Reply Brief — Johnson Controls, Inc. v. Miller

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No. 09-981 “ae

_ Ean MAY -3=2010

Jn The OFFICE OF THe CLERK

Supreme Court of the Gnited States

JOHNSON CONTROLS, INC.; SECURITY GROUP,

INC. AND SUBSIDIARIES, INCLUDING SARGENT

& GREENLEAF, INC.; WILLIS NORTH AMERICA,

INC. AND AFFILIATES; BUNZL USA, INC. AND

SUBSIDIARIES INCLUDING MAK-PAK, INC:;

TREDEGAR CORPORATION, INC. AND SUBSIDIARIES;

RAYCOM TV BROADCASTING, INC., AS SUCCESSOR-

IN-INTEREST OF COSMOS BROADCASTING

CORPORATION AND AFFILIATES, PETITIONERS,

JONATHAN MILLER, SECRETARY OF THE

FINANCE AND ADMINISTRATION CABINET OF THE

COMMONWEALTH OF KENTUCKY: COMMONWEALTH

OF KENTUCKY, DEPARTMENT OF REVENUE

ON PETITION FOR A WRIT OF CERTIORARI

TO THE SUPREME COURT OF KENTUCKY

PETITIONERS’ REPLY BRIEF

ERICA L. HORN PAUL H FRANKEL

Counsel of Record MICHAEL A. PEARL

BRUCE F. CLARK MORRISON & FOERSTER LLP

MARGARET R. GRANT 1290 Avenue of the Amencas

R. BENJAMIN CRITTENDEN New York, NY 10104-0012

STITES & HARBISON, PLLC (212) 468-8000

421 West Main Street

P.O. Box 634

Frankfort, KY 40602-0654

(502) 223-3477

ehorn@stites.com

Counsel for Petitioners

“OCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT +402) 342-2831

ITT.

[V.

TABLE OF CONTENTS

IED oovcrtielipsvtdbisctinadcersiivncexsives

THE ADVERSE CONSEQUENCES OF

ALLOWING THE KENTUCKY OPINION

EE ta cttereadertnddathsadstgioteentescatecoavvorssess

SOVEREIGN IMMUNITY IS NOT APPLI-

CABLE TO THIS CASE AND THERE-

FORE, CANNOT BE A BASIS FOR

DENYING THE PETITION........................

THE OPPOSITION BRIEF SUPPORTS

GRANTING THE PETITION ............0.0......

A. UNRESOLVED QUESTIONS CON-

CERNING THE STANDARD ARTICU-

LG E Ee BOO Gt RREEsd GEN ce scesccvercvesvesarecveres

B. CONFUSION EXISTS AS TO THE

REACH OF MCKESSON ......................

C. RESPONDENTS’ MISCHARACTERI-

ZATION OF THE PETITIONERS’

EQUAL PROTECTION ARGUMENT

IS NOT A REASON TO DENY THE

I ID irsivnncncerscauddlvesctanasetiecevncnieesees

CONCLUSION ............. Sa Maseaa aan Coe

TABLE OF AUTHORITIES

Page

CASES

Alden v. Maine, 527 U.S. 706 (1999)............0.... cece cee ee. 6

Atchison, T: & S.F-R. Co. v. O'Connor, 223 U.S.

PPI GL a Ree 4,10, 11

Baker v. Ariz. Dep’t of Revenue, 105 P.3d 1180

(Axis. CE, icc cccescccccscccsccccccccce ces 8

City of Modesto v. National Med, Inc., 128 Cal.

Ap. SEE Be Satie ssercrcccccccccsccccscsesceees. 8

Ex parte Vulcan Lands, Inc., 6 So. 3d 1157 (Ala.

2008), on remand at, remanded by Vulcan

Lands, Inc. v. Surtees, 6 So. 3d 1164 (Ala.

CiV, A, Re atts serecccccccccccccscsccscsecess 4

IEC Arab Ala., Inc. v. City of Arab, 7 So. 3d 376

(Alan, Cay, Fe ee irtciscccsccscccccceccscccccesceeeee 8

Johnson Controls, Inc., et al. v. Commonwealth

of Kentucky, Finance and Administration

Cabinet, et al., U.S. District Court, Eastern

District of Kentucky, Central Division at

Frankfort, Civil Action No. 3:07-CV-65 ......00.0..000000.. 4

Jonathan Miller, Secretary of the Finance and

Administration Cabinet of the Common-

wealth of Kentucky, et al. v. Johnson Con-

trols, Inc., et al., 296 S.W.3d 392 (Ky. 2009).....1, 8, 9

McKesson Corp. v. Division of Alcoholic Bever-

ages & Tobacco, 496 U.S. 18 (1990).......... 4,9,10, 11

Reich v. Collins, 513 U.S. 422 (1998).........0.00...... 10, 1]

