Judge: Lee W. Tsao, Case: 22NWCV00135, Date: 2023-04-27 Tentative Ruling
Case Number: 22NWCV00135 Hearing Date: April 27, 2023 Dept: C
EMERALD SEVEN, LLC v. STATE OF CALIFORNIA, DEPARTMENT OF TAX AND
FEE ADMINISTRATION, et al.
CASE
NO.: 22NWCV00135
HEARING:
4/27/23
#9
TENTATIVE ORDER
Defendant California
Department of Tax and Fee Administration’s demurrer to plaintiff’s first amended
complaint is SUSTAINED in its entirety, with leave to amend. Plaintiff is
ordered to file and serve a second amended complaint within thirty (30) days of
this ruling.
Defendant’s motion to
strike is GRANTED, without leave to amend. The Court orders the request for
punitive damages and civil penalties for Labor Code violations in the first
amended complaint stricken.
Moving Party to give NOTICE.
PROCEDURAL
BACKGROUND
Plaintiff
Emerald Seven, LLC (“Plaintiff”), filed this action on February 28, 2022,
against Defendant California Department of Tax and Fee Administration, a public
agency sued as “State of California, California Department of Tax and Fee
Administration” (“CDTFA”), and Does 1 through 10, inclusive (collectively,
“Defendants”).
On
November 18, 2022, Plaintiff filed the operative and verified First Amended
Complaint (“FAC”) against the Defendants, asserting causes of action for:
1.
Declaratory
Relief – Misclassification of Taxpayer
2.
Declaratory
Relief – Jeopardy Determination
3.
Declaratory
Relief – Jurisdiction
4.
Declaratory
Relief – Improper Notice
5.
Violation
of Due Process
6.
Injunctive
Relief
7.
Quiet
Title
8.
Gross
Negligence
9.
Breach
of Contract
On
January 10, 2023, CDTFA filed the instant demurrer with motion to strike, along
with a request for judicial notice.
On
April 14, 2023, Plaintiff filed its opposition to the demurrer.
On
April 20, 2023, CDTFA filed a reply.
As
of April 25, 2023, no opposition and reply, directed at the motion to strike, have been filed.
FACTUAL
BACKGROUND
The
FAC alleges the following (among other things).
Plaintiff
owns the real property known as 8821 and 8817 Norwalk Blvd., Whittier, CA 90606
APN: 8178-033-007, 8178-033-006 (the “Property”). (FAC, ¶ 13.) Plaintiff is in
the business of owning real property and leasing units located on the Property
to tenants. (FAC, ¶
18.)
At
all relevant times, Mr. Jimmy Duong (“Mr. Duong”) was Plaintiff’s single member
and owner. (FAC, p. 2:1-2; ¶ 18.)
On
January 1, 2018, Plaintiff entered into a five-year commercial lease agreement
(the “Lease”) for the 8221 Norwalk Blvd. property (the “Premises”) with tenant Peter
Oh (the “Tenant”). (FAC, ¶
19; Exhibit A – a copy of the lease).
The
Lease prohibited Tenant from using the Premises for any unlawful purpose,
including selling illicit drugs. (FAC, ¶ 21.) Tenant “represented that he would be
operating a small market selling legal tobacco products and legal tobacco-related
products.” (FAC, ¶
22.) Prior to December 2020, Mr. Duong periodically scheduled inspections with
the Tenant of the Premises, and observed no sale of cannabis product or
products. (FAC, ¶
27.)
Mr.
Duong’s health deteriorated severely, and he was hospitalized throughout 2020
and 2021. (FAC, ¶¶
23-25.) Indeed, from approximately June 2020 to the present, Mr. Duong has been
under hospice care because his medical condition has placed his left side of
his body in a state of paralysis. (FAC, ¶ 26.)
Nevertheless,
CDTFA sent Mr. Duong a letter dated December 1, 2020 (the “December 1 Letter”),
informing him that illegal sale of cannabis, without required permit or license,
was taking place at the Premises. (FAC, ¶ 28; Exhibit D – a copy of the letter.) The
letter warned that “[a]bsent any documented and verified evidence to the
contrary, Defendants intend to hold Mr. Duong responsible for the sales if Mr.
Duong did not respond within seven (7) days.” (FAC, ¶ 28.) Mr. Duong called
the number on the letter to inform CDTFA that he does not sell cannabis, he had
been hospitalized for most of 2020, and he can provide documents showing he is
the landlord not the tenant of the Premises, but could not reach CDTFA and his
voicemail was not returned. (FAC, ¶ 29.)
Mr.
Duong did not receive any other notice until a Notice of Sheriff’s Sale was
posted on the Premises on or about January 15, 2022. (FAC, ¶ 31; Exhibit E – a
copy of the Notice of Sheriff’s Sale.)
