August 11, 2020

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August 11, 2020

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August 10, 2020

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Is Franchise Tax Board Argument Nothing More Than Blowing In Wind?

Readers may remember this blog post from September of last year: Nevada Supreme Court Upholds Fraud Verdict Against The California Franchise Tax Board.  The subject of the post was Franchise Tax Bd. v. Hyatt, 335 P.3d 125 (Nev. 2014) in which the Nevada Supreme Court partially affirmed a Nevada jury verdict against the California Franchise Tax Board.  The Nevada Supreme Court held that the FTB was “not immune from suit under comity because discretionary-function immunity in Nevada does not protect Nevada’s government or its employees from intentional torts and bad-faith conduct”.

The FTB sought review from the United States Supreme Court, arguing that when “a State is involuntarily haled into the courts of a sister State, it must be accorded at least the same sovereign immunity as the forum State accords itself.”  Franchise Tax Bd. v. Hyatt, Supreme Court Case No. No. 141175.  California grants the FTB absolute immunity, Cal. Gov’t Code § 860.2.  Nevada, in contrast, allows damage awards against state entities but limits the amount of the award.  NRS § 41.035(1).

One big problem for California was that it took a far different position in Nevada v. Hall, 440 U.S. 410 (U.S. 1979), a case in which it persuaded the U.S. Supreme Court that the State of Nevada could be sued in California’s courts and California did not need to recognize Nevada’s limitation on damage awards against Nevada agencies.  California’s reversal of position did not go unnoticed by Justice Ginsburg at oral argument last week:

There is there is a certain irony, isn’t there, that California is the State that gave us a Nevada against California, right? And California then was saying, oh, yes, we can sue the sovereign in Nevada in our courts if they come into our State and hurt our people.  It was California.  So is California now saying they were wrong in the argument that they made?

Paul D. Clement, arguing for California responded:

Well, I – I think the FTB is asking you which is an arm of California is asking you to overrule Hall. So I think it is fair to say that there is some buyer’s remorse on the principle of Nevada against Hall by the sovereign State of California.

Justice Ginsburg called California’s volte face “irony” and Mr. Clement described it more gently as “buyer’s remorse”.  I think a more accurate term would be “chutzpah”.

“For ’tis the sport to have the enginer
Hoist with his own petar; and ‘t shall go hard”

One might say that California lit the fuse with Nevada v. Hall and is now bewailing the fact that it is “hoist on its own petard”.  For those not familiar with the phrase, a “petard” was a small bomb that was used to blow open a gate or portcullis.  Shakespeare apparently used “hoist” in the above lines from Hamlet to mean blown up and away.  The word “petard” comes from the Middle French, péter, which amusingly means to break wind.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume V, Number 349

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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