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PENNWALT CORP. v. METRO. SAN. DIST. OF GR. CHICAGO

United States District Court, Northern District of Illinois


December 12, 1973

PENNWALT CORPORATION, A CORPORATION, PLAINTIFF,
v.
THE METROPOLITAN SANITARY DISTRICT OF GREATER CHICAGO, A MUNICIPAL CORPORATION, DEFENDANT.

The opinion of the court was delivered by: Bauer, District Judge.

  MEMORANDUM OPINION AND ORDER

This cause comes on the plaintiff's motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure.

This is a diversity of citizenship action seeking to redress the alleged unjust enrichment of the defendant Metropolitan Sanitary District of Greater Chicago ("Sanitary District") by its refusal to reimburse the plaintiff Pennwalt Corporation ("Pennwalt") for Pennwalt's discharge of the Sanitary District's legal obligation to pay Illinois Use Tax.

The parties have agreed, solely for the purpose of the disposition of the instant action, to the following stipulation of facts:

  1. The amount in controversy in this action exceeds
     $10,000 exclusive of interest and costs, and this
     Court has jurisdiction of the parties and of the
     subject matter by virtue of diversity of
     citizenship among the parties and the amount in
     controversy.

  2. Pennwalt is a corporation organized under the laws
     of Pennsylvania and has its principal place of
     business in that state. Until March 31, 1969,
     Pennwalt's name was "Pennsalt Chemical
     Corporation."

  3. Pennwalt, is and at all times relevant hereto was,
     engaged in the manufacture and sale of industrial
     chemicals including ferric chloride.

  4. The Sanitary District is a municipal corporation
     organized under the laws of Illinois. The primary
     functions of the Sanitary District are to provide
     water purification and sewage treatment and
     disposal for the Chicago metropolitan area.

  5. One of the chemicals used by the Sanitary District
     in performing its functions is ferric chloride. On
     the 10th day of April, 1958, Pennwalt and the
     Sanitary District entered into Contract No. 58-17
     under which Pennwalt agreed to sell, and the
     Sanitary District agreed to purchase, quantities
     of real ferric chloride in solution during
     quarterly periods beginning

     May 1, 1958 to March 31, 1963.

  6. At the time the parties entered into the contract
     for the purchase and sale of ferric chloride, and
     at all times thereafter, Illinois levied a tax on
     the purchase of tangible personal property sold
     for use or consumption in Illinois. That tax is
     and was known as the Illinois Use Tax.

  7. The Sanitary District's acquisition of ferric
     chloride from Pennwalt constituted a purchase by
     the Sanitary District of tangible personal
     property not purchased for resale.

  8. From May 1958 until July 1961, the Sanitary
     District was exempt from the Illinois Use Tax by
     reason of its status as a "governmental body."

  9. From August 1, 1961 to March 23, 1963 the Sanitary
     District was not exempt from the Illinois Use Tax.

  10. The Sanitary District did not pay Illinois Use
      Tax to Pennwalt on its purchases of ferric
      chloride during the period August 1, 1961 to
      March 23, 1963. The only reason given by the
      Sanitary District for not paying the Use Tax on
      its purchases of ferric chloride from Pennwalt
      during the period August 1, 1961 until March 23,
      1963 was that it had contracted with Pennwalt for
      such purchases at a time when it was exempt from
      the Illinois Use Tax.

  11. Beginning in October of 1961, Pennwalt attempted
      to collect the 3 1/2% Illinois Use Tax from the
      Sanitary District on sales of ferric chloride by
      the issuance of debit memoranda.

  12. On November 14, 1961, E.A. Janssen, Engineer of
      Estimate and Inspection for the Sanitary
      District, advised Haskins & Sells, the certified
      public accountants for Pennwalt, that Pennwalt's
      attempted collection of the Illinois Use Tax was
      erroneous because the contract under which the
      sales were made was awarded prior to July 15,
      1961. Pennwalt accepted the Sanitary District's
      contention that no Illinois Use Tax was due on
      sales of ferric chloride under Contract No. 58-17
      and made no further attempts between November
      1961 and May 1963 to collect said tax.

