Sontchi, C.J.
The crucial background to this motion is that the La Paloma Generating Company, LLC paid all property taxes assessed to the Facility, and thereafter sought a refund of the amounts paid. Now, the La Paloma Liquidating Trust (together with the La Paloma Generating Company, LLC and affiliated debtors, "La Paloma") on the one hand,
In the meanwhile, SBE filed a motion for summary judgment ("SBE's Motion") asserting that this Court does not have jurisdiction to hear the Tax Dispute as established in the Determination Motion and Order. SBE's Motion is premised on two grounds: (i) that the Court does not have subject matter jurisdiction to hear the Tax Dispute pursuant to section 505 of the Bankruptcy Code; and (ii) that the Court has no jurisdiction to decide the Tax Dispute on state sovereign immunity grounds.
The question of this Court's jurisdiction over the Tax Dispute is central to SBE's Motion. "A court has jurisdiction to determine whether or not it has subject matter jurisdiction over a proceeding."
Although filed as a motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure, SBE's Motion asserts that this Court lacks jurisdiction to grant the relief initially requested in the Determination Motion. In fact, SBE has essentially moved to dismiss under Federal Rule of Civil Procedure, Rule 12(b)(1), made applicable pursuant to Federal Rule of Bankruptcy Procedure, Rule 7012(b), to contest this Court's subject matter jurisdiction over the Tax Dispute. Both parties acknowledged that the motion to dismiss standard might be applicable to the SBE Motion.
A motion under Federal Rule 12(b)(l) may be treated as either a "facial attack" on the complaint or, as in the present case, a "factual challenge" to the Court's subject matter jurisdiction.
On December 6, 2016, La Paloma filed a voluntary petition for relief under chapter 7 of title 11 of the United States Code, which the Court later authorized to be jointly administered with certain affiliated cases.
On March 16, 2017, La Paloma filed the Determination Motion under Debtors' Motion for Entry of an Order, Pursuant to 11 U.S.C. § 505, Determining the Taxable Value of the Facility and Debtors' Entitlement to Related Property Tax Refunds.
In response to the Determination Motion, on March 30, 2017, the SBE timely filed the Objection by the California State Board of Equalization to Debtors' Motion for Entry of an Order, Pursuant to 11 U.S.C. § 505, Determining the Taxable Value of the Facility and Debtors' Entitlement to Related Property Tax Refunds ("SBE's Objection").
The Court later heard the matter and ruled that it will "exercise jurisdiction over this issue and dispute under 505" and observed "all the factors, 505(a) have been met, at least on a facial basis."
In May 2017, the parties agreed on a form of scheduling order which the Court entered (the "Stipulated Order"). Specifically,
On November 6, 2017, the Court approved a plan of confirmation, which created the La Paloma Liquidating Trust and authorized such entity to continue litigating the Tax Dispute post-confirmation.
The Court scheduled the Tax Dispute for trial on March 6-9, 2018. On January 30, 2018, SBE filed a Motion for Summary Judgment as to its Jurisdictional Defenses.
La Paloma owned and operated the La Paloma electric generating facility located in Kern County, California (the "Facility") until December 4, 2017. La Paloma is a state assessee for purposes of property taxation and has been assigned identification number 1112 by the SBE.
The SBE is now, and at all times relevant hereto has been, the state agency with jurisdiction to assess the property of designated categories of companies, including the Facility, pursuant to California Constitution article XIII, section 19, Revenue and Taxation Code Section 721.
Kern County is now, and at all times relevant hereto was, a political subdivision of the State of California which collects property taxes referable to the Facility pursuant to Revenue and Taxation Code section 745. Kern County is named a defendant to this action pursuant to Revenue and Taxation Code section 5148(b).
The Facility is a combined-cycle gas turbine generation plant consisting of four separate turbines with an aggregate nameplate generating capacity of 1,048 MW, located at 1760 West Skyline Road, McKittrick in Kern County, California.
The Facility was originally constructed and placed into service in 2003. At the time the Facility commenced operation, it operated pursuant to contracts that supported recovery of the cost to construct the Facility and provided a return on that construction cost. In 2012, three of the four units at the Facility operated pursuant to contract
La Paloma timely paid all property taxes assessed to the Facility, as follows:
Tax Year Payment Dates Payment Amounts 2012-13 4/8/2013 $2,076,222 2013-14 12/6/2013 $1,599,852 4/16/2014 $1,759,838 2014-15 12/5/2014 $1,414,803 4/6/2015 $1,403,086 2015-16 12/4/2015 $1,239,981 4/6/2016 $1,239,981 2016-17 12/14/2016 $933,838 4/7/2017 $933,838
The SBE is required to annually assess the value of La Paloma's property pursuant to the constitutional mandate that the SBE annually value all real and personal property "owned or used" by California electricity generating companies.
Each year, the SBE adopts a "unitary value" of all state-assessed property (such as that owned by electricity generating companies), transmits the assessment to the county (or counties) in which the property is located and then the county bills and collects the applicable property tax from the state assessee based on the assessment amount that has been allocated to it.