Apparently
CDTFA had mailed Mr. Duong a “Notice of Jeopardy Determination” on or about
December 29, 2020, informing Plaintiff that it owed $730,792.14, which
consisted of a sales tax, interest, and negligence penalty, for the period of
January 1, 2018, through September 30, 2020. (FAC, ¶ 42.) However, CDTFA
had mailed the notice to Mr. Duong’s mother’s home in Costa Mesa, California,
and his accountant in Santa Ana. (FAC, ¶ 42.) Therefore, service of the Notice of
Jeopardy Determination was not reasonably effectuated because not only did Mr.
Duong’s health condition not allow him to cognitively acknowledge the
documents, but the notice was sent to the wrong home. (FAC, ¶ 103.)
CDTFA
violated its Compliance Policy and Procedures Manual by, among other things,
closing out Mr. Duong’s account without providing him with the opportunity to
show that he is not liable for the Tenant’s taxes. (FAC, ¶ 36.)
This
action is filed pursuant to the Taxpayer’s Bill of Rights (specifically,
Revenue and Taxation Code section 7099) on Mr. Duong’s behalf, “due to actions
taken by [CDTFA] in reckless disregard of its own published procedures.” (FAC,
¶ 8.)
Plaintiff
seeks (among other things) punitive and compensatory damages. (FAC, p. 39:16-20.)
DEMURRER
A.
Request for Judicial Notice
CDTFA
seeks judicial notice of the following documents in support of its demurrer:
1.
Exhibit
A – a letter dated December 1, 2020, sent to Plaintiff at 8821 Norwalk Blvd.,
Whittier, CA 90606; and 1820 E. Garry Ave., Ste. 210, Santa Ana, CA 92705.
2.
Exhibit
B – Articles of Organization filed by Plaintiff with the Secretary of State on
September 14, 2017, listing Plaintiff’s service of process address as 8821
Norwalk Blvd., Whittier, CA 90606.
3.
Exhibit
C – CDTFA’s Memorandum for Request for Jeopardy Determination dated December
22, 2020.
4.
Exhibit
D – Audit report letters sent to Plaintiff on December 9, 2020, at 8821 Norwalk
Blvd., Whittier, CA 90606; and 1820 E. Garry Ave., Ste. 210, Santa Ana, CA
92705.
5.
Exhibit
E – Notices of Jeopardy Determination sent to Plaintiff and Mr. Duong at 8821
Norwalk Blvd., Whittier, CA 90606 and 2984 Milbro St., Costa Mesa, CA 92626.
(Request
for Judicial Notice, filed on January 10, 2023 (“RJN”), pp. 2:4-3:16.)
The
Court may take judicial notice of “‘[o]fficial acts of the legislative,
executive, and judicial departments of the United States and of any state of
the United States.’ (Evid. Code, § 452, subd. (c).)” (Rodas v. Spiegel
(2001) 87 Cal.App.4th 513, 518.) “Official acts include records, reports and
orders of administrative agencies,” such as Exhibits A, C, D, and E above. (Ibid.)
Official acts also includes a statement filed with the Secretary of State, such
as Exhibit B above. (See Elmore v. Oak Valley Hospital Dist. (1988) 204
Cal.App.3d 716, 722 [“As we have noted in footnote 3, above, once a statement
is filed pursuant to Government Code section 53051, it becomes the duty of the
Secretary of State and the county clerk to place the information so filed in a ‘Roster
of Public Agencies.’ That roster is declared by section 53051 to be a public
record. ¶ Thus, a statement filed with the Secretary of State and indexed in
the ‘Roster of Public Agencies’ becomes a document of which a court can
properly take judicial notice”].)
Accordingly,
CDTFA’s unopposed request of judicial notice is granted as to all documents
(Exhibits A through E).
B.
Legal Standard
A
demurrer can be used only to challenge defects that appear on the face of the
pleading under attack or from matters outside the pleading that are judicially
noticeable. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) For the purpose
of testing the sufficiency of the cause of action, the demurrer admits the
truth of all material facts properly pleaded. (Aubry v. Tri-City Hospital
Dist. (1992) 2 Cal.4th 962, 966-967.) A demurrer “does not admit
contentions, deductions or conclusions of fact or law.” (Daar v. Yellow Cab
Co. (1967) 67 Cal.2d 695, 713.) A demurrer may be sustained “only if the
complaint fails to state a cause of action under any possible legal theory.” (Sheehan
v. San Francisco 49ers, Ltd. (2009) 45 Cal.4th 992, 998.)
Before
filing a demurrer, the moving party must meet and confer in person or by
telephone with the party who filed the pleading to attempt to reach an
agreement that would resolve the objections to the pleading. (Code Civ. Proc.,
§ 430.41, subd. (a).)
C.
Meet and Confer
CDTFA’s
counsel testifies that she emailed Plaintiff’s counsel a letter, outlining the
alleged issues with the FAC and requested further communications to determine whether
the parties can resolve those issues before filing the instant demurrer.
