funds, embarks on duties, selectboard shall require that

person “to give a bond conditioned for the faithful performance of his or her duties,” and “[a]ll

such bonds shall be in sufficient sums and with sufficient sureties as prescribed and approved by

the selectboard”). The court concluded that it would be premature to declare the liability of any

       2
           The court initially found it unnecessary to address qualified immunity in light of 24
V.S.A. § 903, which provides: “An action shall not be maintained against a person for money
paid out by him as an officer of a municipal corporation in accordance with a vote of such
corporation, whether such vote was valid or not.” The court initially found the requirements of
this statute satisfied, but later found a dispute of fact material to the statute’s application. Thus,
in an April 2013 ruling, it revisited the pretrial motions that related to Leopold’s liability.
                                                    7
surety because Leopold’s liability (if any) had not yet been established, citing Keefe v. Atkins,

285 S.W.2d 338, 342 (Tenn. 1955) (“[T]he liability of a surety . . . on an official bond depends

upon the liability of the principal.”).

        ¶ 18.   Finally, as part of its ruling on taxpayers’ motion for summary judgment, the

court sought to clarify the specific elements of taxpayers’ cause of action against Leopold.

Taxpayers principally relied upon a theory that Leopold breached his duty of faithful

performance. While this theory was facially attractive, it assumed that officers of corporations

and municipalities were personally liable if they violated budget rules and regulatory

requirements. Citing McQuillin, the court found the remedy for an employee’s misconduct was

unfavorable to taxpayers in cases where there was no fraud, crime, or personal benefit to the

employee. See 18 E. McQuillin, The Law of Municipal Corporations § 52.07, at 14 (3d ed. rev.

2003) (liability requires showing of purpose contrary to interest of municipality). There was no

allegation in this case that taxpayers’ money was spent for any purpose other than to build BT

and to cover its operating losses. The court concluded that taxpayers’ cause of action should be

limited to cases involving bad faith, that is, cases involving the spending and misappropriation of

funds for the benefit of the official or to cause harm to the city. Here, it appeared undisputed that

Leopold planned to run an overdraft only for as long as it took to secure new financing as he had

done before. If this was indeed undisputed, the court found it hard to see how taxpayers could

prove bad faith.

        ¶ 19.   The court proposed that the elements of taxpayers’ cause of action be defined as

follows: (1) the official authorized the expenditure of city funds in violation of law, including

regulatory conditions; (2) the official acted in bad faith, which is defined as intending to benefit

himself or others financially or to cause harm to the city; and (3) funds or property of the city

were paid to the official or other persons and not repaid to the city. The court found this cause of

action to be a form of equitable restitution, and cited the Restatement (Third) of Restitution and

                                                 8
Unjust Enrichment, § 43 (2011), in support of its proposal. See id. (“A person who obtains a

benefit (a) in breach of a fiduciary duty, (b) in breach of an equivalent duty imposed by a relation

of trust and confidence, or (c) in consequence of another’s breach of such a duty, is liable in

restitution to the person to whom the duty is owed.”). The court concluded that this approach

provided a predictable and familiar remedy; it did not create a new cause of action, previously

unrecognized in Vermont; it solved the problem of “double recovery” presented by taxpayers’

proposal that Leopold simply repay the money currently invested in BT, money that was not

truly “missing” and which had benefitted the City and strengthened BT; and it did not impose

liability upon officials who violated state law by overspending but who had directed this

spending to legitimate municipal purposes. The court invited the parties to file a last motion for

summary judgment addressing these concerns, but the parties did not do so.

                                        D. Jury Trial Request

       ¶ 20.   Taxpayers subsequently requested a jury trial on their remaining claims against

Leopold. The court, with a new presiding judge, denied their request. It found that taxpayers

appeared to have accepted the court’s analysis that their claim against Leopold was a form of

equitable restitution, and a jury trial was not available for claims seeking equitable relief.