As part of this process, the SBE's State-Assessed Properties Division ("SAPD") is responsible for recommending a proposed unitary value to the Board Members for adoption. Thus, each year, the Board Members, with the assistance of SAPD, adopt the unitary value of the taxpayer's unitary property.
Taxpayers who disagree with the Board Member's adopted unitary value can file a petition for reassessment (and claim for refund) with the SBE.
In petitioning for reassessment of state-assessed properties, petitioners may participate in appeals conferences. The purpose of an appeals conference is to exchange additional facts and evidence, obtain stipulations of fact, and refine questions of law and address new issues, in order to facilitate a more efficient and productive oral hearing or other Board action on the petition. An attorney from the Appeals Division of SBE's Legal Department (the "Appeals Division") conducts the appeals conference.
Following the appeals conference, the Appeals Division prepares a hearing summary or summary decision to be submitted to the SBE.
In situations where the taxpayer reaches an agreement with SAPD over the course of the petition process regarding the value that the will be recommended to the Board Members, that agreement does not constitute a withdrawal of the petition for reassessment.
Following the appeals conference, the petitioner has an opportunity to be heard before the Board Members. The petitioner need not pursue an oral hearing in order for the Board Members to accept a recommended value. Forgoing an oral hearing before the Board Members — or any other optional part of the petition process — does not constitute a waiver of any issues the taxpayer may raise.
To the extent there are any claims that the SAPD and the taxpayer have not resolved, the Board Members make a final administrative decision to accept or reject the recommended value on the claims raised in the petition (and claims for refund). The official time limits for hearings are: 10 minutes for opening; 10 min for SAPD; and 5 minutes for rebuttal. Then the Board may ask questions. Hearings can range from approximately 30 minutes to a couple of hours depending on the circumstances.
After the SBE makes a final administrative determination, the taxpayer may pursue relief in court to challenge the valuation of its property and claim a refund. SBE asserts that this is limited to the issues and amounts it raised in its petition. La Paloma asserts that a taxpayer is entitled to a de novo trial in which the Court, by statute, "shall not be restricted to the administrative record, but shall consider all evidence relating to the valuation of the property admissible under the rules of evidence."
La Paloma submitted property statements, certified under penalty of perjury, pursuant to California Revenue and Taxation Code § 826, for each of the 2012 to 2016 tax years. The statements were used by SBE in connection with determining the property tax assessments for the Facility.
For tax year 2012, in May 2012, the SBE initially adopted a unitary value for the Facility of $401,900,000.
On or about July 20, 2012, La Paloma timely filed a Petition for Reassessment of Unitary Value for the 2012 unitary property assessment with the SBE pursuant to Revenue & Taxation Code section 721. The
On September 4, 2012, the SAPD submitted its Analysis to the Appeals Division and La Paloma, rejecting La Paloma's valuation in the 2012 Petition. On September 28, 2012, La Paloma filed its response to the SAPD Analysis.
La Paloma and SBE staff subsequently submitted a joint recommended unitary value of $377,600,000. Through its representatives, La Paloma confirmed in writing that it was withdrawing its request for oral argument before the Board Members.
Based on the joint recommendation of unitary value, the Appeals Division prepared a Summary Decision presenting a unitary value of $377,600,000 to the SBE for adoption.
On November 14, 2012, the Board Members accepted the recommendation of the Appeals Division and reduced the 2012 SBE-Adopted unitary value of $401,900,000 to $377,600,000. On January 10, 2013, the SBE sent La Paloma a Notice of Decision notifying La Paloma that the SBE acted on Paloma's Petition "in public session" and "[b]y a unanimous vote."
On May 31, 2016, La Paloma timely filed a Claim for Refund for the 2012 tax year with the Kern County Board of Supervisors. La Paloma filed the Claim for Refund pursuant to Revenue and Taxation Code Section 5096 because the 2012 Petition was not marked as a claim for refund. La Paloma has not received any notice from the Kern County Board of Supervisors that it has considered, acted on or denied the claim for refund.
For tax year 2013, in May 2013, the SBE adopted a unitary value for the Facility of $333,300,000.
On or about July 18, 2013, La Paloma filed a Petition for Reassessment of Unitary Value for the 2013 unitary property assessment with the SBE pursuant to Revenue and Taxation Code section 721. The Petition was designated as a claim for refund pursuant to Revenue and Taxation Code section 5148(f). The Petition was designated Appeal No. SAU 113-015, Case Identification No. 742923.
On September 9, 2013, the SAPD submitted its Analysis to the Appeals Division and La Paloma, rejecting La Paloma's valuation in the 2013 Petition.
In September of 2013, La Paloma filed its response to the SAPD Analysis.
On December 17, 2013, the SBE rendered a decision that denied La Paloma's petition and affirmed the 2013 SBE-adopted unitary value of $333,300,000. On December 31, 2013, the SBE sent La Paloma a Notice of Decision notifying La Paloma that the SBE acted on Paloma's Petition "in public session" and "[b]y a unanimous vote."
For tax year 2014, in May 2014, the SBE adopted a unitary value of $300,200,000.
On or about July 21, 2014, La Paloma filed a Petition for Reassessment of Unitary Value for the 2014 unitary property assessment with the SBE pursuant to Revenue and Taxation Code section 721. The Petition was designated as a claim for refund pursuant to Revenue and Taxation Code section 5148(f). The Petition was designated Appeal No. SAU 14-020, Case Identification No. 837006.