(Demurrer, declaration of Anna Barsegyan (“Barsegyan Decl.”), ¶ 3.) However,
Plaintiff’s counsel did not respond. (Barsegyan Decl., ¶ 5.)
The
Court finds that CDTFA has satisfied the meet and confer requirement.
D.
Discussion
CDTFA
demurs the FAC, making several arguments. The Court discusses the main arguments
below.
1.
Whether the “Pay First, Litigate Later” Rule
Under the California Constitution Applies to This Action and the FAC Alleges
Compliance with the Rule
According
to the California Constitution:
No legal or equitable
process shall issue in any proceeding in any court against this State or
any officer thereof to prevent or enjoin the collection of any tax. After
payment of a tax claimed to be illegal, an action may be maintained
to recover the tax paid, with interest, in such manner as may be provided by
the Legislature.
(Cal.
Const., art. XIII, § 32 (“Section 32”) [emphasis added].)
CDTFA
argues that the second sentence of Section 32 has long been interpreted to
require that a party who wishes to challenge a tax assessment in court must pay
that assessment first before litigating the tax issue. Here, CDTFA continues,
Plaintiff seeks to challenge CDTFA’s sales tax assessment and subsequent
collection efforts. However, the FAC fails to allege that Plaintiff paid the
tax in full and exhausted its administrative remedies prior to filing this
action. Therefore, CDTFA concludes, the Court should sustain the demurrer to
the FAC without leave to amend because Section 32 prohibits pre-payment
challenges to a tax assessment even when the taxpayer cannot afford to pay the
assessment.
In
opposition, Plaintiff insists repeatedly that it was not provided with the
relevant notices and, therefore, the assessment of taxes on its property is not
effective.
However,
that argument goes to the merits of Plaintiff’s case, which the Court cannot
resolve on demurrer.
Plaintiff
also argues: “The point of both Article XIII section 32 and Rev. & Tax Code
Sec. 6931 of the Code is to prevent litigation against the State or officers of
the State of taxation issues prior to payment of the tax. Here, Plaintiff is
not a taxpayer and is never liable for any tax. Therefore, this case will not
affect, prevent or enjoin the collection of any tax.” (Opposition, p.
9:12-19 [italics in original].)
Plaintiff
cites no authority to support its argument that it is not a “taxpayer,” or its
implied argument that Section 32 only applies to proceedings brought by
“taxpayers.”
Indeed,
the FAC alleges that this action is “filed pursuant to the Taxpayer’s Bill of
Rights (specifically Revenue and Taxation Code Section 7099) ….” (FAC, ¶ 8.)
Plaintiff also repeats in its opposition that it “has filed this action against
the CDFTA because Defendant Board recklessly disregarded its own published
procedures in violation of Revenue and Taxation Code Section 7099 thereby
damaging Plaintiff as he is not the liable taxpayer.” (Opposition, p. 7:2-4.)
However,
Revenue and Taxation Code section 7099 states: “If any officer or employee of
the board recklessly disregards board-published procedures, a taxpayer aggrieved
by that action or omission may bring an action for damages against the State of
California in superior court.” (Rev. & Tax. Code, § 7099, subd. (a) [emphasis
added].)
Therefore,
if Plaintiff was not a “taxpayer,” it would not be bringing this lawsuit pursuant
to Revenue and Taxation Code Section 7099, which is part of the California Taxpayer’s
Bill of Rights.
In
any event, Section 32 states that it applies to “any” legal or equitable
proceeding to prevent or enjoin collection of “any” tax. Therefore, it applies
to this action.
As
CDTFA has argued, “‘[a] taxpayer ordinarily must pay a tax before commencing a
court action to challenge the collection of the tax. This rule, commonly known
as “pay first, litigate later,” is well established and is based on a public
policy reflected in the state Constitution, several statutes, and numerous
court opinions.’ [Citation.]” (California Logistics, Inc. v. State of
California (2008) 161 Cal.App.4th 242, 247 (“California Logistics”).)
Section
32 “establishes that ‘the sole legal avenue for resolving tax disputes is a
postpayment refund action. A taxpayer may not go into court and obtain
adjudication of the validity of a tax which is due but not yet paid. [¶] The
important public policy behind this constitutional provision ‘is to allow
revenue collection to continue during litigation so that essential public
services dependent on the funds are not unnecessarily interrupted.” [Citation.]
“The fear that persistent interference with the collection of public revenues,
for whatever reason, will destroy the effectiveness of government has been
expressed in many judicial opinions.”’ [Citation.]” (California Logistics,
supra, 161 Cal.App.4th at p. 247.) “In explaining the rationale behind
the rule, many judicial opinions have stressed the importance of restraining
courts from unduly interfering with the flow of tax dollars that fund
government operations, thereby preventing the disruption of essential public
services.” (Flying Dutchman Park, Inc. v. City and County of San Francisco (2001)
93 Cal.App.4th 1129, 1135 (“Flying Dutchman”).) ”The Legislature
implemented this [Section 32] constitutional provision by enacting Revenue and
Taxation Code section 6931, which states: ‘No injunction or writ of mandate or
other legal or equitable process shall issue in any suit, action, or proceeding
in any court against this State or against any officer of the State to prevent
or enjoin the collection under this part of any tax or any amount of tax
required to be collected.’” (Id. at p. 1136.)
