Court Opinion

ID: 2684180
Source: CourtListenerOpinion
Date Created: 2014-07-17 12:00:39.051875+00
Date Added: 2024-06-11T09:41:16.913551
License: Public Domain

In the United States Court of Federal Claims
    Nos. 13-402T, 13-917T, 13-972T, 13-935T, 14-174T, 14-93T, 14-175T, 14-047T

                                  (Filed: July 16, 2014)

************************************** *
                                       *
ALTA WIND I OWNER-LESSOR C, and        *
ALTA WIND I OWNER-LESSOR D, et al., *                Tax Case; Treasury Cash Grant;
                                       *             Rule 56(d) Request for Discovery;
                   Plaintiffs,         *             When to Allow Discovery and
 v.                                    *             Stay Motion for Summary
                                       *             Judgment; Theisen Vending Test;
THE UNITED STATES,                     *             Sale-leaseback Agreement.
                                       *
                   Defendant.          *
                                       *
************************************** *

Steven J. Rosenbaum, with whom were Dennis B. Auerbach, and Thomas R. Brugato,
Covington & Burling LLP, Washington, D.C. for Plaintiff.

Michael J. Ronickher, with whom were Tamara W. Ashford, Acting Assistant Attorney
General, David I. Pincus, Chief, and G. Robson Stewart, Assistant Chief, Tax Division,
Court of Federal Claims Section, U.S. Department of Justice, Washington, D.C. for
Defendant.

                                OPINION AND ORDER

WHEELER, Judge.

                                       Background

        These cases involve the determination of the cash grants due Plaintiffs for
investing in wind power facilities in California. Under Section 1603 of the American
Recovery and Reinvestment Act of 2009 (“Recovery Act”), Pub. L. No. 111-5, 123 Stat.
115, Plaintiffs are entitled to a 30 percent credit of the dollar amounts invested in grant-
eligible assets. The dispute centers on establishing a reasonable cost basis for the grant-
eligible assets. Plaintiffs have moved for summary judgment, but Defendant has
requested the Court to stay the summary judgment motions under Rule 56(d) so that
Defendant may conduct discovery before it responds. The parties disagree on whether
discovery is appropriate or necessary.
       These cases began on June 14, 2013, when Plaintiffs Alta Wind I Owner-Lessor C
and D filed a complaint alleging that the Government did not make full payments owed
to them under the Recovery Act. Thereafter, from June 2013 through March 4, 2014,
Plaintiff’s counsel filed seven similar complaints on behalf of other Alta Wind entities,
and an entity called Mustang Hills LLC. In total, there are twenty Plaintiffs in these
suits, and all of them acquired their ownership interests through sale-leaseback
arrangements. The difference between the amount allowed by the Treasury Department
and the amount claimed by Plaintiffs is $226 million. On June 6, 2014, the Court
consolidated these cases for procedural and scheduling purposes.

       To establish their eligibility for the Recovery Act’s cash grants, Plaintiffs
submitted applications and extensive supporting documentation to the Treasury
Department. In response, Treasury requested and later received additional materials from
Plaintiffs. The documents that Treasury obtained included the purchase and sale
agreements between the seller and the Plaintiff buyers, power purchase agreement
(“PPA”) details, facility lease agreements, and detailed asset schedules indicating which
assets were grant-eligible. Plaintiffs provided over 10,000 pages to Treasury in support
of their applications. However, with more than 12,000 other applications submitted at
that time, and with a 60-day period to respond, Treasury representatives undoubtedly
were pressed in providing timely reviews.

       On May 16, 2014, Plaintiffs filed motions for summary judgment under Rule 56.
Among their arguments, Plaintiffs reasoned that “one of the verities of tax law” is that the
buyer’s cost basis equals the purchase price unless “peculiar circumstances” surround the
sale. According to Plaintiffs, no peculiarities exist here, and the Treasury erred as a
matter of law in awarding reduced cash grants on some other basis. Plaintiffs view these
cases as presenting purely questions of law which can be decided on cross-motions for
summary judgment without the need for discovery.

        In response, Defendant noted that a sale-leaseback agreement involves multiple
related transactions where the developer is both the seller and lessee. Defendant is
concerned that such an arrangement creates the opportunity to adjust terms across
transactions to inflate the purchase price while preserving the buyer’s targeted return on
investment. Thus, Defendant requests the Court to stay Plaintiffs’ motions and permit
discovery pursuant to Rule 56(d). Defendant contends that six areas require further
factual development: (1) whether the purchase prices in the sale-leasebacks and single
sale were determined at arms-length; (2) the PPAs’ valuation and why one Plaintiff
altered its original classification of its PPA as an ineligible asset; (3) whether Plaintiffs’
appraiser and independent accountant agree with Plaintiffs that the PPAs are eligible
assets; (4) the full set of Plaintiffs’ eligible and ineligible assets; (5) the goodwill or going
concern valuation encompassed within the purchase price; and (6) why one Plaintiff’s

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appraiser used different methodologies to reach different valuations than that appraiser’s
valuation of another Section 1603 applicant’s seemingly similar wind farm.