Revenue Cabinet v. Gossum, 887 S.W.2d 329

OAR Ee 7

TABLE OF AUTHORITIES — Continued

South Central Bell Telephone Co. v. Alabama,

Sa CLA. Be A See bittcivcctiscencdenensnnaniidasnnscantel 4

friple-S Management, Corp. v. Municipal Reve-

nue Collection Center, No. KLAN200701749

and No. KLAN200800249 slip op. (P.R. July

17, 2008) (unpublished), request for cert.

denied (P.R.S.C. March 16, 2009), and motion

for reconsideration denied (P.R.S.C. April 28,

2009), and second motion for reconsideration

denied (P.R.S.C. May 27, 2909), petition for

cert. filed, 78 US.L.W. 8, p. 3099 (U.S.

August 25, 2009) (No. 09-233)............... Sepdadadodanaasnic D

U.S. v. Carlton, 512 U.S. 26 (1994)............0.. cee. ¢,8,9

U.S. v. Darusmont, 449 U.S. 292 (1981)......................9

STATUTES

3 ¢ gt 2 ener eae

KRS § 141.200(17)......... RD eh ala hop Nom eT utente aa

i £971 e |} | NEES tO Acer se

artes B 141.205.....0c0crccesere seuicaeiglae teuanteceebenteitameeia 7

OTHER AUTHORITIES

MecNichols, E. and Johnson, N., Recession Con-

tinues to Batter State Budgets; State Responses

Could Slow Recovery, Center on Budget

and Policy Priorities. (February 25, 2010),

http://Awww.cbpp.org/cms/?fa=view&id=711................ 3

U.S. Const. amend. XIV, § 1...... bea 4,8

The Petitioners, Johnson Controls, Inc., Security

Group, Inc. and Subsidiaries, including Sargent &

Greenleaf, Inc.; Willis North America, Inc. and

Affiliates; Bunzl USA, Inc. and _ Subsidiaries,

including Mak-Pak, Inc.; Tredegar Corporation, Inc.

and Subsidiaries; and Raycom TV Broadcasting, Inc.,

as successor-in-interest of Cosmos’ Broadcasting

Corporation and Affiliates, respectfully submit this

Reply Brief in response to the Respondents’ Brief in

Opposition (“Opposition Brief” or “Op. Br.”), and in

further support of the Petition for Writ of Certiorari

to the Supreme Court of Kentucky (“Petition”) in the

case of Jonathan Miller, Secretary of the Finance and

Administration Cabinet of the Commonwealth of

Kentucky, et al. v. Johnson Controls, Inc., et al., 296

S.W.3d 392 (Ky. 2009). The Opinion of the Kentucky

Supreme Court is reprinted at Petitioners’ Appendix

(“Pet. App.”) 1-76.

INTRODUCTION

A grant of certiorari is appropriate in this case

because of the egregious error made by the Kentucky

Supreme Court in applying the important judicial

precedents of this Court, which resulted in a denial of

due process. Equally important, certiorari 1s appro-

priate because of the slippery slope onto which the

Kentucky opinion, if it is not reviewed, will poten-

tially place taxpayers across the country. Indeed,

nothing in the Opposition Brief addresses the far-

reaching, adverse consequences of the Kentucky

Supreme Court’s decision. Initially, rather than

providing the Court with reasons that the Petition

should be denied, the Respondents provide an

eighteen page “Statement” hardly germane to the

merits of the dispute between the parties ~ much less

to the question of certiorari. This “Statement” is

followed by nine pages of argument asserting that a

state legislature has an unfettered right to invoke

sovereign immunity without regard to any limits that

might be imposed by the federal constitution.

However, this argument has been clearly rejected by

each of the three courts in which it has been raised.

Finally, the Opposition Brief concludes with eight

pages that primarily address the merits of Peti-

tioners’ claims.

In reply, the Petitioners will forego a lengthy

repudiation of the factual assertions unsupported by

the record and other clear errors set forth in the

Respondents’ “Statement” and, instead, will focus

on three salient points: (1) the potential adverse

consequences of allowing the Kentucky opinion to

stand without further review; (2) the lack of merit of

the Respondents’ sovereign immunity argument as a

reason for denying the Petition; and (3) a showing

that the Opposition Brief actually supports the

granting of the Petition.

