Ventas Finance I, LLC v. Franchise Tax Bd.

• Decision Date: 11 August 2008
• Docket Number: No. A116277.,No. A117751.,A116277.,A117751.
• Citation: 165 Cal.App.4th 1207,81 Cal. Rptr. 3d 823
• Court: California Court of Appeals Court of Appeals
• Parties: VENTAS FINANCE I, LLC, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant.

165 Cal.App.4th 1207

81 Cal. Rptr. 3d 823

VENTAS FINANCE I, LLC, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant.

No. A116277.

No. A117751.

Court of Appeals of California, First District, Division One.

August 11, 2008.

Edmund G. Brown, Jr., Attorney General, Randall P. Borcherding, Jeffrey Rich and Marguerite C. Stricklin, Deputy Attorneys General, for Defendant and Appellant.

Silverstein & Pomerantz, Amy L. Silverstein and Edwin P. Antolin for Plaintiff and Respondent.

OPINION

STEIN, J.

California's Franchise Tax Board (FTB) appeals from a judgment ordering a refund to Ventas Finance I (Ventas), a limited liability company (LLC), of $29,540, the entire amount it paid pursuant to former¹ Revenue and Taxation Code² section 17942 for the years 2001, 2002, and 2003, and a postjudgment order awarding attorney fees to Ventas in the amount of $215,016 pursuant to Code of Civil Procedure section 1021.5.

The trial court ordered the refund based upon its conclusion that, as applied to Ventas, the levy imposed by former section 17942 violated the commerce clause of the United States Constitution (U.S. Const., art. I, § 8, cl. 3) (Commerce Clause) because the levy was based upon total income without apportionment to income attributable to, or derived from, California sources. Although at least some of Ventas's income did derive from California sources, the court ordered FTB to refund the entire amount.

In its postjudgment order awarding attorney fees, the court rejected FTB's contention that section 19717 is the exclusive means of obtaining fees in a tax refund suit. It further ruled that Ventas was the successful party within the meaning of Code of Civil Procedure section 1021.5, and that Ventas met the remaining criteria for an award of fees. In calculating the amount of reasonable fees, the court applied a 1.5 multiplier to a lodestar figure of $143,343.75.

We shall uphold the trial court's determination that former section 17942, as applied to Ventas, violates the Commerce Clause because it is not fairly apportioned, and that the court properly denied FTB's request that it judicially reform former section 17942 by rewriting it to include an apportionment mechanism. We shall also conclude, however, that neither federal due process nor any principle of California law requires FTB to refund the entire amount Ventas paid. The refund should be limited to the amount Ventas paid for the years in issue that exceeds the amount it would have been assessed, without violating the Commerce Clause, using a method of fair apportionment.³ We therefore shall reverse the judgment in part, and remand with directions to redetermine the amount of the refund. In all other respects, we shall affirm the judgment.

We shall also hold that section 19717 is not the exclusive means of obtaining attorney fees in a tax refund suit, and that fees may be awarded pursuant to Code of Civil Procedure section 1021.5, if the criteria specified therein are otherwise established. In light of the partial reversal of the underlying judgment, however, we cannot say with certainty that the court would exercise its discretion in the same manner. We therefore shall also reverse the postjudgment order awarding attorney fees, and remand with directions that the court may redetermine eligibility and the amount of reasonable fees in light of our partial reversal of the judgment.

FACTS⁴

1. The Suit for Refund.

Ventas was formed in 2001 as a limited liability company under the laws of the State of Delaware. It is wholly owned by Ventas, Inc., a Delaware real estate investment trust, and was formed to obtain financing secured by certain skilled nursing facilities to which Ventas held title. From 2001 to 2003, Ventas owned 39 to 40 facilities, three of which were located in California. Ventas had no other property, employees, or representatives working on its behalf in California.

On November 19, 2001, Ventas registered as a foreign LLC with the California Secretary of State, and remained registered through 2003. In 2001, 2002, and 2003 Ventas paid the $800 minimum tax imposed under section 17941. It also paid the following amounts imposed under former section 17942 based upon its "total income from all sources reportable to this state for the taxable year" (former § 17942, subd. (a)): 2001—$6,000; 2002— $11,790; 2003—$11,790. In accordance with FTB's interpretation of former section 17942, Ventas reported its total income from all geographic sources to calculate the amount owed without apportionment to California sources. It was stipulated that if the apportionment methodology California uses for corporations (see § 25128 et seq.) were applied, Ventas's California apportionment percentage would have been only 8.06 percent, 8.34 percent and 6.94 percent, respectively, for these years.

