FRANCHISE TAX BD. v. LABORERS VACATION TRUST
Legal provision: 28 U.S.C. 1441
ORAL ARGUMENT OF PATTI S. KITCHING, ESQ. ON BEHALF OF APPELLANT
Chief Justice Burger: We'll hear arguments next in the Francise Tax Board of California against the Construction Laborers Trust.
Ms. Kitching, you may proceed whenever you are ready.
Mr. Kitching: Mr. Chief Justice and may it please the Court:
There are two issues in this case today.
The first issue is whether the district court ever had subject matter jurisdiction of this action--
Chief Justice Burger: Could you raise your voice a little, Ms. Kitching.
Mr. Kitching: --Yes.
The second question is whether the California tax collection statute has been preempted by the provisions of the Employee Income Security Act of 1974, otherwise known as ERISA.
This lawsuit began because various taxpayers were indebted to the State of California for income tax.
There is no question in this lawsuit concerning the validity of those taxes.
These various taxpayers were employed as laborers in the construction industry and were participants in a vacation plan covered by selected provisions of ERISA.
The employers of these workers funded the vacation plan by contributing a certain amount per hour to the fund for each employee.
The vacation fund paid out periodically the amount owing to each employee.
In order to collect these workers' delinquent income taxes, the Franchise Tax Board of the State of California served what is called an order to withhold on the trustees of the vacation plan.
This order to withhold is a type of levy authorized by the California statute.
The trustees refused to honor the levy, alleging that the California statute had been preempted by ERISA.
The Franchise Tax Board filed suit in Los Angeles Superior Court to enforce their levy and to obtain a declaration that future levies should be honored.
The trustees removed the case to federal court.
The Franchise Tax Board brought a motion to remand, which was denied.
The district court found on the merits for the Franchise Tax Board, that the statute had not been preempted.
The Ninth Circuit reversed and found that the statute was preempted.
One member of the panel of the Ninth Circuit dissented.
He found: first of all, that there was no subject matter jurisdiction; and secondly, that the statute had not been preempted.
Before we discuss the merits of preemption, it is necessary to first discuss the issue of whether the district court ever had subject matter jurisdiction of this action.
California brought this action in state court and relied solely on state law to collect the delinquent taxes.
Unidentified Justice: Ms. Kitching, when you say that California relied solely on state law, is that true of your declaratory... prayer for declaratory relief, as well as your prayer that the taxes be... judgment be given?
Mr. Kitching: Yes, Your Honor.
We have a state declaratory relief action.
We rely... statute, pardon me.
We relied on that statute to bring our action.
Unidentified Justice: Well, I realize that statute gave you the procedural vehicle for a declaratory judgment.
But what was the substance of your claim for a declaratory judgment that there had been no preemption?
Mr. Kitching: We wanted them to honor future levies and we alleged that their defense of preemption as to why they were not honoring our levies was not a valid defense.
Unidentified Justice: And did... I suppose in that part of your prayer for a declaratory judgment you had to discuss some federal authorities?
Mr. Kitching: Well, not necessarily in my prayer I didn't discuss--
Unidentified Justice: Not in your prayer, perhaps, and perhaps not in the allegations of your complaint.
But did you file a memorandum of supporting authorities along with the complaint on a motion?
Mr. Kitching: --No, Your Honor.
We only filed the complaint in state court.
That complaint was removed to district court.
Am I understanding your question?
Unidentified Justice: Well, I'm trying to... I suppose everybody would concede that if your claim had simply been that, you owe us the taxes because California statute XYZ says you do, give us judgment, that there is no... under the well-pleaded complaint doctrine, there is no raising of a federal question.
But I'm wondering whether when you add to that a declaratory judgment prayer you don't, based on preemption, you don't perhaps raise a federal question.
Mr. Kitching: No, I don't believe we do under the authority of this Court, because that's only anticipating what the defense of the Defendant was going to be, which was going to be based on federal law.
The Franchise Tax Board was not relying on federal law for its cause of action or for its remedy.
It was relying solely on state law.
The only way that federal law entered the case was by the defense of the Defendant, and the Franchise Tax Board simply anticipated that defense, and under the authorities of this Court--
Unidentified Justice: Well, but didn't the complaint itself, though, refer to the question about whether ERISA preempted the levy and referred to the position on the face of the complaint taken by the trust fund, the trustees?
Mr. Kitching: --Yes, the complaint set out the position of the trustees.
But again, that was simply their defense to the state cause of action.
The state was not relying on ERISA for anything in this case.
ERISA entered the case as a defense, and under the authorities of this Court anticipating the Defendant's defense does not create federal subject matter jurisdiction.
We did not need federal law to collect our taxes or to receive a declaratory judgment under California law.
As I said, the trustees relied on ERISA as a defense to the California causes of action.
And again, as I said, this Court has held for many years that this defense does not create federal subject matter jurisdiction.
The trustees argue that they could have brought the action in federal court.
However, there are problems with this allegation.
First of all, they did not do that; and second of all, any action that they would have brought in federal court would have been barred by the provisions of 28 U.S.C. 1341, the Tax Injunction Act, which declares that no district court shall enjoin the collection of the tax where there is a plain, speedy and efficient remedy in state court.
This case should have been remanded to state court.
That court was competent to decide whether ERISA preempts the California statute.
If the trustees did not prevail in the California state court, they had the option of pursuing this matter ultimately to this Court.
Assuming for a moment that jurisdiction did exist, the second--
Unidentified Justice: Before we leave jurisdiction, for the Tax Injunction Act to be applicable I suppose we have to determine that there was an adequate state remedy available.
And I wondered whether under California law the trustees, for example, could have challenged the levy, since the California statute seems to limit to only the taxpayers the right to challenge.