Simply
put, under Section 32, “any legal action or defense seeking “prepayment
adjudication that would effectively prevent the collection of a tax [is]
barred.” [Citation.]’ [Citations.]” (Water Replenishment Dist. of Southern
California v. City of Cerritos (2013) 220 Cal.App.4th 1450, 1466.)
“It
is well-established that the applicability of section 32 does not turn on
whether the action at issue specifically seeks to prevent or enjoin the
collection of a tax. Instead, the provision bars ‘not only injunctions but also
a variety of prepayment judicial declarations or findings which would impede
the prompt collection of a tax.’ [Citation.]” (California Logistics, supra,
161 Cal.App.4th at pp. 247-248.)
“The
relevant issue is whether granting the relief sought would have the effect of
impeding the collection of a tax.” (California Logistics, supra,
161 Cal.App.4th at p. 248.)
Here,
the FAC asks the Court to “issue permanent injunctive relief prohibiting
Defendants from expanding taxpayer funds or taxpayer-financed resources, … to
enforce, maintain, or otherwise carry out the sale of the Property and the
policies, procedures, and practices arising thereunder as implemented by the
CDTFA without affording Mr. Duong a hearing before taking its property.” (FAC, ¶
138.) The FAC also asks the Court to “issue a declaration of the rights and
duties of the parties; specifically, that the [Defendants] had no right to
conduct a sale of the Premises or cause such sale to occur because Plaintiff is
not responsible for the alleged cannabis sales that occurred on the Premises
and cannot be liable for the Tenant’s outstanding sales tax for the past and
the future ….” (FAC, p. 39:11-15.)
Therefore,
Section 32 applies here because if the Court were to grant Plaintiff’s
requested relief, such relief would have the effect of impeding CDTFA’s
collection of tax.
Plaintiff
also argues that McClain v. Sav-On Drugs (2019) 6 Cal.5th 951 (“McClain”)
stands for the proposition that “declaratory relief claims that have no such
result or effect invalidating an outstanding tax assessment, include ‘(1)
persons attacking nontax regulations or person attacking tax regulations such
persons who are not the taxpayer.’ McClain v Sav-On Drugs et al (2019),
6 Cal.5th at pp. 959-960, 244 Cal.Rptr.3d 138, 435 P.3d 424.” (Opposition, p.
9:20-23 [emphasis removed].)
However,
the McClain case does say that and the “quoted” portion in Plaintiff’s opposition
does not appear in the opinion. Therefore, the Court is unsure what Plaintiff
is referring to.
Most
importantly, McClain is inapposite. That case concerned customers that
brought a class action against retail pharmacies. “The question [there was]
whether customers who have paid sales tax reimbursement on purchases they
believe to be exempt from sales tax may file suit to compel the retailers to
seek a tax refund from the [CDTFA] when there has been no determination by the [CDTFA]
or a court that the purchases are exempt.” (McClain, supra, 6
Cal.5th at p. 955.)
Plaintiff
has not explained how or why McClain applies to this case.
In
addition, “‘a taxpayer may not circumvent [section 32 's] restraints on
prepayment tax litigation by seeking only declaratory relief’ when the ‘net
result’ or ‘effect’ of granting that declaratory relief is to absolve the
taxpayer of liability for the disputed tax.” (California Department of Tax
and Fee Administration v. Superior Court (2020) 48 Cal.App.5th 922, 931 (“CDTFA
v. Superior Court”.) “Because adjudication of such declaratory relief
claims would be binding on the state in any further proceedings regarding the
taxpayer’s liability [citations], the judgment resolving such claims would
effectively prevent or enjoin the state from collecting the disputed tax.” (Ibid.)
“Thus, as our Supreme Court has noted time and again, declaratory relief claims
that have the ‘net result’ or ‘effect’—by virtue of collateral estoppel—of
resolving a disputed tax claim are subject to section 32 's ‘pay first,
litigate later’ rule.” (Ibid.)
In
CDTFA v. Superior Court, the Court of Appeal held that the net result or
effect of the plaintiff’s declaratory reliefs claims was to absolve him of tax
liability based on the following facts. “Because plaintiff has not paid the
full amount of the sales tax he disputes, his declaratory relief claims are
barred by section 32. Through his declaratory relief claims, plaintiff seeks a
declaration that the Policy and the Regulation are ‘illegal’ and ‘unconstitutional.’
