Hoosier Energy Rural Elec. Co-op., Inc. v. Amoco Tax Leasing IV Corp.

• Decision Date: 17 October 1994
• Docket Number: No. 93-3340,93-3340
• Citation: 34 F.3d 1310
• Parties: -6219 HOOSIER ENERGY RURAL ELECTRIC COOPERATIVE, INCORPORATED, Plaintiff-Appellant, v. AMOCO TAX LEASING IV CORPORATION and Amoco Corporation, formerly known as Standard Oil Company, Indiana, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1310

34 F.3d 1310

74 A.F.T.R.2d 94-6219

HOOSIER ENERGY RURAL ELECTRIC COOPERATIVE, INCORPORATED Plaintiff-Appellant, v. AMOCO TAX LEASING IV CORPORATION and Amoco Corporation formerly known as Standard Oil Company, Indiana Defendants-Appellees.

No. 93-3340.

United States Court of Appeals Seventh Circuit.

Argued March 29, 1994.

Decided Sept. 9, 1994.

Rehearing and Suggestion for Rehearing En Banc Denied Oct. 17, 1994. ^*

Terry M. Grimm (argued), Kimball R. Anderson, Joseph John Zaknoen, Winston & Strawn, Chicago, IL, J. David Huber, Zoercher, Huber & McEntarfer, Tell City, IN, Harold Harrell, Harrell, Clendenning & Coyne, Bloomington, IN, for plaintiff-appellant.

William P. Wooden (argued), Mary L. Titsworth, Wooden, McLaughlin & Sterner, Indianapolis, IN, Daniel Pinkert, Amoco Corp., Chicago, IL, for defendants-appellees.

Before MANION and ROVNER, Circuit Judges, and PLUNKETT, District Judge. ^**

MANION, Circuit Judge.

Hoosier Energy Rural Electric Cooperative, Inc. ("Hoosier Energy") brought a state court action against Amoco Tax Leasing IV Corporation ("Amoco Tax") asserting claims for breach of contract and unjust enrichment and against Amoco Corporation asserting an unjust enrichment claim. Amoco Tax filed a notice of removal to federal court. Hoosier Energy opposed removal, claiming that no diversity jurisdiction existed because Amoco Corporation and Hoosier Energy were both residents of Indiana. The district court held that Hoosier Energy had fraudulently joined Amoco Corporation in its action against Amoco Tax and, therefore, dismissed Amoco Corporation. The district court then exercised jurisdiction over Hoosier Energy's breach of contract and unjust enrichment claims against Amoco Tax and held that Hoosier Energy's complaint failed to state a claim on either basis. Hoosier Energy amended its complaint, again attempting to state claims for breach of contract and unjust enrichment. The district court also dismissed Hoosier Energy's amended complaint for failure to state a claim. Hoosier Energy appeals the district court's holding that Amoco Corporation was fraudulently joined and its holding that its amended complaint failed to state a claim against Amoco Tax for breach of contract. We affirm.

I. Background

On August 13, 1981, the United States Congress enacted the Economic Recovery Tax Act of 1981, commonly known as "ERTA." ERTA allowed the owner of designated property to transfer investment tax credits and cost recovery deductions (or more simply depreciation) to a qualified corporation, provided that the transaction complied with the "safe harbor" leasing rules set forth in section 168(f) of the Internal Revenue Code. As a result of ERTA, an industry developed in which corporations would sell their excess tax credits and deductions to other corporations who could take full advantage of these credits and deductions.

Hoosier Energy and Amoco Tax entered into such an agreement on February 17, 1982. Under the agreement, Hoosier Energy sold certain electrical generating and transmission property to Amoco Tax and then leased back that same property. This sale-leaseback transaction complied with Section 168(f) and thus enabled Amoco Tax's parent company, Amoco Corporation, to claim deductions on its tax return for the depreciation on the electrical generating and transmission property.

At the time that Amoco Tax and Hoosier Energy entered into the sale-leaseback agreement, it was unclear how much depreciation Amoco Corporation would be able to claim because it was unclear whether the Internal Revenue Service ("IRS") would treat the electrical generating and transmission property as public utility property depreciable over fifteen years or as property depreciable over five years. If the IRS allowed depreciation over five years, as opposed to fifteen years, the deductions would be much more valuable to Amoco Corporation because of the time value of money.

