Judges Opinions, — October 15, 2015 10:20 — 0 Comments

City of Lebanon, et al., v. Cornwall Borough, et al., v. Lebanon County Earned Income Tax Bureau No. 2012-01222

Civil Law-Law and Equity-Local Government Entities-Erroneous Payment of Tax Monies-Unjust Enrichment-Constructive Trust-Claim under Local Tax Enabling Act-Conversion-Unclean Hands-Prejudgment Interest-Calculation of Interest on Damages-Negligence-Statute of Limitations of Local Tax Enabling Act-Political Subdivision Tort Claims Act-Compensatory Damages-Consequential Damages-Recovery of Litigation Expenses-Recovery of Pre-Litigation Expenses

1. In 2007, the Lebanon County Earned Income Tax Bureau (“the Bureau”) learned that its former executive director, the late Donald Foltz, had embezzled over $800,000.00 in taxpayer money between 2002 and 2006. The Bureau’s bonding agency reimbursed the Bureau for the monies embezzled by Foltz. With the appointment of a new director, it was discovered that distribution of tax monies by the Bureau to municipalities and school districts between the years 2004 and 2007 may not have been proper. As a result, McKonly & Ashbury (“M & A”), an accounting firm selected by the Bureau with the approval of all of its constituent municipalities and school districts, was engaged to recreate an appropriate tax distribution model for the years 2004 to 2007. The performance of that model resulted in the conclusion that eighteen (18) municipalities and school districts had been overpaid tax distributions during those years. Thirteen (13) of the eighteen (18) municipalities identified in the model as overpaid agreed to return the overpayments over an extended period of time. Defendants refused to return the alleged overpayments, asserting that the M & A model was not accurate.

2. Plaintiffs, comprised of the underpaid municipalities as reflected in the M & A model, filed an action against Defendants with claims of unjust enrichment, constructive trust, violation of the Local Tax Enabling Act and conversion, asserting that the monies distributed by the Bureau between 2004 and 2007 were not distributed in a manner matching the intent of the tax ordinances passed by each school district and municipality, resulting in an underpayment of taxes to Plaintiffs and an overpayment of taxes to Defendants. Defendants filed claims against Additional Defendant, the Bureau, in negligence and violation of the Local Tax Enabling Act.

3. A forensic accountant was appointed by the Court as an independent accountant to evaluate the process employed by M & A to determine an appropriate tax distribution model for the years 2004 to 2007, and the forensic accountant stated that to a degree of accounting and professional certainty, the methodology employed by M & A, while admittedly imprecise, was fair and reasonable based upon all facts known to the parties.

4. In determining whether the M & A methodology of calculation to determine overpayments and underpayments was reasonable and credible, the Court found it significant that the Defendants never proffered an alternative distribution proposal regarding the distribution of funds between 2004 to 2007 and instead request that the Court maintain the status quo by essentially endorsing the system of distribution designed by Foltz who had engaged in criminal activity, which the Court found to be unconscionable.

5. The Court held that while imperfect, the methodology utilized by M & A was a fair and reasonable reconstruction of the manner in which the Bureau should have distributed tax revenue between 2004 and 2007 based upon the fact that all of the Lebanon County school districts and municipalities hired M & A to conduct an analysis, a forensic accountant hired by Plaintiffs credibly testified to a reasonable degree of accounting certainty that the M & A methodology was appropriate and generated a proxy result that would be within a reasonable variance as to what the information would have looked like in a perfect world, an independent forensic accountant engaged by the Court indicated that to a reasonable degree of professional certainty that the methodology employed by M & A was fair and reasonable based upon all of the facts known to the parties, the M & A team testified that they expended roughly 500 hours undertaking the analysis and Keystone Tax Bureau’s calculation of accurate distributions between the years 2009 and 2012 so closely aligned with the distribution proposed by M & A and bears little comparison to the actual distributions actually undertaken by the Bureau between 2004 and 2007.

6. Under Pennsylvania law, a plaintiff must prove damages with a fair degree of probability. While damages cannot be based upon mere guess or speculation, where the amount may be estimated fairly from the evidence, recovery will be sustained even though such amount cannot be determined with entire accuracy.

7. The Court concluded that longstanding Pennsylvania precedent requires that when funds mistakenly are paid, the recipient has a moral and an ethical duty to return the funds to their rightful owner.

8. Prejudgment interest may be awarded when the defendant holds money or property that belongs in good conscience to the plaintiff. The determination of whether to award prejudgment interest and the rate of such interest is vested in the discretion of the Court.

9. The elements of unjust enrichment are a benefit conferred upon a defendant by a plaintiff, acceptance of the benefit by the defendant and retention of the benefit by the defendant under circumstances that would render it inequitable for the defendant to retain the benefit. Privity of contract is not necessary to establish a claim for unjust enrichment. The Court found in favor of the Plaintiffs and against the Defendants on the claim of unjust enrichment and directed that the respective Defendants reimburse the Plaintiffs in the amounts of their individual overpayments as stated in the M & A model, as well as interest in the amount of six percent (6%), the statutory rate of interest in Pennsylvania, on the respective amounts of overpayments beginning January 1, 2008.

10. A constructive trust arises where a person holding title to a property is subject to an equitable duty to convey it to another on the grounds that the person would be unjustly enriched if the person were permitted to retain it. A constructive trust may arise even though the acquisition of the property was not wrongful and a defendant’s intention was not ill conceived. The court focuses not upon intention, but upon the result of the unjust enrichment. The Court held that it would apply the equitable doctrine of constructive trust to ensure that the taxes erroneously retained by the Defendants would be repaid to the Plaintiffs.

11. The elements to a cause of action under the Local Tax Enabling Act are: (1) earned income taxes are not distributed to the appropriate political subdivision within one (1) year after receipt of those funds by a tax officer; (2) the aggrieved political subdivision presents a written demand on the tax officer or political subdivision seeking the return of the revenues attributable to the residents of the aggrieved political subdivision; and (3) the entity improperly retaining the tax revenues fails to remit the proper amount to the aggrieved political subdivision within thirty (30) days of the demand. The Court found that Plaintiffs established all of the necessary elements to prove a cause of action under the Local Tax Enabling Act and again directed the repayment of the overpaid taxes by the Defendants as indicated in the M & A model with legal interest as of January 1, 2008.

12. Civil conversion requires an intentional deprivation of another’s right to property without the owner’s consent and lawful justification. The Court viewed the Plaintiffs’ theory of conversion as an attempt to create civil liability as a result of a defendant’s failure to settle a dispute, as Plaintiffs asserted that the elements of conversion accrued not when the Bureau inappropriately distributed tax funds, but when the report of M & A revealed the improper distributions. The Court stated that neither conversion nor any other tort imposes a remedy against a party for failing to comply with a settlement demand. As such, the Court found in favor of Defendants regarding the Plaintiffs’ claim for conversion.

13. The doctrine of unclean hands requires that one seeking equity must act fairly and without fraud or deceit regarding the controversy at issue. The application of the unclean hands doctrine to deny relief is within the discretion of the Court, which is free to decline to apply it if a consideration of the entire record indicates that an inequitable result will be reached in the event of its application.

14. The Court rejected Defendants’ assertion that Plaintiffs’ failure to oversee the Bureau, to reconcile its distributions with those of the Bureau and to determine the existence of a problem constitutes unclean hands precluding Plaintiffs’ recovery under its equitable claims.

15. The Court ruled in favor of Defendants and against the Bureau in Defendants’ claims in Negligence and violation of the Local Tax Enabling Act, as the director hired by the Bureau acted fraudulently and with willful disregard for the duties of his office and the Bureau was negligent in its oversight of Foltz in carrying out his duties.

16. The Court held that the seven (7) year statute of limitations set forth in the Local Tax Enabling Act had been tolled in accordance with the discovery rule and would not serve as a defense to Defendants’ claim against the Bureau for a violation of the Local Tax Enabling Act.

17. The Court held that the Political Subdivision Tort Claims Act did not bar the Defendants’ claims against the Bureau on the basis of immunity from liability as a local agency, as the Court explained that the Political Subdivision Tort Claims Act applies only in the context of tort litigation, the circumstances of this case would not serve the intention of the Political Subdivision Tort Claims Act of limiting governmental exposure and preserving the public treasury against the possibility of unusually large recoveries in tort cases and a provision of the Political Subdivision Tort Claims Act excludes its applicability cases in which an act of an employee of an agency constitutes willful misconduct.

18. In assessing Defendants’ remedies against the Bureau, the Court recognized that compensatory damages are damages sufficient to indemnify the injured party for the loss suffered. The Court also observed that consequential damages are losses that do not flow directly and immediately from the injurious act but that result indirectly from that act.

19. The Court rejected the Defendants’ request to recover the monies which they were overpaid by the Bureau as indicated by the M & A model as compensatory damages, as the Court reasoned that Defendants never should have received the overpaid funds in the first place and would not be harmed by being required to repay those funds.

20. The Court indicated that it would entertain a request from Defendants for consequential damages against the Bureau, as the distribution scheme that created the overpayments impacted Defendants in ways that transcend their obligations to repay the overpayments.

21. The Court recognized that while Defendants will be required to pay their own litigation-related expenses under the “American Rule” that requires each party to pay its own counsel fees regardless of the party who prevails at trial, the investigative fees and costs expended by Defendants prior to litigation fairly would be assessed against the Bureau.

L.C.C.C.P. No 2012-01222, Bradford H. Charles, Judge, July 15, 2015.

Thomas B. Schmidt, III, Esq., David J. Tshudy, Esq., Justin G. Weber, Esq., and Tucker R. Hull, Esq., for Plaintiffs

Scott T. Wyland, Esq., for Defendants

Howard L. Kelin, Esq., for Additional Defendant

IN THE COURT OF COMMON PLEAS OFLEBANON COUNTY, PENNSYLVANIA

CIVIL ACTION – LAW No. 2012-01222

CITY OF LEBANON, JONESTOWN BOROUGH, NORTH CORNWALL

TOWNSHIP, NORTH LEBANON TOWNSHIP, NORTH LONDONDERRY TOWNSHIP, NORTH LEBANON SCHOOL DISTRICT, PALMYRA AREA SCHOOL DISTRICT, SOUTH LEBANON TOWNSHIP, SOUTH LONDONDERRY TOWNSHIP, SWATARA TOWNSHIP, UNION TOWNSHIP, and WEST LEBANON TOWNSHIP,

Plaintiffs

CORNWALL BOROUGH, HEIDELBERG TOWNSHIP, NORTH ANNVILLE TOWNSHIP, WEST CORNWALL TOWNSHIP, and BETHEL TOWNSHIP,

Defendants

LEBANON COUNTY EARNED INCOME TAX BUREAU,

Additional Defendant

ADJUDICATION

AND NOW, this 15^th day of July, 2015, after bench trial and in consideration of the parties’ Stipulation of Facts and all other information presented, the verdicts of this Court are as follows:

1. On Plaintiffs’ causes of action of unjust enrichment, constructive trust and a violation of the Local Tax Enabling Act, our verdicts will be as follows:

(a) In favor of Plaintiffs and against Cornwall Borough in the amount of $1,532,182.20 plus interest to be computed from July 1, 2015;

(b) In favor of Plaintiffs and against North Annville Township in the amount of $399,350.21 plus interest to be computed from July 1, 2015;

(c) In favor of Plaintiffs and against Heidelberg Township in the amount of $1,111,904.70 plus interest to be computed from July 1, 2015;

(d) In favor of Plaintiffs and against West Cornwall Township in the amount of $187,903.23 plus interest to be computed from July 1, 2015;

(e) In favor of Plaintiffs and against Bethel Township in the amount of $102,328.68 plus interest to be computed from July 1, 2015.

2. On Plaintiffs’ cause of action for conversion, we find in favor of Defendants and against Plaintiffs.

3. With respect to the Defendants’ claim against Additional Defendant Lebanon County Earned Income Tax Bureau, we find in favor of the Defendants and against the Additional Defendant based upon the Defendants’ theories of negligence and a violation of the Local Tax Enabling Act. As a remedy, the Defendants will be entitled to recover pre-litigation fees and expenses. The Defendants shall submit to all opposing parties and this Court an itemized list of all pre-litigation costs and expenses which it seeks to recover. This itemized list is to be submitted within 10 days. Within 10 days thereafter, any other party may object to the amounts claimed by the Defendants. If a dispute exists, we reserve the right to schedule another hearing to determine the amount of the dispute. If no dispute exists, we will award Defendants the amount of pre-litigation fees and costs which it seeks.

4. All fees charged by Forensic Accountant Dennis Houser are to be divided equally between the parties.

BY THE COURT:

BRADFORD H. CHARLES, J.

TABLE OF CONTENTS

I. INTRODUCTION AND GLOSSARY

II. SUMMARY OF STIPULATED FACTS

III. SUMMARY OF TRIAL TESTIMONY

IV. DISCUSSION

A. M&A Analysis

B. General Principles of Equity

C. Unjust Enrichment

D. Constructive Trust

E. LTEA

F. Conversion

G. Unclean Hands

H. PLAINTIFFS’ Remedy

I. Responsibility of BUREAU

J. BUREAU’s Defenses

(1) Statute of Limitations

(2) Political Subdivision Tort Claims Act

K. DEFENDANTS’ Remedies Against BUREAU

V. CONCLUSION

APPEARANCES:

Thomas B. Schmidt, III, Esquire For Plaintiffs

David J. Tshudy, Esquire

Justin G. Weber, Esquire

Tucker R. Hull, Esquire

PEPPER HAMILTON, LLP

Scott T. Wyland, Esquire For Defendants

SALZMANN HUGHES, P.C.

