UNITED STATES v. CALIFORNIA
From 1975 to 1985, the United States Government contracted with Williams Brothers Engineering Company (WBEC) to conduct the federal oil drilling in Kern County, California. By 1981, WBEC had accrued a state tax deficit of $14 million. After the Board of Equalization rejected WBEC's claim that those taxes were invalid, the company paid its deficit, and, according to WBEC's contract, was subsequently reimbursed by the United States Government. In January of 1988, WBEC continued to challenge the taxes by filing an action in state court. This action concluded with an agreement between the state of California and WBEC that the company receive a $3 million refund. The Federal Government filed a suit in the Eastern District of California in May of 1988, arguing that the remaining state taxes totaling $11 million were also illegitimate. The District Court ruled in favor of the state of California, and the Court of Appeals for the Ninth Circuit affirmed.
May the United States Government receive compensation for the state of California's allegedly unfounded taxation of a private federal contractor?
No. In a unanimous decision authored by Justice Sandra Day O'Connor, the Court determined that regardless of the fact that the Federal Government reimburses WBEC for its taxes, the private company is still the taxpayer. And, the taxpayer had its opportunity to go to court and challenge the state taxes imposed upon it, and accepted the result. The Court found that the Federal Government does not have a separate right to do so.
Argument of Kent L. Jones
Chief Justice Rehnquist: We'll hear argument next in number 91-2003, the United States v. California and the California State Board of Equalization.
Mr. Jones, you may proceed.
Mr. Jones: Mr. Chief Justice, and may it please the Court:
This Federal common law action for money had and received was brought by the United States to recover $11 million in public funds paid to the State of California as taxes by the manager of the Naval Petroleum Reserve.
The manager is a Federal contractor who operates under an advance-funding, cost-reimbursement arrangement with the United States.
The State taxes were assessed with respect to purchases of personal property made by the manager in the name of the United States.
The United States contends that the taxes were erroneously and unlawfully assessed.
The courts below did not reach the question of the legality of the State tax.
They acknowledged that the United States has a Federal common law right to recover unlawful payments of State taxes, but they held that the Federal cause of action was inapplicable in this case because the United States had not pursued administrative tax refund procedures available under State law and had not brought its judicial challenge to the State tax within the 90 days provided by State law.
In our view, and in the unanimous view of six other courts of appeals, the Federal common law right of the United States to recover public funds that have been unlawfully obtained is not subject to compliance with the State procedures applicable to State law tax refund suits.
Unknown Speaker: Mr. Jones, is... should we make a distinction in the kinds of unlawfulness that may be appropriate predicates for that common law action?
There was nothing unlawful in the sense of being either criminal or mistaken or tortious.
The unlawfulness here, on your view, is simply an unlawfulness in the sense that if the taxability issue were litigated as far as it could be litigated on the merits, the United States would win and California would not.
But should we distinguish between those two senses of unlawful?
And if we do, are you in trouble under the common law action?
Mr. Jones: Well, there is no basis, or rationale even, for distinguishing in that sense, Justice Souter.
The common law action for money had and received was designed by this Court to protect the United States, to prevent and remedy unlawful takings of public monies.
Whether... or the way that it seems most direct to state it is that under Federal common law, if Federal funds have been taken without lawful justification, they must be returned.
It is for the person who has taken the funds to establish the lawful basis.
In this case, the State of California proposes that the lawful basis for its taking of the funds is the State tax law.
Our position is that the State tax law does not provide a lawful basis.
We would take the same position with respect to other takings of public property with respect to which we think there is no lawful justification.
Unknown Speaker: Well, Mr. Jones, who's the taxpayer here?
Mr. Jones: Well, as California uses that term, the taxpayer is the Federal manager of the Naval Petroleum Reserve.
Unknown Speaker: Who do you say is the taxpayer here?
You don't think the Government's the taxpayer, do you?
Mr. Jones: In... there's two ways to answer that; one is factually and the second is conceptually.
Factually, the court of appeals said, and was correct in saying so, that these taxes were paid with Federal funds.
That's at page--
Unknown Speaker: Well, Federal funds reimbursed the contractor here.
Mr. Jones: --Actually, it was something more than that.
As you would see looking at page 142 of the joint appendix, this is actually Federal funds that were paid directly to the State.
There was... this is an advanced funding arrangement of the type the Court discussed in the United States v. New Mexico case.
Unknown Speaker: Well, in United States v. New Mexico do you think we thought the United States was the taxpayer?
Mr. Jones: --I don't know if... if that question, framed that way, was before the Court.
What was at issue in United States v. New Mexico was whether the immunity of the United States from State taxes applied.
Unknown Speaker: Uh-huh.
Mr. Jones: And what the Court held in that--
Unknown Speaker: And we said it didn't.
Mr. Jones: --The Court held that it did not apply in that case.
Unknown Speaker: And the United States is in no better position here, I assume, than in New Mexico.
Mr. Jones: Well, we are in a better position here.
Our contention is that there is no lawful basis for the State tax to be applied to us.
The... we're not contending--
Unknown Speaker: But you don't claim any sovereign immunity either.
Mr. Jones: --We're not--
Unknown Speaker: Either for yourself or for the contractor.
Mr. Jones: --We are not contending the tax is unconstitutional.
Unknown Speaker: Exactly.
Mr. Jones: However, as... just to inform the Court and not because it's instrumental in our argument, the State's tax is shaped with constitutional constraints in mind.
The State has crafted a tax that applies only to Federal contractors and applies to them differently than it would to other types of contractors, and it does so to meet the requirements of the Constitution.
But our position is that the State tax is unlawful as a matter of State law.
That is another way it's--
Unknown Speaker: Yeah, but maybe you're just in the position of... of being subrogated to whatever the right of the taxpayer was.
If the taxpayer is the... the contractor, then maybe the United States stands... stands in those shoes for purposes of litigating this question, as a matter of State law.
Mr. Jones: --Well that, of course, is the State's position.
Unknown Speaker: Yeah.
Mr. Jones: And I acknowledge that there is a bit of a chicken and an egg problem here.
Unknown Speaker: Yeah.