                                         III. Final Judgment

       ¶ 21.   Following a bench trial, the court granted judgment to Leopold. The court did not

rely on the elements of the cause of action identified above. Instead, the court construed

taxpayers’ claims as a breach-of-fiduciary-duty claim as well as claim for a special sort of breach

of fiduciary duty by a government employee. Citing Johnson v. Nextel Commc’ns, Inc., 660
F.3d 131, 138 (2d Cir. 2011), the court found that to establish a breach-of-fiduciary-duty claim,

taxpayers must show: (1) the existence of a fiduciary duty; (2) knowing breach of that duty; and

(3) damages from that breach.

                                                  9
       ¶ 22.   The court found that Leopold had a fiduciary duty to the City in his role as CAO.3

It further determined Leopold acted without any bad faith and with the City’s best interest in

mind. While his choices might have been wrong, the court found nothing to suggest that

Leopold was motivated by any evil intent or self-interest. The court agreed with taxpayers,

however, that a bad motive was not the only way to violate a fiduciary duty. Relying on a case

that did not involve the liability of a municipal officer, the court reasoned that a fiduciary may

act in good faith, but still fail to use “the care an ordinarily prudent person in a like position

would exercise under similar circumstances.” J.A. Morrissey, Inc. v. Smejkal, 2010 VT 66, ¶ 10,

188 Vt. 245, 6 A.3d 701.

       ¶ 23.   The court concluded that a prudent CAO would not have withheld significant

financial information about the CPG violation from the Mayor, the Board of Finance, and the

City Council for the five-to-six-month period that Leopold did so. This information, the court

concluded, was something that the City would have wanted to know. Thus, the court found that

Leopold breached his fiduciary duty to the City by failing to promptly inform the Mayor, Board

of Finance, and City Council of the Condition 60 violation. It also found that Leopold breached

his fiduciary duty by allowing the violation to continue for several months without consulting the

Mayor, Board of Finance, and City Council, to allow them to decide if that was the proper course

of action.

       ¶ 24.   The court next considered what damages, if any, flowed from this breach. The

court found that the money that BT owed to pooled cash increased by several million dollars

between November 2008 and May 2009. The court found no proof, however, that this would not

       3
           In a footnote, the court found that to the extent that taxpayers sought to assert a
separate claim for breach of a duty under 24 V.S.A. § 832, that statute simply said that
employees such as Leopold were required to give bonds “for the faithful performance of his or
her duties,” and that the employee’s failure to do so (after being directed to) would lead to his or
her termination. The court saw nothing in the statute creating a right of action or creating any
duty other than the duty to obtain a bond, nor was any evidence presented as to whether Leopold
had obtained a bond.
                                                 10
have occurred anyway. It cited evidence that the City Council had repeatedly approved ongoing

expenditures while other financing was being sought; BT had projected it would bring in $70 to

$80 million for the City between 2009 and 2022; and a report that the City had commissioned to

assess BT’s viability going forward had agreed that BT was very valuable and predicted a

positive cash flow for BT by 2013. Given this evidence, the court did not believe that an earlier

disclosure by Leopold would have changed the course of events with regard to BT’s use of City

funds. The court noted that even the PSB, when told that BT had a $10.8 million unpaid debt to

the City in November 2008, took no action, which suggested to the court that the debt alone was

not a red flag that BT was in trouble. The court therefore found insufficient proof of a causal

connection between the breach of duty and the increase in BT’s debt to the City.

       ¶ 25.   Taxpayers also appeared to argue that they had a separate and unique cause of

action against government employees with responsibility for public funds. Taxpayers cited no

Vermont cases or statutes establishing a special cause of action against municipal employees for

personal liability in these circumstances, beyond the normal confines of a fiduciary duty claim,

and the court found none. The City Charter did not create any private right of action for

taxpayers. The court concluded that the doctrine of fiduciary duty and what it required of those

entrusted to care for others’ funds seemed perfectly designed to address the case before it, and

there did not appear to be any other source in Vermont law for another theory to reach the same

facts. Given its conclusions, the court did not address the other defenses proffered by Leopold.

The court entered judgment for Leopold, and this appeal and cross-appeal followed.

