65 N.Y.2d 793 (1985)

A taxpayer has standing to challenge the illegal expenditure of state funds related to a contract, even without demonstrating fraud or collusion, and can potentially recover funds from contractors if the state paid more than it would have under proper bidding procedures.

Summary

The New York State Association of Plumbing-Heating-Cooling Contractors, Inc. (Association) challenged the award of a state contract, alleging illegal expenditure of state funds. The Court of Appeals held that the Association had standing as a taxpayer to bring the action under State Finance Law article 7-A. The Court converted the Article 78 proceeding to an action for relief under State Finance Law Article 7-A and for declaratory relief. The Court found that even absent fraud by the contractors, the contractors can be liable to the extent the state overpaid due to the failure to follow proper bidding procedures. The court also noted that the taxpayer may be awarded attorney fees.

Facts

The New York State Association of Plumbing-Heating-Cooling Contractors, Inc., filed suit challenging the award of a state contract. The Association argued that its members would suffer injury as taxpayers due to the wrongful and illegal expenditure of State funds.

Procedural History

The Appellate Division previously declined to convert the Article 78 proceeding to a declaratory relief action. Special Term limited conversion of the proceeding to a declaratory judgment action and held that amendment of the supplemental petition was unauthorized. The Appellate Division found this to be error. The Court of Appeals agreed with the Appellate Division, modified the order, and remitted the case to Special Term for trial.

Issue(s)

1. Whether the proceeding should have been converted to an action for relief under State Finance Law article 7-A and for declaratory relief?
2. Whether the four-month limitation period applicable to article 78 proceedings (CPLR 217) applied to the supplemental petition seeking to enforce petitioner’s citizen-taxpayer’s right of action for return of illegally paid funds?
3. Whether dismissal of the complaint against the respondent contractors on the papers alone was error?

Holding

1. Yes, because the allegations claimed the petitioner’s members would “suffer injury as taxpayers as a result of the wrongful and illegal expenditure of State funds” and demanded that sums paid to the contractors be returned to the State.
2. No, because as to that cause of action the governing period of limitations is one year (CPLR 215 [4]), which had not run at the time of service of the supplemental petition.
3. Yes, because the absence of fraud or collusion does not preclude recovery from contractors if the State overpaid due to failure to follow proper bidding procedures.

Court’s Reasoning

The Court reasoned that the mischaracterization of the pleading as a “supplemental petition” was irrelevant; the court should have considered the substance of the allegations and the relief sought. The court emphasized that the allegations of injury to taxpayers due to illegal expenditure of state funds, coupled with the demand for the return of funds and counsel fees, clearly indicated an action under State Finance Law article 7-A.

Regarding the statute of limitations, the Court held that the one-year limitation period under CPLR 215(4) applied to the taxpayer’s action for the return of illegally paid funds, not the four-month period for Article 78 proceedings. The court also found that the petitioner was not guilty of laches because the original proceeding was commenced on the day the contract was awarded.

The Court further reasoned that dismissing the complaint against the contractors solely on the basis of the papers was erroneous. Even without fraud or collusion, the contractors could be liable if the State paid more under the contracts than it would have had proper bidding procedures been followed. The court stated, “To hold otherwise is completely to undermine the legislative mandate.” The court also referenced section 123-e (1) of the State Finance Law, which permits the court in a taxpayer’s action to grant such relief as “may seem just and proper”.