Case Number: BC525141 Hearing Date: February 13, 2015 Dept: 58
JUDGE ROLF M. TREU
DEPARTMENT 58
________________________________________
Hearing Date: Friday, February 13, 2015
Calendar No: 7
Case Name: Extra Express (Cerritos), Inc. v. Employment Development Department
Case No.: BC525141
Motion: (1) Motion for Summary Judgment
(2) Motion for Leave to Amend Complaint
Moving Party: Plaintiff/Cross-Defendant Extra Express (Cerritos), Inc.
Responding Party: Defendant/Cross-Complainant Employment Development Department
Notice: OK

Tentative Ruling: (1) Motion for summary judgment is denied.

(2) Motion for leave to amend complaint is denied.
________________________________________

Background –
On 10/18/13, Plaintiff Extra Express (Cerritos), Inc. (“EXE”) filed this action against Defendant Employment Development Department (“EDD”) to recover unemployment insurance contributions, taxes, and penalties assessed and collected by EDD. The Complaint asserted causes of action for (1) recovery of unlawfully collected contributions, interest and penalties; (2) injunctive relief; (3) declaratory relief; and (4) attorneys’ fees and costs.

On 3/10/14, the Court sustained EDD’s demurrer to the 2nd and 3rd COAs without leave to amend. On 3/24/14, EDD filed a cross-complaint against EXE alleging that EXE has a tax liability for failure to file quarterly returns and/or reports. After the Court sustained EXE’s demurrer with leave to amend, EDD filed a First Amended Cross-Complaint on 6/30/14. On 9/30/14, the Court denied EXE’s motion for summary judgment as to the 1st COA in the Complaint and overruled EXE’s demurrer as to the FACC. Trial is set for 4/20/15; FSC for 4/9/15.

Motion for Summary Judgment –
EXE moves for summary judgment as to the FACC.

1. Undisputed Facts
On 7/1/08, EDD issued an assessment to Expressshipit.com (“ESC”) for the period 1/1/04 to 10/31/04 (“Assessment No. 1”). ¶ 1. On 7/22/08, EDD issued an assessment to EXE for the period 11/1/04 to 3/31/08 (“Assessment No. 2”). ¶ 2. On 11/24/08, EDD issued an assessment to ESC for the period 1/1/04 to 6/30/04 (“Assessment No. 3”). ¶ 3. On 11/26/08, EDD issued an assessment to EXE for multiple periods ending 6/20/05, 9/30/05, 12/31/05, 6/30/06, 930/06, 12/31/06, and 9/30/07 (“Assessment No. 4”). ¶ 4. On 6/10/11, EDD mailed a statement of account to EXE for the final amount of taxes assessed by the assessments for $589,178.01: on 6/18/11, EXE paid this amount. ¶¶ 5-6.

On 8/14/08, ESC and EXE submitted petitions for reassessment of Assessment Nos. 1 and 2 to the California Unemployment Insurance Appeals Board (“CUIAB”). ¶¶ 7-8. On 12/10/08, ESC and EXE submitted petitions for reassessment of Assessment Nos. 3 and 4 to the CUIAB. ¶¶ 9-10. The cases were consolidated and heard before Administrative Law Judge Oleh Saciuk (¶ 11): on 6/14/12, ALJ Saciuk cancelled Assessment Nos. 1 and 3 and partially cancelled Assessment No. 2 as to the 11/1/04 to 6/30/05 period and Assessment No. 4 as to the 6/30/05 to 9/30/05 period (¶¶ 12-15). On 7/13/12, EXE appealed the decisions partially granting Assessment Nos. 2 and 4 (¶¶ 17-18) and EDD appealed all assessments (¶18): on 7/23/13, the CUIAB affirmed ALJ Saciuk’s decisions (¶¶ 19-21). EDD did not seek judicial review of the CUIAB decisions (¶ 22) and subsequently refunded EXE on 10/24/13 and 11/21/13 (¶¶ 23-26).

