July 9, 2020 - This Week at the Ninth

This Week at The Ninth: Railroad Discrimination and Remand Review

This week at This Week, we highlight the Ninth Circuit’s decision holding that an Oregon tax unlawfully discriminated against railroads, along with the Court’s opinion examining the strict limits on the appellate jurisdiction over orders remanding to state courts (and further cementing a circuit split in the process).

BNSF RAILWAY COMPANY v. OREGON DEPARTMENT OF REVENUE
The Court holds that Oregon’s tax on a rail carrier’s intangible personal property discriminates against the carrier in violation of the Railroad Revitalization and Regulatory Reform Act (the “4-R Act”).

Panel:  Judges Bybee, VanDyke, and Chhabria (N.D. Cal.), with Judge VanDyke writing the opinion and Judge Chhabria concurring.

Key Highlight:  “The proper comparison class here is Oregon commercial and industrial taxpayers.  Compared to this class, railroads, as part of the small group of centrally assessed taxpayers, ‘are the only commercial entities subject to an ad valorem [intangible personal] property tax’ in violation of 49 U.S.C. § 11501(b)(4).”

Background:  In 2017, Oregon’s Department of Revenue began taxing the intangible personal property of BNSF Railway Company, including its goodwill.  This resulted in a 30% increase in BNSF’s tax liability.  In response, BNSF invoked the 4-R Act and filed suit.  The 4-R Act prohibits three specified categories of state taxation, along with any other “tax that discriminates against a rail carrier.”  49 U.S.C. § 11501(b)(4).  BSNF contended that Oregon’s tax on its intangible personal property violated this catch-all provision.  The district court granted summary judgment for BNSF.

Result:  The Ninth Circuit affirmed.  Agreeing with the Fourth, Seventh, Eighth, and Tenth Circuits, the Court first held that rail carriers may challenge property taxes under § 11501(b)(4).  It explained that although the Supreme Court has held that § 11501(b)(4) does not apply to tax exemption schemes under which some (but not all) non-railroad property is exempted from a generally applicable tax, that does not mean that state property taxes are categorically immune from this anti-discrimination provision. 

The Court also rejected the Department’s contention that the challenged tax was in fact the sort of tax “exemption” to which the 4-R Act was inapplicable, explaining that the Oregon statutes do not provide “a generally applicable intangible personal property tax, from which to grant exemptions.”  Moreover, the Court continued, even if construed as an exemption, Oregon’s tax scheme would remain subject to § 11501(b)(4) because “the practical effect of providing this ‘exemption’ to all except centrally assessed taxpayers is to ‘target railroads, either alone or as part of an isolated group.’” 

Finally, the Court held that BNSF was, in fact, treated differently from “all other commercial and industrial taxpayers” in Oregon.  The Court rejected the Department’s contention that the comparison class should be narrowed to centrally assessed (excluding locally assessed) companies who are also subject to the tax.  Accepting such an argument, the Court reasoned, would “effectively wrest from § 11501(b)(4)’s coverage even a state tax targeted only at railroads … because the only similarly situated comparators would be railroads also subject to the discriminatory tax.”

Judge Chhabria joined the opinion in full (including, he noted, the “cringy railroad puns”).  In his concurrence, he emphasized that the Department had failed to argue that the tax was not discriminatory, either because the centrally assessed and locally assessed industries were differently situated from the railroad, or because the Department had a justification for its higher assessments imposed on the railroad.

DEMARTINI v. DEMARTINI
The Court holds that a district court’s order remanding a case to state court after the joinder of a diversity-destroying party is not reviewable on appeal.

Panel:  Judges O’Scannlain, Paez, and Simon (D. Or.), with Judge O’Scannlain writing the opinion.

Key Highlight:  “In holding that the joinder of a diversity-destroying party is not separable from a § 1447(e) remand order and is therefore unreviewable, we join the Fourth Circuit.  Two circuits, however, hold that an order amending a complaint to add a diversity-destroying party is separable from a remand order.  Respectfully, they do not dissuade us from our holding.”