Howard L Kelin, Esquire For Additional Defendant

KEGEL KELIN ALMY & LORD LLP

ADJUDICATION AND OPINION BY CHARLES, J., July 15, 2015

Given a choice between rough but imperfect justice and gross inequity created in part by corruption, we will choose the former every time. Before us today is the question of how millions of dollars of tax money should be distributed between local school districts and municipalities. Our choices are between [click on image to expand]:

When faced with the alternatives articulated above, our choice is crystal clear. For reasons that we will articulate in more detail within the body of this Opinion, we will redistribute over three million dollars in tax revenue plus interest from municipalities that were overpaid by the corruption-ridden former Earned Income Tax Bureau of Lebanon County to taxpayers in municipalities who were shortchanged for a period of four years.

I. INTRODUCTION AND GLOSSARY

This dispute over distribution of tax monies is as complicated as it is notorious in Lebanon County. The above-captioned lawsuit is only one of several that stemmed from the corruption and mismanagement of the former Earned Income Tax Bureau of Lebanon County when it was led by Donald Foltz. In 2007, the Bureau learned that Mr. Foltz had embezzled over $800,000.00 in taxpayer money. After Mr. Foltz was terminated from his job and committed suicide, a proverbial train of enlightenment gathered steam. It eventually impacted the Bureau’s bonding agency, Foltz’ widow, the BUREAU’s Bank, several accounting firms, numerous local officials and, at least indirectly, every taxpayer within Lebanon County. After months of trying to sort out what one lawyer characterized as a “true mess,” the citizens of Lebanon County learned that the monies distributed by the Bureau between 2004 and 2007 may not have been distributed in a manner that matched the intent of the tax ordinances passed by each school district and municipality. This epiphany was what led to the litigation now before this Court.

Fortunately, the parties to this dispute have been represented by capable and collegial counsel. Recognizing that there was consensus with respect to much of the underlying information relevant to our decision, counsel agreed to two stipulations of fact totaling 26 pages. To supplement those stipulations, we heard testimony in Court from eight witnesses. One of these witnesses was a forensic accountant appointed by the Court to render an independent opinion. We will begin our analysis by summarizing the parties’ stipulations and the testimony presented in Court. Thereafter, we will conduct an analysis of the primary issue before us – how the disputed tax dollars should be distributed. Finally, we will analyze the parties’ legal arguments and will render a final decision.

Before we embark upon the above, we perceive that it would be helpful to create a glossary of sorts. The monikers we will be employing to describe various individuals and entities throughout this opinion will be as follows:

PLAINTIFFS – Various Lebanon County school districts and municipalities that allege that they were underpaid tax money between 2004 and 2007.

DEFENDANTS – Five Lebanon County Municipalities that Plaintiffs believe were overpaid tax money between 2004 and 2007.

BUREAU – The now-defunct Lebanon County Earned Income Tax Bureau that was responsible for distributing tax money between 2004 and 2007.

FOLTZ – Donald Foltz, who was the former Executive Director of the Bureau, was discovered to have embezzled money between 2004 and 2007. His job was terminated in March of 2007. Several weeks later, he committed suicide.

M&A – McKonly & Asbury, which was a firm hired by the Bureau with the approval of all of its constituencies. M&A was charged with the responsibility of trying to recreate an appropriate tax distribution model for the years 2004 through 2007.

MORAN – Nancy Moran was a consultant hired by the Bureau to serve as Interim Director following the termination of Foltz’ employment. Moran served as the Director of the Bureau between April of 2007 and the time it finally became defunct in late 2008.

BOWERCRAFT – Samuel Bowercraft is a principal at M&A who is trained in data analytics. Mr. Bowercraft was the individual employed by M&A who was primarily responsible for developing the opinions and report of M&A.

SMITH – Dana Trexler Smith is a forensic accountant who was employed by Plaintiffs to conduct an analysis of the methodology employed by M&A.

DUFFUS – David Duffus is a forensic accountant who was hired by the ELCO School District to analyze and critique the methodology employed by M&A.

FREEH – Cheri Freeh is an accountant hired by Defendants to analyze and critique the methodology employed by M&A.

HOUSER – Dennis Houser is a forensic accountant who was appointed by the Court to conduct an independent analysis and critique of the methodology employed by M&A.

HOFFMAN – Rebecca Hoffman is a former employee of the Bureau.

GRUMBINE – Cheri Grumbine is the township manager of North Lebanon Township. After M&A communicated its findings, Ms. Grumbine developed a plan by which allegedly overpaid school districts and municipalities could repay alleged underpaid municipalities and school districts over an extended period of time. This plan later became known as the “Grumbine Plan.”

KEYSTONE – The Keystone Collections Group is a company that was hired in late 2008 to collect earned income tax and distribute it accurately to local political subdivisions.

LTEA – The LTEA is the Local Tax Enabling Act

II. SUMMARY OF STIPULATED FACTS

The BUREAU was created in 1967 through a “joint agreement” that was approved by all Lebanon County School Districts and Municipalities. The purpose of the BUREAU was “to collect and distribute earned income tax payments ….” During its existence, the BUREAU was governed by a six-person executive committee comprised of one representative from each of the county’s six school districts. In 1987, FOLTZ was hired to serve as the BUREAU’s Executive Director. FOLTZ designed and implemented the system that was used to distribute tax revenues to school districts and municipalities.

In 2006, the BUREAU’s Executive Committee began an investigation into the administration of the BUREAU. As part of the investigation, the committee retained the accounting firm of Boyer and Ritter to review the BUREAU’s internal controls. Boyer and Ritter issued a report in early March of 2007. On the same day that the report was issued, FOLTZ was placed on administrative leave. One week later, on March 14, 2007, FOLTZ’ employment with the BUREAU was terminated. On March 30, 2007, FOLTZ committed suicide.

Shortly after FOLTZ was relieved of his duties, the BUREAU discovered that money had been embezzled. It was learned that between 2002 and 2006, FOLTZ deposited $895,676.15 of tax revenues into an “off books” account to which only FOLTZ had access. Of this amount, FOLTZ removed $811,000.00 for his own use and benefit. The remaining $80,000.00 that had been deposited into the fraudulent account was recovered by the BUREAU. Later, the BUREAU’s bonding agency reimbursed the BUREAU for $801,000.00 that FOLTZ had stolen.

MORAN was hired on a contract basis to serve as Interim Executive Director of the BUREAU following FOLTZ’ termination. By the end of 2007, MORAN issued a report to the BUREAU’s Executive Committee expressing a concern that tax revenues for the time period between 2004 and 2007 had not been distributed properly. MORAN identified three primary concerns:

(1) Incorrect tax distribution percentages were inputted into the BUREAU’s computer system and were used to distribute tax revenue;

(2) FOLTZ “rounded up” or “rounded down” tax distributions that were determined in accordance with the BUREAU’s computer system;

(3) Incorrect tax rates were inputed into the computer system with respect to three school districts and three local municipalities.

As a result of MORAN’s report, all Lebanon County school districts and municipalities agreed that a more detailed investigation should be launched to determine whether overpayments or underpayments were made during the years 2004 through 2007. In July of 2008, all Lebanon County school districts and municipalities agreed to hire M&A to conduct an analysis of the BUREAU’s tax distribution decisions between 2004 and 2007.

The parties have stipulated that “it was impossible for M&A to recreate the necessary tax data using BUREAU records alone, because the BUREAU did not possess adequate and accurate records of individual taxpayer tax payments for the relevant years.” (¶ 75 of Stipulation). M&A learned that many tax returns no longer existed; BUREAU employees reported that “files and documents were untidy, disorganized and sometimes missing, and there was shredding of documents….” (¶ 78 of Stipulation).

M&A decided to obtain Pennsylvania Department of Revenue data for each taxpayer in Lebanon County. The Department of Revenue possessed a database that identified taxpayers by Social Security numbers and annual compensation. Using data from the Department of Revenue, M&A embarked on analysis to discern whether municipalities had been underpaid or overpaid between 2004 and 2007. After completing its analysis, M&A issued a report on March 17, 2010. M&A concluded that the following school districts and municipalities were underpaid tax money for the years 2004 through 2007:

Annville Township	$ 11,996.40
City of Lebanon	$1,447,958.54
Jonestown Borough	$ 166,503.09
North Cornwall Township	$ 315,164.25
North Lebanon Township	$ 822,264.07
North Londonderry Township	$ 587,268.05
Northern Lebanon School District	$ 107,236.24
Palmyra Area School District	$ 859,018.57
South Lebanon Township	$ 459,635.34
South Londonderry Township	$ 529,205.07
Swatara Township	$ 166,457.74
Union Township	$ 159,455.69
West Lebanon Township	$ 62,135.66

In addition, M&A determined that the following school districts and municipalities were overpaid money during the same years:

Annville-Cleona School District	$ 500,523.00
Bethel Township	$ 70,571.51
Cleona Borough	$ 43,806.82
Cornwall Borough	$1,056,677.45
Cornwall-Lebanon School District	$ 384,926.28
East Hanover Township	$ 186,941.80
Eastern Lebanon School District	$1,171,005.50
Heidelberg Township	$ 766,830.89
Jackson Township	$ 47,838.69
Lebanon School District	$ 326,089.11
Millcreek Township	$ 941.76
Mt. Gretna Borough	$ 219,053.91
Myerstown Borough	$ 44,387.37
North Annville Township	$ 275,413.94
Palmyra Borough	$ 129,669.20
Richland Borough	$ 26,312.78
South Annville Township	$ 313,720.28
West Cornwall Township	$ 129,588.44

Following the publication of M&A’s report, 13 of the 18 political subdivisions in Lebanon County identified as “overpaid” agreed to return their overpayments to the school districts and municipalities who were underpaid. The DEFENDANTS did not agree. The following chart represents the amount of money that M&A’s report identified as being overpaid to the five DEFENDANTS:

Cornwall Borough	$1,056,677.45
Heidelberg Township	$ 766,830.89
North Annville Township	$ 275,413.94
West Cornwall Township	$ 129,588.44
Bethel Township	$ 70,571.51

By a letter dated December 23, 2011, counsel for PLAINTIFFS contacted DEFENDANTS in order to demand payment of the alleged overpaid amounts that the DEFENDANTS retained. The DEFENDANTS declined to pay such amounts.

Beginning in the third quarter of 2008, all school districts and local municipalities agreed that future tax collection and distribution should be conducted by KEYSTONE. KEYSTONE immediately began collecting earned income tax money and distributing it to local municipalities and school districts.

The parties also stipulated that each of the DEFENDANTS received earned income tax disbursements of the following amounts:

1. Bethel Township

2004	$407,122.67
2005	$435,580.43
2006	$461,914.56
2007	$441,216.89
2008	$466,114.00
2009	$438,807.00
2010	$430,203.00
2011	$455,056.00
2012	$486,431.00

2. Cornwall Borough

2004	$683,660.85
2005	$723,022.42
2006	$772,381.13
2007	$742,348.97
2008	$675,582.77
2009	$443,018.49
2010	$511,695.13
2011	$511,102.69
2012	$577,762.69

3. West Cornwall Township

2004	$220,096.58
2005	$231,285.34
2006	$245,726.20
2007	$230,519.51
2008	$232,582.00
2009	$196,618.00
2010	$202,095.00
2011	$207,171.00
2012	$221,247.00

4. Heidelberg Township

2004	$505,148.23
2005	$534,148.23
2006	$570,700.86
2007	$567,498.21
2008	$532,957.00
2009	$343,463.00
2010	$333,289.00
2011	$327,976.00
2012	$383,862.00

5. North Annville Township

2004	$272,049.29
2005	$290,270.39
2006	$312,991.67
2007	$257,120.42
2008	$234,600.00
2009	$230,724.00
2010	$253,520.00
2011	$240,219.00
2012	$245,305.00

III. SUMMARY OF TRIAL TESTIMONY

BOWERCRAFT was the first witness to testify. BOWERCRAFT had training and experience in what he called “data analytics.” BOWERCRAFT was an employee of M&A and was primarily responsible for conducting M&A’s analysis of Lebanon County tax distributions between 2004 and 2007. Together with BOWERCRAFT, three other “team members” of M&A worked on the project. Together the M&A “team” spent almost 500 hours working on an analysis of how monies were and should have been distributed in Lebanon County.

BOWERCRAFT testified that processes and controls governing tax distribution during 2004 and 2007 were “totally lacking.” Based upon information provided by MORAN and employees at the BUREAU, M&A concluded that the tax revenue records of the BUREAU could not be relied upon. In other words, no accurate reconciliation of tax distribution could be conducted based exclusively upon the BUREAU’s records.

BOWERCRAFT and his team developed an analytical model to discern how tax revenue should have been divided between 2004 and 2007. That analytical model was as follows:

(1) Taxpayer compensation would be derived from Pennsylvania Department of Revenue records;

(2) Taxpayer residence would be derived from the BUREAU’s records;

(3) An analysis would be conducted of the degree to which the BUREAU’s residence records and the Department of Revenue’s compensation records could be “matched.”

