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Blue Lake Rancheria, A Federally v. Marty Morgenstern

December 5, 2011

BLUE LAKE RANCHERIA, A FEDERALLY
RECOGNIZED INDIAN TRIBE; BLUE LAKE RANCHERIA ECONOMIC
DEVELOPMENT CORPORATION, A FEDERALLY-CHARTERED TRIBAL CORPORATION; AND MAINSTAY BUSINESS SOLUTIONS, A FEDERALLY AUTHORIZED DIVISION OF BLUE LAKE RANCHERIA ECONOMIC DEVELOPMENT CORPORATION, PLAINTIFFS,
v.
MARTY MORGENSTERN, INDIVIDUALLY AND IN HIS OFFICIAL CAPACITY AS SECRETARY OF THE CALIFORNIA LABOR AND WORKFORCE DEVELOPMENT AGENCY; PAM HARRIS, INDIVIDUALLY AND IN HER OFFICIAL CAPACITY AS CHIEF DEPUTY DIRECTOR OF THE ) EMPLOYMENT DEVELOPMENT DEPARTMENT OF THE STATE OF ) CALIFORNIA ("EDD"); JACK BUDMARK, INDIVIDUALLY AND IN HIS OFFICIAL CAPACITY AS A DEPUTY DIRECTOR OF THE TAX BRANCH OF THE EDD; TALBOTT SMITH, INDIVIDUALLY AND IN HIS OFFICIAL CAPACITY AS A DEPUTY DIRECTOR OF ) THE UNEMPLOYMENT BRANCH OF THE EDD; KATHY DUNNE, INDIVIDUALLY AND IN HER OFFICIAL CAPACITY AS A SENIOR TAX COMPLIANCE REPRESENTATIVE OF EDD; SARAH REECE, INDIVIDUALLY AND IN HER OFFICIAL CAPACITY AS AN ) 2 AUTHORIZED REPRESENTATIVE OF THE EDD; THE STATE OF CALIFORNIA; ) 3 THE EMPLOYMENT DEVELOPMENT DEPARTMENT, A DEPARTMENT OF THE ) 4 STATE OF CALIFORNIA; AND DOES 1- ) 50, INCLUSIVE, 5 DEFENDANTS.



ORDER DENYING DEFENDANTS' MOTION TO DISMISS

This matter is before the Court on Defendants' Marty Morgenstern ("Morgenstern"), Pam Harris ("Harris"), Jack Budmark ("Budmark"), Talbott Smith ("Smith"), Kathy Dunne ("Dunne") and Sarah Reece ("Reece"), the State of California (the "State"), and the Employment Development Department ("EDD") (collectively "Defendants") Motion to Dismiss (Docs. #26, #36) Plaintiffs' Blue Lake Rancheria ("the Tribe"), Blue Lake Rancheria Economic Development Corporation ("EdCo"), and Mainstay Business Solutions ("Mainstay") (collectively "Plaintiffs") Complaint (Doc. #1).

Defendants move to dismiss the Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) for lack of jurisdiction and 12(b)(6) for failure to state a claim. *fn1

Plaintiffs oppose the motion (Doc. #46). For the reasons set forth below, the motion to dismiss is DENIED.

I. FACTUAL ALLEGATIONS AND SUMMARY OF ARGUMENTS

Plaintiffs seek to enjoin Defendants from enforcement of State unemployment insurance taxes. Defendants are attempting to collect approximately $19,285,572.67 in state unemployment insurance contributions that Defendants assert are owed by Mainstay. Plaintiffs allege that if any money is owed, it is 3 less than the amount Defendants seek to recover. Compl., ¶ 26.

Plaintiffs argue that Defendants' collection activities violate 5 tribal sovereign immunity and unlawfully encumber tribal land 6 and tribal assets. Compl., ¶ 31. The Complaint alleges that 7

Plaintiffs have not waived sovereign immunity, nor has Congress 8 abrogated the Tribe's sovereign immunity. Compl., ¶¶ 32,33. 9

Accordingly, the Complaint seeks a declaration that Defendants' collection activities are violating Plaintiffs' tribal sovereign immunity and unlawfully encumbering tribal assets and land, both on and off the reservation. The Complaint also seeks an injunction enjoining Defendants from continuing to bring levies and liens on Tribal assets and property, and requiring Defendants to cancel any existing liens and return any funds seized in response to the existing liens.

Plaintiffs' suit concerns the collection of unemployment insurance contribution payments, pursuant to the Federal Unemployment Tax Act, 26 U.S.C. § 3301 et seq. ("FUTA"). FUTA is a joint federal-state program for unemployment insurance. FUTA was amended in 2001 to require states to allow Indian tribes to elect to be a reimbursing employer. A reimbursing employer reimburses the State for all benefits paid to former employees. (Cal. Unempl. Ins. Code 803(b).) Mainstay elected to be a reimbursing employer under FUTA, and held this designation from 2003 to 2010. Compl., ¶ 24. Mainstay ceased making full contribution payments as required, prompting Defendants to eventually begin the collection activities at issue in this suit.

