891 N.W.2d 884
Mich. Ct. App.
2016

GRASS LAKE IMPROVEMENT BOARD V DEPARTMENT OF ENVIRONMENTAL QUALITY

Docket No. 326571

Michigan Court of Appeals

July 21, 2016

316 MICH APP 356

Submitted July 13, 2016, at Detroit. Decided July 21, 2016, at 9:05 a.m. Leave to appeal sought.

The Grass Lake Improvement Board (the Board) appealed in the Ingham Circuit Court the decision reached by an Administrative Law Judge (ALJ) in the second of two contested cases involving the parties. The first contested case arose when the Board applied for a permit from the Department of Environmental Quality (the DEQ) to use an augmentation well to pump water into Grass Lake. The DEQ initially denied the Board‘s application for a permit, and the Board petitioned for administrative review. The dispute in the first contested case centered on whether the Board‘s proposal would “enlarge” the lake and whether the DEQ had to abide by its own definition of that term as set forth in Mich Admin Code, R. 281.811(1)(e) or whether it could interpret the term differently under MCL 324.30102(1). The ALJ ultimately ruled in favor of the Board, and the Board received a permit to proceed. The ALJ concluded that what the Board proposed was not an enlargement under the administrative rule promulgated by the DEQ. The Board initiated a second contested case to recover the attorney fees it expended in the first contested case. The Board claimed that the DEQ was liable for the Board‘s attorney fees because the DEQ‘s position in the first contested case was devoid of arguable legal merit considering the DEQ‘s own definition of enlargement. The ALJ denied the Board‘s request for attorney fees, reasoning that the first contested case had presented a number of complex and technical issues and in that context the DEQ‘s position could not be considered devoid of arguable legal merit. The Board then appealed the ALJ‘s denial in the circuit court. The court, William E. Collette, J., reversed the ALJ‘s conclusion, ruling that the DEQ‘s position was devoid of legal merit and awarding attorney fees to the Board. According to the court, the DEQ‘s initial denial of the Board‘s application for a permit caused unnecessary litigation and compelled the court‘s award of attorney fees. The DEQ appealed, and the Board cross-appealed.

The Court of Appeals held:

Attorney fees are properly awarded to a prevailing party—other than an agency—after the administrative disposition of a contested case when the agency involved in the proceeding advanced a frivolous position. In this case, the Board contended that the DEQ‘s position was frivolous, that is, that the position was devoid of arguable legal merit. A position is devoid of arguable legal merit when it is not sufficiently grounded in law or fact. In this case, there was a tension between Mich Admin Code, R 281.811(1)(e) and MCL 324.30102(1) concerning the enlargement of lakes. The statute governs when there is conflict between a statute and an administrative rule even though administrative agencies are bound to follow their own rules. However, the rule and the statute did not directly conflict—the tension between them arose from the fact that the term “enlarge” was narrowly defined in the rule whereas it was not defined in the statute. The Board urged the ALJ to adopt the definition in the rule, and the ALJ ruled in the Board‘s favor. However, because there was a bona fide dispute over whether the statute or the rule controlled, and because the case concerned complex and technical issues, the DEQ‘s position was not devoid of arguable legal merit. The circuit court applied the wrong standard to its review of the Board‘s request for attorney fees. The circuit court reviewed the DEQ‘s position in the previous contested case for legal merit only—not arguable legal merit. The Board was not entitled to its attorney fees for the previous contested case.

Reversed.

Clark Hill, PLC (by Douglas R. Kelly), and Charles E. Dunn, PLC (by Charles E. Dunn), for Grass Lake Improvement Board.

Bill Schuette, Attorney General, Aaron D. Lindstrom, Solicitor General, Matthew Schneider, Chief Legal Counsel, and Daniel P. Bock, Assistant Attorney General, for the Department of Environmental Quality.

Before: WILDER, P.J., and MURPHY and O‘CONNELL, JJ.

