William H. Rehnquist: We will hear argument now on No. 86-740, Omni Capital International v. Rudolf Wolff & Company. Mr. Kutcher, you may proceed whenever you are ready.
Robert A. Kutcher: Mr. Chief Justice, may it please the Court: This case addresses squarely the question of whether in a purely Federal question case arising under the Commodities Act against foreign nationals a Federal Court is bound by the state long arm statute in which it sits in determining whether the foreign national is subject to personal jurisdiction. Ancillary to that issue is the question of whether in a private commodities claim there exists the same nationwide service standard as that found in other provisions of the Commodities Act. The facts of the case are set forth in our brief. They do not need to be repeated. I do want to point out, however, to the Court that this is one of the so-called "Silver Straddle" cases which was argued in front of the Tax Court. The Silver Straddle cases involved over 1400 United States taxpayers who, through trading in silver straddles, were attempting to shelter over $100 million. The petitioners in this case were among those investors, Rudolf Wolff & Company and James Gourlay were among the London brokers who effected some of the trades. Accordingly, there was a substantial participation by not only among these petitioners but about 1400 United States taxpayers, all involved in the same transactions. The facts of the case present the Court with clear alternatives. Under the Louisiana long arm statute, we have conceded that there are insufficient contacts to maintain this commodities fraud suit against Rudolf Wolff & Company and James Gourlay, one of whom is a British corporation, the other is a national of the United Kingdom. However, it has also been determined that if one aggregates their contacts not only with the State of Louisiana, but throughout the United States, then there are sufficient contacts to subject them to suit under the Commodities Act. The question which is presented here is what standard should this Court apply. In essence, Your Honors, this case comes down to the application of Federal Rule Civil Procedure 4(e) and whether that procedural rule imposes a substantive standard on personal jurisdiction. We submit that it does not and, as Judge Wisdom pointed out in his dissent in the Fifth Circuit opinion, Rule 4 is nothing more than a procedural rule designed for efficient housekeeping of the Federal Courts. It was never intended nor should it be construed to impose substantive standards of personal jurisdiction.
Byron R. White: Do you think Rule 4(e) ever applies to a purely Federal question case?
Robert A. Kutcher: Justice White, Rule 4(e) applies--
Byron R. White: Or it just doesn't apply when there is a foreigner involved?
Robert A. Kutcher: --Well, Rule 4(e) applies for the purpose of the physical means of effecting service of process, not the amenability of the individual to the court's law.
Byron R. White: So, in a purely Federal question case, Rule 4(e) wouldn't apply at all if the question is the amenability of the defendant to service?
Robert A. Kutcher: Yes, sir. And I think that has to be the logical conclusion of the argument and I think... and I think your opinion, Your Honor, in Insurance Corporation of Ireland properly points out that the source for personal jurisdiction comes from the Fifth Amendment, comes from the due process clause, and 4(e), we submit is nothing more than the procedural means, the second half of determining whether or not you have got personal jurisdiction, but it doesn't effect the amenability. This case involves foreign nationals and I certainly make the argument--
Byron R. White: Well, what if the state didn't have a long arm statute at all and there is just a purely Federal question case pending in a Federal Court?
Robert A. Kutcher: --Yes, sir.
Byron R. White: Can you serve at all?
Robert A. Kutcher: I think that if the state does not have a long arm statute then what you are faced with is whether or not it comports with the due process clause. And, as you pointed out, the Fifth Amendment due process clause is the basis for personal jurisdiction. So, yes, sir, I think you can. The question is whether or not you can... the manner in which you physically effect that service I think, as Judge Wisdom said in his dissent, is something that can be fashioned on an ad hoc basis. You do not need to have a specific provision in 4(e) to determine all methods of service of process, because Rule 82 and 83 permit the courts to fashion rules which are not inconsistent with the Federal Rules.
Charles E. Whittaker: Well, Mr. Kutcher, I think most decisions in this area have taken the position that Federal courts have only as much subject matter and personal jurisdiction as Congress gives them by affirmative grant.
Robert A. Kutcher: Yes, ma'am.
Charles E. Whittaker: And under your theory, there would not be an affirmative grant of jurisdiction then.
Robert A. Kutcher: Justice O'Connor, a personal jurisdiction.
Charles E. Whittaker: Yes.
Robert A. Kutcher: You are correct. And that is the conclusion of our theory that the courts... the Federal courts, the courts of limited jurisdiction, that is that Congress will only create those statutes and you do not have the authority to hear that case. But with respect to personal jurisdiction, with whether or not you can bring somebody in to hear a case, that comes either from the Fifth Amendment insofar as Federal question cases--
Charles E. Whittaker: Well, I suppose the weight of authority might be against you on this point; wouldn't it?
Robert A. Kutcher: --Yes, ma'am. I can't do anything about that.
William H. Rehnquist: Well, it is very difficult to say that the Fifth Amendment is a source of authority to serve process. The Fifth Amendment is a restriction on the authority of government.
Robert A. Kutcher: Yes, sir.
William H. Rehnquist: So, why do you say the Fifth Amendment is a source of authority?
Robert A. Kutcher: Our argument is that the Fifth Amendment requires that there be due process in bringing someone into a court. That is whether--
William H. Rehnquist: But it's not. The Fifth Amendment, you agree, is not an affirmative grant of authority to anyone.
Robert A. Kutcher: --Yes, sir. I do. I do, Chief Justice Rehnquist. And I can't argue that point with you, either. Our position is that the due process clause of the Fifth... if there were no, as Justice White asked me: If there were no state long arm statute, I think that a state under the Fourteenth Amendment, not under the Fifth Amendment, can bring someone in, determine personal jurisdiction based on the limits of the Fourteenth Amendment. In fact, as the Court knows there are some state statutes which simply say if it is okay under the Fourteenth Amendment, you can do it.
Byron R. White: If a state doesn't have a long arm statute it means that its courts... you may never bring in a non-resident into its courts. Why shouldn't Rule 4(e) then govern that? You can't bring him in in a Federal court, either.
Robert A. Kutcher: Well, that relates to the question of whether or not... the distinction that I'm making, Justice White, is the distinction between the amenability to jurisdiction and the physical means of service of process. And I think you can't bring them in based on--
Byron R. White: I know, but the state says that... the state law is that you just may not serve this person at all. You just may not even try to bring him in. He is just not amenable to the service of process for the purposes of a state court suit. Now, why shouldn't the Federal court follow that under 4(e)?
Robert A. Kutcher: --Because this is a Federal question case and the authorities and the authority under which a Federal court is acting in a Federal question case stems from the Commodities Exchange Act and not from state action. And that is precisely the argument that we are making: that in this particular instance the authority under which the court is acting has no relationship to what jurisdiction or what state the District Court is sitting in. To do otherwise would permit a disparity in treatment, depending on a state's long arm statute. To do otherwise would permit a foreign national who, as in this case, has been found to have adequate contacts throughout the United States, but insufficient contacts in any one state to avoid ever having to answer on the merits of whether or not any commodities fraud was committed or not committed.
Sandra Day O'Connor: Mr. Kutcher, there are some Federal statutes in which Congress has expressly adopted a provision such as you would have us apply here without an express provision.
Robert A. Kutcher: Yes, ma'am.
Sandra Day O'Connor: So, I guess, under your view, all those affirmative grants of jurisdiction on a national basis by Congress are superfluous. They are not necessary.
Robert A. Kutcher: Well, I think that--
Sandra Day O'Connor: Isn't that right?
Robert A. Kutcher: --Insofar as a claim against foreign nationals is concerned, I think that the standard is--
Sandra Day O'Connor: Well, you think that that action by Congress is just not necessary. It's superfluous.
Robert A. Kutcher: --Insofar as claims against foreign nationals are concerned because the source of the authority comes from the due process clause of the Fifth Amendment.
William H. Rehnquist: There you go again and say the source of the authority comes.
Robert A. Kutcher: Yes, sir.
William H. Rehnquist: The source of the authority has to come from somewhere else. Where does it come from?
Robert A. Kutcher: Well, I think it comes from whether or not it meets the traditional notions of fair play and justice that this Court has adopted over the past 50 years.
William H. Rehnquist: Are you saying then that we can presume that Congress wished to reach out in every Federal question cause of action to the limits of the due process clause?
Robert A. Kutcher: I don't think you have to make that presumption, Chief Justice Rehnquist. I think that the due process clause on its own permits you to determine whether or not you meet the standards of traditional justice and fair play.
William H. Rehnquist: Of course. But there is always the question entirely apart from the constitutional limitation whether the person having the authority wishes to exercise it. And that is the intimation I drew from Justice O'Connor's question is that Congress in several sections of the Securities Act has indicated: Yes, we do want to reach as far as we can. But you say that you don't need any indication like that from Congress because in every case they have created a Federal question claim, they are going to be presumed to want to reach as far as they can.
Robert A. Kutcher: I think that under, I think that under 4(e) as was argued by Judge Wisdom in the dissent in the Fifth Circuit that Congress in a case... in the case of this nature involving what has been in the legislative history deemed to be something of significant importance to the enforcement of commodities actions would permit the extension of a nationwide service of process. Now, that I will address a little bit later if the Court doesn't mind regarding the application in Commodities Act, but it seems to me that if you take a look at the origin of the way the Commodities Act was originated and the history revolving around the Commodities Act that it is clear that a commodities action was designed to prohibit the very same abuses which the securities laws 50 years earlier were designed to prohibit. And, under those circumstances, we submit that there should certainly with regard to commodities actions be a nationwide service standard for service of process. Yes, sir?