II. PROCEDURAL BACKGROUND

Plaintiffs brought a motion for a preliminary injunction, 5 which this Court heard on June 29, 2011 (see Transcript, Doc. 6 #31). The Court granted the motion on August 11, 2011 (Doc. 7 #40), following the submission of supplemental briefing by both 8 parties. The preliminary injunction enjoined Defendants from 9 further collection activities, ordered them to withdraw and release any liens and levies placed on Plaintiffs' assets and deposit with the Court the amount that had already been collected through the liens and levies. Defendants deposited the required sum with the Court, and have filed a notice of appeal (Doc. #42) of the preliminary injunction order. Plaintiffs have voluntarily dismissed from the suit defendants the State of California and the Employment Development Department (Doc. #45). Accordingly, "Defendants" for purposes of this order refers only to the individual defendants, not the dismissed State and EDD defendants.

Defendants' Reply brief (Doc. #47) also raised the new argument that only defendant Harris is a properly named defendant, because under California Unemployment Insurance Code § 301(c) only the Director of EDD is vested with responsibility for filing and releasing liens. However, as Plaintiffs' contend in the sur-Reply (Doc. #52) ordered by this Court, Defendants offer no legal authority for their argument. Each individually named Defendant is alleged to have some connection with the collection actions at issue in this suit, Compl., ¶ 14, as required under Ex Parte Young, 209 U.S. 123 (1908) for suits 2 against state officers. See also Los Angeles County Bar Ass'n 3 v. Eu, 979 F.2d 697, 704 (9th Cir. 1992). Accordingly, at this 4 time the Court will not dismiss any of the individually named 5 defendants from this suit.

III. OPINION

A. Legal Standard

1. 12(b)(6) Motion to Dismiss

A party may move to dismiss an action for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). In considering a motion to dismiss, the court must accept the allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322 (1972). Assertions that are mere "legal conclusions," however, are not entitled to the assumption of truth. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950 (2009), (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). To survive a motion to dismiss, a plaintiff needs to plead "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570. Dismissal is appropriate where the plaintiff fails to state a claim supportable by a cognizable legal theory. Balistreri v. Pacifica Police Department, 901 F.2d 696, 699 (9th Cir. 1990).

Upon granting a motion to dismiss for failure to state a claim, the court has discretion to allow leave to amend the complaint pursuant to Federal Rule of Civil Procedure 15(a). 2

"Dismissal with prejudice and without leave to amend is not 3 appropriate unless it is clear . . . that the complaint could 4 not be saved by amendment." Eminence Capital, L.L.C. v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003). 12(b)(1)Motion to Dismiss

Dismissal is appropriate under Rule 12(b)(1) when the District Court lacks subject matter jurisdiction over 8 the claim. Fed. R. Civ. P. 12(b)(1). A Rule 12(b)(1) motion may either attack the sufficiency of the 9 pleadings to establish federal jurisdiction, or allege an actual lack of jurisdiction which exists despite the formal sufficiency of the complaint. Because challenges to standing implicate a federal court's subject matter jurisdiction under Article III of the United States Constitution, they are properly raised in a motion to dismiss under Rule 12(b)(1).

Meaunrit v. ConAgra Foods Inc., 2010 WL 2867393, *3 (N.D. Cal. July 20, 2010) (internal citations omitted). When a defendant brings a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), the plaintiff has the burden of establishing subject matter jurisdiction. See Rattlesnake Coalition v. United States Envtl. Protection Agency, 509 F.3d 1095, 1102, FN 1 (9th Cir. 2007).

There are two permissible jurisdictional attacks under Rule 12(b)(1): a facial attack, where the court's inquiry is limited to the allegations in the complaint; or a factual attack, which permits the court to look beyond the complaint at affidavits or other evidence. Savage v. Glendale Union High School, 343 F.3d 1036, 1039 n.2 (9th Cir. 2003). "In a facial attack, the challenger asserts that the allegations contained in a complaint are insufficient on their face to invoke federal jurisdiction, whereas in a factual attack, the challenger disputes the truth of the allegations that, by themselves, would otherwise invoke federal jurisdiction." Li v. Chertoff, 482 F.Supp.2d 1172, 1175 (S.D. Cal. 2007) (internal citations omitted). If the moving 4 party asserts a facial challenge, the court must assume that the 5 factual allegations asserted in the complaint are true and 6 construe those allegations in the light most favorable to the 7 plaintiff. Id. at 1175, citing Warren v. Fox Family Worldwide, Inc., 328 F. 3d 1136, 1139 (9th Cir. 2003). If the moving party 9 asserts a factual attack, the court may resolve the factual disputes, looking beyond the Complaint to matters of public record, without presuming the truthfulness of the plaintiff's allegations. White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000).

Here, Defendants ask the Court to take judicial notice of several affidavits and request an evidentiary hearing as to any disputed facts concerning the Court's jurisdiction, implying a factual attack.*fn2 The affidavits (Doc. #25, exhibits 1-5), are affidavits on the docket that were previously submitted in opposition to Plaintiffs' motion for a preliminary injunction. The affidavits address factual disputes surrounding whether or not any of the tax assessments were in error, whether Plaintiffs may have the money to repay delinquent assessments, and what procedures were followed to review Plaintiffs' account. Documents attached to two of the affidavits that were submitted show the form Plaintiffs filled out to become a reimbursing employer, the information that was sent to Indian tribes in California regarding the option to be a reimbursing employer, 2 and internal information about the reimbursing employer option 3 to which Defendants were privy. These documents are not 4 relevant to the question of the Court's jurisdiction, as they do 5 not address the jurisdictional challenges brought by Defendants 6 concerning Eleventh Amendment immunity, Ex Parte Young, or the Tax ...


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