The Nevada Supreme Court released its decision today in Franchise Tax Board of California v. Hyatt. The decision is definitely a win for the FTB as far as damages; however, the Court upheld that the FTB committed fraud against Mr. Hyatt and the damage award for fraud. Overall, some portions of the District Court decision were reversed, other portions were upheld, and still other portions were remanded for more proceedings.
First, for those who want to read more than the summary I’m going to present, I strongly recommend reading the opinion. It’s quite readable though long (it runs 68 pages). That it runs this long for a unanimous decision just goes to show how lengthy this litigation has been.
As for the decision:
1. The Court upheld that the FTB is not immune to lawsuits for intentional torts and bad-faith conduct. Thus, Mr. Hyatt’s lawsuit has basis in law.
2. Most of Mr. Hyatt’s claims fail, though, as a matter of law. There are two exceptions: fraud and intentional infliction of emotional distress (IIED). Those claims are valid as far as law per the Nevada Supreme Court.
3. The Court upheld the jury’s finding that the FTB made false representation to Mr. Hyatt, and upholds the award of $1,085,281.56 of damages.
4. The Court upheld the jury’s finding that the FTB committed IIED. However, the damages were not upheld. This has been remanded back to the District Court for a new trial on the amount of damages committed against Mr. Hyatt.
5. The Court ruled that “Because punitive damages would not be available against a Nevada government entity, we hold, under comity principles, that FTB is immune from punitive damages.” This is a huge win for the FTB, as $250 million of punitive damages were awarded at trial.
6. The FTB should look at this result and realize the egg on their face…but probably won’t.
1. The Court gives an excellent history of the case, and its winding road to the US Supreme Court and back to the District Court for trial. There are still more trials to come besides the remand proceedings. Mr. Hyatt’s appeal of the FTB’s rulings against him has still not been heard in California. Additionally, Mr. Hyatt sued the FTB in federal district court in Sacramento alleging that the FTB has deprived him of his constitutional rights.
The FTB first again challenged whether or not Mr. Hyatt could sue the FTB. There is a legal principle called “comity.” Generally, under comity, “…[A] forum state may give effect to the laws and judicial decisions of another state based in part on deference and respect for the other state, but only so long as the other state’s laws are not contrary to the policies of the forum state.” The FTB loses here:
Because we conclude that discretionary-function immunity under NRS 41.032 does not include intentional torts and bad-faith conduct, a Nevada government agency would not receIve immunity under these circumstances, and thus, we do not extend such immunity to FTB under comity principles, as to do so would be contrary to the policy of this state.
2. The Court then looked at the torts that Mr. Hyatt alleged the FTB committed. “Hyatt brought three invasion of privacy causes of action-intrusion upon seclusion, publicity of private facts, and false light-and additional causes of action for breach of confidential relationship, abuse of process, fraud, and intentional infliction of emotional distress.”
Mr. Hyatt loses the intrusion upon seclusion and publicity of private facts because the facts that the FTB released (his personal confidential information including his social security number) were in the public domain previously.
The FTB next challenges whether there is a “false light” tort. The Nevada Supreme Court says that there is such a tort. The FTB also appeals arguing that Mr. Hyatt did not present any evidence that anyone thought he was a ‘tax cheat’ based on the litigation list published by the FTB or the FTB’s third-party contacts.
The record before us reveals that no evidence presented by Hyatt in the underlying suit supported the jury’s conclusion that FTB portrayed Hyatt in a false light. Because Hyatt has failed to establish a false light claim, we reverse the district court’s judgment on this claim. [citation omitted]
The FTB argues that there cannot be a breach of a confidential relationship because there was no such relationship. The Court looked at what causes a confidential relationship as far as a tort.
But in conducting the audits, FTB was not required to act with Hyatt’s interests in mind; rather, it had a duty to proceed on behalf of the state of California’s interest. Moreover, the parties’ relationship was not akin to a family or business relationship. Hyatt argues for a broad range of relationships that can meet the requirement under Perry, but we reject this contention. Perry does not provide for so expansive a relationship as Hyatt asks us to recognize as sufficient to establish a claim for a breach of confidential relationship. Thus, FTB and Hyatt’s relationship cannot form the basis for a breach of a confidential relationship cause of action, and this cause of action fails as a matter of law. The district court judgment in Hyatt’s favor on this claim is reversed. [citations and footnotes omitted]
The FTB then challenges the abuse of process tort. The FTB asserted that there can’t be abuse of process as the FTB did not use the judicial process. The Court agreed:
Because FTB did not use any legal enforcement process, such as filing a court action, in relation to its demands for information or otherwise during the audits, Hyatt cannot meet the requirements for establishing an abuse of process claim.
3. The next tort was fraud. “To prove a fraud claim, the plaintiff must show that the defendant made a false representation that the defendant knew or believed was false, that the defendant intended to persuade the plaintiff to act or not act based on the representation, and that the plaintiff had reason to rely on the representation and suffered damages.”
The FTB argued that its statements to Mr. Hyatt that it would provide him with “courteous treatment” and keep his information confidential weren’t sufficient basis for a fraud claim, and even if that was sufficient there wasn’t any evidence that such representations were false when made. On the other hand, Mr. Hyatt claims that the FTB misrepresented their promises.
Here, the Court ruled in favor of Mr. Hyatt.
The record before us shows that a reasonable mind could conclude that FTB made specific representations to Hyatt that it intended for Hyatt to rely on, but which it did not intend to fully meet. FTB represented to Hyatt that it would protect his confidential information and treat him courteously. At trial, Hyatt presented evidence that FTB disclosed his social security number and home address to numerous people and entities and that FTB revealed to third parties that Hyatt was being audited.