       In opposition to Defendant’s request for discovery, Plaintiffs argue that: (1) the
Government has information establishing the parties to the single sale as wholly unrelated
companies and has had the sale-leaseback agreements for over three years; (2) as a part of
the eligible assets, the PPAs’ valuation is irrelevant; (3) the appraiser’s and independent
accountant’s assessments are irrelevant because whether the PPAs are inseparable is a
question of law, not of subjective belief; (4) the Government not only received Plaintiffs’
asset schedules detailing whether or not each asset is grant-eligible, but expressly relied
on those identifications in awarding the contested cash grants; (5) no goodwill or going
concern value was conveyed because the PPAs provide for the entire sale of outputs to a
single customer, and thus Plaintiffs lack the ability to obtain new customers or sales; and
(6) appraisal evidence is, by definition, irrelevant because the cost basis equals the
purchase price.

      On July 3, 2014, Defendant replied to Plaintiffs’ opposition, arguing that the
complicated mixed questions of fact and law before the Court make summary judgment
inappropriate without first allowing broad discovery. The question of whether to allow
discovery is now ready for decision.

                                         Analysis

      A. Standards for Decision

        While requests for discovery pursuant to Rule 56(d) “are generally favored and are
liberally granted,” the allowance of discovery is not without strict qualifications. Clear
Creek Cmty. Servs. Dist. v. United States, 100 Fed. Cl. 78, 83 (2011) (citing Chevron
U.S.A. v. United States, 72 Fed. Cl. 817, 819 (2006)). The requesting party must proffer
“specified reasons” to explain why discovery is “essential” to its summary judgment
opposition. RCFC 56(d). It is axiomatic that “[i]f all one had to do to obtain a grant of a
Rule [56(d)] motion were to allege possession by movant of ‘certain information’ and
‘other evidence,’ every summary judgment decision would have to be delayed while the
non-movant goes fishing in the movant’s files.” Keebler Co. v. Murray Bakery Prods.,
866 F.2d 1386, 1389 (Fed. Cir. 1989). Thus, mere “speculative hope” that discovery will
produce evidence creating a genuine dispute of material fact is inadequate. Pure Gold,
Inc. v. Syntex (U.S.A.), Inc., 739 F.2d 624, 626–27 (Fed. Cir. 1984). The party must
“state with some precision the materials he hope[s] to obtain with further discovery, and
exactly how he expect[s] those materials would help him in opposing summary
judgment.” Simmons Oil Corp. v. Tesoro Petroleum Corp., 86 F.3d 1138, 1144 (Fed.
Cir. 1996) (citations and internal quotation marks omitted). Otherwise, pursuing

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discovery would cost the parties unnecessary expense and waste judicial resources. Pure
Gold, Inc., 739 F.2d at 627.

        Although the Federal Circuit has yet to establish specific Rule 56(d) criteria, this
Court has established a five-part set of prerequisites that is consistent with the precedent
from other circuit courts of appeals. Theisen Vending Co. v. United States, 58 Fed. Cl.
194, 198 (2003). The requesting party must: (1) specify the particular factual discovery
being sought; (2) explain how discovery results are reasonably expected to engender a
genuine issue of material fact; (3) provide an adequate factual predicate for the belief that
there are discoverable facts sufficient to raise a genuine and material issue; (4) recite the
efforts previously made to obtain those facts; and (5) show good grounds for the failure
to have discovered the essential facts sooner. Id. See also Clear Creek Cmty. Servs.
Dist., 100 Fed. Cl. at 83 (applying the Theisen Vending test); Chevron U.S.A., 72 Fed.
Cl. at 819 (same); Jade Trading, LLC v. United States, 60 Fed. Cl. 558, 565 (2004)
(same).

        If the requesting party meets these five requirements, then the Court may allow
discovery. However, discovery may be limited to specific issues germane to the
summary judgment motion. First Nationwide Bank v. United States, 51 Fed. Cl. 762, 770
(2002), aff’d, 431 F.3d 1342 (Fed. Cir. 2005). Alternatively, the Court may order full
discovery for both parties under Rule 56(d)(3) to avoid a “wasteful exercise in piecemeal
litigation” that “could engender extraneous disputes as to the scope of discovery
‘essential’ for [the Government] to respond to Plaintiffs’ motions.” Jade Trading, LLC,
60 Fed. Cl. at 559.