Mr. Jones: And... and it's a little glib to say it, but nonetheless I think there's an element of truth; it's a Federal chicken and a State egg, and under the Supremacy Clause the chicken prevails.
And in our view, the chicken is the common law right that this Court has recognized in... consistently, that the United... that anyone who takes Federal funds has to have a lawful justification.
Unknown Speaker: But in much different circumstances, Mr. Jones.
I don't think any of the cases that you rely on involve a simple case where the claim was that the... the tax was illegal under State law.
Mr. Jones: This is the first time this issue has come to this Court, but it's been in the courts of appeals for decades.
Unknown Speaker: Well, presumably that's why it's here now.
Mr. Jones: That's correct.
This is the first time this Court has had to decide whether a lawful justification exists when the State has taken our funds under an... made an unlawful... an illegal assessment of our funds.
Unknown Speaker: Well, when your funds have been paid to the State by your agent.
Mr. Jones: That is correct, and that was exactly the context of the Bayne case in 1876, where a Federal officer had Federal funds, he misappropriated those funds and transmitted them to a third party.
This Court allowed the United States to recover directly from the third party the funds that had been unlawfully obtained by that party.
Here too, the Court has to assume, on the record of this case, that the State tax is unlawful, that the State has... has no lawful justification for the taking of the funds.
Unknown Speaker: No, but we certainly cannot assume that the funds were unlawfully taken from the United States.
Mr. Jones: I'm sorry, I couldn't hear you.
Unknown Speaker: I mean in... in the Bayne case the funds were unlawfully taken by the Federal officer from the United States, they were misappropriated, as I recall.
So the United States stood, in seeking a quasi-contractual remedy, in a very stronger position than the United States stands here.
Mr. Jones: Well, except that here the... this case falls with... does fall within the confines of this Court's prior decisions in that the funds were paid under protest and under threat of penalty.
This is not a case where the taxpayer voluntarily made the payment and then came back years later and said by the way, I don't think I should have been required to.
What the Court has held is that when... when the taxes have been paid under protest and under threat of penalty, that it is not regarded as a voluntary payment and that it can... the Federal Government, the common law action applies to recovery of the funds.
Unknown Speaker: What... so you've got... you've got the better of me on that legal point.
What's your best case for that proposition?
Mr. Jones: Well, I think Bend v. Hoyt addresses that subject.
I am relatively sure City of Philadelphia v. Collector does.
Unknown Speaker: Is it incorrect to say that the State is indebted to the contractor?
Mr. Jones: Well, under California law, the contractor is what is called the taxpayer.
I am just talking now about California... the way California describes the situation, and the United States is called the real party in interest.
California says that the real party in interest is not allowed to bring a suit to recover the refund, only the taxpayer may.
As a result, the United States has no remedy under State law.
California does not recognize any claim of the United States.
The only exception that the California courts have described to that standing rule is when, as a matter of State law, the taxpayer is required by law, as a condition of receiving the refund, to pass the refund through to the real party in interest.
Unknown Speaker: If... if this case had proceeded with the contractor's claim being adjudicated and there was a final judgment in the California courts as to the contractor and that judgment was in favor of the State, adverse to the contractor, would you still have the right to maintain this suit?
Mr. Jones: We would then have the problem that the Court, I believe, addressed in the Montana case about collateral estoppel.
And I think it's relevant to point out... and we would be bound if we had participated in the litigation and... and--
Unknown Speaker: Which you did here, incidently, did you not?
Mr. Jones: --Well, but the... the State court litigation here did not proceed to conclusion.
Unknown Speaker: Well, you did at the administrative level.
Mr. Jones: Well, I don't... I don't think it can be said that we participated in any manner at the administrative level; we had no right to.
The contractor made that protest.
Unknown Speaker: Didn't you pay the... didn't you pay the attorneys, or am I incorrect about that?
Mr. Jones: Well, under our contract we had a duty to reimburse them for the costs.
But I believe that... that... the joint appendix, and I don't recall the page... the counsel who was representing the contractor said quite clearly he had no authority to represent the United States.
He was there--
Unknown Speaker: Well, could you have stopped your contractor from settling this case?
It didn't go to the... it didn't go to conclusion and decide the very issue that... that the contractor had raised.
Mr. Jones: --The settle... the settlement of the claim presents a different issue than... than collateral estoppel.
The United States, in our view, has an independent Federal cause of action that the contractor cannot settle.
Unknown Speaker: Well, could you have... could you have forbidden the... your contractor from settling that case and... and instead, litigating it to its conclusion?
Mr. Jones: Could we have forbidden them from settling it?
I, frankly, don't know the answer.
And it's normal in--
Unknown Speaker: Well, if you could, you just... you just blew it, that's all.
Mr. Jones: --Well, this case wasn't settled in that respect below.
What was done in the State courts was that the State acknowledged that a certain portion of its taxes were improper; the remaining portion was still being disputed.
The record reflects that the contractor then advised the State that they had decided to dismiss the contractor's claim and that the United States would then commence a suit in Federal court.
Now, the court of appeals didn't seem to be aware of that.
It sort of made it sound like we made a tactical decision--
Unknown Speaker: Yes.
Mr. Jones: --To settle something and then sneak it away.
Unknown Speaker: Exactly.
Mr. Jones: But at least--
Unknown Speaker: We take our facts, generally, as found by the court of appeals.
We don't relitigate facts here.
Mr. Jones: --Well, the court of appeals didn't find anything on that.
It's just reading between the lines, it seemed to be the tenor of the court's--
Unknown Speaker: But it... but it was dismissed without prejudice, wasn't it?
Mr. Jones: --It was dismissed without prejudice and at page 97 of the joint appendix there's a letter between counsel that makes it quite clear that the State was aware that the United States was going to pursue the claim in Federal Court.
Claims of the United States involving public funds inherently implicate an important national interest.
Unknown Speaker: Oh, let me just press one... one more question here.
On your theory that the United States is the primary party here, do you think that the California... that the Federal contractor had standing to proceed with its litigation in State court, claiming the money?
Mr. Jones: Because it was in State court, under the State rules it had standing.
The State rule is that--
Unknown Speaker: But under your theory here, it wouldn't.