On August 21, 2014, the SAPD submitted its Analysis to the Appeals Division and La Paloma, rejecting La Paloma's valuation in the 2014 Petition.
On November 19, 2014, the SBE rendered a decision that denied La Paloma's petition and affirmed the 2014 SBE-adopted unitary value of $300,200,000. On December 15, 2014, the SBE sent La Paloma a Notice of Decision notifying La
For tax year 2015, in May 2015, the SBE adopted a unitary value of $290,800,000.
On or about July 16, 2015, La Paloma filed a Petition for Reassessment of Unitary Value for the 2015 unitary property tax assessment with the SBE pursuant to Revenue and Taxation Code section 721. The Petition was designated as a claim for refund pursuant to Revenue and Taxation Code section 5148(f). The Petition was designated Appeal No SAU 15-007, Case Identification No. 901576.
On September 10, 2015, the SAPD submitted its Analysis to the Appeals Division and La Paloma, rejecting La Paloma's valuation in the 2015 Petition.
On November 17, 2015, the SBE denied La Paloma's petition and adopted the 2015 SBE-adopted value of $290,800,000 for the 2015 petition. On December 2, 2015, the SBE sent La Paloma a Notice of Decision notifying La Paloma that the SBE acted on La Paloma's Petition "in public session" and "[b]y a unanimous vote."
For tax year 2016, in May 2016, the SBE adopted a unitary value of $168,800,000.
On or about July 1, 2016, La Paloma filed a Petition for Reassessment of Unitary Value for the 2016 unitary property tax assessment with the SBE pursuant to Revenue and Taxation Code section 721. The Petition was designated as a claim for refund pursuant to Revenue and Taxation Code section 5148(f). The Petition was designated Appeal No. SAU 16-012, Case Identification No. 96716.
On September 12, 2016, the SAPD submitted its Analysis to the Appeals Division and La Paloma, rejecting La Paloma's valuation in the 2016 Petition.
On October 16, 2016, La Paloma submitted its response to the SAPD Analysis, contesting the SAPD's arguments regarding valuation and appraisal of La Paloma's unitary property.
On December 14, 2016, the SBE granted La Paloma's petition, in part, and reduced the 2016 SBE-adopted value of $168,800,000 to $136,100,000. On December 16, 2016, the SBE sent La Paloma a Notice of Decision notifying La Paloma that the SBE acted on Paloma's Petition "in public session" and "[b]y a unanimous vote."
As a consequence of the petition for review process, the SBE enrolled reduced assessed values for 2012 and 2016 assessments, but made no changes to the other assessments, as reflected in the chart below, and the Kern County Assessor enrolled the following values as the state-assessed value of the Facility:
Year Original SBE-Assessed SBE-Assessed Value After Value Appeal 2012 $401,900,000 $377,600,000 2013 $333,300,000 $333,300,000 2014 $310,200,000 $310,200,000 2015 $290,800,000 $290,800,000 2016 $168,800,000 $136,100,000
The discount rate developed by the SBE for La Paloma was the same discount rate used to assess all other combined cycle merchant plants for the years at issue.
As the experts for both parties in the instant litigation have essentially relied on the income approach for valuation, the SBE does not believe that land value is a material issue in the instant litigation.
Accordingly, SBE has agreed for the purposes of this litigation only, and provided that such values set forth in this paragraph cannot be used in any other proceeding for any purpose, that the land (but not the improvements) that is assessable in connection with the Facility has a value for purposes of property taxation for the years at issue in this litigation, as follows. (This limitation against using the values set forth below does not apply to two paragraphs noted with an
Lien Date: January 1, 2012 Parcel 1 $170,000 Parcel 2 $416,200 Parcel 3 $183,800 Parcel 4 $200,000 Total $970,000Lien Date: January 1, 2013 Parcel 1 $238,400 Parcel 2 $583,800 Parcel 3 $257,800 Parcel 4 $200,000 Total $1,280,000Lien Date: January 1, 2014 Parcel 1 $253,900 Parcel 2 $621,600 Parcel 3 $274,500 Parcel 4 $200,000 Total $1,350,000Lien Date: January 1, 2015 Parcel 1 $276,000 Parcel 2 $675,700 Parcel 3 $298,300 Parcel 4 $200,000 Total 1,450,000Lien Date: January 1, 2016 Parcel 1 $287,000 Parcel 2 $702,700 Parcel 3 $310,300 Parcel 4 $220,000 Total 1,520,000
Tax Year Assessed Value Tax 2012 $20,226 $208.07 2013 $371,241 $3,848.69 2014 $372,929 $3,853.14 2015 $380,377 $3,914.99 2016 $386,177 $4,264.50 TOTAL $16,089.48
Two jurisdictional arguments support SBE's Motion: the first argument is based on an interpretation of section 505 of the Bankruptcy Code, the other argument rests upon a state sovereign immunity defense under the Eleventh Amendment.
SBE asserts that 11 § U.S.C. 505 limits the jurisdiction of this Court to hear the Tax Dispute. Section 505 provides that the Court "may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid ..."
