California Franchise Tax Board v. Hyatt, Gilbert, et al. (04/23/2003)

Questions presented: Did the Nevada Supreme Court impermissibly interfere with California's capacity to fulfill its sovereign responsibilities, in derogation of art. IV, sec. 1 of the U.S. Constitution, by refusing to give full faith and credit to California law (Government Code section 860.2) in a suit brought against California for the torts of invasion of privacy, outrage, abuse of process, and fraud alleged to have occurred in the course of California's administrative efforts to determine a former resident's liability for California personal income tax?

BY ADRIENNE KOVALSKY, MEDILL NEWS SERVICE

Gil Hyatt is an inventor. Some of his inventions have resulted in patents, including a computer microprocessor chip and a computer data storage system. One of his creations, made while living in California, resulted in a patent for which he was due $40 million. In 1991, he moved from California to Nevada and received payment after the move.

Nevada does not collect income tax. After moving to Nevada, Hyatt was audited by the California Franchise Tax Board, which claims he underpaid California state income taxes in 1991 and 1992.

Unhappy with the fact that he was being audited by California while he was living in Nevada, as well as the way the audit was being carried out, Hyatt filed suit against the California Franchise Tax Board in a Nevada district court, claiming several intentional torts and one negligent act. Hyatt felt that during the assessment, he was mistreated by the tax board several times intentionally and once accidentally.

Prior to trial, the district court ruled that all of the tax boards documents were to be released to Hyatt. The tax board also filed a motion for summary judgment or dismissal because the suit was filed in a Nevada court, which the tax board claimed did not have jurisdiction because they were a California agency. The district court denied the motion.

The tax board appealed these rulings to the Nevada Supreme Court. No decision was made by the district court on the merits.

The Nevada Supreme Courts decision, filed April 4, 2002, tackled the documents and summary judgment issues separately.

The first issue at hand was whether Nevada courts had jurisdiction over a California-based agency. Arguments the Nevada Supreme Court used to establish jurisdiction included the following: the 11th Amendment protects California in federal, not state, courts; and Nevada is not required to apply the Full Faith and Credit clause (that states should respect each others laws) if it impinged on Nevada public policy, in this case, protection of the best interests of its citizens.

Next, Nevada Supreme Court addressed whether it should exercise its jurisdiction regarding the negligence and tort claims based on the doctrine of comity, in which states respect each others laws and decisions.

The Nevada court decided that because Nevada agencies are given immunity in carrying out investigations, which was the issue in the negligence claim, the states interests were similar and the tax board was granted equal immunity. It overturned the district courts ruling and granted the motion for summary judgment regarding the negligence claim.

Regarding the matter of the intentional tort claims, the Nevada Supreme Court upheld the district courts ruling, or denial for motion for summary judgment or dismissal. In contrast to a negligence act, "Nevada does not allow its agencies to claim immunity of discretionary acts taken in bad faith, or for intentional torts committed in the course and scope of employment," the majority wrote. Hyatt claimed the audit was carried out in bad faith and employees committed intentional torts during the investigation.

"We believe that greater weight is to be accorded Nevada's interest in protecting its citizens from injurious intentional torts and bad faith acts committed by sister states government employees, than California's policy favoring complete immunity for its taxation agency," the majority wrote.

Having established that the case for intentional torts would still be heard by the district court, the Nevada Supreme Court addressed the order requiring a release of all documents. The tax board did not demonstrate the documents could be classified as attorney-client correspondence or that the documents had been kept confidential within the agency, except in the case of a single memorandum recording phone correspondence arguably acting in their roles as attorney. Therefore, the Nevada Supreme Court affirmed the district court ruling that all the documents must be release except for the one memorandum.

Judge Robert E. Rose dissented in part, arguing that he would not have granted California immunity for alleged negligence. He cited the 1983 Nevada case, Mianecki v. District Court, in which the Nevada did not find it in the best interest of its citizens to recognize Wisconsins immunity.

"Based on this very similar case, I would not grant comity to California, and I would extend immunity to the agents of California only to the extent that such immunity is given them by Nevada law," he wrote. "Denying a grant of comity is not uncommon, as California has denied comity to the state of Nevada in years past."

This last statement stems from the 1979 U.S. Supreme Court opinion in Nevada v. Hall, in which the State of Nevada was sued in California courts. The majority ruled Nevada was to be held accountable for an auto accident involving a Nevada state employee on official business in California.

On Oct. 15, 2002, the U.S. Supreme Court granted certiorari in the case. Both the Multistate Tax Commission and Oregon, et al., filed friend of the court briefs.

On April 23, 2003, the Court unanimously affirmed, holding for Hyatt that the Constitution's Full Faith and Credit Clause didn't require Nevada to abide by California's statutes providing its tax collection agency with immunity from suit.

In writing the Court's opinion, Justice Sandra Day O'Connor noted that the the Clause does not require a state to substitute the statutes of other states for its own laws concerning subject matters on which it is competent to legislate so long as a state has not exhibited a "policy of hostility to the public Acts" of the sister state.