Hattem v. Schwarzenegger

• Decision Date: 23 May 2006
• Docket Number: Docket No. 05-3926-cv.
• Citation: 449 F.3d 423
• Parties: Alex N. HATTEM, solely in his capacity as a participant in a pension plan funded by The Long-term Investment Trust, AT & T Investment Management Corporation, not in its individual capacity, but solely in its capacity as The Long-term Investment Trust's "named fiduciary," and JPMorgan Chase Bank, not in its individual capacity but solely in its capacity as trustee for The Long-term Investment Trust, Plaintiffs-Appellants, v. Arnold SCHWARZENEGGER, in his official capacity as Governor of the State of California, Selvi Stanislaus, in his official capacity as Interim Executive Officer of The California Franchise Tax Board, Desmond Press, in his official capacity as Program Manager of The California Franchise Tax Board, and Does 1-10, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

449 F.3d 423

Alex N. HATTEM, solely in his capacity as a participant in a pension plan funded by The Long-term Investment Trust, AT & T Investment Management Corporation, not in its individual capacity, but solely in its capacity as The Long-term Investment Trust's "named fiduciary," and JPMorgan Chase Bank, not in its individual capacity but solely in its capacity as trustee for The Long-term Investment Trust, Plaintiffs-Appellants, v. Arnold SCHWARZENEGGER, in his official capacity as Governor of the State of California, Selvi Stanislaus, in his official capacity as Interim Executive Officer of The California Franchise Tax Board, Desmond Press, in his official capacity as Program Manager of The California Franchise Tax Board, and Does 1-10, Defendants-Appellees.

Docket No. 05-3926-cv.

United States Court of Appeals, Second Circuit.

Argued: February 7, 2006.

Decided: May 23, 2006.

Ethan Lipsig, Paul, Hastings, Janofsky, & Walker, LLP, (Kevin C. Logue, Patrick W. Shea, on the brief) Los Angeles, CA, for Plaintiffs-Appellants.

Stephen Lew, Deputy Attorney General for the State of California, (Bill Lockyer, Attorney General, W. Dean Freeman, Lead Supervising Deputy Attorney General, Donald R. Currier, Deputy Attorney General, on the brief), Los Angeles, CA, for Defendants-Appellees.

Before: POOLER, B.D. PARKER, Circuit Judges, and CHIN, District Judge.¹

POOLER, Circuit Judge.

Plaintiffs-appellants Alex N. Hattem et al. (plaintiffs-appellants) appeal from a June 15, 2005, decision of the United States District Court for the Southern District of New York (Lynch, J.) granting summary judgment in favor of defendants-appellees Arnold Schwarzenegger et al. (defendants-appellees) and denying plaintiffs-appellants' cross motion for summary judgment, Hattem v. Schwarzenegger, No. 04-cv-1944, 2005 WL 1459103, at *6 (S.D.N.Y. June 17, 2005). The district court granted summary judgment after holding that the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 et seq., does not preempt California's tax on unrelated business taxable income ("UBTI"). See id. at *5-6. The court also found that such a claim of preemption is not barred by the Tax Injunction Act ("TIA"), 28 U.S.C. § 1341. See id. at *2.

On appeal, plaintiffs-appellants argue that the district court erred by finding that ERISA does not preempt California's UBTI system, and they urge this court to find the state law preempted. Defendants-appellees also challenge the decision of the district court by raising an alternative basis—one rejected by the district court—to support the grant of summary judgment. They contend that summary judgment is proper because the TIA precludes the suit. According to defendants-appellees, the TIA bars the claim because plaintiffs-appellants have a "plain, speedy, and efficient" remedy in state court. For the reasons discussed below, we disagree with both plaintiffs-appellants' and defendants-appellees' positions on appeal. We therefore affirm the decision of the district court in toto and uphold the grant of summary judgment in favor of defendants-appellees.

BACKGROUND

In 1984, AT & T Corporation established the AT & T Master Pension Trust ("Trust"), which has the sole purpose of holding and managing the assets of various ERISA-covered pension plans established and maintained by AT & T. The Trust is a qualified tax-exempt trust under the federal, Internal Revenue Code ("IRC"). However, it is responsible for paying federal taxes on its UBTI. Some of this UBTI is generated by the Trust's investments. Because of this, the Trust files federal tax returns and pays federal taxes when required.

The State of California—like many other states—maintains a UBTI scheme similar to that found in the IRC. Compare, e.g., Cal. Rev. & Tax Code §§ 17651, 17631, 23731 with 26 U.S.C. §§ 501, 511, 401.² The primary purpose, aside from raising revenue, behind both the federal and state UBTI schemes is the same: UBTI laws serve to even the playing field among tax-exempt organizations and their for-profit rivals. They accomplish this by ensuring that tax-exempt entities pay taxes on revenue unrelated to their tax-exempt purpose. That way, tax-exempt organizations do not receive an unfair advantage in the market based on an unrelated-tax-exempt purpose.