Section 505(a) is a "jurisdictional statute that confers on the bankruptcy court authority to determine certain tax claims[,]"
In City of Perth Amboy v. Custom Distribution Services, the debtor commenced an adversary proceeding against the city of Perth Amboy seeking a reassessment of its real estate obligations and tax refund, among other arguments. The city argued that because the debtor has not made proper refund requests under New Jersey law for any of the years at issue, the court was without authority to decide the debtor's right to a refund. Specifically, the city noted that § 505(a)(2)(B)(i) allows the bankruptcy court to determine any right to a tax refund before "120 days after the trustee/[debtor in possession] properly requests such refund from the governmental unit from which such refund is claimed..."
In its decision, the court focused on the words "properly requests" and found them to be "susceptible to more than one meaning."
Furthermore, in In re ANC Rental Corp.,
SBE argues that section 505 limits this Court's subject-matter jurisdiction for the following reasons: (i) no "trustee" had requested a refund (as La Paloma requested the refund prior to the Petition Date); and (ii) La Paloma only requested $3.5 million in refunds from SBE and as such would be capped at "such amount" properly requested (i.e. the Court could not award a higher refund than La Paloma previously requested).
Section 505 (a)(2)(B)(i) states:
In support of their "plain meaning" argument, SBE cites to the now repealed Bankruptcy Act, section 2a(2A) as legislative history for section 505.
Under the Act, the bankruptcy court only had jurisdiction over unpaid taxes
Unlike Chapter 7 cases where the "debtor" and the "trustee" are "two distinct persons,"
Thus, SBE's argument fails as it is irrelevant whether either "the trustee" or the "debtor" as an entity prior to its bankruptcy requested such return.
Accordingly, pursuant to section 505(a)(2)(B)(i), La Paloma has to "properly request" such refund. SBE asserts that a "proper" request is one that meets the procedural law requirements of the taxing jurisdiction. SBE continues that as La Paloma only requested a refund of $3.5 million
Section 5143 of the California Revenue and Tax Code states:
Furthermore, section 5142 of the California Revenue and Tax Code states:
In Mission Housing Development Co. v. City & County of San Francisco, reviewing sections 5142 and 5142 of the California Revenue and Tax Code together, the court held:
La Paloma claims that Mission Housing is distinguishable and inapplicable to the matter sub judice.
In Mission Housing Development Co., owners of locally-assessed housing projects filed assessment appeals which were not denominated as claims for refunds.
La Paloma claims that the holding in Mission Housing is limited to its facts and inapplicable for several reasons. First, La Paloma asserts that it is entitled to a de novo trial under Section 5170 of the California Revenue and Taxation Code, which did not apply in Mission Housing because that case involved locally assessed property subject to a different statutory scheme. SBE states that the de novo trial is irrelevant because in Mission Housing, the court determined the value of the property completely in favor of the taxpayer but nonetheless limited refunds to an amount no greater than what the taxpayer sought in their prior claim for refunds.
SBE is correct. Although a trial court is not limited to the administrative record, the trial court's review is limited to whether there is "substantial evidence" to support the administrative determination.
Second, La Paloma asserts that Mission Housing is limited to the peculiar procedural posture of that case, the distinguishing feature of which was the equivalent of a default judgment enrolling the taxpayer's opinion of value as a penalty for delayed action on the administrative application. SBE responds that the taxpayers in Mission Housing had already received a court determination that the value of the property was the lower of the two values posited by the taxpayers.
Again, SBE is correct. In the second appeal, the Mission Housing court still ruled that, under Section 5143 of the California Revenue and Taxation Code, the taxpayers were limited to refunds based on the higher of the values put forward by the taxpayers. As a result, if this Court were to allow these proceedings to move forward, and if La Paloma were to achieve complete success at trial, La Paloma would still be in the same position as the taxpayers in Mission Housing — having a legal determination that their new valuation of the Facility is correct, but still being limited by the lower amounts asserted in their prior administrative refund claims.
Third, La Paloma asserts that local assessment proceedings are markedly different from state-assessed appeals before the SBE. SBE responds that La Paloma's reading of Mission Housing as being limited to local assessment proceedings ignores the plain language of Section 5143. In SBE's own words:
The Court is in agreement with SBE, there is nothing in the statutes or case law that would limit Mission Housing to state-assessed property appeals.
Fourth, La Paloma makes a policy argument:
SBE states that this policy argument is pure speculation, with no supporting evidence or greater explanation. The Court agrees with SBE.
Lastly, at oral argument, La Paloma asserted that Mission Housing is also distinguishable because in that case the taxpayer made a statement as to the amount of their requested refund. In contrast, on the forms submitted by La Paloma, La Paloma listed the "Petitioner's Opinion" concerning the unitary value of the property; and not the amount of the requested refund.
As stated above, La Paloma is limited by the holding in Mission Housing to the amount "properly request[ed]," in other words, to the amount of approximately $3.5 million sought before the Board. Although La Paloma has the right to a trial de novo in California state court and may expand upon the record established before the Board, it would be limited to seeking the amount sought before the SBE.