Byron R. White: Rule 4(e) says that whenever a statute of the United States or an order of the Court provides for service of summons, then you will serve the summons that way. What is the... what does the reference to an order of the Court mean?
Robert A. Kutcher: I think it refers to local rules or to rules which the courts--
Byron R. White: You mean a Federal Court in a Federal question case could, where a statute does not provide for a service, just enter an order in that particular case providing for serving of process?
Robert A. Kutcher: --To effect the physical means of notifying a defendant of the pendency of an action in a jurisdiction. Yes, sir. And that is exactly what happened in the Petro Shipping case.
Byron R. White: Well, what about amenability?
Robert A. Kutcher: On amenability, it comes down to the standard of whether or not you meet the traditional notions of fair play and justice.
Byron R. White: Well, could an order, could just... I just don't know why the rule has a reference to an order of the Court.
Robert A. Kutcher: Well, it seems... my interpretation of that, Your Honor, is that it authorizes and incorporates Rule 83 where the Court has the authority to enter rules as long as they are not inconsistent with the Federal Rules of Civil Procedure. And that is how I interpret that particular provision.
William H. Rehnquist: Well, it could be, too, couldn't it to authorize substitute service, substitute service of process where one method has been tried and the person can't be found at the address? That was the practice in Arizona.
Robert A. Kutcher: Yes, sir. I think that is another alternative that could apply.
Antonin Scalia: Mr. Kutcher?
Robert A. Kutcher: Yes.
Antonin Scalia: If the Congress is not using the manner of service as a shorthand for prescribing what the reach of personal jurisdiction is, then why is it that when the manner of service is improper, the suit is dismissed for want of jurisdiction? Isn't that what happens? Is it dismissed for procedural--
Robert A. Kutcher: The suit is dismissed for insufficiency of service of process. And the process is fair--
Antonin Scalia: --That is not a jurisdictional defect?
Robert A. Kutcher: --It is not a personal jurisdictional defect, no, sir. I think it is dismissed for insufficiency of service of process. And I think if you can properly--
Antonin Scalia: Well, what other kinds of jurisdictions are there other than jurisdiction over the person and the subject matter?
Robert A. Kutcher: --That's it. But what I am suggesting--
Antonin Scalia: So, you are saying that all these dismissals because of improper service really are not jurisdictional--
Robert A. Kutcher: --They are not necessarily. I think that they are separately addressed under Rule 12(b). You can bring a motion to dismiss for a lack of personal jurisdiction or you can bring a motion for insufficiency of service or insufficiency of process. So, the Federal Rules contemplate a distinction between personal jurisdiction and service of process. And I think what has happened... and I can't argue with Justice O'Connor that the courts have done this... is somehow they have adopted a substantive constitutional basis and incorporated that into the procedure of Rule 4 for obtaining service of process.
Antonin Scalia: --What if you have an improper service of process and the point is not noted by the defendant, the case goes on to judgment and that judgment is then sued on somewhere else.
Robert A. Kutcher: That's waived. As I appreciate 12(b) the only thing that you can't waive is subject matter jurisdiction. You can waive personal jurisdiction and you can waive the service of process, Your Honor. And I think that, as in this case, if you don't file a motion to dismiss for--
Antonin Scalia: The individual never appears.
Robert A. Kutcher: --And if you've got good service and the individual never appears and the default is taken, I don't think you can collaterally--
Antonin Scalia: Improper service. Improper service and the individual never appears and judgment is entered nonetheless?
Robert A. Kutcher: --As I appreciate it, you would have to come back and argue the same way you would in any other default. The service... the question of the propriety of service is waived if it is not asserted under Rule 12(b).
Antonin Scalia: There is jurisdiction over the person, then, right?
Robert A. Kutcher: I think so. It's waived. It's... there--
Antonin Scalia: How do you waive it by not appearing?
Robert A. Kutcher: --Well, the same way that you would if you don't assert it, you waive it. And if you appear, Judge. Justice. It seems to me--
John Paul Stevens: Well, that is a rather extreme position. Say the defendant never even heard of the lawsuit.
Robert A. Kutcher: --Well, then he has got the same remedies available to him--
John Paul Stevens: Well, he has some remedy other than 12(b)?
Robert A. Kutcher: --Yes, sir.
John Paul Stevens: Well, what is the difference if you have never heard of it and you are improperly served? What is the distinction? When is an improper service waived and when isn't it?
Robert A. Kutcher: I think an improper service is waived if... I think an improper service such as would be dismissable under Rule 12(b) would be waived in any instance that any other 12(b) motion would be waived.
John Paul Stevens: Even if he never even heard of the fact that a lawsuit had been brought against him?
Robert A. Kutcher: Well, if he never heard of it--
John Paul Stevens: How could he waive?
Robert A. Kutcher: --then I assume, then I would assume that when they went to try to collect on the judgment he would have remedies available to him.
John Paul Stevens: Well, he hears about it when they collect on the judgment, but the time to file a 12(b) motion is long gone.
Robert A. Kutcher: I think that is something that is addressed, frankly, to the discretion of the trial court as to whether or not there was... whether he should have known about it or not. But that really--
John Paul Stevens: Do you have any cases for this rather novel approach?
Robert A. Kutcher: --No, sir, because I didn't plan on getting on the question of whether or not a default was taken. I think we are taking the position that under the... that Rule 4 simply prescribes the method by which you physically notify someone of a suit. Rule 4, by its own language, says service may be made under the circumstances which we argue and which Judge Wisdom and five other Circuit Court judges in the Fifth Circuit, viewed to be discretionary, not the mandatory method of if you can't do it this way, you can't do it at all, but simply, you can another route. And the whole basis should be whether or not the presence of the defendant in the Federal Court is such that it does not offend the traditional notions of fair play and justice.
William J. Brennan, Jr.: Well, you mentioned earlier, I think, that a source of authority to fashion the service of process rule is 83.
Robert A. Kutcher: Yes, sir.
William J. Brennan, Jr.: Which deals with local rules; doesn't it?
Robert A. Kutcher: As I understand it it deals with--
William J. Brennan, Jr.: Beyond that?
Robert A. Kutcher: --Yes, sir. As I appreciate it and again as the dissent pointed out and as was determined in the Petro Shipping case which is cited in Judge Wisdom's dissent that the Court has the... the Federal District Court has the authority to effect a method by which service is obtained. And what we are submitting--
William J. Brennan, Jr.: But if it is on alien defendants lack minimum contacts with the states, it nevertheless has to be sufficient national contacts?
Robert A. Kutcher: --Oh, absolutely.
William J. Brennan, Jr.: To be amenable jurisdiction under the Fifth Amendment.
Robert A. Kutcher: Absolutely.
William J. Brennan, Jr.: So, to that extent, your submission is not as broad as I thought you were referring--
Robert A. Kutcher: Oh, no. I'm not suggesting that. What I am suggesting is that in Federal question cases, which the Commodities Act certainly is, and certainly in cases involving foreign nationals. And, if you look at the national contacts cases which have been decided, which are cited in our brief, they all talk about... one of the factors that we--
William H. Rehnquist: --Let me ask you one question, Mr. Kutcher.
Robert A. Kutcher: --Yes.
William H. Rehnquist: To the extent that you rely on Rule 83, does that mean that the District Court in New Orleans can have a rule saying: We want to go to the full extent of the Fifth Amendment in these cases. And Western District in Shreveport can say: Well, no, we don't think we will go that far. I mean is it 93 different rules for 93 different districts?
Robert A. Kutcher: I think the authority is such that--
William H. Rehnquist: Well, what authority?
Robert A. Kutcher: --I think that the argument that we are asserting, Chief Justice, is that under the... that the Federal Rules should not substantively effect the rights of a plaintiff to maintain an action against a foreign national. Judge Wisdom analogized the state long arm statute to the national contacts theory in cases involving foreign nationals. And I think that is a pretty fair analogy.
William H. Rehnquist: Well, now, are you going to get back to my question about Rule 83?
Robert A. Kutcher: Well, I think that 83 just permits you to fashion... no, I don't think that you can have 93 different rules.
William H. Rehnquist: So, how do you determine which rule is right in the various districts?
Robert A. Kutcher: I think as long as the rule is in compliance--
William H. Rehnquist: In compliance with what?
Robert A. Kutcher: --With the limits of what is permitted under the Fifth Amendment.
William H. Rehnquist: Well, then you say that every district has to promulgate a rule that goes as far as the Fifth Amendment permitted.
Robert A. Kutcher: Well, every district has, I think... I think the Federal Courts have that authority.
William H. Rehnquist: What if one particularly, the Chief Judge up in Shreveport says: I may have that authority, but I just don't choose to exercise it. That is not the way I read this statute.
Robert A. Kutcher: Chief Justice, I think that under those circumstances that there would be some sort of appellate review. I can't answer your question specifically because it seems to me that the likelihood, frankly, of 93 different opinions as to what they can do or what a District Court judge can do--
Antonin Scalia: It is not what they can do, it is what they choose to do. The Chief Justice's question focuses on the fact that Rule 83 is not mandatory. It says that in cases not provided for by rule, they may regulate their practice in any manner not inconsistent with these rules. Now, it wouldn't be inconsistent to assert the full scope of jurisdiction that you assert exists, but it also would not be inconsistent to assert something less than that. So, how would you be reversed if you chose to exercise less than that?
