Opposition Brief — Birch Securities Co. v. California

Subject Index

Page

i ea i Loa. cae fa chin cused ekeSecnsecas 1

ee tebe Kea coke hed bsGne bee Gan dneekeeshesess 5

I. Principles settled by prior decisions of this court

clearly establish that the federal court judgment re-

lied upon by petitioner is not a bar to this action.... 5

A. The plaintiff in this state court action was not a

party to the federal court action ............... 5

B. The judgment in the federal court action would

not be conclusive of the present action even if

the State had been a party to the federal court

DT. .d ciahs can 0s subhshakbanenkeahenth sens s 13

Ne tua cba bawakskauaats 15

Table of Authorities Cited

Cases Pages

Carr v. United States, 98 U. S. 483 ................0008- 7, 8,10

Cromwell v. County of Sac, 94 U. S. 351................. 9,13

Duhne v. New Jersey, 251 U. S. 311. ........ ccc cece eeee 6

mem Weim Tm Wm, BP TE. Th. GGG ncn ovina cccicccasecacs 7

People v. Bruce, C.C.A, 9, 129 F2d 421, cert. den. 317 U.S.

eh wis SEERA SEAS 40 b6 SR 40eKE Oh dbandbenigndeees 6

Sunshine Anthracite Coal Co. v. Adkins, 310 U. S. 381...8, 9,13

Statutes

Bank and Corporation Franchise Tax Act, Section 30...... 7

California Constitution, Article XIII, Section 15 .......... 7

California Statutes 1939, ch. 1050, p. 2968, Section 30...... 7

3 Deering’s Gen. Laws, Act 8488, Section 30 ............ 7

_—

In the Supreme Court

OF THE

United States

OcToBER TERM, 1948

No. 519

Bircu Securities Company, Petitioner,

Vs.

PEOPLE OF THE STATE OF CALIFORNIA, Respondent.

BRIEF FOR RESPONDENT IN OPPOSITION TO THE

GRANTING OF THE WRIT OF CERTIORARI.

STATEMENT OF THE CASE.

The petition for the writ of certiorari seeks review

of a judgment of the District Court of Appeal, Third

Appellate District, of the State of California, entered

July 12, 1948 (R. 111), affirming a judgment of the

Superior Court of the State of California, in and for

the County of Sacramento. (R. 30.) The opinion of

the District Court of Appeal is reported in 86 Advance

California Appellate Reports 732, 196 P. (2d) 143.

Renee eee

The Supreme Court of California denied a petition

for hearing. (R. 33.)

The Superior Court found (R. 25) upon the evi-

dence introduced at the trial, and its findings were

affirmed on appeal, that the Birch Securities Co., a

Nevada corporation, qualified to do business in the

State of California in 1934, and that during the tax

period here involved the Birch Securities Co. engaged

in activities in the State of California other than the

receipt and disbursement of dividends from stock or

interest from bonds; that it actively engaged in trans-

actions in the State of California for the purpose of

financial or pecuniary gain or profit; and that during

the tax period involved the Birch Securities Co. was

doing business within the limits of the State of Cali-

fornia. (R. 26.) The court further found that after

the filing of returns by the Birch Securities Co., the

Franchise Tax Commissioner of the State of Cali-

fornia examined the returns, computed the correct

amount of tax due and mailed notices of additional

tax proposed to be assessed and that the Birch Secu-

rities Co. received the notices but did not file a protest

against the proposed levy, that thereafter the fran-

chise tax commissioner mailed notices and demands

for payments but that no payment has been made

and that the whole of the additional tax is due, owing

and unpaid. (R. 27-28.)

Petitioner, Birch Securities Co., contends that a

federal court judgment is res judicata. The federal

court action referred to by petitioner, No. 1430 B,

was brought in the District Court of the United

3

States, in and for the Southern District of California,

Central Division. It was brought by A. Otis Birch

who owned stock in the Birch Holding Company, a

corporation, which in turn owned the stock of the

petitioner, Birch Securities Co., and it named Charles

J. McColgan, as Franchise Tax Commissioner of the

State of California, and certain other State officers as

defendants, as well as the Birch Securities Co. and

certain other corporate and individual defendants.

(R. 140.) In the federal court action the plaintiff

Birch sought to enjoin the Birch Securities Co. from

paying any part of the taxes sought to be recovered in

the present action which was pending, to enjoin the

defendant state and county officers from maintain-

ing or attempting to maintain any suspension or

forfeiture of the charter of the Birch Securities Co.

and to enjoin the defendant state and county officers

from assessing or collecting or attempting to assess

or collect any tax from the Birch Securities Co., and

to stay all further proceedings in this state court

action other than the dismissal thereof. (R. 164-165.)