The Trust is tax exempt under California law just as it is under the IRC; thus, it pays state tax only on its UBTI. Since 1994, the Trust, which has approximately twenty-billion dollars of investments, has paid $6,149,438.29 in UBTI to California. According to plaintiffs-appellants, the Trust has forgone an unquantifiable amount of income by avoiding UBTI-generating investments. The Trust also claims that it has incurred substantial administrative and fiduciary burdens as a result of the California UBTI system because it has been forced to expend time and resources determining when to avoid certain investments that may generate state UBTI. According to the Trust, these burdens divert the Trust's resources away from fulfilling its primary function, which is providing retirement income to many retirees.

Plaintiffs-appellants challenge California's UBTI system, arguing that ERISA preempts California's right to maintain it. The district court disagreed with plaintiffs-appellants. It held that ERISA does not preempt California's UBTI system, and it granted summary judgment in favor of defendants-appellees. See Hattem, 2005 WL 1459103, at *5-6.

On appeal, plaintiffs-appellants contend that the district court erroneously granted summary judgment in favor of defendants-appellees. Defendants-appellees of course disagree, claiming both that plaintiffs-appellants' preemption claim is barred by the TIA—an argument rejected by the district court, see id. at *2,—and that ERISA does not bar California's tax on UBTI.

We disagree that the TIA bars the preemption claim, and we hold that ERISA does not preempt California's UBTI system. We therefore affirm the district court in all respects.

DISCUSSION

I. The Tax Injunction Act

The district court determined that plaintiffs-appellants' ERISA preemption claim was not barred by the TIA. See id. The TIA, 28 U.S.C. § 1341, states that "district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." Id. According to the Supreme Court, the purpose of the TIA is "to limit drastically federal district court jurisdiction to interfere with so important a local concern as the collection of taxes." California v. Grace Brethren Church, 457 U.S. 393, 408-09, 102 S.Ct. 2498, 73 L.Ed.2d 93 (1982) (internal quotation marks and citation omitted). Because of this, the Court has noted that the TIA prohibits, in most circumstances, a federal district court from issuing an injunction preventing the collection of state taxes. Id. at 408, 102 S.Ct. 2498. The Court has also held that the TIA prohibits a district court from issuing a declaratory judgment holding state-tax laws unconstitutional. Id.

We have explained that two conditions must exist before the TIA can be invoked. See Travelers Ins. Co. v. Cuomo, 14 F.3d 708, 713 (2d Cir.1994) [hereinafter Cuomo], rev'd on other grounds, N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995) [hereinafter Travelers].³ "[F]irst, the surcharges must constitute `taxes,' and second, the state remedies available to plaintiffs must be `plain, speedy and efficient.'" Id. (internal footnote omitted). Neither party disputes that the tax on UBTI constitutes "taxes" as the term relates to the TIA.

As to the second requirement, that the TIA bars federal review only when there is a "plain, speedy and efficient" remedy in state court, we have clearly held that in cases involving ERISA, such a state remedy is lacking. Id. at 714. In Cuomo, we explained that ERISA dictates that federal courts maintain exclusive jurisdiction over actions such as those determining whether a state's tax system is preempted by ERISA. See id. Therefore, a "plain, speedy and efficient" remedy is lacking in state court as to such claims, and the TIA does not bar suit in federal court.⁴ Id. For these reasons, we agree with the district court that the TIA does not bar plaintiffs-appellants' claim that California's UBTI system is preempted by ERISA.

II. ERISA Preemption

ERISA preempts state law in certain circumstances. According to 29 U.S.C. § 1144(a), "the provisions of [ERISA] shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." Id. (emphasis added). Although a plain reading of this statute lends itself to an extremely broad interpretation, the Supreme Court has greatly narrowed the scope of this section.

The Court applied such a narrowed interpretation in Travelers, 514 U.S. at 655-56, 115 S.Ct. 1671. In that case, the Court considered whether ERISA "pre-empts the state provisions for surcharges on bills of patients whose commercial insurance coverage is purchased by employee health-care plans governed by ERISA, and for surcharges on HMO's insofar as their membership fees are paid by an ERISA plan." Id. at 649, 115 S.Ct. 1671. Under the surcharge system at issue, different surcharges were added to individuals' hospital bills depending on the health-insurance provider. See id. at 650, 115 S.Ct. 1671. The Court decided that this scheme did not violate ERISA, holding that "the provisions for surcharges do not `relate to' employee benefits plans within the meaning of ERISA's pre-emption provision." Id. at 649, 115 S.Ct. 1671.

In reaching this decision, the Court declined to interpret "relate to" literally. See id. at 655, 115 S.Ct. 1671. It explained that to interpret the term literally would render Congress's words of limitation a mere sham. Id. Instead, the Court concluded that a law...