Robert A. Kutcher: --In thinking about it, I think, as Mr. Lee did this morning, I think that I have got to change my response and say that as long as it is constitutional a District Court judge can do anything which is permitted under the Fifth Amendment--
Antonin Scalia: So, you can have 93 different rules.
Robert A. Kutcher: --Theoretically, you can have 93 different rules. I think... but the venue provisions which are going to limit where you can maintain an action regardless of personal jurisdiction are going to have an effect here as well. And that is something that I think needs to be addressed. As the Fifth Circuit has held in several cases, the Federal Courts have never had to fashion a personal jurisdiction basis because your strict venue requirements dictate that you can either bring your action where the plaintiffs reside or the cause of action arose where the defendants reside, depending on whether or not you have got diversity of Federal question jurisdiction. And under those circumstances, I think the limitation, if you will, on the power of a Federal District Court stems from the venue provisions and not from the personal jurisdiction basis. And that is the argument which we are asserting: that venue is what is going to limit the hailing of a foreign national, such as Rudolf Wolff & Company, into a court where there wouldn't... where the court may have the personal jurisdiction and it may be constitutional and it may meet traditional notions of fair play, but it simply is not the proper venue. And you have got to shop elsewhere.
Byron R. White: You say that 4(e) just deals with the manner of service of process and never in any action doesn't go to amenability of service outside the state.
Robert A. Kutcher: I think that, yes, sir. That's my argument and 1 think that in Federal--
Byron R. White: And so, I suppose you would say Federal District Court could by rule say that when the suits are against non-residents service of process may be had on those people to the extent the Fifth Amendment will allow.
Robert A. Kutcher: --And I think... yes, sir.
Byron R. White: And provide the method.
Robert A. Kutcher: And provide the method. And I think that is accurate.
Byron R. White: And without having to worry about Rule 4(e).
Robert A. Kutcher: That's exactly right. And that's the national contacts theory. You look to the basis of the foreign nationals contacts with the entire United States. And this Court has held in at least one case that in terms of foreign relations that this is one country. It is not 50 separate states. It is not 50 separate autonomous units. It is one country with regard to foreign nationals. I think that standard applies. And I think it particularly applies in a case of this nature in an action which is a commodities fraud case which was initially filed as a securities fraud claim. The irony is that this lawsuit when it was initially filed, was filed as a securities fraud claim. No dispute that Section 27 permits nationwide service of process. Subsequently, the case is amended to include a commodities fraud claim, then it is determined that the commodities remedy is the exclusive remedy. And, now, all of a sudden, these Petitioners, who when the suit was filed had service of process against Rudolf Wolff & Company and against James Gourlay, all find themselves relegated to the state remedy, the Louisiana state long arm statute to determine whether or not they have got jurisdiction over the foreign nationals. They went from no contest as to having it to being relegated to the state claim simply... and the facts, and the underlying facts of causes of action never changed. And under those circumstances, we believe that insofar as this cause of action is concerned that a nationwide national contacts theory should apply and that Rudolf Wolff and James Gourlay have both been found to have national contacts with the United States, although not with the State of Louisiana. And I will reserve the rest of my time for rebuttal. Thank you, Your Honors.
William H. Rehnquist: Thank you, Mr. Kutcher. We will hear now from you, Mr. Paskoff.
Elliot Paskoff: Mr. Chief Justice, and may it please the Court: To address the limitations of personal jurisdiction in Federal Courts over non-residents, I think we should start in the beginning. Pursuant to Article 3, Section 1 of the Constitution, it is Congress that is ordained... that may ordain and create the lower Federal Courts. Our Federal Court system is a creature of Congressional grant as a limited... as a court of limited jurisdiction, our Federal District Courts may not create their own jurisdictional premise. If we delve back into history, we find that the members of this nation's First Congress were concerned with pre-revolutionary oppressiveness of causing persons to travel long distances to settle their disputes.
John Paul Stevens: Mr. Paskoff, before you get into your legal argument, could you help me on one factual matter?
Elliot Paskoff: Yes, sir.
John Paul Stevens: Your opponent indicated at the end of his argument something I hadn't really quite understood. That the London parties who deny personal... who claim there is no personal jurisdiction over them, were subjected to the personal jurisdiction of the court while it was a Securities Act claim and then they subsequently claim there was no jurisdiction. I had thought they were brought in as Third Parties after the Securities Act--
Elliot Paskoff: Your Honor, what has happened is in the original Point Landing litigation, one of my clients, Rudolf Wolff & Co., Ltd. , was named as a direct party. That Defendant moved to dismiss for failure to assert impersonum jurisdiction under Section 27. We never conceded that we were subject to the jurisdiction of the Federal District Court in Louisiana pursuant to Section 27. The reason why we never conceded that, Justice Stevens, is that the assertion of personal jurisdiction over a non-resident is a dual-pronged requirement. And these are not parallel prongs. The initial prong is you require a statutory grant from Congress--
John Paul Stevens: --You had it in Section 27.
Elliot Paskoff: --Yes, but then you had the next step. The next step was whether or not that statutory grant as applied comports with traditional notions of fair play and substantial justice.
John Paul Stevens: Whether your contacts with the whole country were adequate.
Elliot Paskoff: Exactly. Now, understanding the--
John Paul Stevens: And that motion was never decided. Is that right?
Elliot Paskoff: --Your Honor, that motion... that motion was decided... the motion was decided and that was Point Landing 1. In Point Landing 1, the Federal District Court held that there was impersonum jurisdiction.
John Paul Stevens: So, then your client was before the court.
Elliot Paskoff: Yes. But we also argued at that time, Your Honor, that the Commodities Act as amended in 1974 granted exclusive jurisdiction... I know this is not part of this petition, but we did argue that it granted exclusive jurisdiction through the Commodity Futures Trading Commission and to the Federal District Courts.
John Paul Stevens: But if you had lost on that argument, your client would have been before the court?
Elliot Paskoff: If I had lost under that argument, we would have been before the court. That's right.
John Paul Stevens: And, of course, if the District Court was right on the contacts rule.
Elliot Paskoff: That is correct. Under Section 27 of the Federal Securities--
John Paul Stevens: What if the District judge had deferred ruling on your pre-emption argument or the, you know, that there's no Securities Act claim here, until the end of the Plaintiffs' case, something like that. And then they had said, "Well, I was wrong. " "I never should have gone to trial on the Securities Act because there is just no... it has been preempted by the Commodities Exchange Act. " Would you still be able to get out on your present jurisdictional theory, do you think?
Elliot Paskoff: --I believe so, Your Honor.
John Paul Stevens: After the case is half tried?
Elliot Paskoff: Because if the Commodities Exchange Act has preempted the regulation of commodities futures trading, then Section 27 does not apply because the commodity... because the Securities Exchange Act is not applicable to determining the duties and liabilities involved with trading of commodity futures.
John Paul Stevens: What if instead of the preempt, the argument that the Commodities Act superceded the other, you had simply persuaded the District judge that it didn't state a cause of action under the Securities Act and, yet, you were properly before... if you were before the court on the Securities Act, I presume they also could have tried the commodities exchange claim at the same time. Couldn't they? You can't have a pending jurisdiction motion.
Elliot Paskoff: Well, I understand what you are saying, Your Honor, except Congressional history has clearly indicated that the Commodity Exchange Act preempts--
John Paul Stevens: Well, I understand that. I understand. But at least that he had the right to bring you before the court and require you to make that argument to the court and demonstrate that there really is no valid claim under the Securities Act.
Elliot Paskoff: --That is correct.
John Paul Stevens: So, you were, for a brief period of time at least, subject to the jurisdiction of the Louisiana court. It's a kind of a puzzle. I don't know what... they haven't really argued this, but I have to confess I don't quite understand it. You don't really want to give that pendant jurisdiction necessarily applies to jurisdiction over the person as well as it applies to jurisdiction over subject matter?
Elliot Paskoff: That's correct. Part of the second prong of the Petitioners' request to this Court is to ask for an implication of nationwide service of process under the Commodity Exchange Act. Congress has had three separate opportunities within the last 12 years to speak on the subject of nationwide service of process. In 1974, the Commodity Futures Trading Commission Act was enacted and it specifically conferred nationwide service of process under Section 13(a)(1) on the Commodity Futures Trading Commission. It similarly conferred nationwide service of process on the sister states' attorney generals under Section 13(a)(2). Nowhere was there a mention that there was a nationwide service of process for private litigants. This Court decided Merrill Lynch v. Curran in 1982, holding that a private right of action exists under the Commodity Exchange Act. In 1982, the Futures Trading Act amending the Commodity Exchange Act expressly provided for a private right of action by a private litigant aggrieved under the Commodity Exchange Act. That was the perfect place if Congress had so intended to assert a nationwide service of process clause for private litigants. That Act is silent. That provision does not provide for nationwide service of process in enforcing private claims. Congressional history with respect to the enactment of Section 25 in 1982 indicates that Congress recognized... the Agricultural Committee of the House stated that Congress does not intend to rely upon private litigants as the policemen of the Commodity Exchange Act. More recently, Congress enacted the Futures Trading Act of 1986 which among other provisions granted to the Commodity Futures Trading Commission the power to serve extra-territorial subpoenas beyond the United States' territories. In the conference committee report relating to that provision, the conference committee has instructed the Commissioners that prior to the issuance of a pre-complaint investigatory subpoena they must confer with the Department of State in order to meet with representatives of the receiving nation so as not to cause a perception of intrusion on the sovereignty of the receiving nation. It is not surprising in light of the caution and sensitivity expressed by Congress in dealing with aliens under the Commodity Exchange Act that a restrictive scope of personal jurisdiction has been defined because Congress simply cannot restrain private litigants in their dealing with aliens. So, we are left with the statutes, the Commodity Exchange Act. It has in some sections grants of nationwide service of process with respect to the Commodity Futures Trading Commission and in other sections relating to private action, there is no such language. This Court has observed in Russello v. United States as a matter of constitutional construction that where Congress includes particular language in one part of the statute but omits that language in another section of the statute, it will be presumed that that omission was intentional and deliberate. The basic assumption is that Congress knows how to write its statutes. I think the likely inference that I draw is that Congress did not intend to grant extra-territorial jurisdiction as a weapon to private litigants. For that reason, I would urge this Court to reject the request by the Petitioners to imply a nationwide service of process clause under the Commodity Exchange Act.