Mr. Jones: --Well, I believe there's... there's two separate causes of action.
California law recognizes a cause of action for the putative taxpayer, and allows them standing to pursue it only in State court.
This Court has recognized a Federal common law cause of action for the United States, which we think is a separate cause of action that, under 28 USC 1345, falls within the plenary jurisdiction of this Court.
There is no dispute we are the real party at interest, that these were paid with Federal funds; all of the elements of the Federal common law cause of action have been met.
I would just like to take a minute to explain what I think is the background of that action, although it may be apparent by now.
As the Court held in the Chesapeake & Delaware Canal Company case, even when commercial transactions such as stock dividend payments are involved, when the United States seeks to recover public funds it is, quote, acting in its governmental capacity as much as if it were collecting taxes.
The Court has thus consistently concluded, as it stated in Clearfield Trust, that it is for the Federal courts to fashion the rules governing the rights and duties of the United States in its financial and proprietary transactions.
Unknown Speaker: Well, Mr. Jones, might there not be, in that situation, one rule for actions by the United States against private parties who may have kind of absconded with Government funds, as it appears to have been the case in Bayne, and another rule where the State is... where the Government is simply protesting a collection that has already been made by a State of taxes?
Mr. Jones: Well, the only orderly way in which we can protest that collection is to subject ourselves to the risk of penalties and compulsory process at State law, or to bring... to make the payment in an orderly fashion, as this Court has... has held in... in the Courts I cited... in the cases I cited to Justice Souter.
Unknown Speaker: Well, did any of those involve proceedings that involved the collection of State taxes as opposed to private individuals?
Mr. Jones: Actually, the common law rule has its roots in those two cases I cited that involve suits to recover Federal taxes.
This Court has held... held at common law that individuals could recover Federal taxes from the United States, even though they had been voluntarily paid, because it was the orderly thing to do, I suppose.
Unknown Speaker: Was there any other process for doing so at that time?
Mr. Jones: There was no statutory remedy at that time, although I suppose that the taxpayer could have resisted the assessment and not voluntarily--
Unknown Speaker: Well, could... under the California rule, you could not have intervened in the proceedings that your contractor had instituted.
Mr. Jones: --California cases seem to assume we can intervene.
We could... but we would--
Unknown Speaker: They assume you could.
Mr. Jones: --Yes.
They assume that we could intervene, and there's no authority, really, that answers that question.
But I also assume, because there isn't any... any case law to the contrary, that we could assume... we could intervene, but we would be intervening in a State court proceeding.
Unknown Speaker: Yes.
Mr. Jones: We would be intervening in a proceeding that would make the Federal claims subject to State law procedures, to the State statute of limitations, and to State court adjudication of the claim.
And those results are inconsistent with this Court's recognized need for uniform rules to govern the claims of the United States, in particular with 28 USC 2415, which provides a 6-year statute of limitations for claims by the United States arising under contract, express or implied, in law.
Requiring us to proceed in State court as an intervenor would also conflict with 28 USC 1345, under which Congress has given the Federal courts plenary jurisdiction over claims by the United States.
Unknown Speaker: Plenary and exclusive?
Mr. Jones: Well, exclusive through the removal procedure... not expressly, Chief Justice Rehnquist, but pragmatically exclusive through the removal procedure.
The United States is entitled to have its claims adjudicated in Federal Courts.
Congress has determined that.
Unknown Speaker: But... but when you talk about removal, you're talking about the United States as a defendant, then.
Mr. Jones: Well, the United States has... has the option in every case to have its claims heard in Federal court.
No party has the option to require the United States to have its claims heard anywhere else.
Unknown Speaker: Well, but what may be the rule as to the United States as a defendant may be quite different than the rule as the United States as a plaintiff.
I mean, if... if the United States is to... is to be sued by someone claiming that the... the Government owes it money, Congress may quite likely have provided that the suit is to be heard in Federal court, either through removal or through having been brought there in the first place.
But I don't see that says much about the legitimacy of the Government's claim to recover taxes in a State proceeding.
Mr. Jones: Well, 28 USC 1345 gives the Federal court jurisdiction over all, and that's the statutory word, all causes of action, suits, or proceedings commenced by the United States.
It is as broad and plenary a jurisdiction as Congress has provided.
Congress obviously intended that the claims of the United States would be adjudicatable or adjudicated in Federal courts.
There is no basis under the Federal common law remedy for requiring the Federal cause of action of the United States to be adjudicated in State court.
I should make emphatic what I... I said indirectly about the statute of limitations.
The Court has held on several occasions that the Federal claims of the United States, and in particular the Federal common law action for money had and received, is not subject to State statutes of limitations.
In 1966, Congress enacted a statute that expressly provides for every action for money damages brought by the United States for contracts implied at law to be given a 6-year Federal statute of limitations.
The Federal statute of limitations applies directly to the quasi-contractual claim of the United States.
The statute legislatively fills the gap created by this Court's decisions rejecting State law rules of limitation for the Federal claims.
Unknown Speaker: Does that apply even if the United States is subrogated to the claim and proceeds in a subrogation capacity?
Mr. Jones: If the... I take it the premise of that question is there are two causes of action.
The United States has its Federal cause of action; the United States also, under the State's theory, could be subrogated to the State law cause of action.
The answer to your question turns on the character of the State statute of limitations, at least that's what the Ninth Circuit has held in a series of cases not at issue here today.
The Ninth Circuit has suggested that when the State statute incorporates the limitations period as an element of the cause of action, then compliance with the State statute of limitations is necessary to give rise to the cause of action.
We think it apparent... although that issue isn't presented here, we think it apparent that this State statute of limitations does not incorporate compliance with the State period as an element of the cause of action.
To the contrary, what the State statute of limitations says is that failure to bring suit within 90 days will be deemed to constitute a waiver of the State claim, so it is a traditional or more traditional State statute of limitations.
So the short answer to your question is if we had proceeded under State law, we would not be subject to the State statute of limitations, the 6-year Federal statute of limitations would apply, but the case hasn't been presented on that basis in the lower courts.
The State's argument takes a somewhat different tack.
They don't join the contention that we should be required to exhaust a nonexisting remedy.