Of this requested relief the only relief granted in

the federal court action, however, was an injunction

against maintaining or attempting to maintain or en-

force any suspension or forfeiture of the corporate

powers, rights or privileges of the Birch Securities

Co., from prosecuting or threatening to prosecute any

officer, director or agent of said company for or on

account of the exercise of said powers, rights or

privileges and from in any manner preventing or at-

tempting to prevent the company from commencing,

sian ee

4

maintaining or defending any action in any court of

the State of California. (R. 108-109.) In essence,

therefore, the injunction was against enforcing any

suspension of the company.

The federal court first granted a preliminary in-

junction but only, as we have mentioned, to the ex-

tent of enjoining the enforcement of any suspension

of the company. This preliminary injunction was ac-

companied by a memorandum opinion in the course

of which it was stated in effect (39 Fed. Supp. 358,

366) that an injunction against maintaining or at-

tempting to maintain any suspension or forfeiture of

the charter of the Birch Securities Co. would enable

that company to defend this state court action with-

out fear of incurring any penalties by so doing. The

federal court expressly refused to enjoin or in any

way interfere with this state court action.

Thereafter a stipulation was entered into in the fed-

eral court action between the plaintiff Birch and cer-

tain of the defendants in that action. (R. 139.) The

stipulation stated that the federal court had issued a

temporary injunction against the defendant state and

county officers restraining them from maintaining,

enforcing or giving effect to the suspension of the

corporation, and had denied all other relief. The

stipulation went on to provide that findings of fact and

conclusions of law might be made based upon the

allegations of the plaintiff’s complaint in that suit and

final judgment entered thereon in the plaintiff’s favor

and against the said defendants, the same as if said

defendants had defaulted at the trial of the action

a ,

upon the merits and the same as if the plaintiff had

introduced evidence in support of each allegation,

provided, however, that the relief granted the plaintiff

in such action should be in conformity with the opin-

ion of the court theretofore filed therein. (R. 140.)

Subsequent to the execution of the stipulation, judg-

ment (R. 107) was entered in the federal court action

against the defendant state officers, and a permanent

injunction was issued of the same limited scope as the

interlocutory, enjoining the enforcement of any sus-

pension of the Birch Securities Co. As in the inter-

locutory injunction, so also in the permanent injune-

tion, the court refrained from in any manner inter-

fering with this state court action.

The petitioner, Birch Securities Co., now contends

that the judgment in the federal court action not

merely enables it to defend this state court action but

is res judicata. )

ARGUMENT.

I. PRINCIPLES SETTLED BY PRIOR DECISIONS OF THIS COURT

CLEARLY ESTABLISH THAT THE FEDERAL COURT JUDG-

MENT RELIED UPON BY PETITIONER IS NOT A BAR TO

THIS ACTION.

A. The plaintiff in this state court action was not a party to

the federal court action.

A complete answer to petitioner’s contention re-

garding res judicata is found in the circumstance that

whereas the State is the plaintiff in the present ac-

tion and is suing in the exercise of its sovereign power

6

to collect taxes,* ‘t was not and could not be made a

party to the federal court action. Hence the parties

to the federal court case were not the same as the

parties to this suit.

The State could not be made a party to the federal

court case and could not be bound by any of the

proceedings therein because a state cannot without its

consent be sued by a private party in a federal court.

In other words, a private party cannot make a state

a party defendant without its consent in a federal

court action. Federal courts do not have jurisdiction

to entertain such suits. Duhne v. New Jersey, 251

U.S. 311, 313, 314.

In Duhne v. New Jersey this court observes at page

313 that ‘‘it has been long since settled that the whole

sum of judicial power granted by the Constitution to

the United States does not embrace the authority to

entertain a suit brought by a citizen against his own

state without its consent * * *’’ (Citing cases.) And

at page 314 this court refers to ‘‘the rule now so well

settled as to be elementary, that the federal jurisdic-

tion does not embrace the power to entertain a suit

brought against a state without its consent * * *”’

Not only has the State not consented to be sued

in an injunction proceeding in a federal court, but

on the contrary the Legislature very clearly has ex-

pressed itself to the effect that the State does not

consent to such a suit. Disapproval of injunction pro-

*Cf. People v. Bruce, C.C.A. 9, 129 F2d 421, 423, cert. den. 317

U.S. 678.