                                     IV. Claims on Appeal

                                         A. Accounting

       ¶ 26.   We begin with taxpayers’ assertion that the trial court erred in denying their

request for an accounting from the City. According to taxpayers, the court initially based its

decision on “primary jurisdiction,” but changed its ground on reconsideration to

                                               11
“nonjusticiability.” Taxpayers contend that both grounds are incorrect. As to the latter ground,

taxpayers assert that the court was overly concerned by the nature of the accounting remedy.

They contend that an accounting is a standard equitable remedy and that the scope of the

accounting requested does not present a particularly difficult issue.

       ¶ 27.   We reject taxpayers’ construction of the court’s decision. The court did not base

its decision on primary jurisdiction or nonjusticiablity. While it discussed various issues in

reaching its decision, the court explicitly recognized that it had broad discretion in deciding

whether to order an accounting and denied taxpayers’ request as an exercise of that discretion.

See First Commodity Traders, Inc. v. Heinhold Commodities, Inc., 766 F.2d 1007, 1011 (7th Cir.

1985) (“Because an accounting is an equitable remedy, a court has broad discretion to determine

whether it is appropriate to order an accounting.”). We review the court’s decision for abuse of

discretion, which “requires a showing that the court withheld its discretion entirely or exercised

it on clearly untenable grounds.” Shattuck v. Peck, 2013 VT 1, ¶ 10, 193 Vt. 123, 70 A.3d 922

(quotation omitted). Taxpayers fail to show an abuse of discretion here.

       ¶ 28.   As the trial court stated, an equitable accounting is generally invoked where there

is a need for discovery, the accounts at issue are complicated, there is a fiduciary or trust

relationship, and legal remedies are inadequate. See, e.g., Bossaler v. Red Arrow Corp., 897
S.W.2d 629, 630 (Mo. Ct. App. 1995) (identifying basic elements of equitable accounting claim).

The heart of taxpayers’ claims is that payments were made to BT in violation of the charter and

the CPG. This appears to be undisputed. The City disclosed extensive information to taxpayers

in response to the claims in their complaint and the court reasonably found no basis for the

additional inquiries sought by taxpayers. There was no dispute as to the amount that BT owed to

the general fund. The timing and amount of payments made from the general fund to BT were

documented in the financial records provided by the City. The City also provided taxpayers with

independent audit reports, which reviewed the financial and accounting records during the

                                                 12
relevant time period.    Additionally, taxpayers received monthly information from the City

pursuant to the interim stipulated order.

       ¶ 29.   The question of how the City’s payments were used at BT over a four-year period

presents a much different issue than whether the payments were made in violation of the charter

and the CPG. This question was not relevant to any claim before the court. As the trial court

concluded, taxpayers sought to use the court’s judicial authority for no particular end and to

answer no specific legal question. Taxpayers essentially proposed a very expensive and time-

consuming fishing expedition, one that the court, in its broad discretion, reasonably rejected.

Taxpayers war with the trial court’s decision, complaining that the court was overly concerned

about the nature of the accounting remedy and that the scope of the accounting does not present a

particularly difficult issue. Taxpayers’ disagreement with the court’s conclusions does not

demonstrate an abuse of discretion. See, e.g., Meyncke v. Meyncke, 2009 VT 84, ¶ 15, 186 Vt.
571, 980 A.2d 799 (explaining that arguments which amount to nothing more than a

disagreement with court’s reasoning and conclusion do not make out a case for an abuse of

discretion). We find no error in the court’s denial of taxpayers’ request for an accounting.

                                      B. Leopold’s Liability

       ¶ 30.   We turn next to the parties’ arguments concerning Leopold’s liability. Taxpayers

challenge the court’s breach-of-fiduciary-duty analysis, particularly its conclusion that no harm

resulted from Leopold’s actions. According to taxpayers, there was evidence to show that the

City Council would have cut off payments to BT if Leopold had disclosed the CPG violation in

November 2008 when he learned of it. In any event, taxpayers argue, Leopold had the burden to

show that the harm would have occurred regardless of his breaches, and he failed to do so. To

the extent that proximate cause is an issue, taxpayers argue that they were entitled to have a jury

decide this question.

