Lennane v. Franchise Tax Bd.

• Decision Date: 20 December 1996
• Docket Number: No. A070652,A070652
• Citation: 59 Cal.Rptr.2d 602,51 Cal.App.4th 1180
• Court: California Court of Appeals Court of Appeals
• Parties: , 96 Cal. Daily Op. Serv. 9341, 96 Daily Journal D.A.R. 15,345 James P. LENNANE et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent.

Page 602

59 Cal.Rptr.2d 602

51 Cal.App.4th 1180, 96 Cal. Daily Op. Serv. 9341,

96 Daily Journal D.A.R. 15,345

James P. LENNANE et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent.

No. A070652.

Court of Appeal, First District, Division 2, California.

Dec. 20, 1996.

Gray Cary Ware & Freidenrich, John R. Shuman, Jr., Hugh Goodwin Christina Groll, Palo Alto, for Plaintiffs and Appellants.

Daniel E. Lungren, Attorney General of the State of California, Richard F. Finn, Supervising Deputy Attorney General, for Defendant and Respondent.

LAMBDEN, Associate Justice.

Section 19717 of the Revenue and Taxation Code (unspecified section references are to that code) grants the court in a tax refund action the discretion to award taxpayers their reasonable litigation costs if they prevail and the position of the State of California in the proceeding was "not substantially justified" (subd. (c)(2)(A)(i)). ¹ We hold in this refund

action against the Franchise Tax Board (FTB) that prevailing parties James [51 Cal.App.4th 1184] P. and Susan K. Lennane (taxpayers) were properly denied litigation costs in appellate litigation because, as the superior court found, FTB's position was substantially justified.

BACKGROUND

The genesis of this appeal is recounted in the Supreme Court's decision in Lennane v. Franchise Tax Bd. (1994) 9 Cal.4th 263, 36 Cal.Rptr.2d 563, 885 P.2d 976 (Lennane ). The underlying dispute was whether former section 17063.11, which exempted from income preference the capital gains from sales of certain small business stock, applied to stock acquired on or before September 16, 1981, the statute's effective date. Taxpayers sold such stock in 1986 (before a 1987 repeal of the section), claiming the exemption. In October 1991, after a notice of proposed assessment and FTB's ultimate disallowance of their claim for refund, taxpayers filed this action in superior court. (Lennane, supra, at pp. 265-267, 36 Cal.Rptr.2d 563, 885 P.2d 976.) Their complaint sought litigation costs under former section 19420, the predecessor statute to section 19717.

Taxpayers moved for summary judgment, and their motion was granted by the Honorable Lucy Kelly McCabe. By a judgment filed April 30, 1992, Judge McCabe rendered judgment, found FTB's position not substantially justified and awarded taxpayers "reasonable costs" in an undetermined amount. FTB filed notice of appeal on May 14.

On May 11, meanwhile, taxpayers filed a memorandum of costs, claiming costs and attorney fees totaling $24,799.14. FTB followed with a motion to tax or strike costs, claiming substantial justification for its position. Taxpayers opposed that motion, and Judge McCabe heard the matter on July 9. Her order denying FTB's motion was filed on August 3. FTB did not file a separate notice of appeal from it but did urge in a footnote that reversal of the judgment would The appeal came before this division which, in an unpublished opinion filed in June 1993 and authored by Justice Phelan (Kline, P.J. and Benson, J., conc.) (Lennane v. Franchise Tax Board (June 29, 1993) A057655), reversed. While upholding FTB's position, the opinion made no mention of the costs award. Taxpayers then obtained review by the Supreme Court, and that court ultimately decided in their favor, reversing this court's decision and, like this court's prior opinion, saying nothing about the costs award, despite FTB having reiterated its arguments on that point (again in footnote). (Lennane, supra, 9 Cal.4th 263, 36 Cal.Rptr.2d 563, 885 P.2d 976.)

"include the reversal of the award" (citing Tetra Pak, Inc. v. State Bd. of Equalization (1991) 234 Cal.App.3d 1751, 286 Cal.Rptr. 529) and that FTB's position was substantially justified in any event.

Following remittitur, taxpayers filed a motion for costs and fees (§ 19717) in superior court, seeking litigation expenses incurred in the appellate proceedings. This time the matter came before the Honorable William J. Cahill. Relying in part on this court's decision in favor of FTB and rejecting a claim that the prior costs ruling by Judge McCabe was law of the case, he found FTB's position substantially justified, denied attorney fees of $80,071 for that reason, and awarded taxpayers uncontested other costs of $1,711.04. Taxpayers timely appeal the denial of attorney fees.

DISCUSSION

Res judicata/law of the case

Taxpayers argue Judge McCabe's costs ruling was not effectively appealed, became final without challenge and was therefore res judicata on the issue of substantial justification on the subsequent motion for appellate costs. We do not decide the appeal question for even if the costs award was validly appealed, ² Judge McCabe's ruling was not binding on the later motion.

