Stern & Co. v. State Loan and Finance Corporation

• Decision Date: 08 June 1962
• Docket Number: Civ. A. No. 2429.
• Citation: 205 F. Supp. 702
• Parties: STERN & CO., a corporation of the State of Pennsylvania, Plaintiff, v. STATE LOAN AND FINANCE CORPORATION, a corporation of the State of Delaware, Defendant.
• Court: U.S. District Court — District of Delaware

205 F. Supp. 702

STERN & CO., a corporation of the State of Pennsylvania, Plaintiff, v. STATE LOAN AND FINANCE CORPORATION, a corporation of the State of Delaware, Defendant.

Civ. A. No. 2429.

United States District Court D. Delaware, at Wilmington.

June 8, 1962.

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E. N. Carpenter, II (Richards, Layton & Finger), Wilmington, Del., and W. Wilson White, and Bernard V. Lentz (White & Williams), Philadelphia, Pa., for plaintiff.

Howard L. Williams (Morris, James, Hitchens & Williams), Wilmington, Del., Robert Ash, and Carl F. Bauersfeld (Ash, Bauersfeld & Burton), Washington, D. C., for defendant.

LEAHY, Senior District Judge.

I. Dismissal. Defendant's motion for dismissal of the complaint is bottomed on four arguments that:

1) this Court lacks jurisdiction over this subject matter under the Declaratory Judgment Act; 2) such relief as sought by plaintiff is not binding on the United States Treasury Department, not a party here; 3) the present action should be dismissed, in any event, as the complaint and exhibits show defendant made no binding representation regarding plaintiff's federal tax liability such as to support plaintiff's suit at bar; and 4) this Court should not exercise its declaratory judgment jurisdiction, even if it exists, since such exercise is discretionary and because the same issues attempted to be tried here are already before the Tax Court for consideration.

1. 28 U.S.C. § 2201 provides:

"In a case of actual controversy within its jurisdiction, except with respect to Federal taxes, any court of the United States, upon the filing of appropriate pleadings, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such." (Emphasis added).

As originally adopted in 1934 the exemption with respect to Federal taxes was not contained in the statute, thus leading to serious speculation¹, ² that the then new declaratory judgment act could be used as a quick way for persons to gain a determination of tax status. The additional words were specially fashioned to avoid any such "radical departure from the long-continued policy of Congress * * * with respect to the determination, assessment, and collection of Federal taxes."³ That the exemption does prevent a taxpayer from obtaining declaratory relief from the Commissioner has been frequently proclaimed through the years.⁴

But, in the case at bar, however, one plaintiff-taxpayer seeks declaratory relief from an alleged breach of contract⁵ by the other contracting party, which breach plaintiff claims will result in serious consequences of a tax nature to it. Defendant simply says this matter is "with respect to federal taxes" and obviously falls within the specific exemption found in the present Declaratory Judgment Act.

I cannot agree. For, if plaintiff's allegations in ¶ 10 of its complaint are true, defendant has breached the contract. If, for example, the contract had stated explicitly what plaintiff claims it stated "by necessary and inevitable implication", i. e., that defendant pledged not to allocate or cause its subsidiaries to allocate any part of the purchase price to the covenants not to compete, found in two of the four separate agreements signed by the parties, then plaintiff would have a valid action for breach of contract against defendant. Too, it would have a valid action under the Declaratory Judgment Act to prevent the alleged subsequent breach from occurring.⁶, ⁷ Thus I hesitate to deny plaintiff an opportunity to be heard simply on the basis of the exemption in the statute. This Court should examine the facts and determine whether plaintiff's interpretation of the contract is correct. This Court may not determine tax liability; but it may determine facts which may have a direct, even immediate, bearing on what the tax liability will be.⁸ The fact that plaintiff has "tax motives" for bringing this suit to determine rights of parties under their contract cannot squeeze this action into the statutory exemption by virtue of depriving this Court of jurisdiction. Such motives are relevant in determining the quantum of taxes due; they are not relevant in determining whether a party has made a claim to which he is entitled to declaratory relief. Veil-piercing techniques have a place in the law, particularly in the law of corporate action and taxation, but such mechanisms should not lead Courts to dismiss timely actions on the basis of a search for such motive-hunting. If the declaratory judgment act affords plaintiff a remedy, the mere bringing of the suit is an act of independent legal significance; and a plaintiff's motive, under such circumstances, has no relevance on whether the Court should exercise its judgment in taking cognizance of the law suit and whether the Court should decide it.