SBE also argues that the Court cannot award any refund for 2012 because La Paloma never fully litigated the 2012 amounts before the SBE. After La Paloma filed its petition for reassessment, La Paloma reached an agreement with the SBE staff as to the Facility's unitary value and that value was presented to, and adopted by, the Board. Nonetheless, La Paloma argues that notwithstanding the failure to litigate the 2012 value in the proceeding before the Board, it met the exhaustion requirements because it filed a claim for a refund and the Board issued its decision.
The purpose of the "exhaustion" requirement is to "ensure that the Board receives sufficient notice of the claim and its basis" and to give the Board "an opportunity to correct any mistakes, thereby conserving judicial resources."
The exhaustion doctrine has various exceptions:
However, by consenting to the 2012 unitary assessment of the property, none of these exceptions are met (nor does La Paloma plead that any such exceptions are relevant).
For example, in Jimmy Swaggart Ministries v. Board of Equalization of California,
Likewise, in the case sub judice, La Paloma cannot agree to a unitary value of the Facility with the SBE and then raise new issues on appeal as to that agreed upon valuation (or any other issue). This is different from whether La Paloma raised sufficient information about the value of its claim or the value of the property for the tax year 2012. Here, La Paloma failed to present any issue for final determination and agreed as to the value. Consequently, La Paloma is barred for seeking re-adjudication of the assessment on the Facility for 2012 because La Paloma failed to exhaust its remedies before the SBE related thereto.
Given that the section 505 analysis does not fully resolve the Tax Dispute, the Court will now consider SBE's claim of
The Eleventh Amendment to the United States Constitution states "[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State."
An Eleventh Amendment sovereign immunity defense "differs from a defense on the merits in the key respect that a defendant may raise the defense of sovereign immunity at any time in the absence of an explicit waiver."
Generally speaking, federal courts "will find a waiver either if the State voluntarily invokes [their] jurisdiction... or else if the States makes a clear
The Supreme Court has previously declined to rule on the application of sovereign immunity waivers where a proceeding does not require extrapolating to other scenarios.
SBE's Motion has sought judgment on the Tax Dispute by making jurisdictional challenges against the Determination Motion. The parties nevertheless conflate the issue presented to the Court.
The Court confines its review to the language in the Determination Order and its authority under section 505. The Determination Order, as submitted by La Paloma and entered by the Court, states "[t]he Court shall determine the taxable value of the Facility for tax years 2012 through 2016 pursuant to section 505(a) of the Bankruptcy Code."
As a result, the Court must interpret the Tax Dispute as both a request to determine the value of the Facility and a claim for a potential tax refund using the readjusted valuation. La Paloma believes any sovereign immunity defense SBE could bring as to the Tax Dispute is barred because prior litigation acts invoked federal court jurisdiction and because the tax dispute falls within the waiver for bankruptcy proceedings described by the Supreme Court in Katz. The Court reviews each argument in turn.
La Paloma begins by asserting waiver arguments centered on SBE's prior litigation acts in the Tax Dispute. La Paloma contends (1) SBE waived any Eleventh Amendment challenge with its prior litigation actions; (2) any determination on SBE's Motion would constitute a collateral attack against the Determination and Stipulated Orders; and (3) any new jurisdictional arguments are otherwise precluded by the law of the case doctrine.
La Paloma believes SBE voluntarily invoked the jurisdiction of the Court through its "extended silence on [sovereign immunity], combined with its stipulations and actions for several months, [which] support a finding of waiver ..."
For involuntary state defendants, only a narrow set of litigation actions will constitute a state's invocation of federal court jurisdiction.
In the Third Circuit, an involuntary state defendant may raise a sovereign immunity defense "for the first time on appeal even if the state defended the merits of the suit ..."
In the context of this tax dispute, SBE must be treated as an involuntary state defendant. La Paloma filed the Determination Motion and brought the tax dispute before the Court. Indeed, were it not for the Determination Motion, SBE would have no interest in any part of La Paloma's bankruptcy proceedings. SBE has not filed a claim, it has not sought the removal of the tax dispute from state court, nor has it joined any causes of action. That SBE objected to the Determination Motion, agreed to the Stipulated Order, and waited until the eve of trial to bring its Eleventh Amendment defense does not affect its ability to bring a sovereign immunity claim. While waiting until the eve of trial may constitute grounds for a waiver in other circuits,
Neither do any of the actions highlighted by La Paloma show a "change in behavior that demonstrates [the state] is no longer defending the lawsuit and is instead taking advantage of the federal forum."
Yet, as the language in the Stipulated Order suggests, the parties' stipulations amount to nothing more than a recitation of language previously granted by the Court in the Determination Order, which SBE objected to initially.
La Paloma next argues that allowing SBE's Eleventh Amendment defense now would constitute an impermissible collateral attack on the Determination and Stipulated Orders.
A "final judgment in a civil action may be challenged on direct review but cannot be collaterally attacked in a subsequent proceeding."
But "the general rule of finality of jurisdictional determinations is not without exceptions. Doctrines of federal pre-emption or sovereign immunity may in some contexts be controlling."
