APPEAL from orders of the Superior Court of San Diego County, David B. Oberholtzer, William S. Dato, Judges. (Super. Ct. No. GIC821775)
The opinion of the court was delivered by: Haller, Acting P. J.
CERTIFIED FOR PUBLICATION
Affirmed in part, reversed in part, and remanded with directions.
In 2003, Candace Cates brought a taxpayer action against several defendants, including the California Gambling Control Commission (Commission) and the California State Controller (Controller), alleging these entities had failed to discharge their mandatory statutory duties to collect money derived from gambling owed to the state by various Indian tribes. After Cates engaged in independent investigation and discovery and the court ruled on numerous motions, the trial court granted summary judgment in defendants' favor.
In 2007, this court reversed the summary judgment, finding defendants did not show they complied with their mandatory duties to collect the portion of gambling revenue owed to the state. (Cates v. California Gambling Control Com. (2007) 154 Cal.App.4th 1302 (Cates I).) In reaching our conclusions, we found "troubling" the Commissioners' testimony showing the Commission was not conducting the necessary oversight to determine whether delinquencies existed under the applicable standards. (Id. at p. 1311.) We stated that it "appears from the evidence" the Commission is "simply verifying the accuracy of [the tribes'] mathematical calculations," rather than complying with its legal duty to confirm that the tribes are paying the required amounts. (Ibid.)
After the case was remanded to the trial court, the Commission completed audits of all the affected tribes and determined the tribes had underpaid the state by about $12.8 million, and the Commission collected at least $11.5 million of this amount. Based on the Commission's audits and its collection of the delinquent funds, Cates was satisfied the Commission was complying with its mandatory duties and dismissed her substantive causes of action. As part of the dismissal, the parties stipulated the court would decide issues pertaining to Cates's entitlement to attorney fees and the reasonable amount of any such fees in bifurcated proceedings.
In the entitlement phase, Cates sought attorney fees under Code of Civil Procedure section 1021.5 (section 1021.5), arguing her lawsuit was a "catalyst" that caused a change in defendants' conduct and vindicated an important public interest. (See Graham v. DaimlerChrysler Corp. (2004) 34 Cal.4th 553 (Graham).) Specifically, Cates asserted that her lawsuit prompted the Commission to enforce proper standards for calculating amounts owed by the tribes and to identify and collect millions of dollars in gambling revenues owed by the tribes. After examining the parties' extensive written submissions and conducting a lengthy hearing, the court (Judge David Oberholtzer) ruled that Cates met her burden to show the elements necessary to recover against the Commission and the Controller on a section 1021.5 catalyst theory, including that her lawsuit was a substantial factor in causing these entities to properly enforce and collect the tribes' substantial delinquencies.
The matter was then reassigned to Judge William Dato for the second phase of the litigation pertaining to the amount of recoverable attorney fees incurred in the six-year litigation. After examining the submitted documentation and legal memoranda, and conducting a hearing, the court awarded $2,011,844, which reflected a lodestar of $1,087,483 (2,398 attorney hours at a $451 blended hourly rate, plus paralegal hours) and a 1.85 positive multiplier. This amount was substantially less than the fees requested by Cates, and was substantially more than that advocated by defendants.
On appeal, the Commission and Controller challenge the court's rulings on the entitlement and amount of attorney fees. On entitlement, they contend the court erred in granting attorney fees under the catalyst theory because there was insufficient evidence showing the lawsuit caused the public agencies to provide the primary relief sought in the lawsuit and because Cates did not make a reasonable attempt to settle the litigation before filing suit. We reject these arguments as to the Commission, but find there is insufficient evidence in the record to show the lawsuit was a catalyst as to the Controller.
On the amount issue, we conclude the court's lodestar determinations were within the court's discretion. We reject the Commission's evidentiary challenges to the reconstructed attorney time records. These challenges go to the weight of the evidence and not to its admissibility. The court had sufficient information to evaluate the reliability of the submitted records.
