Kowalchik v. Brohl

• Decision Date: 15 March 2012
• Docket Number: No. 11CA2634,11CA2634
• Citation: 411 P.3d 681
• Parties: Walter KOWALCHIK and Carolyn Kowalchik, individuals; Marshall T. Riggs and Nancy C. Riggs, individuals; Tract 1, LLC, a Colorado limited liability company; Tract 2, LLC, a Colorado limited liability company; Roger Walker and Suzanne Walker, individuals; Tract 6, LLC, a Colorado limited liability company; Stanley K. Mann and Sharon Cairns Mann, individuals; Joshua Rabinowitz and Gillian Driscoll, individuals; Tract 16, LLC, a Colorado limited liability company; Tract 17, LLC, a Colorado limited liability company; Tract 18, LLC, a Colorado limited liability company; and Tract 19, LLC, a Colorado limited liability company, Plaintiffs–Appellees, v. Barbara BROHL, Executive Director, Colorado Department of Revenue, Defendant–Appellant.
• Court: Colorado Court of Appeals

411 P.3d 681

Walter KOWALCHIK and Carolyn Kowalchik, individuals; Marshall T. Riggs and Nancy C. Riggs, individuals; Tract 1, LLC, a Colorado limited liability company; Tract 2, LLC, a Colorado limited liability company; Roger Walker and Suzanne Walker, individuals; Tract 6, LLC, a Colorado limited liability company; Stanley K. Mann and Sharon Cairns Mann, individuals; Joshua Rabinowitz and Gillian Driscoll, individuals; Tract 16, LLC, a Colorado limited liability company; Tract 17, LLC, a Colorado limited liability company; Tract 18, LLC, a Colorado limited liability company; and Tract 19, LLC, a Colorado limited liability company, Plaintiffs–Appellees,

v.Barbara BROHL, Executive Director, Colorado Department of Revenue, Defendant–Appellant.

No. 11CA2634

Colorado Court of Appeals, Div. A.

Announced March 15, 2012

Moye White LLP, Scott P. Greiner, William F. Jones, Dean E. Richardson, Denver, Colorado, for Plaintiffs–Appellees

John W. Suthers, Attorney General, Melanie J. Snyder, First Assistant Attorney General, Alison K. Blair, Assistant Attorney General, Michael J. Shea, Assistant Attorney General, Denver, Colorado, for Defendant–Appellant

Law Office of Paul Zogg, Paul Zogg, Boulder, Colorado; Mark A. MacDonnell, Las Animas, Colorado, for Amicus Curiae Land Owners United, Inc.

Opinion by JUDGE WEBB

¶ 1 In this dispute involving conservation easement (CE) tax credits, we granted the petition of defendant, Barbara Brohl, the Executive Director of the Colorado Department of Revenue (DOR), for interlocutory review of the trial court's orders in favor of plaintiffs,¹ holding that persons who purchased CE tax credits (transferees) from plaintiffs: are not within the statutory definition of "taxpayer" under section 39–22–522(1), C.R.S.2011; have no tax liability for deficiencies, interest, and penalties for the improper claim of a tax credit; need not be joined as necessary parties to this action under C.R.C.P. 19(a) ; and may be given notice of this proceeding by mail rather than being personally served under C.R.C.P. 4. Kowalchik v. Brohl, 2012 COA 25, ¶ 1, 277 P.3d 885 (Brohl I ).

¶ 2 Having received briefs on the merits and heard oral argument, we conclude that although under section 39–22–522(7)(j), C.R.S.2011, "[f]inal resolution of disputes regarding the tax credit between [DOR] and the tax matters representative ... shall be binding on transferees," the transferees are not necessary parties, and need not be served with summonses and complaints. However, contrary to the trial court, we further conclude that transferees are within the definition of "taxpayer," and thus may be liable for deficiencies, interest, and penalties, if disallowance of the CE credits they claimed is upheld in this action.

I. Background

¶ 3 Plaintiffs donated CEs purportedly generating several million dollars of CE tax credits. They sold these credits to transferees, who claimed the credits on their state income tax returns or retained them for use against future tax liability. DOR disallowed all of the claimed tax credits. Plaintiffs filed an amended complaint in the district court appealing DOR's decision, acting as "tax matters representatives" (TMRs) under section 39–22–522(7)(i), C.R.S.2011, who are "responsible for representing and binding the transferees with respect to all issues affecting the credit."

¶ 4 Although this action will result in a judgment determining the tax liability, if any, of those transferees who claimed tax credits, plaintiffs did not join them as parties. DOR moved to dismiss under C.R.C.P. 12(b)(6) for failure to join indispensable parties or in the alternative to compel plaintiffs to join the transferees under C.R.C.P. 19(a). The trial court denied DOR's motion.

II. Law

¶ 5 C.R.C.P. 19(a) requires joinder of a person if "in his absence complete relief cannot be accorded among those already parties." See Potts v. Gordon, 34 Colo.App. 128, 132, 134, 525 P.2d 500, 503 (1974) ( " C.R.C.P. 19(a) is mandatory and requires the trial court to join persons falling within its provisions, if feasible."). Joinder of a nonparty may be ordered to avoid multiple litigation and provide the existing parties with complete relief in a single action. Bd. of Cnty. Comm'rs v. Roberts, 159 P.3d 800, 808 (Colo.App.2006) ; see also 7 Charles Alan Wright, Arthur R. Miller, & Mary Kay Kane, Federal Practice and Procedure § 1604 (3d ed.2001).