Because, as plaintiff elsewhere alleges, the outstanding tax assessment against
him rests exclusively upon the validity of the Policy and the Regulation, a
declaration that the Policy and the Regulation are “illegal” and
“unconstitutional” would invalidate them and negate the sole basis of his
outstanding and unpaid tax assessment.” (CDTFA v. Superior Court, supra,
48 Cal.App.5th at p. 932.)
Here,
like in CDTFA v. Superior Court, the net result or effect of Plaintiff’s
declaratory reliefs claims (i.e., the first through fourth causes of action) is
to absolve itself of tax liability. (See FAC, ¶¶ 83 [requesting judicial
determination that Mr. Duong is not the responsible taxpayer for the Tenant’s
conduct for the alleged cannabis sales on the Premises, and is not responsible
for the outstanding balance owed to the CDTFA]; 87 [requesting the Court to
make a “de novo determination of whether [CDTFA’s] making of the [tax]
assessment was reasonable …”]; 95 [requesting the Court to determine that real property
exclusion prevents Defendant from assessing sales and use taxes]; 113
[requesting the Court to determine that Mr. Duong, as a non-taxpayer or as a
matter of due process has a right to a judicial declaration that he Defendant
violated their own policy, revenue, and tax codes, U.S. or California
constitution right of due process of placing a lien on the property prior to
Mr. Duong receiving this Notice”].) Even Plaintiff’s “breach of contract” claim
alleges that CDTFA “violated their duty by wrongfully alleging the tax
investigation period prior to Mr. Duong being an entity, or leaving commercial
space at the Property” (FAC, ¶ 159), and that “Plaintiff seeks a judicial
determination and declaration that December 1, 2020, Letter, policies, and
practices arising thereunder as implemented by the CDTFA are unlawful and void”
(FAC, ¶ 161).
Therefore,
Plaintiff may not circumvent Section 32’s restraints on prepayment tax
litigation by relying on its declaratory relief claims.
Notwithstanding
the above, the California Supreme Court has recognized an exception to Section
32’s ban on prepayment review. In one case, “[t]he taxpayer … objected to a
Board of Equalization discovery order, claiming that compelled disclosure
constituted an unreasonable search and seizure under the federal Constitution
because the underlying tax assessment was invalid.” (Calfarm Ins. Co. v.
Deukmejian (1989) 48 Cal.3d 805, 838–839 (“Calfarm”) [discussing Western
Oil & Gas Assn. v. State Board of Equalization (1987) 44 Cal.3d 208].) The
California Supreme Court “recognized that ‘[t]he ban on prepayment judicial
review found in the state Constitution must yield, of course, to the
requirements of the federal Constitution.’ [Citation.] Since the federal courts
permitted prepayment relief in ‘those situations in which it is clear that “‘under
no circumstances’ can the government prevail”’ [citation], [the California
Supreme Court] adopted that same standard for state prepayment suits asserting
federal constitutional issues.” (Calfarm, supra, 48 Cal.3d at p.
839.)
However,
“that exception to section 32 [that the ban on prepayment judicial review must
yield to the requirements of the federal Constitution] is ‘extremely narrow’ and
does not encompass claims based on the state constitution alone.” (California
Logistics, Inc. v. State of California (2008) 161 Cal.App.4th 242, 250–251
[discussing the California Supreme Court’s decision in Calfarm].)
Here,
Plaintiff does not allege this case involves unreasonable search and seizure
under the federal constitution. Although the FAC implies that CDTFA violated
“Mr. Duong’s due process rights under the Fifth Amendment of the United States
Constitution …” (FAC, ¶ 88), Mr. Duong is not the plaintiff in this this case.
In addition, the California Supreme Court and Court of Appeal have held that
the pay first, litigate later rule does not violate due process. (See California
Logistics, Inc. v. State of California (2008) 161 Cal.App.4th 242, 251 [“Finally,
appellant argues that to dismiss its suit on the basis of the “pay first,
litigate later” rule would violate its federal constitutional right to due
process by effectively depriving it of an opportunity for judicial review,
because it relied on the prior adjudications in conducting its business
operations and cannot afford to pay the $1.2 million proposed assessment in
order to proceed with its challenge. The California Supreme Court in [Modern
Barber Colleges v. California Employ. St. Com'n (1948) 31 Cal.2d 720], has
addressed this argument, ruling that a ban on prepayment review complies with
the due process clause”].)
Again,
as stated above, the net result and effect of Plaintiff’s action is to absolve
itself of tax liability.
For
those reasons, the demurrer on the ground that this action is barred by Section
32’s pay first, litigate later rule, is sustained.
With
regards to leave to amend, “[w]here an ‘action is barred as a matter of law,
the demurrer is properly sustained without leave to amend.’ [Citation]” (CDTFA
v. Superior Court, supra, 48 Cal.App.5th at p. 932.) In CDTFA v.
Superior Court, the Court of Appeal held “section 32 bars plaintiff’s
declaratory relief claims unless and until he pays the full amount of the
outstanding tax assessment. He admits he has not done so, and has declined to
do so even after the trial court initially gave him leave to amend solely to
allege a ‘refund action.’ Accordingly, his claim is barred as a matter of law
and the demurrer must be sustained without leave to amend.” (Id. at p.