We further conclude the court acted within its discretion in applying the positive multiplier with respect to the attorney fees incurred to prove the merits of Cates's claims and to establish entitlement to the fees on a catalyst theory. Under the deferential review standard, the court's reliance on the contingent risk factor to enhance these fees was reasonable under the circumstances. However, we determine there was an insufficient basis for the court to award a multiplier on the attorney fees incurred to litigate the appropriate amount of the fee award. As explained, there was no contingent risk associated with this issue, except for the risk created by Cates's own attorneys. We thus remand for the court to strike this enhanced amount from the attorney fees award.
Accordingly, as to the Controller, we reverse the orders in their entirety. As to the Commission, we affirm the order determining that Cates proved she was entitled to attorney fees under a section 1021.5 catalyst theory, but reverse the order establishing the amount of the award with specific directions set forth in the Disposition section.
FACTUAL AND PROCEDURAL SUMMARY
In 1997, the Legislature created the Commission, an independent agency charged with regulating and setting gambling policy in California. (Bus. & Prof. Code, § 19800, et seq.) The Commission is governed by five members (Commissioners) appointed by the Governor subject to confirmation by the state senate. (Bus. & Prof. Code, § 19811.)
Two years later, the State of California and various California Indian tribes executed a Tribal-State Gaming Compact (Compact), permitting the tribes to operate public gambling casinos on their respective California reservations. (Cates I, supra, 154 Cal.App.4th at p. 1305.) The Compact requires the tribes to pay a percentage of their gambling revenues to a special state fund (Fund), and to submit quarterly contribution reports regarding the required payments. (See Gov. Code, § 12012.85.)
Under the Compact, tribes must contribute to the Fund a specified percentage of their average "net win," which is a portion of gambling revenue derived from slot machines. (Cates I, supra, 154 Cal.App.4th at p. 1305.) The Compact states: " 'Net Win' means 'net win' as defined by American Institute of Certified Public Accountants [AICPA]." (Compact, § 2.15.) The AICPA defines "net win" as the difference between gaming wins and losses before deducting costs and expenses.
The tribes' first quarterly reports and payments were due on October 30, 2002. Before that time, the Commission hired Dr. John Mills, an independent certified public accountant and accounting professor, to render an expert opinion on the "net win" definition used by the AICPA. Based on his opinion, on September 4, 2002, "the Commission adopted the 'net win' definition set forth in the AICPA Audit and Accounting Guide . . . which uses the term synonymously with 'win' and 'gross gaming revenue.' "
Thereafter many Indian tribes raised concerns about the application of the AICPA " 'net win' " definition. To resolve these concerns, in January 2003, the Commission again hired Dr. Mills to render an additional expert opinion regarding the " 'costs and expenses' that could appropriately be deducted under the AICPA's 'net win' definition." Dr. Mills did not complete this task for more than one year.
The same month that the Commission hired Dr. Mills for the second time, in January 2003, former Governor Gray Davis issued Executive Order D-66-03 (2003 Executive Order) acknowledging that the tribes are required to make quarterly contributions to the Fund under the "net win" formula set forth in the Compact and submit certified quarterly reports to the state for such contributions. The order stated the Commission is the authorized state body that "shall" (1) collect and account for all contributions to the Fund; and (2) collect and analyze the certified quarterly reports submitted by the tribes.
In 2003, Cates was a law enforcement agent with the California Division of Gambling Control (Gambling Control Division), a separate agency from the Commission. The Gambling Control Division is a law enforcement unit within the California Department of Justice responsible for investigating violations of controlled gambling laws and enforcing those laws. (See Gov. Code, § 15000.1; Bus. & Prof. Code, § 19826; Cates I, supra, 154 Cal.App.4th at p. 1306.)
At some point in late 2002 or early 2003, Cates began complaining to Gambling Control Division management that the Indian tribes were refusing to comply with her requests to produce documents, including copies of audit-related documents. When she did not receive a satisfactory response, Cates retained attorneys who conducted an extensive independent investigation.
