Dann v. City of San Diego

Filed 6/13/06 Dann v. City of San Diego CA4/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

APPEAL from a judgment and order of the Superior Court of San Diego County, Richard E. L. Strauss, Judge. Judgment is affirmed; order is reversed.

I.

INTRODUCTION

Plaintiff Dann^[1] appeals from a judgment following the trial court's sustaining of a demurrer without leave to amend. Dann also appeals from an order of the trial court imposing sanctions against him for filing a frivolous complaint.

Dann sued the City of San Diego (the City), charging that the City's practice of withholding taxes from his paycheck constituted breach of contract and conversion. The City demurred to the complaint on the ground that federal law mandates that an employer withhold taxes from wages for services. The trial court concluded that Dann could not show a reasonable possibility of curing the defects in his complaint by amendment.

On appeal, Dann contends that the trial court erred in sustaining the City's demurrer because the federal income tax withholding statute does not establish a defense to breach of contract or conversion. Dann also contends that the trial court's imposition of sanctions pursuant to Code of Civil Procedure^[2] section 128.7 was improper because the City failed to satisfy the procedural requirements of the statute.

II.

FACTUAL AND PROCEDURAL BACKGROUND

Dann has been an employee of the City since June 1965. The City routinely withholds a portion of Dann's wages and sends this amount to the Internal Revenue Service for purposes of the federal income tax. Until 2001, Dann did not object to this practice. In July 2001, and at various times thereafter, Dann informed the City that he was "withdraw[ing] his consent to not being paid the full amount of money he was owed by contract." Dann apparently believes he is not subject to, nor liable for, any federal income tax.

On January 4, 2005, Dann filed a complaint against the City seeking specific performance and injunctive and declaratory relief based upon allegations of breach of contract and conversion. The City demurred to the complaint and at the same time filed a request for sanctions pursuant to section 128.6.^[3]

The trial court held a hearing on the demurrer on March 25, 2005. The court sustained the City's demurrer without leave to amend and imposed $1,500 in sanctions against Dann on the ground that his complaint was filed in bad faith and entirely lacking in merit. The City served Dann with a notice of ruling on the demurrer on April 1, 2005. Dann filed a timely notice of appeal on May 24, 2005.

III.

DISCUSSION

A. Dann's complaint fails to state a viable cause of action

1. Standards

We review an order sustaining a demurrer without leave to amend de novo. (CPF Agency Corp. v. Sevel's 24 Hour Towing Service (2005) 132 Cal.App.4th 1034, 1042.) We exercise our independent judgment as to whether the complaint states a cause of action, "giv[ing] the complaint a reasonable interpretation" and "treat[ing] the demurrer as admitting all properly pleaded material facts." (Palestini v. General Dynamics Corp. (2002) 99 Cal.App.4th 80, 86.) If the complaint states any possible legal theory, the trial court's order sustaining the demurrer must be reversed. (Ibid.)

2. Conversion

Dann alleges in his complaint that the City converted his wages by withholding a portion of those wages for federal tax purposes. In order to state a cause of action for conversion, Dann "must allege that he owned or had the right to possess the withheld money at the time of the conversion and that [the City] willfully and without legal justification interfered with this right." (Otworth v. Southern Pac. Transportation Co. (1985) 166 Cal.App.3d 452, 458 (Otworth).)

"It has consistently been held that employees have no cause of action against employers who, pursuant to directives or regulations of the IRS, withhold wages and pay them over to the government in satisfaction of federal income tax liability." (Otworth, supra, 166 Cal.App.3d at p. 458.) Federal law clearly requires that employers who pay wages to employees withhold income and Social Security taxes. (See 26 U.S.C. § 3402(a)(1); Federal Insurance Contributions Act (FICA), 26 U.S.C. § 3101, et seq.)

Under 26 U.S.C. 3402(n), the only time an employer is not required to deduct and withhold income and Social Security taxes from an employee's wages is when the employee furnishes the employer with a withholding exemption certificate:

"Employees incurring no income tax liability. Notwithstanding any other provision of this section, an employer shall not be required to deduct and withhold any tax under this chapter [26 U.S.C. §§ 3401 et seq.] upon a payment of wages to an employee if there is in effect with respect to such payment a withholding exemption certificate (in such form and containing such other information as the Secretary may prescribe) furnished to the employer by the employee certifying that the employee--[¶] (1) incurred no liability for income tax imposed under subtitle A [26 U.S.C. §§ 1 et seq.] for his preceding taxable year, and [¶] (2) anticipates that he will incur no liability for income tax imposed under subtitle A [26 U.S.C. §§ 1 et seq.] for his current taxable year."