Mr. Kitching: --Well, it's the position of the Franchise Tax Board that the trustees could have defended in the lawsuit which had been brought against them.
Unidentified Justice: They couldn't have brought an action had they been concerned?
Mr. Kitching: No.
Actually, we feel they could have brought an action, too.
Had they paid the money over, they could have filed a claim with the State Board of Control, and if that claim were denied then they would have the right to bring an independent action against the Franchise Tax Board for conversion and litigate whether they should have turned over their funds.
So we feel they had adequate remedies at state law.
Unidentified Justice: Well, what if the trustees had gone to the federal court in the first place, beat you to the courthouse, and wanted a declaratory judgment that ERISA did preempt your tax scheme?
Do you think there would have been federal jurisdiction?
Mr. Kitching: No, I don't believe so, because--
Unidentified Justice: Do you think... why not?
Mr. Kitching: --Because of 28 U.S.C. 1341.
They clearly would have been enjoining the collection of a tax.
Unidentified Justice: But aside from that provision, would there have been federal jurisdiction?
Mr. Kitching: The trustees have argued that ERISA gives them--
Unidentified Justice: They go in and--
Mr. Kitching: --a statutory--
Unidentified Justice: --their claim, their federal claim, is that ERISA preempts.
That's their sole claim in federal court.
It may be thrown out under the Injunction Act, but otherwise there would be jurisdiction?
Mr. Kitching: --If they can use a statute under ERISA, they probably have jurisdiction in the federal court.
Going to the principles of preemption, as this Court has stated many times preemption is not lightly to be presumed.
And regarding the police power of the State of California to collect the revenue, that power should not be preempted unless that was the clear and manifest intent of Congress.
ERISA is primarily pension legislation.
It comprehensively regulates pensions and mandates that those benefits will not be alienated.
By contrast, it only regulates welfare plans in the areas of recording and disclosure, fiduciary responsibility, and administration and enforcement; and it does not mandate a non-alienation provision.
The vacation plan at issue in this case is a welfare plan and not a pension plan.
ERISA's preemption provision is Section 514.
It provides that the provisions of Titles I and IV of ERISA shall supersede any and all state laws insofar as they relate to any benefit plan described.
The term "state" includes governmental entities which purport to regulate, directly or indirectly, the terms and conditions of benefit plans.
The Franchise Tax Board contends that preemption under 514 is not limitless.
Congress could not have intended to preempt all state laws which incidentally touch ERISA plans.
It is more reasonable to conclude that Congress only meant to preempt state laws that regulated in the same areas as ERISA or that interfered with the purposes of ERISA.
This interpretation is supported by the comments of Representative John Dent and Senator Harrison Williams, who said that the purpose of the preemption clause was to eliminate the threat of conflicting or inconsistent state and local regulation of employee benefit plans.
The California statute does not relate to vacation plans.
It does not regulate or mandate the terms and conditions of any plan.
It does not conflict with the purposes of ERISA.
The preemption section has recently been amended.
The background of this amendment begins with certain Hawaii statutes that required employers in Hawaii to provide health insurance benefits for their employees.
These laws were challenged by an employer in the case of Standard Oil versus Agsalud, where the employer argued that the health insurance laws were preempted by ERISA.
The Ninth Circuit agreed and this Court affirmed.
In order to save the concept of the Hawaii law, which was that all employees in the State of Hawaii be provided with health insurance by their employers, Congress amended Section 514.
This amendment exempts Hawaii's health insurance plan from preemption and states that nothing in the new exemption shall be construed to exempt from preemption any state tax law relating to employee benefit plans.
The words 514(a)(5), which deals exclusively with the Hawaii problem.
The words must also be interpreted within the context of the Agsalud case, where Hawaii unsuccessfully argued that the payment required from the employer was a tax.
The words "tax law" in the amendment were apparently a response to what Hawaii was attempting to classify as a tax.
The complete Section 514, the only place I believe it's set out in any of the briefs is in the amicus brief of the State of Connecticut on pages 10 and 11, which sets out the former Section 514 and the amendment, which are Sections (5) and (6).
The only pertinent comment in regard to tax laws in the legislative history with regard to the amendment comes from Senator Dole, who stated that the amendment was intended to exempt Hawaii's health plan from preemption, but preclude Hawaii from imposing tax liability on insurance premiums or benefits.
If Senator Dole's comment on tax laws is the reason why the words "tax law" appear in the amendment, then the California statute does not fall within the real of Senator Dole's concern.
Moreover, there is evidence that the Hawaii amendment did not change the scope of Section 514.
According to the Senate Committee on Finance, the amendment
"does not affect the status under the preemption provisions of ERISA of any state tax law relating to employee benefit plans. "
In addition, the Conference Report explained that the amendment continues preemption of state law
"with respect to matters governed by the reporting and disclosure and the fiduciary responsibility provisions of ERISA, as well as certain provisions of the administration and enforcement rules of ERISA. "
If the amendment is interpreted within the context of the Agsalud case and the legislative history of the Hawaii amendment, then the words 514.
It must also be noted that the amendment again uses the words "relate to".
The California statute did not relate to benefit plans either before or after the Hawaii amendment.
With these facts in mind, it is clear that the California statute is not affected by this amendment.
The domestic relations cases have shown that it is necessary for the courts to define the limits of ERISA's preemption.
Where courts have found a high public purpose, they have interpreted the preemption section accordingly.
In the area of domestic relations, almost all courts which have considered the problem have allowed ex-spouses and children to levy on pension funds for the collection of family maintenance or community property rights.
Unidentified Justice: You feel that that is a precedent for this case?
Mr. Kitching: --We feel that we also have a high public purpose, yes, we do.
