City of New Orleans v. United States

• Citation: 371 F.2d 21
• Decision Date: 10 February 1967
• Docket Number: No. 22554.,22554.
• Parties: CITY OF NEW ORLEANS and Robert E. Develle, Director of Finance of the City of New Orleans, Appellants, v. UNITED STATES of America et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

371 F.2d 21 (1967)

CITY OF NEW ORLEANS and Robert E. Develle, Director of Finance of the City of New Orleans, Appellants, v. UNITED STATES of America et al., Appellees.

No. 22554.

United States Court of Appeals Fifth Circuit.

January 6, 1967.

Rehearing Denied February 10, 1967.

Ernest L. Salatich, Asst. City Atty., Alvin J. Liska, City Atty., Preston H. Hufft, Asst. City Atty., New Orleans, La., for appellants.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz, J. Edward Shillingburg, Attys., Dept. of Justice, Washington, D. C., Richard M. Roberts, Acting Asst. Atty. Gen., Washington, D. C., Louis C. Lacour, U. S. Atty., Walter F. Gemeinhardt, Asst. U. S. Atty., of counsel, for the United States.

David J. Conroy, Guy C. Lyman, Jr., of Milling, Saal, Saunders, Benson & Woodward, New Orleans, La., for Chrysler Corp.

Before BROWN, BELL and DYER, Circuit Judges.

JOHN R. BROWN, Circuit Judge:

What started out a decade ago as one of those always knotty problems of municipal-state taxation of equipment or materials used or consumed by contractors in the performance of a contract for the Federal Government has been greatly simplified by two trips to the Louisiana Supreme Court and, in a companion state tax case, a trial in the State Court with a successful sequel in the Federal District Court. The case comes to us from a summary judgment in favor of the Government and against the City of New Orleans. We resist the importunities of the City to require once again a trial on the intrinsic merits and affirm on established principles of collateral estoppel. This means we also reject the other contentions of the City.

The case grows out of a 1951 "facilities contract" by which Chrysler Corporation undertook to acquire and install the necessary machinery and equipment in the Government's vast Michoud Ordnance Plant¹ to adapt it for the production of military tank engines.²

In the course of these activities Chrysler acquired approximately 40 million dollars of tangible personal property comprising machinery, equipment, furniture and some materials. Of this about 92% was purchased from vendors outside of Louisiana and shipped to Chrysler at Michoud under usual carriers' commercial bills of lading. The remaining 8% was sold and delivered F.O.B. Michoud or installed by the vendors. In November 1955 the City assessed Chrysler a "use" tax of $405,903.00 under its Sales and Use Tax Ordinance.³ Fearing a distraint and sale of its properties and at the direction of the Government, Chrysler arranged for payment under protest and a special escrow agreement. On November 25, 1955, the Government reimbursed Chrysler for the cash and Government bonds deposited in escrow. And on December 13, 1955, again at Government direction, Chrysler instituted its suit in the Louisiana State Courts under Ord. No. 15,201 (note 3, supra).⁴

To that suit the Louisiana Trial Court sustained the City's exception of no cause of action presumably on the ground that Chrysler had not paid the tax. On appeal, the Supreme Court of Louisiana reversed and remanded the case. The court held that the petition stated a cause of action. The assessment was invalid because the ordinance taxed the exercise of a right or power over property incident to ownership, and Chrylser, in view of the terms of the facilities contract and the allegations of the petition, did not own the property in question. The court pointed out that the contract provided that title to the property vested in the Government upon the acquisition by the contractor or its subcontractors or upon installation in the plant, whichever occurred first, and that the petition alleged (the allegations of which were to be taken as true on an exception of no cause of action) that, pursuant to the contract, title passed out of the seller and, with no intervening period of time, vested in the Government prior to the time the property came into the State of Louisiana and had continued since in the United States. The court also declared that, in its view of the contract, Chrysler was procuring or purchasing the property as an agent of the Government. Chrysler Corp. v. City of New Orleans, 1959, 238 La. 123, 114 So.2d 579.

The case came back for trial on its merits. On remand, the City filed an exception of want of interest, contending that Chrysler was without interest in the subject matter of the litigation. The trial court overruled the exception, tried the case on its merits, and rendered judgment for Chrysler against the City for $546,517.35, plus interest and costs and denying the City's reconventional demand for penalties and attorneys' fees and an alternative demand for a lessee's tax.

