Alvin Ltd. v. U.S. Postal Service

• Decision Date: 14 April 1987
• Docket Number: No. 86-634,86-634
• Citation: 816 F.2d 1562
• Parties: 34 Cont.Cas.Fed. (CCH) 75,255 ALVIN, LTD., et al., Appellants, v. UNITED STATES POSTAL SERVICE, Appellee. Appeal
• Court: U.S. Court of Appeals — Federal Circuit

Page 1562

816 F.2d 1562

34 Cont.Cas.Fed. (CCH) 75,255

ALVIN, LTD., et al., Appellants, v. UNITED STATES POSTAL SERVICE, Appellee.

Appeal No. 86-634.

United States Court of Appeals, Federal Circuit.

April 14, 1987.

Keith D. Krakaur, Williams & Connolly, Washington, D.C., argued, for appellants. Raymond W. Bergan, Williams & Connolly, of Washington, D.C., was on the brief, for appellants.

Eva M. Plaza, Commercial Litigation Branch, Dept. of Justice, Washington, D.C., argued, for appellee. With her on the brief were Richard K. Willard, Asst. Atty. Gen., David M. Cohen, Director and M. Susan Burnett, Asst. Director. Helene M. Goldberg, Commercial Litigation Branch, Dept. of Justice, Washington, D.C., is counsel of record.

Before DAVIS, Circuit Judge, BALDWIN, Senior Circuit Judge, ^* and NEWMAN, Circuit Judge.

PAULINE NEWMAN, Circuit Judge.

The Postal Service Board of Contract Appeals ("Board" or "PSBCA") held that, subsequent to amendment to the California Constitution, Cal. Const. art. XIIIA (1978) (hereinafter "Proposition 13" or "Article XIIIA"), the United States Postal Service was not obligated to pay, under existing lease agreements, certain levies imposed by California taxing authorities. Alvin, Ltd., et al., 85-3 B.C.A. (CCH) p 18,216 (1985). We reverse.

Background

The appellants are thirty limited partnerships ¹ (collectively "Alvin") that own real property comprising postal facilities leased to the Postal Service in the state of California. The Postal Service entered into long-term leases for the properties starting in the 1950s, the most recent lease at issue having first been executed in 1974. Each lease agreement was in substantially the same form, provided by the Postal Service, and contained a Tax Clause Rider substantially as follows:

The lessor shall present to the Government the general real estate tax bills of each taxing authority for taxes due and payable on the land and buildings hereby demised.... [T]he Government shall pay to the lessor, as additional rent due hereunder, the net amount of said taxes by check made payable to the lessor and the taxing authority issuing said tax bill....

In 1975 a definition of "general real estate taxes" was added to the Rider by the Postal Service, as

taxes which are assessed on an ad valorem basis, ... without regard to benefit to the property, for the purpose of funding general governmental services.

No change in the lease terms accompanied this addition.

The Postal Service regulations include a definition of "special assessment" as follows:

A levy on property to pay for one or more specified public improvements to the property or to the immediate area, as for road construction, sidewalks, street lights, etc. Usually calculated pro rata to street frontage occupied by the property or by some other physical measure.

85-3 B.C.A. (CCH) at 91,434.

Proposition 13, added to the California Constitution as Article XIIIA on June 6, 1978, provided that ad valorem taxes on real property shall not exceed 1% of the assessed value of the property. Neither party disputes that the result was the immediate reduction of community revenues from ad valorem real estate taxes. Id.

This was not, however, the end of many of the community services that had been supported by general real estate taxes. Communities invoked alternative revenue collection methods, variously entitled special assessments, service charges, and benefit assessments. As the Board found, these assessments and charges, collectively referred to as special assessments, were for designated services of "flood control, mosquito abatement, lighting, garbage, sewer, sanitation, ... water...." Id. It was not contested, and the Board found that "[m]any of the governmental services presently funded by special assessments were funded by general real estate taxes before Proposition 13. Thus, it was not the use of the funds that changed, but the basis on which they were assessed." Id.

For the tax years 1978 to 1981 the Postal Service paid the reduced general real estate taxes and some of the new special assessments levied against the leasehold properties, payment the Board held to be a "mistake". Id. at 91,433, 91,434. After 1981 the Postal Service refused to pay anything other than taxes denominated "general real estate taxes" and assessed on an ad valorem basis, pointing to the letter of the lease agreements. It was stipulated that as a result the Postal Service's lease costs decreased, with corresponding increases in costs to the lessors.

