• Formal School Board Approval Required For Tax Settlement To Be Valid
  • January 27, 2004
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • In rendering its decision in Berkheimer Associates v. Norco Motors (January 16, 2004), the Commowealth Court issued the following warning to taxpayers: "PERSONS RELYING ON AGREEMENTS WITH AN AGENT OF THE SCHOOL DISTRICT WITHOUT FIRST OBTAINING THEIR APPROVAL BY A VOTE OF THE MAJORITY OF THE MEMBERS AT A PUBLIC MEETING DO SO AT THEIR PERIL."

    This decision is important to any taxpayer who has entered into - or is considering entering into - a tax settlement agreement with a "duly appointed" local tax collector. Berkheimer held that an authorized tax collector does not have authority to enter into such an agreement unless the local school board has voted affirmatively to approve such settlement.

    The settlement agreement at issue in this case had not yet been filed with the court. The decision, therefore, leaves open the question of whether a settlement agreement that has been filed with a court, but has not been formally approved by the appropriate school board, is valid.

    Berkheimer Associates, Inc. (Berkheimer) is the agent of the North Coventry Township (Township) and Owen J. Roberts School District (School District). In accordance with the Local Tax Enabling Act, the governing bodies of the Township and School District formally adopted resolutions "duly appointing" Berkheimer as their authorized tax collector.

    Berkheimer filed a complaint against Norco for failure to pay mercantile tax owed for the years 1990 through 1997 on the sales of vehicles. Subsequently, Berkheimer amended the complaint to recover taxes for the years 1986 through 1989. Norco disputed the assessments and, as a result, Norco and Berkheimer began to negotiate a settlement of the dispute.

    In anticipation of a court-ordered status conference, on April 25, 2000, Berkheimer counsel sent a letter to the clerk of the court confirming the cancellation of the status conference because "the parties have reached a settlement in principle in the matter [and] the parties, including the solicitors for the respective taxing bodies . . . are in the process of refining a draft settlement agreement and release[.]" (emphasis added). Over the next six months, the parties exchanged multiple drafts of the settlement agreement but were unable to finalize it. On October 20, 2000, the School Board met and decided to reject the then current draft settlement agreement.

    Berkheimer asked the trial court to rule on its petition to amend the complaint to include the 1986 through 1989 years. On December 20, 2000, the trial court rejected Berkheimer's petition. Subsequently, Norco filed a petition to enforce the settlement and the trial court issued an order directing the parties to execute the then current draft of the settlement agreement. Berkheimer appealed that order.

    The Commonwealth Court held that the settlement agreement was a "contract" that the Public School Code (24 P.S. § 5-508) required to be approved by a majority vote of the school board and that failure to obtain such approval rendered the settlement agreement "void and unenforceable." Despite acknowledging that the School District "duly appointed" Berkheimer as its tax collector, the Commonwealth Court did not address whether such appointment effectively delegated the School District's authority to enter into the settlement agreement on behalf of the School District without additional approval.1 In other words, did the school board's approval of the "contract" to retain Berkheimer as its tax collector fulfill the requirements of 24 P.S. § 5-508?

    In reaching its conclusion, the Commonwealth Court found that two "doctrine of apparent authority" cases upon which Norco relied did not control because they did not involve a school district and the specific approval requirement of 24 P.S. § 5-508. The Court did not, however, discuss why this distinction provided a controlling difference. The Court's silence becomes more noticeable when one remembers that the school district had "duly appointed" Berkheimer as its tax collector. The Court also determined that Berkheimer was entitled to amend its complaint to add tax assessments for the 1986 through 1989 tax years.

    In rendering this decision, the Commonwealth Court issued the following warning to taxpayers:

    Any apparent authority of its agents or officers is statutorily tentative and contingent upon further approval from the school board. Persons relying on agreements with an agent of the school district without first obtaining their approval by a vote of the majority of the members at a public meeting do so at their peril. (emphasis added).

    This decision suggests that a school district must "re-approve" every action of a "duly appointed" agent where the agent seeks to exercise authority over more than $100. This result that could cause school districts to question the value of delegating their authority in the first place.

    Importantly, the decision leaves open the question whether a school district may attempt to set aside a taxpayer's withdrawal of a case where the settlement was not formally approved by the school board. For this reason alone, further litigation of this issue should not be surprising.

    1The term "nominating committee" refers not only to a nominating committee or a committee performing similar functions, but also to a group of directors fulfilling the role of a nominating committee. The group may be comprised of the full board, subject to compliance with applicable exchange or NASDAQ requirements.