People v. Sprint Commc'ns, Inc.

Full title: PEOPLE OF THE STATE OF NEW YORK, by Eric T. Schneiderman, Attorney General…

Court: SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: COMMERCIAL DIVISION PART 49

Date published: May 4, 2016

2016 N.Y. Slip Op. 30827 (N.Y. Sup. Ct. 2016)

Opinion

Index No.: 103917/2011

05-04-2016

PEOPLE OF THE STATE OF NEW YORK, by Eric T. Schneiderman, Attorney General for the State of New York, and STATE OF NEW YORK, ex rel., EMPIRE STATE VENTURES, LLC, Plaintiffs, v. SPRINT COMMUNICATIONS, INC, f/k/a SPRINT NEXTEL CORP., SPRINT SPECTRUM L.P., NEXTEL OF NEW YORK, INC., and NEXTEL PARTNERS OF UPSTATE NEW YORK, INC., Defendants.

O. PETER SHERWOOD, J.

DECISION AND ORDER

Motion Seq. Nos.: 007

O. PETER SHERWOOD, J. :

In motion sequence 007, defendants (collectively, "Sprint") move pursuant to CPLR 3211(5) to dismiss plaintiffs' claims under Article 28 of the New York Tax Law ("Tax Law") to the extent they pertain to conduct prior to March 31, 2008. Sprint asserts that such claims are barred by the three-year statute of limitations in Tax Law § 1147(b).

For the following reasons, the motion is denied.

Background

In 2009, the Department of Taxation and Finance ("DTF") began auditing defendants regarding the sales tax at issue in this lawsuit pursuant to Tax Law 1138(a)(1), "Determination of tax" (see Am. Compl. ¶ 93). Significantly, during the audit, Sprint and DTF entered into a series of tolling agreements (see Am. Compl. Exs. A-C).

On March 31, 2011, the relator (Empire State Ventures, LLC) filed this civil qui tam action under the New York False Claims Act, essentially alleging that Sprint failed to collect or pay New York sales taxes on receipts from the sale of certain wireless telephone services (see Am. Compl. 10). The Attorney General ("AG") responded by issuing an investigatory subpoena to Sprint in May 2011, as well as two more subpoenas in December 2011. It also took testimony from Sprint employees between December 2011 and February 2012. On April 17, 2012, DTF recommended that the AG's office bring an action against defendants (see Am. Compl. Ex. D). The Attorney General filed a superseding complaint two days later claiming that Sprint knowingly filed false tax returns and underpaid New York sales taxes on its mobile telecommunications offerings in order to gain an advantage over its competitors.

On June 27, 2013, the court dismissed the Tax Law claims to the extent they concerned conduct prior to March 31, 2008, finding them barred by the three-year statute of limitations in Tax Law 1147(b) (see Decision and Order, NYSCEF Doc. 29, at 13. The court noted that "[t]the submissions do not include the tolling agreements"¹ (see id.). The Attorney General filed an amended complaint on November 20, 2015 that attaches the missing tolling agreements. The AG's action gives rise to Sprint's motion (Am. Compl. ¶¶ 101-08, Exs. A-C).

1 More fully, the court found that:

Defendants acknowledge that . . . some of the defendants signed tolling agreements extending the time for the Department to make a final determination of any sales taxes owed. However, defendants argue that the tolling agreements do not apply to this case since this litigation is not part of the audit process.

On the other hand, plaintiff maintains that the tolling agreements do not limit their application to the audit process and, in fact, gives the Attorney General a referral, pursuant to Tax Law §1141(a), to commence an action to collect back taxes and penalties owed for defendants' sales tax violations.

The submissions do not include the tolling agreements.

(Decision and Order, NYSCEF Doc. 29, at 13).

The tolling agreements do not expressly mention civil enforcement actions (see Am. Compl., Exs. A-C). They were executed "[p]ursuant to Section 1147C . . . of the Tax Law," and under the agreements, DTF and Sprint agreed "[t]hat the amount of Sales and Use Taxes due from the above named vendor, for the taxable period(s) . . . may be determined at any time on or before . . ." (see id.). They are titled "Consent Extending Period of Limitations for Assessment of Sales And Use Taxes Under Article 28 and 29 of the Tax Law" (see id.).

Arguments

I. Sprint's Arguments

Sprint makes three arguments (Memo., NYSCEF Doc. No. 69, p. 4). First, the tolling agreements were signed by DTF, the entity that conducts the administrative audit under the tax law. Second, the agreements only apply to " determining the taxes owed." Third, the agreements recite they were executed "pursuant to Section 1147C . . . of the Tax Law," which only authorizes extensions of the period for the assessment of additional tax.