WILDER, P.J. In this appeal and cross-appeal arising out of a contested administrative proceeding, the par-ties challenge the circuit court‘s order reversing the decision of an administrative law judge (ALJ) and awarding attorney fees to petitioner, Grass Lake Improvement Board (the Board). We reverse the circuit court and reinstate the decision of the ALJ.

I. FACTUAL BACKGROUND

The attorney fees at issue were incurred in a previous contested case under the Administrative Procedures Act (APA), MCL 24.201 et seq., that was initiated by the Board against respondent, the Department of Environmental Quality (DEQ). The dispute between the parties arose after the Board filed an application seeking a permit to use an augmentation well to pump water into Grass Lake and thereby increase its water level. In June 2009, the DEQ denied the Board‘s application. In response, the Board filed a petition seeking review of the DEQ‘s decision and initiated the first contested case.

The pivotal issue in the first contested case was whether the Board‘s proposed augmentation well would “enlarge” Grass Lake as that term is used in Part 301 of the Natural Resources and Environmental Protection Act (NREPA), MCL 324.30101 et seq., specifically in MCL 324.30102(1) (“Except as provided in this part, a person without a permit from the department shall not . . . [c]reate, enlarge, or diminish an inland lake or stream.“) (emphasis added). Part 301 of the NREPA does not define the term “enlarge,” but at the time the DEQ denied the Board‘s application, the Michigan Administrative Code provided a definition at Mich Admin Code, R 281.811(1)(e):

“Enlarge or diminish an inland lake or stream” means the dredging or filling of bottomlands, or the dredging of adjacent shorelands, to increase or decrease a body of water‘s surface area or storage capacity or the placement of fill or structures, or the manipulation, operation, or removal of fill or structures, to increase or decrease water levels in a lake, stream, or impoundment.1

The Board argued that, under this definition of “enlarge,” its proposed activity of raising the water level by constructing an augmentation well did not constitute an enlargement of Grass Lake. Thus, the Board argued, DEQ‘s denial of the Board‘s application was improper under the DEQ‘s own administrative rules.

The DEQ responded that, as interpreted by both the DEQ and an advisory opinion of our Attorney General‘s office, “the plain language of the statute [MCL 324.30102(1)] . . . clearly includes adding water to a lake to increase its volume and surface area[.]” The DEQ acknowledged that this interpretation of MCL 324.30102(1) was contrary to Mich Admin Code, R 281.811(1)(e). Nevertheless, citing the well-settled principle that “when a statute and an administrative rule conflict, the statute controls,” the DEQ argued that, to the extent its administrative rule conflicted with the plain meaning of MCL 324.30102(1), the DEQ was required to follow the statute and ignore the rule.

In reply, the Board argued that, under established Michigan law, administrative agencies, such as the DEQ, have a duty to follow their own duly promulgated administrative rules. Citing in support Micu v City of Warren, 147 Mich App 573; 382 NW2d 823 (1985), the Board further argued that the DEQ‘s duty to follow Rule 281.811(1)(e) extended even to a situation, such as this one, in which the DEQ believed the rule was contrary to the plain meaning of a statute.

After considering the matter, the ALJ decided in the Board‘s favor, reasoning as follows:

The [DEQ] contends that it “has worked for years to change the existing administrative rule [Rule 281.811(1)(e)], but such changes can take a very long time due to debate amongst the relevant stakeholders as to what should be changed, and how it should be changed, etc.” By making this statement, the [DEQ] is acknowledging the very reason why it must follow its administrative rules. When the [DEQ] is able to ignore its own administrative rule, it is able to create and enforce policy without considering the input and interests of relevant stakeholders. Reconciling stakeholder interests is an important part of the rulemaking process. Allowing the [DEQ] to circumvent its rules through an alternate interpretation bypasses the steps which were created in the APA to account for and protect relevant stakeholders and public interests. The statutory language taken on its own seems broad enough to include the [Board]‘s proposed activity (i.e. lake enlargement). However, the rule defining the term “enlargement” clearly limits the [DEQ]‘s jurisdiction to activities taking place on bottomlands. Based upon the application of the Rule . . . and other documentary evidence submitted, the proposed lake augmentation project does not implicate Part 301 jurisdiction.