(4) If the “match” was deemed to be representative, the Department of Revenue’s income data would be used to determine what percentage of earned income tax revenue should be distributed to each local agency using correct tax rates.

BOWERCRAFT communicated the analytical model developed by M&A with the BUREAU’s Board of Directors. No evidence was presented that anyone dissented to M&A’s proposed methodology. M&A thus embarked on a one-year project to employ the model that was outlined above. M&A’s data analysis was not completed until early 2010.

BOWERCRAFT testified that with the assistance of local officials, M&A was able to obtain compensation records from the Department of Revenue broken out by Social Security numbers of taxpayers. BOWERCRAFT testified that M&A was able to match 88% of state revenue records with local tax role documentation. Of more importance to BOWERCRAFT was the fact that there was a 95% “revenue capture.” In other words, BOWERCRAFT testified that 95% of revenue from Social Security numbers identified by the Department of Revenue matched Lebanon County residents. In real dollars, BOWERCRAFT testified that M&A “matched” 8.5 billion dollars in revenue to local Lebanon County taxpayers. M&A determined that this was “good enough” to create a viable analysis of whether or to what extent each Lebanon County local government agency was overpaid or underpaid. The analysis that was therefore derived was summarized by BOWERCRAFT in a table marked as Table 6 to Exhibit 3. A copy of that table is as follows [click on image to expand]:

After M&A published its findings, but before the trial, M&A undertook to compare its findings with actual tax distributions made by KEYSTONE. BOWERCRAFT testified that KEYSTONE distributed tax revenue using original tax returns, locally-generated documentation and a correct methodology. BOWERCRAFT viewed the KEYSTONE disbursements as being the most accurate gauge of how Lebanon County local income tax should be distributed. Using these accurate figures, BOWERCRAFT created graphs representing KEYSTONE’s actual disbursements and M&A’s calculations. BOWERCRAFT testified that the M&A calculations for 2004 through 2007 aligned very closely with KEYSTONE’s correct actual disbursements between 2009 and 2011.

On cross-examination, BOWERCRAFT acknowledged that M&A’s analysis was predicated upon figures that were derived using the Commonwealth of Pennsylvania’s definition of income. BOWERCRAFT also acknowledged that there are differences between the state’s definition of what is taxable and local agencies’ definitions of what is deemed to be taxable. Of most note is the fact that S corporation profits are includable as income on state returns but are excludable on local income tax returns. BOWERCRAFT acknowledged that this difference could help explain why 5% of state revenues were not “captured” in M&A’s analysis.

BOWERCRAFT also acknowledged that the BUREAU did not properly disburse amounts paid by wage earners who worked but did not live in Lebanon County. By law, local income tax deducted from non-resident workers should have been distributed to the counties where those non-resident workers resided. The BUREAU did not do this between 2004 and 2007, and M&A made no accommodation in its calculations for this sort of non-resident taxation.

BOWERCRAFT also admitted on cross-examination that neither the BUREAU nor KEYSTONE adopted M&A’s percentages for purposes of distributing 2008 or future local earned income tax. Likewise, BOWERCRAFT acknowledged that M&A never undertook to determine whether the “size of the tax pie” collected by the BUREAU was correct or incorrect; M&A’s sole purpose was to determine how the pie should have been divided between all of the BUREAU’s local governmental constituencies.

The second witness at trial was forensic accountant Dana Trexler Smith. SMITH was hired by the PLAINTIFFS to conduct a litigation-focused evaluation of M&A’s methodology. SMITH was asked whether the M&A methodology could be relied upon “to a reasonable degree of accounting certainty.”

In describing the purpose of an accounting reconstruction, SMITH characterized the goal as determining “what should distributions have looked like in a perfect world.” SMITH acknowledged that determining what a “perfect world” would look like in this case was impossible given the disarray of the BUREAU and its records. SMITH opined that the “next best source of information” that could be used to determine taxable income was the Department of Revenue records that were reviewed by M&A.

SMITH acknowledged that the local definition of income excluded S corporation earnings that would have been included in the Department of Revenue documentation. However, she stated that federal statistics reveal that S corporation income is only 3% of the total aggregate taxable income in the United States.

SMITH corroborated BOWERCRAFT’s description of M&A’s 95% compensation match as being “more important” than the 88% records match. However, she classified either match as complying with a “reasonable degree of accounting reconstruction certainty.” She also concurred with BOWERCRAFT’s testimony that KEYSTONE’s actual distribution amounts between 2009 and 2011 supported the accuracy of M&A’s calculated distribution percentages. SMITH stated: “The fact that M&A figures aligned with KEYSTONE figures told me that M&A figures were reasonable.”

Like BOWERCRAFT, SMITH acknowledged on cross-examination that M&A’s calculated percentages may not have been completely accurate. She acknowledged that the BUREAU’s decision not to distribute income to other counties for non-resident workers probably overstated the BUREAU’s distributions by 2% annually. She also acknowledged that the amount that FOLTZ embezzled – $811,000.00 – while less than 1% of the total amount distributed by the BUREAU, nevertheless also resulted in an overstatement of the gross amount of monies distributed by the BUREAU between 2004 and 2007. On the other hand, SMITH emphasized that M&A’s role was to determine percentages of distribution, not to verify whether the BUREAU distributed the correct aggregate amount to its constituencies between 2004 and 2007.

SMITH indicated that the BUREAU was riddled with “known fraud” and that fraud has “tentacles” that affect all aspects of recordkeeping. SMITH referenced the systematic destruction of records by FOLTZ and concluded that state Department of Revenue compensation records would be far more accurate than any incomplete analysis of existing BUREAU records. In addition, the DEFENDANTS’ counsel asked extensive questions of SMITH with respect to M&A’s decision to use the BUREAU’s records for residential purposes but not for income purposes. SMITH indicated that she believed that local school districts “vetted” the residency data maintained by the BUREAU, and this afforded additional verifiability with respect to the BUREAU’s residency data that would not have existed with respect to incomplete revenue data.

The Court questioned SMITH with respect to her opinion that the 88% records “match” and the 95% revenue “match” were within a reasonable degree of certainty with respect to accounting reconstruction. She described the 95% revenue match as “absolutely within” any variance standard that could be utilized. She also stated that the 88% records match was “still pretty good.” She testified that when an accounting reconstruction is completed, a 20% variance between known and presumed data (i.e., 80% verified and 20% not) would still be reasonable.

The next witness presented at trial was David Duffus. DUFFUS is a Certified Forensic Accountant who works for a firm in the Pittsburgh area. DUFFUS was originally hired by the ELCO School District to undertake a critique of the M&A evaluation. At the risk of oversimplification, DUFFUS was not critical of M&A’s decision to use Department of Revenue data in its reconstruction, but he was critical of M&A’s failure to test and verify the data: “M&A relied upon data that was not tested in any meaningful way.”

Unlike SMITH, DUFFUS characterized the number of tax records that were not “matched” between the Department of Revenue and the BUREAU as “very high,” especially in 2007. He opined that much more could have been done to verify the accuracy of the BUREAU’s residency records. Acknowledging that M&A did randomly select 120 taxpayer records and independently verified that 119 of those taxpayers did live at the address reflected on the BUREAU roles, DUFFUS opined that the verification sample should have been much larger.

On cross-examination, DUFFUS acknowledged that he was not supporting the BUREAU’s distribution percentages that were utilized to divide tax revenue between 2004 and 2007. He acknowledged that those distribution figures were “likely incorrect.” He also acknowledged that when he wrote his report for ELCO, the actual tax distribution data from KEYSTONE was not available. DUFFUS stated “I wanted to see the KEYSTONE data. I thought it would be meaningful.”

Cheri Freeh was next to testify. FREEH is a principal in an accounting firm located in Quakertown, Pennsylvania. She is not a forensic accountant. By her own admission, FREEH is not qualified to conduct a financial reconstruction similar to the one undertaken by M&A. However, FREEH has a wealth of experience in auditing of tax collection agencies such as BUREAU. Moreover, FREEH has unique experience with respect to local government taxation. For two years, she served as President of the Pennsylvania Institute for Certified Public Accountants. She also served on the Governor’s committee for local taxation.

FREEH was hired by the DEFENDANTS to examine whether the Department of Revenue documents were the “proper data set to use.” She was also asked to provide guidance with respect to auditing of a tax collection agency such as the BUREAU.

FREEH testified that most tax collection agencies paid quarterly tax estimates and a final reconciliation at the end of each year. She stated that the BUREAU conducted no reconciliations at all between 2004 and 2007. Both tax collection agencies and the governmental entities to whom taxes are paid must conduct reconciliation audits.

FREEH emphasized that “in reality, most school districts and municipalities rely upon the reconciliation of the collection agency and its auditor.” She stated that it would be impossible for school districts and municipalities to conduct a comprehensive audit “because the tax collector – not the municipalities – had possession of the actual records.” FREEH repeated on multiple occasions during her testimony that a tax collection agency’s audit is expected to be more strenuous and detailed than any reconciliations conducted by local municipalities.

According to FREEH, audits are not generally designed to detect fraud. She acknowledged that someone who is smart and nefarious will probably be able to commit fraud and avoid detection by an auditor. FREEH specifically stated that the type of audit normally conducted by municipalities and school districts “probably would not detect the type of embezzlement conducted by FOLTZ.”

On the other hand, FREEH was critical of the BUREAU’s auditor. She stated that a tax agency auditor should have detected the fact that tax rates established by local agencies differed from the distribution schedule maintained on the BUREAU’s computer. The BUREAU’s auditor should also have detected the fact that the BUREAU’s distribution percentages had not been updated since 1994. In addition, FREEH would have expected that the BUREAU’s auditor would have noticed and questioned the disorganized and disheveled state of the BUREAU’s recordkeeping as described by MORAN and other witnesses. In summary, FREEH testified that she would have expected the BUREAU’s auditor to have discovered problems between 2004 and 2007.

In terms of the auditing process, FREEH described the various phases of a tax collection agency audit. Those stages are:

(1) Calculate materiality – No auditor expects perfection. However, the auditor should know at the outset of his/her engagement “at what level can we have an error and still give a clean bill of health.”

(2) Audit plan – The auditor must develop a plan to assess internal controls, verify whether procedures were routinely followed and detect areas of weakness.

(3) Expectation analysis – An auditor must develop an expectation of what the data should show based upon past data.

(4) Testing – It is not necessary for an auditor to look at each and every source document. However, a representative sample of source documents must be examined and cross-checked to ensure validity and reliability.

(5) Explaining variance – If there is any variance between actual testing and the expectation developed that exceeds the materiality percentage developed in step one above, that variance must be examined and explained before an auditor can approve the entity being audited.

FREEH testified that there are auditing checklists that are adopted by accountants as “industry standard.” She referenced form ALGCX2.1 published by Thompson-Reuters PPC as one such form. FREEH testified that using these checklists can assist an auditor in determining what is and is not a “material variance.” For an entity like the BUREAU which processed between 90 and 100 million dollars in tax payments over four years, FREEH stated that anything over a $625,000.00 variance should be viewed as problematic. She then extrapolated that the 5 million dollar difference between the Department of Revenue income “captured” by M&A and the actual amount distributed by the BUREAU during the same time frame “exceeds the variance that would be approved by an auditor under any materiality standard.”

In her analysis, FREEH also attempted to develop an auditing expectation of the distribution percentages to which the BUREAU should have adhered between 2004 and 2007. She based her expectation on three components:

(1) The average distributions in the four years prior to 2004;

(2) The average distributions in the four years following 2007;

(3) A figure derived by multiplying census data by average weekly wage statistics to calculate an expected average per capita wage for each municipality and school district.

For reasons we will outline in more detail in the body of this Opinion, we did not find FREEH’s expectation analysis to be credible, and we will therefore not spend more time describing it.

During cross-examination, FREEH provided testimony that we found to be refreshingly candid. At one point, FREEH stated: “We are accountants. We can make numbers show whatever we want.” When discussing the plight of reconstructing the BUREAU’s appalling lack of verifiable revenue information, FREEH stated: “No one can provide a perfect answer. We are all giving estimates. The question is…which is the best estimate?”

Rebecca Hoffman worked for the Bureau between July of 1990 and September of 2008. She described FOLTZ as a dictatorial boss who demanded compliance and punished initiative. The picture painted by HOFFMAN of life at the BUREAU under FOLTZ was horrifying. HOFFMAN stated:

(1) When asked about recordkeeping by BUREAU employees, HOFFMAN responded rhetorically: “Have you ever seen the television show ‘Hoarders’? That is what it looked like.”

(2) When HOFFMAN gave FOLTZ computer reports reflecting how money should be distributed to various municipalities and school districts, he would adjust the figures. (See Exh. 19). His changes were “totally random.”

(3) Sometimes, FOLTZ would even physically confiscate a check before it was sent and demand that a new check in a different amount be written. Once again, there was no apparent or stated reason for this conduct.

(4) Several school districts would call and complain about the amount of their distribution. FOLTZ would be angered by these telephone calls. However, sometimes the amounts of the checks to these entities would be altered. HOFFMAN got the impression “the dog that barked the loudest got the benefit of changes in checks.”