John Paul Stevens: It seems to me that argument would also demonstrate that Congress didn't intend any cause of action to be implied.
Elliot Paskoff: Your Honor, not necessarily. And the reason... I am quite familiar with your decision in Merrill Lynch v. Curran. The Congressional intent relied upon by the majority seemed to want to preserve a private right of action which existed by case law prior to the enactment of the Commodity Futures Trading Commission Act of 1974. There was a private right of action by case law. So all that decision does is preserve. Congress did not intend, Congress did not specifically intend to eliminate that private right of action. When a Federal statute is silent as to a provision for nationwide service of process, Rule 4(e) instructs us how to obtain impersonum jurisdiction over a non-resident. 1963, we had 4(e) amended to the Federal Rules of Civil Procedure. It used the language, "Service of process may be made under the circumstances and in the manner prescribed by the statute or rule of the state where the District Court is sitting. " The commentators including the reporter to the Advisory Committee in 1963 have indicated that it was the intent to incorporate by reference the state's standard of amenability to personal jurisdiction. There is no other reason to include the language under the circumstances but for to include the state standard of personal jurisdiction. Thus, if Respondents Wolff and Gourlay were amenable to the impersonum jurisdiction of the Louisiana long arm statute, then they would be amenable to the impersonum jurisdiction of the Federal District Court under 4(e). Petitioners concede and this can be found at page 50 of the joint appendix. Petitioners concede and Plaintiffs concede that there is no personal jurisdiction under the Louisiana long arm statute. What concerns me is an implication of nationwide service of process under the Commodity Exchange Act. If that were to be granted today would, by analogy, be applicable to every single Federal question statute which is silent as to service of process. I do not believe that that is what Congress intended. Mr. Chief Justice, if any Member of the Court has a question for me, I would respond. Otherwise, I will sit.
William H. Rehnquist: Thank you, Mr. Paskoff. Mr. Kutcher, you have four minutes remaining.
Robert A. Kutcher: First, I will respond to Justice Stevens' inquiry regarding what happened in the District Court below. The District Court judge did find that there existed adequate national contacts based on... for Mr. Rudolf Wolff and Mr. James Gourlay, and held that he had personal jurisdiction. Subsequently, the Fifth Circuit in DeMelo came out and said: You have to look to the state statute under 4(e). And that was when they came back for motion for reconsideration. And the District Court judge reversed himself based on the DeMelo decision, but there was no question that the judicial determination after discovery as to the contacts found that there weren't adequate national contacts. The national contacts theory in Federal question cases I think has application here and, as Judge Wisdom indicated in dissent, in the appellate court opinion, is something which the court should consider in Federal question cases. Mr. Paskoff's argument that what is going to result are rampant lawsuits everywhere in all Federal question cases ignores what I alluded to in my argument in chief and that is the venue provisions of the United States Code which will limit where litigation can take place. Before 1963, this Court in International Shoe and its successors determined that all that is required is traditional notions of fair play and justice. The argument that a rule of procedure which has been described as a housekeeping rule should somehow control the rights of a Federal litigant in a Federal cause of action in a Federal court is something which places procedure over substance. This is a commodities fraud claim. The exclusive place to bring it is in the United States District Courts. And the effect of the Fifth Circuit decision is to insulate the foreign aliens from any action in any District Court because they don't have adequate contacts with that particular district, although there is no question that they have contacts with the entire country. I thank Your Honors for your time. If you have got any questions, I will be happy to answer them.
William H. Rehnquist: Thank you, Mr. Kutcher. The case is submitted.


William H. Rehnquist: We'll hear argument next in Number 88-1951, United States v. Frances Dalm. Mr. Desan-Husson you may proceed. Am I pronouncing your name right?
Christine Desan-husson: Yes.
William H. Rehnquist: Good. It's written out here but I wasn't sure.
Christine Desan-husson: Thank you, Mr. Chief Justice, and may it please the Court: The issue in this case is whether equitable recoupment can confer jurisdiction on a district court to hear a taxpayer's suit against the United States for a tax refund when that suit is otherwise barred as untimely. The short answer is no. Equitable recoupment is a defensive doctrine. Its logic operates to reduce a claim, a currently owed claim or debt. It operates in litigation about the amount of that claim, litigation over which a court already has jurisdiction. Equitable recoupment must operate in this way because an equitable doctrine cannot expand the jurisdiction of a district court beyond its statutory limits. Here, Sections 7422 and 6511 of the Internal Revenue Code make it clear that no suit for a tax refund may be maintained against the United States unless a refund claim for that tax has been timely filed. The refund claim for the gift tax at issue here was untimely, and nothing in the doctrine of equitable recoupment changes that. The dispute... this dispute began because of the tax treatment of a lump sum payment received by the respondent in 1976. At that time, she was serving as the administrator of her former employer's estate. She received two lump sum payments from the brother of her employer and the beneficiary of his estate. In 1976 she received $180,000. A gift tax return was filed and the respondent paid a gift tax of approximately $20,000. In 1977 she received approximately $133,000. No return or gift tax was paid on that.
Harry A. Blackmun: Do you know why there was no gift tax return filed that year?
Christine Desan-husson: The record does not reflect that.
Harry A. Blackmun: Maybe I should ask your opponent.
Christine Desan-husson: Yes, you could.
Sandra Day O'Connor: In theory, if the government later decides that income tax was owing on it, that it wasn't a gift, should the government give credit for the gift tax that was paid?
Christine Desan-husson: The government will give credit. In fact, what happened in this case is that in 1983 the Internal Revenue Service determined that the amount was income and asserted the deficiency. The Internal Revenue Service can't in the notice of deficiency just lop off a certain amount because the amount of the deficiency is statutorily defined. So, that amount goes off in credits or recoupment can't be performed. The Service could... does have the authority to settle a claim, at which point it may make... it may take into account the fact that a gift tax was paid.
Sandra Day O'Connor: And there was some settlement here?
Christine Desan-husson: There was a settlement in this case. In this case--
Sandra Day O'Connor: Did that give credit in the settlement for the gift tax?
Christine Desan-husson: --It's unclear whether... the court of appeals decided that it was necessary to remand the case to determine whether or not the settlement had given credit for the gift tax. It's clear that--
Sandra Day O'Connor: But you do avow that one way or another credit will be given for the gift tax that was paid?
Christine Desan-husson: --Well, at this point I don't think any court has jurisdiction over this claim, this claim for a gift tax. It's possible that credit was given in the settlement. It's also possible that... a taxpayer can also file... pay a tax and file a refund claim.
Sandra Day O'Connor: Right.
Christine Desan-husson: And at that point the IRS will give credit, will... it's given notice to taxpayers in its Revenue Ruling 7156 that it will at that point perform equitable recoupment. So, it--
Anthony M. Kennedy: Well, can... can that happen now?
Christine Desan-husson: --It can't happen now because the--
Anthony M. Kennedy: Can or cannot?
Christine Desan-husson: --Cannot. Cannot happen now. The income tax deficiency... the way recoupment works is to reduce a currently owed debt. So, it could have reduced the income tax deficiency. And the administrative claim that would have been timely was an income tax administrative claim. At that point, the Service could have reduced the administrative claim. It doesn't have the authority to... to consider an untimely claim for the gift tax. That would just have been a claim for a refund of gift tax, and that was outside of its authority. The point is only that... that the taxpayer had to litigate the income tax deficiency and seek to reduce the amount of the income tax deficiency because the gift tax claim was untimely in 1985, which is when this claim... this claim began.
John Paul Stevens: May I just interrupt, if I may? 1984 I think it was, wasn't it, that they filed the--
Christine Desan-husson: Well, the... the district court suit was filed in '85. But the... that's right, the administrative claim was filed in '84.
John Paul Stevens: --I thought the refund suit for the recovery of the gift tax was filed on December 1, 1984.
Christine Desan-husson: I believe it was November 1, 1984. But, then, I was just saying the district court's was in '85.
John Paul Stevens: Which was before the deficiency matter had been concluded?
Christine Desan-husson: That's right.