Based on this investigation, on November 26, 2003, Cates filed a taxpayer's action seeking injunctive and declaratory relief, alleging that the tribes were not paying their required share of "net win" revenue into the Fund. The defendants included the Commission, the State Controller, and the Attorney General. Cates alleged that since 1999 the Indian tribes have received in excess of $3 billion per year in gambling revenues, but the state entities were not fulfilling their statutory duties to collect or require the tribes to account for the portion of funds owed to the state. Cates further alleged that defendants had failed and refused to properly collect and analyze the tribes' required quarterly reports.
One month before filing the lawsuit, Cates wrote a letter to the Controller requesting that the Controller discharge its mandatory duties to collect required amounts of gaming revenue from the Indian tribes. On the same date she filed the lawsuit, Cates wrote a letter to the Commission, similarly expressing concern that the Commission was not properly collecting funds owed from the tribes. Neither agency responded to the letters.
When Cates filed her complaint, only one audit of a small Indian tribe had been completed, and this audit was primarily for training purposes. At the time, there were approximately 28 Indian tribes required to pay a portion of their "net win" income into the Fund.
C. Summary of Litigation and Related Events
In 2004, the Controller and Attorney General filed a demurrer arguing they had no duty to collect or oversee money due to the Fund. The demurrer was overruled. Several months later, these same parties moved for summary judgment on the grounds that Cates lacked standing to maintain the action, they had no responsibility to collect or account for contributions to the Fund, and the tribes were indispensable parties to the action. (Cates I, supra, 154 Cal.App.4th at p. 1306.) The trial court rejected these arguments and denied the motion. (Ibid.)
In September 2004, two Commissioners provided deposition testimony in which they acknowledged that compliance audits were essential for determining whether the tribes were paying the correct amount of their net win earnings under the Compact, but that audits were not being conducted and the Commission did not know whether the tribes were paying their required quarterly contributions because the tribes were using various definitions of "net win" and the Commission had not yet defined the phrase. (Cates I, supra, 154 Cal.App.4th at pp. 1310-1311.)
In February 2005, the Commission published written guidelines pertaining to the "net win" definition based on Dr. Mills's second report. The guidelines provided a definition that was essentially the same definition that Dr. Mills had provided in 2002.
Defendants thereafter moved for summary judgment, arguing Cates was not entitled to injunctive or declaratory relief because: (1) none of the tribes were delinquent in their payments to the Fund; (2) the Commission fulfilled its statutory duties; and (3) the Controller had no collection obligation because the tribes were not delinquent in their payments to the Fund. (Cates I, supra, 154 Cal.App.4th at p. 1306.) In addition to presenting the Compact and the 2003 Executive Order, defendants based their motion on a declaration of Gary Qualset, the deputy director of the Commission's compliance division. (Id. at pp. 1308-1309.) In his declaration, Qualset claimed that since April 2003, the Commission had commenced audits of nine of the 28 tribes, but had completed only one of those audits. (Id. at p. 1309.) He also claimed that audits were discretionary, and that " 'desk reviews' " were sufficient to show there were no delinquencies. (Ibid.) In opposition, Cates presented the September 2004 deposition testimony of the two Commissioners who stated that audits were not being conducted pending a clarification of the "net win" standard. (Id. at pp. 1310-1311.)
The trial court granted defendants' motion, finding that based on Qualset's declaration and the court's examination of the Compact and the 2003 Executive Order, the record showed defendants had complied with their statutory duties as a matter of law and there was no reason to initiate any collection actions because no tribe had been found delinquent. (Cates I, supra, 154 Cal.App.4th at p. 1309.)