(5) HOFFMAN eventually came to the conclusion that “there was no rhyme or reason to anything that was done.” To protect herself, HOFFMAN began making photocopies of documents whenever FOLTZ would alter computer print-outs or demand that check amounts be changed.

(6) If employees questioned FOLTZ, he would become quite angry. HOFFMAN observed that people who would have been in a position to perceive that FOLTZ was covering up his theft were paid monetary bonuses. Other hardworking employees were not paid such bonuses.

(7) FOLTZ kept boxes of records in his own office and refused to permit anyone to work on those records. On occasion, FOLTZ would also bring in an outside company to shred documents.

MORAN is a consultant who works for a company which provides interim CEOs for entities in transition. She earned a Master’s Degree in Accounting and a Master’s of Business Administration at Northeastern University. She was contacted by the BUREAU’s Board of Directors in March of 2007, and she agreed to undertake the responsibility to serve as Interim CEO. She then added with a wry smile: “I did not see the place before I agreed.”

MORAN described an environment at the BUREAU that was “in complete disarray.” She described the office as overcrowded, messy and completely disorganized. She stated that some employees were using Xerox boxes as work space. To compound these problems, the BUREAU’s computer system was antiquated; “it was DOS-based. I did not even know at the time that people still used DOS-based computers.”

One of the first things that MORAN discovered was that extra-payroll compensation was paid by FOLTZ. MORAN stated that three BUREAU employees received “five figure” compensation outside the BUREAU’s normal payroll. In addition, five to ten additional “home workers” were paid “compensation” for additional “work” that these individuals performed at home. MORAN was forced to prepare ex post facto W-2 and 1099 tax forms for each of these “workers.” At the direction of the BUREAU’s insurance company, all employees who had received “extra-payroll compensation” were terminated. One of the employees who received additional compensation resigned. Before she did so, she was caught attempting to place spyware on MORAN’s computer.

MORAN also quickly learned that FOLTZ had not paid distributions to out-of-county tax bureaus for non-resident tax income that was collected by the BUREAU. According to Exhibit 21, 1.95 million dollars was owed by the BUREAU to out-of-county governmental entities as of November 13, 2007.

MORAN also learned that the BUREAU had not been distributing tax money in accordance with the accurate tax rates adopted by local school districts and municipalities. By the end of 2007, MORAN advised the BUREAU’s Board of Directors that she believed tax money had been improperly distributed among the BUREAU’s various constituencies. She therefore recommended that an investigation be conducted to compare what had actually occurred and what should have occurred. Everyone agreed and M&A was eventually hired.

During the middle of MORAN’s tenure, it became obvious that the BUREAU would no longer be able to continue in a tax collection role. MORAN stated: “Trust in the BUREAU had been compromised. There was too much to recover from.” As a result, MORAN assisted in the selection of a new tax collection entity. MORAN testified that KEYSTONE was particularly impressive because it possessed “superior technology” and would be able to accurately discern how much money should be paid and to whom.

HOUSER is a forensic accountant who practices in Lebanon County. On April 7, 2015, this Court exercised its authority under Pa.R.Ev. 706 and appointed HOUSER as an independent accountant. We asked HOUSER to evaluate the process employed by M&A to determine overpayments and underpayments. In HOUSER’s own words:

In accordance with the Court’s order dated April 7, 2015, my evaluation was limited to examining the methodology employed by M&A and expressing an opinion regarding the fairness of the findings developed by M&A. I have not rendered an opinion with respect to specific amounts by which the parties may have been over or underpaid.

HOUSER testified that he reviewed hundreds of pages of documents provided by the Court and all parties. Included among these documents were all of the reports authored by M&A, the report submitted to ELCO School District by DUFFUS, an affidavit from BOWERCRAFT and the deposition of FREEH. In addition, this Court caused the testimony of HOFFMAN at trial to be transcribed, and a copy of that transcript was provided to HOUSER before he testified in Court.

HOUSER acknowledged that the methodology employed by M&A resulted in calculations that were imperfect. He acknowledged that the state and local definitions of income varied, and that M&A’s evaluation of only 120 local tax returns as a “control” could have been expanded. Nevertheless, HOUSER concluded that M&A’s findings were fair and reasonable. In his report, HOUSER stated: “It is my opinion with a reasonable degree of accounting and professional certainty that the methodology employed by M&A, and its related findings, while admittedly imprecise, are fair and reasonable based upon all facts known to the parties.”

IV. DISCUSSION

The parties have presented us with legal and factual arguments that require discussion. However, we recognize that there is one overriding factual question that will impact all others before us – Whether the M&A analysis of overpayments and underpayments is reasonable and credible? We will therefore begin by addressing this fundamental dispute that was hotly contested by the parties. Thereafter, we will address all of the parties’ numerous factual and legal arguments.

A. M&A Analysis

Notwithstanding all of the punches thrown by the DEFENDANTS at M&A’s evaluation, never once did the DEFENDANTS proffer an alternative distribution proposal. By asking this Court to continue the status quo, the DEFENDANTS have essentially asked us to endorse the scheme of distribution for which FOLTZ was the architect. We would find such a result unconscionable for many reasons, including the following:

(1) FOLTZ was a criminal who systematically pilfered hundreds of thousands of dollars of taxpayer money. FOLTZ had a vested interest in covering up his theft, and he employed fraud and deception to do just that. FOLTZ was the antithesis of trustworthy and we categorically reject his work product as worthy of our endorsement.

(2) The scheme of distribution created and implemented by the BUREAU did not even employ the correct tax rates for four school districts and municipalities. Stated differently, the distribution of tax money by the BUREAU did not comport with the will of the people who, through their elected representatives, determined how income should be taxed at a local level.

(3) The percentages of tax money distributed to each municipality were inputted into the BUREAU’s computer between 1992 and 1994 and were never altered thereafter. In a multitude of ways, Lebanon County evolved between 1994 and 2007. Some municipalities and school districts grew dramatically, while others constricted both in terms of population and economic output. This was not reflected in the BUREAU’s hard-wired distribution percentages.

(4) FOLTZ either intentionally or carelessly neglected to distribute non-resident worker local income tax to out-of-county agencies. The parties stipulated that almost 2 million dollars in non-resident earned income tax was not paid to the entities who were entitled to receive said funds.

(5) FOLTZ unilaterally and arbitrarily altered computer-generated tax distribution schedules so that the final distribution did not even comport with the hard-wired percentages imputed into the computer system. Although FOLTZ took the reason for these arbitrary alterations with him to his grave, HOFFMAN perceived that distributions were sometimes changed “because the dog that barks the loudest gets the most attention.”

(6) FOLTZ sometimes altered the computer-generated schedules of distribution to create “rounded” numbers that were not in accord with the actual hard-wired percentages inputted into the AS-400 computer program.

(7) When MORAN was hired by the BUREAU, she learned that FOLTZ had paid off-payroll bonuses and financial compensation to some BUREAU employees and outside individuals with no ties to the BUREAU. FOLTZ authorized the payment of tens of thousands of dollars without the knowledge of the BUREAU’s Board of Directors and without even the issuance of a Federal W-2 or 1099 statement.

(8) FOLTZ did not reconcile his year-end tax distributions. In fact, he had no incentive to do so given that he was concealing his own theft of taxpayer funds.

(9) The BUREAU utilized an antiquated DOS-based computer system that MORAN described as inadequate for the task it was asked to undertake. In addition, the recordkeeping system employed by the BUREAU was inefficient, inconsistently applied, and sometimes ignored altogether.

(10) No meaningful audits were performed of the BUREAU’s work between 2004 and 2007. In 2006 and 2007, the BUREAU continued to distribute tax monies without any audit whatsoever. For 2004 and 2005, we conclude based upon the information presented at trial that the BUREAU’s auditors performed their assignment in a manner that was grossly negligent and wholly inadequate. In essence, we determine that the work product of the BUREAU between 2004 and 2007 was unsupported by any viable internal controls or external audits.

We conclude based upon all of the above that adopting the DEFENDANTS’ position in favor of the status quo would have the effect of approving a distribution scheme by BUREAU that is completely and utterly unworthy of approval. Stated bluntly, the BUREAU’s distribution of tax money between 2004 and 2007 was the product of corruption, mismanagement, malfeasance, neglect and lack of oversight. None of the above are descriptive words that we wish to have associated with a verdict that seeks to effectuate justice. We therefore categorically reject the BUREAU’s actual distribution of funds between 2004 and 2007 as any benchmark of how taxpayer monies should have been allocated between 2004 and 2007.

Having reached the above conclusion, we must still evaluate whether the distribution scheme proffered by M&A can or should form the basis of a verdict in favor of PLAINTIFFS. As we do so, we cannot ignore the reality that M&A was confronted with “a true mess” when it undertook to conduct its analysis. Given the fraud perpetrated by FOLTZ, the fact that records were stored in a haphazard manner, and the fact that multiple witnesses reported that FOLTZ systematically shredded a multitude of records and tax returns to cover his own trail, it was simply impossible for M&A – or anyone else – to conduct a completely accurate reconstruction of how tax monies should have been distributed between 2004 and 2007. Given that perfection was simply not possible, the question we are required to answer is: “Was M&A’s effort good enough?” For the following reasons, we hold that it was:

(1) M&A was hired to conduct its analysis by all Lebanon County school districts and municipalities, including the DEFENDANTS. BOWERCRAFT testified that once he and his team identified a methodology – but before the results of that methodology could be known – he spoke with representatives of the local municipalities to explain and then discuss how the analysis would be conducted. There is no evidence that anyone objected to M&A’s analytical process until after it was discovered that some entities had been overpaid.

(2) SMITH is a forensic accountant who has conducted data reconstruction for 18 years. She testified to a reasonable degree of accounting certainty that the M&A methodology was appropriate and generated a “proxy result” that would be within a reasonable variance to “what the info would have looked like in a perfect world.” We found SMITH’s testimony to be credible.

(3) HOUSER was an independent expert appointed by the Court. When it became apparent during pretrial proceedings that several highly-qualified accountants had rendered differing opinions with respect to M&A’s methodology, this Court decided to invoke the authority granted to it under Pa.R.Ev. 706 to solicit assistance from an independent accountant. Dennis Houser of Financial Forensic Consultants, LLC has been a Certified Public Accountant since 1977 and a Certified Fraud Examiner since 1992. He is familiar with how financial reconstruction is undertaken. Because HOUSER approached the task of analyzing M&A’s analysis from a non-partisan perspective, we have afforded his opinion with significant weight. HOUSER concluded: “It is my opinion with a reasonable degree of accounting and professional certainty that the methodology employed by M&A and its related findings, while admittedly imprecise, are fair and reasonable based upon all facts known to the parties.” (HOUSER’s Report at pg. 18).

(4) When M&A conducted its analysis, it was able to “capture” 95% of revenue compensation by matching it with local records. In other words, M&A was able to match 95% of the compensation figure obtained from the Department of Revenue with local taxpayers. Both HOUSER and SMITH described this 95% compensation match as “extremely high.”

(5) For nearly one full day, we listened to BOWERCRAFT testify about his methodology. In the process, we watched BOWERCRAFT respond to the criticisms hurled by the DEFENDANTS. The more we listened to BOWERCRAFT’s testimony, the more we were impressed by his grasp of data analytics and the application of his expertise to the difficult assignment of reconstructing how taxes should have been distributed in Lebanon County between 2004 and 2007. The bottom line is that we found BOWERCRAFT’s testimony to be credible.

(6) Although DUFFUS complained that M&A could and should have done far more to test and verify the raw data which it utilized, DUFFUS was not highly critical of the analytical process employed by M&A. Moreover, at the time DUFFUS completed his report for the ELCO School District, the KEYSTONE tax distribution data for 2009 through 2012 was not available. DUFFUS stated: “I wanted to see the KEYSTONE data. I thought it would be meaningful.” We agree with DUFFUS that the KEYSTONE calculation of tax distribution was an important piece of the reconstruction verification process, and DUFFUS’ self-admitted inability to examine such data causes us to view with skepticism the ultimate conclusion he communicated to the ELCO School District.

(7) We found FREEH to be refreshingly candid in her testimony. We chuckled at the irony of FREEH’s statement that: “We are accountants. We can make numbers show whatever we want.” We also agreed with FREEH’s testimony that in this case, “[A] completely accurate reconstruction is not possible…we are all giving estimates. The question is…which is the best estimate?” In addition to the above, we found FREEH’s description of the auditing process to be blunt, understandable and enlightening.

Even though we were impressed by FREEH’s candor and her knowledge of auditing, we cannot adopt the “expectation analysis” that she proffered as an alternative to M&A’s more comprehensive analysis. FREEH testified that she developed her “expectation tolerance” depicted on Exhibit 8-A by combining three data sets:

(1) The average of the distributions during the four years preceding 2004-2007;

(2) The average of the distributions for the four years following 2004-2007;

(3) An analysis of the per capita wage derived from the 2000 census and Pennsylvania’s “weekly wage index.”