Because of the uncertainty of the economic value of the tax deductions, the sale-leaseback agreement provided:

Prepayment of Section 168 Loans. Notwithstanding the provisions of paragraphs (b) and (f) of this Section 3, if, prior to June 30, 1983, Regulations, proposed treasury regulations or a revenue ruling of the Internal Revenue Service shall be published with respect to the definition of "public utility property", within the meaning of section 167(1)(3)(A) of the Code, with the effect that, in the opinion of Messrs. Dewey, Ballantine, Bushby, Palmer & Wood or other outside tax counsel to Amoco (the reasonable fees and disbursements of which shall be paid by Hoosier), such definition shall be, or, in consequence of proposed Regulations, will be amended to conform in substance to Sec. 1.46-3(g)(2) of the Regulations, then, if (i) Amoco shall then be able to make effective use, for Federal Tax Purposes, of the full incremental Recovery Deductions attributable to "5-year property" within the meaning of section 168(c)(2)(B) of the Code, and (ii) in the opinion of such counsel, such amended Regulations, proposed regulations or revenue ruling shall be applicable to either or both of the Units of Property and shall permit Amoco to claim Recovery Deductions in respect of such "5-year property", Amoco shall pay to Hoosier, within 10 days following the receipt of such opinion, amounts in immediately available funds, as [set forth below.]

Agreement p. 11, Sec. 3(c) (emphasis added).

On February 16, 1984 the IRS published a proposed treasury regulation which clarified that the electrical generating and transmission property was not public utility property subject to fifteen-year depreciation, but was property depreciable over five years. The IRS made this Regulation retroactive to property placed in service after December 31, 1980. Because of the retroactivity of this Regulation, Amoco Tax was able to depreciate the property it had bought from Hoosier Energy over five years instead of fifteen years. Based on Amoco Tax's ability to depreciate the property over five years, Hoosier Energy sought additional compensation from Amoco Tax estimated at between twenty-five and twenty-eight million dollars. In doing so, Hoosier Energy contended that the sale-leaseback agreement "obligated Amoco Tax to pay Hoosier Energy additional compensation if Amoco Tax ever depreciated the property over a five-year life." Amoco Tax disagreed, pointing to Section 3(c) of the sale-leaseback agreement which stated that Amoco Tax would pay Hoosier Energy additional funds only "if, prior to June 30, 1983, Regulations, proposed treasury regulations or a Revenue Ruling of the Internal Revenue Service shall be published" treating the property as five-year property. Amoco Tax maintained that since the proposed treasury regulation was not published until February 16, 1984 (after the June 30, 1983 deadline), no additional compensation was due Hoosier Energy under the sale-leaseback agreement.

After Amoco Tax refused to pay Hoosier Energy any additional compensation, Hoosier Energy filed suit in Indiana state court against Amoco Tax and Amoco Corporation. Hoosier Energy asserted claims against Amoco Tax for breach of contract and unjust enrichment and against Amoco Corporation for unjust enrichment. Amoco Tax filed a notice of removal to federal court. Hoosier Energy opposed removal claiming that no diversity jurisdiction existed because both it and Amoco Corporation were citizens of Indiana. The district court held that Hoosier Energy had fraudulently joined Amoco Corporation and accordingly dismissed Amoco Corporation, thereby creating complete diversity. Amoco Tax then moved to dismiss Hoosier Energy's complaint for failure to state a claim for breach of contract and unjust enrichment. The district court granted this motion. The district court then granted Hoosier Energy's motion to amend its complaint, but also dismissed this amended complaint for failure to state a claim.

II. Analysis

Hoosier Energy appeals the district court's holding that Amoco Corporation was fraudulently joined in its suit against Amoco Tax. Hoosier Energy also appeals the district court's dismissal of its breach of contract claim against Amoco Tax as set forth in its amended complaint. Hoosier Energy does not appeal from the district court's dismissal of its unjust enrichment claim against Amoco Tax.

A. Fraudulent Joinder

This court's diversity jurisdiction is limited. "For a case to be within the diversity jurisdiction of the federal courts, diversity of citizenship must be 'complete' meaning that no plaintiff may be a citizen of the same state as any defendant." Fidelity & Deposit Co. of Md. v. Sheboygan Falls, 713 F.2d 1261, 1264 (7th Cir.1983). Hoosier Energy is a cooperative incorporated in Indiana and has its principal place of business in Indiana. Amoco Tax is incorporated in Delaware and has its principal place of business in Illinois. Amoco Corporation is incorporated in Indiana with its principal place of business in Illinois. Despite the apparent lack of diversity jurisdiction (both Hoosier Energy and Amoco Corporation are Indiana citizens), Amoco Tax nonetheless filed a notice for removal to federal court, asserting that Amoco Corporation was fraudulently joined in that action and that without the presence of Amoco Corporation diversity of citizenship existed between the parties.

"Diversity jurisdiction cannot be destroyed by joinder of nondiverse parties if such joinder is fraudulent." Gottlieb v. Westin Hotel Co., 990 F.2d 323, 327 (7th Cir.1993). Thus, if joinder of Amoco Corporation was fraudulent, removal was proper. Poulos v. Naas Foods, Inc., 959 F.2d 69, 73 (7th Cir.1992). "Fraudulent joinder occurs either when there is no possibility that a plaintiff can state a cause of action against nondiverse defendants in state court, or where there has been outright fraud in plaintiff's pleading of jurisdictional facts." Gottlieb, 990 F.2d at 327. Amoco Tax does not claim that there...