938.)
Here,
Plaintiff has not made any representations or allegations regarding whether it
paid the taxes at issue. Therefore, the Court cannot rule at this time that, as
a matter of law, Section 32 bars Plaintiff’s action.
Accordingly,
the demurrer to the FAC, on the ground that the pay first, litigate later rule
bars this action is SUSTAINED, with leave to amend.
2.
Whether the FAC Alleges Exhaustion of
Administrative Remedies Under the Revenue and Taxation Code
CDTFA
demurs the FAC arguing that the California Revenue and Taxation Code required
Plaintiff to show that it paid the disputed taxes, applied for a refund, and
the grounds for refund raised in this action were previously raised in
Plaintiff’s administrative claim.
CDTFA
concludes that “[s] ince
Plaintiff has not paid the tax due and exhausted its administrative remedies as
required under the Revenue and Taxation Code, the Court should sustain the
CDTFA’s Demurrer without leave to amend.” (Demurrer, p. 18:23-25.)
As
discussed above, “the Legislature implemented [the Section 32] constitutional
provision by enacting Revenue and Taxation Code section 6931, which states: ‘No
injunction or writ of mandate or other legal or equitable process shall issue
in any suit, action, or proceeding in any court against this State or against
any officer of the State to prevent or enjoin the collection under this part of
any tax or any amount of tax required to be collected.’” (Flying Dutchman,
supra, 93 Cal.App.4th at p. 1136.)
Therefore,
Plaintiff was required to pay the taxes first and litigate the dispute later
under the Revenue and Taxation Code.
Here,
the Court has found that the FAC fails to allege whether Plaintiff paid the
taxes prior to bringing this lawsuit.
Accordingly,
the demurrer on the ground that the FAC fails to allege exhaustion of
administrative remedies under California’s Revenue and Taxation Code is SUSTAINED,
with leave to amend.
3.
Whether the FAC Alleges Facts Sufficient to
Constitute a Cause of Action for Gross Negligence
“‘The
elements of a cause of action for negligence are well established. They are
“(a) a legal duty to use due care; (b) a breach of such legal duty; [and] (c)
the breach as the proximate or legal cause of the resulting injury.”’
[Citation.]” (Ladd v. County of San Mateo (1996) 12 Cal.4th 913, 917 (“Ladd”)
[italics removed].)
CDTFA
argues that Plaintiff’s eighth cause of action for gross negligence fails to
state facts sufficient to constitute a cause of action because a public entity
and its employees are not liable for an injury caused by the administration of
tax laws and the collection of tax under Government Code section 860.2.
In
opposition, Plaintiff argues that the Government Code section 860.2 does not
apply in this case because the statute only applies to actions that seek
damages. Here, Plaintiff argues, it is not seeking damages, but only seeks to
compel Defendants to perform their statutory duties. (Opposition, pp.
9:25-10:13; 11:25-26.)
However,
as CDTFA points, the FAC alleges that Plaintiff is seeking damages. (FAC, p.
39:16.)
In
any event, Government Code section 860.2 states: “Neither a public entity nor a
public employee is liable for an injury caused by:
(a)
Instituting
any judicial or administrative proceeding or action for or incidental to the
assessment or collection of a tax.
(b)
An
act or omission in the interpretation or application of any law relating to a
tax.”
(Gov.
Code, § 860.2.)
As
Plaintiff argues, Government Code “section 860.2 is concerned with limiting
governmental liability for an injury, which is defined in section 810.8
as ‘death, injury to a person, damage to or loss of property, or any other
injury that a person may suffer to his person, reputation, character, feelings
or estate, of such nature that it would be actionable if inflicted by a private
person.’” (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 867
[italics in original].) A defendant’s failure to comply with statutory duties,
does not constitute an injury. (See Ibid. [“Defendants’ failure to
comply with their statutory duty to correctly allocate and distribute tax
revenue to other public entities does not constitute an ‘injury” within the
narrow meaning of sections 810.8 and 860.2”].)
Here,
the FAC alleges the following under the eighth cause of action for gross
negligence. Defendants failed to act within the standard of care “to Mr. Duong”
by failing to give Mr. Duong the proper notices, opportunity to show that he is
not liable as a taxpayer for taxes owed, and the opportunity to correct the tax
liability. (FAC, ¶ 149.) “The imputed tax liability to Mr. Duong, therefore,
was the resulting damages.” (FAC, ¶ 149.) “And so, Defendants breached their
duty of care to Mr. Duong, causing Mr. Duong to incur unnecessary fees and
damages. Defendants, therefore, behaved and acted with gross negligence to Mr.
Duong.” (FAC, ¶¶ 150, 151.)