The doctrine of res judicata fails because, as FTB observes, the first ruling was not in a former action (Panos v. Great Western Packing Co. (1943) 21 Cal.2d 636, 637-638, 134 P.2d 242; Levy v. Cohen (1977) 19 Cal.3d 165, 171, 137 Cal.Rptr. 162, 561 P.2d 252), a requirement which would also apply should we view the issue one of "collateral estoppel" (Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 910, 226 Cal.Rptr. 558, 718 P.2d 920). This was an earlier ruling in the same action. While a prior appealable order becomes "res judicata" in the sense that it becomes binding in the same case if not appealed (In re Matthew C. (1993) 6 Cal.4th 386, 393, 24 Cal.Rptr.2d 765, 862 P.2d 765; Reeves v. Hutson (1956) 144 Cal.App.2d 445, 451, 301 P.2d 264 [order refusing to set aside a default] ), FTB clarifies it does not seek to overturn Judge McCabe's order (rightly or wrongly decided), only to limit its effect to the costs then at issue and substantial justification as it then appeared. ³ FTB informs us it long ago paid the costs awarded by Judge McCabe.

A potential issue is law of the case, but that doctrine cannot apply because no appellate court in this litigation ever actually determined the question. (People v. Scott (1976) 16 Cal.3d 242, 246, 128 Cal.Rptr. 39, 546 P.2d 327; Tally v. Ganahl (1907) 151 Cal. 418, 421, 90 P. 1049.) It seems doubtful either court appreciated the issue was presented. ⁴ But, if so, neither court's opinion acknowledged or expressed any view on the question.

Finally, an added obstacle to invoking res judicata or law of the case is that Judge McCabe's determination of no substantial justification was necessarily made on the facts as they then appeared, before the FTB's position on the subsequent appeals was known. Judge Cahill, on the other hand, limited his decision to the question of litigation costs in the appellate proceedings here and in the Supreme Court. The two rulings concerned two different temporal assessments.

Multiple determinations

Taxpayers contend, as a matter of statutory construction, that section 19717 does not allow multiple determinations to be made at different points in the litigation and, in essence, the first such determination controls throughout subsequent appeals. They rely on federal cases considering the parallel "substantially justified" finding needed for fee-shifting under the federal Equal Access to Justice Act (EAJA) (28 U.S.C. § 2412(d)(1)(a)).

The issue in the EAJA cases they cite is whether the government may relitigate "substantial justification" at the tail end of litigation, when the only question left is whether to award the prevailing party fees incurred for efforts spent litigating whether the fees were appropriate in the first place. The answer in this "fees for fees" context is, not surprisingly, no. The federal high court has reasoned that EAJA envisions a unitary determination based on the entire course of the litigation, without provision for multiple substantial-justification determinations at different stages along the way. (Commissioner, INS v. Jean (1990) 496 U.S. 154, 158-166, 110 S.Ct. 2316, 2318-2323, 110 L.Ed.2d 134.) "[O]nly one threshold determination for the entire civil action is to be made." (Id. at p. 159, 110 S.Ct. at p. 2319 , fn. omitted.) Indicators of that intent are the use of terms " 'position' " and " 'the record' " in the singular (id. at pp. 159-160, 110 S.Ct. at pp. 2319-2320) and allowing a court discretion to discount the fee amount for dilatory conduct by a party during any portion of the litigation (id. at p. 161, 110 S.Ct. at p. 2320). Practical considerations also dictate that a fee request not result in " 'a second major litigation' " or "spawn a 'Kakfaesque judicial nightmare' of infinite litigation to recover fees for the last round of litigation over fees" (id. at p. 163, 110 S.Ct. at p. 2321, citations omitted). (Accord Doty v. U.S. (Fed.Cir.1995) 71 F.3d 384, 386; see also Bode v. U.S. (5th Cir.1990) 919 F.2d 1044, 1052, and Powell v. C.I.R. (5th Cir.1990) 891 F.2d 1167, 1170-1172, construing similar language in 26 U.S.C. § 7430.)

The case before us presents no such nightmare of fees-for-fees litigation, only twin determinations of substantial justification--one at the close of trial proceedings (summary judgment on the merits) and one at the close of appellate proceedings resolving the merits of the substantive dispute. More importantly, in their focus on the EAJA case law, both parties miss a key statutory distinction which makes the analogy inapt. That distinction is in the timing of the fee applications and awards.

EAJA compels an application to be filed within 30 days of "final judgment" in the action (28 U.S.C. § 2412(d)(1)(B)), which is specially defined as a judgment that is "final In California, by contrast, dual determinations for trial and appeal are compelled by the statutory language. An order granting or denying an award "in whole or in part" must be "incorporated as a part of the decision or judgment in the case" and so becomes "subject to appeal in the same manner as the decision or judgment." (§ 19717, subd. (e); fn. 1, ante.) This implies, of course, that an award is...