There’s more here, and I’ll get to this in my views (below, in #6).
The FTB then argued that there should be a limit on the damages based on fraud (based on the FTB being immune from fraud in California and there being certain limits in Nevada), while Mr. Hyatt argues that the FTB isn’t entitled to any caps on damages. The Court agreed with Mr. Hyatt:
This state’s policy interest in providing adequate redress to Nevada citizens is paramount to providing FTB a statutory cap on damages under comity. Therefore, as we conclude that allowing FTB a statutory cap would violate this state’s public policy in this area, comity does not require this court to grant FTB such relief. As this is the only argument FTB raised in regard to the special damages awarded under the fraud cause of action, we affirm the amount of damages awarded for fraud. [citation omitted]
4. The court then looked at intentional infliction of emotional distress (IIED). The FTB argued that because Mr. Hyatt didn’t provide any medical evidence, he can’t claim IIED. Mr. Hyatt disagreed, and that given that he was severely harmed that the proof level can be less than medical records. The Court agreed with Mr. Hyatt, and that this case was on the more extreme end of the scale:
As explained above in discussing the fraud claim, FTB disclosed personal information that it promised to keep confidential and delayed resolution of Hyatt’s protests for 11 years, resulting in a daily interest charge of $8,000. Further, Hyatt presented testimony that the auditor who conducted the majority of his two audits made disparaging remarks about Hyatt and his religion, was determined to impose tax assessments against him, and that FTB fostered an environment in which the imposition of tax assessments was the objective whenever an audit was undertaken…
In support of his lIED claim, Hyatt presented testimony from three different people as to the how the treatment from FTB caused Hyatt emotional distress and physically affected him. This included testimony of how Hyatt’s mood changed dramatically, that he became distant and much less involved in various activities, started drinking heavily, suffered severe migraines and had stomach problems, and became obsessed with the legal issues involving FTB. We conclude that this evidence, in connection with the severe treatment experienced by Hyatt, provided sufficient evidence from which a jury could reasonably determine that Hyatt suffered severe emotional distress.
However, the damage award for this claim was not upheld, and the Court remanded the case back to the District Court for a new trial on the damages. The Court concluded that there was evidentiary and jury instruction errors.
5. The FTB appealed whether punitive damages are allowed. “FTB argues that it is entitled to immunity from punitive damages based on comity because, like Nevada, California law has expressly waived such damages against its government entities. California law provides full immunity from punitive damages for its government agencies.” The Court finds that comity warrants that the FTB be immune from punitive damages:
The broad allowance for punitive damages under NRS 42.005 does not authorize punitive damages against a government entity. Further, under comity principles, we afford FTB the protections of California immunity to the same degree as we would provide immunity to a Nevada government entity as outlined in NRS 41.035(1). Thus, Hyatt’s argument that Nevada law provides for the award of punitive damages against FTB is unpersuasive. Because punitive damages would not be available against a Nevada government entity, we hold that under comity principles FTB is immune from punitive damages. We therefore reverse the portion of the district court’s judgment awarding punitive damages against FTB.
6. My thoughts: If I as a tax professional were to conduct myself in the manner that the FTB did, I would almost certainly be liable for truckloads of damages and would lose my license. Consider that the Nevada Supreme Court called the conduct of the FTB “extreme.” Consider also that at trial the FTB called its conduct typical:
Tax agents rummaged through his trash without warrants, visited business partners and doctors, and shared his Social Security Number and other personal information with the media. This is outrageous behavior and I call on the FTB to rein in their agents. What really galled me is the FTB testified in open court that this level of harassment was only a typical audit. If true, then the stormtroopers are alive and well at the FTB.
The author of the above quote, Bill Leonard, knows what he’s talking about. He’s a former member of the California Board of Equalization, the California tax agency which hears appeals from the FTB. There really isn’t much to add to that description. But let me include the entire text of what the Nevada Supreme Court wrote in affirming that the FTB committed fraud:
The record before us shows that a reasonable mind could conclude that FTB made specific representations to Hyatt that it intended for Hyatt to rely on, but which it did not intend to fully meet. FTB represented to Hyatt that it would protect his confidential information and treat him courteously. At trial, Hyatt presented evidence that FTB disclosed his social security number and home address to numerous people and entities and that FTB revealed to third parties that Hyatt was being audited. In addition, FTB sent letters concerning the 1991 audit to several doctors with the same last name, based on its belief that one of those doctors provided Hyatt treatment, but without first determining which doctor actually treated Hyatt before sending the correspondence. Furthermore, Hyatt showed that FTB took 11 years to resolve Hyatt’s protests of the two audits. Hyatt alleged that this delay resulted in $8,000 in interest per day accruing against him for the outstanding taxes owed to California. Also at trial, Hyatt presented evidence through Candace Les, a former FTB auditor and friend of the main auditor on Hyatt’s audit, Sheila Cox, that Cox had made disparaging comments about Hyatt and his religion, that Cox essentially was intent on imposing an assessment against Hyatt, and that FTB promoted a culture in which tax assessments were the end goal whenever an audit was undertaken. Hyatt also testified that he would not have hired legal and accounting professionals to assist in the audits had he known how he would be treated. Moreover, Hyatt stated that he incurred substantial costs that he would not otherwise have incurred by paying for professional representatives to assist him during the audits.
The only solution to such behavior by tax agencies is the “what’s good for the goose is good for the gander rule.” If a tax agency (or its employees) commits fraud against a taxpayer, the tax agency should be held liable. I urge California voters to rescind the blanket liability protection that tax agencies have. The actions of the FTB show it’s not warranted.
For Mr. Hyatt, the case will head back to Las Vegas for another trial (most likely next year) followed by, almost certainly, another appeal.