Thus, unless an employee furnishes his or her employer with a withholding exemption certificate, an employer must deduct and withhold a portion of that employee's wages, and no cause of action for conversion may be sustained as a result of this practice. (Otworth, supra, 166 Cal.App.3d at p. 458; see also 26 U.S.C. § 3403 ["The employer shall be liable for the payment of the tax required to be deducted and withheld under this chapter [26 U.S.C. §§ 3401 et seq.], and shall not be liable to any person for the amount of any such payment"].)

Dann contends that Otworth supports his position because it holds that in order for the employer's withholding to be lawful, the employee must be subject to the federal tax. Dann contends that it has not been established that he is in fact subject to any tax. However, the issue in this case is not whether Dann is liable to the federal government for federal income or Social Security taxes. Rather, Dann's claims for breach of contract and conversion challenge whether the City may legally withhold certain sums from his paycheck for the purpose of forwarding those monies to the federal government. The unambiguous answer to that question is that it may. In fact, an employer must do so unless the employee has furnished the employer with a withholding exemption certificate. Dann has not provided the City with a withholding exemption certificate. Under these circumstances, federal law requires that the City withhold a certain amount of Dann's wages and pay those funds to the federal government. A cause of action for conversion against the City for engaging in this practice cannot be sustained. (Otworth, supra, 166 Cal.App.3d at p. 458; 26 U.S.C. § 3403.)

3. Breach of contract

Dann also contends that by withholding some of his wages, the City is breaching his employment contract. For the same reasons that Dann cannot state a claim for conversion with regard to the City's practice of withholding federal taxes, he also cannot state a claim for breach of contract. (See Freis v. Soboroff (2000) 81 Cal.App.4th 1102, 1104 [because federal law requires defendant to withhold portions of wages or royalty payments for taxes, plaintiff cannot state a cause of action such as conversion or breach of contract against defendant].)

Dann's breach of contract claim suffers from additional deficiencies as well. In order to state a cause of action for breach of contract, the complaint must indicate on its face whether the contract is written, oral, or implied by conduct. (Otworth, supra, 166 Cal.App.3d at pp. 458-459, citing Code Civ. Proc., § 430.10, subd. (g).) "If the action is based on an alleged breach of a written contract, the terms must be set out verbatim in the body of the complaint or a copy of the written instrument must be attached and incorporated by reference." (Otworth, supra, 166 Cal.App.3d at p. 459.) Dann does not indicate in his complaint whether the contract is written or oral. He does not set forth the terms of the alleged contract or include the contract as an attachment. He does not allege "that the employment contract contained a provision requiring [the defendant] to refrain from withholding federal taxes from [the plaintiff's] wages." (Ibid.) "In the absence of such a provision, an employer discharges its contractual obligations when it withholds taxes from the employee's wages and pays the employee the balance." (Ibid.) Thus, Dann has failed to state a cause of action for breach of contract and the trial court properly sustained the City's demurrer as to this cause of action.

B. Sanctions

Dann challenges the court's imposition of $1,500 in sanctions against him pursuant to section 128.7 for filing this lawsuit in bad faith. Under subdivision (c), the court may impose sanctions for a party's failure to adhere to the good faith filing requirements of subdivision (b) of section 128.7. Subdivision (c) provides :

"(c) If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation. In determining what sanctions, if any, should be ordered, the court shall consider whether a party seeking sanctions has exercised due diligence."

A party seeking sanctions for a violation of subdivision (b) of section 128.7 must adhere to the provisions of subdivision (c)(1), which provides:

"A motion for sanctions under this section shall be made separately from other motions or requests and shall describe the specific conduct alleged to violate subdivision (b). Notice of motion shall be served as provided in Section 1010, but shall not be filed with or presented to the court unless, within 21 days after service of the motion, or any other period as the court may prescribe, the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected. If warranted, the court may award to the party prevailing on the motion the reasonable expenses and attorney's fees incurred in presenting or opposing the motion. Absent exceptional circumstances, a law firm shall be held jointly responsible for violations committed by its partners, associates, and employees." (Italics added.)