—

7

ceedings is expressed in Section 30 of the Bank and

Corporation Franchise Tax Act.*

The plaintiff in the federal court action, therefore,

was unable to bring the action against the State be-

cause the Legislature not only had not consented that

the State be sued, but had affirmatively declared that

the State does not consent to such a suit. In other

words, the State expressly refused to be a party in

such a suit. Accordingly, the plaintiff in the federal

court brought the action against certain state officers.

Such a suit could be maintained only on the basis

that it was a personal suit against the defendants

therein as individuals and was not a suit against the

State (cf. Ex parte La Prade, 289 U. S. 444) and it

follows that the State would not be bound by the judg-

ment. Carr v. United States, 98 U. S. 433.

The State is entitled to its day in court and it

eannot be compelled to litigate its rights in a federal

court. The petitioner now is attempting to set up

as res judicata against the State a judgment rendered

in an action to which the State was not a party, a

judgment which the federal court would have had no

jurisdiction to render against the State if an attempt

had been made to make the State a party.

A state cannot be forced by a private party into

litigating its rights in a federal court, and it cannot

be precluded by proceedings to which it was not a

party.

*Calif. Stat. 1939, ch. 1050, p. 2968, see. 30; 3 Deering’s Gen.

Laws, Act 8488, sec. 30, quoted in the appendix to this brief. A

similar provision is contained in art. XIII, see. 15, of the Con-

stitution of California and is quoted in the appendix to this brief.

saan sient oat. ee

8

The State was not a party to the federal court ac-

tion and there is no basis of privity which would bind

the State. The defendants in the federal court action

were not authorized to represent the State in that ac-

tion (as we have seen the State has not consented to

such an action but on the contrary has expressly de-

clared a policy against such an action), and the State

is not claiming rights derived from anyone who was a

party to that action, but rather is suing in the exercise

of its sovereign power to collect taxes. Cases such as

Carr v. United States, 98 U.S. 433, and Stone v. In-

terstate Natural Gas Co., 103 Fed. (2d) 544, affirmed

308 U. S. 522, which we shall discuss later in the brief,

clearly demonstrate that the State was neither a party

nor in privity with anyone who was a party to the

federal court action.

The statement is made at page 12 of the petition

that the decision of this Court in Sunshine Anthracite

Coal Co. v. Adkins, 310 U.S. 381, 402, 403, relates to

a state of facts almost identical to those in the within

action. On the contrary, there is a clear point of dis-

tinction between the two cases. This Court said, at

page 403 of the opinion in the Adkins case, that:

‘“* * * The crucial point is whether or not in the

earlier litigation the representative of the United

States had authority to represent its interests in

a final adjudication of the issue in controversy

* #% #9?

The vital point of distinction is that in the Adkins

ease the representative of the United States had au-

thority to represent its interests in the earlier litiga-

saa =

tion whereas here the defendants in the federal in-

junction proceedings did not have authority to repre-

sent the interests of the State of California in those

proceedings. As we have seen, the State not only did

not authorize representation, it expressly refused to

be a participant in such proceedings.

Petitioner’s citation of cases, such as the Adkins

case, for the proposition that the State may be bound

by a judgment in an action to which an officer of the

State is a party in his official capacity, with respect to

those matters as to which such officer has authority to

represent the State in the litigation, has no signifi-

cance here. As we have seen, the defendants in the

federal court action were not authorized to represent

the State in that action. A private party cannot make

a state a party defendant without its consent in a

federal court action. The State had not consented to

such suit but had declared a policy against such suits.

Since the defendants in the federal court action were

not authorized to represent the State in that action,

it matters not whether the judgment in that case was

reached by default, stipulation or after contest, the

State is not bound. The acts of the defendants in that

suit do not constitute acts of the State since the de-

fendants were not authorized to act for or represent

the State in that suit. The State was not a party to

the suit nor was there any privity between the State

and the defendants in that suit.

Cromwell v. County of Sac, 94 U.S. 351, 353, cited

by petitioner, held that the judgment in a prior action

10

was not res judicata. Moreover, what was said in that

case concerning the effect of a prior judgment between

the same parties or those in privity with them is in-

applicable here because the State of California was

not a party or in privity with anyone who was a party

to the federal court action.