We feel that if the domestic--
Unidentified Justice: What is a high public service, collection of taxes?
Mr. Kitching: --Certainly, Your Honor, the collection of taxes, which are the lifeblood of government.
Unidentified Justice: But there are other means of collecting taxes, aren't there?
Mr. Kitching: Yes, Your Honor, and the state has the ability to use all of its cumulative remedies.
The state must be allowed to use each of the remedies which it possesses.
Sometimes it cannot use its other remedies, and this may be the only one that it has left to it.
As in this case, where we're dealing with transient workers, this may be the only remedy that the state has to collect this outstanding income tax.
Unidentified Justice: On that point, I suppose that the spouses and dependent children of a beneficiary under the trust fund stand in a special relationship, because they are among the beneficiaries in a sense themselves, the intended beneficiaries of those funds ultimately, unlike perhaps the State of California.
Mr. Kitching: The State of California does not have the same purpose, of course, as the ex-spouse and children.
However, it does have a high public purpose, and the point we are showing is that when there is a high public purpose there are exceptions to ERISA and the preemption does not cover those areas where the state can show that it has a high public purpose, and that Congress would not intend to preempt that state law.
Unidentified Justice: Do you have withholding in California?
Mr. Kitching: Yes, we do, Your Honor.
Unidentified Justice: And that was insufficient in these cases?
Mr. Kitching: Yes, Your Honor.
In these cases, some of them were by assessment a certain amount would have been withheld and that would not have covered the ultimate tax liability, yes, Your Honor.
Unidentified Justice: Well, I ask that because you emphasize the transient character of these workers.
Normally, withholding would catch those that do opt, if they're in there for just a short time and then go out and leave the state.
Mr. Kitching: Well, in some cases it would, Your Honor.
In not all cases, however, did it cover their tax liability.
Sometimes there are assessments after the return is filed and there's an audit and it's determined that the taxpayer owes more money.
Perhaps it hasn't withheld enough money to cover his tax liability.
Unidentified Justice: This is just a test case, of course, but the great sum of $308 or something like that?
Mr. Kitching: That's right, Your Honor.
However, there are over 400,000 people who belong to vacation trusts in California, and millions of dollars per year are contributed by the employers into these accounts.
In this case the Department of Labor has provided its opinion that the California statute has been preempted.
However, this opinion is of little assistance because it simply cites sections of ERISA and the trust agreement and comes to the conclusion, with no legal analysis.
It should be noted that the Department of Labor supports an preemption for domestic relations law.
Apparently within the context of domestic relations laws they are not concerned with ERISA's preemption section, the fiduciary responsibility section, or the anti-alienation provisions.
These are the very sections which the Department of Labor relies upon to preclude the Board's levy.
However, if these sections are not effective as to domestic relations laws, the Franchise Tax Board contends they should not be effective as to state collection laws.
In conclusion, the Franchise Tax Board does not regulate nor relate to this vacation plan.
There is no tax being imposed on the fund itself.
There is no tax being imposed on the benefits paid.
There is no tax being imposed on the employer.
The money is in the fund and it belongs to the taxpayer.
It has been levied upon to satisfy old tax liabilities.
If the trustees prevail in their argument that all terms in a vacation plan are protected from state law by ERISA's preemption section, then there is no end to the trust's ability to exempt itself and the assets of its participants from any valid state law or any other state law.
If the trust provisions can prohibit California from levying on a vacation plan, could they also provide that one-half of the participants' wages should be considered vacation pay and not subject to state tax or withholding at all?
Under the argument of the trustee, that is what could happen.
It is clear that the district court never had jurisdiction of this case.
Furthermore, with regard to ERISA, Congress could not have intended to interfere with the California revenue collection statutes, which do not regulate the terms or conditions of an ERISA plan or interfere with the purposes of ERISA.
Your Honors, I will reserve the rest of my time for rebuttal.
Unidentified Justice: Of course, if we were to vacate and remand this case on your jurisdictional approach, that doesn't mean you've necessarily won it in state court, does it?
Mr. Kitching: You're correct, Your Honor.
It should be heard in state court--
Unidentified Justice: Actually, you won it at the district court level on the federal side.
Mr. Kitching: --Yes.
Yes, we did win at the district court level, Your Honor.
Unidentified Justice: And you're complaining now because you got tipped over in the Court of Appeals.
Mr. Kitching: Yes, we are.
It would start over in the state court, Your Honors, similar to the Grace Brethren case which you had last season.
Chief Justice Burger: Mr. Watson?
ORAL ARGUMENT OF JAMES P. WATSON, ESQ. ON BEHALF OF APPELLEES
Mr. Watson: Mr. Chief Justice and may it please the Court:
I will first address the jurisdictional issue which has been raised by the state in this case.
The starting point for the Appellees is the unanimous decision of this Court almost 50 years ago through Mr. Justice Cardozo in the Gully case.
In that case, Justice Cardozo warned that it would be futile to attempt to determine the issue of federal question jurisdiction in future cases without specific reference to the context of the case.
In that case he suggested that the court apply a common sense accommodation of judgment to kaleidoscopic situation which characterize the law in other areas, such as the treatment of the problem of proximate cause in tort law.
He advocated a selective process which picks the substantial federal causes out of the web and lays the others aside.
We believe the Court should have no difficulty in finding federal question jurisdiction in this case without doing violence to its precedents in cases such as Louisville & Nashville Railroad versus Mottley and other cases of that ilk.
Unidentified Justice: When did the federal question arise in the case?
Mr. Watson: I think the federal question arose in the case, Your Honor, immediately when the complaint was filed.
The complaint and the exhibits to the complaint lay out the federal dispute in great detail.
The Department of Labor's opinion is attached as an exhibit to the complaint.