I conclude as a matter of law that the proposed lake augmentation project, that is the act of adding water to the lake without activity on bottomlands, does not implicate the Department‘s jurisdiction under Part 301. There is no enlargement of Grass Lake.

Following a motion for reconsideration, the ALJ‘s opinion and order was adopted by DEQ Director Dan Wyant. Thereafter, the remaining issues were summarily dismissed by stipulation of the parties, the contested case was concluded, and the DEQ issued the requested permit to the Board.

Afterward, the Board initiated a second contested case, in which it sought its attorney fees related to the first contested case. Relevant to this appeal, the Board argued that, under MCL 24.323(1), it was entitled to such fees because the DEQ‘s legal position in the prior contested case was “devoid of arguable legal merit.” The ALJ denied the Board‘s request for attorney fees, deciding that the DEQ‘s legal position had at least some arguable legal merit:

Entitlement to relief under § 123(1)(c) may . . . be summarily eliminated based on the [Board]‘s argument, that “[t]his case is one that has numerous complex legal and technical issues.” In reviewing the proceedings and pleadings in this case, the [Board]‘s characterization of the “numerous complex legal . . . issues,” is accurate. Given this, the [DEQ]‘s positions cannot be deemed to be devoid of arguable legal merit under MCL 24.323(1)(c).

The Board appealed in the circuit court, which reversed the ALJ‘s fee decision:

The ALJ below found that the [DEQ]‘s position was not devoid of arguable legal merit. . . . The [Board] argues, and this Court agrees, that this determination fails as a reasoned determination by an administrative agency. The ALJ failed to make any conclusions of fact or law. The ALJ failed to point out any particulars within the record to support such a conclusion. He cited no legal authority and provided no reasoning whatsoever in support of his conclusion. This is the very definition of arbitrary and capricious: unreasoned, without reference to guiding principles or considerations, and a decisive exercise of will or caprice.

Furthermore, [the Board] argues that the [DEQ]‘s position was frivolous by being devoid of legal merit. This Court agrees. The [DEQ]‘s position was that there existed a conflict of law between a statute, . . . MCL 324.0101 et seq., and an administrative rule, Rule 281.811. The [DEQ] argued that where such conflicts exist, the statute prevails over the rule. . . .

. . .

However, the Director [Wyant] found in his final order that . . . the language of the statute and the language of the Rule were not conflicting per se. The statute at issue does not define what it means to “enlarge” a lake or stream, where that is precisely what the Rule does. The Rule‘s narrow interpretation of the statute is not a direct conflict.

Furthermore, Michigan case law makes it clear that administrative agencies must follow their own rules once properly promulgated. MICU v City of Warren, 147 Mich App 573, 584; 382 NW2d 823 (1985). . . . Here, not only did the [DEQ] knowingly violate its own rule, it apparently did so for years without attempting to re-promulgate a new rule. Given the overwhelming case law that condemns this exact behavior, it is clear the reliance on a policy that prescribes that behavior is devoid of legal merit, and therefore, the [DEQ]‘s position in this case was frivolous. This Court grants [the Board]‘s motion for fees and costs incurred defending its case in the Michigan Administrative Hearing System.

The instant appeals followed.

II. STANDARDS OF REVIEW

We review the circuit court‘s decision to determine whether it “applied correct legal principles and whether it misapprehended or grossly misapplied the substantial evidence test to the agency‘s factual findings.” City of Sterling Heights v Chrysler Group, LLC, 309 Mich App 676, 681; 873 NW2d 342 (2015) (quotation marks and citation omitted). We review de novo the circuit court‘s interpretation and application of statutes. Glenn v TPI Petroleum, Inc, 305 Mich App 698, 702; 854 NW2d 509 (2014). On the other hand, an administrative agency‘s statutory interpretation is reviewed under the standard first enunciated in Boyer-Campbell Co v Fry, 271 Mich 282; 260 NW 165 (1935):