Il. THE ADVERSE CONSEQUENCES OF

ALLOWING THE KENTUCKY OPINION

TO STAND

The national import of this case is demonstrated,

in part, by the fact that three major business tax-

payer advocacy groups in the country — Council on

State Taxation, Institute for Professionals in Taxation

and Tax Executives Institute, Inc. — filed amicus

curiae briefs in support of Petitioners. This is because

the approach employed by Kentucky in this case — if

followed nationally, will encourage states to address

their budget woes by first demanding taxes not due,

and by then later escaping the duty to refund the tax

overpayments by legislatively eliminating all refund

claims filed.

The projected total budget shortfall for the 50

states for 2010-2011 is estimated to be $375 billion.

One way of easing these budget deficits would be for

each state to adopt the approach employed by the

Kentucky Revenue Cabinet and Kentucky General

Assembly in this case (as sanctioned by the Kentucky

Supreme Court). The approach works like this — the

executive branch taxing authority applies = an

aggressive, overreaching and unlawful interpretation

of a taxing statute to increase state revenues.

Because most states, if not all, lack a “pre-deprivation

McNichols, E. and Johnson, N , Recession Continues to

Batter State Budgets; State Responses Could Slow Recovery,

Center on Budget and Policy Priontics, (February 25, 2010),

http://www.cbpp.org/cms/?fa=view&id=711

remedy” many taxpayers will comply with the

potentially erroneous statutory interpretation when

filing their tax returns. They will do so to avoid the

imposition of interest and penalties and a payment of

tax will be made in reliance on the “clear and certain

remedy” promised by the refund statutes of their

respective states, which are required by the Due

Process Clause of the Fourteenth Amendment’ as

interpreted by this Court in McKesson Corp. uv.

Division of Alcoholic Beverages & Tobacco, 496 U.S.

18, 32 (1990), quoting Atchison, T: & S.F.R. Co. v.

O’Connor, 223 U.S. 280, 285 (1912). Then, when the

taxpayers learn that the taxing authority’s inter-

pretation was erroneous and they file proper refund

claims, the legislature acts to retroactively extinguish

the claims — thus allowing the state to keep monies to

which it was not entitled in the first place.* The best

“Nor shall any State deprive any person of life, liberty, or

property, without due process of law.” U S. Const. amend XIV, § 1.

* This scenario mirrors the facts of this case. Together with

passage of statutes with excess retroactivity this scenamno 1s

being played out in similar or analogous fact patterns in

California, Micmgan and Virginia within either the states’

administrative process or lower courts The battle continues to

rage in Kentucky — see the Bnef of Amicus Curiae Kentucky

Chamber of Commerce and Johnson Controls, Inc, et al. 1

Commonwealth of Kentucky, Finance and Administration

Cabinet, et al., U.S. District Court, Eastern District of Kentucky,

Central Division at Frankfort, Civil Action No. 3:07-CV-65

Furthermore, the ten year battle that began with South Central

Bell Telephone Co. v. Alabama, 526 US. 160 (1999) has only

recently concluded. See Ex parte Vulcan Lands, Inc., 6 So. 3d

1157 (Ala. 2008), on remand at, remanded by Vulcan Lands, Inc

(Continued on following page)

reason for granting certiorari in this case is to stop

the states from charging down this unconstitutional

and confiscatory slippery slope dragging taxpayers

with them.

lil. SOVEREIGN IMMUNITY IS NOT APPLI-

CABLE TO THIS CASE AND THEREFORE,

CANNOT BE A BASIS FOR DENYING THE

PETITION

The Respondents assert, “Petitioners’ tax over-

payment claims are barred by well settled principles

of state sovereign immunity which do not need to be

rehashed on certiorari.” Op. Br. at 19. A portion of the

Respondents’ statement is true; that is, “well settled

principles of state sovereign immunity [] do not need

to be rehashed on certiorari.” This is because the idea

that the Petitioners’ refund claims are barred by

passage of KRS § 141.200(17) has been rejected by

every court to which it has been addressed.

v Surtees, 6 So. 3d 1164 (Ala. Civ. App 2008). See also Triple-S

Management, Corp. v. Municipal Revenue Collection Center, No

KLAN200701749 and No KLAN200800249 slip op. (PR. July

17, 2008) (unpublished), request for cert denied (P.R.S C. March

16, 2009), and motion for reconsideration denied (P.R.S.C. April

28, 2009), and second motion for reconsideration denied (P_R.S.C

May 27, 2009), petition for cert. filed, 78 U.S.LW. &, p. 3099

(U.S August 25, 2009) (No 09-233) (Puerto Rico Supreme Court

upheld administrative action by the Municipal Revenue

Collection Center to retroactively impose property taxes for a

period of fifteen years).