It is incorporated by reference in the complaint.
And in paragraph 20 of the complaint the state asks not merely for a collection of the tax delinquencies of the laborers; it rather asks for a declaration of the rights and obligations of all the parties, including the trustees and the trust.
That leads me into the first reason why federal question jurisdiction must exist in this case.
Unidentified Justice: Mr. Watson, it is correct, is it not, that the entire prayer of the complaint, the four paragraphs after the "wherefore", say nothing at all about anything federal?
Mr. Watson: That is right, Your Honor.
It's in the body of the complaint and in the exhibits, not in the prayer.
Under some Ninth Circuit authorities, I might add, the prayer itself is not considered part of the text of the complaint, only the allegations of the complaint and the incorporated exhibits.
Unidentified Justice: Would you not also agree that the reference to the federal claim is in the nature of what the Defendants will assert by way of defense?
Mr. Watson: I would agree that the Board has laid out the federal question and stated that it is the position of the trust that there is a federal preemption, that is true.
I have no quarrel with that.
Certainly the state has a contention, however, also about the effect of the federal law, albeit a negative one.
Unidentified Justice: But the prayer for relief and what they ask for is not a claim arising under federal law, is it?
Mr. Watson: The declaratory judgment action they have filed is not a federal remedy and their claim is founded on a California statute, that is clear.
Unidentified Justice: Could the state have filed this action in the federal court?
Mr. Watson: I believe could have, Your Honor.
Unidentified Justice: On what grounds?
Mr. Watson: Well, I believe it raises an issue under Section 301.
At least in the Ninth Circuit, it has been held that collective bargaining agreements... and trust fund documents are considered collective bargaining agreements in the Ninth Circuit under the Rehmar case... that third parties--
Unidentified Justice: How does 301 get here?
Mr. Watson: --Well, 301 gets here because 301 provides that there is concurrent jurisdiction in state and federal courts of suits--
Unidentified Justice: Did the complaint allege anything about 301?
Mr. Watson: --It did not mention 301.
Unidentified Justice: Well, I asked could this complaint have been filed in a federal court.
Mr. Watson: It could have.
Unidentified Justice: Originally?
Mr. Watson: It could have.
Unidentified Justice: And on what basis?
Mr. Watson: On the basis that the state as a third party under our Ninth Circuit law would have the right, since it asserts a claim arising under this collective bargaining agreement... it says, the trust fund holds assets, the trustees are obligated to give those assets to us--
Unidentified Justice: And you would agree to jurisdiction?
Mr. Watson: --In federal court, yes, we would.
Unidentified Justice: You'd have been in there fighting just like you're fighting now, wouldn't you?
Mr. Watson: Yes, I would, and gladly so.
If I may now turn to the first of my reasons why I think there is federal question jurisdiction here, under Section 502(a)(3) of ERISA Congress gave fiduciaries the right to bring suit to obtain a determination of rights and obligations under a trust agreement such as this or under ERISA itself, and provided that federal courts would have exclusive jurisdiction over such suits.
Now, it's the position of the trustees in this case that the Congressional intent is clear that federal courts decide these issues.
There would be no reason to provide for exclusive federal court jurisdiction of these cases unless Congress intended that.
Unidentified Justice: But the Tax Injunction Act, which Congress also passed, certainly would indicate that the district courts will not enjoin the state tax, and Grace Brethren says that applies to declaratory judgment as well.
Mr. Watson: I was going to get to that later, but let me address that now, since Your Honor brings it up.
The Tax Injunction Act, as Your Honor has already commented, contains an exception requiring that a plain, speedy and effective remedy exist.
Otherwise it will be of no effect.
In this case, as the Court already noted in colloquy with counsel, the plain, speedy and effective remedy exists, all right, for the taxpayer, but it doesn't exist for the fiduciary.
Nor does the taxpayer have the incentive to raise the legal issues the fiduciaries would.
We don't know whether these taxpayers owe these taxes or not.
As far as I am aware, they probably do.
If they have a claim against the state, it's only that we don't owe the tax, we already paid it in the year in which it was due.
They have no incentive to go out and hire a lawyer and say, just a minute here, these are trust fund assets and you're breaking the trust agreement.
There is no reason to suppose that they would even have standing to raise such an issue in a state administrative proceeding for refund.
So it's clear that the Tax Injunction Act doesn't provide the plain, speedy and effective remedy to the trustees in this case that it provides to the taxpayer, and it's also clear that the taxpayer probably would not raise the fiduciary issue.
A second reason, however, exists to provide that the Tax Injunction Act would not apply here.
In Mitchum versus Foster, a 1972 decision of this Court through Mr. Justice Stewart, the Court held that in cases of conflicts between federal statutes providing for injunctive remedies and the general federal anti-injunction statute, that 28 U.S. Code 2283, the Court must look to see whether application of the general anti-injunction statute would frustrate the Congressional purpose in enacting the subsequent law providing for injunctive relief.
That's exactly what we have here.
It's clear, it seems to me, that Congress intended trustees to get equitable relief, declaratory judgments, injunctive relief, and did not specifically address the issue of tax laws, although they must have realized tax laws were one possible area of preemption, and applying the Tax Injunction Act to prevent them from getting that kind of relief in this case would frustrate the clear Congressional intent to permit them to get instruction from the federal courts about how to properly operate the trust under ERISA.
Unidentified Justice: Well, Mr. Watson, perhaps Congress thought that tax laws weren't preempted.
Mr. Watson: That's another possibility, Your Honor.
But the legislative history suggests strongly to the contrary, and although this gets into my preemption argument, it's clear from the preemption statute itself, which contains its own exceptions for banking laws, insurance laws, securities laws, it doesn't mention tax laws and it doesn't mention state levies, and it certainly doesn't mention individual creditors, even if they are individual government bodies acting as creditors.