                                                13
       ¶ 31.   Taxpayers also appear to reiterate their argument that there is some sort of

separate special duty applicable to municipal employees. They argue that Leopold thwarted the

taxpayers’ right to enjoin the illegal expenditures by concealing them, and therefore, Leopold or

his insurer should be liable for repayment. In connection with this argument, taxpayers advocate

a “due care” standard for municipal employees as set forth in Stanson, 551 P.2d at 15. They also

assert that they had the right to seek a declaratory judgment as to whether Leopold violated his

“duty of faithful performance.”

       ¶ 32.   In his cross-appeal, Leopold argues that the trial court erred in finding that he

breached a fiduciary duty because taxpayers never pled such a claim, and because he acted with

the City’s best interests in mind and without bad faith. Leopold contends that the court erred in

finding his duty to the City analogous to that applicable to private industry. According to

Leopold, established law dictates that a municipal officer does not breach a fiduciary duty absent

malice, ill-will or self-dealing, and here, the trial court found that he acted in good faith.

Leopold maintains that judgment in his favor is further warranted by his immunity defenses.4

       ¶ 33.   We begin by considering the precise nature of taxpayers’ claims.           In their

complaint, taxpayers raised the following legal claims against Leopold: “recovery of taxpayer

funds paid to BT in violation of law,” and “breach of duty of faithful performance.” They sought

to hold Leopold or his surety liable for the $16.9 million in cost overruns and to recover this

money through “[d]isgorgement, restitution or other equitable relief resulting in the repayment

with interest of all amounts improperly paid to BT from the General Fund.” They also sought a

declaratory judgment that Leopold “breached his duty of faithful performance and his fiduciary

duty by authorizing expenditures from the City’s cash pool to BT” in violation of the city charter

and the CPG.

       4
         These include Leopold’s assertions that taxpayers’ claims are barred by the absolute
immunity doctrine, the qualified immunity doctrine, and by the statutory immunity provided in
24 V.S.A. § 901.
                                             14
       ¶ 34.   As the trial court recognized in its pretrial ruling, taxpayers’ causes of action are

not easily defined and neither party attempted to identify any particular elements of these broadly

stated claims. It is well-established that a taxpayer may file suit seeking relief from certain

official actions. See Cent. Vt. Pub. Serv. Corp. v. Town of Springfield, 135 Vt. 436, 438, 379
A.2d 677, 679 (1977) (stating that taxpayer suits have “long been recognized as appropriate

vehicles for seeking relief from official action”).5 Taxpayer suits are

               a derivative proceeding based on some illegality for which the
               municipality would have a right of action. The theory of such suits
               is that the money or property squandered or about to be squandered
               belongs to the taxpayers, and hence every taxpayer has a
               substantial interest in it, which he or she is entitled to have
               protected.

18 E. McQuillan, The Law of Municipal Corporations § 52.03.10, at 6 (3d ed. rev. 2003)

(footnotes omitted).

       ¶ 35.   Taxpayer suits are “intended to protect the taxpayer against dishonest

officials . . . and against illegal contracts”; they are not to be used “as an instrument for

unwarranted attacks on honest officials.” Id. § 52.04, at 7. Thus, McQuillan states that:

                 To justify the bringing of a taxpayer’s action some improper
               motive of an officer is essential. The act complained of need not
               be corrupt in the sense of not being induced by a desire for
               pecuniary gain; but it must be done to accomplish some purpose
               foreign to the interest of the municipality which is tantamount to
               fraud. Bad judgment, even gross incompetency, is not bad faith.

Id. § 52.07, at 14. We have echoed this sentiment in our case law. See Cent. Vt. Pub. Serv.