       B. The Government Proffered “Specific Reasons” Sufficient to Satisfy Rule 56(d)
          Criteria and Justify Discovery.

        In this case, the Government argues that the cost basis cannot equal purchase price
because sale-leaseback agreements allow parties to inflate purchase prices through value
shifting across multiple transactions, and the Recovery Act only provides grants for
eligible property. Thus, the legal standard for determining cost basis based on the
purchase price is only appropriate if: (1) the purchase price actually reflects an arm’s-
length transaction; and (2) the purchase price encompasses only eligible assets. As the
Government has made clear, both determinations depend on the facts surrounding the
transactions, which the Government has not fully explored at this stage. Discovery is
thus necessary before the Government can respond to Plaintiffs’ motions. Factual
development will allow the Court to identify the correct legal standard to apply and
render a determination on the summary judgment motions.

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       1. Sale-leaseback Agreements May Qualify as “Peculiar Circumstances.”

        The parties agree that the general tax rule for determining cost basis provides that
the buyer’s cost basis is equal to the property’s purchase price. Lemmen v. Comm’r, 77
T.C. 1326, 1347–48 (1981) (citing Edwards v. Comm’r, 19 T.C. 275, 279 (1952)).
However, this rule does not apply if the transaction in question was “not conducted at
arm’s-length by two economically self-interested parties” or was based upon “peculiar
circumstances” that contributed to a price inflated above the property’s fair market value.
Id. at 1348 (citing Bixby v. Comm’r, 58 T.C. 757, 776 (1972)). The Court is unaware of
any case law excluding sale-leaseback agreements, such as those involved in this dispute,
from qualifying as “peculiar circumstances.” Furthermore, a sale-leaseback agreement’s
potential for value transfers across transactions mirrors the value shifts found in Lemmen,
where the U.S. Tax Court found “peculiar circumstances” were present. 77 T.C. at 1349
(finding “peculiar circumstances” where the seller inflated the purchase price by
including future maintenance fees in the total, thus “sweetening the investment” by
increasing the buyer’s income tax credit).

        Here, the Government has proffered specific reasons why it requires discovery to
address the potential peculiarity of the sale-leaseback agreements at issue. As the
Government explained, each agreement comprises multiple related transactions between
the parties where the developer is both the seller and lessee. This arrangement provides
the opportunity to adjust terms to yield a higher purchase price without lowering the
buyer’s targeted return on investment. However, during application evaluations,
Treasury did not review the complete set of transaction documents associated with each
sale-leaseback agreement. As a result, the Government needs discovery to evaluate the
evolution of terms and to determine whether the final terms reflect an inflated purchase
price above arm’s length amounts. Additionally, the Government properly desires access
to evidence regarding the appraiser’s methods, conclusions, and influences on setting the
purchase prices. The facts strongly suggest that the appraisal values dictated purchase
price amounts, as some purchase prices are exactly equal to the appraised values. Indeed,
stilted appraisal methods that comport with other evidence of value shifting would
engender a genuine issue of material fact, and thus preclude a grant of summary
judgment. Therefore, the Court finds that the Government has met the Rule 56(d)
requirements and thus, should be permitted to obtain the remaining documents and
appraisal information through discovery.

       2. Only Eligible Property May Serve as a Cost Basis.

       Even if no “peculiar circumstances” exist, the Court cannot apply the general rule
for determining cost basis unless the purchase price comprises only eligible assets. In
accordance with the Recovery Act, Treasury issues cash grants to applicants only for

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their grant-eligible property, denoted as “specified energy property.” §1603(a).
Ineligible property does not qualify. Here, it is unclear whether Plaintiffs purchased only
eligible property, and if not, what proportion of the purchase price does not qualify under
the Recovery Act. As a result, factual questions arise regarding the valuation of the
individual assets acquired.

        The Government is entitled to receive Plaintiffs’ detailed work papers, accounting
records, and calculations used in developing the cost schedules because Treasury did not
obtain all pertinent transaction documents through Plaintiffs’ applications. Plaintiffs
supplied Treasury with asset schedules identifying which property was grant-eligible, but
this provided only Plaintiffs’ representations of each asset’s valuation and qualification
status. The Government is entitled to discovery to make its own determination.

       Due to the fact that Plaintiffs considered the appraisal results in allocating the
purchase price among the acquired assets, discovery of the appraisal methodology and
conclusions also is necessary. In short, a claim of this size demands that both parties
have access to the underlying calculations to ensure that the Court considers the correct
valuations. The Court concludes that discovery is necessary to determining the cost basis
and would permit the Government to confirm that Plaintiffs made no errors in the many
asset calculations and classifications submitted to Treasury.