They instead contend that we should be required to resort to the State process.
For the reasons I've already described, that conflicts with well established rules requiring Federal rules to govern Federal actions.
But I should also point out that it would make the public right of the United States to recover public funds turn on the perseverance of Federal contractors who ultimately have no stake in the outcome, and who operate under an enormous variety of tax procedures in literally thousands of local taxing jurisdictions.
In Clearfield Trust the Court concluded that because United States transactions proceed upon such a vast scale, the Federal right should not be subjected to the exceptional uncertainties imposed by the vagaries of the State law rules.
Finally, I do want to address the Court--
Unknown Speaker: Yeah, but businesses do that all the time.
I mean they have less money than the United States.
I don't understand why that is such a big imposition.
Mr. Jones: --I think the Court has--
Unknown Speaker: The United States is... is claiming exemptions, or whatever, under State laws, to follow those procedures.
Mr. Jones: --I think the Court has recognized that the claims of the United States differ both in quality and quantity in that respect.
The United States as the sovereign, should not be subjected to State law rules that limit Federal rights.
I think the Court looks at it from that perspective.
I believe it is also true that it is... it is comparing apples and oranges to compare even a large corporation with the pervasive and extensive reach of the Federal Government throughout every city, county, and State.
Unknown Speaker: But the so-called Federal right here is simply a claim under California law.
Mr. Jones: Chief Justice Rehnquist, it is a claim under Federal law.
It is a claim that the State has taken money without lawful justification.
It is a claim under Federal common law.
Unknown Speaker: Yeah, but the basis for that claim lies entirely in California State tax law, doesn't it?
Mr. Jones: I would put it the other way.
I would state... say that the basis for the State's defense, the basis for the State's assertion that, in fact, it took the monies lawfully, lies in its claim under State law.
That is a claim that we... we disagree with and that the Court, for purposes of this case, must assume is incorrect.
For purposes of this case, the Court must assume the State tax is unlawful and that--
Unknown Speaker: Well who... who'd better decide that case, the California courts or the Ninth Circuit, as to whether a California State tax is unlawful or not, under... under California State law?
Mr. Jones: --Well this... there certainly has never--
Unknown Speaker: For California courts are better equipped to speak on that than the Ninth Circuit.
Mr. Jones: --There's no question that the Federal courts have competence to decide these questions of State law.
The question, it seems to me, the prudential one that you're framing, is whether the... as a matter of comity or abstention, the State courts should decide these Federal claims.
The comity doctrine, as applied in fair assessment, stems from the Anti-Injunction Act and... and the conclusion that Congress didn't intend jurisdiction to reach State tax rules.
But the... but the Anti-Injunction Act, by this Court's decision in Department of Employment, does not apply to the United States.
And to the contrary, Congress gave the Federal courts plenary jurisdiction.
Unknown Speaker: You're asking us here to extend previous holdings of the Court to a situation involving collection of State taxes.
And it seems to me that you've... you've got to answer questions like which would be the preferable court system to decide the question, just as a matter of policy since the prior cases don't support what you're seeking to do here.
Mr. Jones: Well, Chief Justice Rehnquist, we think the case... this Court's cases do support it.
And as a matter of... and as a policy matter... the two policy sources that I can refer the Court to... this Court has plenary jurisdiction over claims of the United States; it doesn't have that kind of jurisdiction for anyone else.
And secondly, the Anti-Injunction Act does not apply to the United States.
In the Department of Employment case, this Court sustained a holding that the United States could enjoin a State tax and recover damages.
Unknown Speaker: Well, what if you... what if you got into court on this suit that... that you think the Federal court can hear, and it suddenly happens that a Supreme... a decision of the Supreme Court of California was found that squarely decides the issue that you want litigated against you?
Mr. Jones: That--
Unknown Speaker: --That's a matter of State law, then, isn't it?
Mr. Jones: --I would expect the Federal court to look for sources of State law here, just as it does in any other case where it decides questions of State law.
Unknown Speaker: Why, sure.
And you... and you would be stuck with it.
So... so... so you really are wanting to litigate an issue of State law.
Mr. Jones: Well, actually, we want to litigate facts as well.
We want to litigate the question of whether the contractor under our Federal contract is a construction contractor.
Unknown Speaker: Right, exactly.
Mr. Jones: There are factual questions and legal questions that implicate the rights of the United States, and we think they should be decided in Federal court.
Unknown Speaker: Well, let's assume that there's a... a State supreme court case that's... that is so similar to this that anyone would say it would control.
Mr. Jones: In that event, I suppose the district court properly should decide that there was a lawful justification of public funds.
But on this record, this Court has to assume there was no lawful justification.
And I want to... I should point out, just in... that in the Board of County Commissioners case the Court emphasized that nothing... and I think I quoting... nothing that the State can do will be allowed to destroy the Federal right, which is to be vindicated.
And our point is that we should be allowed to determine our Federal right under the Federal common law in Federal courts.
I'd like to reserve any time I have left for rebuttal.
Unknown Speaker: Very well, Mr.... Mr. Jones.
Mr. Milam, we'll hear from you.
Argument of Robert D. Milam
Mr. Milam: Mr. Chief Justice, and may it please the Court:
Although the contractor's attorney disclaimed any representation of the United States, the joint appendix is clear that the United Stakes... States directed and controlled that action.
Not only at joint appendix pages 131 and 135 does it show that... the United States obligated to pay the contractor's attorney, at joint appendix page 58 the WBEC attorney told the Board of Equalization at the hearing on petition... at the petition for redetermination that the United States was instructing WBEC as to each step in the process.
Joint appendix pages 59 and 60 show that the United... the WBEC attorney told the Board of Equalization at that same hearing that he had been not authorized to discuss a certain subject with the board.
Unknown Speaker: May I ask you this question, does that really make any difference?
Under your theory of the case, I don't think you have to establish that the Government controlled the case, do you?
Mr. Milam: I agree.
I don't think so.
Unknown Speaker: Yeah.
Could the... you say the Government did control this case, but could it formally have intervened under California law?
Mr. Milam: Your Honor, under... under the judicial remedy, the Code of Civil Procedure, section, I think, 389, authorizes and almost requires a real party in interest to be before the court.