  13. Under date of May 6, 1963, Pennwalt executed a
      release in favor of the District. The release
      recites as consideration the payment to Pennwalt
      by the District of $14,658.50, which was the
      undisputed balance due Pennwalt on Contract
      58-17.

  14. On April 18, 1963, the Sanitary District advised
      Pennwalt that its exemption from the Illinois Use
      Tax was reinstated as of March 21, 1963 and that
      the Sanitary District was not subject to the Use
      Tax on deliveries made after that date even
      though the contract for the purchase may have
      been entered into prior to March 21, 1963.

  15. Between July 1, 1966 and August 1, 1966
      Pennwalt's sales invoices were audited by the
      Sales and Use Tax Division of the Illinois
      Department of Revenue. The Department auditor
      questioned the failure of Pennwalt to collect Use
      Tax from the District on deliveries of ferric
      chloride made between January 1, 1962 through
      March 21, 1963. The Department auditor advised
      Pennwalt that such deliveries measured a Use Tax
      despite the fact that the District had contracted
      for such purchases at a time when it was exempt
      from the Use Tax. The Sanitary District was
      notified of the audit by letter dated July 15,
      1966.

  16. Between September 1966 and December 1966,
      representatives from Pennwalt's sales department

      discussed the audit by the Illinois Department of
      Revenue and the question of unpaid Illinois Use
      Tax with representatives of the Sanitary
      District. If called to the stand, a
      representative of Pennwalt would testify that Joe
      Wade, who at that time was an employee of the
      Sanitary District's Maintenance and Operations
      Department, assured Pennwalt's sales
      representatives that the District would pay the
      Use Tax allegedly due on deliveries of ferric
      chloride during the period January 1, 1962
      through March 23, 1963 either to Pennwalt or
      directly to the State of Illinois. If called to
      the stand, Joe Wade would deny making said
      assurances.

  17. In a letter dated September 7, 1966, George A.
      Lane, attorney for the Sanitary District, advised
      Pennwalt that Mr. E.A. Janssen was no longer
      employed by the District and that an examination
      of the files indicated that there was no basis
      for Janssen's letter of November 14th to Haskins
      & Sells.

  18. On May 29, 1967, the Sanitary District filed an
      antitrust suit against Pennwalt Chemicals
      Corporation in the United States District Court
      for the Northern District of California. In
      connection with the antitrust suit, the Sanitary
      District filed on August 16, 1967, Answers to
      Interrogatories. The Answers stated that Contract
      No. 58-17 with Pennwalt for the sale of ferric
      chloride was one of the transactions involved in
      the antitrust suit. The antitrust suit was
      settled and a release executed on August 12,
      1969. In the antitrust suit, Pennwalt did not
      file any counter-claims.

  19. Under date of June 5, 1968, the Department of
      Revenue of the State of Illinois issued a Notice
      of Tax Liability to Pennwalt. Said Notice
      included an assessment for Use Tax, penalty and
      interest due on purchases of ferric chloride made
      by the Sanitary District under Contract No. 58-17
      during the period January 1, 1962 to March 23,
      1963. The Sanitary District had no notice of such
      Notice of Tax Liability.

  20. Pennwalt formally resisted and contested the
      assessment of Use Tax on purchases by the
      Sanitary District under Contract No. 58-17 during
      the period January 1, 1962 to March 23, 1963 on
      the basis that sales to the District did not
      measure a tax because the District had contracted
      with Pennwalt for such purchases prior to July 1,
      1961 and at a time when the District was exempt
      from the payment of Use Tax. Under date of
      October 15, 1968, the Department of Revenue
      rejected Pennwalt's objections as reflected in
      the Hearing Disposition and a Final Assessment
      was issued against Pennwalt on August 20, 1969
      which included an assessment for Use Tax, penalty
      and interest due on said purchases. The Sanitary
      District received no notice of, nor did it
      participate in, the hearings before the
      Department of Revenue nor did it receive notice
      of the issuance of the Final Assessment.

