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HATTEM v. SCHWARZENEGGER

June 15, 2005.

ALEX HATTEM, solely in his capacity as a participant in a pension plan funded by by The Long-term Investment Trust; J.P. MORGAN CHASE BANK, not in its individual capacity but solely in its capacity as trustee for The Long-term Investment Trust; AT&T INVESTMENT MANAGEMENT CORPORATION, not in its individual capacity but solely in its capacity as The Long-Term Investment Trust's "Named Fiduciary," Plaintiffs,
v.
ARNOLD SCHWARZENEGGER, in his Official Capacity as Governor of the State of California; GERALD A. GOLDBERG, in his Official Capacity as Executive Officer of the California Franchise Tax Board; DESMOND PRESS in his Official Capacity as Program Manager of the California Franchise Tax Board, and DOES 1-10, Defendants.



The opinion of the court was delivered by: GERARD E. LYNCH, District Judge

OPINION AND ORDER

Plaintiffs, respectively a participant, a trustee, and a fiduciary in a pension plan funded by The Long-Term Investment Trust, allege that California statutes that tax the unrelated business taxable income of the Trust are preempted by the federal Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq., and seek declaratory and injunctive relief accordingly. The parties now cross-move for summary judgment. Defendants' motion will be granted, and that of plaintiffs will be denied.

  BACKGROUND

  Unless otherwise noted, the following facts are drawn from plaintiffs' Local Rule 56.1 statement of undisputed material facts, submitted in support of their own motion for summary judgment, which defendants have fully incorporated in support of their motion. In 1984, AT&T Corporation established the AT&T Master Pension Trust (amended in 1996 to change its name to The Long Term Investment Trust) ("Trust"), which has as its sole purpose the holding and managing of the assets of various ERISA-covered pension plans established and maintained by AT&T and its affiliates. At all times, the Trust has been, and continues to be, a qualified tax-exempt trust under the Internal Revenue Code ("IRC"), 26 U.S.C. §§ 401(a) and 501(a), subject to federal income taxes only to the extent that it receives unrelated business taxable income ("UBTT"), pursuant to IRC § 511. Since at least 1994, the Trust has earned income from a variety of investments, including limited partnership interests acquired with Trust assets. Since such income from the Trust's limited partnership investments may constitute UBTI as defined in IRC § 512, the Trust files federal tax returns and pays federal taxes as appropriate. Plaintiffs filed the instant complaint on March 11, 2004, challenging a California tax provision that imposes a separate state tax on UBTI earned by trusts otherwise tax-exempt under IRC § 401(a). See Cal. Rev. & Tax § 17651(b) (imposing UBTI tax on trusts exempt under Cal. Rev. & Tax § 17631, which in turn, defines as tax-exempt those organizations, with certain exceptions, exempt under IRC § 401(a)). California's definition of UBTI mirrors that found in IRC § 512, see Cal. Rev. & Tax § 23732. The Trust, accordingly, is subject to California's UBTI tax, and between 1994 and 2002, defendants have collected $6,149,438.29 in taxes on the Trust's UBTI. Plaintiffs contend that any such tax is preempted under ERISA § 514(a), 19 U.S.C. § 1144(a), and that defendants' collection of these taxes is thus illegal. Plaintiffs seek declaratory relief as to the preemption of any California tax law imposing a tax on the Trust's UBTI and enjoining further collection of any such taxes. (Compl. ¶ 31.)*fn1 Both parties now move for summary judgment.

  DISCUSSION

  I. Legal Standard on Summary Judgment

  Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Here, however, there are no material disputed facts, and the case turns purely on issues of statutory interpretation, appropriately adjudicated on a motion for summary judgment. See Metro. Life Ins. Co. v. Bigelow, 283 F.3d 436, 440 (2d Cir. 2002).

  II. Tax Injunction Act

  As a preliminary matter, defendants argue that plaintiffs' suit is barred in its entirety by the Tax Injunction Act ("TIA"), 28 U.S.C. § 1341, which provides that
The district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.
The Supreme Court has held that the purpose of the TIA is "to limit drastically federal district court jurisdiction to interfere with so important a local concern as the collection of taxes," California v. Grace Brethren Church, 457 U.S. 393, 408 (1982), quoting Rosewell v. LaSalle Nat'l Bank, 450 U.S. 503, 522 (1981), and defendants cite to Seventh and Ninth Circuit cases for the proposition that civil suits asserting ERISA preemption are not excepted from the TIA's proscription. See Darne v. Wisconsin, 137 F.3d 484 (7th Cir. 1998); Ashton v. Cory, 780 F.2d 816 (9th Cir. 1986). (D. Mem. 14-17.)