John Paul Stevens: And is it correct that had the taxpayer at that time paid the income tax in dispute and filed a claim for refund that the taxpayer could have recovered the gift tax--
Christine Desan-husson: If she--
John Paul Stevens: --erroneously--
Christine Desan-husson: --If she had paid the income tax and filed the income tax refund, she could have--
John Paul Stevens: --She could have--
Christine Desan-husson: --Well, one... excuse me... once... once the claim was in the tax court, the tax court has jurisdiction over that claim.
John Paul Stevens: --Well, yes, but--
Christine Desan-husson: If she hadn't gone to tax court in 1983--
John Paul Stevens: --If instead of proceeding in the tax court--
Christine Desan-husson: --Right.
John Paul Stevens: --she had paid her income tax and filed a refund suit which had two counts in it. Count one says I want the money back for the erroneously collected income tax; count two, I want the gift tax repaid also. Would the gift tax claim have been timely?
Christine Desan-husson: I... I believe what would have happened is that the Service would have considered... the way you stated it, would have considered under number one that what in fact had happened was that the taxpayer was filing a refund claim for the income tax. And it would then have used the gift tax, the payment of the gift tax, as an equitable reason why the income tax could be reduced. So she would have gotten credit.
John Paul Stevens: It might have given her credit if... but would it have had the authority under your argument you make here to strike count 2 of her complaint and say it's too late to sue for the gift tax?
Christine Desan-husson: Yes. I believe if count 2 constituted a gift tax refund claim, it wouldn't have had the authority to do otherwise. It wouldn't have had the authority under its Section 6402 of the Code. When--
John Paul Stevens: Assume for a moment that the income tax claim is $100,000 and the gift tax claim is $30,000, so we have... and she files the two counts. And you say you could strike count one for 30 but would they then... could they then have defended the 100,000 on the ground... the $100,000 claim on the ground that there's... it's too late to get the 30 back?
Christine Desan-husson: --I don't think that the IRS would have done that. I mean,--
John Paul Stevens: Well, I... are we relying on the good faith or sort of the equitable judgment of the administrator or did she have a right? I'm asking if she had a right at that time--
Christine Desan-husson: --She did have a right.
John Paul Stevens: --to 30,000?
Christine Desan-husson: And if... if for some reason the Service hadn't given her the... hadn't reduced the $100,000 by $30,000, she could have filed suit in the district court.
John Paul Stevens: And she could have--
Christine Desan-husson: And the district court would--
John Paul Stevens: --And she had a right to prosecute successfully a refund claim for the $30,000?
Christine Desan-husson: --I wouldn't call it a refund claim. I think... the distinction that--
John Paul Stevens: Well, she had a right to recover $30,000.
Christine Desan-husson: --She had a right to have her income tax reduced by $30,000.
John Paul Stevens: So she could do it by an independent action but not by way of a counterclaim. That's what it boils down to.
Christine Desan-husson: She couldn't do it by way of an independent action for the gift tax.
John Paul Stevens: But as a separate count she could.
Christine Desan-husson: What I'm trying to--
John Paul Stevens: Well, okay.
Christine Desan-husson: --What I'm trying to... the distinction I'm trying to draw is that the difference between an independent suit for the gift tax and a suit for the income tax is not a subtle distinction. It's a distinction on which jurisdiction rests. Specifically, the Tucker Act gives the district courts jurisdiction over a tax refund suit. However, that jurisdiction is expressly limited by provisions of the Internal Revenue Code. Section 7422(a) provides that no suit or proceeding shall be maintained in any court for a tax refund unless an administrative claim has been duly filed according to relevant law. Now, Section 6511(a) of the Code in turn specifies that an administrative claim for a refund must be filed within three years of the time the return is filed or within two years of the time a return is paid. That is, the limiting words of the statute are express and make it explicit--
John Paul Stevens: Yes, but it seems to me if you read those as you... literally, that would bar her refund claim for the 30,000 even if she'd filed it in connection with an income tax refund claim.
Christine Desan-husson: --Well, the theory of equitable recoupment... I mean, it could be that--
John Paul Stevens: Because it's not a defense anymore at this point. She's not a defendant. She is now the plaintiff seeking money.
Christine Desan-husson: --Under... the Court explained in Bull that it considered her a defendant. That is, as the Court put it in Bull, a collection... there could be a hypothetical collection action by the government in which equitable recoupment was raised as a defense. But under current revenue procedures the government goes ahead and summarily collects tax, and the refund suit for that tax is functionally a defense. It's the taxpayer's opportunity to litigate the amount of the income tax deficiency due. So that in that refund action, in an action here for the income tax deficiency, the taxpayer could raise an equitable recoupment claim and it would be functioning according to this Court's reasoning in Bull as a defense. It would be an equitable reason why the income tax should be reduced. Now, I would note that--
William H. Rehnquist: Could a claim like that ever be not just kind of a recoupment or... but lead to an affirmative recovery against the government on the basis--
Christine Desan-husson: --No. No. Recoupment is always limited by the amount of the affirmative claim.
Antonin Scalia: --Well, it... it is an affirmative recovery against the government in the sense that you're talking about a suit for a refund.
Christine Desan-husson: In the sense that the government--
Antonin Scalia: She's paid the tax and she is... she can sue to get back the amount of the gift tax, although it would not be described as a refund of the gift tax, it would be described as a recoupment and, therefore, a reduction of her income tax.
Christine Desan-husson: --That's right. I mean, the government would have to write her a check because it already had her money. I was--
Anthony M. Kennedy: And perhaps... perhaps you think that you have been through this with Justice Stevens, but I want to make sure I understand it. Your position is that if she had filed a suit for a refund... I know she didn't, but suppose she had paid the income tax, filed the suit for a refund, would she have had a right... a right... to recoup the gift tax previously paid even though the gift tax... even though the statute of limitations had long since run?
Christine Desan-husson: --Yes.
Anthony M. Kennedy: Yes, she would have had that right?
Christine Desan-husson: Yes, she would have. And--
William H. Rehnquist: Now, what if... if in Justice Stevens' hypothetical instead of the income tax being $100,000 and the gift tax $30,000, the income tax is $100,000 and the gift tax $200,000, could she possibly have recovered more than $100,000 from the government?
Christine Desan-husson: --No. No. I mean, in any other way the gift tax... the claim for the gift tax as an independent... as a counterclaim in that kind of situation, is barred. And in this... in that situation this taxpayer is not in any different posture than any other taxpayer for whom the statute of limitations has barred. And she's simply lost a meritorious claim.
Antonin Scalia: Well, in that situation the government wouldn't have... wouldn't have sought to convert a $200,000 gift tax into a $100,000 income tax anyway. I mean--
Christine Desan-husson: Well,--
Antonin Scalia: --presumably the IRS would have been quite happy to have her pay the gift tax instead of the properly due income tax.
Christine Desan-husson: --Well, presumably they would have assessed whatever they thought the correct deficiency was.
William H. Rehnquist: That lawyers are required to answer hypothetical questions from judges. [Laughter] Well, but... but under your theory I suppose the government would not have been diffident about asking for a deficiency for the extra $100,000. That's exactly what happened here.
Christine Desan-husson: That's right.
Harry A. Blackmun: I'm sure that the Service has not been this charitable always, has it? It certainly opposed Daniel Bull in his case.
Christine Desan-husson: Well, I don't think there's anything in the record in this case that indicates that the Service acted incorrectly.
Harry A. Blackmun: Well, the... Daniel Bull is an old client. [Laughter] And I remember how the Service opposed it rather vigorously.
Christine Desan-husson: Well, the decision was correct in Bull. To play this out a little further--
John Paul Stevens: While you're interrupted, could I ask you one other question--
Christine Desan-husson: --Oh.
John Paul Stevens: --about the fact? Is it the government's theory... I guess about a third of the estate is... we're treating as income here if we... at least, that's the impression I get... that this was income... taxable as income because it was on account of services that she'd performed during the decedent's lifetime, or is this supposedly an executor's fee or an administrator's fee?
Christine Desan-husson: It was supposedly an executor's fee.
John Paul Stevens: A third of the estate?
Christine Desan-husson: That's right.
John Paul Stevens: Wow.
Christine Desan-husson: That's right. And that was litigated in the tax court.
John Paul Stevens: And that's--
Christine Desan-husson: But that's not before the Court.
John Paul Stevens: --Yeah. I see.
Christine Desan-husson: To play this out a little farther, just to make sure that the theory... I'm getting across the theory, once the respondent petitioned the tax court, she was in a forum that this court has considered to be without equitable powers to apply equitable recoupment. In theory she could have raised her equitable recoupment claim there because she at least would have been in the middle of the right litigation. She would have been in litigation about the income tax deficiency and she could have argued that the income tax should be recomputed because it didn't correctly reflect equitable reasons, in this case the fact that a gift tax had already been paid. The district... the tax court would have had jurisdiction and this case would have been about whether it could apply equitable recoupment and it would have been about Gooch Milling, the old case in this Court. But that case turned on somewhat different facts and there may have been an argument. In short, the respondent could have raised her claim in the district court; she could have attempted to raise her claim in the tax court. What she couldn't do was conduct her challenge to the income tax deficiency--
John Paul Stevens: Let me just say... I'm sorry to keep interrupting. You say she could have attempted to raise it. I got the impression from your briefs that it was not at all clear that she could raise it.
Christine Desan-husson: --That's the Gooch Milling case. My only point was that in theory she could raise it. In fact, I think that case... that case turned on very different facts, and their reasoning was quite specific to the facts. And there is a reasonable legal argument.