However,
those facts are insufficient to state a negligence cause of action against
CDTFA because “‘[l]iability for negligent conduct may only be imposed where
there is a duty of care owed by the defendant to the plaintiff or to a class of
which the plaintiff is a member. [Citation.]’ [Citation.]” (Ladd, supra,
12 Cal.4th at p. 918.) The facts above focus on CDTFA’s alleged breach of duty
towards Mr. Duong, but Mr. Duong is not a plaintiff in this action.
Notwithstanding
that finding, it is clear that Plaintiff is seeking damages in connection with
its eighth of action for gross negligence. (FAC, ¶¶ 149, 150, 151.)
Therefore,
Government Code section 860.2 bars the claim.
Although
it is unclear what other relief other than damages Plaintiff can request in
connection with its gross negligence claim, the Court will grant Plaintiff
leave to amend.
Accordingly,
the demurrer to the eighth cause of action for gross negligence is SUSTAINED, with
leave to amend.
4.
Whether the FAC Alleges Compliance with the Claims
Presentation Requirement
CDTFA
next demurs the FAC, arguing that Plaintiff has not complied with the
Government Claims Act (the “Act”), which requires a claim for money or damages
against a public entity to be presented to the State before filing a lawsuit.
In
opposition, Plaintiff alleges that it has alleged substantial compliance with
the Government Claims Act.
As
the Court of Appeal stated recently, Government Code “Section 905.2,
subdivision (b) requires the presentation of ‘all claims for money or damages
against the state’ in all cases of ‘injury for which the state is liable.’
[Citation.]” (Malear v. State (2023) 305 Cal.Rptr.3d 708, 712 (“Malear”).)
“‘[N]o suit for money or damages may be brought against a public entity on a
cause of action for which a claim is required to be presented ... until a
written claim therefor has been presented to the public entity and has been
acted upon by the board, or has been deemed to have been rejected.’ [Citation.]”
(Ibid.) “If the public entity provides written notice of its rejection
of a claim, any suit against the public entity must be brought no later than
six months after the notice is personally delivered or deposited in the mail. [Citation.]
If written notice is not given, the plaintiff has two years from accrual of the
cause of action to file suit. [Citation.]” (Ibid.)
“Plaintiffs
filing a complaint against a public entity ‘must allege facts demonstrating or
excusing compliance with the claim presentation requirement. Otherwise, [their]
complaint is subject to a general demurrer for failure to state facts sufficient
to constitute a cause of action.’ [Citation.]” (Malear, supra, 89
Cal.App.5th at p. 712.)
“[T]he
presentation and denial of a government claim as a statutory prerequisite to
initiating suit.” (Malear, supra, 305 Cal.Rptr.3d at p. 712.)
However,
“‘a plaintiff need not allege strict compliance with the statutory claim
presentation requirement.’ [Citation.]” (Malear, supra, 305
Cal.Rptr.3d at p. 713.)
“Under
the doctrine of substantial compliance, the court may conclude a claim is valid
if it substantially complies with all of the statutory requirements for valid
claim even though it is technically deficient in one or more particulars.” (Santee
v. Santa Clara County Office of Education (1990) 220 Cal.App.3d 702, 713 (“Santee”).)
“The doctrine of substantial compliance is normally raised where a timely but
deficient claim has been presented to the public entity.” (Ibid.)
However,
the doctrine of substantial compliance “is inapplicable where the claim is
presented to the wrong entity.” (Santee, supra, 220 Cal.App.3d at
p. 713.)
Here,
Plaintiff argues that it substantial complied with the claims presentation
requirement by putting “numerous CDFTA agents on notice … with regard to
Plaintiff’s attempt to dispute the tax liability.” (Opposition, p. 11:2-15.)
Plaintiff also “contacted the number provided on the [December 1 Letter] and
left a voicemail; however, the voicemail was never returned.” (Opposition, p.
11:15-21.) “Subsequently, Plaintiff hired a tax professional to help him
dispute the alleged liability. On April 20, 2022, Plaintiff’s tax professional
also mailed a Protest Letter dated April 20, 2022; to no avail as the CDFTA, in
bad faith, did not provide him with adequate remedies and/or accommodations.”
(Opposition, p. 11:22-24.)
Plaintiff
cites Life v. County of L.A. (1991) 227 Cal.App.3d 894 (“Life”), to
support its conclusion that “the doctrine of ‘substantial compliance’ applies
in the context of Section 915 only if the claimant can show actual receipt by a
designated person.” (Opposition, p. 11:6-11.)
However,
in Life, the Court of Appeal rejected that argument. It declined to
follow another case which deemed the presentation of a claim to a public
employee to amount to substantial compliance. (See Life v. County of L.A.
(1991) 227 Cal.App.3d at p. 901, disagreeing with Jamison v. State of
California (1973) 31 Cal.App.3d 513.)
