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John S. Karls v. Mellon Capital Management Corporation et al

December 15, 2010

JOHN S. KARLS, PLAINTIFF AND APPELLANT,
v.
MELLON CAPITAL MANAGEMENT CORPORATION ET AL., DEFENDANTS AND RESPONDENTS. JOHN S. KARLS, PLAINTIFF AND APPELLANT,
v.
THE BANK OF NEW YORK ET AL., DEFENDANTS AND RESPONDENTS.



(San Francisco County Super. Ct. No. 489458) (San Francisco County Super. Ct. No. 489460)

The opinion of the court was delivered by: McGuiness, P.J.

Karls v. Mellon Capital Management CA1/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

Appellant John S. Karls sued various financial institutions for conversion in 16 different lawsuits, claiming the institutions had converted an idea he conceived that would allow them to achieve tax savings through the use of foreign tax credits. On appeal from orders dismissing two of the lawsuits, Karls contends the trial court erred in dismissing certain defendants, arguing that "a group of corporations" that files consolidated tax returns exists as a separate legal entity capable of being sued. He also contends the trial court erred in concluding that his claim for conversion of an idea is preempted by state and federal intellectual property law and that he failed to state a claim for conversion of tangible property. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

On June 15, 2009, Karls filed a complaint alleging a single cause of action for conversion against Mellon Capital Management Corporation and other entities claimed to have been part of the "Mellon Financial Corporation U.S.-Tax 'Consolidated Group' of Corporations" (the Mellon action).*fn1 On that same date, Karls filed a virtually identical complaint against The Bank of New York and other entities claimed to have been part of the "Bank of New York U.S.-Tax 'Consolidated Group' of Corporations" (the BNY action). All of the entities that were defendants in the Mellon action--with the sole exception of The Mellon Financial Corporation U.S.-Tax "Consolidated Group" of Corporations--were also defendants in the BNY action. In addition, the BNY action included a number of defendants that were not named in the Mellon action.*fn2

Each of the Mellon action complaint and the BNY action complaint states a single claim for conversion and alleged the defendants made use of confidential and proprietary "intellectual property" belonging to Karls. The complaints describe the property, in general, as " 'an idea' " that Karls "invented" to generate tax savings for two different groups of companies. More precisely, "[t]he [p]roperty was the idea that two different groups of companies could claim a tax advantage from combining the separate income taxes that each would otherwise pay on a portion of their income into a single tax for which both could claim benefit." To secure this advantage, the parties would create a "joint structure [that] would be subject to income tax in two different jurisdictions, one of which would grant a credit (or tax reduction) for the tax paid to the other jurisdiction."

By some means not alleged in the complaints, the defendant financial institutions appropriated Karls's idea and used it to obtain foreign tax credits. Karls seeks compensatory damages in the amount of the foreign tax credits that defendants have been claiming and will be able to claim in the future as a result of their use of his idea, as well as punitive damages equal to three times the amount of compensatory damages. Attached to the complaints in both the Mellon action and the BNY action is a copy of a newspaper article published on June 30, 2006 in the Wall Street Journal. The article discusses a scheme similar to that described by Karls and explains that it had been used by Barclays Capital Limited in various deals with nine other financial institutions. The article describes the scheme as "tax arbitrage," which "plays off one nation's tax system against another to reduce the banks' tax bills."

The complaint in the Mellon action contains an allegation that the "Mellon Financial Corporation U.S.-Tax 'Consolidated Group' of Corporations was formed by its members for the purpose of reducing their combined U.S. income tax liability." The complaint describes this " 'Consolidated Group' of Corporations" as an "unincorporated association, acting as a common-law partnership." The complaint alleges that this purported entity is described in section 1504 of the Internal Revenue Code, which defines an "affiliated group" that may choose to file a consolidated income tax return. (26 U.S.C. §§ 1501, 1504(a).) In effect, therefore, the complaint alleges that a group of corporations choosing to file a consolidated tax return as an affiliated group constitutes a separate legal entity that is capable of being sued as such. The BNY action contains similar allegations with respect to the "Bank of New York U.S.-Tax 'Consolidated Group' of Corporations," which was allegedly formed for the purpose of reducing its members' tax liability. For the sake of brevity, we shall refer to the alleged entities that filed consolidated tax returns on behalf of their members as the "Mellon tax return group" and the "BNY tax return group."*fn3