John Paul Stevens: Well, is the... is the government making an unqualified representation that in this set of facts if she had raised it in the tax deficiency proceeding, she could have... it would have been proper? I didn't understand--
Christine Desan-husson: It would have been proper to raise it.
John Paul Stevens: --Okay.
Christine Desan-husson: I'm not... I'm not taking any position on what the result would be.
John Paul Stevens: Well, you can always raise anything. I mean, it was proper for her to file--
Christine Desan-husson: I just mean--
John Paul Stevens: --the refund suit, too. But--
Christine Desan-husson: --Excuse me. I just--
John Paul Stevens: --you're just saying she ought to lose. And I think you're also saying she could have raised it but she would have lost.
Christine Desan-husson: --I just mean jurisdictionally. That our main point here is that the district court didn't have jurisdiction over this... this case.
John Paul Stevens: But I'm... I have the distinct impression that they would have denied the claim in the tax deficiency proceeding because it's not a proceeding on which you get refunds of incorrectly paid tax--
Christine Desan-husson: I think that the... it wouldn't have been a refund. It would have been a recoupment claim. And I think that the litigation then would have gone up on whether this court followed Gooch Milling or not is a different question. I was only trying to make the jurisdictional point and I don't mean to convert this into a discussion of what the recoupment powers of the tax court are. In any event, what the respondent couldn't do was conduct the entire litigation about the income tax deficiency and then, independently of that challenge, raise the gift tax refund claim later. Nothing but the income tax--
John Paul Stevens: --But again, it wasn't later. It was before that case was over.
Christine Desan-husson: --Right. It doesn't matter. It could have been concurrently--
John Paul Stevens: All right.
Christine Desan-husson: --with the income tax litigation. It would have been separate from that litigation. And once that litigation was going... in fact, in this case it's exceptionally clear. There's a provision in the Code, Section 6512, which provides that once a petition has been filed in the tax court no suit for recovery of any part of the tax at issue there can be filed in another court.
John Paul Stevens: Which means, if I understand it correctly, had she'd filed her gift tax refund case the day the government asserted the deficiency, your same argument would be made here?
Christine Desan-husson: That's right.
John Paul Stevens: Yeah.
Christine Desan-husson: That's right.
John Paul Stevens: Okay.
Christine Desan-husson: It's barred. And this provision makes it clear that once you're in tax court, you have to litigate out completely the income tax deficiency in that court. So that there was no... there could be no other litigation, no subsequent litigation after the tax court proceeding about any part of the income tax deficiency. Or, conversely, if in fact in substance this proceeding was about the income tax deficiency in order to be consistent with equitable recoupment theory, then it violated this provision of the Internal Revenue Code that says all... that that litigation had to be in the tax court. The court of appeals had no jurisdiction to reach the equities of the situation here. But it's worth noting that Congress' decision to limit jurisdiction in this case is also based on the equities as well as on other needs of the government. Statutes of limitation are necessary to promote values of repose and finality. We recognize that they can work harshly in individual cases, but Congress has decided that's the price it's willing to pay to increase the fairness of the entire system. In this case, I would maintain that the situation is not as troubling as in many others because Respondent was actually in a better position that other taxpayers. This was the type of overpayment that she had a chance to recoup. She had alternatives available to her. We've already talked about the alternatives in court and I've reviewed the administrative alternatives. In short, Respondent had her opportunity to litigate the amount of the income tax deficiency. Nothing about the defenses that could have been raised in that litigation give the courts jurisdiction over this litigation.
Byron R. White: And so it was just a... just a bad oversight not to claim recoupment when they were talking about settling the income tax claim?
Christine Desan-husson: That's right. It was a very big mistake. I think it was a jurisdictional mistake.
Antonin Scalia: They... they could claim that alternatively. That is, they could claim recoupment without admitting that... that it was properly not a gift tax.
Christine Desan-husson: Yes. That's what the taxpayer claimed in Bull. I would like to reserve the remainder of my time.
William H. Rehnquist: Very well, Ms. Desan-Husson. Mr. Pierce.
Robert B. Pierce: Mr. Chief Justice and Honorable Justices, may it please the Court: With the Court's permission, I would like to very briefly restate the salient facts to bring this matter into perspective, and it will be very short. In December of 1976 Frances Dalm believed she had received a gift and a check was sent to IRS on the premise that a gift tax was due. That was in December of 1976. In 1983 the government asserted an income tax deficiency against Frances stating that she owed $160,000 in income tax plus penalties and interest that at that time would amount to approximately $300,000. Now, contrary to the nuances in the government's brief--
Harry A. Blackmun: Mr. Pierce, may I... may I interrupt you? The same routine was not gone through in 1977 was it? No gift tax return was filed?
Robert B. Pierce: --No. No, Your Honor.
Harry A. Blackmun: And why... why the difference in treatment of the two years?
Robert B. Pierce: The... the first question, why was a gift tax not filed in 1977. The gift tax is a tax that falls on the donor and I believe it is in the record in the tax court proceeding that at that time Clarence Schrier had had an automobile accident and became incompetent. It was the duty of the donor to file a gift tax return. That's why the gift tax return in '77 was not filed.
Harry A. Blackmun: Of course, the donee is also liable secondarily.
Robert B. Pierce: The donee is liable secondarily.
Harry A. Blackmun: Who took the initiative with respect to the '76 return?
Robert B. Pierce: Clarence Schrier.
Harry A. Blackmun: Uh-huh.
Robert B. Pierce: All right. Contrary, as I was saying, Your Honor, to the nuances in the government's brief that in 1983 that Frances could have filed a protective claim for refund of gift tax, that's an abstraction. At that time she could not do that because the time had expired then. So she couldn't do it.
Sandra Day O'Connor: Well, could... could she have paid the income tax deficiency and filed suit in district court seeking the setoff on--
Robert B. Pierce: Your Honor--
Sandra Day O'Connor: --on the gift tax as paid.
Robert B. Pierce: --you're getting to the heart of the issue. The answer is no, and the reason--
Sandra Day O'Connor: Why not?
Robert B. Pierce: --and the reason the answer is no is that she could not pay $300,000 and go to tax court... I mean, go to the district court or the court of claims. And, as a matter of fact--
Sandra Day O'Connor: You mean she lacked the money--
Robert B. Pierce: --She lacked the money to do that.
Sandra Day O'Connor: --to pay the deficiency?
Robert B. Pierce: That is correct. And, as a matter of fact, Your Honor, as I was going to get into the real world, the majority of the taxpayers today cannot pay the tax first and then go to the district court. They are financially unable. They, therefore, go to the tax court without paying the tax. That's the reason, the basic reason, for going to the tax court. So... and that is exactly what happened here. Now, on November 1, 19... in 1984 she did petition the tax court, and after approximately two day's trial the parties settled the matter for exactly one-half the amount the amount the government claimed. That $80,000 plus interest then was paid, and that was done prior to the tax court settlement becoming final and--
Byron R. White: And there was never any mention in those settlement proceedings, or anything else, about the gift tax that had been paid?
Robert B. Pierce: --There... there had been, yes. And I think--
Byron R. White: Yes, what?
Robert B. Pierce: --there's an allegation in the petition that the gift tax had been paid as well, yes.
Byron R. White: Well, was there any claim that the Service should... should recognize that they were trying to tax to... the same event twice and that they should grant equitable recoupment?
Robert B. Pierce: There was a claim in the petition that the government had received an economic benefit to which it was not entitled. There was oral claims for equitable recoupment.
Byron R. White: Well, then why... why shouldn't the settlement figure represent a settlement of everything that was involved?
Robert B. Pierce: Because the government and the revenue officials threw out, denied, any credit whatsoever of the gift tax for the erroneous... to the income tax... the gift tax being erroneous only upon collection of the second tax.
William H. Rehnquist: But if I sue you one count in contract and one count in tort and we... in the middle of the trial we settle for a stipulated amount of $80,000 without specifying, both those claims are barred thereafter, aren't they?
Robert B. Pierce: No, Your Honor. Both claims--
William H. Rehnquist: What's your authority for that?
Robert B. Pierce: --What is my authority--
William H. Rehnquist: What is your authority for saying both of those claims are not barred?
Robert B. Pierce: --Number one, the tax court does not have jurisdiction over equitable recoupment. This court--
William H. Rehnquist: Well, so it couldn't... you filed this complaint and alleged the government had gotten money was... but it could... the tax court couldn't have given you any relief in it?
Robert B. Pierce: --The tax court had no jurisdiction over the doctrine of that--
William H. Rehnquist: Why did you make the allegation?
Robert B. Pierce: --Because it was a fact, Your Honor.
William H. Rehnquist: Well, that isn't really the reason you ordinarily put something in a pleading. There are lots of facts you don't put in pleadings.
Robert B. Pierce: We believed it was very unfair. We believe it was unfair, as this Court has held in one single transaction, which this is and which the government admits... one taxable transaction, two taxes on inconsistent legal theories. And we believe it was unfair and... and the authority, Your Honor, the answer... the answer to that is that the taxpayer had a cause of action. And that cause of action... she has been denied a hearing on the merits of that substantive right given to her by this Court in the Bull doctrine. And that's the authority for the situation.
William H. Rehnquist: I don't find it persuasive.
Robert B. Pierce: All right.
Harry A. Blackmun: Mr. Pierce, how did you ever effect a settlement in the tax court, 50 percent of the asserted deficiency? It sounds like a good deal to me.