Background:  Two brothers (Timothy and Michael DeMartini) and their wives (Margie and Renate DeMartini) co-own two commercial properties.  After a dispute about loan payments and diverted income, Timothy and Margie (citizens of California) sued Michael and Renate (citizens of Nevada) in California state court.  They sought, among other things, dissolution of the partnership that owns one of the properties.  During discovery, the parties learned that Timothy and Michael’s deceased father’s estate retained an interest in the partnership.  Timothy and Margie then moved to amend their complaint to join the trustees of the estate as defendants.  One crucial detail:  Timothy was actually one of the trustees, so joining him as a defendant would put him on both sides of the “v.” and destroy the previously complete diversity of the parties. 

The district court determined that the partnership-dissolution claim could not proceed without joining the trustees as parties.  Thus, all in a single order, the district court amended the complaint to add the trustees, severed the partnership-dissolution claim, and remanded that claim to state court.  In doing so, it invoked 28 U.S.C. § 1447(e), which provides that a court may “permit joinder and remand the action to state court” if, after removal, a “plaintiff seeks to join additional defendants whose joinder would destroy subject matter jurisdiction.”  Michael and Renate appealed the district court’s order.

Result:  The Ninth Circuit dismissed the appeal.  Under 28 U.S.C. § 1447(d), “[a]n order remanding a case to the State court from which it was removed” generally “is not reviewable on appeal or otherwise.”  The Court rejected each of the appellants’ arguments as to why this statute did not preclude review of the district court’s order.  First, the Court disagreed with Michael and Renate’s contention that § 1447(d) applies only to remand orders under § 1447(c), the more general remand provision, and not remand orders under § 1447(e), holding that Ninth Circuit precedent forecloses that argument.  Second, the Court also rejected the argument that § 1447(d) did not apply because the district court’s conclusion that the joinder destroyed diversity was purportedly legally erroneous.  The Court observed that § 1447(d) bars appellate review of § 1447(e) remand orders as long as the district court has relied on a ground colorably characterized as a lack of subject-matter jurisdiction—whether or not that ground was legally erroneous.  Third, the Court quickly rejected Michael and Renate’s assertion that § 1447(d) did not apply because the district court remanded a single claim to state court, not the entire “case.”  It reasoned that the severance of the partnership-dissolution claim created a separate case, which the district court then remanded to state court.

The Court then held that the joinder of the trustees was not reviewable separately from the remand under the Supreme Court’s 1934 decision in City of Waco v. United States Fidelity & Guaranty Co.  Under that “terse, cryptic, and now-controversial” decision, a determination that is separable from and antecedent to a remand order is reviewable if it (1) “preceded the remand order in logic and fact” and (2) is “conclusive, i.e., functionally unreviewable in state courts.”  Here, although the joinder issue satisfied the first requirement, the Court held that the second requirement was not satisfied because the state court could determine on remand that joinder of the trustees was improper and dismiss the trustees.  In reaching this conclusion, the Ninth Circuit joined the Fourth Circuit, which similarly has held that joinder of a diversity-destroying party is not separable from a § 1447(e) remand order and is thus unreviewable.  While the Third and Fifth Circuits have, by contrast, held that an order adding a diversity-destroying party is separable from a remand order, those decisions did “not dissuade” the Ninth Circuit.  The Third Circuit case was at least partially distinguishable: the joinder of the diversity-destroying defendant would relate back to the date of the complaint’s original filing, so the joinder there significantly affected the defendant’s substantive rights.  And the Ninth Circuit found the Fifth Circuit decision unpersuasive for two reasons:  it was based on precedent that failed to consider City of Waco’s conclusiveness requirement, and it involved a remand order under § 1447(c), not § 1447(e).

Finally, the Ninth Circuit observed that severance of the partnership-dissolution claim, unlike joinder of the trustees, may be separable from the remand and thus reviewable.  But it saw no need to reach the issue because Michael and Renate waived any objection to the merits of the severance.  And the Court declined Michael and Renate’s alternative request to construe their appeal as a mandamus petition.  It observed that § 1447(d) bars review of remand orders “on appeal or otherwise,” which includes review through a writ of mandamus.