In support of these arguments, Sprint cites a few cases that describe some basic contract interpretation principles. A written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms (Kolmar Americas, Inc. v Bioversal Inc., 89 AD3d 493, 494 [1st Dept 2011]). The fundamental rule of contract interpretation is that agreements are construed in accord with the parties' intent (Banco Espirito Santo, S.A. v Concessionaria Do Rodoanel Oeste S.A., 100 AD3d 100, 106 [1st Dept 2012]). Sprint also cites two cases holding that tolling provisions should be construed narrowly (Memo, at 5, citing McCarthy v Volkswagen of Am., Inc., 55 NY2d 543, 548 [1982] [tolling provisions should not readily be given an expansive interpretation tending to undermine the basic purposes behind the Statutes of Limitation]; see also See v Arias, 209 AD2d 503, 504-05 [2d Dept 1994] [same]).

Sprint also argues that neither the referral letter from DTF authorized by Tax Law §1141(a), nor Tax Law §1141(a) itself, provide a basis for the AG to claim that the tolling agreements extend the time for the AG to bring a civil claim.

Finally, Sprint argues that when the AG elected to remove this case from the administrative process Sprint was deprived of important rights which rights vindicated another service provider on the same issue now before this court (see Matter of Helio, LLC, 2014 WL 2809222, at *9 [NY Div Tax App, June 12, 2014]).

II. AG's Opposition

The AG argues that the plain language of the tolling agreements shows that they apply to this civil litigation because under the Tax Law, "assessment" and "determined" encompass both a civil enforcement action and an administrative process. The AG notes that Sprint's position is inconsistent because Sprint has repeatedly argued that Tax Law §1147(b) imposes a three-year limitations period on tax enforcement actions that begin to run when the tax filing is submitted - even though the second sentence in Tax Law §1147(b) says nothing about civil enforcement actions (see Memo., at 3; see also Sprint's June 14, 2012 Memo, from their previous motion to dismiss ["New York Tax Law section 1147 also provides a three-year limitations period on tax enforcement actions"]). The AG adds that it makes no sense to read "determined" as excluding a civil enforcement action (Opp., NYSCEF Doc. No. 64, at 5). The tolling agreements do not limit how, or by whom, the amount must be "determined." While the AG admits that Tax Law §1138, which provides for the administrative process, is titled "Determination of tax," Sprint does not give any reason why "determined" would exclude a civil action under Tax Law §1141(a).

The AG also argues that it is irrelevant that the tax commissioner executed the tolling agreements, and not the AG, where the State is asserting claims under the Tax Law. The AG asserts that "it is enough that the Tax Commissioner was acting as the State's agent and was empowered to bind the State (see Opp., at p. 5, fn. 7, citing In the Matter of the Application of George Monier d/b/a Kozy Korner, 1980 WL 6820, at *2 (NY Dept Tax Fin Jan 11, 1980) [tolling agreement under Tax Law Section 1147(c) is valid even without a signature]). Section 1141(a) makes clear that the Tax Commissioner always has the authority to decide that the State will proceed via a civil enforcement action.

The AG makes two additional arguments. First, the tolling agreements are not ambiguous, but if they were, the motion should be denied because the finder of fact should determine the meaning of an ambiguous agreement (see Opp., at 6, citing Telerep, LLC v U.S. Intern. Media, LLC, 74 AD3d 401, 402 [1st Dept 2010] [if the court concludes a contract is ambiguous, dismissal is not appropriate]). Regarding the case law cited by Sprint, the AG argues that Sprint falsely urges the court to apply a rule of statutory construction to the tolling agreement. Specifically, McCarthy v Volkswagen of Am. (construing CPLR 208) and See v. Arias (construing CPLR 208) are irrelevant because they pertain to statutory construction. Additionally, if contra proferentem applies here, which requires interpretation of ambiguity against the agreement's drafter, the court should only apply it as a last resort (Opp., at 7, citing, inter alia, Schron v Troutman Saunders LLP, 97 AD3d 87, 93 [1st Dept 2012] affd sub nom. Schron v Troutman Sanders LLP, 20 NY3d 430 [2013] [contra proferentum is a last resort] [citations omitted]).