On 10/18/13, EXE filed this action for refund. ¶ 27. On 6/30/14, EDD filed the FACC which seeks to recover tax liabilities for the periods of the cancelled and partially cancelled assessments. ¶¶ 30-31.

2. Offset Claim
a. Northrop Aircraft
EXE argues that the cancelled assessments can no longer give rise to tax liability, relying principally on Northrop Aircraft v. Cal. Employment Stabilization Comm’n (1948) 32 Cal.2d 872. The lynchpin of EXE’s motion is the Supreme Court’s statement: “there is no doctrine of recoupment or of permissible redetermination of the tax liability which will bestow power on the taxing body to make an assessment when the exercise of that power in respect to a particular tax has been terminated by statutory provision.” Northrop Aircraft, 32 Cal.2d at 881. Northrop Aircraft concerned the erroneous determination of the unemployment insurance contribution rate for a given year, which the unemployment commission sought to amend during the year (id. at 874-75): the Supreme Court concluded that the amendment was a nullity because the unemployment commission failed to comply with the statutory process for making an amendment (id. at 877-78, 881).

No such similar facts are presented in this action. Indeed, the Court of Appeal has noted that Northrop Aircraft addressed a challenge to the illegality of an assessment that was improper from its beginning: this was distinguished from a refund action in which tax liability may be recomputed after the statute of limitations had lapsed. Owens-Corning Fiberglas Corp. v. State Bd. of Equalization (1974) 39 Cal.App.3d 532, 536-37; see also John Breuner Co. v. Perluss (1963) 220 Cal.App.2d 163, 167 (permitting the tax rate to change in a protest proceeding where the plaintiff sought an adjustment of its account).

EXE argues that the cancelled assessments are a nullity because EDD failed to seek judicial review of the CUIAB decisions affirming their cancellation pursuant to Unemployment Ins. Code § 410. As stated in the Court’s 6/4/14 ruling on EXE’s demurrer, EDD has not sought judicial review of the CUIAB’s decisions and instead properly seeks offset in response to EXE’s refund action (see Pope Estate Co. v. Johnson (1941) 43 Cal.App.2d 170, 173). As stated in the Court’s 9/30/14 ruling on EXE’s demurrer, the Court has rejected EXE’s argument that the CUIAB decisions affirming the cancellation of the assessments are final and binding to preclude EDD’s offset claim.

Therefore, Northrop Aircraft is inapposite.

b. Affirmative Defense
EXE argues that EDD has failed to assert the offset claim as an affirmative defense. Although the offset claim has been discussed as an affirmative defense (see, e.g., Title Ins. Co., 4 Cal.4th at 731), such a discussion really concerned the nature of the offset claim raising new matters. No case has concluded that the offset claim may only be raised as an affirmative defense. Indeed, because the offset claim may result in a greater liability than before (see generally John Breuner Co., 220 Cal.App.2d at 166), it can also be properly asserted in a cross-complaint (Tomales Bay Oyster Corp. v. Superior Court (1950) 35 Cal.2d 389, 393).

c. “Period in Question”
EXE argues that it is not seeking a claim for refund for the periods of the cancelled assessments. EDD argues that this is contrary to the allegations of the Complaint. Complaint ¶ 49 (requesting all payroll taxes unlawfully assessed and collected pursuant to the four assessments based on an erroneous employee determination).

EDD’s offset claim is “not confined to the isolated transactions on which the taxpayer’s refund claim is based . . . ‘[a] refund case throws open the taxpayer’s entire tax liability for the period in question, and the Board may raise issues unrelated to the basis or theory on which the taxpayer is seeking a refund in order to defeat the claim.’” Sprint Communications Co. v. State Bd. of Equalization (1995) 40 Cal.App.4th 1254 (quoting and adding italics Title Ins. Co. v. State Bd. of Equalization (1992) 4 Cal.4th 715, 732 (citations omitted)).