And as to the judicial remedy, I believe it could have intervened under that section.
Unknown Speaker: And did it get to... it never got beyond the administrative stage, did it?
Mr. Milam: I don't understand the question, I'm sorry.
Unknown Speaker: Did the... well, the contractor wanted a refund?
Mr. Milam: Yes.
Unknown Speaker: And it... and it... and it employed the administrative remedy.
Mr. Milam: Right.
Unknown Speaker: Did it... did it... it never got to court, did it?
Mr. Milam: WBEC filed two court actions in State court, yes, at the direction of the United States.
Unknown Speaker: And those were... and those were settled?
Mr. Milam: Those were not... I agree with Mr. Jones' characterization of that, that the... the Board of Equalization, through discovery, found that it had--
Unknown Speaker: Uh-huh.
Mr. Milam: --Misapplied the tax to some extent.
Unknown Speaker: To some extent.
Mr. Milam: And so they agreed to pay that back.
And the result of that was the dismissal of the suit by... of the two suits by WBEC.
Unknown Speaker: So--
Mr. Milam: There was no settlement, as such.
Unknown Speaker: --No, no, no.
Well, but nevertheless, did... did the contractor raise the issue that the United States wants to litigate?
Mr. Milam: Yes.
The... the issues before the State courts would be the same issues before the Federal court.
Unknown Speaker: And... and so that issue never went to judgment.
Mr. Milam: It did not.
Unknown Speaker: It did not.
Mr. Milam: It was... the cases were dismissed.
Unknown Speaker: And you think... and... and... you think the United States could have intervened in those two cases.
Mr. Milam: Yes, I believe--
Unknown Speaker: And if they lost in the... in the trial court on the issue they wanted to litigate, they could have appealed.
Mr. Milam: --Yes, I believe that.
Also, I believe, contrary to Mr. Jones, that the United States, under circumstances of this case, could have had an administrative remedy also... could have... could have filed a claim for refund and pursued administrative remedy.
There are circumstances when that... that would not be possible, but under the circumstances of this case I think they could have.
Unknown Speaker: But assuming this is Federal property at issue, do you know of any other instances where in order to hold on to its own property the Federal Government has to appear in State proceedings?
Mr. Milam: I cannot identify any other instances.
I would... I would suggest that when State taxes are at issue, the State and State courts have a tremendous interest in... in resolving those issues, but I cannot cite another case to... to support that.
Unknown Speaker: Do you accept the premise of its being Federal property?
Mr. Milam: That... the money was... was paid from Federal funds.
Now, whether they want Federal property back or not, I really don't know, because WBEC was a taxpayer, we assessed the taxpayer, and they had some mechanism to... to pay the money with Federal funds.
It's hard for me to believe that they want Federal funds back, but I... I don't know how to resolve that... that argument of theirs.
This was... the State court suits were an action... was an action... were actions by a State taxpayer, WBEC, against the taxing entity that imposed the taxes, and the only issue was the application of State tax law.
And this Court has often held--
Unknown Speaker: Was... was Mr. Jones correct in saying that the... the State was told that... when the case was dismissed or the cases were dismissed, that the United States was going to pursue the issue in Federal court?
Mr. Milam: --I think he cited something in the joint appendix.
I'm not aware of that, but he... he cited something in the joint appendix that I'm not aware of.
I do not know.
Unknown Speaker: So, I suppose the State could have... could have refused to have the case dismissed?
Mr. Milam: No, I think dismissal is... is a duty.
I mean it... it is a right of a party who brought the suit and... and actually under California law it's very difficult to... almost impossible to contest that.
If they want to dismiss without prejudice, they are allowed to do so.
Unknown Speaker: Even after the case has... even after discovery and things like that?
Mr. Milam: Yes.
I had... to give you an example, I had one case on appeal where I had... in the California courts... where I had filed my respondent's brief after the appellant's brief had been filed.
And after I filed my respondent's brief, the court allowed the taxpayer to dismiss the... the appeal over... over my protest.
But the... the opportunity to... to dismiss the case is very broad in California.
Unknown Speaker: But you say the United States could have intervened at any time?
Mr. Milam: Yes, Your Honor.
The United... under section 389 of the Code of Civil Procedure, a real party in interest has the right to be before the California courts.
In fact, I think they're almost required to be before the California courts.
Unknown Speaker: Now, would it have had the... the right also, in your view, to intervene in the administrative proceedings?
Mr. Milam: I'm sorry, I did not hear you.
Unknown Speaker: Would it have had the same right to intervene in the administrative proceedings?
Mr. Milam: Under the circumstances of this case, they could have either intervened, stepped into the shoes, or, on their own, pursued the administrative remedies.
As I said, that's not always the case if the circumstances were different.
But they could have done both in this case.
This Court has often held that in the interests of Federalism and... and the principle of comity, State courts are the best place to determine the application of State tax law.
Comparing the interests of the United States and the State of California in this case presents a dramatic example of why this should be the result in this case.
California has retained as part of its sovereignty the ability to tax its own citizens.
A part of that finality... a part of that sovereignty is the power to determine the finality of its tax payments.
That is, when they can no longer be refunded.
Joint appendix page 21 shows that the first WBEC case was filed on February 18th, 1983.
And here we are more than 10 years later, arguing whether the United States has a cause of action in Federal courts.
In contrast, under California law trial... court... cases must be brought to trial within 5 years or be subject to mandatory dismissal.
Joint appendix page 95 shows that upon instruction of the United States, the WBEC... E-C cases were dismissed, and joint appendix pages 46 and 49 show that they were dismissed within 1 month of the running of the 5-year statute, the California 5-year statute.
United States interest, on the other hand, is simply that of a taxpayer.
There are no issues unique to the United States in this case, no Supremacy Clause issues, no sovereign immunity issues, no discrimination issues, no Federal constitutional issues, and no Act of Congress is involved.
A Federal contractor can take advantage of the United States tax immunity because it derives from the Federal contract.
The reverse also must be true.
When the contractor cannot take advantage of the United States tax immunity, the right of the United States to sue the State for a tax refund derives soley from the Federal contract.