  But defendants too lightly disregard the clear Second Circuit precedent cited by plaintiffs. (P. Reply Mem. 6-8.) For the TIA to operate as a bar to suit, a "plain, speedy and efficient remedy" must be available in state court. In Travelers Ins. Co. v. Cuomo, 14 F.3d 708 (2d Cir. 1993), rev'd on other grounds sub nom. New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995), New York taxpayers sued as plan fiduciaries to enjoin the enforcement of New York statutes imposing surcharges plaintiffs alleged were preempted by ERISA. Id. at 712. Affirming the district court's holding that such an action was not barred by the TIA, the Second Circuit held that no such "plain, speedy and efficient" remedy exists where plaintiff taxpayers sue to enjoin practices violative of ERISA because "Congress has divested state courts of jurisdiction over such claims." Id. at 714, citing ERISA § 502(e), 29 U.S.C. § 1132(e)(1). Although the Supreme Court reversed the Second Circuit's decision, it did so on unrelated grounds, remarking only that "[n]either party challenges [the conclusion of the district court and court of appeals that no `plain, speedy and efficient remedy' exists in state court because ERISA divests state courts of jurisdiction] and we have no occasion to examine it." Travelers Ins. Co., 514 U.S. at 652 n. 4. Accordingly, Travelers Insurance Co. v. Cuomo remains good law in this Circuit for the proposition that no "plain, speedy and efficient" remedy exists in state court for the type of complaint brought here. Accordingly, the TIA does not bar this suit.

  III. ERISA Preemption

  ERISA, enacted in 1974, aims at the comprehensive and exclusive federal regulation of employee welfare and pension benefit plans, see generally Travelers Ins. Co., 514 U.S. at 650-51, and, accordingly, preempts state laws "insofar as they . . . relate to any [ERISA-covered] employee benefit plan." ERISA § 514(a), 29 U.S.C. § 1144(a). In determining which state laws are preempted under § 514(a), courts must apply the starting presumption that "the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress." Travelers Ins. Co., 514 U.S. at 655, quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947) (internal quotation marks omitted). There can be no question that taxation goes to the heart of a state's traditional regulatory power, Case of the State Freight Tax, 82 U.S. (15 Wall.) 232, 272 (1872), and, thus, that plaintiffs bear the "considerable burden of overcoming `the starting presumption that Congress does not intend to supplant state law.'" De Buono v. NYSA-ILA Medical and Clinical Services Fund, 520 U.S. 806, 814 (1997), quoting Travelers Ins. Co., 514 U.S. at 654. On the other hand, this burden is no higher for state tax laws than for any other state law not excepted from ERISA preemption under the savings clause of § 514(b), 29 U.S.C. § 1144(b). De Buono, 520 U.S. at 814 n. 11.

  Although § 514(a) provides that state law is preempted under ERISA where it "relate[s] to any [ERISA-covered] employee benefit plan," the Supreme Court long ago rejected the most literal and expansive reading of the "relate to" language: "If `relate to' were taken to extend to the furthest stretch of its indeterminacy, then for all practical purposes pre-emption would never run its course, for really, universally, relations stop nowhere." Travelers Ins. Co., 514 U.S. at 655 (internal quotation marks and citation omitted). The Supreme Court's consideration of the "relate to" language across several cases has yielded the following two-part inquiry: "A law `relate[s] to' a covered employee benefit plan for purposes of § 514(a) if it [1] has a connection with or [2] reference to such a plan." California Div. of Labor Standards Enforcement v. Dillingham Constr., 519 U.S. 316, 324 (1997) (internal quotation marks and citation omitted).

  In turn, a state law "references" an ERISA-covered plan where "a State's law acts immediately and exclusively upon ERISA plans . . . or where the existence of ERISA plans is essential to the law's operation." Id. at 325. Determining whether a state law "has a connection with" an ERISA-covered plan, by contrast, requires examination of "`the objectives of the ERISA statute as a guide to the scope of the state law that Congress understood would survive,' as well as ? the nature of the effect of the state law on ERISA plans." Id., quoting Travelers Ins. Co., 514 U.S. at 656, 658-59. Where burdens imposed by state law on ERISA plans are so great as to operate as a regulation of the plans themselves, that is, to compel plan structure or choices, state law will be preempted as inconsistent with "the nationally uniform administration of employment benefit plans," Travelers Ins. Co., 514 U.S. at 659, 662, that is a goal of ERISA. State laws which only incidentally affect plan administration in a manner "no different from myriad state laws in areas traditionally subject to local regulation" are not preempted. Id. at 668; see also District of Columbia ...


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