¶ 6 Generally, due process limits the binding effect of judgments to persons who are parties to the action. See, e.g., Zaborski v. Colorado Dep't of Corr., 812 P.2d 236, 238 (Colo.1991) ; Weaver Constr. Co. v. Dist. Court, 190 Colo. 227, 232, 545 P.2d 1042, 1045 (1976). Personal service of a summons and complaint makes a person a party. Zaborski, 812 P.2d at 238 ; Weber v. Williams, 137 Colo. 269, 277, 324 P.2d 365, 369 (1958).

¶ 7 The parties have not cited any case, nor have we found one, involving a due process challenge to a similar statute that binds a nonparty to a judgment obtained by a statutory representative without requiring judicial scrutiny of the adequacy of the representation or allowing the nonparty to opt out of the litigation.

¶ 8 A party who acts under a statute is presumed to know all of its terms. See Paul v. Indus. Comm'n, 632 P.2d 638, 639 (Colo.App.1981) (claimant is presumed to have knowledge of contents of unemployment compensation statutes). Further, a "taxpayer is not obliged to avail himself of the privilege conferred; [but] if he does so, he takes it with the condition attached." Nuckolls v. United States, 76 F.2d 357, 360 (10th Cir.1935).

¶ 9 Where a nonparty has agreed to be represented, the nonparty will be bound by the judgment if the representative participated in the litigation. Restatement (Second) of Judgments § 41 (1982).² A representative "may be constituted as such through some transaction antedating the litigation wherein the representative is given authority to manage and safeguard interests of a beneficiary." Restatement § 41 cmt. a .

¶ 10 And in other "limited circumstances," a nonparty will be bound by a judgment where the nonparty "was adequately represented by someone with the same interests who [wa]s a party to the suit." Taylor v. Sturgell, 553 U.S. 880, 894, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008) (internal quotation marks and citation omitted); see also Goldsworthy v. Am. Family Mut. Ins. Co., 209 P.3d 1108, 1116 (Colo.App.2008) (concluding policyholders' attempted class action against insurer was precluded by two denials of motion for class certification by other policyholders who had previously brought the same claims, made the same arguments, and employed the same attorneys).

¶ 11 Adequate representation will be found where the interests of the nonparty and party are aligned; "either the party understood herself to be acting in a representative capacity or the original court took care to protect the interests of the nonparty;" and in some circumstances, the nonparty received prior notice of the original suit. Taylor, 553 U.S. at 900, 128 S.Ct. 2161 ; South Cent. Bell Tel. Co. v. Alabama, 526 U.S. 160, 168, 119 S.Ct. 1180, 143 L.Ed.2d 258 (1999). A "pre-existing substantive legal relationship," or "one in which parties to the first suit are somehow accountable to nonparties who file a subsequent suit raising identical issues," can create such an alignment of interests. Pelt v. Utah, 539 F.3d 1271, 1290 (10th Cir.2008) (citing Taylor, 553 U.S. at 900, 128 S.Ct. 2161 ). Qualifying relationships include assignee and assignor. Taylor, 553 U.S. at 894, 128 S.Ct. 2161 (citing Restatement § 55 ).

¶ 12 Applying these principles under substantially similar Fed. R. Civ. P. 19(a),³ mandatory joinder is not required if the nonparties' interests are identical or substantially similar to those of a party who is participating fully in the litigation. See, e.g., Ohio Valley Envtl. Coal. v. Bulen, 429 F.3d 493, 504–05 (4th Cir.2005) ("A litigant may serve as a proxy for an absent party if the interests of the two are identical."); North Shore Gas Co. v. Salomon Inc., 152 F.3d 642, 648 (7th Cir.1998) (subsidiary of party company not a necessary party because the two companies' interests were "virtually identical" and the parent company's "motives and ability to defend" were the same as its subsidiary, leading to no possibility of prejudice to subsidiary (internal quotation marks and citation omitted)), overruled on other grounds by Envision Healthcare, Inc. v. PreferredOne Ins. Co., 604 F.3d 983, 986 n.1 (7th Cir.2010).⁴

¶ 13 In most contexts, a nonparty must receive prior notice of the litigation to be bound. Tulsa Prof'l Collection Servs., Inc. v. Pope, 485 U.S. 478, 484–85, 108 S.Ct. 1340, 99 L.Ed.2d 565 (1988) (state action affecting a protected property interest "must generally be accompanied by notification of that action"). Notice is not required, however, where the nonparty has agreed to be represented. Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1278 (9th Cir.1992) (citing Restatement § 41 ). Further, a judgment in prior litigation without notice to absent parties could bind them if the proceedings were " ‘so devised and applied as to insure that those present are of the same class as those absent and that the litigation is so conducted as to insure the full and fair consideration of the common issue.’ " Richards v. Jefferson Cnty., Ala., 517 U.S. 793, 801–02, 116 S.Ct. 1761, 135 L.Ed.2d 76 (1996) (quoting Hansberry v. Lee, 311 U.S. 32, 43, 61 S.Ct. 115, 85 L.Ed. 22 (1940) ).

III. Application

¶ 14 We first consider DOR's contention that the General Assembly intended to require transferees to be parties, and conclude that it did not. This conclusion does not answer the C.R.C.P. 19(a) inquiry because if due process precludes binding transferees to judgments entered in their absence, joinder of transferees could still be required. Hence, we next consider whether the statutory procedure binding transferees requires that they be joined or served with...