Robert B. Pierce: It was a very poor deal, Your Honor. And it was a poor deal--
Byron R. White: That's all the money that he had. The government probably settled for all they could get.
Robert B. Pierce: --It was a poor deal for the taxpayer for the simple reason that he could not take the chance of losing and going bankrupt. And so prior to this... prior to the litigation in the tax court that... the IRS people would not even discuss settlement. It was only after trial when they became aware, in my opinion, that they were going to lose and so they would settle. But they refused any credit for the gift tax. And I think that... I think that that is a direct answer to your question, Your Honor. In any event--
Byron R. White: Well, why did you settle?
Robert B. Pierce: --Why did the taxpayer settle?
Byron R. White: Yeah.
Robert B. Pierce: The taxpayer settled because--
Byron R. White: If you thought you were going to win--
Robert B. Pierce: --Because they would have been bankrupt if they had lost, and that was the taxpayer's very words.
Byron R. White: --Well, but if they... do you suppose on review if they had... if they had lost, do you suppose on review... and the government wanted to collect the income tax... don't you suppose you could have claimed equitable recoupment in reviewing the tax court?
Robert B. Pierce: No, Your Honor.
Byron R. White: Why not?
Robert B. Pierce: Because--
Byron R. White: You say the tax court didn't have jurisdiction to rule on it. Some court must have jurisdiction on it.
Robert B. Pierce: --We believe the district court has jurisdiction to rule on it.
Byron R. White: You mean later.
Robert B. Pierce: Yes.
Byron R. White: How about on review of the tax court?
Robert B. Pierce: I don't believe so. I don't believe that the court of appeals would accept a case that you would raise the doctrine at that point of time when the tax court lacked jurisdiction. And it seems to me pretty clear that the tax court did not have jurisdiction. We agree with the government's brief in that respect, that the tax court did not have jurisdiction over the doctrine.
Byron R. White: So you say... you say that this is the only way that you could get equitable recoupment and that you... there was no way, as long as you didn't have money to pay the tax, that you could have--
Robert B. Pierce: That is correct, Your Honor. This--
Byron R. White: --tried to exercise the setoff?
Robert B. Pierce: --That is correct, Your Honor. This is the only way. I would like to point out in my mind how the issue has been narrowed by the government's reply brief. And in the government's reply brief, it... it flows well and it's good, but we think superficially. We think if you look beneath the surface of that brief, it's not on a very solid foundation.
Byron R. White: But is it... is it clear in this record that... that the IRS in the course of settlement absolutely refused any recognition of the prior payment of the gift tax?
Robert B. Pierce: Absolutely. I was there. And that's a factual issue.
Byron R. White: Well, I know you were there, but does the record show it? I didn't know that the--
Robert B. Pierce: I don't... I don't know that the record will show it. It would have to be on testimony. It is a factual issue, and that is why the court of appeals remanded the case for that purpose to the district court. But I'm trying to answer Your Honor as to what the facts were.
Byron R. White: --What did... the court of appeals remanded to see if... if what? That the government had refused--
Robert B. Pierce: Yes. Yes, Your Honor. For that... for that limited factual determination.
Byron R. White: --Well, the... so you did claim in the court of... I see. All right. Go ahead.
Robert B. Pierce: I... I would like to point out some of the government's concessions in their reply brief that I think narrows the issue for this Court. Now, the government, in their reply brief, said that she, Frances Dalm, could properly have invoked Bull's doctrine of equitable recoupment to diminish the amount of the income tax deficiency by the amount of the gift tax she had paid. In short, they have admitted that the basic elements of equitable recoupment are present in the Dalm situation. They admit one taxable event. They admit two taxes, two different taxes, on the same transaction. So, those essential elements are admitted in this case.
William H. Rehnquist: But what... what... how would you describe the one transaction?
Robert B. Pierce: One transaction is the receipt of the money in 1976. That receipt of money--
William H. Rehnquist: Taxed twice.
Robert B. Pierce: --has been subjected to two inconsistent treatments, inconsistent taxes... that one single transaction. Those are the tests set by this Court for equitable recoupment, and the government in their reply admits that that's present in this case. They summarize their admissions on page 10 of their reply brief, where they say that both the payment of the gift tax and the later assessment of a deficiency--
William H. Rehnquist: The brief only has eight pages, as I see it. Their reply brief.
Robert B. Pierce: --Their reply brief.
William H. Rehnquist: I only see... I thought you said page 10.
Robert B. Pierce: It's page 10 of the government's reply brief on the writ of certiorari.
William H. Rehnquist: Oh, the--
Robert B. Pierce: This is on the merits, Your Honor. On the merits.
William H. Rehnquist: --Merits.
Robert B. Pierce: And they state that both the payment of the gift tax and the later assessment of a deficiency and payment of the income tax concerned one transaction that could have been examined in all its aspects without offending the policies underlying the statute of limitations. Now, I'd like to point out our area of disagreement and our area of agreement here. The area of disagreement, and it's a big area, a tremendous area, is that tax... that by going to the tax court that Frances Dalm gave up her substantive right of equitable recoupment. The areas of agreement are that by virtue of a 1926 law, which was a statute enacted before this Court determined the Bull case, that the tax court decisions become final as to the taxes brought before it. We agree with that proposition. We further agree with the government's proposition that the tax court lacked jurisdiction over the doctrine of equitable recoupment. Now, with that it seems to me the issue comes right into focus. And the issue is may a taxpayer be denied a hearing of a substantive right by going to the tax court which had no jurisdiction to hear it on the merits. That is the issue, and that is scary to me. The government's argument is very scary. They treat this as a normal situation. They treat this... this situation abstractly, as academic. It isn't. It's a fundamental doctrine of a fairness established by this Court. That's precisely what it is. And that's... that's... they are not treating it that way. What they are saying... and the only way I can illustrate it would be as if Congress had enacted a law that provided that the only way any of us could... could contest a government deficiency would be to pay the tax and then go to the tax court or the court... or the district court. And that means only the extremely rich would ever be able to hear... have a hearing on the merits. And that is exactly where their argument leads us. And that is not true because this is a cause of action that this court has held is a right, a fundamental right, and protected by due process. And we submit that is exactly what this situation is.
Byron R. White: Has the government assessed you... assessed your client some income taxes with penalties and interest?
Robert B. Pierce: Yes, Your Honor.
Byron R. White: And if you hadn't gone to the tax court, what would the government have done? I suppose they would have what... put--
Robert B. Pierce: The government would have put them out of business. They would have come and taken their property. And that would be it.
Byron R. White: --Well, at that point would you have had any way of asserting your setoff?
Robert B. Pierce: No, Your Honor, we would not because the only method of doing it would be to pay the tax in full. You have no right to go to the district court without payment of the tax in full, and that includes the interest.
Byron R. White: Uh-huh. Mr. Pierce, you don't really say this is a due process right, do you? I mean,--
Robert B. Pierce: Oh, yes, Your Honor.
Antonin Scalia: --don't you think the government could say any erroneous taxes you pay, too bad? They could tell you if you pay a tax... if you pay a gift tax that you didn't owe, that's not our fault, it's your fault? Don't you think the government could say that? Would that violate due process?
Robert B. Pierce: No, Your Honor, I'm not saying that. I'm saying that--
Antonin Scalia: Well... Well, if they can do that, then I assume you could... you could disallow... you could disallow recoupment entirely, couldn't you? If you... I mean, that's... that's... Bull was less than that. If it was a constitutionally required case.
Robert B. Pierce: --No, you could not. Your Honor, the doctrine of equitable recoupment is a substantive right, and without that there would be a denial of due process.
William H. Rehnquist: What's your case-- --[inaudible] authority that stands for that proposition?
Robert B. Pierce: For the proposition that it would be a lack of due process?
William H. Rehnquist: That Bull... you're saying Bull was required by the Constitution, I take it.
Robert B. Pierce: No, I'm... no. I'm... I'm saying that in the Bull case itself, that Court held that the right of equitable recoupment was a substantive right. At page--
Antonin Scalia: Well, what if it was? I... I'll stipulate that it was his substantive right. But that doesn't prove that it's a substantive right that is required to be accorded by the Constitution. It's one that the Court found existed. But that doesn't mean it has to be expanded so that you can assert it in all circumstances.
Robert B. Pierce: --No, Your Honor. Not in all circumstances. Only in the circumstance where you have a single transaction and where that single transaction has been subjected to two taxes inconsistency... inconsistently. Now, what you have when the government collects the second tax... you have a cause of action, and you have a cause of action at that time only. The cause of action comes about by the collection of the second tax. It didn't come about in 1976 because Frances Dalm thought she had paid a proper tax. It came about came about when a second tax was collected. And this Court has held, as we've stated in our brief, that a cause of action is a right that is protected by due process provisions. And I believe that was the Zimmerman case, and I'm sure there must be other cases on that point. And that--
Antonin Scalia: Well, even... even the Bull case, Counsel, says that the taxpayer has a right of restitution, but nevertheless, he may be without a remedy.