Corp., 135 Vt. at 439, 379 A.2d at 680 (concluding in taxpayer action that when municipality has

accepted benefits wrought by performance of contract that is invalid for failure to satisfy some

       5
             We note that many states have statutes governing when a taxpayer action is
appropriate. See 18 E. McQuillan, The Law of Municipal Corporations § 52.05, at 11 (3d ed.
2003) (“In most jurisdictions, the right to bring a taxpayers’ suit is regulated by statute. . . . The
purpose of the statutes authorizing a taxpayer’s action is not to confer upon the taxpayer the
power to bring actions which the public authorities have no power to bring, but . . . to confer
upon the taxpayer the right to bring such an action in the cases specified in the statute which are
cases where the relief sought could be obtained by appropriate proceedings on the part of public
officers.” (footnotes omitted)).
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formality in its execution, but within apparent scope of municipality’s authority, municipality, or

taxpayer suing in its behalf, should not be allowed to recover funds paid absent evidence of

“fraud, collusion, or like conduct on the part of the contracting party”).

       ¶ 36.   Mindful of these authorities and the nature of taxpayer suits in general, we

conclude that the breach-of-fiduciary-duty test used by the trial court encompasses too wide a

range of discretionary behavior and it is not the appropriate standard here. We also reject

taxpayers’ assertion that there are two separate standards available in cases such as this one—the

standard applicable in breach-of-fiduciary-duty cases as well as another special standard for

public officials. Determining when a public official will be held personally liable calls for a

distinct test and one set of factors must govern when and under what circumstances a taxpayer

can recover funds from a municipal officer.

       ¶ 37.   We do not adopt the “due care” test advocated by taxpayers. We note, however,

that the “due care” standard is not as broad in application as it appears, and even assuming

arguendo that we were to adopt this standard, we would not find Leopold liable upon these facts.

       ¶ 38.   We agree with the court’s pretrial ruling that taxpayers’ cause of action must

include an element of bad faith, that 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. The

court’s pretrial construction of taxpayers’ claim as one seeking equitable restitution makes sense

for the reasons identified by that court. It defines taxpayers’ remedy in a way that is predictable

and familiar and it does not create a new cause of action. Thus, to recover, taxpayers must show

that: (1) the official authorized the expenditure of city funds in violation of law, including

regulatory conditions; (2) the official acted in bad faith, defined as intending to benefit himself or

others financially, or to cause harm to the city; and (3) funds or property of the city were paid to

the official or other persons and not repaid to the city.

                                                  16
       ¶ 39.   Other courts similarly require a showing of “bad faith.” In Adams v. Bryant, 370
S.W.2d 432, 436-37 (Ark. 1963), for example, the plaintiffs brought a taxpayers’ suit seeking

injunctive relief against a city’s light and water commissioners. The taxpayers argued that the

commissioners had used city funds to purchase stock in violation of the state constitution, and

they asked the court to order the commissioners to return the money. The court held that

individuals who acted in good faith would not be held individually liable, and there must be

evidence that the commissioners acted willfully or maliciously. Id. at 436. “Were the rule

otherwise,” the court explained, “few persons of responsibility would be found willing to serve

the public in that large capacity of offices, which require a sacrifice of time and perhaps money,

but affords neither honor nor profit to the incumbent.” Id. (quotation omitted). See also Powers

v. Goodwin, 291 S.E.2d 466, 470, 476 (W. Va. 1982) (explaining that by statute, municipal

officer is personally liable for amount illegally expended if he or she willfully participates in

violating certain statutory fiscal limits, but statute does not encompass actions taken in good faith

even if negligent; to hold officials personally liable, court must find that officer intended to

expend funds for what officer thought was an unauthorized purpose; “[i]n other words, ‘good

faith’ is a defense to personal liability under the statute”); Bd. of Educ. of Oklahoma City v.

Cloudman, 92 P.2d 837, 840 (Okla. 1939) (“Usually, nothing short of willful misconduct will

subject an officer to liability for acts done in the exercise of his official discretion. . . . In the

absence of malice, oppression in office, or willful misconduct, public officers cannot ordinarily

be held liable for mistaken exercise of discretion, or error in judgment, in the performance of

official duties. This is an expression of the common law, and applies to every discretionary act

of all public officials in this state, in the absence of positive legislative enactment to the

contrary.” (quotation omitted)).6     We find the policy concerns identified by these cases

compelling here.