The United States agreement to reimburse WBEC in this case, under the contract, merely provides the opportunity for the United States to step into the shoes of the taxpayer, and enabling the United States to pursue those remedies of a taxpayer.
Indeed, because the United States controlled and directed these actions, it shows that the United States actually stepped into the shoes of the taxpayer in this case.
The actions of the United States in controlling the actions and the willingness of WBEC to submit to that control shows that they view their relationship as one of subrogee and subrogor.
The United States is asking this Court to do two things.
First, to disregard the available State remedies in asking this Court to have the Federal courts instruct California on the application of State tax law.
To paraphrase this Court in Penhurst State High School or Hospital versus Halderman, it's an invasion of California sovereignty for the Federal courts to instruct the State officials on the application of State tax law.
Unknown Speaker: May I ask a question that's kind of running through my mind about the analogy with the litigation costs and all?
Suppose... the United States under the contract had to pay the attorneys fees, I think, did it not, of the contractor?
Mr. Milam: They obligated themselves to... to pay--
Unknown Speaker: And if... if they were persuaded that the attorney had overcharged the client and they wanted to recover the overcharge from the client, would they... and... and the California statute of limitations had run, would they be able to sue in Federal court, in your view?
Mr. Milam: --I do not know the answer to that question.
Unknown Speaker: Isn't that the same question we have here?
Mr. Milam: I don't believe so.
Unknown Speaker: Why not?
It's a State law cause of action.
It overcharges a matter... say there's some State rule you don't charge unreasonable fees, or something like that.
And the United States basically is a subrogee to the contractor, trying to get back, on a State cause of action, an excess charge.
And here... here the contractor gave too much money to the tax collector, and it also gave too much money to its lawyer.
Why are they different?
Mr. Milam: Well, the only... the thing that I'm relying on in this... in this case is the sovereign power of California to impose taxes.
And that sovereignty, I think, makes it different from the example you... you gave me.
I'm not sure there's the same interest of California, but--
Unknown Speaker: Well, they have the sovereign power to decide how much... what is a fair fee for a lawyer, I guess, a member of the State bar, and so forth and so on.
But you think that's different?
Mr. Milam: --I think it's different, yeah.
Unknown Speaker: Yeah.
Of course, even if you admitted in that case, as I suspect might be the case, the United States could sue in Federal court, that's not the issue here.
It's just whether the State statute of limitations would apply to that suit, isn't that... isn't that right?
Mr. Milam: I'm not sure I understand the question, Justice--
Unknown Speaker: We're just arguing about what statute of limitations applies.
That's... that's the issue in this case, isn't it?
Mr. Milam: --Well if--
Unknown Speaker: So even if your response to Justice Stevens were yes, the United States would... could proceed in Federal Court against the... against the lawyer, you... you still might be--
--Even if... even if the statute of limitation is run, is my question.
Even if the State statute's run.
Even if it's run, I see.
Mr. Milam: --Now, the State's... the difference between sovereign power and a running of a State statute of limitation is that under this Court's decision in United States v. Dalm, the principles of sovereign immunity indicate whether or not there's a claim against the sovereign.
And the... the Dalm case found that the... both a timely filing of a Federal claim for refund and a timely filing of a lawsuit were conditions precedent to the accrual of a cause of action.
Chief Justice Rehnquist: We'll resume there at 1:00, Mr. Milam.
Mr. Milam, you may resume.
Mr. Milam: Mr. Chief Justice and may it please the Court:
The United States is asking the Court to invoke equitable remedies, that of a contract implied in law or money had and received, and declaratory relief.
And California's position is that this Court's answer should be consistent with the long line of authority, from Dows v. City of Chicago in 1870 to Fair Assessment in Real Estate v. McNary in 1981, that the Federal Government cannot invoke equitable remedies, at least against a State where no Federal issues are involved, unless the effective pursuit of remedies, State remedies, is pursued... is done.
Unknown Speaker: Well, I take it you're... you're saying that this so-called common law cause of action the Government relies on just doesn't apply in the... the State tax context.
Mr. Milam: That's our position.
Yes, Your Honor.
Unknown Speaker: Yes, uh-hum.
What was the first of those cases you just mentioned?
Mr. Milam: Dows v. City of Chicago in 1870.
Unknown Speaker: Dow?
Mr. Milam: Dows, I believe.
Unknown Speaker: Yeah.
Where is that cited in your brief?
Mr. Milam: I don't believe I cited it in my brief.
Unknown Speaker: Why didn't you?
Mr. Milam: I have no excuse.
Unknown Speaker: Could you give us the citation now?
Mr. Milam: I do not have it handy, Your Honor.
I'm sorry, I do.
78 U.S. 108 1870.
Unknown Speaker: But there are several court of appeals cases that... to the contrary to your position, aren't there?
Mr. Milam: There are and I'm going to... I'm going to discuss those in a few seconds, but first I want to discuss the Department of Employment case which deals specifically with this area.
Unknown Speaker: The what?
Mr. Milam: Department of Employment v. the United States.
Unknown Speaker: Oh yes, uh-hum.
Mr. Milam: Mentioned by Mr. Jones.
Unknown Speaker: Uh-hum.
Mr. Milam: The Department of Employment case was a case that refused to apply the Tax Injunction Act as to State taxes because a Federal instrumentality was being taxed in violation of its sovereign immunity.
That rule does not apply in this case because WBEC was not a Federal instrumentality and there's no issue of sovereign immunity.
Indeed, if you take the facts of the Department of Employment case and take away the Supremacy Clause issue in that case and substitute in its place the principle of comity, because tax... State tax law was involved, it's California's position that even Federal instrumentalities must be required to pursue State remedies before seeking relief in the Federal courts.
There are three cases at least, and maybe more, that... I've put down... I've put three cases that the United States has cited that fall into this category.
The United States v. Benton, United States v. Broward County, and United States v. DeKalb County all involve issues of application of tax... State tax law only and there are no Supremacy Clause issues.
And California believes that to the extent that these cases stand for the proposition that State remedies need not be pursued, they are wrongly decided.
These are all lower court decisions.