In a published opinion, we reversed the summary judgment. (Cates I, supra, 154 Cal.App.4th at pp. 1304-1305.) We held the court erred in concluding defendants met their burden to show they were entitled to judgment as a matter of law, and alternatively we determined there were triable issues of fact. (Id. at pp. 1308-1311.) We found the trial court's factual premise underlying its conclusion--that there were no delinquencies by the tribes--to be faulty. (Id. at p. 1310.) We explained defendants had failed to proffer any evidence showing they had conducted a proper audit or other evaluation of the tribes' submissions to permit a fair determination as to whether any amounts were owed. (Id. at pp. 1309-1310.) In this regard, we noted that the undisputed evidence showed that only one audit had been completed between 2003 and 2006 and thus "the Commission does not know whether the tribes have paid the appropriate sums into the Fund." (Id. at p. 1310.)
We also expressed substantial concern with the deposition testimony of the two Commissioners who said the " 'net win' " phrase remains ambiguous and the tribes were using their own definitions of the standard to calculate the owed amounts. (Cates I, supra, 154 Cal.App.4th at p. 1311.) Despite acknowledging that audits were necessary to determine whether the tribes were using the correct definition and paying the correct amounts and that audits were not being conducted because of the "net win" controversy, these Commissioners said they believed the tribes were paying their fair share into the Fund "because no tribe was behind in its payments into the Fund or its payment of any penalty." (Ibid.)
We found the Commissioners' deposition testimony to be "startling because the Compact unambiguously defines the term 'net win.' " (Cates I, supra, 154 Cal.App.4th at p. 1311.) We further stated: "The testimony is even more troubling given Qualset's assertion that the Commission accounts for all Fund contributions by performing 'desk reviews' of all quarterly Fund contribution reports submitted by the tribes to ensure the mathematical accuracy of the reports . . . . We are at a loss to understand exactly how the Commission can possibly 'ensure the mathematical accuracy of the reports' when 'net win' is a critical element in calculating the contribution amount, but the Commission purportedly does not know how 'net win' is defined. It appears from the evidence presented that the Commission is simply verifying the accuracy of mathematical calculations set forth in the reports submitted by the tribes without confirming that the numbers used to perform the calculations are those called for by the Compact. Needless to say, the Commission cannot collect and account for Fund contributions and collect and analyze the reports submitted by the tribes without knowing the definition of 'net win.' " (Ibid.)
Cates filed her appeal in Cates I in May 2006, and the Cates I decision was issued in September 2007. Although no Commission audits had been completed in 2004 or 2005, the Commission completed eight audits by the end of 2006, 14 in 2007 and six in 2008. By late 2008, the Commission completed audits of all 27 or 28 tribes that were required to contribute a portion of their "net win" revenue to the Fund.
In May 2009, the parties entered into a stipulation to dismiss Cates's causes of action for injunctive and declaratory relief. The stipulation stated: "[P]laintiff is now satisfied that the Commission is complying with its mandatory duties . . . and that appropriate accounting, auditing and collection procedures are in place to account for and collect monies due the State from tribal . . . gaming." The stipulation further provided "the issue of entitlement to attorney fees and costs will be determined through bifurcated proceedings in which the issue of plaintiff's entitlement to attorney fees will be determined first, followed by a determination of the amount of any award, if necessary."
In the entitlement phase, Cates sought to recover her attorney fees under a section 1021.5 catalyst theory, asserting that she filed the lawsuit in 2003 to "force California state officials to do what they had been unwilling to do; analyze, confirm and account for payments due the [state] from Indian gaming tribes" and that "[b]ecause of her lawsuit, certain state officials/state entities changed their behavior regarding oversight duties in connection with Indian gaming activities in California, resulting in the determination that the tribes had under-reported their net winnings by over $100,000,000 . . . resulting in an underpayment to the State of over $12,880,737 . . . , $11,539,869 of which has finally been collected." (Bolding omitted.)
In support, Cates relied on the Cates I decision showing that although the Commission had a legal mandate since 2002 to ensure the tribes were properly reporting and paying the required money into the Fund, two years later the Commissioners acknowledged in their testimony that the Commission was not yet implementing these duties. (Cates I, supra, 154 Cal.App.4th at pp. 1308-1311.) Cates also relied on the evidence showing that only one audit was completed before 2006 and that the " 'desk reviews' " performed by the Commission during this time were not reasonably calculated to obtain sufficient information to determine whether the tribes were complying with their mandatory duties.