Robert B. Pierce: --Your Honor, I would refer to Judge Hand in the Elbert case, that I believe was way before his time, where he said one does not lose a remedy by going to a forum where the remedy in fact did not exist. And that is precisely this situation. Frances Dalm did not lose her remedy by going to the tax court when that remedy did not exist in that court. I would... I think that case and Judge Hand's decision in that concurring opinion becomes very relevant because if you could take the Dalm situation from the present and lift it up and put it back into the Elbert situation, Judge Hand held that the district court had jurisdiction. The majority court did not hold in that case that there was no jurisdiction of the district court because of an untimely claim. The majority in that court held merely that the taxpayer by going to the tax court could not then later contest the income tax, which we agree. The majority opinion there merely held that there was no jurisdiction because there was no allegation that a gift had been paid and equitable recoupment was not proper on the merits. But it is here in Dalm, as the government admits. And if you would take this case and put it right over there, you would have a decision for the respondent in this case. And I think the case is very material. I... I disagree with the government's statement when they challenged Judge Hand's statement that this Court held that the statute of limitations is tolled by... in the Bull case. This Court did not hold that. In the Bull case you had a situation where the taxpayer had been subjected to an estate tax. The revenue people increased the value of the property and subjected it to an additional estate tax and then the petitioner taxpayer argued that because the government had done that by virtue, in effect, of estoppel they could not take inconsistent positions and assert an income tax that was inconsistent. And this Court merely said that that does not toll the limits of the statute of limitations. But the way the government states it takes that statement out of context. It takes it completely out of context. What has happened here is that we have done no violence to the statute of limitations because we have pursued the action when the cause of action arose. And I think it's fundamental that no statute of limitations begins to run until the cause of action accrues. It's impossible. And that alone would be a denial of due process, it seems to me. And I would--
Byron R. White: And what was the total... what was the total income tax claim? $300,000?
Robert B. Pierce: --The... the principal was $160,000.
Byron R. White: And... but with penalty and interest?
Robert B. Pierce: With penalties and interest you'd have approximately $300,000 at that time.
Byron R. White: And you settled it for 150?
Robert B. Pierce: No. It was settled for 80 plus interest, which was over 50 percent.
Antonin Scalia: Your cause of action really arose... I mean, this is... this is recoupment of... recoupment assumes recoupment of something that you had a cause of action for. I think, to be realistic about it, your cause of action arose when you erroneously paid the gift tax and had a cause of action for unjust enrichment of the government of sorts. And... and basically what's going on here is an extension of the statute of limitations within which you can assert that cause of action. And the issue we're debating is whether that cause of action to extend the statute of limitations can only be asserted in certain contexts or, as you contend, must be able to be asserted in all contexts. But I think that's quite different from whether you're being deprived of a cause of action. You could have filed for a refund of that gift tax the day after you paid it on the basis that it was erroneously paid.
Robert B. Pierce: But it wasn't erroneously paid, Your Honor. There was no reason to believe it was erroneously paid.
Antonin Scalia: Well, it was in fact. They didn't know it was, but... but in fact it was.
Robert B. Pierce: In fact it was not. It only became erroneous when the government collected the second tax. It wasn't erroneous at that time. It was the collection of the second tax that gave--
Antonin Scalia: But it was not determined to have been erroneous until... until it was determined that an income tax was due instead of a gift tax. But, in fact, the gift tax shouldn't have been paid. Isn't that right?
Robert B. Pierce: --Our position is that it was a gift. Our position throughout is that it was a gift.
Antonin Scalia: You... you were wrong. I mean, that's--
Robert B. Pierce: No, Your Honor, we were not wrong. We were not wrong. It was settled on litigations hazards. That's what happened here. It was settled on litigation hazard. And the cause of action arose at that time when they collected the second tax through the doctrine of equitable recoupment that this... this Court gave birth to in the Bull case.
Byron R. White: --Well, no court has ruled that you were wrong?
Robert B. Pierce: Not really. No, Your Honor.
Byron R. White: Not really. After a two-day trial you settled it?
Robert B. Pierce: That is correct, Your Honor. That is absolutely correct. And that's the situation. I think the government's position becomes very scary to me because it is a denial of due process, and that's what this issue comes to.
William H. Rehnquist: The government just wants the statute of limitations applied equitably to all taxpayers, it says, so that everybody gets a fair shake in the tax thing. You're trying to come in at a time when the statute of limitations has run. And you're trying to take advantage of the Bull case but it seems to me you want to expand that.
Robert B. Pierce: No, Your Honor. The issue is not whether the doctrine should be expanded, as the government seeks to have you believe. The issue here is whether it's going to be drastically restricted to--
William H. Rehnquist: Well, but--
Robert B. Pierce: --where it virtually has no existence.
William H. Rehnquist: --It was fairly drastically restricted in Rothensies, wasn't it?
Robert B. Pierce: I believe Rothensies restricted the doctrine to... to where it should have been restricted, to this Dalm situation. To one single transaction, one taxable event. Two taxes on inconsistent legal theories, precisely this situation, which they admit... all they say is that we had an opportunity to pay the tax, which is not true because we couldn't pay the tax. And that... that's an unreal world. The real world out there is taxpayers cannot pay the tax first. Congress has given the right--
Byron R. White: At least, many of them can't.
Robert B. Pierce: --Most of them can't. Most of them can't. That's why you have the system the way we have it.
Antonin Scalia: Mr. Pierce, you're arguing now that the gift tax was not wrongly paid?
Robert B. Pierce: We... We--
Antonin Scalia: If it was not wrongly paid, what is your basis for recoupment?
Robert B. Pierce: --Because of the collection of the second tax on an inconsistent theory treating it as an income tax transaction.
Antonin Scalia: Therefore you must assume it was wrongly paid. I mean, whether it was adjudicated by the earlier court or not, the whole theory of your case is that the gift tax was wrongly paid. Isn't that right?
Robert B. Pierce: The whole theory of the case is that... is the doctrine of equitable recoupment, Your Honor.
Byron R. White: Well, whichever one it was--
Robert B. Pierce: That is--
Byron R. White: --it doesn't justify two taxes.
Robert B. Pierce: --That's correct. Absolutely.
Byron R. White: It was either a gift tax... it was either a gift or an income.
Robert B. Pierce: One tax. That is correct.
Byron R. White: And there was supposed to be one tax, not two.
Robert B. Pierce: That is correct. I would... I would state... I think... I've got five minutes and I'd probably just like to state and use Justice O'Connor's language in discussing equitable estoppel. I would paraphrase her language and say that the government's interest in the simplistic interpretation of the statute of limitations here is outweighed by the taxpayer's countervailing interest in some medium, some reliable standard of honor and reliability in dealing with IRS. And that's what you have here. You have an unfairness. You don't have... you don't have tax administration on a high plane. You're going to a lower level. And the Bull court opted for a higher plane of tax administration. I believe that it's an absolute certainty this Court give moral instructions for future guidance because if you don't, the revenue people will collect the most tax without regard to principle, and that's exactly what they'll do. I think that my time is about up, and I'd merely conclude to say that my grandfather said that... he was a circuit rider minister... said that a man, if he had anything to say, he could say it in 30 minutes, and I believe that's true and I've said it. And I think we're right and I certainly hope you decide the case for Frances.
William H. Rehnquist: Thank you, Mr. Pierce. Ms. Desan-Husson.
William H. Rehnquist: Let me. Go ahead. One of Mr. Pierce's points, as I understood it, was that if instead of going into the tax court the respondent here had been able to pay the tax and go into the district court, she would now be in a position to recover what she wants here whereas she isn't, under your view, having gone to the tax court. What's your response to that?
Christine Desan-husson: If she had gone to the district court before going to the tax court, and if the claim in the district court had been a claim for the income tax deficiency, she could raise equitable recoupment. Once she went to the tax court, provision 6512 precludes further litigation about the income tax deficiency in the district court. So, she couldn't have done that. As far as sort of the larger point about the unfairness of the tax--
Byron R. White: Well, if she had paid the tax and... and went in for an income tax refund--
Christine Desan-husson: --Right.
Byron R. White: --she could have raised the recoupment?
Christine Desan-husson: That's right.
Byron R. White: Yes.
Christine Desan-husson: That's right.
William H. Rehnquist: How about the larger point?
Christine Desan-husson: The larger point I was just going to make is that I think... I mean, Congress decided that collecting taxes first and settling disputes later was the way it was going to build the revenue code. And the IRS actually has the authority to work out installment payments, and if that had become necessary--
Byron R. White: Should we--
Christine Desan-husson: --I guess that would have been... that would have been the way to guard access to the district court.
Byron R. White: --Can we judge this case on the assumption that the Internal Revenue Service did not give any credit in the settlement for the prior payment of the gift tax?
Christine Desan-husson: You can do that, yes, because the--
Byron R. White: The... our adversary said they... it was urged that the Service give credit and that was denied.
Christine Desan-husson: --It's unclear. The only thing I can say from the record is--
Byron R. White: But, anyway, we judge the case as though there was no credit given?
Christine Desan-husson: --Yes.
William H. Rehnquist: Well, is that entirely accurate to... you have an $80,000 payment... and what more about it do you know than that? That there was no credit expressly given.
Christine Desan-husson: That's all... that's all we know. All I'm saying is that it's irrelevant to the equitable recoupment... to whether the statute of limitations had run on the gift tax claim, exactly what was decided in the settlement. The point is that the court didn't have jurisdiction to reach that question.
Byron R. White: So you say it's irrelevant whether they gave credit or not.
Christine Desan-husson: That's right. If the Court has no further questions--
William H. Rehnquist: Thank you, Ms. Desan-Husson. The case is submitted.
Speaker: The Honorable Court will now adjourn until Tuesday next at 10:00.