       6
           As Powers illustrates, some states have enacted legislation that addresses the
                                            17
       ¶ 40.   Although the trial court ultimately did not apply the test that we now adopt, the

undisputed facts and the court’s post-trial findings are sufficient to allow us to affirm its

judgment in Leopold’s favor. As set forth above, the court found that Leopold acted without any

bad faith, and with the City’s best interests in mind. There was no self-dealing, no effort by

Leopold to line his pockets or those of his friends, and no inappropriate motive. To the extent

that Leopold permitted payments for BT to continue after November 2008, he did so because he

believed it was necessary to keep BT in operation, and that doing so was in the City’s best

interests. While those payments violated the CPG, they were all spent on a City enterprise that

Leopold believed was a benefit to the City. In light of these findings, we agree with the trial

court that Leopold should not be held personally liable for the cost overruns here. We thus

affirm its judgment on different grounds.

       ¶ 41.   Finally, we reject taxpayers’ argument that they had the right to a declaratory

judgment as to whether Leopold violated his “duty of faithful performance.” “The purpose of a

declaratory judgment action is to enunciate, so far as is requested and is appropriate, the rights of

the parties . . . .” Graves v. Town of Waitsfield, 130 Vt. 292, 295, 292 A.2d 247, 249 (1972)

(citations omitted); see also 12 V.S.A. § 4711 (“Superior Courts within their jurisdictions shall

have power to declare rights, status, and other legal relations whether or not further relief is or

could be claimed.”). Taxpayers rely on 24 V.S.A. § 832, which provides that before a town

officer, who is authorized to receive or disburse town funds, embarks on his or her duties, the

selectboard shall require that person “to give a bond conditioned for the faithful performance of

his or her duties,” and “[a]ll such bonds shall be in sufficient sums and with sufficient sureties as

circumstances under which public officials will be subject to personal liability for violations of
spending limits. See also Burt v. Blumenauer, 699 P.2d 168, 177 (Or. 1985) (discussing
Oregon’s personal liability statute, O.R.S. § 294.100). While Vermont law limits the liability of
a municipal official for expenditure of public funds made in accordance with a vote by a
municipal corporation, see 24 V.S.A. § 903 (“An action shall not be maintained against a person
for money paid out by him as an officer of a municipal corporation in accordance with a vote of
such corporation, whether such vote was valid or not.”), we have not yet considered the standard
by which to evaluate claims that fall outside of this statute.
                                                 18
prescribed and approved by the selectboard.”7 We agree with the trial court that, assuming

arguendo this statute applied to city officials, there is nothing in the statute creating a right of

action and the statute imposes no duty on officials other than the duty to obtain a bond.8 There

was no evidence presented here as to whether Leopold did or did not obtain a bond, and

declaratory relief was not warranted on this issue. The question of Leopold’s liability for his

actions related to his performance in office, moreover, is controlled by the discussion above.

       ¶ 42.   Given our conclusions, we need not address Leopold’s immunity defenses or

remaining arguments. We similarly need not consider taxpayers’ assertion that, to the extent that

proximate cause is an issue, they were entitled to have a jury decide this question.9 Our

conclusion rests on the absence of bad faith, not the absence of proximate cause.

       Affirmed.

                                               FOR THE COURT:

                                               Chief Justice

       7
           By its terms, the statute applies to town officials. The Burlington City Charter contains
a similar provision, stating that “The Treasurer and all other City officers who receive or
disburse any of the funds of the City shall annually, before entering upon the duties of their
office, give bonds to the City in amount satisfactory to the City Council for the faithful discharge
of their respective duties.” 24 V.S.A. App. Ch. 3, § 134.
       8
          The remedy for failing to obtain a bond, after being notified of such failure by the City
Council, is provided in the Burlington City Charter. See 24 V.S.A. App. Ch. 3, § 136.
       9
           On appeal, taxpayers do not argue that they were entitled to a jury on any other aspect
of their breach-of-duty claim, and accordingly, we do not reach the question.
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