Opinion ID: 771782
Heading Depth: 1
Heading Rank: 3

Heading: tax adversary

Text: 49 In the Tax Adversary, we are confronted with two distinct issues. The Fund appeals the district court's determination that it is not an arm of the state and thus cannot invoke Eleventh Amendment immunity. The Trustee cross-appeals the district court's order affirming the bankruptcy court's judgment that the fees paid into the Fund are taxes for the purposes of bankruptcy, pursuant to 11 U.S.C. 507(a)(8). We examine each issue in turn.
50 We have jurisdiction under the collateral order doctrine to review the district court's denial of the Fund's claim that it is an arm of the State of California. Metcalf & Eddy, Inc., 506 U.S. at 147. We review questions of Eleventh Amendment immunity de novo. Hill, 179 F.3d at 756. 51 In determining the Eleventh Amendment status of a defendant, [t]here may be a question . . . whether a particular suit in fact is a suit against a State. Pennhurst , 465 U.S. at 100. It is well established that the Eleventh Amendment's reference to actions `against one of the United States' encompasses not only actions in which a State is actually named as the defendant, but also certain actions against state agents and state instrumentalities. Regents of the Univ. of Cal. v. Doe, 519 U.S. at 429. 52 We inquire into the relationship between the state and its instrumentality to decide whether it may invoke the state's immunity. Id. In particular, 53 [t]o determine whether a governmental agency is an arm of the state, the following factors must be examined: [1] whether a money judgment would be satisfied out of state funds, [2] whether the entity performs central governmental functions, [3] whether the entity may sue or be sued, [4] whether the entity has the power to take property in its own name or only the name of the state, and [5] the corporate status of the entity. 54 Durning v. Citibank, N.A., 950 F.2d 1419, 1423 (9th Cir. 1991) (quoting Mitchell v. Los Angeles Community College Dist., 861 F.2d 198, 201 (9th Cir. 1988)) (internal quotation marks omitted). [W]hether a particular state agency . . . is an arm of the State . . . is a question of federal law. But that federal question can be answered only after considering the provisions of state law that define the agency's character. Regents of the Univ. of Cal. v. Doe, 519 U.S. at 429 n.5. On balance, we hold that the five Durning factors compel the conclusion the Fund is an arm of the State of California. 55 The first factor, namely whether a judgment against the [Fund] under the terms of the [Tax Adversary] complaint would have to be satisfied out of the limited resources of the [Fund] itself or whether the state treasury would also be legally pledged to satisfy the obligation, ITSI TV Prods., Inc. v. Agricultural Ass'ns, 3 F.3d 1289, 1292 (9th Cir. 1993) (quoting Durning, 950 F.2d at 1424) (internal quotation marks omitted), provides little guidance in this case. That is, in the Tax Adversary, the Trustee seeks from the Fund both reimbursement for the improper payment of fees and actual damages, and these differing claims point us in different analytical directions. 56 More precisely, under California law, the Trustee's reimbursement claims would be paid only out of the[F]und, Cal. Health & Safety Code 25299.60(b) (West 1999), and the [California] state treasury is not liable, Durning, 950 F.2d at 1425; see Cal. Health & Safety CodeS 25299.60. Thus, to the extent the Trustee seeks reimbursement from the Fund in the Tax Adversary, this first factor weighs against an arm-of-the-state finding. See Durning, 950 F.2d at 1424-26 (When a state entity is structured so that its obligations are its own special obligations and not general obligations of the state, that fact weighs against a finding of sovereign immunity under the arm of the state doctrine.). As to the Trustee's nonreimbursement, damages claims, however, no statute specifically protects the state treasury from a court judgment against the Fund, and, in fact, California law provides that when the Fund sunsets, all of its liabilities shall be transferred to the state's general fund. Cal. Gov't Code 16346 (West 1995) (providing that whenever a special fund in the state treasury is abolished, and no successor fund is specified in the act providing for abolition, all of the special fund's liabilities shall be transferred to and become a part of the general fund). Thus, to the extent the Trustee seeks not reimbursement, but actual damages from the Fund in the Tax Adversary, this factor appears to weigh in favor of an arm-of-the-state finding. In short, this first factor is a close question and for this reason is entitled to little weight in the overall balance. Belanger v. Madera Unified Sch. Dist., 963 F.2d 248, 254 (9th Cir. 1992). 