The principle that a state may not without its con-

sent be sued by a private party in a federal court

would be nullified if suit could be brought against

state officers in a manner to which the state did not

consent, and if the judgment rendered in such action

were treated as binding upon the state. It would

mean that a state would be concluded as to its rights

by an action in a federal court to which it had not

consented. Such is not the law. As we have seen,

a state cannot be forced by a private person into

litigating a matter in a federal court. A _ private

person cannot against the state’s consent prosecute

a federal court action to a judgment which will be

binding upon the state.

For the reasons we have stated, a judgment ren-

dered against state or federal officers in an action to

which the state or United States does not consent is

not res judicata in a suit brought by the state or

United States. Thus, for example, it has been held

that a judgment rendered against officers of the

United States in an action in which the United States

did not consent to be sued, was not res judicata in a

subsequent suit brought by the United States regard-

ing the same matter. Carr v. United States, 98 U. S.

ll

The case of Stone v. Interstate Natural Gas Co.,

C.C.A. 5, 103 Fed. (2d) 544, affirmed per curiam in

308 U. S. 522, shows that the federal court judgment

relied upon by defendant is not res judicata because

the state could not be made a party to the federal

court action without its consent and was not a party

thereto. In the Interstate Natural Gas Co. case the

contention was made by a taxpayer that a decree of a

three-judge federal court enjoining certain tax of-

ficers of the State of Mississippi from collecting un-

der a tax statute of that state was res judicata in a

subsequent action brought by the taxpayer, Interstate

Natural Gas Co., against A. H. Stone, Commissioner

of Franchise Tax, to recover taxes collected by him

from the company under a similar statute. Although

the three-judge case was decided under a different

statute from the one involved in the subsequent suit,

and although Stone was not one of the tax officials

named as a party in the three-judge suit, nevertheless

one of the alternative grounds of decision stated by

the Cireuit Court of Appeals was founded upon the

reasoning that although an injunction was issued

against state officials in the three-judge suit, the State

of Mississippi was not a party to the three-judge case

and was not bound by the judgment in that case. The

Cireuit Court of Appeals stated at page 547:

‘*We conclude also that the judgment in the three-

judge case of Dec. 4, 1931, is no estoppel. It does

not appear to be between the same parties. The

Gas Company is plaintiff in both suits but Stone,

the present defendant who is sought to be bound

by the former judgment, was not a party to it.

a

12

This suit against him is a personal suit and the

judgment rendered is a personal judgment. Ex-

ecution on it would run against him. The refer-

ence to him as Commissioner is descriptio per-

sonae. Smietanka, Collector, v. Indiana Steel Co.,

257 U. S. 1, 42 S. Ct. 1, 66 L. Ed. 99. The three-

judge suit was against other individuals, who

though officers were enjoined from what they

were about to do on the ground that the law of

their office did not justify them. The state of

Mississippi for whom they tried to act was not a

party, though her Attorney General was among

those sued. She could not under the Eleventh

Amendment, U. S. C. A. Const. have been sued.

How officers who act for their government under

an unconstitutional authority may be sued, and

yet their government not be bound by the judg-

ments, is fully explained in United States v. Lee,

106 U. S. 196, 222, 1 S. Ct. 240, 27 L. Ed. 171. See

also Sage v. United States, 250 U.S. 33, 39 S. Ct.

415, 63 L. Ed. 828. Hassey v. Crane, 222 U. S.

88, 93, 32 S. Ct. 33,56 L. Ed. 106. Carr v. United

States, 98 U. S. 483, 25 L. Ed. 209. Stanley v.

Schwalby, 162 U. S. 255, 16 S. Ct. 754, 40 L. Ed.

960. Stone can now justify hts collection of these

taxes as fully as the State of Mississipm could do

if she were now sued; and as she is not bound by

the former, judgment against her officers, he is

not.’ (Emphasis added.)

We think it is evident from the authorities we have

cited that the State was not a party to the federal

court action and that the judgment therein is not res

judicata in the present action.

13

The only cases cited by petitioner on the res

judicata point, Sunshine Anthracite Coal Co. v.

Adkins, 310 U. S. 381, 402, 403, and Cromwell v.

County of Sac, 94 U.S. 351, 353, are inapplicable

here for reasons already stated in this brief. On

the other hand, petitioner makes no effort to meet

or discuss the authorities relied upon by the District

Court of Appeal in reaching its decision and does not

so much as refer to those authorities except for a

casual remark, such as appears at page 14 of the peti-

tion, to the effect that ‘It would seem that the case

of Stone v. Interstate Natural Gas Company, 103 F.

(2d) 544, cited in the opinion of the District Court of

Appeal, as well as each of the other cases therein

cited, have no reiationship to the facts of, or to the

principles of law involved in, the present action”’.