The Board found that, as a matter of contractual intent at the time the leaseholds were entered into, "the parties expected the lessors' costs to be stabilized ... with respect to assessments for government services funded through general real estate taxes". Id. at 91,436. The Board concluded, however, that the changes in tax structure upon enactment of Proposition 13 did not overcome the long-standing policy of the Postal Service not to pay special assessments. Id. The Board found that Alvin

assum[ed] ... the risk that a third party--the state or local governments--would change the method through which revenues were raised. Therefore, while Respondent [Postal Service] bore the risk of increases in general real estate taxes, Appellant assumed the risk that its obligation for other revenue raising devices would be increased.

Id. at 91,436-437.

The Board declined to decide whether the new assessments and charges had the characteristics of general real estate taxes, and thus lacked the characteristics of traditional special assessments and service charges, reasoning that such a finding "would of necessity conclude that the assessments violated the 1% limit on general real estate taxes imposed by Article XIIIA" (emphasis added), and that "[t]his Board is not the appropriate forum for resolution of such a controversy." Id. at 91,435.

Alvin appeals the decision of the PSBCA pursuant to 41 U.S.C. Sec. 607(g)(1)(A).

Analysis

Appellate review is governed by 41 U.S.C. Sec. 609(b):

In the event of an appeal by a contractor or the Government from a decision of any agency board pursuant to section 607 of this title, notwithstanding any contract provision, regulation, or rules of law to the contrary, the decision of the agency board on any question of law shall not be final or conclusive, but the decision on any question of fact shall be final and conclusive and shall not be set aside unless the decision is fraudulent, or arbitrary, or capricious, or so grossly erroneous as to necessarily imply bad faith, or if such decision is not supported by substantial evidence.

Contract interpretation is a question of law, and thus the Board's interpretation is not final, although it is afforded careful consideration and great respect. George Hyman Construction Co. v. United States, 564 F.2d 939, 944, 215 Ct.Cl. 70 (1977).

A.

The government enters into contracts as does a private person, and its contracts are governed by the common law. Torncello v. United States, 681 F.2d 756, 762, 231 Ct.Cl. 20 (1982). See also Prudential Insurance Company of America v. United States, 801 F.2d 1295, 1298 (Fed.Cir.1986). The parties are presumed to have entered into a valid and binding contract. Id. at 761; see also Restatement (Second) of Contracts Sec. 203(a) (1981) ("an interpretation which gives a reasonable, lawful, and effective meaning ... is preferred"); Hobbs v. McLean, 117 U.S. 567, 576, 6 S.Ct. 870, 874, 29 L.Ed. 940 (1886).

Alvin asserts that the case at bar is solely a matter of implementing the intention of the parties to a contract, and that despite the unforeseen enactment of Proposition 13, the original and mutual intention has not been challenged. Alvin contends that it was the "shift between forms of taxation, where the revenues continue to be used for traditional services of general benefit to the community, that has created the controversy in this case." The Postal Service counters that the Board was correct in recognizing the "well-established" distinction between a general tax and a special assessment, and that a taxing entity cannot change the contractual agreement of the parties. Neither side has sought rescission nor has argued that the leasehold contracts are not enforceable. Similarly, neither side disputes that the contractual obligations contemplated in the Tax Clause Riders were fulfilled prior to Proposition 13. The issue is the fulfillment of those same obligations after enactment of the California constitutional amendment.

In resolving a disputed interpretation of a contract,

[w]ords and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is acertainable it is given great weight.

Restatement (Second) of Contracts Sec. 202(1). Indeed, "[i]n the case of contracts, the avowed purpose and primary function of the court is the ascertainment of the intention of the parties." 4 S. Williston, A Treatise on the Law of Contracts Sec. 601 (3d ed. 1961), quoted with approval in Dynamics Corp. of America v. United States, 389 F.2d 424, 429, 182 Ct.Cl. 62 (1968). See also Restatement (Second) of Contracts Sec. 202 comment b. The Board treated the question of contractual intent solely as whether the Postal Service intended to pay for levies denominated "special assessments", whatever their genesis or scope, and held that the Postal Service did not. Therein lies its error. The dispute arises not out of the circumstances at the time of formation of these contracts, but out of a change in state law enacted up to 25 years later. In ascertaining whether such a change may be accommodated, the original intention of the parties must be considered.

"The parties' intent must be gathered from the instrument as a whole", Kenneth Reed Construction Corp. v. United States, 475 F.2d 583, 586, 201 Ct.Cl. 282 (1973), from the perspective of "a reasonably intelligent person acquainted with the contemporary circumstances". Firestone...