2. Defendant's argument that a judgment of this Court would be binding neither on the Commissioner of Internal Revenue nor the Treasury Department nor the Tax Court is true, but also irrelevant. It should be understood the most plaintiff can receive by way of declaratory judgment from this Court is a determination that defendant has breached its contract with plaintiff. Final decisions as to taxes are decisions for the Tax Court. Functioning under its expertise, it will determine how much, if anything, defendant may claim was paid as consideration for the covenants not to compete mentioned in the agreements. It may engage as this Court will not in the balancing process of determining how much, if any, of the $1,218,742.80 allegedly paid for covenants not to compete may be so treated for tax purposes. The point of the matter here is that all plaintiff asks is for this Court to bind defendant against its breach, not the United States. I think this Court has power so to act.

3. Defendant's third point is essentially for dismissal on the merits because the exhibits show it made no representation such as plaintiff claims here. As this claim is similar to that of plaintiff for summary judgment, it shall be considered, infra, together with that particular motion.

4. Defendant's argument that the same issues as are being tried here are already before the Tax Court may have merit. It is true that,

"Upon reaching the conclusion that the ends of justice would be best served by such a course * * of declining jurisdiction a court of the United States in its discretion may refuse declaratory relief because another court has jurisdiction in an executory or non-declaratory action of proceedings involving an issue identical with that involved in the suit for declaratory relief. Such a conclusion must be based upon sound reasons why under all the circumstances a non-declaratory or executory action is to be preferred over a suit for a declaration. See Borchard, Declaratory Judgments, p. 181 et seq." (Emphasis supplied.)⁹

Here it would seem the issues may be identical with those before the Tax Court. The same contract may there be interpreted; the same parties may there be heard; the same factors may there be weighed in making a determination as to the tax consequences of the sales agreement.

If the Tax Court does, in fact, take into account issues identical with those that would be taken into account here, and every issue that would be so taken into account, this case might then be ripe for dismissal on the basis of the Tax Court determination. But if the Tax Court does not, the case at bar might then be heard by trial; and, while an injunction would no longer aid plaintiff, damages could and might issue from this Court in the form of a monetary decree were it to find what plaintiff claims here. Meanwhile, it would serve no useful purpose to hear this case at the present time; but it well might be an injustice to dismiss it. Therefore, the present case shall be stayed until the Tax Court's decision is made; this will enable this Court to consider its further decision as to what may then appear to be meet.

II. Summary Judgment. While the above decision to stay these proceedings allows this Court the option of staying determination on plaintiff's motion for summary judgment, the motion has been made, briefed, and argued; and it best be disposed of at this time.

The object of a motion for summary judgment "is to separate what is formal or pretended in denial or averment from what is genuine and substantial, so that only the latter may subject a suitor to the burden of a trial."¹⁰ The Supreme Court has again recently restated the general policy with respect to the granting of such motions as follows:

"Summary judgment should be entered only when the pleadings, depositions, affidavits, and admissions filed in the case `show that except as to the amount of damages there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.' Rule 56(c), Fed.Rules Civ. Proc., 28 U.S.C.A. This rule authorizes summary judgment `only where the moving party is entitled to judgment as a matter of law, where it is quite clear what the truth is, * * * and where no genuine issue remains for trial * * * for the purpose of the rule is not to cut litigants off from their right of trial by jury if they really have issues to try.' Sartor v. Arkansas Natural Gas Corp., 321 U.S. 620, 627 64 S. Ct. 724, 88 L.Ed. 967."¹¹

In the second circuit, debate, always instructive and often profound, has been long-standing between those proponents of the views of Judge Clark, who favor a broader grant of summary judgment, and those of the late Judges Learned Hand and Frank, who favored a more limited grant.¹² In this circuit, the decision has long since been reached that courts will look particularly closely to insure that parties are not too quickly deprived of a "full dress" trial. Hart & Co. v. Recordograph...