On this issue, the Franklin Circuit Court (the

trial court) held, “The Defendants unconvincingly

assert the defense of sovereign immunity.” Pet. App.

p. 108, fn. 4. The Court of Appeals of Kentucky next

held: “Upholding the Cabinet’s sovereign immunity

claim would, therefore, improperly extinguish appel-

lants’ clear right to seek a post-deprivation remedy.”

Id. at 97. Finally, both the majority and dissenting

opinions of the Kentucky Supreme Court cite this

Court’s opinion in Alden v. Maine, 527 U.S. 706

(1999) as being dispositive of the Respondents’

argument. Pet. App. pp. 11, 55-57. In Alden, this

Court held: “The constitutional privilege of a State to

assert its sovereign immunity in its own courts does

not confer upon the State a concomitant right to

disregard the Constitution or valid federal law. * * *

Rather, certain limits are implicit in the constitu-

tional principle of state sovereign immunity.” 527

U.S. at 754-755.

Much of the Respondents’ lengthy sovereign

immunity argument is based on an improper framing

of the issue and citations to cases not applicable to

this case. Specifically, Respondents improperly frame

the issue as whether a state’s consent to suit confers

a property right protected by due process. Op. Br. at

19-28. However, the proper question is whether the

state can eliminate an existing property right arising

under the federal constitution (z.e., the mght to post-

deprivation relief from exaction of unlawful or

erroneous taxes), by simply withdrawing its “con-

sent” to be sued. This question has been addressed by

this Court and the answer is “No”. As a result, the

Petitioners’ claims are not barred by sovereign

immunity, and the doctrine therefore does not serve

as a basis for denying the Petition.

IV. THE OPPOSITION BRIEF SUPPORTS

GRANTING THE PETITION

The Respondents assert that the Court should

reject the Petition because, “The Court has already

provided ample ‘guidance’ on the ‘due process limits of

retroactive legislation.’” Op. Br. at 28. Thus, if this

assertion is incorrect, this Court should accept

review. As shown in the original Petition, and as

further addressed below, much remains unsettled

after this Court’s decision in U.S. v. Carlton, 512 U.S.

26 (1994).

A. Unresolved Questions Concerning the

Standard Articulated in Carlton

As an initial matter, courts have taken con-

flicting positions on whether due process merely

‘ The Commonwealth has enacted two applicable refund

statutes’ a specific income tax refund statute, KRS § 141 235;

and a general tax refund statute, KRS § 134.580. By enacting

these tax refund statutes, the Commonwealth has provided

taxpayers the constitutionally required clear and certain remedy

for an overpayment of taxes. See also Revenue Cabinet 1

Gossum, 887 S.W.2d 329, 333 (Ky. 1994)

requires that states have a “rational basis” for

implementing a retroactive tax statute or whether

there is a two-part (or three-part) test for deter-

mining whether a retroactive tax violates the Due

Process Clause (1.e., requiring a rational purpose for

the retroactivity and a modest period of retroactivity

and prompt legislation).”

As alluded to above, courts are at odds as to

whether the second prong of the test from Carlton

contains its own two-part test requiring both a

modest period of retroactivity and prompt legislative

action, or whether it requires only a modest period of

retroactivity. Compare IEC Arab Ala., Inc. v. City of

Arab, 7 So. 3d 370 (Ala. Civ. App. 2008) (discussing

only modesty) and Baker v. Ariz. Dep’t of Revenue,

105 P3d 1180, 1186-1188 (Ariz. Ct. App. 2005)

(discussing only modesty) with City of Modesto vw.

National Med, Inc., 128 Cal. App. 4th 518, 528, 529

(2005) (discussing both promptness and modesty).

Furthermore, as described, on pages 16-19 of the

Petition, there has been much discussion of what

constitutes a “modest” period of retroactivity.

With regard to legislative promptness, the

Respondents chastise the Petitioners for “asking the

* In this case, the precise test rehed upon by Kentucky

Supreme Court appears to be something of a hybnd —

“retroactive application of a statute need only be (1) supported

by a legitimate legislative purpose (2) furthered by rational

means, which includes an appropriate modesty requirement.”

296 S.W.3d at 399, Pet. App. p 16

Court ‘to establish that retroactive legislation violates

due process when a state legislature fails to enact the

legislation at the first possible legislative session.’”