We do not agree with the first and third components of FREEH’s expectation analysis. The first component (average of four years preceding 2004) effectively reinforces the incorrect distribution scheme that the BUREAU was employing between 2004 and 2007. For the four years preceding 2003, the BUREAU was using the stale hard-wired computer percentages from 1992-1994, and it was using incorrect tax rates for four school districts and municipalities. We simply do not believe that a viable expectation analysis of a suspect class of data should be analyzed using data identical to that which was suspect. With respect to the third component employed by FREEH, we note that the census data was from the year 2000, and had not been updated to reflect any shifts in population that occurred thereafter. Even more important is the fact that the weekly wage index was derived from statewide statistics that calculated how individuals across the state of Pennsylvania were paid. As anyone who resides in this community knows, the differences between Lebanon and cities such as Philadelphia are as vast as the differences between the planets Mercury and Neptune. We reject any use of statewide wage information as a benchmark to determine how Lebanon County earned income should have been distributed.

We did not find FREEH’s expectation analysis set forth in Exhibit 8-A to be credible. We therefore reject it as a viable alternative to M&A’s more detailed analysis.

(8) BOWERCRAFT testified that he and three other M&A “team members” spent roughly 500 hours undertaking the analysis that had been discussed with the BUREAU and its constituencies. This is a significant investment of time and effort that we cannot and will not discount.

Perhaps more important than any other factor, we have been given information that would enable us to “test” the M&A analysis by comparing it with what everyone has agreed is accurate data created by KEYSTONE. Specifically, we have been given KEYSTONE’s actual distribution figures for the years 2009 through 2012. Because no one has questioned the accuracy of KEYSTONE’s data analytics, we view the KEYSTONE distributions between 2009 and 2012 to be the “gold standard” by which earned income tax should be distributed in Lebanon County. This conclusion is bolstered by the fact that BOWERCRAFT, SMITH, HOUSER and FREEH all relied upon the KEYSTONE data in one way or another, and DUFFUS wished that he would have had said data available to him when he completed his analysis.

The following chart is derived from information that no party has disputed. Column one represents the aggregate distribution to all five DEFENDANTS by KEYSTONE between 2009 and 2012. Column two represents the proposed distribution by M&A for years 2004 through 2007. Column three represents the actual distribution by the BUREAU – which the DEFENDANTS seek to have us adopt – between 2004 and 2007:

Municipality KEYSTONE M&A BUREAU

Bethel	$1,810,497.00	$1,675,263.00	$1,745,834.00
Cornwall	$2,043,578.00	$1,864,735.00	$2,921,413.00
Heidelberg	$1,388,548.00	$1,410,718.00	$2,177,549.00
North Annville	$ 969,768.00	$ 857,017.00	$1,132,431.00
West Cornwall	$ 827,131.00	$ 798,039.00	$ 927,627.00

TOTAL:

$ 7,039,522.00¹

$ 6,605,772.00²

$ 8,904,854.00³

Simple math reveals that there is a difference of $433,748.00 between M&A’s calculations and the KEYSTONE “gold standard.” On the other hand, the BUREAU’s actual distributions to the five DEFENDANTS were $1,865,334.00 greater than the amounts distributed by KEYSTONE. To put this in perspective, the aggregate variance between KEYSTONE’s distribution to the DEFENDANTS and M&A’s calculation of what should have been distributed is 6%. In stark contrast, the variance between KEYSTONE’s distributions and the actual amount distributed by the BUREAU to the five DEFENDANTS is 26%, or over four times greater than the variance that relates to M&A’s calculations. We place significant weight on the fact that KEYSTONE’s accurate distributions between 2009 and 2012 so closely aligns with the distribution proposed by M&A, while it bears little comparison to the actual distributions undertaken by the BUREAU.

Could M&A have done better? Yes, it could have. We were disappointed by the relatively small test sample size of 120 local tax returns used to verify taxpayer residence. In addition, at least some of the existing local tax returns could have been matched with Department of Revenue data to test the difference in income between the Department of Revenue data set and local tax returns. In addition, we would have preferred to receive additional hard data to measure the degree to which S corporation income created a difference between state and local revenue calculations. Still, these imperfections of M&A’s analysis will not cause us to reject its findings.

Under Pennsylvania law, a plaintiff must prove damages “with a fair degree of probability.” Wujcik v. Yorktowne Dental Assoc., Inc., 701 A.2d 581, 584 (Pa.Super. 1997). However, “recovery will not be precluded simply because there is some uncertainty as to the precise amount of damages incurred. It is well established that mere uncertainty as to the amount of damages will not bar recovery where it is clear that damages were the certain result of the defendant’s conduct.” Pugh v. Holmes, 405 A.2d 897, 909-10 (Pa. 1979). Stated differently, “[W]hile damages cannot be based on mere guess or speculation, yet where the amount may be fairly estimated from the evidence, a recovery will be sustained even though such amount cannot be determined within entire accuracy.” Osterling v. Frick, 131 A. 250, 251 (Pa. 1925).

While we recognize that M&A’s analysis was imperfect, we find it to be a fair and reasonable reconstruction of how the BUREAU should have distributed tax revenue between 2004 and 2007. We also conclude that M&A’s distribution percentages are infinitely closer to what SMITH described as “the ideal world” than were the actual distributions by the BUREAU that the DEFENDANTS ask us to endorse. To summarize, we find as a fact that the percentages of distribution determined by M&A are fair, reasonable and based upon sound methodology, painstaking research and unassailable mathematical calculations. We therefore adopt Tables 3, 4, 5 and 6 from M&A’s report (Exh. 3) as our own findings of fact.

B. General Principles of Equity

Almost since the inception of the Republic, the law has recognized that mistakenly received monies must be repaid. Using a variety of equitable theories, Courts have consistently declared that when funds are mistakenly or wrongfully received, the recipient has an equitable and moral duty to return the funds and property to their rightful owner.

In Union Trust Co. v. Gilpin, 84 A. 450 (Pa. 1912), Pennsylvania’s highest court was confronted with a situation where monies were paid to the Defendant as a result of what the Court characterized as “a blunder,” Pennsylvania’s Supreme Court cited a general rule of law articulated by the Connecticut Supreme Court and stated:

We mean distinctly to assert that where money is paid by one under a mistake of his rights and his duty, and he was under no legal or moral obligation to pay, and which the recipient has no right in good conscience to retain, it may be recovered back in an action of indebitatus assumpsit whether such mistake be one of fact or law; and this we insist may be done both upon principal of Christian morals and the common law.

Id. at 450. This principle has been affirmed many times as part of Pennsylvania’s common law. In First Nat’l Bank of Monongahela City v. Carroll Twnshp., 27 A.2d 527 (Pa.Super. 1942), the Superior Court stated:

We have a long line of decisions which hold, in effect: ‘where one has in his hands money which in equity and good conscience belongs and ought to be paid to another, an action for money had and received will lie for the recovery thereof. No privity of contract is necessary to sustain this action, for the law, under the circumstances, implies a promise to pay.

Id. at 530, citing McAvoy and McMichael, Ltd. v. Commonwealth Title Ins. & Trust Co., 27 Pa.Super. 271, 1905 WL3585 (Pa.Super. 1904); Cameron Bank v. Aleppo Twnshp, 13 A.2d 40 (Pa. 1940); Greenwich Bank v. Commercial Banking Corp., 85 Pa.Super. 159, 1925 WL 4943 (Pa.Super. 1924).

At multiple times during the course of this litigation, the parties have cited the case of Brubaker v. Berks Co., 112 A.2d 620 (Pa. 1955). In Brubaker, the Court dealt with a situation similar to the one at bar. In Brubaker, the Plaintiff gave two checks totaling $7,000.00 to Samuel N. Moyer for the purpose of purchasing real estate. At the time, Mr. Moyer served as County Treasurer of Berks County. Either intentionally or by mistake, Mr. Moyer deposited the $7,000.00 checks into the County treasury. After Moyer died without completing the proposed real estate transaction, Brubaker sued the County to recover the amounts Moyer had wrongfully deposited into the County treasury. The Court analyzed the above facts through the lens of equity and stated:

Looking at this entire transaction through the eyes of abstract justice, one can come to no conclusion other than that Brubaker is entitled to his $7,000. Moyer had no right to turn the money over to the County and the County had no ethical or moral right to keep it once it was ascertained that the money in no way belonged to the County. Coming to this conclusion of natural justice, it would be shockingly incongruous if the law were to stamp on the money a title of County ownership simply because, through some adroit maneuvering on the part of the Treasurer, the money had fallen into the County’s coffers…

It is to be remembered, however, that the $7,000 was not taken from the County Treasurer but from the plaintiff Brubaker who certainly owed the County nothing. If the plaintiff had accidentally left his wallet on the County Treasurer’s desk and the Treasurer had dropped it into the County till, it could not be maintained with any semblance of law and justice that the County became the legal possessor of it.

Id. at 622-623.

As in Brubaker, the improper acts of an additional defendant – Moyer in Brubaker and BUREAU in this case – created an overpayment that was retained by the Defendants. Also as in Brubaker, the Plaintiffs suffered financial loss as a result of the Defendants’ retention of funds. In Brubaker, the Court imposed responsibility for the return of the monies upon the entity that retained them. So too will we.

From the above, we conclude from long-standing Pennsylvania precedent that when monies are mistakenly paid, the recipient has a moral and ethical duty to return the funds to their rightful owner. In addressing the specific causes of action proffered by PLAINTIFFS we will apply this general precept of equity of law and equity.

C. Unjust Enrichment

Unjust enrichment is a doctrine founded on principles of equity. “The polestar of the unjust enrichment is whether the Defendant has been unjustly enriched; the intent of the parties is irrelevant.” Limbach, LLC v. City of Philadelphia, 905 A.2d 567, 577 (Pa.Cmwlth. 2006). The elements of unjust enrichment in Pennsylvania are:

(1) A benefit conferred on a defendant by a plaintiff;

(2) Acceptance of such benefit by the defendant; and

(3) Retention of the benefit under such circumstances that it would be inequitable for the defendant to retain it.

See, e.g. Schenck v. K.E. David, 668 A.2d 327 (Pa.Super. 1995); Styer v. Hugo, 619 A.2d 347 (Pa.Super. 1993); Braun v. Wal-Mart, 24 A.3d 875 (Pa.Super. 2011).

In Caskie v. Philadelphia Rapid Transit Co., 184 A.17 (Pa. 1936), Pennsylvania’s highest court declared that privity of contract is not necessary to establish a claim for unjust enrichment. The Court declared that the key question in any unjust enrichment case is whether the Defendant “received money or property which he is not entitled to keep and which in equity and good conscience should be paid to Plaintiff in accordance with principles of natural justice.” Id. at 19. This principle was reaffirmed more recently in the case of Hughley v. Robert Beech Assoc., 378 A.2d 425 (Pa.Super. 1977), where the Superior Court held:

Where one has in his hands money which in equity and good conscience belongs and ought to be paid to another…no privity of contract is necessary to sustain this action, for the law, under these circumstances, implies a promise to pay…it makes no difference that it is from someone other than the Plaintiff that the Defendant received the money.

Id. at 427, citing Caskie, supra at 19.

In our opinion, the PLAINTIFFS have proven all elements of unjust enrichment. PLAINTIFFS have established that monies were paid to the DEFENDANTS that exceeded what the DEFENDANTS were entitled to receive. This constituted a “benefit.” Even until this day, the DEFENDANTS have continued to retain those “benefits.” Moreover, we conclude that it would be “inequitable” to permit the DEFENDANTS to retain tax monies that should have been paid to the PLAINTIFFS.

We cannot ignore the source of the money that is now in dispute; the excess monies paid by the BUREAU to the DEFENDANTS represented tax dollars paid by PLAINTIFFS’ residents. While everyone complains about taxes, at some level all citizens recognize that taxes are necessary in order for the government to provide needed services such as community policing, fire coverage, road maintenance, etc. In this case, the taxpayers of PLAINTIFFS complied with their civic duty to pay amounts intending that said amounts be used for the benefit of their own community. To permit monies paid by PLAINTIFFS’ residents to be used to benefit DEFENDANTS’ residents would, in the opinion of this Court, violate all principles of “natural justice.”

Based upon our initial factual conclusion that DEFENDANTS were overpaid at the expense of PLAINTIFFS, and based upon the law outlined above, we will find in favor of PLAINTIFFS and against DEFENDANTS on PLAINTIFFS’ unjust enrichment claim. As damages, we will require that the DEFENDANTS reimburse PLAINTIFFS for the amount of their overpayments plus interest on those overpayments from January 1, 2008. An accounting of these damages will be set forth below.

D. Constructive Trust

The doctrine of constructive trusts is another equitable cause of action that is very closely related to unjust enrichment. See Kimball v. Barr Township, 378 A.2d 366 (Pa.Super. 1977). A constructive trust arises “where a person holding title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it.” 5 A. Scott, Law of Trusts, § 462 (3^rdEd. 1967); see also Yohe v. Yohe, 353 A.2d 417 (Pa. 1976); Kimball, supra. In describing a constructive trust, Pennsylvania appellate courts have repeatedly cited with approval the language of former Justice Cardozzo of New York in Beatty v. Googenheim Exploration Co., 122 N.E. 378 (N.Y. 1919):

A constructive trust, it has often been said, is not really a trust at all but rather an equitable remedy. Like all remedies in equity, it is flexible and adaptable. Changing times and circumstances create different problems for society and, present new questions to the courts. An equity has never been reluctant to right injustices or to correct societal ills.