  21. On February 13, 1970, the Circuit Court of
      Sangamon County entered a judgment against
      Pennwalt on its complaint under the
      Administrative Review Act. The judgment
      sustained, among other things, that part of the
      Final Assessment which assessed a Use Tax
      deficiency, penalty and interest on sales to the
      Sanitary District under Contract No. 58-17 during
      the period January 1, 1962 to March 23, 1963. The

     judgment and the Department of Revenue's Final
     Assessment were satisfied on February 25, 1970 by
     Pennwalt's payment of $87,407.10, which amount
     included $34,493 in Use Tax, penalty and interest
     assessed on sales to the Sanitary District under
     Contract No. 58-17 during the period January 1,
     1962 to March 23, 1963. The Sanitary District had
     no notice of, nor did it participate in, the
     proceedings before the Circuit Court.

The plaintiff, in support of its motion for summary judgment, contends:

  1. The Sanitary District's 1961-1963 purchases from
     Pennwalt were subject to Illinois Use Tax.

  2. The Sanitary District is primarily liable for
     paying the Use Tax to the state.

  3. Pennwalt's payment of the tax subrogated it to the
     state's right against the Sanitary District.

  4. The affirmative defenses advanced by the Sanitary
     District are without merit.

The defendant, in opposition to the instant motion for summary judgment, contends:

  1. The general release signed by Pennwalt bars the
     plaintiff's action.

  2. The statute of limitations bars the plaintiff's
     action.

  3. The plaintiff's claim should be barred because the
     plaintiff violated the Sanitary District's due
     process right by depriving the Sanitary. District
     of notice of the proceeding by the Department of
     Revenue.

It is the opinion of this Court that summary judgment should be granted in favor of the plaintiff.

I. THE SANITARY DISTRICT IS PRIMARILY LIABLE FOR PAYING THE USE
    TAX TO THE STATE OF ILLINOIS ON ITS 1961-1963 PURCHASES FROM
    PENNWALT.

The Sanitary District has steadfastly maintained in this case that no use tax was due the State of Illinois on its 1961-1963 purchases from Pennwalt because the contract for such materials was executed at a time when the Sanitary District was exempt from the use tax.

The provisions of the Illinois Use Tax Act (Ill.Rev.Stat. Chap. 120 § 439.1 et seq.) which imposes a tax on the purchase of tangible personal property is complemented by the provisions of the Retailer's Occupation Tax Act which imposes a tax of equal rate on "persons engaged in the business of selling tangible personal property at retail."*fn1 Except for the period of August 1, 1961 to March 23, 1963 governmental bodies were generally exempt from both types of tax (Ill.Rev.Stat. Chap. 120 §§ 439.3, 441).

Consistent with the statutory criteria for tax liability of "ownership" and "transfer" thereof, the Illinois Department of Revenue has ruled that the date of actual delivery, rather than the date of mere contracting for purchase and sale, is the critical date in determining whether the "governmental body" exemption applies:

  "Sales made on or after March 21, 1963, to a
  governmental body (Federal, State, local or foreign),
  or to any agency or instrumentality of a governmental
  body, are exempt from the retailers' occupation tax
  [and the corresponding use tax].

    For the foregoing purposes, the date of sale is
  considered to be the date of delivery to the
  purchaser." [Rules and Regulations Relating to the
  Retailers' Occupation Tax Act of

  1962, Rule 40, 1 CCH State Tax Reporter: Illinois
  Para. 60-143 (1969) (emphasis added).]