The failure of petitioner to come forward with any

adequate answer to the well settled principles an-

nounced in the decisions relied upon by the District

Court of Appeal demonstrates that no substantial

question is presented and that the petition should be

denied.

B. The judgment in the federal court action would not be

conclusive of the present action even if the State had been

& party to the federal court action.

Absence of the State from the federal court action

provides, we believe, a complete answer to petitioner’s

contention of res judicata.

We feel it is pertinent to observe, however, that

petitioner is seeking to give the action of the federal

14

court an effect beyond that which would be war-

ranted even if the State had been a party to the fed-

eral court action which, of course, it was not. While

the plaintiff Birch in the federal court sought to

enjoin this state court action to collect the tax, the

federal court expressly refused to do so but enjoined

the defendant state officers from enforcing any sus-

pension against the Birch Securities Co. in order that

it might defend in this action.

As we previously have mentioned, the federal court

first granted a preliminary injunction, but only to

the extent of enjoining the enforcement of any suspen-

sion of the company. This preliminary injunction

was accompanied by a memorandum opinion in the

course of which it was stated in effect (at page 366

of 39 Fed. Supp.) that an injunction against main-

taining or attempting to maintain any suspension or

forfeiture of the charter of the Birch Securities Co.

would enable that company to defend this state court

action without fear of incurring any penalties by so

doing. The parties in the federal court action stipu-

lated that the relief granted in the final judgment

should be in conformity with the opinion of the court.

Although it was the purpose of the federal court

judgment to permit the Birch Securities Co. to defend

in this state court action, the contention now is made

that because of that judgment there is nothing left to

litigate in the state court action. We respectfully

submit that there would be no merit in petitioner’s

claim of res judicata even if the State had been a

al

15

party to the federal court action. However, as we

have pointed out, the State was not a party to the

federal court action and the judgment in that action

cannot in any event be res judicata here.

CONCLUSION.

We respectfully submit that the petition for a writ

of certiorari should be denied.

Dated, San Francisco, California,

March 9, 1949.

Respectfully submitted,

Frep N. Howser,

Attorney General of the State of California,

JAMES E. SaBIne,

Deputy Attorney General of the State of California,

Attorneys for Respondent.

(Appendix Follows.)

Appendix

Constitution of California, Article XX, Sec-

tion 6:

“Suits may be brought against the State in such

manner and in such courts as shall be directed by

law 9?

Constitution of Californa, Article XIII, Sec-

tion 15:

_ “* * * No injunction or writ of mandate or other

| legal or equitable pre <ss shall ever issue in any suit,

_ action or proceeding in any court against this State,

- or any officer thereof, to prevent or enjoin the collec-

tion of any tax levied under the provisions of this

| article; but after payment thereof action may be

' maintained to recover, with interest, in such manner

: as may be provided by law, any tax claimed to have

' been illegally collected.”’

Bank and Corporation Franchise Tax Act,

Section 30:

‘No injunction or writ of mandate or other legal

© or equitable process shall issue in any suit, action or

' proceeding in any court against this State or against

any officer thereof to prevent or enjoin the assess-

' ment or collection of any tax under this act but any

| taxpayer claiming that the tax computed and levied

- against it pursuant to section 25 of this act is void

> in whole or in part may bring an action against the

' commissioner for the recovery of the whole or any

| part of the amount paid.

* * * * * * *

Within ninety days after the mailing of the notice —

of the commissioner’s action upon any refund claim, or —

in case of an appeal to the State Board of Equalization —

from the disallowance of any refund claim, within —

ninety days after the mailing of the notice of the

board’s determination of the appeal, the taxpayer may —

bring an action against the commissioner on the —

grounds set forth in such claim for the recovery of 4

the whole or any part of the amount claimed as an ©

overpayment. 8

* * * * * 7 e%

Whenever under the provisions of this section an ~

action is commenced against the commissioner, a copy

of the complaint and the summons must be served

upon the commissioner or assistant commissioner. At

the time the commissioner demurs or answers, he may a

demand that the action be tried in the superior court 3

of the county of Sacramento, which demand must be |

granted. The Attorney General or the counsel for the ;

commissioner must defend the action. The provisions ©

of the Code of Civil Procedure, relating to pleadings, ©

proofs, trials, and appeals are applicable to the ma

ceedings herein provided for. * * *”’ '

(California Statutes 1939, Ch. 1050, p. 2968,

sec. 30; 3 Deering’s Gen. Laws, Act 8488,

sec. 30.) :