Second, the AG argues that the civil action and use of the tolling agreements is fair (Opp., at 7). The "choice" to bring the civil enforcement action was made by the Tax Commissioner, not the AG. The "important procedural rights" Sprint claims to have been stripped of (a written assessment, administrative hearing, deferential appellate review of that tribunal's decision via Article 78 proceedings) have been replaced by the procedural and appellate rights guaranteed to civil litigations (full discovery, jury, burden of proof, full appellate review). The AG also asserts that the administrative tribunal did not "vindicate" Helio. Instead, it required the taxpayer to pay sales taxes on the entire monthly charge for wireless voice services. It made no findings as to "reasonable cause" as penalties were not an issue. Recently, the Court of Appeals distinguished Helio, noting that "that case did not involve the level of deception and fraud alleged on the part of Sprint here" (People v Sprint Nextel Corp., 26 NY3d 98, 112-13 [2015]). Moreover, the Tax Commissioner's decision in April 2013 to proceed through a civil enforcement action in this case could not have been influenced by an administrative decision that would not be issued until two years later.²

2 The AG states that if the Court grants Sprint's instant motion, the State will proceed against Sprint through the administrative process for the earliest time periods and "certain inefficiencies" will occur as a result.

III. Sprint's Reply

In reply, Sprint reiterates that the AG is not a party to the tolling agreements. Each tolling agreement was signed by Bruce C. Van Schaick, Section Head of the New York State Department of Taxation and Finance "[f]or the Commissioner of Taxation and Finance" (see Am. Compl. Exs. A-C). DTF is a juridical entity that can be sued in its own name (Reply, at 2, citing, inter alia Wegmans Food Markets, Inc. v DTF, 115 AD2d 962 [4th Dept 1985]). New York State agencies are "separate and distinct public authorities" (Niagara Mohawk Power Corp. v Hudson Riv.-Black Riv. Regulating Dist., 2009 WL 3030146, at * 7 [NDNY Sept. 16, 2009] affd , 673 F3d 84 [2d Cir 2012] [dismissing claims against New York's Department of Environmental Conservation because no legal or factual connection between that agency's alleged actions and the claims in the Complaint]). Juridical entities have the power to make contracts (see Amtorg Trading Corp. v Camden Fibre Mills, Inc., 304 NY 519, 521 [1952]).

Sprint also notes that the AG's citation to In the Matter of the Application of George Monier d/b/a Kozy Korner, 1980 WL 6820, at *2 (NY Dept Tax Fin Jan 11, 1980) for the proposition that a tolling agreement under Tax Law §1147(c) is valid without a signature does not address the issue at hand.

Sprint further argues that it is black-letter law that a non-party to a contract generally lacks enforceable rights under that contract, and the limited exceptions, such as assumption, piercing the corporate veil and third-party beneficiary doctrines, do not apply here (see Reply, at 3-4). The AG is not a third-party beneficiary because it was not the intended beneficiary of the tolling agreement. Courts have applied this rule in the context of governmental and private contract cases (see Fourth Ocean Putnam Corp. v Interstate Wrecking Co., Inc., 66 NY2d 38, 45 [1985]), as well as tolling agreements (Oxbow Carbon & Minerals LLC v Union Pac. R.R. Co., 81 F Supp 3d 1, 8 [DDC 2015]). Absent clear contractual language evincing such intent, New York courts have demonstrated a reluctance to interpret circumstances to construe such an intent (see LaSalle Nat. Bank v Ernst & Young LLP, 285 AD2d 101, 108-09 [1st Dept 2001]).

Sprint dismisses the AG's assertion that it is immaterial that the Tax Commissioner rather than the AG executed the tolling agreement since the Tax Commissioner was acting as the State's agent. In Sprint's view, the AG makes the wrong distinction. The question is whether the DTF was acting as the AG's agent, not the reverse (see Reply at 4-5). The fact that DTF is authorized under Tax Law §1141(a) to refer disputes does not mean that the AG can avail itself of routine tolling agreements entered into during a tax audit in the context of civil litigation (see id.).

Second, Sprint argues that the tolling agreements do not apply to this civil action. Sprint reiterates that the tolling agreements do not recite anything about civil actions (see Vermont Teddy Bear Co., Inc. v 538 Madison Realty Co., 1 NY3d 470, 475 [2004] [courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include]). The tolling agreements state that "the amount of Sales and Use Taxes due from the above named vendor . . . under the Tax Law may be determined any time on or before [a date certain]" (Am. Compl. Exs A-C). Sprint asserts that the AG's argument that it "makes no sense to read 'determined' as excluding a civil enforcement action" tacitly acknowledges that there is no express reference to civil actions in the agreement (Reply, at 6). "Determined" is the same term used in section 1138 of the Tax Law to refer to the DTF audit process (see id., citing N.Y. Tax Law §1138 ("Determination of Tax"). The tolling agreements nowhere mention tolling of a "claim," "cause of action," or even a "dispute."

