Del Costello v. State of California

• Decision Date: 16 September 1982
• Docket Number: Cr. 21126
• Citation: 185 Cal.Rptr. 582,135 Cal.App.3d 887
• Court: California Court of Appeals Court of Appeals
• Parties: Cheryl Del COSTELLO, Plaintiff and Appellant, v. STATE of California and Franchise Tax Board, Defendants and Respondents.

Page 582

185 Cal.Rptr. 582

135 Cal.App.3d 887

Cheryl Del COSTELLO, Plaintiff and Appellant, v. STATE of California and Franchise Tax Board, Defendants and Respondents.

Cr. 21126.

Court of Appeal, Third District, California.

Sept. 16, 1982.

James H. Harrington, Hayward, for plaintiff and appellant

George Deukmejian, Atty. Gen., Matthew P. Boyle, Deputy Atty. Gen., for defendants and respondents.

BLEASE, Associate Justice.

Cheryl Del Costello expected to receive $515 as a refund for overpayment of her state income taxes for 1979. In lieu of the check she found the money had been applied to offset an amount due to the state as a result of a judgment obtained against her for reimbursement of sums paid through the Aid to Families With Dependent Children Program (AFDC). The funds supported her daughter, a minor, when she was living apart from plaintiff in the custody of the child's grandmother. Plaintiff filed a class action to remedy the perceived injustice of this procedure. Defendants, the State of California and the Franchise Tax Board (state), successfully demurred. Plaintiff declined to amend her pleading and judgment of dismissal was entered. She appeals. We affirm the judgment.

DISCUSSION

I

The amount of the judgment was withheld from plaintiff's income tax refund under the authority of a statute which permits the controller to "offset any amount due a state agency from a person ... against any amount owing such person ... by any state agency." (Government Code, § 12419.5) ¹ Plaintiff argues that withheld taxes remain the property of the wage earner until the actual tax liability is determined. She claims that overpayment remaining after the tax liability is satisfied is held in trust by the state and offsetting this trust res against the state's claim violates the fiduciary obligations of the state, as trustee. We reject the claims. We hold that where, as here, the AFDC obligation has been reduced to a judgment ² it is an "amount due" the state and may be offset by the amount of any income tax refund owing the taxpayer. ³

II

The state contends the claim of the Department of Social Services is an "amount due" a state agency because Welfare and Institutions Code section 11477 ⁴ currently provides that an application for AFDC benefits operates as an assignment by law to the state of the child's "rights to support." ⁵ This provision was not added to the statute until 1980 and is not controlling.

The claim was reduced to judgment in favor of the county and the judgment provides the basis for the setoff. However, a person who is not a party to an action but who is represented by a party is bound by and entitled to the benefits of the judgment as though he were a party. A person is represented by a party if the party is an agency invested by law with authority to represent the person's interests. (Rest.2d Judgments, § 41, p. 393; and Illustrations d. at p. 397.) Such a relationship exists here.

AFDC is a grant-in-aid program established by the federal government. (See generally 51 Cal.Jur.3d Public Aid and Welfare §§ 10-19, pp. 421-437.) It is governed in sequential hierarchy by federal statutes, federal regulations, state statutes, and state regulations. (See County of Alameda v. Carleson (1971) 5 Cal.3d 730, 739, 97 Cal.Rptr. 385.) The counties administer the AFDC program for the state in California, as the agents of the state. (See Ross v. Superior Court (1977) 19 Cal.3d 899, 906-908, 141 Cal.Rptr. 133, 569 P.2d 727; County of Marin v. Martin (1974) 43 Cal.App.3d 1, 3-4, 177 Cal.Rptr. 364.) In particular, the counties are charged with the duty of enforcing child support laws as agents of the state. (Welf. & Inst. Code §§ 11475-11476.) This relationship establishes the state's right to enforce the judgment obtained by the county against plaintiff by resort to the offset statutes (See also Rest.2d Agency, § 292, pp. 19-20.)

III

Plaintiff claims that the tax refund is not an "amount owing" to the taxpayer because it is money held in trust for the taxpayer. She relies upon Bonelli v. State of California (1977) 71 Cal.App.3d 459, 139 Cal.Rptr. 486 in which the widow of a former state official sought to compel payment of an income tax refund held by the state as an offset against sums allegedly due the state because of bribes received by the official. The court said the offset statute did not apply. It reasoned the refund was the "property of the Bonellis' held in trust for them by the state", and was not therefore "an amount owing ... by any state agency ...." (Id., at p. 469, 139 Cal.Rptr. 486.) We distinguish Bonelli on its facts.