57 The second factor in our arm-of-the-state inquiry, however, is not uncertain, and it weighs strongly in favor of finding that the Fund is an arm of the state. The Fund performs central governmental functions, Rounds, 166 F.3d at 1035, and California exercises substantial centralized control over the [Fund], Belanger, 963 F.2d at 253; see also Franceshi v. Schwartz, 57 F.3d 828, 831 (9th Cir. 1995) (noting that, in performing an arm-of-the-state analysis, a court must assess the extent to which the entity `derives its power from the State and is ultimately regulated by the State.'  (quoting Greater Los Angeles Council on Deafness, Inc. v. Zolin, 812 F.2d 1103, 1110 (9th Cir. 1987))). 58 The California legislature created the Fund to protect public health and safety and the environment in light of the perception that a significant number of the underground storage tanks containing petroleum in the state may be leaking. Cal. Health & Safety Code 25299.10(b)(1), (3) (West 1999 & Supp. 2000). Nonetheless, the Trustee argues that the Fund was enacted primarily for the financial benefit of tank owners. In particular, he characterizes the Fund as an insurance measure sponsored by a service-station lobby and as a means by which underground storage tank owners and operators may comply with their federal financial-responsibility requirements. 59 That the Fund works to the benefit of owners and operators of underground storage tanks does not diminish its public importance. Rather, the language of the authorizing statute demonstrates that the Fund performs services that benefit owners and operators for the purpose of protecting the public health. Id. 25299.10(b)(5), (6) (West 1999 & Supp. 2000) (There are long-term threats to public health and water quality if a comprehensive, uniform, and efficient corrective action program is not established. . . . It is in the best interest of the health and safety of the people of the state to establish a fund to pay for corrective action where coverage is not available.). 60 Moreover, the California Health and Safety Code is replete with provisions establishing that the state is both the Fund's source of power and its ultimate regulator. For example, section 25299.50(a) provides that the Fund is created in the state treasury. See id. 25299.50(a). This same section authorizes the State Board to expend the Fund's monies upon appropriation by the Legislature. Id. Therefore, we conclude that the Fund derives its power from the State. Franceschi, 57 F.3d at 831. 61 We also conclude that the Fund is ultimately regulated by the state through the State Board. By statute, the State Board must report at least once every three months on the [payment of claims from the Fund] to the Senate Committee on Budget and Fiscal Review, the Senate Committee on Environmental Quality, the Assembly Committee on Budget, and the Assembly Committee on Environmental Safety and Toxic Materials, or to any successor committee, and to the Director of Finance. Cal. Health & Safety Code 25299.50(c)(2) (West Supp. 2000). Additionally, the State Board has statutory authority to modify existing accounts or create accounts in the [F]und or other funds administered by the board, which the board determines are appropriate or necessary for proper administration. Id. 25299.50(a) (West 1999 & Supp. 2000). The state's regulation of the Fund is also manifested through the BOE's statutory authority to adopt regulations to carry out its role as the collector of Fund fees. See id. 25299.42(a) (West 1999). 62 Accordingly, we find that this second factor weighs heavily in favor of finding that the Fund is an arm of the state. 63 As for the remaining factors, the California legislature has not granted the Fund corporate status or given it the power to take property in its own name. Thus, these two factors weigh in the Fund's favor. See Durning, 950 F.2d at 1427. Finally, the Fund admits that it may sue or be sued in its own name, which would weigh against an arm-of-the-state finding. See id. at 1427. Although recent legislation adds some uncertainty to this admission, compare Cal. Health & Safety Code 25299.52(g) (West 1999) (The fund may sue and be sued in its own name.), with id. 25299.52 (West. Supp. 2000) (deleting subsection (g), pursuant to 1999 legislative amendments), this factor does not turn the balance in any event. 64 For the foregoing reasons, then, we must conclude that, on balance, the Fund is an arm of the State of California, thereby entitled to invoke Eleventh Amendment immunity. 18 In reaching this conclusion, we find it most significant that the California legislature established the Fund to serve the central governmental function of ensuring safe and healthy water resources for the state's citizens.