Instead,
the Court of Appeal held that “substantial compliance under the statute demands
that the misdirected claim be ‘actually received’ by the appropriate person or
board. ([Gov. Code] § 915, subd. (c).) If a public employee has failed to
fulfill a duty to forward a misdirected claim to the appropriate party, such
claim cannot be in substantial compliance because it was not ‘actually received’
by the appropriate party.” (See Life v. County of L.A. (1991) 227
Cal.App.3d at p. 901.)
Here,
Plaintiff has not alleged that it drafted a proper claim or the “numerous CDFTA
agents” it allegedly put on notice about the tax dispute forwarded the claim to
the appropriate party. In addition, CDTFA argues in reply that claims under the
act must be filed with the Department of General Services, not CDTFA. (Reply,
p. 7:7-9.) Therefore,
Therefore,
to the extent the FAC seeks damages, Plaintiff has failed to allege compliance
with the Government Claims Act.
Accordingly,
the Court sustains the demurrer to the FAC’s allegations of damages, with leave
to amend.
5.
Whether the FAC Alleges Facts Sufficient to
Constitute a Cause of Action for Breach of Contract
CDTFA
demurs the ninth cause of action for breach of contract, arguing that it fails
to state facts sufficient to constitute a cause of action because CDTFA’s
enforcement of the Sales and Use Tax Law does not create a contractual
relationship with Plaintiff.
Plaintiff’s
opposition does not address CDTFA’s argument concerning the breach of contract
claim.
Plaintiff
only argues that it has alleged facts sufficient to constitute that cause of
action by alleging facts showing violation of Mr. Duong’s due process rights
under the Fifth Amended of the United States Constitution. (Opposition, p.
12:4-18.)
However,
as discussed above, Mr. Duong is not a plaintiff in this action. In addition,
Plaintiff fails to explain how due process violations amount to breach of contract.
In
addition, as CDTFA argues: “A tax is a charge upon persons or property to raise
money for public purposes. It is not founded upon contract; it does not
establish the relation of debtor and creditor between the tax-payer and State;
it does not draw interest; it is not the subject of attachment; and it is not
liable to set-off. It owes its existence to the action of the legislative
power, and does not depend for its validity or enforcement upon the individual
assent of the tax-payer.” (Perry v. Washburn (1862) 20 Cal. 318, 350
Here,
Plaintiff’s breach of contract claim alleges that CDTFA violated its Compliance
Policy and Procedures Manual, but fails to allege facts showing a contract
between Plaintiff and CDTFA. To the extent Plaintiff is arguing that the Sales
and Use Tax Law forms a contract between the agency and Plaintiff, as stated
above, tax is not founded upon contract.
Accordingly,
the demurrer to the ninth cause of action for breach of contract is SUSTAINED,
with leave to amend.
MOTION TO STRIKE
A.
Legal Standard
“The
court may, upon a motion … or at any time in its discretion, and upon terms it
deems proper:
(a)
Strike
out any irrelevant, false, or improper matter inserted in any pleading.
(b)
Strike
out all or any part of any pleading not drawn or filed in conformity with the
laws of this state, a court rule, or an order of the court.”
(Code
Civ. Proc., § 436.)
Before
filing a motion to strike, the moving party must meet and confer in person or
by telephone with the party who filed the pleading to attempt to reach an
agreement that would resolve the objections to the pleading. (Code Civ. Proc.,
§ 435.5, subd. (a).)
B.
Meet and Confer
CDTFA’s
counsel testifies that she emailed Plaintiff’s counsel a letter, outlining the
alleged issues with the FAC and requested further communications to determine
whether the parties can resolve those issues before filing the instant
demurrer. (Motion to Strike, declaration of Anna Barsegyan (“Barsegyan Decl.”),
¶ 3.) However, Plaintiff’s counsel did not respond. (Barsegyan Decl., ¶ 5.)
The
Court finds that CDTFA has satisfied the meet and confer requirement.
C.
Discussion
CDTFA
moves to strike the request for punitive damages and civil penalties for Labor
Code violations in the Prayer for Relief (FAC, pp. 39-40, specifically,
Paragraphs 4 and 7 in the prayer).
Plaintiff
did not file any opposition to the motion.
The
Court finds it proper to grant the motion. As CDTFA points out, “[n]otwithstanding
any other provision of law, a public entity is not liable for damages awarded
under Section 3294 of the Civil Code or other damages imposed primarily for the
sake of example and by way of punishing the defendant.” (Gov. Code, § 818.)
Therefore, Plaintiff’s request for punitive damages against CDTFA is improper.
In addition, the FAC seeks “civil penalties with respect to the Labor Code
violations that Defendants committed against Plaintiff, according to proof on
each cause of action for which such penalties are available ….” (FAC, Prayer
for Relief, ¶ 7.) However, as CDTFA argues, the FAC does not allege any Labor
Code violations. Therefore, Plaintiff’s request for civil penalties under the
statute is improper.
There
being no opposition to the motion to strike, the motion is sustained without
leave to amend.