That isn't in the statute, and, as counsel for the state pointed out, the statute has recently been amended, after the Ninth Circuit ruled in this case.
If Congress wanted to change this statute and say, the Ninth Circuit made a mistake, we want to make it clear that state levy laws... not tax laws now, but levy laws, because that's what we're talking about here... are not preempted, they could have added that in when they amended 514 this year.
They did not do so, and this Court in the has dealt with the issue of Congressional silence in a way which I think would suggest in this case that, even if Congress didn't know in 1974 that they were preempting state levy laws, they surely must know now.
And of course, there's been litigation in other courts about this matter also indicating that ERISA preemption is very broad.
So surely the Congressional intent is tacitly in the record.
Moreover, there is copious and I think even redundant quotes from the sponsors of the original ERISA bill set forth in the briefs which show how broadly they felt the preemption statute was to be read.
They did not suggest that all common law remedies would never apply to the trust funds, but they did suggest, as in the collective bargaining cases, like Lincoln Mills and Aero Lodge and cases of that kind, that a federal common law would be developed by the federal court to govern this type of situation, and exactly that type of thing ought to be done in the debtor-creditor type situation we have here.
We're not saying that federal courts might not develop a federal common law authorized by ERISA that would permit some kind of levy in the future.
But that hasn't been done yet and it can't be done under state law.
That's our main point.
Unidentified Justice: May I ask, before you get too far away from the jurisdictional question, on the question of an adequate state California remedy, are you telling me that, supposing the state had levied, had a case of mistaken identity, for example, that a person that they said owed them taxes was not really a beneficiary of the trust or something like that... wouldn't the trustees have a remedy in resisting the levy in some state proceeding that would be prompt and efficient?
Mr. Watson: Well, I know of no reported state case that addresses the issue as Your Honor has framed it, but the statute refers to the taxpayer as having the remedy.
Now, I concede to the Court that probably when the California statute was drafted nobody thought about trust funds like this, but they surely must have thought about third party creditors the state might be chasing after in order to collect tax funds, and apparently they decided to leave it up to the taxpayer to fight his own battle.
Unidentified Justice: Well, let me just be sure I understand your position.
You're not questioning the fact that the trustee would have a prompt and adequate state remedy to determine whether or not it had any obligation to comply with the levy, are you?
Mr. Watson: Oh, yes, I am.
I'm saying the statute does not provide that.
In so many words, the statute provides that remedy to the taxpayer.
Unidentified Justice: And you don't think there is any declaratory judgment proceeding in California law at all that would enable the trustee to question a levy of this kind?
Mr. Watson: I'm saying... I'm saying to the Court that the specific statutory proceeding which is provided is apparently the exclusive remedy, and I'm quite clear that the Board would take the position that the trust doesn't have the standing to come into court and say, wait a minute, Mr. Zarate doesn't owe this tax, and that in effect it's none of the trust fund's business as long as the trust fund holds assets payable to Mr. Zarate, he being one of the taxpayers in this case.
Unidentified Justice: Do you think that the duty of the trustee always would be just to pay over the money?
Mr. Watson: I think the statute is set up in such a way as to require the taxpayer to fight his own battle, and--
Unidentified Justice: And you think the trustees would just automatically pay over the money in all cases?
Mr. Watson: --If it weren't for ERISA--
Unidentified Justice: Yes.
Mr. Watson: --and it weren't for the strictures--
Unidentified Justice: I'm assuming no ERISA problem, just the state law, you know, sort of garden variety defense.
Mr. Watson: --Well, the state law that also limits the recovery rights to the taxpayer also protects, also protects the third party who pays the money over against suit or challenge by the taxpayer.
So the trustees would have no reason not to and in fact would be compelled to by the state.
Unidentified Justice: Thank you.
Mr. Watson: And frankly, if we took just an ordinary third party, as opposed to the trustees, given the protections the statute gives them if they pay the money to the state and given the judicial process the state has to compel it, they would have no reason in the world not to pay the money over.
I mean, the pressure comes from the state, not from the taxpayer, at that point.
They're facing suit by a state agency.
It can be a fairly serious thing.
Unidentified Justice: Mr. Watson, if I understood Ms. Kitching correctly, she suggested that the state remedy was for the trustees to pay it over and then sue for conversion?
Mr. Watson: Yes, and I don't follow that.
Unidentified Justice: Is that the theory?
Mr. Watson: I don't follow that.
One of the difficulties in this case is that the state has raised the Tax Injunction Act in its reply brief filed just one week ago, so the Board does not have the benefit of full briefs from both parties on that.
Had it been raised in the original brief, I would have addressed the matter in detail, and some of the questions that Justice Stevens has asked suggest that perhaps the matter ought to be looked into in greater detail.
Let me pass, if I might, though, to a second important reason why federal question jurisdiction ought to exist here.
As I mentioned a moment ago in response to one of Justice Marshall's questions, it's clear at least under Ninth Circuit law that this trust agreement is a collective bargaining agreement.
It was signed by the employers and the union.
It is part and parcel of the collective bargaining process.
This Court has made it clear in Section 301 suits, in Avco and Boys Market and other suits, that the federal interest in the collective bargaining process is pervasive and, even when such suits on common law theories are brought in state courts under Section 301, they can be removed by the defendant party to federal court and once in federal court they must stay there.
That's in the Aero case and that's cited in our brief.
This same overwhelming federal interest is present in this case, not only because this is a form of collective bargaining agreement, but also because of the very comprehensive umbrella of ERISA and the very clear statements in the legislative history and in Section 502 that Congress wanted these questions resolved in federal courts.