65 The Trustee has cross-appealed in the Tax Adversary, arguing that the district court erred in finding that the fees paid into the Fund are taxes under 11 U.S.C. 507(a)(8). Because we lack jurisdiction over this non-final judgment, however, we cannot consider the Trustee's appeal. 66 Under 28 U.S.C. 158(d), we have jurisdiction of appeals from all final decisions, judgments, orders, and decrees entered under 28 U.S.C. 158(a). 28 U.S.C. 158(d) (1994). 28 U.S.C. 158(a) in turn provides that [a] district court has jurisdiction over a bankruptcy appeal from: (1) final judgments, orders, or decrees, and (2) interlocutory orders with leave from the bankruptcy court. Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774, 779 (9th Cir. 1999) (citing 28 U.S.C. 158(a)(1), (3)). The Trustee did not seek or obtain leave from the bankruptcy court to appeal. Thus, the district court had jurisdiction over the appeal, if at all, as a final judgment. Id. 67 [T]his court has adopted a `pragmatic approach' to finality in bankruptcy cases. Id. at 780. This `pragmatic approach' . . . focuses on whether the decision appealed from`effectively determined the outcome of the case.'  Elliott v. FourSeasons Properties (In re Frontier Properties, Inc.) , 979 F.2d 1358, 1363 (9th Cir. 1992) (quoting In re Mason , 709 F.2d 1313, 1318 (9th Cir. 1983)). Specifically, [a ] bankruptcy court order is final and thus appealable `where it 1) resolves and seriously affects substantive rights and 2) finally determines the discrete issue to which it is addressed.'  Law Offices of Nicholas A. Franke v. Tiffany (In re Lewis), 113 F.3d 1040, 1043 (9th Cir. 1997) (quoting In re Frontier Properties, Inc., 979 F.2d at 1363). [T]raditional finality concerns nonetheless dictate that we avoid having a case make two complete trips through the appellate process. Id. (internal quotation marks and citations omitted). 68 In response to the Trustee's motion for partial summary judgment, the bankruptcy court ruled that [t]he Fees imposed by Article 5 of Chapter 6.75 of the California Health & Safety Code are taxes for the purposes of 11 U.S.C. 507(a)(8). The Trustee argues that this ruling is final underS 158(a) because the court's characterization [of the monies paid into the Fund] will determine the priority of payments. . . because taxes have priority and fees do not. We reject the Trustee's argument. 69 It is true, of course, that the Bankruptcy Code grants priority status to taxes. 11 U.S.C. 507(a)(8) (1994). The Tax Adversary, however, is, at its core, an action by the Trustee seeking equitable subordination 19 of the BOE's postpetition claims for UST fees. In United States v. Noland , 517 U.S. 535 (1996), and United States v. Reorganized CF&I Fabricators, 70 Inc., 518 U.S. 213 (1996), the Supreme Court held that [d]ecisions about the treatment of categories of claims in bankruptcy proceedings . . . are not dictated or illuminated by principles of equity and do not fall within the judicial power of equitable subordination. Noland, 517 U.S. at 541 (emphasis added) (omission in original) (quoting Burden v. United States, 917 F.2d 115, 122 (3d Cir. 1990) (Alito, J., concurring in part and dissenting in part)) (internal quotation marks omitted); accord Reorganized CF&I Fabricators, Inc. , 518 U.S. at 229 (The principle is simply that categorical reordering of priorities that takes place at the legislative level of consideration is beyond the scope of judicial authority to order equitable subordination under 510(c).). In so doing, however, the Supreme Court reaffirmed what is relevant to this case: that  `principles of equitable subordination' permit[ ] a court to make exceptions to a general rule when justified by particular facts. Noland, 517 U.S. at 535; see also Paulman v. Gateway Venture Partners III, L.P. (In re Filtercorp, Inc.) , 163 F.3d 570, 583 (9th Cir. 1998) (noting that equitable subordination requires that . . . the claimant who is to be subordinated has engaged in inequitable conduct). The Trustee alleges such particular facts and inequitable conduct  in his Tax Adversary complaint. Thus, if the bankruptcy court rules in favor of the Trustee on his equitable-subordination claim, the BOE's claims for UST fees, be they taxes or not, will be subordinated. See Noland, 517 U.S. at 535. 20 71 Because the bankruptcy court's order did not resolve the question of priority, then, it is not final. United States v. Stone (In re Stone), 6 F.3d 581, 583 n.1 (9th Cir. 1993); accord Christian Life Ctr. Litig. Defense Comm. v. Silva (In re Christian Life Ctr.), 821 F.2d 1370, 1373 (9th Cir. 1987) (holding that the bankruptcy court's order was final and appealable because it finally determined the question of subordination of officers' indemnity claims and[n]o further action on this issue [wa]s contemplated or necessary); see also In re P.R.T.C., Inc., 177 F.3d at 780 (noting that, to be final, a bankruptcy order must finally determine[ ] the discrete issue to which it is addressed and resolve[ ] and seriously affect[ ] substantive rights). The district court, therefore, did not have jurisdiction under 158(a). 28 U.S.C. 158(a); In re P.R.T.C., Inc., 177 F.3d at 779 (explaining the district court's jurisdiction over bankruptcy appeals). And we do not have jurisdiction to review cases in which the district court affirms an order of the bankruptcy court that is not final. Vylene Enters., Inc. v. Naugles, Inc. (In re Vylene Enters., Inc.), 968 F.2d 887, 895 (9th Cir. 1992). Accordingly, we dismiss the Trustee's cross-appeal. 21