Nevada District Court Judge Jessie Walsh on January 29 rejected a motion by the Franchise Tax Board for a new trial in Hyatt v. FTB, and also rejected the FTB's motion asking her to reduce a Las Vegas jury's award of more than $388 million to inventor Gil Hyatt.
Rejecting the motion for a new trial based on alleged judicial errors, Judge Walsh said, "FTB essentially relies on previously unsuccessful arguments."
Completing the day's good news for Mr. Hyatt, the judge ruled that the FTB must post a bond in order to keep Mr. Hyatt from executing his judgment against the state while the FTB appeals the case to the Nevada Supreme Court, as the tax agency plans to do. In Nevada, there is no appellate court before the Supreme Court, and thus the court cannot refuse to hear cases.
"After 11 years of litigation, justice is served," Mr. Hyatt said after the hearing.
During Thursday morning's session, Judge Walsh also appointed a special master to go over attorney costs submitted by Mr. Hyatt's legal team for reimbursement by the FTB. Mr. Hyatt is seeking $3.2 million for legal costs, but the FTB says he should get nothing due to a late filing, or a maximum of $53,000 if the court allows the late filing but knocks out all the charges the tax agency views as improper.
Background
Mr. Hyatt, inventor of a computer microprocessor chip and data storage system, said he moved from California to Nevada in October 1991, and he received a $40 million payment for licensing a patent shortly after the move. In 1993, during the administration of FTB Executive Officer Gerald Goldberg, FTB auditors read about Mr. Hyatt in a newspaper and decided to examine his records, then began a formal audit. In 1995, the FTB issued a determination letter claiming that Mr. Hyatt was a California resident in 1991 and part of 1992, and that he owed substantial taxes and massive penalties for fraud.
The FTB continues to seek $49 million in the residency audit. That sum includes the 1991 tax year ($1.8 million in taxes, a $1.4 million fraud penalty and $7.2 million in interest) and the 1992 tax year ($5.6 million in taxes, a $4.2 million fraud penalty and $19 million in interest), plus a $10 million penalty for not taking part in the amnesty program (his attorneys contend that he could not have legally participated in the program because his taxes were not "due and payable," as required by the statute, and that the FTB used this penalty as "extortion" to try to get him to drop his protest and litigation).
In 1996, Mr. Hyatt filed a protest that remained with the FTB until late last year and is just beginning to go before the Board of Equalization. Mr. Hyatt has filed briefs with the BOE, and the FTB is due to file briefs by March.
In 1998, Mr. Hyatt sued the FTB in Nevada for its conduct during the audit. The FTB attempted to have the suit dismissed, saying a Nevada court does not have jurisdiction over a California tax agency, and further arguing that FTB employees are immune to prosecution for acts carried out as part of their jobs (California residents do not have the right to sue the FTB for alleged wrongdoing during the course of an audit). The FTB's challenge reached the U.S. Supreme Court, and in 2003 the high court ruled in Mr. Hyatt's favor, setting the stage for the trial in Judge Walsh's courtroom.
In addition to the jury's award for intentional infliction of emotional distress and other torts, the court awarded $101 million in pre-judgment interest on compensatory damages to cover the period of litigation, from the date the complaint was served through 2008. Additionally, interest continues to accrue on the entire award, including the punitive damages, during the FTB's appeal.
Thursday's Rulings
The hearings on the FTB motions were limited to one hour each. Pat Lundvall, a Nevada lawyer contracted by the FTB to handle the lengthy trial, said that was not enough time. Judge Walsh, however, indicated that the time was sufficient because the motions covered the same ground as previous motions that have been decided by the court, and the court had been thoroughly briefed by both parties.
Ms. Lundvall started the day by asking the judge to reduce the jury's award. In an effort to paint the award as excessive, she pointed to a magazine article that ranked the award as the largest jury verdict in the nation in 2008, and she mentioned that other Nevada judges have reduced jury verdicts. She also cited cases involving military veterans who were awarded less than $2,000 for pain and suffering, and medical malpractice cases where awards were much lower than in the Hyatt case.
Las Vegas lawyer Mark Hutchison, leading Mr. Hyatt's team, said the FTB's motion was a "dishonor" to the jury. "There were egregious and offensive actions by the Franchise Tax Board that were brought before the jury," he said, citing issues related to the tax amnesty penalty that were "particularly egregious." The jury simply decided on awards that were in line with the misconduct they heard about, he said – and, he noted, the jury could have awarded an even larger amount under Nevada law.
Judge Walsh said the jury was presented with evidence that the FTB "consciously and purposely delayed protests" in order to harm taxpayers, among other things, and she said the jury's ruling would not be disturbed.
The issue of whether FTB would have to post a bond to keep the judgment from being executed while it appeals brought out an interesting argument from the FTB. Ms. Lundvall argued both that a bond is unnecessary because California clearly is good for the money (because it "can't engage in the type of shenanigans" that private parties might use to hide assets) and that it is uncalled for because California is facing such fiscal hardship that paying for the bond would cause "irreparable harm" to public services, including "everything from schools to health care to public safety."
The lawyer said California's bond premium will be $22 million to $37 million per year, for what she estimated would be two to three years of appeals, and said the FTB won't get that money back even if it wins on appeal. The state also will have to post assets to secure the bond.
Mr. Hyatt's attorneys argued that a bond is necessary to ensure that the inventor will be paid, and will not have to go through the legislative process to get his award if his victory is sustained by the appellate courts.
Judge Walsh, rejecting the FTB's argument, said: "Mr. Hyatt has been fighting the FTB for about 16 years. FTB's conduct throughout the audit process and this 10-year litigation does not give this court any reason to believe that payment to Mr. Hyatt will be swift" if FTB loses its appeal. She also said the FTB's arguments about how the bond would relate to California's finances were "striking in their contradictory nature."
If the state is unable to post a bond, "Mr. Hyatt is free to execute on his judgment against the assets of the state of California in any way he deems appropriate," Mr. Hutchison said after the hearing.
During the discussion of legal fees, Ms. Lundvall contested many of the charges.
"Both sides make some very good and valid arguments," Judge Walsh said before appointing Las Vegas consultant Ashley Hall as the special master. She added that she would not "tie his hands" with too many restrictions, but would let him go through the 10 years of records and report back to the court "in an expeditious manner." His fee will be split by both parties. Both sides said they welcomed Mr. Hall's review, although Ms. Lundvall expressed concern that the FTB could end up paying the entire bill for his services, since his fee will be listed as one of the Hyatt team's legal costs.
In an interesting sidenote, Mr. Hall notified the court that he had officiated over Ms. Lundvall's wedding many years ago. Mr. Hyatt's attorneys said this did not pose a problem for them, and Ms. Lundvall commented that he had done a good job, as she is still married.
Situation Comity
The issue of "comity" – the legal doctrine under which states recognize and enforce each others' laws – was a major point of contention during the hearing. Ms. Lundvall argued that because California does not require government agencies to post bonds before an appeal, the Nevada judge should follow California law and not require a bond. Mr. Hutchison said the FTB "continually misrepresents" laws and court decisions relating to comity, and another attorney for Mr. Hyatt said the FTB has "a complete lack of understanding of the principle of comity in this case." Mr. Hyatt's team said the policy in both California and Nevada is that their own government agencies do not have to post bonds, but foreign jurisdictions do. Thus, they said, comity means Nevada should do just what California would do – require an out-of-state agency to post a bond before an appeal.
(Source: Cal-Tax coverage of Hyatt v. FTB, January 29.)
Cal-TaxReports, February 2, 2009
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