To show the results of her lawsuit, Cates relied on a January 2008 letter written by the Commission chair stating: "To date, we have completed 29 financial audits on tribes that contribute to the [Fund] and seven audits on tribes that contribute to the general fund. From these audits we have identified underpayments to the state totaling approximately $12.7 million and are collecting this money." Cates also presented a chart showing that since September 2002 the tribes had underpaid approximately $12.8 million (including interest) in amounts owed from gambling revenue and the Commission has collected approximately $11.5 million of this amount.
Cates additionally proffered evidence to show the Commission's asserted justifications for its prior failure to monitor and enforce the "net win" obligations were pretextual and unreasonable. In this regard, Cates submitted a declaration of Craig Greene, a certified public accountant, who has extensive experience in Indian gaming accounting and auditing issues. Greene explained that the Compact's definition of "net win" ("the difference between gaming wins and losses before deducting costs and expenses") was "clear and unambiguous" and is "the generally accepted definition" used by federal regulators, other states involved in the gaming industry, and textbooks dealing with the Indian gaming subject. (Underscoring omitted.) Greene opined that the Commission's failure to perform necessary audits before 2006 was unreasonable, explaining that compliance audit procedures for determining " 'net win' " earnings are "well known" in the industry and generally take "between two to four weeks."
Cates also submitted reports from the California Legislative Analyst's office pertaining to the 2005-2006 and 2006-2007 state budgets, recommending that the Legislature deny the Commission's requests to retain more auditors because of the "limited financial audit productivity" from existing staff.
Cates also presented her counsel's letters sent to the Controller one month before she filed the lawsuit and to the Commission on the day she filed the lawsuit, notifying these agencies of Cates's concerns that these agencies were not complying with their duties to ensure the tribes were paying the required amounts.
Opposing Cates's motion, defendants argued that Cates did not prove she was a successful party under the catalyst theory because her lawsuit "did not result in any changed behavior by State Defendants" as the Commission had already sought expert definitions as to " 'net win' " and the efforts to audit the tribes were "ongoing" when she filed her lawsuit. In support, defendants relied primarily on the declaration of former Commission compliance manager Qualset. Qualset denied that Cates's lawsuit had any effect on the Commission's compliance with the Compact, stating: "None of the goals, plans or any policy, procedure or action taken in the area of Commission compliance with its . . . review, audit, and collection functions . . . were put into practice, accelerated or changed as a result of Plaintiff's lawsuit." He asserted that the Commission's delays were instead caused by "Budget constraints, multiple workload responsibilities, staff experience, and recurring concerns about the definition of 'net win' raised by many [Fund]-paying tribes . . . ." Qualset also detailed the Commission's efforts to define the "net win" standard and its "outreach efforts" with the various Indian tribes. Qualset claimed that three audits were scheduled in 2003, but acknowledged that two of those audits were not completed for more than two years. The Commission also submitted the declaration of its current compliance manager, Rachelle Ryan, who stated: "Between April 2003 and October 2008, the Commission completed audits of every [Fund] tribe--and in some cases had twice audited tribes. . . ." She also stated that the Commission's methods and practices for determining compliance have "evolved" and become more accurate over time.
Defendants also argued that Cates was barred from recovering under the catalyst theory because she had not provided the agencies with adequate notice before filing the lawsuit. They argued that the two letters relied upon by Cates were insufficient to provide defendants with a reasonable opportunity to settle the matter.
After considering the parties' submissions and holding a hearing, the court concluded that Cates satisfied her burden under section 1021.5 to show she is entitled to attorney fees as the successful party against the Commission and the Controller.*fn2 On the issue of causation, the court found the evidence supported a "strong" inference that Cates's action was a catalyst to these agencies' actions, and defendants did not present credible evidence to rebut this conclusion. On the issue of prelitigation notice, the court found that although Cates's letters may have been ...