        Moreover, the Government specifically points out that any existing goodwill or
going concern values must be subtracted from the purchase price, as neither of these
qualifies as eligible property under the Recovery Act. The total purchase price cannot
serve as the cost basis where Treasury Regulation § 1.1060-1 requires an allocation of an
amount of the purchase price to goodwill and going concern value. The transaction falls
within the scope of § 1.1060-1 if the “character [of the assets] is such that goodwill or
going concern value could under any circumstances attach to” the group of assets. Treas.
Reg. § 1.1060-1(b)(2)(B) (emphasis added). Making this determination requires
consideration of “all the facts and circumstances surrounding the transaction.” Treas.
Reg. § 1.1060-1(b)(2)(iii). Plainly, finding that goodwill and going concern value exist
in a transaction is a broad fact-based inquiry. Thus, the Government requires discovery
to identify the amount of the purchase price that constitutes goodwill and going concern
value. Ultimately, this calculation contributes to the total amount of ineligible property
contained within the purchase price, altering the amount that may serve as the cost basis.
As a result, the Court cannot consider Plaintiffs’ motions for summary judgment with this
unresolved fact issue pending and finds that the Government has met the Rule 56(d)
criteria for establishing a clear need for discovery.

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      C. The Government Met its Burden Despite Documentation Already in its
         Possession.

       To the Court’s knowledge, no case here or in the Federal Circuit has ever held that
possessing pre-litigation documents disqualifies a party from or increases its burden in
seeking Rule 56(d) discovery. Instead, other districts have simply found that where the
Government is “already in possession of a vast number of documents relating to the
issues” in a case, it cannot meet its burden of showing a need for discovery with the
“conclusory assertion that some facts are still exclusively in [Plaintiffs’] control.”
Beechwood Restorative Care Ctr. v. Leeds, 317 F. Supp.2d 248, 285 (W.D.N.Y. 2004).
Accord United States v. Gordon Stafford, Inc., 810 F. Supp. 182, 186 (N.D. W. Va. 1993)
(denying the Government’s Rule 56(d) motion where the Government had already
acquired information through extensive investigations and thus could not show a need for
further discovery). Rather, the Government must “specify what, if anything, would be
revealed by further discovery,” or its request is defective on its face. Franke v.
Midwestern Okla. Dev. Auth., 428 F. Supp. 719, 724 (W.D. Okla. 1976).

        Here, the Government has shown that, although it already has Plaintiffs’ grant
applications, these documents should not preclude the Government from discovery. Even
though Treasury did receive over 10,000 pages in support of Plaintiffs’ applications, the
Government has identified more documents essential to its response to Plaintiffs’
motions. For example, Treasury did not review detailed records created in producing the
facilities’ cost schedules. Moreover, Treasury’s representatives undoubtedly were
constrained during the review process. Although Treasury received more than 12,000
other applications at the time that Plaintiffs filed their applications, the Recovery Act
required Treasury to make payments within 60 days of the finalization of applications.
Thus, Treasury’s review, while sufficient to issue payments, was not exhaustive or done
in contemplation of future litigation. As a result, Treasury’s pre-litigation document
review is likely an inadequate basis upon which to fashion a response to Plaintiffs’
motions for summary judgment.

      D. Full Discovery is Appropriate.

       Under Rule 56(d)(3) the Court may order full discovery to avoid a “wasteful
exercise in piecemeal litigation” that “could engender extraneous disputes as to the scope
of discovery ‘essential’ for [the Government] to respond to Plaintiffs’ motions.” Jade
Trading, LLC, 60 Fed. Cl. at 559. Here, the Court finds that authorizing full discovery is
preferable and will prevent disputes over the proper scope. Full discovery will permit an
efficient factual development of the issues currently before the Court. Further, full
discovery will eliminate the risk that parties will waste time and resources on additional
filings only to affirm what the Court has already concluded— that further factual

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development is warranted. Thus, the Court finds that both parties should be permitted
full discovery to avoid inefficient piecemeal litigation.

                                      Conclusion

       For the foregoing reasons, the Government’s motion for discovery pursuant to
Rule 56(d) is GRANTED and Plaintiffs’ motions for summary judgment is STAYED
pending the completion of discovery. The Court will hold a status conference in the near
future to establish a reasonable discovery schedule.

      IT IS SO ORDERED.

                                               s/ Thomas C. Wheeler
                                               THOMAS C. WHEELER
                                               Judge

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