Unknown Speaker: Those are the ones on the Government's brief page 20, I think, yeah, yeah.
Mr. Milam: So California's answer to the question presented by the United States is that assuming it had... just assuming for purpose of argument that it can state a quasi-contract cause of action, when the issue is one of application of State tax law only and there are no Supremacy Clause issues, pursuit... effective pursuit of State remedies is required before the access to Federal Courts, and this includes meeting all the procedural requirements of State law.
Unknown Speaker: Why is that?
I don't understand.
I mean I can understand the other basis for the result you want, namely the basis that... where the United States is just subrogated to a... to a claim of someone else.
If that someone else has no right to ignore the State procedures, neither does the United States; that makes sense to me.
But you're... this theory you're giving us now that even if it were the United States in its own right that were suing, it would have to follow the State procedure--
Mr. Milam: Well, that was the question presented.
Unknown Speaker: --That seems, that's a lot harder to swallow.
Mr. Milam: I'm sorry, I'm... I interrupted you, I didn't--
Unknown Speaker: That... that was the question presented?
Mr. Milam: --The question presented is that the United States assumes it has a quasi-contract cause of action, and the question then is do they have to pursue State remedies.
And our answer is yes, even if they can state a cause of action--
Unknown Speaker: The quasi-contract cause of action precludes any subrogation theory.
Mr. Milam: --I don't believe it precludes subrogation theory.
I think the subrogation theory is correct.
But the United States, in presenting the question to the Court, assumed it had a quasi-contract cause of action.
Unknown Speaker: Oh, so I have to assume that this case is the same as though the United States were suing in its own right, as though the tax had been posed on the United States and not on its contractor?
Well, haven't you already answered that, yes, by saying that the United States could have not only intervened but might... should have been required to intervene because it's the real party in interest?
Mr. Milam: Yes.
That's right, Your Honor.
Unknown Speaker: Uh-hum.
Who's... you may agree with the subrogation theory but that isn't really the main thrust of your argument at all.
Mr. Milam: Well it... it... it... it is.
We think it's the correct answer, but the problem that, of course, we've had with... with that--
Unknown Speaker: Yes, but you say--
Mr. Milam: --There's no court that has... has held that.
And... and it's a new... it's an issue that this Court's never... never reached.
And so to rely solely on that.
Unknown Speaker: --Well why is that... why is that a problem?
I this Court has never held... never expressed an opinion one way or the other, why does that prevent you from urging it to us?
Mr. Milam: It doesn't.
It just causes me to... to... to be careful and not putting all my eggs in one basket just in case it... this Court doesn't agree with me.
Unknown Speaker: You want to have several strings to your bow.
Mr. Milam: Exactly, Your Honor.
Unknown Speaker: What about the--
--At least one egg out of a half a dozen.
I'm not sure... the State's... the Government's proceeding on a common law count for money had and received.
Mr. Milam: That's my understanding, yes.
Unknown Speaker: Well is... was that an equitable action at common law?
Mr. Milam: I don't know the answer to that.
Unknown Speaker: Well, I... I think it was not, which is what... why I'm not sure why you say that equity requires that it follows exhaustion of remedy.
You don't have to exhaust remedies to sue for money had and received, do you?
What's your authority for that?
Mr. Milam: --I have no authority, Your Honor.
Unknown Speaker: Do you... let's... let's go back to the cause of action again for a moment.
Mr. Jones relied heavily on... on the Bend & Hoyt and the City of Philadelphia case.
Do you accept them as being in point?
Mr. Milam: I don't accept them as having a... a contract... a quasi-contract cause of action.
But they may be in point if they do have a contract, quasi-contract cause of action.
Unknown Speaker: Well I thought... I looked at them very quickly.
I thought they did, but do you... can you think of any basis to distinguish them from the... from the case that you've got today?
Mr. Milam: The only basis that... that I've been able to distinguish the common law quasi-contract action is that the money was supposed to be paid involuntarily.
And although WBEC may be said to... to pay... have paid the taxes involuntarily, I don't think that could be said of the United States and the United States is the one asserting this action.
Unknown Speaker: Yeah.
Mr. Milam: So I'm not sure they meet the common law definition.
Unknown Speaker: Okay.
Mr. Milam: All the other cases... all the cases, besides the three I mentioned, relied upon by the United States involve Supremacy Clause issues.
And in that sense... and that situation is the only time that the courts allow the United States to go directly to the Federal Court.
Those issues are not present in this case.
The Clearfield Trust case also would not apply.
The Clearfield Trust was a response to this Court's decisions in Erie v. Tompkins and Hinterleiter v. LaPlada.
Those two cases stand for the proposition that Federal courts can invoke Federal common law to protect the interests of the United States.
However, the application of that rule has some conditions precedent which aren't present... which have not been discussed.
One is that this Court has held that when the United States and a State are the parties, then the interests of both governments must be considered.
And when you consider the interests of State government, the principle of comity also comes into play.
That was the Board of Commissioners v. the United States, 308 U.S. 343, 1939.
Also, this Court has stated that the invoking of Federal common law is usually applied in situations where a Federal rule is necessary to protect uniquely Federal interests.
There's no uniquely Federal interest in this case that needs protection.
Third, in determining whether to apply common law, this Court has held that a guiding principle is a significant conflict between the use of State law and Federal interest or policy.
And as the Ninth Circuit held in this case, there is no such conflict.
The United States does not have a quasi-contract cause of action, although up to this point I've been assuming it had, for two reasons.
First, the Ninth Circuit was correct in holding there has been no unjust enrichment of California as that term is used in the quasi-contract action.
How can California be unjustly enriched when WBE... State court actions could have resolved every State law issue in this case, including whether taxes were overpaid.
California cannot be unjustly riched... enriched at the expense of the United States when the United States directed and controlled the State court actions and failed to bring the suits to trial within 5 years and directed WBEC to dismiss the actions.
The second reason that the United States has no quasi-contract cause of action in this case is that the United States as a subrogee can invoke only those remedies of WBEC, and WBEC did not have a remedy of a quasi-contract action in this case.
Unknown Speaker: Well, as I suggested, that is somewhat inconsistent with your notion that the United States was the real party in interest and could have and should have intervened.
