Judge approves settlement in LA lawyer reimbursement case

LOS ANGELES -- The city of Los Angeles will stop collecting taxes on reimbursed law firm expenses after a judge on Wednesday granted final approval of a settlement.

The agreement resolving the class action, filed by Berkes Crane Robinson & Seal LLP, enjoins the city from collecting the tax. A total of $4.6 million will be reimbursed to firms that paid either via an audit or voluntarily. The settlement also awards $1.2 million in attorney fees to the plaintiff.

Los Angeles County Superior Court Judge Maren Nelson, who approved of the settlement, called it a "fair" agreement that gives back virtually 100 percent to those who paid the tax.

"The fees are appropriate in my view for the work that was done. It was a very longstanding case," Nelson said.

The case lasted seven years and cycled through six judges.

The city "unilaterally" chose to tax reimbursed expenses starting 25 years ago, classifying them as not true reimbursements, according to the settlement.

Michael Brown, an Irvine sole practitioner who sued, said the city would reimburse 2,000 law firms and about 4,500 lawyers would be impacted by injunctive relief.

"I'm very happy the city came to the table and addressed the issue for all the lawyers in LA. I think it was the fair thing to do," Brown said.

"I think the reason the city settled is because they realized ... money that is reimbursed to anybody for advancing costs on behalf of a client isn't really income to that individual," he said.

The bulk of the case, moving at a crawl since it was filed in 2011, involved reviewing more than 1,000 city audits and deposing auditors and those involved with implementing the city's taxation policy, Brown said. It also consisted of figuring out how to get money back to those attorneys or firms who voluntarily included the reimbursed expenses in their gross receipts.

"That took time," he said.

The he rigorous discovery was necessary to determine the two types of class members to be reimbursed, Brown said. Those who were audited will automatically get 100 percent of their refund and need not fill out a claim form, according to the settlement.

That class, A1, will receive about $1.05 million for a class period ranging from May 1, 2010 to Dec. 31, 2013 -- the period the city levied the additional tax, interest or penalties on audited class members, according to the settlement.

Attorneys and firms who paid voluntarily as class A2 will recover $3.6 million, a 91 percent recovery, according to the settlement. The taxable years are from 2011 to 2017.

The lawsuit was filed after the city said the firm underreported gross receipts by not including expert witness fees and travel expenses -- money that was reimbursed. Berkes Crane Robinson & Seal LLP v. City of Los Angeles, BC473557 (L.A. Super Ct., filed Nov. 15, 2011).

Stephen Weisskopf of Theodora Oringher PC, who defended the city, deferred comment to Beverly Cook of the city attorney's office, who did not respond to a request for comment.

In court filings, the city contended the reimbursement to the firm constituted gross receipts and was therefore taxable. It uniformly applied LAMC SEC 21.190 to all law firms when determining gross receipts, the lawsuit said.

The complaint said such items are excluded via another city law, LAMC SEC 21.49 (c) 3 (vi), which excludes taxation of reimbursed receipts.

"Firms, when paying for these case related costs, are acting as the agent for the client and are reimbursed by the client for the payment of these costs," according to the complaint.

Meanwhile, Brown said he was optimistic throughout the case's long duration that it would settle.

"The city always indicated an intention to get it resolved," he said.