Trust is a legal term that encompasses two dissimilar concepts, express trust and constructive trust. ⁶ An express trust arises from the intention of the parties to set aside property under the stewardship of a trustee for the benefit of the beneficiary. It establishes a fiduciary relationship. A constructive trust does not. It is imposed by a court of equity, independent of the intention of the parties, to prevent a party in possession of property from being unjustly enriched. (Scott, ante., fn. 6.)

The court in Bonelli left open the question of the character of the trust upon which its holding was premised. (Id., at p. 466 fn. 4, 139 Cal.Rptr. 486.) However, its statement that the controller violated the state's "trusteeship obligations" by withholding payment of the tax refund evidences an express trust. (Id., at p. 469, 139 Cal.Rptr. 486.) Its suggestion of a fiduciary duty is inconsistent with a constructive trust. We find further support in the facts. Prior to Mrs. Bonelli's suit, the controller notified her he had set aside her tax refund and was holding the funds in trust for her. (Id., at p. 465, 139 Cal.Rptr. 486.) Thus, two essential elements of express trust were present. There was an establishment of a trust res from the undifferentiated funds in the treasury. (Cf. In re Lamb (1923) 61 Cal.App. 321, 328, 215 P. 109 ["To the creation of a trust, a trust-res or subject matter is sine qua non "]; Eaton v. City of Los Angeles (1962) 201 Cal.App.2d 326, 332, 20 Cal.Rptr. 456 ["In an express voluntary trust there must be a subject or trust res, i.e., the trustor must set aside some specific real or personal property."].) Second, there was an acknowledgement of the trust by the putative trustee. (See Civ.Code, § 2222.) ⁷ Since the controller had established an express trust, he was precluded from offsetting the trust res as an "amount owing" pursuant to the setoff statute, by his obligations as trustee.

Bonelli does not answer the generic question, are all tax refunds held in trust? "A case is not authority for propositions not presented or considered." (Emphasis added.) (Brokopp v. Ford Motor Co. (1977) 71 Cal.App.3d 841, 851, 139 Cal.Rptr. 888.) Here, there was no acknowledgement of trust or segregation of a trust res. We review the statutes afresh to determine if they establish an express trust or create a circumstance in which a constructive trust should be equitably imposed. ⁸ If either obtains a tax refund is perforce excluded from offset.

IV

Express or voluntary trusts ordinarily occur in the context of relations between private entities. However, no doctrinal barrier prevents a government entity from mandating an express trust via statutory enactment. (See e.g., Gov.Code § 20758; Cf. Eaton, supra.) We can conceive of a tax withholding system which functions as an express trust, though it would create serious economic consequences for the state.

The paramount measure of an express trust is the intention of the parties. (See Civ.Code, §§ 2221-2222.) That must be discerned either by statutory declaration, or the inference of its presence from any indicia of a trust relationship present in the statutory scheme. A review of statutes governing income tax withholding and refunds reveals no intention to establish an express trust. There is no statutory declaration of trust. Nor are there present any criteria which distinguish a trust from a debtor-creditor relationship. (See Petherbridge v. Prudential Sav. & Loan Assn. (1978) 79 Cal.App.3d 509, 517-518, 145 Cal.Rptr. 87.)

The employer withholds the appropriate sum from the wages of the employee. It pays that sum to the Franchise Tax Board as a tax. (Rev. & Tax. Code, §§ 18805-18806.) The board deposits its receipts in the treasury and the money becomes immediately available for use by the state in meeting its obligations. If at the end of the year the tax liability is determined to have been overpaid, the wage earner may apply for a refund. (Rev. & Tax. Code, §§ 18820, 19051 et seq.) This is normally accomplished by requesting on the tax return that the amount overpaid be refunded. (See 18 Cal.Admin.Code, §§ 18805(e) and 19064(a).) The overpayment is offset against state income taxes due from the taxpayer for other years. (Rev. & Tax. Code, § 19051.) No interest is paid on the amount overwithheld unless the board is dilatory in making the refund. (See Rev. & Tax. Code, § 19062.11.)

There is not the slightest evidence of an intention to create an express trust. Where the payment of money is intended to create a trust, the payor retains the beneficial interest in the money paid; the payee may not use the money for his own purposes; he must keep the money separate from his own; and generally has a duty to invest the money and make it productive for the payor. (Petherbridge, supra, at p. 517-518, 145 Cal.Rptr. 87.) The money collected by the wage withholding scheme is not the property of the wage earner held in an express trust by the state. Rather, it is the state's property when levied and the wage earner has a correlative property right to recover any amount overpaid. ⁹

V

Nor is this an appropriate case for imposition of a constructive trust. By statute a constructive trust may be imposed if the state has wrongfully detained the tax refund, or gained it by accident, mistake, or other wrongful act in...