Mr. Milam: I don't believe so, Your Honor.
If... if the United States steps into the shoes of the... of the contractor it becomes... it becomes a real party in interest.
I think the real party in interest is the one whose money is at stake, and I don't believe that being a subrogee has any conflict with that concept at all.
Unknown Speaker: Well, why is the United States the real party in interest if it isn't its money that's involved?
Mr. Milam: That's the reason it is the real party in interest.
Unknown Speaker: Okay.
Mr. Milam: But that... I don't think that conflicts with being a subrogee.
The United States' claim in this case is based entirely upon California tax law.
And like this Court's decision in United States v. Dalm, the United States... the California tax law requires the filing of a claim for refund and the filing of a suit within 90 days of the notice of denial of the claim for refund.
WBEC did go through this procedure.
Notice of denials were made and it filed suit within 90 days.
However, because it's a part of the California accrual of a cause of action under a waiver of sovereign immunity, once the dismissals were made WBEC's actions... claim against the State of California were extinguished by operation of law when the dismissals were made.
The Ninth Circuit said that a dismissal means those cases were never filed, and if the WBEC cases were never filed no case was filed within the 90 days of the notice of denial of WBEC's claim for refund.
So the United States can make no claim against California either as a taxpayer, because it did not file a claim for refund, or as a subrogee of WBEC.
And it's reliance upon Summerlin--
Unknown Speaker: But can you bring a suit for money had and received as subrogee?
I mean the question we'd accepted is whether invoking... in invoking the Federal cause of action for money had and received, the United States must comply with the State law requirements.
Can you do that when you're a subrogee?
Mr. Milam: --I don't... in this case I don't believe so because WBEC had no such action and a subrogee just takes the remedies of the subrogor.
So the United States reliance on the Summerlin case is misplaced because it fails to distinguish between a statute... State statute of limitations depriving the United States of a preexisting valid claim and the conditions precedent to an accrual of a cause of action under a waiver of sovereign immunity.
The first question for Summerlin and Summerlin analysis is is there a valid cause of action.
If there's no valid cause of action, then you never get to the second element of Summerlin, the deprival... depriving of the United States of a cause of... of a claim.
Even if you assume that during the pendency of the State court actions that WBEC filed the United States had a valid claim, that claim was not denied by statute of limitations, that claim was denied by the voluntary dismissal of those cases under direction of the United States.
I have nothing further.
Unknown Speaker: Thank you, Mr. Milam.
Mr. Jones, you have 1 minute remaining.
Rebuttal of Kent L. Jones
Mr. Jones: Excuse me.
Federal... Federal common law has been applied to actions brought by the United States to recover States taxes.
This is not the first case of this type.
Board of County Commissioners was a suit by the United States to recover taxes paid to the State of Kansas.
Unknown Speaker: But there the only question this Court decided was whether interest would be available, wasn't it?
Mr. Jones: --It's the only question the Court decided, but it's not the only question the Court discussed and addressed.
The Court specified the fact that Federal common law creates the remedy and... and governs the choice of the... of the rules to apply.
Unknown Speaker: But nobody was arguing otherwise in that case.
Mr. Jones: I... I assume that's correct, but I don't know, I wasn't up there.
Unknown Speaker: Well, I mean judge... I don't claim to have been present at the argument.
I'm just saying from the opinion it doesn't appear that anyone was arguing otherwise.
Mr. Jones: Well, the opinion discusses the issues as if they were relevant to its decision, and so I assume that those issues were discussed before the Court.
But as far... I'm just being honest... in terms of what was actually presented to the Court, I'm... I'm not certain.
The second point is that common... at common law, at... the exhaustion of remedies was not required.
The City of Philadelphia v. Collector, this Court's decision specifically rejected a suggestion that the Federal remedy should not be available because there was an administrative procedure not exhausted.
The Court said there was no support for that proposition.
Chief Justice Rehnquist: Thank you, Mr. Jones.
The case is submitted.
Argument of Justice O'Connor
Mr. Jones: The second is United States versus California, which comes here on writ of certiorari to the United States Court of Appeals for the Ninth Circuit.
The State of California assessed approximately $14 million in sales and use taxes against a federal contractor.
Under the federal contract that government paid the contractor an annual fixed fee and also paid its costs including moneys to cover the state taxes.
At the government's direction, the contractor protested the assessment of the state taxes first in administrative proceedings and later in State Court proceedings.
In January 1988, the contractor and state agreed to a $3 million refund and to dismissal of the actions without prejudice.
In May 1988, the Federal Government filed this suit in Federal District Court seeking refund of $11 million in a declaratory judgment that California had classified and taxed the contractor erroneously under state law.
The District Court rejected the government's argument that it was entitled to recover using the federal common law action for money had and received and gave summary judgment for the state.
The Ninth Circuit Court of Appeals affirmed.
In the case of United States versus New Mexico, we held the federal contractors were not immune from state taxation simply because the government shouldered the entire economic burden of the levy.
The contract here is in all relevant respects like the contracts that we discussed in United States versus New Mexico, it is clear that California taxed the contractor not the Federal Government.
The Federal Government's voluntary agreement to pay the taxes does not make those payments a direct disbursement of federal funds to the state.
The Federal Government may not convert an obligation to indemnify its contractor into a right to proceed under the federal common law action for money had and received.
Because that government indemnified the contractor, it did have the right to be subrogated to the contractor's claims against the state.
Under traditional principles of subrogation, however, the subrogate takes no more rights than a subrogor had.
In this case, once the contractor dismissed its state law causes of action, it no longer had the right to sue because the statute of limitations had run in California.
The Federal Government argues it is not subject to the state statutes of limitation.
But in the case of Guaranty Trust Company against the United States, this Court held that even if that were true the principle did not apply when the government acquired by a right of assignment after the statute of limitations had run against the assignor.
Although the government acquired a right to be subrogated to the contractor's claims when it paid the amount of the taxes, it was not subrogated for those claims until it filed a proceeding in Federal Court.
By then, the state statute of limitations had run.
Thus, the government was not subrogated to "a right free of a pre-existing infirmity".
The opinion is unanimous.