A Taxing Situation

What are the penalties in Harris County's tax collection deal with Heard, Goggan?

Nobody, it's generally agreed, enjoys paying taxes. But what could make the sting of taxation even worse is discovering that you had forked over more than you legally had to -- and that the company that got you to pay the extra was arguing that the windfall should be theirs, not yours, to keep.

That seems to be the situation in Harris County, which last June contracted with the law firm of Heard, Goggan, Blair and Williams to collect overdue taxes. In the six months after that contract was signed, tardy Harris County residents ponied up more than $13 million in delinquent county taxes. They also ponied up in excess of three-quarters of a million dollars in late fees that, according to a recent ruling by state District Court Judge Tony Lindsay, they didn't actually owe. And now lawyers for Heard, Goggan are claiming that regardless of the legality of those fees, the law firm should be allowed to retain the money it collected.

Actually, given the deal between Heard, Goggan and Harris County, the law firm may be correct in asserting that the extra cash is theirs. And the county judge, among others, has weighed in on Heard, Goggan's side.

The genesis of this convoluted situation traces back to last summer, when Commissioners Court approved a contract giving Heard, Goggan the job of collecting delinquent taxes for the county, as well as for the other 35 political entities that use County Tax Assessor-Collector Carl Smith's office to collect their taxes. That contract was not a favorite of County Attorney Mike Driscoll, who, even before it was signed, filed a lawsuit claiming that he and Smith should retain all tax collection duties.

A state district judge ruled against Driscoll, but last August, Smith followed up with another suit to challenge the 15 percent fee the contract allowed Heard, Goggan to tack onto overdue taxes. Pending the resolution of Smith's lawsuit, $1.1 million in disputed fees was put into an escrow account administered by Lindsay's court.

More than $800,000 of that escrow comes from penalties applied by Heard, Goggan to collected taxes that may be as much as 20 years delinquent. Smith argued that those penalties -- known as 33.07 fees, after the applicable statute of the Tax Code -- were illegal. He was right: in February, Lindsay ruled that Heard, Goggan had no legal authority to tack a 33.07 fee onto taxes that were delinquent prior to 1994. However, Lindsay added that even though taxpayers didn't know the legality of their penalties was in dispute, they had paid their bills willingly. As a result, they weren't entitled to a refund.

That left open who should get the $800,000 of improperly collected penalties. Heard, Goggan quickly suggested that it should get the money, even though it hadn't bothered to tell delinquent taxpayers that the late fees might not hold up in court, and so given them a chance to pay under protest. "The clear and unambiguous terms of the contract," wrote Bill King, the Kemah attorney representing Heard, Goggan, "provide that any [statute] 33.07 penalty collected by any of the entities that are a party to that contract immediately 'become the property of HGBW' upon payment to the Tax Assessor-Collector."

Assistant county attorneys representing Smith's office don't see it that way. They're arguing that because Lindsay has ruled that the fees collected weren't legal, they aren't, in fact, 33.07 penalties, and so Heard, Goggan has no right to them. Not that the attorneys for Smith's office are suggesting the money go back to the taxpayers who mistakenly paid it. Instead, they're suggesting the bonus go into the county's general coffers.

A hearing to determine who, other than the taxpayers, should get the escrow money is expected soon. But the legal issues being raised by both sides in this dispute are only half the story. The real question may be something simpler: just how did Commissioners Court let Heard, Goggan walk out of a June 27, 1995 meeting with a deal so sweet that, though a judge ruled that the law firm basically picked the pockets of Harris County taxpayers, it could very well end up with the spoils?

The county attorney's office says the county's contract is so favorable to Heard, Goggan that it even allows the law firm to calculate its own monthly fees. Worse, it doesn't even limit Heard, Goggan's compensation to fees allowed under the state tax code.

Under the code, outside law firms contracted to collect back taxes can receive two forms of compensation, the 33.07 fees -- 15 percent of the tax collected -- and attorneys' fees on certain cases that go to litigation. But Harris County's contract with Heard, Goggan isn't quite so restrictive, according to first assistant county attorney Marsha Floyd. "Their contract with the county doesn't talk in terms of any of those statutes," she says. "It says, 'We're entitled to 15 percent of everything paid to Carl Smith.' "

In other words, Heard, Goggan can take 15 percent of overdue taxes that it had nothing to do with collecting. Such a generous arrangement isn't exactly standard. For example, Heard, Goggan's collection contract with the Houston Independent School District is considerably more restrictive. Like the county's, the school district's contract covers one year of collections. But the HISD contract also limits Heard, Goggan to "the amount of monies actually and finally collected as attorneys' fees or as Section 33.07 penalties and designated by HISD as fees ...."

Moreover, under the HISD contract, any legal fees Heard, Goggan collects on bankruptcy cases are subtracted from the 33.07 penalties awarded. And in cases involving federal agencies, such as the Federal Deposit Insurance Corp., which often waive fees and penalties, the school district has no obligation to compensate Heard, Gog-gan for its work.

In other words, the HISD contract specifically limits Heard, Goggan's fees to those taxes that become delinquent in the contract year, and which the law firm actually collects. And the school district decides what is or isn't a legitimate fee under the tax code. Also, Heard, Goggan is obligated to provide some services to HISD for which the law firm is not compensated, precisely because simply mailing out notices, then taking 15 percent of what comes back in, can be very lucrative.