Aside from the fact the Mellon action refers to the Mellon tax return group and the BNY action refers to the BNY tax return group, the allegations in the two complaints are identical. Indeed, as reflected in the record on appeal and in a summary provided by Karls, he filed a total of at least 16 lawsuits against various financial institutions alleging conversion of his "idea." He claims his "property was stolen by Barclays Capital Ltd. from whom the 16 different groups of Defendants acquired the property."

The defendants in the Mellon action filed a demurrer and motion to dismiss in which they argued that the court lacks jurisdiction over the Mellon tax return group, which they claimed does not exist as a separate legal entity and cannot be sued as such. In the alternative, the defendants sought to quash service of process with respect to the Mellon tax return group. Further, the defendants argued the Mellon action is entirely duplicative of the BNY action, which contains the same claim and includes all of the defendants named in the Mellon action following dismissal of the Mellon tax return group from the Mellon action. The defendants sought to dismiss the Mellon action with prejudice under Code of Civil Procedure section 430.10, which permits a party to demur to a cause of action on the ground "[t]here is another action pending between the same parties on the same cause of action." (Code Civ. Proc. § 430.10, subd. (c).)

In an order dated September 14, 2009, the trial court granted the defendants' motion and dismissed the Mellon action in its entirety with prejudice. Specifically, the court ruled that it lacked jurisdiction over the Mellon tax return group because that "Defendant is not an existing legal entity or person that can sue or be sued." Further, the court concluded the Mellon action "is identical to and duplicative of" the BNY action with respect to the remaining defendants. Karls filed a timely notice of appeal from the order of dismissal in the Mellon action.

In the BNY action, the defendants filed a demurrer for failure to state a claim as to the conversion cause of action. The defendants argued that federal and state intellectual property laws preempt a common law cause of action for conversion of intangible intellectual property. The defendants also sought to dismiss the BNY tax return group or, alternatively, to quash service of process on the ground that no such legal entity exists.

In its September 14, 2009 order, the trial court dismissed with prejudice all claims against the BNY tax return group, reasoning that no such legal entity exists. The court sustained the demurrer to the conversion cause of action without prejudice and granted Karls 10 days to file an amended complaint. The court's order states that the conversion claim as pleaded was preempted by federal and state intellectual property laws. Nevertheless, the court permitted Karls an opportunity to amend his complaint to "demonstrate his claim is not preempted under California [or] federal law and that his conversion claim is for tangible property."

On September 24, 2009, Karls filed what he entitled a "First Amendment to Plaintiff's Complaint for Conversion" in the BNY action. This "first amended complaint" primarily consists of legal arguments explaining why Karls's claims are not preempted and why his cause of action contains a claim for conversion of tangible property. Among other things, Karls asserted that the "idea" allegedly converted "is so complicated that it cannot be understood without being embodied in a 'written presentation.' "

The defendants in the BNY action demurred to the first amended complaint, contending that it still failed to state a cause of action for conversion. The defendants argued that federal and state intellectual property laws preempt Karls's claims and that he failed to plead the requisite elements of a conversion claim. The defendants also argued Karls's action was barred under principles of res judicata in view of the fact that identical claims against other defendants (in some of the 14 similar cases) had been dismissed with prejudice for failure to state a cause of action.

By order dated November 12, 2009, the trial court sustained the defendants' demurrer to the first amended complaint without leave to amend in the BNY action. The court stated that Karls "has not alleged facts showing the claim is not preempted by state and federal intellectual property law or that the property converted was tangible property." The court further stated there was no reasonable probability the defect could be cured by amendment. The court's order dismissed the action with prejudice as to the remaining defendants. On January 6, 2010, Karls filed a timely notice of appeal in the BNY action from the court's order dated ...


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