Id. at 380.

A constructive trust arises “when the legal title to property is obtained by a person in violation, express or implied, of some duty owed to the one who is equitably entitled…” Pierro v. Pierro, 264 A.2d 692, 696 (Pa. 1970). “Moreover, a constructive trust may arise even though the acquisition of the property was not wrongful and the Defendant’s intention was not malign. Our courts focus not on intention, but on the result of unjust enrichment.” Kimball, supra at 368-369. There are no rigid standards for determining when a court in equity can or should impose a constructive trust. Kimball, supra.

Our analysis with respect to PLAINTIFFS’ cause of action for constructive trust is identical to the one we articulated above with respect to unjust enrichment. Here, DEFENDANTS retained tax dollars that rightfully belonged to PLAINTIFFS. Under the circumstances, it would be inequitable to permit the DEFENDANTS to retain the benefit of those tax dollars. Accordingly, we will apply the doctrine of constructive trust in order to ensure that the tax dollars wrongfully retained by the DEFENDANTS are repaid to PLAINTIFFS.

E. LTEA

The LTEA was created to govern the imposition and collection of local earned income tax. The version of the LTEA that was in effect between 2004 and 2007 was found at 53 P.S. § 6901. The LTEA permitted school districts and municipalities to form a tax collection agency such as the BUREAU in order to process and distribute earned income tax within a county. See 53 P.S. § 6910. It was pursuant to the authority granted by the LTEA that all Lebanon County municipalities entered into a “joint agreement” to create the BUREAU.

Under the LTEA, the tax collection agency – referred to as the “tax officer” – was responsible for collecting and distributing earned income taxes. The LTEA required the tax officer to “at least quarterly, distribute earned income taxes to the appropriate political subdivisions.” 53 P.S. § 6913(V)(h). If the tax officer failed in its duties, the aggrieved school district or municipality was authorized to make demand for payment within one year. If payment was not forthcoming, the aggrieved political subdivision was authorized to “bring an action in an appropriate Court of Common Pleas…for the recovery of taxes not distributed in accordance with this subsection.” 53 P.S. § 6913(V)(h). Nothing is contained in the LTEA that would limit an aggrieved municipality to recovery only against the tax officer.

We are unaware of any appellate case law that has applied the LTEA in the context of one municipality seeking redistribution of tax dollars from another. Moreover, none of the parties have similarly referred us to any governing case law. Nevertheless, we perceive, based upon the statute itself, that there are three elements to a cause of action under the LTEA. They are:

(1) Earned income taxes are not distributed to the appropriate political subdivision within one year after receipt of those funds by the tax officer;

(2) The aggrieved political subdivision makes a written demand on the tax officer or political subdivision, seeking the return of the revenues attributable to the residents of the aggrieved political subdivision; and

(3) The entity improperly retaining the tax revenues fails to remit the proper amount to the aggrieved political subdivision within thirty days after demand.

In this case, we have approved the calculations of M&A. As such, we have determined that the DEFENDANTS were overpaid tax money that rightfully belonged to PLAINTIFFS. According to the parties’ Stipulation, PLAINTIFFS’ counsel issued a written demand to the DEFENDANTS on December 23, 2011, seeking collection of all amounts identified in this litigation. As is obvious from the fact that this case has proceeded to trial, the DEFENDANTS have declined to return the overpayments.

We conclude that PLAINTIFFS have established all elements needed to prove a cause of action under the LTEA. Accordingly, we will find in PLAINTIFFS’ favor with respect to their statutory LTEA claim and will order the repayment of funds as outlined in the Report of M&A.

F. Conversion

In law school, this Jurist’s law professor referred to the tort of conversion as “the civil counterpart to theft.” While this description may be somewhat exaggerated, it nevertheless conveyed the principle that civil conversion requires an intentional deprivation of another’s right to property without the owner’s consent and without lawful justification. Stephenson v. Economy Bank of Ambridge, 197 A.2d 721 (Pa. 1964).

In the case of Norrition East Realty Corp. v. Central Penn Nat’l Bank, 254 A.2d 637 (Pa. 1969), Pennsylvania’s Supreme Court defined conversion as “an act of willful interference with a chattel, done without lawful justification, by which any person entitled thereto is deprived of use and possession.” Id. at 637. In so defining the tort, the Court emphasized that wrongful intent is not an element of civil conversion. Quoting Processor on Torts (2^nd Ed. 1955), the Supreme Court stated: “The intent required is not necessarily a matter of conscious wrongdoing, it is rather an intent to exercise a dominion or control over the goods which is in fact inconsistent with the Plaintiff’s rights.” See also Restatement (Second) Torts § 223 (1965) at Comment B.

PLAINTIFFS’ theory of conversion against DEFENDANTS is a bit different than the theories we have already addressed. The PLAINTIFFS acknowledge that when DEFENDANTS initially took possession of the dollars distributed by BUREAU, they did so innocently and without any actual knowledge that funds paid to it actually should have been paid to other political subdivisions. On the other hand, the PLAINTIFFS have alleged that once M&A completed its report, the DEFENDANTS should have known that they were overpaid. At that point, PLAINTIFFS allege that the DEFENDANTS should have repaid the amount of their overpayment to the political subdivisions that were underpaid. Thus, PLAINTIFFS argue that the elements of conversion accrued not when the BUREAU inappropriately distributed funds, but when everyone learned of those improper distributions via M&A’s Report.

Even though malicious intent is not an element of civil conversion, we are not comfortable declaring DEFENDANTS to be guilty of the tort based upon their unwillingness to immediately adopt M&A’s calculations. We take a somewhat different view of this case than do PLAINTIFFS. PLAINTIFFS seem to presume that M&A’s Report should have been accepted by the DEFENDANTS as unassailable, and any retention of funds contrary to M&A’s Report must be viewed as “wrongful.” In our opinion, M&A’s Report was a well-planned and solidly implemented analysis, but it was hardly unassailable. In fact, two highly-qualified experts, FREEH and DUFFUS, communicated significant concerns to the DEFENDANTS about M&A’s evaluation.

We view the PLAINTIFFS’ theory of conversion to be more like an attempt to create civil liability as a result of a defendant’s failure to settle a dispute. To our knowledge, neither conversion nor any other tort imposes remedies against a party for failing to comply with a settlement demand.

In this case, there were legitimate arguments that the DEFENDANTS proffered in opposition to M&A’s Report. While this Court has ultimately rejected those arguments, we cannot ignore their existence. In our opinion, the DEFENDANTS’ failure to settle the above-referenced dispute in accordance with M&A’s Report and the subsequent GRUMBINE plan cannot be equated with the civil tort of conversion. For this reason, we find in favor of the DEFENDANTS and against PLAINTIFFS with respect to PLAINTIFFS’ claim for conversion.

G. Unclean Hands

DEFENDANTS argue that PLAINTIFFS should not be permitted any recovery due to what DEFENDANTS characterized as “Plaintiffs’ own unlawful conduct.” DEFENDANTS point to PLAINTIFFS’ failure to oversee the BUREAU and reconcile its distributions: “Plaintiffs themselves admit that they also failed to reconcile their own receipts of tax revenue with Bureau records to determine that there was a problem….” (DEFENDANTS’ Brief at 29).

We recognize that PLAINTIFFS’ causes of action for unjust enrichment and constructive trust are equitable claims. We also recognize that the doctrine of unclean hands bars a plaintiff from recovery in equity. However, we disagree with DEFENDANTS’ assertion that the PLAINTIFFS were guilty of “unlawful conduct” or “unclean hands.”

“The doctrine of unclean hands requires that one seeking equity must act fairly and without fraud or deceit as to the controversy at issue.” Terraciano v. Commonwealth Dept. of Transportation, 753 A.2d 233, 238 (Pa. 2000). This precept has evolved from the long-standing principle that one who seeks equity must do equity. In re: Estate of Aiello, 993 A.2d 283 (Pa.Super. 2010). “The clean hands doctrine is applicable when the court, within its discretion, finds that the party seeking affirmative relief is guilty of fraud, unconscionable conduct or bad faith directly related to the matter at issue which injures the other party and affects the balance of equities between the litigants.” Equibank v. Adle, Inc., 595 A.2d 1284, 1287 (Pa.Super. 1991). Moreover,

The application of the [unclean hands] doctrine to deny relief is within the discretion of the chancellor, and in exercising his discretion, the chancellor is free not to apply the doctrine if a consideration of the entire record convinces him that an inequitable result will be reached by applying it.

In re: Bosley, 26 A.3d 1104, 1114 (Pa.Super. 2011), quoting Stauffer v. Stauffer, 351 A.2d 236, 245 (Pa. 1976).

In this case, the BUREAU could certainly have been deemed to possess “unclean hands,” but we will not impugn the PLAINTIFFS with any taint from the BUREAU. There is absolutely no evidence in this case that PLAINTIFFS acted fraudulently or even knowingly with respect to the distribution of funds by the BUREAU.

We specifically reject the DEFENDANTS’ argument that PLAINTIFFS’ ineffective audit and reconciliation process should be equated with fraud, deceit or bad faith. In this regard, we clearly recall the testimony of FREEH, who was the expert witness most familiar with auditing and reconciliation of tax collection agencies. FREEH testified that while local municipalities are required to conduct periodic reconciliations of tax receipt records, “in reality, most school districts and municipalities rely upon the reconciliation of the taxing agency and its auditor.” They do this because it would be impossible for political subdivisions to conduct a proper reconciliation because the tax collector – not the local agencies – possessed the actual records.

On multiple occasions and in several contexts, FREEH emphasized that the type of audit reconciliation completed by governmental entities is typically far less strenuous than the audits that are required of the tax collection agency. In fact, FREEH even testified that while the BUREAU’s auditor should have discovered problems at the BUREAU, she would not have expected a government agency audit to have detected what was going wrong at the BUREAU.

We must also recognize that, to the extent the DEFENDANTS argue that greater oversight should have been undertaken by PLAINTIFFS, they must look in a mirror at their own conduct. It is certainly arguable that every single Lebanon County political subdivision should have more actively participated in oversight of the BUREAU. This includes PLAINTIFFS; it also includes the DEFENDANTS. For us to hold today that PLAINTIFFS are guilty of “unclean hands” for improper oversight of the BUREAU would be to punish the PLAINTIFFS for conduct that was identical to that of the DEFENDANTS. Equity would not sanction such a result.

Without hesitation, we reject the DEFENDANTS’ argument that the doctrine of unclean hands somehow bars PLAINTIFFS from prevailing in this lawsuit. In fact, we declare that if the doctrine of unclean hands is applied, the result would be contrary to all doctrines of natural justice; applying the doctrine of unclean hands is simply not a part of any equitable equation.

H. PLAINTIFFS’ Remedy

The remedies available under PLAINTIFFS’ unjust enrichment, constructive trust and LTEA causes of action are identical. With respect to each of the claims for which we have rendered a verdict in favor of PLAINTIFFS, the DEFENDANTS will be required to return all overpaid amounts plus pay appropriate interest.

Because we have adopted M&A’s analysis, our verdict will require the following:

(1) Cornwall Borough will be required to reimburse PLAINTIFFS in the amount of $1,056,677.47.

(2) Heidelberg Township will be required to reimburse PLAINTIFFS in the amount of $766,830.89.

(3) North Annville Township will be required to reimburse PLAINTIFFS in the amount of $275,413.94.

(4) West Cornwall Township will be required to reimburse PLAINTIFFS in the amount of $129,588.44.

(5) Bethel Township will be required to reimburse PLAINTIFFS in the amount of $70,571.51.

In addition to the principal amount owed, we also recognize the time value of money. Since 2007, the PLAINTIFFS have been deprived of money they could have used or invested. The corollary is that DEFENDANTS enjoyed the benefit of monies that they either used to earn interest/investment income or provide municipal services for which they otherwise would have had to tax their citizens. Either way, the PLAINTIFFS lost and the DEFENDANTS gained more than simply the principal amount of the overpayments.

Under Pennsylvania law, prejudgment interest may be awarded “when the defendant holds money or property which belongs in good conscience to the plaintiff and the objective of the court is to force disgorgement of his unjust enrichment.” In re: Estate of Alexander, 758 A.2d 182, 189 (Pa.Super. 2000), citing Kaiser v. Old Republic Ins. Co., 741 A.2d 748, 755 (Pa.Super. 1999). In such cases prejudgment interest is awarded “to avoid injustice.” Id. “The determination of whether to award prejudgment interest and the rate of such interest is left to the sound discretion of the trial court in equity.” Gurenlian v. Gurenlian, 595 A.2d 145, 147 (Pa.Super. 1991).

There are several ways to calculate time value of money. Historically, the legal interest rate of 6% has been employed as a means to compensate a plaintiff who was deprived of the use of money to which the plaintiff was entitled. However, in some economic climates, fixed interest of 6% may not be fair. For example, during the great recession years of 2008 through 2010, no investment in America would have generated a return of 6%. In contrast, most investors would have fired an investment broker who earned them only a 6% return between 2012 and 2014.