On January 4, 2005, Ventas filed a timely claim for refund on the ground that former section 17942 contained no method for apportioning the levy to the proportionate amount of income earned, or attributable to economic activity, in California and therefore violates the Commerce Clause and the due process clause of the United States Constitution. On February 24, 2005, and again on March 1, 2005, FTB informed Ventas that it had denied the refund claim. Although Ventas did not file an appeal to the State Board of Equalization, it did exhaust its administrative remedies for the purpose of filing a suit for refund, and timely filed its complaint seeking a refund.

After a trial based upon stipulated facts, the court held that former section 17942 is a tax and, as applied to Ventas, violates the Commerce Clause and due process, because it is based upon all income unapportioned to activities within California. The court refused FTB's request to reform former section 17942 to add an apportionment mechanism because the legislative history showed that the Legislature had considered and rejected including an apportionment mechanism, and neither the statute nor the legislative history contained any indication of the type of apportionment mechanism the Legislature would have enacted. The court ordered that Ventas was entitled to a refund of the entire amount it paid pursuant to former section 17942, plus interest and costs for the years in issue. FTB filed a timely notice of appeal from the judgment.

2. The Motion for Attorney Fees.

Ventas thereafter filed a motion seeking attorney fees pursuant to Code of Civil Procedure sections 1021.5 and 1032, subdivision (b). The case was accepted on a contingency fee basis. Based upon standard billing rates, the attorney fees actually incurred through November 2006 would have totaled $143,343.75. Ventas sought $30 million in fees.

This request for a substantial upward adjustment of the lodestar figure was largely predicated upon the theory that this case was the second of two filed by the same attorneys for different plaintiffs that, if upheld, would entitle tens of thousands of LLC's registered in California to obtain refunds estimated to total as much at $1.4 billion, and no less than $300 million.

In the first case, Northwest Energetic Services, LLC v. Franchise Tax Bd. (Super Ct. S.F. City and County, 2006, No. CGC-05-437721), the same attorneys who represented Ventas had already obtained a judgment ruling that former section 17942 was unconstitutional as applied, and an award of $3.5 million in attorney fees.⁵ The plaintiff LLC in that case, however, did not earn any income that could be sourced to California, and there had been no dispute that it was entitled to a refund of all amounts it had paid. Ventas argued the instant litigation was necessary to address FTB's position that only those LLC's that had no income attributable to California sources were entitled to a full refund. In all other cases, FTB maintained that the appropriate remedy was to refund the difference between the amount the LLC paid and the amount it would have paid if former section 17942 included a fair apportionment mechanism. Ventas reasoned that this litigation conclusively resolved issues left unresolved after the Northwest trial by establishing that former section 17942 could not be judicially reformed, and that any LLC who paid the levy is entitled to a full refund.

FTB, on the other hand, estimated the amount of potential refunds as a result of the Northwest trial and this case was closer to $215 million. FTB based its much smaller estimate on its determination that approximately 93 percent of LLC's earned all of their income from California sources. It reasoned that, as applied to these LLC's, former section 17942 would not violate the Commerce Clause. FTB argued that the decision following the Northwest trial and in this case therefore only applied to 7 percent of registered LLC's that had no income from California sources, or, like Ventas, had income from both inside and outside California. These two categories of LLC's together paid 21.5 percent of the levy paid annually under former section 17942.

The court found both estimates to be somewhat speculative, but concluded that the economic benefit secured by this case was "at least the $215 million" in refunds "due to California LLCs with activities within and without California." The court relied upon this estimate both as a factor in concluding that the litigation had produced considerable pecuniary benefits for a large class of persons, and as a factor in applying an upward adjustment to the lodestar figure, albeit a much more modest increase than Ventas had sought.⁶

In selecting a multiplier of 1.5, the court weighed the additional benefits conferred by the litigation, including "the preservation of valuable resources, both public and private, and particularly those of the judiciary, by obviating the need for duplicative litigation; and the vindication of important constitutional rights under the Commerce and Due Process Clauses of the United States Constitution,...