[T]he construction given to a statute by those charged with the duty of executing it is always entitled to the most respectful consideration and ought not to be overruled without cogent reasons. However, these are not binding on the courts, and [w]hile not controlling, the practical construction given to doubtful or obscure laws in their administration by public officers and departments with a duty to perform under them is taken note of by the courts as an aiding element to be given weight in construing such laws and is sometimes deferred to when not in conflict with the indicated spirit and purpose of the legislature. [In re Complaint of Rovas, 482 Mich 90, 103; 754 NW2d 259 (2008) (quotation marks and citations omitted; second alteration in original), quoting Boyer-Campbell, 271 Mich at 296-297.]

“Respectful consideration” of an agency‘s statutory interpretation is not akin to “deference,” at least as that “term is commonly used in appellate decisions” today. Rovas, 482 Mich at 108. While an agency‘s interpretation can be a helpful aid in construing a statutory provision with a “doubtful or obscure” meaning, our courts are responsible for finally deciding whether an agency‘s interpretation is erroneous under traditional rules of statutory construction. Id. at 103, 108.

III. ANALYSIS

On appeal, the DEQ argues that the circuit court applied incorrect legal principles when it reversed the ALJ‘s decision. We agree.

In pertinent part, MCL 24.323 provides:

(1) The presiding officer that conducts a contested case shall award to a prevailing party, other than an agency, the costs and fees incurred by the party in connection with that contested case, if the presiding officer finds that the position of the agency to the proceeding was frivolous. To find that an agency‘s position was frivolous, the presiding officer shall determine that at least 1 of the following conditions has been met:

(a) The agency‘s primary purpose in initiating the action was to harass, embarrass, or injure the prevailing party.

(b) The agency had no reasonable basis to believe that the facts underlying its legal position were in fact true.

(c) The agency‘s legal position was devoid of arguable legal merit.

(2) If the parties to a contested case do not agree on the awarding of costs and fees under this section, a hearing shall be held if requested by a party, regarding the awarding of costs and fees and the amount thereof. [Emphasis added.]

Under MCL 24.325(1), “a party that is dissatisfied with the final action taken by the presiding officer under section 123 [MCL 24.323] in regard to costs and fees may seek judicial review of that action pursuant to chapter 6.” The reviewing court “may modify” the presiding officer‘s “action only if the court finds that the failure to make an award or the making of an award was an abuse of discretion, or that the calculation of the amount of the award was not based on substantial evidence.” MCL 24.325(2); Widdoes v Detroit Pub Sch, 218 Mich App 282, 289-290; 553 NW2d 688 (1996). “If the court awards costs and fees to a prevailing party upon judicial review of the final action of a presiding officer in a contested case,” then “the court shall award those costs and fees provided for in [MCL 24.323], if the court finds that the position of the state involved in the contested case was frivolous.” MCL 600.2421d; see also Widdoes, 218 Mich App at 289.

The circuit court decided that, under MCL 24.323(1)(c), the DEQ‘s legal position in the original contested case was frivolous. In reaching that conclusion, the circuit court applied an incorrect legal standard. The circuit court reasoned that because the DEQ‘s legal position was “devoid of legal merit,” it necessarily followed that the DEQ‘s legal “position in this case was frivolous.” But whether an argument has “legal merit” is not the proper legal question to be considered by the circuit court. Rather, the standard, as set forth in MCL 24.323(1)(c), is whether the DEQ‘s legal position “was devoid of arguable legal merit.” (Emphasis added.)