In an effort to provide a concrete example of how prejudgment interest could be calculated in this case, we have identified three potential methods to measure how PLAINTIFFS should be compensated for their inability to use and grow the amounts that should have been paid into their coffers between 2004 and 2007. The first method employs the legal rate of interest of 6% per annum. The second methodology employs a “blended investment income average” of 2.6% per annum measured by Forbes Magazine between 2005 and 2015. The final method uses the percentage increase of the Standard and Poor’s Fortune 500 index between January 1, 2008 (1411) and June 30, 2015 (2109) which, on average, generated a 8.9% return on investment per annum. The following charts depict each of the options outlined above. Chart No. 1 depicts the amount of interest that will be owed by the DEFENDANTS based upon a 6% per annum “legal rate.” Chart 2 reflects the “blended investment average” derived from Forbes Magazine. Chart 3 depicts investment earnings based upon the Standard and Poor’s Fortune 500 index.

CHART 1 – LEGAL RATE

(.06 percent per year)

Municipality Overpayments Annual Yearly Years Total

Rate Earnings Owed

Cornwall	$1,056,677.45	x .06 =	$63,400.64	x 7.5 =	$475,504.83
N. Annville	275,413.94	x .06 =	16,524.83	x 7.5 =	123,936.27
Heidelberg	766,830.89	x .06 =	46,009.85	x 7.5 =	345,073.89
W. Cornwall	129,588.44	x .06 =	7,775.30	x 7.5 =	58,314.79
Bethel	70,571.51	x .06 =	4,234.29	x 7.5 =	31,757.17

TOTAL:

$1,034,586.80

CHART 2 – AVERAGE INVESTMENT

(Forbes blended investment average at .026 per year for past 10 years)

Municipality Overpayments Annual Yearly Years Total

Rate Earnings Owed

Cornwall	$1,056,677.45	x .026 =	$27,473.61	x 7.5 =	$206,052.09
N. Annville	275,413.94	x .026 =	7,160.76	x 7.5 =	53,705.71
Heidelberg	766,830.89	x .026 =	19,937.60	x 7.5 =	149,532.02
W. Cornwall	129,588.44	x .026 =	3,369.29	x 7.5 =	25,269.74
Bethel	70,571.51	x .026 =	1,834.85	x 7.5 =	13,761.44

TOTAL:

$448,321.00

CHART 3 – AVERAGE INVESTMENT

(S&P 500 – Index Average Increase from 1-1-08 until 6-30-15)

Municipality Overpayments Annual Yearly Years Total

Rate Earnings Owed

Cornwall	$1,056,677.45	x .089 =	$94,044.28	x 7.5 =	$705,332.16
N. Annville	275,413.94	x .089 =	24,511.84	x 7.5 =	183,838.89
Heidelberg	766,830.89	x .089 =	68,247.94	x 7.5 =	511,859.61
W. Cornwall	129,588.44	x .089 =	11,533,37	x 7.5 =	86,500.28
Bethel	70,571.51	x .089 =	6,280.86	x 7.5 =	47,106.48

TOTAL:

$1,534,637.20

For various reasons, we will be selecting the 6% per annum legal rate as the amount of interest that DEFENDANTS will have to pay. We have selected this legal rate of 6% for several reasons, including the following:

(1) The statutory rate of interest in this Commonwealth is set at 6%. 41 P.S. § 202.

(2) While our appellate courts have not established any hard and fast rules for prejudgment interest, there is at least some precedent for an award of 6% legal interest. Pittsburgh Const. Co. v. Griffith, 834 A.2d 572 (Pa.Super. 2003); Daset Mining Corp. v. Industrial Fuels Corp., 473 A.2d 584, 595 (Pa.Super. 1984). In fact, our Superior Court specifically approved a 6% rate of prejudgment interest in a constructive trust context. See Gurenlian v. Gurenlian, 595 A.2d 145 (Pa.Super. 1991).

(3) Investment markets have been extremely volatile since January 1, 2008. For the first several years following FOLTZ’ termination, the stock market, the bond market and the real estate market all plummeted. Since 2010, the stock and bond markets have rebounded, and have even reached unprecedented levels. Not so with the real estate market. Because of the volatility of the investment markets over the past seven and one-half years, selecting any accurate gauge of investment income would be difficult;

(4) If we were to select some sort of investment-driven measure of interest, powerful arguments would be available to contravene our selected measure. In our research to identify ten year investment averages, we identified numerous options, including the ones identified in Charts 2 and 3 above. Some were no doubt driven by “puffing” designed to motivate sales and were as high as 25%. Others, like the Forbes Magazine estimate, were much lower. A few closely approximated the 6% legal rate that we have chosen. Given the lack of any generally-accepted data on investment income, we perceive that our “safe” option is the legal rate of 6%.

We candidly acknowledge that our decision to select 6% per annum as the interest rate applicable to what the DEFENANTS owe represents an effort to seek a “middle ground” in defining interest income. Our desire is not to punish the DEFENDANTS or afford PLAINTIFFS with a windfall that would overcompensate them for the time value of money they lost. We believe that our choice to select 6% per annum as an appropriate measure of interest achieves equity.

Having accepted M&A’s determination of the overpayment amounts due and owing by DEFENDANTS, and having chosen 6% as the appropriate measure of interest, the following chart represents the aggregate amounts that we will award to PLAINTIFFS in the above-referenced case:

Municipality Overpayments Interest at 6% Amount Owed by

for 7.5 years DEFENDANTS

Cornwall	$1,056,677.45	$475,504.83	$1,532,182.20
N. Annville	275,413.94	123,936.27	399,350.21
Heidelberg	766,830.89	345,073.89	1,111,904.70
W. Cornwall	129,588.44	58,314.79	187,903.23
Bethel	70,571.51	31,757.17	102,328.68

TOTAL:

$3,333,669.02

I. Responsibility of BUREAU

At the risk of stating what is now intuitively obvious, the BUREAU under FOLTZ was guilty of malfeasance and misfeasance to a degree that fortunately has had few parallels in the entire history of Lebanon County. Theft of $800,000.00 by its Director. Use of tax rate percentages that did not comport with the underlying tax ordinances. Systematic and arbitrary altering of tax distribution checks in a manner that bore “no rhyme or reason” to logic. Recordkeeping that was compared to the clutter portrayed in the television show “Hoarders.” Systematic shredding of taxpayer records. Lack of any internal control that would ordinarily be performed by auditors and/or a Board of Directors. This is the legacy and heritage that Lebanon County citizens will always associate with the Lebanon Earned Income Tax Bureau.

We understand that employers such as the BUREAU cannot always be held responsible for the criminal acts committed by their employees. However, what we heard in this litigation about the BUREAU far transcends a rogue employee who committed ultra acts. In this case, the wrong man – FOLTZ – was given too much power for far too long without meaningful oversight. The result of this potent cocktail played itself out in Courtroom No. 3 for one week in June of 2015.

To its credit, the BUREAU has throughout this trial acknowledged the mistakes and malfeasance that were committed during the tenure of FOLTZ. Moreover, the BUREAU points out, with some justification, that it has done everything in its power to correct the mistakes of its past. The BUREAU hired MORAN and instructed MORAN to be completely transparent with respect to what she found. Once all of the BUREAU’s constituents agencies agreed to hire M&A, the BUREAU paid the complete cost of $70,000.00 for M&A’s analysis. The BUREAU also cooperated with KEYSTONE and with all parties to this litigation.

While we laud the BUREAU’s efforts since March of 2007, we cannot declare that the transparency of BUREAU and its willingness to pay M&A somehow expunges all of the misfeasance and malfeasance during the reign – and it was a reign – of FOLTZ.

For all of the reasons stated throughout this Opinion, we conclude that FOLTZ acted fraudulently and with willful disregard for the responsibilities of his office. We also conclude that the BUREAU itself was negligent in its oversight of FOLTZ and all of the other BUREAU employees. Therefore, we will rule in favor of the DEFENDANTS and against the BUREAU with respect to the DEFENDANTS’ third party complaint.

J. BUREAU’s Defenses

The BUREAU has raised two legal defenses that it believes provides insulation against all liability. The first is based on the statue of limitations. The second is based upon the PSTCA. For reasons we will articulate in more detail within this section, we do not believe that either defense relieves the BUREAU of liability.

(1) Statute of Limitations

One of the DEFENDANTS’ causes of action against the BUREAU is predicated upon the LTEA. There is a seven-year time limitation for pursuing statutory claims under the LTEA. 53 P.S. § 6913(V)(h). The BUREAU argues that an LTEA claim was not formally submitted until the filing of DEFENDANTS’ Second Amended Complaint in May of 2015. The BUREAU argues:

As of the filing date for the Second Amended Complaint on May 21, 2015, the seven-year statute of limitations could only reach back to May 21, 2008. Thus, Defendants’ claim in the Second Amended Complaint pertaining to the period of 2004 through 2007, is time-barred.

Initially, we do not accept the BUREAU’s argument that the DEFENDANTS’ initial claim under the LTEA was filed in May of 2015. The DEFENDANTS’ initial third party Complaint against the BUREAU was filed on July 23, 2013. It was couched as a claim for contribution. No specific causes of action were denoted in the 2013 Complaint. However, the 2013 Complaint did incorporate the PLAINTIFFS’ claims against the DEFENDANTS. More importantly, the 2013 Complaint specifically referenced the LTEA. (¶ 17 of 2013 Complaint). Thus, even if the BUREAU is correct in its interpretation of the LTEA time bar, the DEFENDANTS would still be able to assert a claim under the LTEA extending back to 2006.

More important is the fact that no one was aware of the BUREAU’s improper distribution of funds until March 17, 2010 when M&A authored its report. In addition, the DEFENDANTS could not have known that they would need to seek contribution against the BUREAU until the DEFENDANTS initiated their suit in 2012. The LTEA time bar does not specifically include a provision tolling the time limit for the period of time when knowledge of a potential cause of action does not exist. However, our Supreme Court has long recognized the equitable doctrine of “tolling” the statute during the period of time when a Plaintiff could not know that he/she possessed a cause of action. This “tolling” has come to be known as the “discovery rule.” See, e.g., McCain v. Montgomery Hospital, 578 A.2d 970 (Pa.Super. 1990). In addition, 42 Pa.C.S.A. § 5532 states:

In the case of a civil action . . . the time within which such an action or proceeding by or on behalf of a beneficiary on account of fraud must be commenced shall be computed from the discovery of the fraud . . .

This statute also promotes the equitable concept that one will not be required to file a claim that is impossible to identify due to someone else’s fraud.

We believe that the concept of a “discovery rule” should apply equally to the statute of limitations found in the LTEA. Suppose, for example, that the fraud of FOLTZ would not have been discovered until 2014. If we were to adopt the BUREAU’s argument, no claim for relief under the LTEA could be asserted even though no party would have known that it suffered loss or possessed a cause of action. Such a result would not be equitable.

We do not believe any of the claims before this Court should be time-barred. That includes DEFENDANTS’ claims against the BUREAU. Therefore, we will reject the BUREAU’s statute of limitations defense.

(2) Political Subdivision Tort Claims Act

The BUREAU also argues that the DEFENDANTS’ claims are barred by the Political Subdivision Tort Claims Act (PSTCA). See 42 Pa.C.S.A. § 8541 et seq. The PSTCA provides immunity and a limitation of damages in any tort litigation filed against a “local agency.” The BUREAU argues that it is a “local agency” and the DEFENDNATS’ third party complaint against it is therefore barred and limited by the PSTCA.

Initially, we wish to emphasize that the PSTCA applies only in the context of tort litigation. A claim that is not tort-based is thus outside the scope of the PSTCA. See Commonwealth Dept. of Transportation v. Municipal Authority of Westview, 919 A.2d 343 (Pa.Cmwlth. 2007). Accordingly, the PSTCA cannot apply to the DEFENDANTS’ statutory claim against the BUREAU filed under the LTEA.

To be sure, the DEFENDANTS have also proffered a claim for negligence against the BUREAU, and negligence is a tort cause of action. Moreover, we are aware that the term “local agency” includes a “local authority,” which is defined as any “body corporate and politic created by one or more political subdivisions pursuant to statute.” 1 Pa.C.S.A. § 1991. Therefore, we must agree with the BUREAU that it could be classified as a local agency under the PSTCA.

With the above being said, we nevertheless cannot apply the PSTCA to immunize the BUREAU under the circumstances of this case. We have searched for any case where the PSTCA was applied to preclude a lawsuit against a “local authority” by one of its constituent political subdivisions. We found none. The clear purpose of the PSTCA is to “limit governmental exposure” and “preserve the public treasury against the possibility of unusually large recoveries in tort cases.” See, e.g. Sphere Drake Ins. Co. v. Philadelphia Gas Works, 782 A.2d 510 (Pa. 2001); Helsell v. Commonwealth Care Services, 797 A.2d 1051 (Pa.Cmwlth. 2002); Leone v. Commonwealth Dept. of Transportation, 780 A.2d 754 (Pa.Cmwlth. 2001). It would be completely incongruous to believe that the General Assembly intended to harm political subdivisions and their treasuries by precluding a lawsuit by a local government agency against an authority that acted in a tortious manner.

In addition to the above, a provision of the PSTCA excludes its applicability in a case involving “willful misconduct.” That section reads:

In any action against a local agency or employee thereof for damages on account of an injury caused by the act of the employee in which it is judicially determined that the act of the employee caused the injury and that such act constituted a crime, actual fraud, actual malice or willful misconduct, [the provisions of the PSTCA] shall not apply.

