Case Name: Eileen A. Staats v. City of Palo Alto
Case No.: 2015-1-CV-284956

This is a putative class action alleging that the City of Palo Alto unlawfully imposed a Utility Users Tax (“UUT”) on customers of cellular phone service providers. Before the Court is the City’s motion for leave to file a first amended answer, which plaintiff opposes.

I. Factual and Procedural Background

According to the allegations of the Class Action Complaint (“Complaint”), plaintiff Eileen A. Staats is a resident of the City and a customer of cellular phone service provider(s). (Complaint, ¶ 1.) Plaintiff has paid and continues to pay the City’s UUT to these cellular phone providers. (Ibid.) Plaintiff’s service providers have collected and continue to collect the UUT as part of their normal billing practice on behalf of the City. (Ibid.) Plaintiff alleges that the UUT has been impermissibly assessed and collected from her and similarly situated taxpayers because it does not apply to (1) mobile phone services; (2) services that include long distance telephone service where the charge varies only by time; and (3) charges for “bundled service.” (Id. at ¶¶ 24, 27.)

The Complaint, filed on August 27, 2015, asserts the following causes of action: (1) declaratory relief; (2) money had and received; (3) unjust enrichment; (4) writ of mandamus; (5) illegal imposition of tax invalid under Government Code § 53723; and (6) violation of California Constitution Article XIII, C § 2 (also known as Proposition 218), invalid tax due to failure to obtain voter approval.

The City answered on December 18, 2015. The parties proceeded with discovery, and plaintiff moved to certify the class on May 5, 2017. Before the City filed its opposition papers, the hearing on plaintiff’s motion was vacated on June 23 to allow plaintiff to file additional declarations in support of her motion. Plaintiff filed these declarations on September 7, and the hearing on the motion for class certification was rescheduled for March 16, 2018. Opposition papers are now due on January 19 and reply papers are due on February 20.

On November 9, 2017, counsel for the City asked plaintiff’s counsel to stipulate to the filing of an amended answer adding a defense for equitable setoff. Plaintiff’s counsel did not agree, although counsel continued to communicate. On November 28, the City filed the instant motion for leave to amend, which plaintiff opposes.

II. Legal Standard

Section 473, subdivision (a)(1) of the Code of Civil Procedure states in pertinent part: “[t]he court may … , in its discretion after notice to the adverse party, allow, upon any terms as may be just, an amendment to any pleading or proceeding in other particulars ….” (Atkinson v. Elk Corp. (2003) 109 Cal.App.4th 739, 76.) In considering a motion for leave to amend, “courts are bound to apply a policy of great liberality in permitting amendments to [a pleading] at any stage of the proceedings, up to and including trial.” (Atkinson v. Elk Corp. (2003) 109 Cal.App.4th 739, 761.) “[I]t is a rare case” in which a court will be justified in denying a party leave to amend his pleadings. (Morgan v. Superior Court (Morgan) (1959) 172 Cal.App.2d 527, 530.) “If the motion to amend is timely made and the granting of the motion will not prejudice the opposing party, it is error to refuse permission to amend and where the refusal also results in a party being deprived of the right to assert a meritorious cause of action or a meritorious defense, it is not only error but an abuse of discretion.” (Ibid.) “In particular, liberality should be displayed in allowing amendments to answers, for a defendant denied leave to amend is permanently deprived of a defense.” (Royal Thrift and Loan Co. v. County Escrow, Inc. (2004) 123 Cal.App.4th 24, 41, citation omitted.)