There is little authority interpreting the language of MCL 24.323(1)(c). Fortunately, however, there are many cases interpreting the nearly identical language found in MCL 600.2591(3)(a).2 See, e.g., Adamo Demolition Co v Dep‘t of Treasury, 303 Mich App 356, 367 & n 27; 844 NW2d 143 (2013), citing Pontiac Country Club v Waterford Twp, 299 Mich App 427, 439; 830 NW2d 785 (2013). We find such authority highly persuasive here. “A claim is not frivolous merely because the party advancing the claim does not prevail on it.” Adamo, 303 Mich App at 368. Instead, “a claim is devoid of arguable legal merit if it is not sufficiently grounded in law or fact, such as when it violates basic, longstanding, and unmistakably evident precedent.” Id. at 369 (quotation marks and citations omitted; emphasis added).

Here, although the DEQ did not prevail in the prior contested case, its legal position was sufficiently

grounded in law so as to have some arguable legal merit. There is an undeniable tension between the legal rules cited by the parties in the prior contested case. On one hand, as the DEQ argued below, Michigan courts have long recognized that, due to the very nature of an administrative agency‘s rulemaking power, when a statute and an administrative rule conflict, the statute necessarily controls. See Rovas, 482 Mich at 98 (“While administrative agencies have what have been described as ‘quasi-legislative’ powers, such as rulemaking authority, these agencies cannot exercise legislative power by creating law or changing the laws enacted by the Legislature.“); Mich Sportservice, Inc v Dep‘t of Revenue Comm‘r, 319 Mich 561, 566; 30 NW2d 281 (1948) (“The provisions of the rule must, of course, be construed in connection with the statute itself. In case of conflict, the latter governs. It is not within the power of the department of revenue to extend the scope of the act.“); Acorn Iron Works, Inc v State Bd of Tax Admin, 295 Mich 143, 151; 294 NW 126 (1940) (“The State board of tax administration from time to time has changed its construction and method of enforcing the sales tax law as it affects building trade transactions; but in this connection it is sufficient to note that liability for payment of the sales tax is controlled by statute. It cannot be imposed by rulings or regulations of the board.“); Guardian Indus Corp v Dep‘t of Treasury, 243 Mich App 244, 254; 621 NW2d 450 (2000) (“[I]nterpretative rules are invalid when they conflict with the governing statute, extend or modify the statute, or have no reasonable relationship to a statutory purpose.“).

On the other hand, it is equally well settled, as the Board argued below, that agencies are bound to follow their own duly promulgated rules. See Detroit Base Coalition for Human Rights of the Handicapped v Dep‘t of Social Servs, 431 Mich 172, 189; 428 NW2d 335 (1988) (“An agency is under a duty to follow its own rules.“); Micu, 147 Mich App at 584 (“[O]nce promulgated, the rules made by an agency to govern its activity cannot be violated or waived by the agency that issued the rules.“); Rand v Civil Serv Comm, 71 Mich App 581, 586; 248 NW2d 624 (1976) (“An administrative agency, in addition to following constitutional and statutory mandates, must also comply with its own rules.“).

Given the tension between such precedents as they apply to the facts of the prior contested case, we conclude that the ALJ did not clearly abuse his discretion. The DEQ‘s legal position was sufficiently grounded in law as to have at least some arguable legal merit, and hence it was not frivolous under MCL 24.323(1)(c).3

Accordingly, we reverse the circuit court and reinstate the decision of the ALJ. As the prevailing party, the DEQ may tax costs pursuant to MCR 7.219.

MURPHY and O‘CONNELL, JJ., concurred with WILDER, P.J.

Notes

1
Mich Admin Code, R 281.811 has since been amended to remove the definition at issue here. 2015 Mich Reg 5, p 75 (April 1, 2015).
2
MCL 600.2591(3)(a) provides:

(a) “Frivolous” means that at least 1 of the following conditions is met:

(i) The party‘s primary purpose in initiating the action or asserting the defense was to harass, embarrass, or injure the prevailing party.

(ii) The party had no reasonable basis to believe that the facts underlying that party‘s legal position were in fact true.

(iii) The party‘s legal position was devoid of arguable legal merit.

3
Having reached that conclusion, we need not address the additional issues raised in the appeals regarding the propriety of the amount of costs and attorney fees awarded by the circuit court.
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