Sprint also notes that the AG has entered into tolling agreements in other cases which contain express language tolling civil actions. According to Sprint, such agreements are distinguishable from the tolling agreements involved here (Reply, at 5-7). Citing cases holding that tolling agreements should be narrowly construed given the difficulty of defending long-pending claims where witnesses' memories fade and employees leave companies (Reply, at 7, citing, inter alia, McCarthy v Volkswagen of Am., Inc., 55 NY2d 543, 548 [1982] [the tolling provisions should not readily be given an expansive interpretation tending to undermine the basic purposes behind the Statutes of Limitation]) Sprint urges that the tolling agreements should not be interpreted to extend to encompass litigations.

Next, Sprint challenges the AG's assertion that the term "assessment" includes a civil enforcement action. Sprint argues that §1147(b) of the Tax law, for example, refers to actions taken to "assess" a tax, and that it distinguishes such assessments from actions taken to "enforce" its collection. Tax Law § 1147(b) provides:

The provisions of the civil practice law and rules or any other relative to limitations of time for the enforcement of a civil remedy shall not apply to any proceedings or action taken by the state or the tax commission to levy, appraise, assess , determine or enforce the collection of any tax or penalty provided by this article

Sprint, relying on this language, argues that the AG's argument that "assessment" subsumes "enforcement" ignores that these two words appear separately in Tax Law §1147(b) (Reply, at 8, citing Criscione v City of New York, 97 NY2d 152, 157 [2001] [meaning and effect should be given to every word of a statute]). Moreover, the AG's argument that "assessment" encompasses civil actions because the parties have invoked the three-year statute of limitations in §1147(b), flips logic on its head. An "assessment" of the amount of taxes is a first step to enforcing a tax. An enforcement action is not a first step to an assessment of tax. In other words, an "enforcement" action might be predicated on and encompass a prior "assessment". There is no conflict between the three-year statute of limitations applying to enforcement actions while a tolling limited to tax assessments remains inapplicable to civil actions. (see Reply, at 8-9).

Discussion

Under the standards applicable to a motion to dismiss, this motion must be denied. Although the tolling agreements are titled "Consent Extending Period of Limitations for Assessment of Sales . . . Taxes" and state that "the amount of sales . . . Taxes due . . . may be determined at any time on or before [date]", it nowhere limits the ability of DTF to assert the amount of the assessment in a civil complaint and to have that amount determined by a court. The decision of DTF to recommend to the AG that his office bring "an action . . . to enforce the payment of requisite tax, penalties and interest" (NYSCEF Doc. No. 56, Ex. D) owed determined by a constitutional court rather than by an administrative tribunal, accords the taxpayer protections that are more robust than the "important" procedural rights Sprint claims were stripped away as a result of DTF's decision to pursue a civil action.

This is not a case where Sprint is likely to have fears that as time passes without the protection of the statute of limitations, the difficulty of defending its interests will increase because Sprint took that "difficulty" into account at the times that it affirmatively agreed to tolling.

There is nothing in the tolling agreements that restrict the authority of the commissioner to choose to have a court determine the amount of tax that is owed to the State. In this case, the AG is acting as the lawyer for the State as he authorized to act under Executive Law §63(1). As the lawyer, the AG's office is bound by the undertakings of his client. Acting on behalf of the client, the AG can seek to enforce the terms of binding agreements between Sprint and an authorized State officer. The AG is before the court pursuant to a lawful referral by the State's taxing official (see NYSCEF Doc No. 56, Ex. D). That AG's office is not a party to the tolling agreement is of no moment because the office is appearing on behalf of the State which is a party to the tolling agreement (see Morgan v New York State Dept. of Environmental Conservation, 9AD3d 586, 587 [3d Dept 2004]["State agencies have an attorney-client relationship with the Attorney General's office"]).

Accordingly, the motion of Sprint to dismiss the Amended Complaint to the extent it seeks to recover tax revenue based on conduct prior to March 31, 2006 is DENIED.

This constitutes the decision and order of the court.

DATED: May 4, 2016

ENTER,

/s/ _________

O. PETER SHERWOOD

J.S.C.