The Illinois Supreme Court has held that a seller of gravel and crushed stone to a county government was liable for the Retailers' Occupation Tax on sales contracted before but delivered after August 1, 1961, the date on which the "governmental body" exemption from Retailers' Occupation and Use Taxes was temporarily repealed. Western Ill. Stone Co. v. Department of Revenue, 35 Ill.2d 275, 220 N.E.2d 207 (1966). Given the complimentary nature of the Illinois Retailers' Occupation Tax and the Illinois Use Tax it would logically seem to follow that in the instant action a purchaser who is a governmental body is liable for Use Tax on the purchase of tangible personal property contracted before but delivered after August 1, 1961, because it is the law in force at the time of delivery of the property that is determinative of whether any exemption is applicable.

The defendant Sanitary District, when it was to its advantage to do so, recognized this principle that the time of delivery rather than the time of contracting governs the application of the governmental body exemption to the Use Tax.*fn2

The Illinois statute imposing the Use Tax makes it clear that payment of the tax is the primary obligation of the purchaser running directly to the state:

    "The tax hereby imposed shall be collected from the
  purchaser by a retailer maintaining a place of
  business in this State or a retailer authorized by
  the Department pursuant to Section 6 hereof, and
  remitted to the Department, pursuant to Section 9
  hereof.

    The tax imposed and not paid to a retailer pursuant
  to the preceding paragraph of this Section shall be
  paid to the Department directly by any person using
  such property within this State, pursuant to the
  provisions of Section 10 hereof." Illinois Revised
  Statutes, Chapter 120, § 439.3.

The Illinois Supreme Court has interpreted this statute to provide that primary liability is incurred by the one who purchases for use, and the seller's failure to collect the tax cannot operate to discharge the purchaser's liability. Klein Town Builders, Inc. v. Department of Revenue, 36 Ill.2d 301, 222 N.E.2d 482 (1966). Thus, it is clear that the Sanitary District is primarily liable for paying the Use Tax to the State of Illinois on its 1961-1963 purchases from Pennwalt.

II. PENNWALT'S PAYMENT OF THE TAX SUBROGATED IT TO THE STATE'S
    RIGHT AGAINST THE SANITARY DISTRICT.

By paying the tax judgment entered against it Pennwalt discharged the primary legal obligation of the Sanitary District to pay use taxes to the state. Pennwalt thereby became subrogated to the right of the state to collect that tax from the Sanitary District.

The doctrine of subrogation originated in equity, but is presently an integral part of the common law, and is designed to place the ultimate responsibility for a loss upon the one on whom in good conscience it ought to fall, and to reimburse the innocent party who is compelled to pay.*fn3

  A person who, not acting voluntarily, pays taxes for which
another is legally or equitably bound is entitled to recover upon
the doctrine of subrogation. See Lidster v. Poole, 122 Ill. App. 227
 (1905).*fn4 In order to entitle one to recover in such a
case it is not necessary that he pay the tax under duress of
person or property, or by compulsion of legal proceedings. It is
sufficient if he does so to relieve himself from legal liability
for the tax paid.*fn5

Since, in the instant action, the liability of the plaintiff for the use tax is only secondary and the liability of the defendant for the use tax is primary, it follows that the tax should have been paid by the defendant rather than the plaintiff. The plaintiff stands in a position analogous to that of a surety for the defendant. The fact that the defendant's liability for the use tax was extinguished when plaintiff paid it to the state does not prevent the plaintiff from bringing this instant action against the defendant. The liability of defendant to plaintiff is not upon the tax, but is implied by law from the circumstances of the case, and arises only when the plaintiff rather than defendant has paid the use tax. Thus, Pennwalt's payment of the use tax subrogated it to the state's right against the Sanitary District and prevents the unjust enrichment of the Sanitary District at the expense of Pennwalt.

III. THE GENERAL RELEASE, SIGNED BY PENNWALT, DOES NOT BAR THE
    INSTANT ACTION.

The Sanitary District contends that the general release signed by Pennwalt bars the plaintiff's action. The Sanitary District further contends that the law has long been settled that a general release will bar a plaintiff from suing on even those actions which were unknown to and concealed from the plaintiff at the time of signing the release. It is the opinion of this Court that the defendant's contentions are without merit.