Now, there's a third reason why federal question jurisdiction exists here, I believe.
In 1974 in the Oneida case this Court held federal question jurisdiction to exist in a suit brought under a simple common law ejectment theory in New York by an Indian tribe, because the Court found that inevitably the federal question would arise.
It was not a speculative issue, it was not something lurking in the background like Gully.
It was central in the total focus of the case.
That is exactly what we have here.
Some of the lower courts have used the so-called pivotal question doctrine to find federal question jurisdiction.
In this case the federal question isn't the pivotal question; it's the only question.
There is no other question in the case.
The trustees have no other defense to the payment of these moneys, we don't know whether these taxpayers owe the money, and the state of California gives the state the right to collect and leaves it to the taxpayer to fight it out once they've gotten the money.
Unidentified Justice: Mr. Watson, suppose the trust fund didn't pay its property tax.
Would that be a federal case?
Mr. Watson: If it didn't pay its property tax?
Unidentified Justice: Yes, sir, on the building it owned.
Mr. Watson: Yes.
If it didn't pay property tax on the building it owns, I assume that it would not have a defense under ERISA.
I don't believe that would be preempted.
Unidentified Justice: The only reason it has a defense is... well, let me try.
They didn't pay the property tax and they alleged in the complaint that this was an agreement they had and all.
Would that change it?
Mr. Watson: No, I don't think it would, Your Honor.
And there's a crucial difference between that type of tax and what we have going on here, where someone outside, albeit a state agency, is trying to take assets of the fund.
In this case, necessarily--
Unidentified Justice: They're trying to take assets of the fund.
They're trying to get their taxes.
Mr. Watson: --Well, they're trying to get property taxes.
Unidentified Justice: In both cases they're trying to get money.
Mr. Watson: That's true.
In this case, though, they're trying to get money set aside by the trust to pay benefits to the beneficiaries of the trust, based entirely on a third party dispute.
In the case you posit, it's an indebtedness of the trust itself--
Unidentified Justice: You couldn't take the property taxes out of that money if there was no other money?
Mr. Watson: --No, it's quite clear to me that the trust as a general debtor itself in the state of California would not have a special position, although the Heffernan case from Connecticut does suggest that direct taxes on the trust fund may be preempted by ERISA, special taxes directed just at trust assets.
But if the trust owns real estate and is subject to property taxes, I do not believe that the ERISA preemption provision, which says that it preempts statutes which indirectly regulate these trust funds, as this kind of levy would by taking away the benefits payable to the individuals... that's simply not the same thing.
Here there's a very real risk of depleting trust fund assets that were set aside for another purpose, and that is what we're concerned about here.
I might comment that the problem is not made simpler by the fact that this is a state agency.
An Ohio district court, in an opinion cited in the state's brief, has found that general creditors can invade this trust.
And I might also comment that, although we realize as we stand before you today that a vacation trust does not seem by its very essence to be a very important kind of trust fund, the Court must understand that Congress treats the vacation trust in the same way as health and welfare trusts and apprenticeship trusts and education trusts that provide medical and dental care and visual care and things of that kind.
Unidentified Justice: Differently from pension trusts.
Mr. Watson: Differently from pension trusts in the sense that there's less regulation.
But the preamble to ERISA indicates that Congress was concerned about all these employee benefit plans.
Perhaps this case looks and sounds less weighty because we're not talking about seizing the money payable for surgical benefits for a laborer's wife who has been in the hospital and he doesn't have any other money.
Since it's a vacation trust, it looks like a check that's payable to him for a relatively inconsequential purpose.
But by letting the state invade this fund now for this reason, the Court will open the door to having the health and welfare benefits taken, the educational benefits taken, and any other benefits that creditors want to latch onto.
And if the Ohio court's theory were followed... and they followed the dissent of the Ninth Circuit... this would not be limited to state agencies.
This would be limited to any general creditor.
So we have I think a rather significant federal problem in the case.
There is a fourth reason why we think that this is clearly a federal question case.
In two recent cases in this Court, Jones versus Rath Packing, and the Alessi case, Alessi versus Raybestos-Manhattan, this Court has accepted and heard cases on the merits raising preemption issues, the Jones case from the Ninth Circuit, the Allessi cases, two of them, from the Third Circuit.
Both of those cases were cases where in the courts below extended consideration was given to whether jurisdiction existed under the so-called "arising under" language, and in both cases the employers were able to convince the courts that that was so.
This Court left those findings undisturbed, and since subject matter jurisdiction is never waived I can only conclude that this Court was satisfied that there was an adequate jurisdictional ground.
Unidentified Justice: That doesn't answer the propriety of removal here.
Mr. Watson: That is true, Your Honor, that is true.
However, the removal statute provides that cases which could have been brought in the district court which are arising under federal law may be removed.
And since the preemption issue we believe furnishes the adequate basis for, as this complaint came to the Court and as it was pleaded, the "arising under" jurisdiction, we don't think there's a problem with that.
Unidentified Justice: Well, I don't suppose there's any doubt that, had the trustees sought to sue, they could have found some basis for federal jurisdiction.
But that doesn't answer the propriety of removal on the basis of the state's complaint.
Mr. Watson: I think Your Honor is right.
The Court has to take the case as it finds it, although I might comment that the Wong case, which is discussed in some detail in our brief, does indicate that courts have the power to realign the parties, and because of the pervasive federal interest and the fact that all of the features of the dispute were known, it would not be beyond the power of the district court in determining whether jurisdiction existed to bring the case originally to say, well, effectively the trustees can be treated as plaintiffs here.
That's what happened in Bacon versus Wong, where the original complaint did not adequately state--
Chief Justice Burger: We will resume there at 1:00 o'clock, counsel.