Op. Br. at 28. The respondents continue, “Presumably

this Due Process Clause requirement would shackle

Congress as well.” Id. In fact, Congress has set its

own limits. In Carlton, the Court recognized that the

brief retroactive nature of a curative statute is a

“customary congressional practice,” one that is

generally confined to short and limited periods

required by the practicalities of producing national

legislation. 512 U.S. at 33 (quoting U.S. uv.

Darusmont, 449 U.S. 292, 296-97 (1981)). The variety

of opinions in the cases cited above establish, and

require, that this Court has the last word on the

standard for analyzing a retroactive tax statute.

Thus, granting the Petition is proper.

B. Confusion Exists as to the Reach of

McKesson

The Kentucky Supreme Court took the position

that McKesson applies only to situations in which the

tax statute generating the refund claim is found to be

in violation of the constitution. Johnson Controls, 296

S.W.3d at 402. Pet. App. pp. 24-25. The Respondents

* In its Opposition Bnef, the Respondents make numerous

statements in support of the idea that the Kentucky General

Assembly acted at the first possible legisiative session Op Br

at 10-15, 29, fn. 14. The record, if cited in its entirety, does not

support such a claim.

set forth this position on pages 25-28 of the

Opposition Brief with regard to both McKesson and

Reich v. Collins, 513 U.S. 422 (1998). To reach this

conclusion, though, both the Kentucky Supreme

Court and the Respondents had to ignore the

precedent leading up to McKesson and Reich and,

instead, had to view those two cases in a vacuum. For

example, nearly 100 years ago the Court in Afchison

did not limit the scope of due process remedies to only

constitutional violations. The Court held:

It is reasonable that a man who denies the

legality of a tax should have a clear and

certain remedy. The rule being established

that, apart from special circumstances, he

cannot interfere by injunction with the

state’s collection of its revenues, an action at

law to recover back what he has paid is the

alternative left. Of course we are speaking of

those cases where the state is not put to an

action if the citizen refuses to pay. In these

latter, he can interpose his objections by way

of defense; but when, as is common, the state

has a more summary remedy, such as

distress, and the party indicates by protest

that he is yielding to what he cannot

prevent, courts sometimes perhaps have

been a little too slow to recognize the implied

duress under which payment is made. But

even if the state 1s driven to an action, if at

the same time, the citizen is put at a serious

disadvantage in the assertion of his legal, in

this case of his constitutional, rights, by

defense in the suit, justice may require that

he should be at liberty to avoid those dis-

advantages by paying promptly and bringing

suit on his side.

223 U.S. 280, 285-286. The court below and

Respondents simply turn a blind eye to the roots of

the holdings in McKesson and Reich — roots implicit

in the expansive language used by the Court in

McKesson requiring a clear and certain remedy “for

any erroneous or unlawful tax collection to ensure

that the opportunity to contest the tax is a

meaningful one.” 496 U.S. at 39 (emphasis added).

Furthermore, taking the Kentucky Court’s and

Respondents’ position to its logical conclusion would

mean that McKesson and Reich have no precedential

value other than to factual situations identical to

those cases. The narrowing of the due process rights

of taxpayers by the Kentucky Supreme Court, and as

urged by the Respondents, is reason enough that this

Court should grant the Petition.

C. Respondents’ Mischaracterization of the

Petitioners’ Equal Protection Argument

Is Not a Reason to Deny the Petition

On pages 32-35 of the Opposition Brief, the

Respondents conclude by first reintroducing their

sovereign immunity argument and then by describing

the different treatment of “‘similarly situated tax-

payers” as a “function of the effective date of the two

statutes [KRS § 141.200(17) and KRS § 141.200(18)],

not of any legislative classification among taxpayers.”

Op. Br. at 33. The Petitioners’ equal protection

argument is set forth at pages 19-24 of their brief and

will not be repeated here. Suffice it to say that

Petitioners’ equal protection claim is not based on the

date of two statutes; rather it is based on similarly

situated taxpayers being treated different'y prior to

the date selected by the statute (December 22, 1994).

Thus, the 2000 Amendments, as applied, worked an

unconstitutional discrimination against the twenty-

nine taxpayers at whom those amendments were

directed. This discrimination warrants granting the

Petition.

Vv. CONCLUSION

For the reasons set forth in their Petition for

Writ of Certiorari and herein, the Petitioners

respectfully request that the Petition be granted.

Respectfully submitted,

ERICA L. HORN PAUL H. FRANKEL