The law in Illinois and in other jurisdictions is clear that a release, no matter how broad its terms, does not include claims not within the contemplation of the parties. As early as the nineteenth century, the Illinois Supreme Court held that a general release is inapplicable to unknown claims. Todd v. Mitchell, 168 Ill. 199, 48 N.E. 35 (1897). It is well settled that a court of equity will not allow the releasee to take advantage of the general words of a release to defeat the collection of a demand not then in the minds of the parties. Butcher v. United Elec. Coal Co., 174 F.2d 1003 (7th Cir. 1949); Keeran v. Wahl Co., 320 Ill.App. 457, 51 N.E.2d 598 (1943). Since the release that the Sanitary District imposed on Pennwalt was intended to cover only "performance of the contract" it would not be construed under Illinois law to cover an unrelated matter such as use tax liability. Further, the contentions of the Sanitary District have ignored the fact that Pennwalt's claim is based on the Illinois use tax statute and not on performance of the contract. In reality, Pennwalt's claim is not really its own, but rather the claim of the Department of Revenue to which Pennwalt was subrogated. It has been held that a general release does not bar an action based on subrogation. Tibbetts Contracting Corp. v. O & E Contracting Company, 15 N.Y.2d 324, 258 N.Y.S.2d 400, 206 N.E.2d 340 (1965). At the time the release was executed, both Pennwalt and the District believed that the use tax issue had been long since resolved, and that the only "consideration" for the release was the balance due under the contract.*fn6 Under such circumstances it must be concluded that the liability of defendant asserted by the plaintiff was beyond the contemplation of the parties and that, therefore, they could not have intended the release to include it.*fn7

Thus, it is clear that Pennwalt's claim is not barred by the general release.*fn8

IV. THE INSTANT ACTION IS NOT BARRED BY THE STATUTE OF
    LIMITATIONS

The Sanitary District contends that Pennwalt's cause of action commenced upon the Sanitary District's refusal to pay Pennwalt the use tax and that therefore the ten-year statute of limitations has run. Any cause of action which may have arisen upon the District's refusal to pay the tax to Pennwalt was separate and distinct from the cause of action that arose upon Pennwalt's payment of the tax. The present action arises not from the contract for the purchase of ferric chloride but rather from Pennwalt's payment of a judgment entered against it in accordance with a state statute imposing a use tax measured by the Sanitary District's purchases of tangible personal property. This subrogation action is thus one of implied assumpsit for money paid and to prevent the unjust enrichment of the defendant. Illinois case law firmly establishes that in such actions the statute of limitations begins running when the payment is made. Rath v. City of Chicago, 207 Ill.App. 117 (1917); Flower v. Beveridge, 58 Ill.App. 431, aff'd 161 Ill. 53, 43 N.E. 722 (1895). See also Brantjen & Kluge, Inc. v. Fincher, 44 Cal.App. 2 d Supp. 939, 111 P.2d 979 (1941).*fn9 Since Pennwalt paid the use tax judgment on February 25, 1970 and filed this action on July 19, 1972, Pennwalt's claim clearly is not barred by the ten-year statute of limitations pleaded by the Sanitary District.

V. PENNWALT'S CLAIM DOES NOT DENY THE SANITARY DISTRICT DUE
   PROCESS OF THE LAW.

The Sanitary District finally contends that it was deprived of due process by Pennwalt's failure to notify it of the Department of Revenue's action to collect the use tax. Further, the Sanitary District contends that it is entitled to its day in court and that prior judgments are not binding on it since it has not been made a party to them. This contention of the defendant is also without merit. The Sanitary District is presently a party to the instant action and it is now having its day in court to litigate the issue of its use tax liability. The right to due process in no way allows a defendant to prevent a plaintiff from litigating a claim against that defendant in the first instance. In the instant action the Sanitary District is not bound by prior determinations of issues by the state court but neither is the Sanitary District immune from ever being sued on a claim related to it. Thus, both Pennwalt and the Sanitary District in the instant action have received their day in court.

Accordingly, the plaintiff's motion for summary judgment in its favor is granted.


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