Mr. Watson, you may continue.
ORAL ARGUMENT OF JAMES P. WATSON, ESQ., ON BEHALF OF APPELLEES
Mr. Watson: Yes, Your Honor.
Mr. Chief Justice and may it please the Court:
I would like now to move to the preemption phase of the case in the remaining ten minutes of my argument.
As Mr. Justice Powell has noted in many opinions for this Court, the primary source for interpreting the statute is the statute itself.
In this case, we believe the provisions of the statute, both the preemption provision and Section 403, which limits the right of the trustees as fiduciaries to spend money for the purposes set forth in the trust agreement and for the reasonable costs of defraying trust expenses, are very, very clear.
If there were any doubt about the breadth of the preemption provision, we think the legislative history wipes away that doubt.
And I will not take the Court's time this afternoon to quote that history.
It is extensive and in the briefs.
The state suggests that, as in the marital dissolution cases, there ought to be some kind of implicit exception for state tax levies.
They say that state courts and some federal courts have found such an exception in cases where pension benefits and other benefits had to be divided between former spouses to a dissolved marriage, and they say, why not us as well.
And we think there are two answers to that: One, it is not clear from the opinions of this Court that the marital dissolution cases are correct.
Although this Court summarily dismissed the Campa case for want of a substantial federal question, there is no authoritative opinion of this Court approving the reasoning of the lower court decisions in the marital dissolution cases.
Second, as was brought out in the colloquy between counsel for the state and one of the members of this Court, there is a distinct difference between dividing benefits among co-beneficiaries of one of these trust funds and giving those intended benefits to a creditor.
And in a case like this, the state is nothing more--
Unidentified Justice: What is the difference?
What is the significant difference as far as this case is concerned?
Well, the significant difference as far as this case is concerned is that it can be argued, and I say not necessarily rightly, but it can be argued, that the purpose of the trust instrument is met when you give the benefits to co-beneficiaries, a husband and wife, particularly in a community property state where they jointly own the whole community property, with California as a community property state.
When you give the benefits to a third party creditor not interested in benefits under the trust fund, simply trying to latch onto those assets to satisfy some alleged debt incurred by one of the beneficiaries, you are defeating the purpose of the trust in a way you are not doing when you give the benefits to another person, a spouse, a husband or a wife, who shares those benefits under California law with the named beneficiary under the trust fund.
Well, I suppose if there were a levy on a life insurance policy that had a large cash value and a lot of beneficiaries in a community property state, it wouldn't be any different, would it?
Mr. Watson: --Well--
Unidentified Justice: Is there any barrier to a creditor levying on the cash value of a life insurance policy in California?
Mr. Watson: --You're talking now not about a life insurance policy under one of these controlled trusts, but just a general life insurance policy.
I think the answer is no.
I think that there could be a levy on such a policy.
Unidentified Justice: Why should there be a difference because it's in a controlled trust?
Mr. Watson: Because in this situation the trust is controlled by ERISA and ERISA explicitly in Section 403 limits the way in which the assets can be disbursed, and apparently does that, if I may expand on that, because Congress was concerned in passing ERISA that trust fund benefits were being dissipated in ways which cause the purpose of the trust to be defeated.
We all know that the main reason--
Unidentified Justice: The purpose of the life insurance trust would be defeated, too.
Mr. Watson: --Well, it would.
But since it's a private arrangement and one in which Congress has not injected itself, the federal interest is not there.
There could be federal legislation on that at some time in the future, but absent that there would be no argument in a federal court on it like there is today.
I mean, ERISA is the reason we are here, and I think that--
Unidentified Justice: Would you be making the same argument if all these events occurred after 1982?
Mr. Watson: --Oh, yes, I definitely would.
If the Court is asking, do the new amendments to the statute affect the outcome of this case in any way, I would say the only way in which they do so is to make it clear that Congress was satisfied with the result the Ninth Circuit reached in this case.
It is not unusual, as the Court knows from the Kaiser-Mullins case, for Congress to comment on decisions by the Court of Appeals and lower federal courts, and the legislative history in Kaiser-Mullins, many lower court decisions are cited.
This legislation, which was passed and signed just in January of this year, six months after this decision was issued, two years after the Heffernan delinquent, contains no indication that Congress was dissatisfied.
Unidentified Justice: Do you think the '82 amendment just confirmed the meaning of the prior law?
Mr. Watson: I do, Your Honor.
I do think that.
I think that in attacking the Agsalud problem and leaving this problem alone, Congress was telling this Court and other courts that it is satisfied with the preemption results being reached by lower courts.
Unidentified Justice: That isn't what it says.
It really... it just didn't disturb whatever the law was.
Mr. Watson: That's exactly right, yes.
I am not representing to the Court that the legislative history specifically says, we think the result the Ninth Circuit reached in this case is a good one.
Unidentified Justice: So it didn't really change, the '82 amendment--
Mr. Watson: --It didn't change it, that's exactly right.
Unidentified Justice: --didn't purport to change what the law was or anything of the kind.
Mr. Watson: That's exactly right.
That's exactly right.
Prior to the break Justice Marshall had asked why it would be that the trust would have to pay property taxes but would not have to pay this kind of levy.
The simple answer to that is in Section 403 of the Act, which provides that the trustees may pay out trust assets for the purposes described in the trust document and also for defraying the expenses of operating the trust.
Having a building, hiring employees, paying the taxes incurred in operating the trust, those are clearly permissible purposes.
Unidentified Justice: It said "may".
It didn't say they had to.
Mr. Watson: It said "may".
It didn't say "had to".
Unidentified Justice: That's right.
Mr. Watson: That's correct.
Those are clearly permissible purposes, however, that don't raise the preemption problem here.