42 Pa.C.S.A. § 8550. In this case, the BUREAU, by its Executive Director FOLTZ, certainly committed “willful misconduct” as that term is defined in § 8550 of the PSTCA. For this reason also, PSTCA immunity cannot be applied to benefit the BUREAU.

K. DEFENDANTS’ Remedies Against BUREAU

The DEFENDANTS argue that they should be permitted to recover from the BUREAU all funds that they are required to pay to PLAINTIFFS. The DEFENDANTS argue that their taxpayers were innocent of any wrongdoing and should not be required to fund a verdict in this case via new or additional taxes. As much as we sympathize with the DEFENDANTS’ taxpayers, we cannot agree with the premise of the DEFENDANTS’ argument.

PLAINTIFFS have proffered equitable claims and a statutory claim under the LTEA seeking return of the monies paid by PLAINTIFFS’ taxpayers. PLAINTIFFS have not asserted any claim against the BUREAU. The reason that the BUREAU is a party is because DEFENDANTS joined the BUREAU as an Additional Defendant.

In their Complaint to Join the BUREAU, DEFENDANTS sought both compensatory and consequential damages. Compensatory damages have been defined as “damages sufficient to indemnify the injured person for the loss suffered.” Black’s Law Dictionary, 9^th Ed. at 445. See also, Birth Center v. St. Paul Companies, Inc., 787 A.2d 376 (Pa. 2001) (compensatory damages are meant to place the injured party in the place he was prior to the injury). Consequential damages have been defined as “losses that do not flow directly and immediately from an injurious act but that result indirectly from the act.” Black’s Law Dictionary, 9^th Ed. at 446. See also, Safe Auto Ins. Co. v. Berlin, 991 A.2d 327 (Pa.Super. 2010) (adopting the Black’s Law Dictionary definition cited above). As it relates to this case, we perceive a huge difference between DEFENDANTS’ request that the BUREAU “compensate” it for the amount of the overpayments and their request for consequential damages flowing from the BUREAU’s wrongful conduct.

As PLAINTIFFS have made clear from the very outset of this litigation, the monies wrongfully distributed by the BUREAU were not retained by the BUREAU – those funds were received, possessed and used by the DEFENDANTS. The BUREAU was a conduit of the funds; it has not for over seven years possessed any of the monies that PLAINTIFFS now seek to recover. To the extent that PLAINTIFFS seek a return of their own money, PLAINTIFFS must look to DEFENDANTS. So must we.

Simply stated, the DEFENDANTS are not entitled to be “compensated” for the money that was wrongfully distributed to them by the BUREAU because the DEFENDANTS were never entitled to possess and retain those funds in the first place. Stated differently, the DEFENDANTS are not entitled to be “compensated” by the BUREAU for monies that actually belonged to the PLAINTIFFS. In fact, if we were to require that the BUREAU pay the DEFENDANTS for the amount of the overpayments that were retained, the net result would create a windfall for the DEFENDANTS. Equity would not sanction such a result.

Several Pennsylvania cases have recognized that when a defendant is required to repay funds to which he had no right, title or interest, the mere fact of repayment does not “harm” that defendant. In Donner v. Sacket, 97 A. 89 (Pa. 1916), the Pennsylvania Supreme Court stated that “the Defendant will sustain no damage if he is compelled to repay [money mistakenly received]. In all good conscience they [Plaintiffs] are entitled to it; with no good conscience can he [Defendant] hold onto it, and the law requires him to return it.” Id. at 90. Similarly, in Greenwich Bank v. Commercial Banking Corp., 85 Pa.Super. 159, 1925 WL 4943 (Pa.Super. 1924), a defendant was required to return a mistaken double payment. In that context, the court noted:

Negligence in making a mistake does not deprive a party of his remedy on account thereof [for the return of a mistaken double payment]; it is the fact that one by mistake unintentionally pays money to another to which the latter is not entitled from the former, that gives the right of action. Especially so, in view of the fact that the Defendant will sustain no damage if compelled to repay the money; nor be placed in a worse condition than if the money had not been paid.

(Slip Opinion at pg. 2, citations omitted.) More recently, the Pennsylvania Superior Court declared in an insurance dispute that the requirement to repay funds mistakenly received will not be characterized as a “loss.” In South Central Employment Corp. v. Birmingham Fire Ins. Co., 926 A.2d 977 (Pa.Super. 2007), the Court stated that “even where inadvertently acquired, money or property that has to be returned does not belong to the [party possessing it] and therefore the [party] has not suffered a loss.” Id. at 982.

In this case, we do not believe that the DEFENDANTS have suffered “harm,” “loss” or “damage” by being required to repay the overpaid funds that never should have been received in the first place. Because it would not be legally correct or equitably justifiable to award “compensatory” damages to the DEFENDANTS for the amount of the overpayments, we will reject the DEFENDANTS’ request to recover all such overpayments from the BUREAU.

Having concluded that the DEFENDANTS cannot recover the overpaid funds from the BUREAU does not end our analysis. In addition to their effort to shift their entire loss to the BUREAU, the DEFENDANTS also claim “consequential damages.” Because we agree that the distribution scheme that created overpayments has impacted the DEFENDANTS in ways that transcend their obligation to repay what they should not have been given in the first place, we will entertain a request by the DEFENDANTS for consequential damages.

The DEFENDANTS have indicated that they expended over one-half million dollars in legal fees and costs related to their receipt of overpayments. However, the DEFENDANTS indicated at trial that they did not have an itemization of those amounts. The DEFENDANTS reserved and were granted the right to supplement the record as needed with an itemization of fees and costs expended. Because we conclude that some – but not all – of the fees and costs expended by the DEFENDANTS should be paid by the BUREAU, we will be directing that the DEFENDANTS submit the itemized statement that they referenced at trial.

There is a significant distinction between litigation and pre-litigation expenses. Under the so-called “American Rule” that requires each party to pay his/her own counsel fees regardless of who prevails at trial, the DEFENDANTS will be required to pay their own litigation-related expenses. See, e.g., Saylor v. Skutches, 40 A.3d 135 (Pa.Super. 2012) (“a litigant cannot recover counsel fees from an adverse party unless there is express statutory authorization, a clear agreement of the parties or some other established exception.” Id. at 140, citing Trizechahn v. Titus, 976 A.2d 474, 482 (Pa. 2009)). Our analysis with respect to pre-litigation expenses, though, is much different.

When the elected representatives of the DEFENDANTS learned that their constituents could be asked to pay an aggregate of over two million dollars to the PLAINTIFFS, they concluded that additional investigation would be appropriate. We cannot fault the DEFENDANTS for making that choice. The fact that the DEFENDANTS were placed in this position was the direct result of the malfeasance and misfeasance of the BUREAU. As we see it, the investigative fees and costs expended by the DEFENDANTS prior to litigation can and should be fairly assessed against the BUREAU.

We will be directing that the DEFENDANTS submit an itemized invoice outlining all of their claimed prejudgment fees and expenses. This invoice is to be submitted within 10 days. Within 10 days thereafter, all other parties will be afforded the opportunity to lodge objections to the amounts set forth on the DEFENDANTS’ itemized invoice. If necessary, we will then conduct a hearing to determine the amount of pre-litigation expenses to be assessed against the BUREAU.

V. CONCLUSION

In school, children are taught that if they find a lost wallet, it should be returned to its rightful owner. Stripped to its essence, this case presents an identical lesson. Here, the DEFENDANTS found themselves in possession of several million dollars in money that rightfully belonged to someone else. There is no principle of equity that would support the DEFENDANTS’ retention of someone else’s tax dollars. Like the child who should return the wallet, the DEFENDANTS must return the funds that rightfully belong to PLAINTIFFS.

We wish there was some magic fund or method by which all taxpayers in Lebanon County could be made whole. Unfortunately, there is not. Even with their “victory,” the taxpayers of PLAINTIFFS will still be required to expend counsel fees and costs of litigation which likely will be measured in the hundreds of thousands of dollars. In addition to repaying the overpayment amounts plus interest, the DEFENDANTS’ taxpayers will also have to absorb litigation-related fees and costs. Moreover, because the BUREAU has already voluntarily paid significant amounts related to FOLTZ’ fraud and mismanagement, and because we will be requiring that the BUREAU pay additional pre-litigation fees and expenses, all taxpayers of Lebanon County have or will indirectly be responsible for paying the BUREAU’s obligations relating to the misallocation of funds between 2004 and 2007. In short, the so-called “EIT Scandal” has produced no winners, and the biggest “losers” have been and will continue to be the hardworking taxpayers of Lebanon County.

We have done our best via this decision to effectuate justice in an impossible situation. Our hope is that this opinion will end the BUREAU-related litigation. Even more, our hope is that this Court will never again be faced with a scenario such as this one. Our expectation is that no one will ever again place a man such as FOLTZ in a position of authority without adequate oversight. As painful as the lesson taught by this litigation has been for so many, we take solace in the belief that, moving forward, nothing like the “EIT Scandal” will ever be permitted to occur again.

Via a Court Order that will be issued simultaneous with this Opinion, our verdict will be rendered. The only aspect of our verdict to remain open will be the amount of pre-litigation fees and costs that the BUREAU will be required to pay to DEFENDANTS.

Footnotes:

1) This testimony was in accord with the parties’ Stipulation of Fact. (¶ 75 of Stipulation).

2) She also has training as a counselor, which she stated was “particularly helpful” to her assignment at the BUREAU.

3) We could not make this up. MORAN seemed particularly troubled by the fact that someone tried to spy on her while she was attempting to sort through the “mess” at the BUREAU.

4) This language was quoted from HOUSER’s Report.

5) Of particular import is the fact that the parties stipulated that “it was impossible for M&A to recreate the necessary tax data using BUREAU records alone, because the BUREAU did not possess adequate and accurate records of individual taxpayer tax payments for the relevant years.” (¶ 75 of Stipulation.)

6) We appointed an independent accountant in part because we have observed in decades of legal experience that perception can often be colored by perspective, we wanted to employ a completely independent expert who had no allegiance to either the PLAINTIFFS, the DEFENDANTS or the BUREAU.

7) We do not have a transcript, and our ability to simultaneously transcribe quotations via note taking is admittedly imperfect. Nevertheless, the above provides a fair representation of FREEH’s testimony.

8) Some of the difference between M&A’s calculations and KEYSTONE’s distribution could be explained by expansion of the local economy between 2007 and 2012.

9) We wish the 120 document sample would have been significantly larger. While 119 out of 120 is a darn good match by any definition, we would have been more impressed by even less of a match with a greater sample size.

10) It was interesting that the experts differed sharply about the impact of S corporation income. SMITH, BOWERCRAFT and HOUSER all opined that relatively little income is derived from S corporations. SMITH cited statistics from the Federal Government showing that only 3% of total aggregate taxable income in the United States can be attributed to S corporations. HOUSER explained that S corporations became far less attractive to business owners when the IRS put in place a regulation that required owners to claim a “reasonable salary” from an S corporation. In contrast, FREEH testified that there are certain peculiarities of Pennsylvania tax law that have incentivized Pennsylvania taxpayers to utilize S corporations more than their counterparts in other states. While we found HOUSER’s testimony to be the most credible regarding this issue, we would have preferred to see additional statistical data regarding S corporations revenue.

11) In Pugh, the Supreme Court cited the rational for this principal of law: “The basis for this rule is that the breaching party should not be allowed to ship the loss to the injured party when damages, even if uncertain in amount, were certainly the responsibility of the party in breech.” Id. at 910.

12) This earlier version of the LTEA was repealed in 2012. The parties do not dispute that the former version is the one that should apply in this case.

13) From a perspective of liability, we find in favor of the DEFENDANTS and against the BUREAU on both proffered causes of action based upon negligence and a violation of the LTEA. To the extent necessary, we would even characterize the BUREAU’s conduct as “willful” and “grossly negligent.”

14) This seven-year time limitation was found in the version of the LTEA that was in effect between 2004 and 2007. While an argument can be made that the time bar no longer applies, such an argument is not necessary to our determination of the issue. Therefore, we will assume that former § 6913(V)(h) governs this case and will analyze its applicability.

15) It is true that the DEFENDANTS could have more artfully drafted their July 23, 2013 Complaint to Join. However, the BUREAU chose not to file Preliminary Objections seeking a more specific Complaint. Moreover, when this Court directed the DEFENDANTS to outline their causes of action with more specificity, the DEFENDANTS filed their May 21, 2015 amendment. We view this amendment as an explanation – and not an expansion – of the original claim proffered in the July 23, 2013 Complaint to Join BUREAU.

16) At the risk of emphasizing the obvious, we must also point out that the DEFENDANTS possessed PLAINTIFFS’ money for years, and this likely prevented the imposition of higher taxes during previous years.

17) Once the DEFENDANTS made their choice to pursue litigation, the cost of that litigation belongs to the DEFENDANTS.

18) We are aware of no additional pending lawsuits relating to the BUREAU and FOLTZ.

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Judges Opinions, — October 15, 2015 10:20 — 0 Comments

City of Lebanon, et al., v. Cornwall Borough, et al., v. Lebanon County Earned Income Tax Bureau No. 2012-01222

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