This Court decided the issue of jurisdiction over the valuation of the Facility in an earlier proceeding. SBE's Objection in that proceeding made several arguments implicating the Court's jurisdiction unrelated to sovereign immunity. At oral argument, SBE reiterated these arguments. The Court nevertheless granted the Determination Order noting its "ability to exercise jurisdiction over this matter under 505" and choosing to "exercise that jurisdiction, and ... grant the motion."
The Court recognizes, however, the unique nature of the sovereign immunity defense. First, as explained in detail supra, the Determination Motion and Order, obfuscated whether La Paloma intended to seek an assessment of the taxable value of the Facility only, or also request judgment on its alleged claim for a tax refund.
The Court finds that a collateral attack is permissible in this "rare situation[]" concerning an issue of immunity from suit.
La Paloma finally implores the Court to reject SBE's sovereign immunity defense under the law of the case doctrine.
In general, once "a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case."
As explained supra, the Court's past ruling must yield to the jurisdictional concerns potentially at issue in SBE's immunity defense. Both Supreme Court and Third Circuit law give states significant deference in making sovereign immunity arguments in the later stages of a proceeding, even after a merits hearing.
Given the unique nature of SBE's sovereign immunity and the limited prejudice to the opposing party, the Court declines to reject SBE's argument on law of the case grounds.
La Paloma lastly argues that this proceeding is of the type consented to by the states in their ratification of the Bankruptcy Clause. The Third Circuit has not squarely addressed the Supreme Court's decision in Katz and its waiver of sovereign immunity for certain bankruptcy proceedings. Consequently, the Court has treated SBE's argument as a matter of first impression, beginning with a review of caselaw since Seminole Tribe and then turning to the issue at hand.
In Seminole Tribe, the Supreme Court determined that Congress did not have authority under Article I of the Constitution to abrogate state sovereign immunity, although it maintained authority to do so pursuant to §§ 1 and 5 of the Fourteenth Amendment.
Two years later, the Third Circuit applied the logic of Seminole Tribe to section 106(a) of the Bankruptcy Code. Revised and enacted under the Bankruptcy Reform Act of 1994, 11 U.S.C. § 106 expressed Congressional intent to abrogate sovereign immunity for certain bankruptcy proceedings.
After assessing the statutory scheme, the Third Circuit held "§ 106(a) ... unconstitutional to the extent that it purports to abrogate state sovereign immunity in federal court."
The Supreme Court twice set out to resolve the circuit split on whether § 106(a) constituted a valid Congressional abrogation of state sovereign immunity, first in Tennessee Student Assistance Corp. v. Hood and later in Cent. Va. Cmty. Coll. v. Katz.
In Hood, a debtor signed promissory notes for educational loans guaranteed by the Tennessee Student Assistance Corporation, a government corporation created by the state in order to administer student loans. Hood filed a Chapter 7 bankruptcy petition and received a general discharge, which did not cover the aforementioned student loans. Later that same year, Hood reopened her petition and sought a determination, through an adversary proceeding, that her loans were dischargeable.
The Supreme Court in Hood set out to decide whether the Bankruptcy Clause in Article I of the Constitution granted "Congress the authority to abrogate state sovereign immunity from private suits."
The Court explained that "[b]ecause the court's jurisdiction is premised on the res, however, a nonparticipating creditor cannot be subjected to personal liability."
Finally, the court declined to extend its conclusion to a bankruptcy court's exercise of in personam jurisdiction over a state. There was no need to reach such a conclusion, since "the Bankruptcy Court would still have authority to make the undue hardship determination Hood seeks" as an in rem proceeding.
Two years later, the Supreme Court again considered the question of "whether Congress' attempt to abrogate state sovereign immunity in 11 U.S.C. § 106(a) is valid" by reviewing a proceeding pursuant to §§ 547(b) and 550(a) to avoid and recover alleged preferential transfers to state agencies.
In so concluding, the court refused to abide by the dicta set out in the majority and dissenting opinions in Seminole Tribe, since "[t]he history of the Bankruptcy Clause ... demonstrate[s] that it was intended not just as a grant of legislative authority to Congress, but also to authorize limited subordination of state sovereign immunity in the bankruptcy arena."
Katz then turns to whether this limited waiver of sovereign immunity included the avoidance of preferential transfers. The
The court notes that the Farmers would have understood the Bankruptcy Clause not just to include "simple adjudications of rights in the res" but also "order[s] ... ancillary to and in furtherance of the court's in rem jurisdiction, [which] might itself involve in personam process."
Katz does not explicitly provide the contours for this more expansive jurisdiction. The court does, however, note several "critical features of every bankruptcy proceeding[,]" including "the exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a `fresh start' by releasing him, her, or it from further liability for old debts."
Notably, however, the court acknowledges that the "proper characterization of such [preference] actions is not as clear as petitioners suggest."
The court, nevertheless, found no reason to expound further on the nature of preferential transfers. Since "[w]hatever the appropriate appellation[,] ... the power to authorize courts to avoid preferential transfers and to recover the transferred property ... has been a core aspect of the administration of bankrupt estates since at least the 18th century."
The majority concludes by finding that "Congress may, at its option either treat States in the same way as other creditors insofar as concerns `Laws on the subject of Bankruptcies' or exempt them from operation of such laws. Its power to do so arises from the Bankruptcy Clause itself; the relevant `abrogation' is the one effected in the plan of the Convention, not by statute."