Dann contends that the City failed to follow the procedural requirements of section 128.7, subdivision (c)(1) in that it failed to make a separate motion for sanctions, and failed to serve him with the motion for sanctions 21 days before filing the motion with the court. We agree that the sanction award must be reversed because the City did not comply with the strict procedural requirements of section 128.7, subdivision (c)(1).

The text of section 128.7, subdivision (c)(1) clearly requires that any sanctions motion be served at least 21 days prior to the time it is filed with the court, in order to give the responding party or counsel the opportunity to withdraw "the challenged paper, claim, defense, contention, allegation, or denial." (See also Goodstone v. Southwest Airlines Co. (1998) 63 Cal.App.4th 406, 423 [concluding that "safe harbor" provisions of section 128.7 required that motion be served 30 days before it may be filed with the court].)^[4] Here, the City filed its request for sanctions with the court without previously having served Dann with a motion for sanctions.

The City contends that because Dann had 51 days between the time he was served with the request for sanctions and the date of the hearing at which the court imposed sanctions, he had more than sufficient time to withdraw his complaint. However, the text of the statute specifically requires that a party be given notice of the proposed motion and a 21-day safe harbor period during which no motion is filed with the court. In drafting section 128.7, subdivision (c)(1), the Legislature took guidance from the sanctions procedure set forth in rule 11 of the Federal Rules of Civil Procedure (rule 11). Rule 11 requires service of a sanctions motion 21 days prior to its filing. (Goodstone, supra, 63 Cal.App.4th at pp. 421, 423-424 ["The committee reports make it clear the Legislature fully intended to have California sanctions practice be brought into conformity with rule 11 including the use of the safe harbor provisions designed to allow a 'challenged paper, claim, defense, contention, allegation, or denial' [citation] to be withdrawn"].)

Federal courts have routinely held that the "safe harbor" provisions of rule 11 are mandatory, regardless of whether or not the responding party had actual notice of a motion for sanctions.^[5] Since section 128.7 subdivision (c)(1) is modeled on rule 11, we should apply the safe harbor provisions of section 128.7, subdivision (c)(1) in the same manner as the federal courts apply the corresponding provisions of rule 11. (See Goodstone, supra, 63 Cal.App.4th at p. 422 ["The effect of federal law is important in terms of applying section 128.7 which contains virtually the same safe harbor provisions as rule 11. This is because the Legislature specifically intended to adopt the rule 11 model with its 'safe harbor' provisions"].) Because the City failed to meet the procedural requirements of section 128.7, subdivision (c)(1), the sanction award cannot stand.

IV.

DISPOSITION

The judgment of the trial court in favor of the City is affirmed. The order imposing sanctions against Dann is reversed. The parties shall bear their own costs on appeal.

AARON, J.

WE CONCUR:

McDONALD, Acting P. J.

McINTYRE, J.

Publication Courtesy of California free legal resources.

Analysis and review provided by Spring Valley Apartment Manager Attorneys.

^[1] Appellant identifies himself only as "Dann" in all briefing and court documents.

^[2] Further statutory references are to the Code of Civil Procedure, unless otherwise specified.

^[3] The City apparently incorrectly cited section 128.6 as the basis for its request for sanctions. That section, although enacted, will take effect only if section 128.7 is repealed. (Olmstead v. Arthur J. Gallagher & Co. (2004) 32 Cal.4th 804, 813.)

^[4] A prior version of the statute required 30 days between service and filing.

^[5] See, e.g., Gordon v. Unifund CCR Partners (8th Cir. 2003) 345 F.3d 1028, 1030 [reversing sanctions where party failed to file a separate motion for sanctions and failed to properly serve the motion prior to filing with the court]; Radcliffe v. Rainbow Const. Co. (9th Cir. 2001) 254 F.3d 772, 789 [reversing sanctions order and rejecting district court conclusion that a "'literal application of the safe harbor provision'" was unnecessary because three months had passed between the motion and the court's order regarding sanctions, giving party adequate notice and opportunity to withdraw challenged paper]; Elliott v. Tilton (5th Cir. 1995) 64 F.3d 213, 216 ["The plain language of the rule indicates that this notice and opportunity prior to filing is mandatory" (italics added)].