                          STATE OF MICHIGAN

                           COURT OF APPEALS



GRASS LAKE IMPROVEMENT BOARD,                                      FOR PUBLICATION
                                                                   July 21, 2016
               Petitioner-Appellee/Cross-                          9:05 a.m.
               Appellant,

v                                                                  No. 326571
                                                                   Ingham Circuit Court
DEPARTMENT OF ENVIRONMENTAL                                        LC No. 2014-001064-AA
QUALITY,

               Respondent-Appellant/Cross-
               Appellee.


Before: Wilder, P.J., and Murphy and O’Connell, JJ.

WILDER, P.J.

       In these cross-appeals arising out of a contested administrative proceeding, the parties
appeal from 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 of 1969 (APA), MCL 24.201 et seq., which was initiated by the
Board against respondent, 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, DEQ
denied the Board’s application. In response, the Board filed a petition seeking review of DEQ’s
decision in a contested cas.

        The pivotal issue in the 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 do any of the following. . . . Create, enlarge, or diminish an inland lake or stream.”)




                                               -1-
(emphasis added). Part 301 of the NREPA does not define the term “enlarge,” but, at the time
DEQ denied the Board’s application, the Michigan Administrative Code provided1 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.

The Board argued that, under the above 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
department’s own administrative rules.

        DEQ responded that, as interpreted by both 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[.]” DEQ acknowledged
that the above 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,” DEQ argued that, to the extent its
administrative rule conflicted with the plain meaning of MCL 324.30102(1), 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 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 DEQ’s duty to follow Rule 281.811(1)(e) extended even to a situation, such as this,
where 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:

              [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, [DEQ] is
       acknowledging the very reason why it must follow its administrative rules. When
       [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 [DEQ] to circumvent its rules through an alternate interpretation
       bypasses the steps which were created in the APA to account for and protect


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-
       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 DEQ issued the requested permit to the
Board.

        Afterwards, 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 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 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, [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 [DEQ]’s position was not devoid of arguable legal
       merit. . . . The [Board] argues, and this [c]ourt 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 [DEQ]’s position was frivolous by
       being devoid of legal merit. This [c]ourt agrees. The [DEQ]’s position was that
       there existed a conflict of law between a statute, Part 301[ of the NREPA], and an
       administrative rule, [] Rule 281.811. The [DEQ] argued that where such conflicts
       exist, the statute prevails over the rule[.]

                                            * * *
                                               -3-
               However, [] 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 statue is not a direct conflict.

               Furthermore, Michigan case law makes it clear that administrative
       agencies must follow their own rules once properly promulgated. MICU[, 147
       Mich App at 584]. . . . Here, not only did [DEQ] knowingly violate its own rule, it
       apparently did so for years without attempting to re-promulgate [sic] 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 [c]ourt grants [the
       Board]’s motion for fees and costs incurred defending its case in the Michigan
       Administrative Hearing System.

The instant cross-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 the circuit
court’s interpretation and application of statutes de novo. 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, 101, 108; 754 NW2d 259 (2008) (second alteration in original),
       quoting Boyer-Campbell, 271 Mich at 296-297 (quotation marks and citations
       omitted).]

“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,
108-109.

                                                -4-
                                          III. ANALYSIS

       On appeal, 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. . . . [Emphases 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;
553 NW2d 688 (1996). If the reviewing 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 reviewing
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; Widdoes,
218 Mich App at 289.

        The circuit court decided that, under MCL 24.323(1)(c), 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 DEQ’s legal position was
“devoid of legal merit,” it necessarily followed that 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 announced by MCL 24.323(1)(c), is
whether 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

                                                -5-
600.2591(3)(a).2 See, e.g., Adamo Demolition Co v Dep’t of Treasury, 303 Mich App 356, 368;
844 NW2d 143 (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.” Id. 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,
citations, and footnotes omitted; emphasis added).

        Here, although DEQ did not prevail in the prior contested case, its legal position was
sufficiently grounded in law 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
DEQ argued below, it has long been recognized by Michigan Courts 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 v Nims, 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 v Auditor Gen, 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.”); Walgreen
Co v Macomb Twp, 280 Mich App 58, 71; 760 NW2d 594 (2008) (“A rule is invalid when it
conflicts with the provisions of the governing statute.”).

       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 Handicapped v Dep’t of Social Services, 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



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.


                                                  -6-
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. 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, DEQ may tax costs pursuant to MCR 7.219.



                                                            /s/ Kurtis T. Wilder
                                                            /s/ William B. Murphy
                                                            /s/ Peter D. O’Connell




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


                                               -7-