EXE emphasizes that its refund action cannot logically be interpreted to include the cancelled assessments, inasmuch as EDD conceded that it would refund such portions paid prior to EXE’s refund action being filed (see Opp’n Sep. Statement ¶¶ 23-25) and in fact refunded such portions (see id. ¶ 26). This argument appears to have merit because it raises the following reasonable question: why would EXE’s refund action cover the cancelled periods in the assessments which portions EDD indicated would be refunded and was in fact refunded?

The answer turns on the definition of “period in question.” EXE’s argument is that the “period in question” consists only of the periods for which EXE seeks a refund, i.e., those periods in which the assessments were not cancelled. EDD appears to argue that the “period in question” is governed by all tax years covered in the assessments which are the subject of Plaintiff’s refund action. However, case law is unanimous in defining the “period in question” as the whole tax year. Pope Estate Co., 43 Cal.App.2d at 174; Sprint Communications Co., 40 Cal.App.4th at 1260. See also Northrop Aircraft, 32 Cal.2d at 877-78 (addressing the “rating period”). It appears that the periods in the assessments were based on quarters, and although neither party has explained how a tax year is calculated for unemployment insurance purposes, the Court will assume that the tax year is calculated based on a calendar year.

Even if EXE’s refund claim concerns only those periods in which taxes were assessed against it (i.e., those periods of the assessments that were not cancelled), these periods consist of 7/1/05 to 3/31/08 as to Assessment No. 2 and 10/1/05 to 9/30/07 as to Assessment No. 4. This would result in EDD properly seeking offsets during the 2005 tax year despite EXE only challenging certain quarters of the 2005 tax year (Sprint Communications Co., 40 Cal.App.4th at 1263-64), although precluding EDD from seeking taxes and penalties for the 2004 tax year. See FACC ¶¶ 27-28 (seeking taxes and penalties for 1/1/04 to 6/30/05). To the extent EDD argues that the entirety of its offset claim is properly brought pursuant to Unemployment Ins. Code § 1852, the Court notes that there is no evidence of any assessments of delinquent contributions or taxes in the 2004 tax year.

3. Ruling
Consistent with the Court’s discussion above, the motion for summary judgment is denied. EXE’s arguments only address a portion of EDD’s claim in the FACC. Therefore, summary judgment is not warranted.

Motion for Leave to File First Amended Complaint –
On 11/26/14, EXE filed a motion for leave to file a First Amended Complaint which would omit the 2nd and 3rd COAs and make explicit that EXE’s refund claim is for the period 7/1/05 to 3/31/08. Ott Decl. ¶ 9. EXE submits that this motion was filed because of the Court’s 8/4/14 ruling on its demurrer to the FACC, where the Court could not determine at the pleading stage whether EXE’s action sought refunds for tax years in which EDD seeks offsets. Id. ¶ 5.

“In furtherance of justice,” the Court may permit amendment of any pleading on such terms as may be proper. See CCP §§ 473(a), 576. While the Court has discretion to permit or deny amendment of a complaint, denial of leave to amend is rare. Armenta ex rel. City of Burbank v. Mueller Co. (2006) 142 Cal.App.4th 636, 642. The Court may deny leave to amend after long, inexcusable delay, where there is prejudice, such as where new issues would require further discovery. Atkinson v. Elk Corp. (2003) 109 Cal.App.4th 739, 761. Absent prejudice, delay alone is not sufficient to deny leave to amend. See Higgins v. Del Faro (1981) 123 Cal.App.3d 558, 564-65.

The Court concludes that this is the rare case where denial of leave to amend is warranted. As to the 2nd and 3rd COAs, the Court has already sustained EDD’s demurrer without leave to amend. As to clarifying the “period in question,” the Court’s discussion of EXE’s motion for summary judgment evidences that no clarification is necessary. Indeed, whatever ambiguity the Complaint contained as to the “period in question,” EDD has filed its claim and asserted arguments based on the Complaint. Under these circumstances, the Court declines to grant leave to amend.