Finally, if I may turn to one other question that was raised before the break, Justice Stevens had asked, well, couldn't the trustees get some kind of remedy in state court using some kind of common law theory.
Even if the statute provides only the taxpayer has the remedy, surely the trustees can go in and challenge this whole setup.
The quick answer to that, and it gets us back to the jurisdictional issue, is that Section 502 requires that the trustees, when they seek instruction from the court about their fiduciary responsibilities or their responsibilities under ERISA, it requires that those suits be brought in federal court.
So if the trustees in this case had brought their own suit against the state in state court, the state would have had a total defense: the state court simply does not have jurisdiction.
Again, it gets us back to why this must be a federal court case.
Finally, and I will conclude on this point, the state has suggested, in referring to the marital dissolution cases, that there's that implicit exception in the Act; perhaps, as some lower courts have stated and suggested, other high public purposes deserve an equal exemption.
My response to that is simply, there is nothing in the legislative history to suggest that Congress intended that every high public purpose would create an implicit exemption to the very clear preemption statute.
A second response to that is: How many high public purposes are there and who is to decide what they are?
If the Court goes along with the idea that levying on trust assets to satisfy tax delinquencies of the beneficiaries is a high public purpose, we will see many more cases before this Court and lower courts where people are asserting that their purposes are equally worthy.
That is surely not what the framers of the Act intended.
It is very foreign to the purpose of the ERISA statute.
I thank the Court.
Unidentified Justice: Mr. Watson, let me be sure I understood your answer to my other question.
Where is the requirement that the trustees must proceed in federal court?
Mr. Watson: The requirement is in Section 502(a)(3) and 502(e) of the Act.
Unidentified Justice: Of ERISA?
Mr. Watson: Of ERISA.
It provides that the trustees may bring an action seeking equitable or other relief, including injunctive relief... which gets us to the Tax Injunction Act problem, as it may conflict in this language with that... to determine their rights and obligations under the trust instrument or under ERISA itself.
Now, in the case Your Honor posited the only defense the trustees have, the only one we're asserting here, is that ERISA prevents us from paying out this money to third party creditors.
That is exactly the kind of suit, exactly the kind of question, that Section 502(e) says federal courts have exclusive jurisdiction of.
And if a state court proceeding were allowed to get at that kind of critical issue under ERISA despite the exclusive jurisdiction language in the statute, the whole purpose of the statute, to keep these very sensitive questions in federal court, would be completely frustrated.
Unidentified Justice: So you're saying... excuse me, go ahead.
I just want to be sure.
What you're saying is the reason there's no state remedy is that ERISA has preempted the state remedy?
That's what you're argument is?
Mr. Watson: I'm saying that, regardless of the remedy that the trustee sought--
Unidentified Justice: That the absence of the adequate state remedy, if I understand your argument, is because there's a provision in ERISA which preempts what might otherwise be a state remedy?
Mr. Watson: --Yes.
I am saying that, whether the trustees call the lawsuit a cow or a pony, whether they say it's a state court declaratory relief action or under some state common law theory like conversion, it's clear that what they're really looking for is instruction about how to operate under their fiduciary obligations under ERISA, and the statute says that's preempted.
It's got to be in federal court.
Unidentified Justice: In other words, the state court would have no jurisdiction to pass on your defense?
Mr. Watson: That's exactly right.
The state lacks the jurisdiction to reach that issue.
Unidentified Justice: It's sort of like in antitrust, federal courts have exclusive jurisdiction over antitrust cases, and I take it state courts haven't got any jurisdiction.
I might, before you sit down: you're lucky that your brief was filed in this Court.
I didn't see a summary in your brief, and I thought our rules provided for a summary.
Usually briefs get sent back if they don't have a summary, but you were just lucky.
Mr. Watson: Your Honor, I apologize to the Court if there was a defect in the brief.
Chief Justice Burger: Ms. Kitching.
REBUTTAL ARGUMENT OF PATTI KITCHING, ESQ. ON BEHALF OF APPELLANT
Mr. Kitching: Mr. Chief Justice and may it please the Court.
I just have a few brief remarks in the area of jurisdiction.
The adequate remedy principle doesn't provide that they should be able to challenge the tax, but whether they can litigate the issue of preemption in the state court.
It is our contention that they could have litigated that issue of preemption in a defensive manner in the lawsuit which we already brought against them.
They could have raised the issue of preemption.
Unidentified Justice: What do you think about 502(a)(3), then?
Mr. Kitching: Well, we're not talking about where they're bringing the lawsuit.
We're talking about where they're defending the lawsuit.
And this Court has held a state--
Unidentified Justice: You don't think it was Congress' intention, then, to reserve those kinds of considerations for a federal court?
Mr. Kitching: --No, Your Honor.
I think this Court has held many times the state courts are perfectly capable and they're mandated to consider federal questions.
Unidentified Justice: What do you say about the '82 amendment?
Mr. Kitching: We agree that it has not changed anything under ERISA and that whatever was--
Unidentified Justice: You wouldn't be making this argument, then, after... or would you, after '82?
Mr. Kitching: --We don't think the statute has changed anything.
We think if something was not preempted before 1982 it is not preempted now.
If it was preempted before it is still preempted.
However, the state of California contends that their levy does not relate to a vacation trust and therefore wouldn't be preempted either before or after the amendment.
Just one further point.
The adequate remedy principle does not mean that they can litigate the validity of the tax, but only if they could litigate the same issue that they could have litigated in federal court, and here that would be the issue of preemption.
And this Court has found that state courts are perfectly capable of deciding any federal issues and they are bound to do just that.
Thank you very much.
Chief Justice Burger: Thank you, counsel.
The case is submitted.