Indiana Court Decisions – May 6-19, 2021

7th Circuit Court of Appeals

May 10

Civil Plenary – Defamation/Intentional Infliction of Emotional Distress

Katherine Black v. Cherie Wrigley and Pamela Kerr

20-2656

A law school professor suing for defamation and intentional infliction of emotional distress could not convince the 7th Circuit Court of Appeals that the jury was wrong to reject her claims.

Katherine Black (Litvak) and her husband, Bernard Black, both professors at Northwestern University’s Pritzker School of Law, initiated a lawsuit against a relative after the two were excluded from a $3 million estate left by Bernard’s mother upon her death.

The Blacks expected to inherit about one‐third of that estate, but Bernard’s mother cut them out of her will and left nearly the entire estate to Bernard’s homeless and mentally ill sister, Joanne, who lived in Denver. Bernard then appointed himself as Joanne’s conservator and worked to redirect much of her inheritance to himself and Katherine.

At the same time, Bernard’s cousin, