Opinion ID: 4658989
Heading Depth: 1
Heading Rank: 6

Heading: Analysis of Parties' Arguments: D. Introduction to Interest and State v. Sanders

Text: ¶27 Interest is defined in one Oklahoma statute as the compensation allowed for the use or forbearance or detention of money, or its equivalent. 41 Historically, prejudgment interest served to compensate for the loss of use of money due as damages from the time the claim accrues until judgment is entered, thereby achieving full compensation for the injury those damages are intended to redress. 42 This historical prejudgment interest, as one type of damages, was an element of the total liability adjudicated. 43 This prejudgment interest was calculated by the trial court and the amount was stated in the judgment. 44 ¶28 We have observed that at common law, judgments do not bear interest, 45 and it is a well-settled rule that the recovery of interest on a judgment must be predicated on statute. 46 In contrast to prejudgment interest having a source in the concept of a complete compensation for a loss, postjudgment interest has its source in the concept of a penalty for delayed payment of the judgment. 47 In contrast to prejudgment interest, postjudgment interest is calculated from the date of judgment until the date of payment. 48 ¶29 The distinction between postjudgment interest and prejudgment interest is important because (1) taxpayers' arguments rely upon this distinction, and (2) taxpayers rely on our 1956 opinion in State ex rel. Oklahoma Employment Security Commission v. Sanders , supra . Sanders relied on a federal court opinion applying an equitable right to prejudgment interest as authority for holding a postjudgment interest statute applied to a judgment against a state entity. Prior to Sanders we had previously approved of postjudgment interest in an equity proceeding, 49 and of course, a general statute providing payment of interest on a court judgment usually applies to both an action at law as well as a decree in equity requiring payment. 50 The Sanders Court used a claim in equity for interest as damages in support of the Court's conclusion relating to postjudgment interest, and the distinction is important to taxpayers' arguments herein and the legislature's changes to the ad valorem statutes after Sanders . III. Analysis of Parties' Arguments: E. Interest in Federal Courts as a Proper Award in Equity with Some Tax Refund Controversies, The Tax Injunction Act in Federal Court, and From Eaton v. St. Louis to State, etc. v. Sanders ¶ 30 Prior to 1913, courts of equity in Oklahoma, pursuant to both statute 51 and the general equity powers, granted injunctions against the collection of taxes alleged to be illegal and void and provided tax refund relief. 52 Statutory enactments partially based upon equity procedure 53 occurred in 1913 and 1915 and resulted in this Court explaining the former injunctive relief in equity was no longer used to prevent payment of taxes alleged to be illegal when the new statutory remedy was plain, speedy, adequate, and exclusive. 54 After creation of the statutory remedies we continued to explain the availability of injunctive and declaratory relief was restricted in scope, 55 and remained for only a few types of controversies, 56 including one involving a federal constitutional right when the adequacy of a state's remedy was an issue. 57 Although an injunction in equity could not be used to prevent payment or seek a refund of a taxpayer's tax and replace the then new statutory remedies, the nature of the statutory tax refund judicial proceeding remained a proceeding governed by equitable principles 58 with the statutes providing the mandatory manner and method by which the claim for a refund was adjudicated. 59 ¶31 This mandatory statutory method for a tax refund dating from 1913-1915 did not expressly include interest to be paid to a taxpayer. Our 1925 opinion in Eaton v. St. Louis & S. F. Ry. Co. , 60 explained the taxes were paid under protest, the partes' rights were limited to the statutory tax refund procedure which did not authorize interest, and we modified the trial court's judgment so that interest on the tax refund would not be awarded. 61 At the time Eaton was decided a general statute for postjudgment interest had been in effect for several years, R.L. 1910 § 1008, but the statute was not discussed in Eaton . Although Eaton had concluded interest was not proper for the tax refund, legal authors and other courts at this time began to recognize that interest was proper based upon equitable principles in some, but not all, state tax refund controversies. ¶32 Five years after Eaton , three authors discussed equity and the propriety of federal injunctions in state tax refund cases. They stated if interest was not allowable under state law, then a taxpayer clearly suffered a loss which equity may properly prevent. 62 They relied on Judge Learned Hand's opinion in Proctor & Gamble Distributing Co. v. Sherman , 2 F.2d 165 (S.D.N.Y. 1924), 63 and his well-known observation on a taxpayer not receiving interest while the tax protest proceeding was being adjudicated. While I have been referred to no decision on the point it seems to me plain that it is not an adequate remedy, after taking away a man's money as a condition of allowing him to contest his tax, merely to hand it back, when, no matter how long after, he establishes that he ought never to have been required to pay at all. Proctor & Gamble Distributing Co. , 2 F.2d at 166. The three authors also relied on a 1928 U. S. Supreme Court opinion which affirmed a U. S. Court of Appeals Ninth Circuit opinion which had explained the laws of California did not allow interest for one who recovered a wrongfully collected tax paid under protest until after judgment , and the court made a comparison to Judge Hand's opinion in Proctor & Gamble , supra , discussing a taxpayer's injury from not receiving interest for the time the tax had been paid under protest. 64 This equitable claim to interest was recognized in 1939 by the U. S. Supreme Court in Board of Comm'rs of Jackson County, Kansas, v. United States . 65 ¶33 In Board of Comm'rs of Jackson County , the Court concluded that in an intergovernmental dispute in the absence of a federal statute, and assuming applicable quasi-contract principles, i.e. , equity, interest was not recovered against a state entity on an illegal state tax according to a rigid theory of compensation for money withheld; but compensatory interest may be granted based on (1) considerations of federal and state concerns, and (2) the fairness and equity of the award. 66 The Court also noted compensatory interest should be denied when granting it would be inequitable. In Board of Comm'rs of Jackson County, the Supreme Court examined a controversy arising in Kansas which, as previously noted by the Tenth Circuit Court of Appeals, had statutes similar to those in Oklahoma which did not award interest on a tax refund. 67 Although prejudgment interest was not awarded in Board of Comm'rs of Jackson County, because of fairness, 68 this same standard has been used to award prejudgment interest as a form of compensation to balance the equities in other controversies. 69 ¶34 A few years after the Supreme Court's 1939 opinion, the Tenth Circuit Court of Appeals decided controversies arising in Oklahoma and applied Board of Comm'rs of Jackson County , supra . In 1942 the federal appellate court disallowed a district court's award of interest, and the issue was not raised when the controversy was subsequently before the U.S. Supreme Court. 70 However, one year earlier in Bryan County v. United States , the Tenth Circuit Court explained the federal trial court correctly refused interest on the taxes from the date of their collection but correctly allowed judgment for equitable interest from the date of its rendition , 71 and this opinion was used by the Oklahoma Supreme Court in 1951 when awarding statutory postjudgment interest against a state entity. ¶35 In 1951, we addressed the issue of interest on a judgment against the State as a question of first impression in this court. State ex rel. Comm'rs of Land Office v. Warden ,1951 OK 334, 242 P.2d 129. Warden did not involve an ad valorem tax refund. However, in support of its rationale our Court cited the Tenth Circuit Court's opinion in Bryan County v. United States , supra , as an example when interest was allowed on a judgment against a State. 72 We stated the then general statute providing interest on a judgment applied. 73 This statute was 15 O.S.1941 § 274. 74 Which was later codified in an altered form at 12 O.S.2011 § 727.1. ¶36 A few years after Warden a taxpayer sought a refund of an overpayment of unemployment taxes plus interest in State ex rel. Oklahoma Employment Security Commission v. Sanders , 1956 OK 262, 304 P.2d 287. We relied upon Warden and 15 O.S. 1941 § 274, 75 and stated: Much the same proposition as here was considered in the case of State ex rel. Com'rs of Land Office v. Warden , . . . wherein was held that 'Interest is recoverable on judgment against state from and after its date at legal rate.' 76 ¶37 In our case today, taxpayers argued that Sanders rejected the specific-controls-general argument when it concluded interest on a judgment against a state entity should be paid based upon the interest-on-judgments statute in 15 O.S.1951 § 274, and thus controlled 40 O.S.1951 § 224 which provided express authority for employer refunds. Taxpayers' reading and application of Sanders herein is not correct. The 1951 refund procedure authorized an employer to recoup payments of the tax, penalties, and interest the employer had previously paid, but the §224-authorized amounts to be refunded did not expressly include either accumulated or postjudgment interest on those amounts. The statute was silent on this issue. For example, when an employer appealed the assessment if, upon a final determination of the appeal the order assessing such contributions, penalties, and interest is reversed or modified and it is determined that said contribution or part thereof was erroneously assessed, the amount paid by the employer, shall be refunded to the employer by the Commission. 77 Sanders authorized application of the general postjudgment statute on a judgment against a state entity when the legislature had been silent on the issue of accrued and postjudgment interest on a 40 O.S.1951 § 224 appeal seeking a refund of employer contributions. Sanders did not involve a conflict between two different statutory procedures providing for interest when a statutory refund received a judicial adjudication. ¶38 In State, etc. v. Sanders , the Court's reasoning noted interest was not an expressly authorized item to be awarded by (1) a statute authorizing a refund of overpaid unemployment taxes, or (2) a statutory remedy for a refund of an ad valorem tax as interpreted by the Court in 1925 in Eaton v. St. Louis & S. F. Ry. Co. , supra . 78 We concluded in Sanders that recovery of interest was prohibited on the taxpayer's overpayment of unemployment taxes, a type of prejudgment interest, but recovery of interest would be allowed on the amount of the judgment to be refunded; i.e. , the postjudgment interest statute would apply. 79 ¶39 Neither Warden nor Sanders , involved an ad valorem tax refund, but in allowing postjudgment interest against the state our Court relied on the Tenth Circuit Court's opinion in Bryan County imposing a form of equitable interest on an ad valorem state tax refund judgment, and our Court also relied on 15 O.S.1941/1951 § 274, which provided interest on a court judgment. Again, when Warden and Sanders were decided the two primary ad valorem tax refund procedures, 68 O.S. 1951 § 15.48 80 and § 15.50, 81 did not provide for either (1) protested funds to be deposited into an interest-bearing fund or (2) accrued interest to be paid to a successful taxpayer. ¶40 Although Warden and Sanders temporarily settled the issue that postjudgment interest would apply to an Oklahoma tax refund judgment using a postjudgment statute against a state entity, the issue whether prejudgment interest on a protested tax payment should be considered a potential part of a tax remedy due to equity was not settled by those two opinions. The growth of using equity in a federal court to challenge a state tax had been slowed when Congress created the Tax Injunction Act of 1937, codified at 28 U.S.C. § 1341, but the Act did not stop a federal court from awarding interest in a state tax refund controversy when a state's refund procedure was adjudged deficient by the Act. 82 ¶41 For example, in 1959 and after both Warden and Sanders and the enactment of the Tax Injunction Act, a three-judge panel of the United States District Court for the Eastern District of South Carolina in United States v. Livingston , stated that: It is well settled that a right to recover taxes illegally collected is not an adequate remedy if it does not include the right to recover interest at a reasonable rate for the period during which the taxpayer's money is withheld. 83 The federal court relied upon (1) its previous opinions (2) two opinions by the United States Court of Appeals for the Ninth Circuit, 84 one of which observed the inadequacy of postjudgment interest, 85 and (3) Judge Hand's opinion in Proctor & Gamble Distributing Co. v. Sherman , supra . 86 ¶42 A few years later in Department of Employment v. United States , 385 U.S. 355, 358, 87 S.Ct. 464, 17 L.Ed.2d 414 (1966), the U. S. Supreme Court declined to decide whether omission to provide interest on a successful refund application renders the state remedy here an inadequate one within the meaning of § 1341. Then in 1979 and twenty years after United States v. Livingston , the Seventh Circuit Court of Appeals in LaSalle National Bank v. Rosewell , 87 addressed what constituted a plain, speedy and efficient state remedy for the Tax Injunction Act, concluded nonpayment of interest on a state tax refund rendered a state remedy inadequate, 88 and removed the Act's bar to the federal court exercising jurisdiction in a taxpayer action seeking a state tax refund. 89 ¶43 The U. S. Supreme Court reversed the Seventh Circuit in Rosewell v. LaSalle Nat'l Bank , a 1981 opinion which explained the taxpayer's claim of no interest on a tax refund was a substantive concern; but the plain, speedy and efficient remedy requirement of the Tax Injunction Act addressed procedural concerns and requirements for state remedies. 90 While the substantive claim of a lack of interest on a state tax refund was no longer a sufficient basis for showing the absence of a plain, speedy and efficient state remedy, a claim to interest in equity remained available as a potential substantive concern in federal court when the court otherwise had jurisdiction because the state remedy was insufficient on another ground, 91 or the Tax Injunction Act not applicable when deciding a taxation issue. 92 ¶44 We need not delve into related issues such as listing examples of what constitutes a tax for purposes of the Tax Injunction Act and what constitutes a plain, speedy, and efficient state remedy, 93 or issues related to the Rules of Decision Act 94 and awards of interest in federal question and diversity of jurisdiction controversies, 95 or other related issues. ¶45 The importance of these federal cases to our controversy today is fivefold: (1) They recognized for some, but not all, controversies an equitable and substantive right for interest on a state tax refund as a form of damages; (2) Due to the equitable nature of the interest, the damages could be awarded from the time the taxpayer paid the protested tax payment until the taxpayer received his or her refund, or only as a form of postjudgment interest, or another period of time could be used for calculating the interest; (3) This concept of an equitable interest was used in support of reasoning by our Court in Warden and Sanders when applying a postjudgment interest statute to a refund controversy controlled by a statute which was silent on the issue of postjudgment interest; (4) This concept of an equitable and substantive interest expressly recognized from 1924 -1981 in these opinions was also being raised in tax refund controversies in the courts of several states; and (5) This jurisprudence, including Sanders , occurred prior to important changes to our ad valorem statutes which began in the 1980s.