The City appealed. The Supreme Court of Louisiana reversed. Holding that the trial court had erroneously overruled the City's exception of want of interest and dismissing Chrysler's petition, the Court declared:

"For a right of action under this ordinance, a party must be aggrieved. A pecuniary interest is essential. As we stated in our previous decision herein, the `use\' embraced by the ordinance is the exercise of a right or power over property incident to ownership. The tax is imposed upon the owner. In the instant case the owner was the United States. Chrysler paid the tax under instructions of the United States government with attendant reimbursement. Moreover, the United States is ultimately entitled to the money if it is recovered. Under these circumstances, Chrysler does not have the requisite interest to maintain this action." ⁵

Under Louisiana procedure the intervention of the United States fell with the main demand of Chrysler. The petition of Chrysler and the United States for rehearing was denied. 243 La. 514, 145 So.2d 17. The decisions of the Supreme Court of Louisiana have become final.

The present Federal Court action was instituted by the United States and Chrysler on December 28, 1962. It seeks the recovery of the amount held in escrow by the City on the grounds of money illegally had and received, unjust enrichment, and the terms of the escrow agreement. In its answer, the City denied some of the allegations of the complaint and asserted several defenses (i. e., statute of limitations, estoppel, laches, election of remedies, and the Tenth Amendment to the Constitution of the United States) and a counterclaim against Chrysler for the amount of disputed assessment, penalties, etc. The United States and Chrysler moved for summary judgment, asserting that there was no genuine issue as to any material fact, and that the defenses and counterclaim of the City were insufficient in law. The motion was based on affidavits incorporating the opinions, judgments, record, and briefs in the state court litigation.

The Court granted judgment for the United States, ordering the City to pay over all cash and obligations held under the escrow agreement, and dismissed the counterclaim of the City.

The City makes two principal attacks. The first is that there are disputed issues of fact. These questions are (a) whether Chrysler was purchasing as agent for the Government and (b) whether the Government became the owner of these properties with Chrysler never acquiring any ownership in them. Consequently, summary judgment was unwarranted. The second is that the Government has not, and cannot now, comply with the tax recovery machinery prescribed in the ordinance (see note 4, supra).

Of course, the first attack has to assume that collateral estoppel does not apply. We say "has to assume" because the City's position is unclear. The City's escape from the prior holdings of the Louisiana Supreme Court seems to us to be the impermissible one of showing that that Court was in error. The City really never challenges the proposition that such holdings were essential to the judgment rendered. But since a discussion of the City's contentions on the intrinsic merits illumines the critical question of essentiality, some brief comments are warranted.

The City builds its structure on principles to which all subscribe. Capsulated it runs this way. In the early case of McCulloch v. Maryland, 1819, 4 U.S. (4 Wheat.) 316, 4 L.Ed. 579, the principle was enunciated, as an interpretation of the supremacy clause of the Constitution, that the property of the Government and its instrumentalities was free from taxation by the States. But two corollaries of this rule exist. First, that property of contractors of the United States Government purchased by these contractors and used by these contractors in the States is subject to taxation by the States. See Henneford v. Silas Mason Company, 1936, 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814; Alabama v. King & Boozer, 1941, 314 U.S. 1, 62 S.Ct. 43, 86 L.Ed. 3, 140 A.L.R. 615; Curry v. United States, 1941, 314 U.S. 14, 62 S.Ct. 48, 86 L.Ed. 9. These Government contractors are not instrumentalities of the United States as has been pointed out by the Supreme Court of the United States consistently. See United States v. Township of Muskegon, 1958, 355 U.S. 484, 78 S.Ct. 483, 2 L.Ed.2d 436. The second corollary to the doctrine of McCulloch v. Maryland is that as to property directly sold by vendors to the Government and in turn delivered to Government Contractors for their use, the States cannot levy taxes on this property. The two most recent cases affirming this proposition are United States v. Allegheny County, 1944, 322 U.S. 174, 64 S.Ct. 908, 88 L.Ed. 1209, and Kern-Limerick, Inc. v. Scurlock, 1954, 347 U.S. 110, 74 S.Ct. 403, 98 L.Ed. 546.

Against this backdrop and particularly Kern-Limerick, supra, and cases of like holding, the City emphasizes what it regards as decisive distinctions. Thus, unlike Kern-Limerick, where the contract expressly provided that the contractor "* * * shall act as the purchasing agent of the Government * * * and the Government shall be directly liable to the vendors for the purchase price," and that "Title to all such materials * * * shall pass...