As a threshold matter, Katz stipulates that federal courts should steer clear from inquiring into whether Congress properly abrogated sovereign immunity pursuant to section 106(a). As the Eleventh Circuit describes, "Katz did not directly address the constitutionality of § 106(a) or the viability of the `congressional abrogation' theory, the Katz Court made clear that the Bankruptcy Clause — and not ... § 106(a) — represents the source of any subordination of state sovereign immunity..."
After Hood and Katz, federal courts are thus left to piece together how to contemplate the full scope of the sovereign immunity waiver as consented to by the states in their ratification of the Bankruptcy Clause. To the extent a proceeding falls under the waiver, any Eleventh Amendment sovereign immunity defense must be found waived. The analysis infra reviews the Tax Dispute for this consent-by-ratification waiver.
To the extent a section 505 determination of tax liability squarely fits the in rem jurisdiction of the bankruptcy court, there is relatively little need for further inquiry into the applicability of Katz.
The Tax Dispute requires a bifurcated review of in rem jurisdiction. The Court must consider whether either the underlying debtor property or the prior tax payments create enough of an in rem hook to ensure that the Tax Dispute as litigated in this Court is an in rem proceeding.
The Court first considers whether in rem jurisdiction exists through the Tax Dispute's connection to the Facility. Two conflicting pre-Katz cases closely parallel the issue here: In re Metromedia Fiber Network and In re Cable & Wireless. The Court begins by assessing the views therein.
In Metromedia, the Bankruptcy Court for the Southern District of New York reviewed adversary proceedings contesting property valuations of certain taxable property allegedly grossly in excess of fair market value, but which were used by several taxing entities as part of an attempt to collect ad valorem taxes. The bankruptcy court was asked to ascertain the fair market value of the taxable property in question in order to prevent the tax claims.
Metromedia reviewed whether "a proceeding to determine the amount of a tax
While Metromedia predates Katz, the above analysis is nevertheless supported by Katz's description of in rem jurisdiction. Katz highlights "the three critical in rem functions of bankruptcy courts: [1] the exercise of exclusive jurisdiction over all of the debtor's property, [2] the equitable distribution of that property among the debtor's creditors, and [3] the ultimate discharge that gives the debtor a `fresh start'..."
In Cable & Wireless, Judge Peterson, sitting as a visiting judge in this bankruptcy court, reviewed what was perceived to be a similar issue regarding certain claims objections of the debtor to state tax claims, including a challenge to the valuation underlying the taxes.
The Court cannot, however, agree with all the findings drawn in Cable & Wireless. Hood centered on the issue of dischargeability, which fall within the administration and disposition of property within the bankruptcy estate. There is no reason to believe that the majority in Hood contemplated expanding in rem jurisdiction beyond those rights and claims actually tied to the res. In fact, this is the only way to take seriously the focus on in rem jurisdiction. Hood ultimately dealt with a suit wherein the state wished to participate in
More importantly, Cable & Wireless's belief that Hood is purely an in rem proceeding was openly revisited in Katz. Describing the broader ancillary in rem jurisdiction of the bankruptcy court, Justice Stevens noted:
These words, while written in dicta, must be reviewed as persuasive authority in understanding the Hood decision, from which Katz clearly follows.
That Judge Peterson bases his Hood analysis on Gardner v. New Jersey further supports the view that in rem jurisdiction is not so easily found here. Gardner purely focuses on the jurisdiction of the bankruptcy court when a claim has been filed by the state as an actor against the estate, where the "whole process of proof, allowance, and distribution is, shortly speaking, an adjudication of interests in a res."
But even if Gardner were the logical centerpiece of Hood, a bankruptcy court's in rem jurisdiction would still need to focused on adjudications of interests in the underlying res, which as noted in Metromedia, is not at play in a tax assessment with regard to the underlying property.
The Court next considers whether La Paloma's prior tax payments make the current tax assessment in rem.
To begin, the Court notes that merely because the estate may have a claim for a tax refund is not enough to invoke the in rem jurisdiction of a bankruptcy court. Some have suggested that the inferences in Katz could extend so broadly as to include the pure liquidation of claims held by the estate.
Similarly, in rem jurisdiction is not created by bluntly asking for a lump sum of value. Katz has been distinguished from Nordic Village, Inc., another preference action reviewed by the Supreme Court which determined an in rem exception to sovereign immunity was unavailable. The Katz court concluded that the preference in Nordic Village did not invoke the in rem jurisdiction of the bankruptcy court because it only asked for a "sum of money." In contrast, the preference in Katz sought both the "value" of the preference and the return of the actual "transferred property," pursuant to §§ 547 and 550.
Analogous cases have waived sovereign immunity for tax determinations by underscoring a bankruptcy court's ability to discharge and assess the amount of a debt pursuant to a tax assessment, albeit none of them considered a situation where judgment on a tax refund was requested.