While often paramount, the policy of liberality in permitting amendments should be applied only where no unfair prejudice is shown to the adverse party. (Atkinson v. Elk Corp., supra, 109 Cal.App.4th at p. 761.) Where an amendment would require substantial delay in the trial date and substantial additional discovery; would change not only the specific facts and causes of action pled, but the tenor and complexity of the pleading as a whole; and where no reason for the delay in seeking leave to amend is given, refusal of leave to amend is not an abuse of discretion. (See Magpali v. Farmers Group (1996) 48 Cal.App.4th 471, 486-488 [affirming denial of request to amend made during trial].) “Even if a good amendment is proposed in proper form, unwarranted delay in presenting it may – of itself – be a valid reason for denial,” which “may rest upon the element of lack of diligence in offering the amendment after knowledge of the facts, or the effect of the delay on the adverse party.” (Roemer v. Retail Credit Co. (1975) 44 Cal.App.3d 926, 939-940 [trial court appropriately denied request to amend answer made during trial]; see also P & D Consultants, Inc. v. City of Carlsbad (2010) 190 Cal.App.4th 1332, 1345 [plaintiff did not seek leave to amend until after the trial readiness conference, amendment would require additional discovery and might prompt a demurrer or other pretrial motion, and plaintiff’s explanation for the delay was inadequate].)

III. Analysis

The City provides a declaration by counsel in support of its motion. Counsel explains that the City has learned that some carriers may be collecting less telephone users tax than they are lawfully required to collect from Palo Alto residents. This provides a basis for the equitable setoff defense that the City seeks to add to its answer. (See Sprint Communications Co. v. State Bd. of Equalization (1995) 40 Cal.App.4th 1254, 1259 [the equitable principles underlying a tax refund action limit recovery to the difference between the tax actually paid and that which properly should have been exacted, entitling the government to set off any underpayments].)

Counsel declares that the City was not aware of any factual basis for claiming that carriers were undercollecting taxes at the time it filed its answer. While it has been largely focused on class discovery, in December of 2016, the City issued deposition subpoenas for the production of business records to five carriers. The carriers responded between January and May of 2017. Some produced a few sample invoices describing the telephone services purchased by their customers and the charges for those services. Using those invoices, the City attempted to determine how the carriers had calculated the amount of telephone users tax they collected from each customer, but it was unable to do so.

When plaintiff moved for class certification in May of 2017, the City again tried to determine how carriers were collecting the tax, to determine whether their collection practices were consistent. After several months of additional research and factual investigation, it concluded that there is a reasonable possibility that some carriers are collecting less tax than they are lawfully required to collect on taxable telephone services. It accordingly seeks leave to amend its answer. The City notes that it “is bringing this motion now, before its opposition of Plaintiff’s motion for class certification is due, so that if equitable setoff becomes a topic of discussion in the certification briefing, Plaintiff will have an opportunity to address the issue in her reply.”

Plaintiff contends that she will be prejudiced by the proposed amendment because her class certification motion is already on file. She notes that she did not have an opportunity to conduct discovery on the defense prior to filing her motion. In addition, she argues that the proposed defense in a compulsory counterclaim barred by the statute of limitations.

While the Court is sensitive to plaintiff’s concerns regarding her ability to address a new defense raised in opposition to her class certification motion, it does not believe that she will be unduly prejudiced by the proposed amendment. Any need for further discovery or time to respond to the City’s opposition will be accommodated, just as plaintiff’s filing of new evidence was accommodated with a continuance of the class certification hearing and extension of the briefing schedule earlier this year. While it may have been preferable for the City to bring its motion earlier, it does not appear that it realistically could have done so prior the filing of plaintiff’s class certification motion, and the Court finds no evidence of a lengthy or impactful delay. Finally, plaintiff provides little analysis in support of her statute of limitations argument, which the City addresses in detail on reply. The Court will not resolve the statute of limitations issue at this juncture, but plaintiff retains her right to challenge the answer when it is filed.

For these reasons, the City will be permitted to amend its answer.

IV. Conclusion and Order

The motion for leave to amend is GRANTED. The First Amended Answer attached as Exhibit A to the Declaration of Gabriel McWhirter supporting plaintiff’s motion shall be deemed filed as of the date the Court’s order is filed.

The Court will prepare the order.