The HISD contract is similar to the city of Houston's delinquent tax collection agreement with Calame, Linebarger, Graham and Pena, which also spells out strict limitations on compensation. The collection contract Heard, Goggan once had with the city -- which was terminated in 1989 after the law firm failed to meet its performance goals -- likewise had such limitations. But in its arrangement with Harris County, Heard, Goggan appears to be trying to set a new standard for delinquent tax collection contracts.

Unlike the HISD contract, there is no language in the county's deal that restricts Heard, Goggan's compensation to that outlined in the tax code. Therefore, Heard, Goggan can argue, as it has, that Judge Lindsay's ruling prohibiting 33.07 penalties on taxes delinquent prior to 1994 doesn't apply to their contract.

The $1.1 million now sitting in the escrow account overseen by Lindsay's court represents only a portion of the compensation that Heard, Goggan has claimed since it began collecting delinquent Harris County taxes last summer. Since last July, Heard, Goggan has been paid approximately $1.15 million in uncontested fees. That total could reach $10 million if the law firm matches the collection performance of County Attorney Driscoll and Assessor-Collector Smith for the 1994 tax year.

That amount would include $4.5 million for taxes that became delinquent on February 1 of this year. Previously, such taxes weren't assessed penalties until July 1, and late last week, the county attorney's office determined that Heard, Goggan has no right to collect any penalties on those taxes. But, county attorney Floyd admits, Heard, Goggan may well challenge that opinion. "There are a lot of places where they indicated they wanted 15 percent, and it's not tied to any of those fees in the statutes," Floyd says.

Harris County could be stuck with its deal with Heard, Goggan. Though HISD's contract gives the district the right to terminate its pact at any time, for any reason, Harris County commissioners can only cut Heard, Goggan loose for cause -- and even then, Heard, Goggan can continue working cases and collecting fees on those cases for a year.

County Judge Robert Eckels says he hopes to sit down with Floyd and Heard, Goggan to work out "some sort of global settlement" of the Smith lawsuit. Until then, he believes that Heard, Goggan is entitled to the disputed $800,000, and probably more.

"When it was being looked at, it was assumed that it was all going to be 33.07 fees," says Eckels. "But whatever has been collected, whether it's 33.07 or 15 percent, it's probably Heard, Goggan's, because they have been collecting it."

The law firm's unusually generous contract with Harris County appears to have been the result of a rush to privatization. Last June, Eckels, a privatization proponent, wanted to hire Heard, Goggan without soliciting bids from other law firms. Two commissioners objected, so Eckels gave interested law firms three days to submit proposals.

The following week, commissioners voted 3-1 to award the contract to Heard, Goggan. But because by that time County Attorney Mike Driscoll had already filed his suit challenging the whole idea of an outside collection agency, county commissioners couldn't get the county's legal arm to negotiate its contract with Heard, Goggan. Instead, it hired the law firm of Aiken, Gump, Hauer and Feld to do the job, something that ended up costing the county around $65,000 in legal fees and apparently produced a less than perfect document.

Eckels says the final contract might not have turned out so lopsided if the county attorney's office had been involved in the negotiations. "I blame part of this on the county attorney for suing us instead of helping draft the contract," says Eckels. "If they had taken a cooperative stance instead of being antagonistic, we probably would not be having these problems."

But "these problems" were the very reason Driscoll has repeatedly questioned the wisdom and legality of privatized collection deals. The county attorney has long argued that his and Smith's offices -- which brought in more than $400 million in delinquent taxes in the last decade -- are the ones that should go after back taxes. And, the county attorney has pointed out, unlike private collectors, he and Smith do not earn individual fees for their efforts. Even so, the legal fees charged by the county attorney's office on cases in litigation have tended to total more than $1 million annually -- enough to cover the operation of Driscoll's office and put an extra $300,000 or so a year into the county treasury.

Since Eckels' election in November 1994, however, the argument in favor of the county attorney has carried less weight. A political and territorial dispute has raged between the Republican judge and the Democratic county attorney, a dispute that has lately taken on overtones of a class war.

In the minds of Driscoll and others opposed to privatized collection, it's the poor who don't pay their taxes on time. The penalties applied to cover the fees of a private tax collection firm usually hit those who can least afford it, Driscoll and his supporters insist.

But private collectors such as Heard, Goggan -- which collects delinquent taxes for more taxing entities in Texas than any other law firm -- disagree with that assessment. The Harris County commissioners evidently agree with Heard, Goggan. They've joined with the law firm to hire Vinson and Elkins to defend the tax collection contract. So far, Heard, Goggan has paid some $100,000 to Vinson and Elkins to support its right to collect as many fees as it can get.

Though Eckels hopes for a reasonable solution to the Smith lawsuit, it seems unlikely that, given the politics and the money at stake, any resolution will come about peacefully. And, of course, Heard, Goggan's contract presents some formidable obstacles as well.

As assistant county attorney Marsha Floyd notes, "[Heard, Goggan's] contract with the county says that anything they get paid, they keep.

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