The Lake Worth court's conclusion is correct in that the focus must be on the underlying debt, i.e. whom it is owed to and in what amount. It is for this exact reason that the Tax Dispute, as it relates to SBE, cannot attach to the prepaid taxes. Both parties agree that the taxes in this Tax Dispute were collected by Kearn County, not by the SBE. Thus, to the extent in rem jurisdiction exists as to this tax refund claim it exists against Kearn County, not SBE. As other courts have demonstrated, claims against a tax assessor are more than appropriate when challenging the assessment of taxes pre-payment, but the party of interest changes once payment occurs.
The Court finds that this Tax Dispute, wherein La Paloma seeks funds already paid to a collector, similar to the latter case. The actual funds at issue trace their delivery to Kearn County; the Court cannot locate a discrete res under which to justify suit against the SBE. What La Paloma contests here is nothing more than a state law claim for a sum of dollars. To disallow a sovereign immunity defense in this situation would be to erase the distinction made between Katz and Nordic Village, and to allow a wholesale suit for money damages.
It is also irrelevant that California has structured its tax payment structure to funnel tax refund suits through the SBE. The law is clear that "a State does not consent to suit in federal court merely by consenting to suit in the courts of its own creation."
This Court accordingly concludes that no purely in rem jurisdiction would allow the current Tax Dispute against SBE to yield the remedies sought by La Paloma. Nevertheless, this is not the end of the inquiry, as the Court must now consider the Tax Dispute's possible ancillary connection to in rem jurisdiction.
The Katz waiver does not merely apply to simple in rem adjudications, but also those ancillary orders necessary to effectuate the in rem jurisdiction of the Court. While courts have not settled on a single set of criteria under which to evaluate such proceedings ancillary to in rem jurisdiction, it is far from certain that a section 505 assessment for a tax refund will fit these requirements. Indeed, one bankruptcy court recently found, in dicta, that section 505(a) did not fulfill these requirements.
As described by Judge Walsh in Zazzali v. Swenson (In re DBSI, Inc.), 463 B.R. 709 (Bankr.D.Del. 2012), any attempt to plainly categorize a proceeding as one type of jurisdiction or another forces courts into "blurred distinctions and perplexing case law."
The Court first reviews for section 505's application of the uniformity requirement. To the extent bankruptcy laws do not add to uniform treatment of creditors, such laws may be removed from the consent-by-ratification waiver.
If Congress "treats [s]tates in the same way as other creditors insofar as concerns `Laws on the subject of Bankruptcies' or exempt[s] them from operation of such laws" their legislative action is valid.
The Katz majority determined "Congress has the power to enact bankruptcy laws the purpose and effect of which are to ensure uniformity in treatment of state and private creditors."
Analogizing the laws adopted around habeas corpus and bankruptcy to section 505, the Court determines that the ability to seek an assessment in bankruptcy court does aid in the uniform treatment of state and private creditors. Section 505 can be utilized by both creditors and debtors, respects state administrative proceedings related to taxes, and implicates governmental entities of all types. That section 505 effects taxes, which are inherently governmental activities, does not mean that the law is not uniform. Section 505 implicates all governmental entities assessing and collecting taxes, including counties, cities, and the federal government, none of which receive the same Eleventh Amendment protections granted to states.
A tax assessment under section 505 is thus a more straightforward case for uniformity of treatment than the very examples used to explain the holding in Katz. Supreme Court law on uniformity implicates more than geographic immunity, but does not prevent section 505 from applying uniformity in this broader sense.
The Court next reviews whether the Tax Dispute aids in the core administration of the bankruptcy proceedings. A proceeding's connection to the core administration of a bankruptcy can extend from historical roots or from practical effects.
In order for historical subtext to generate the necessary connection the proceeding must be "core aspects of the administration of the bankrupt estates since at least some point in the eighteenth century."
Nevertheless, as explained by the Eleventh and Third Circuits, proceedings may be ancillary to in rem proceedings wherein they functionally serve the administration of the res.
In certain situations one cannot doubt that "Section 505 [is] clearly the heart and soul and an indispensable part of the administration of the estate under the Bankruptcy Code."
This issue with the Tax Dispute, at least as it relates to SBE, is that there is no real estate administration accomplished here that cannot be done accomplished in the suit against Kearn County. Litigation of the dispute against Kearn County has "already accomplished its purpose of preserving the assets of the estate ..." as it relates to the tax refund.
For the reasons set forth above, the Court finds that SBE has not consented to suit through litigation actions, and the Tax Dispute falls outside the contours of the Katz consent-by-ratification waiver.
This conclusion does not implicate the current litigation against Kearn County, nor does it implicate any action by La Paloma to seek enforcement of assessment for future taxes or unpaid taxes. Nevertheless,
Under section 505(a)(2)(B)(i), this Court has jurisdiction to hear the Determination Motion, however, La Paloma's request would be limited to the amount La Paloma sought before the Board. Furthermore, La Paloma is barred from seeking a refund for the tax year 2012, as it agreed to a unitary value with the SBE and, thus, did not exhaust its administrative remedies.
In addition, the Court grants SBE's Eleventh Amendment immunity defense, as SBE has neither waived its argument by consent nor waived its immunity under the consent-by-ratification waiver established in Katz.
SBE's Motion will be GRANTED. An Order will be issued.
Id. (emphasis added).
