CalPERS Files Amicus Brief in San Bernardino Tax Dispute

Agencies supported by the brief include the State Department of Finance and the Office of the State Controller. The heads of both agencies are listed as defendant-appellants in a suit filed by the city in the United States Bankruptcy Court for the Central District of California (Case No. 6:13-ap-01127-MJ).

In short, the suit is a counter measure aimed at preventing the agencies from carrying out threats to withhold sales and use taxes due to the city should its redevelopment successor agency prove unable to pay more than $15 million in unencumbered low- and moderate-income housing funds, case documents show. 

According to the text of the amicus brief, CalPERS lawyers believe features of the 11th Amendment to the U.S. Constitution imply California’s bankruptcy court inappropriately relied on precedent set by the case Central Virginia Community College vs. Katz (546 U.S. 356, 2007) to determine that the state was not immune from such a suit.

CalPERS lawyers also argue the case represents the first time that a court has determined that a state agency can be subject to suit from a group it has legal authority over against its will in federal court during Chapter 9 bankruptcy proceedings.

Here’s how the brief makes the argument: “Katz’s limited exception to sovereign immunity does not apply. A world of difference exists between a Chapter 11 adversary proceeding brought by a private party seeking to set aside preferential transfers to a State (Katz), and the instant suit filed by a creature of the State on behalf of a separate and distinct legal entity (the successor agency) seeking to require its master to turnover tax revenues that have never been in the possession of that separate entity. The bankruptcy court failed to acknowledge this distinction, instead labeling the State’s refusal to turnover tax revenues to a non-party debtor as a mere collection action.”

The brief also points to Section 903 of the U.S. Bankruptcy Code, which stipulates the following: “Any State law that governs municipalities or regulates the way in which they may conduct their affairs controls in all cases. Likewise, any State agency that has been given control over any of the affairs of a municipality will continue to control the municipality in the same way, in spite of a Chapter IX petition.”

One other key feature to the brief is that CalPERS itself plans to file an appeal hoping to stay the city’s bankruptcy proceedings. In that appeal, CalPERS lawyers said they will contest that the city did not consider alternatives to filing for Chapter 9 protection, did not file its bankruptcy petition in good faith, and has not provided reliable financial information.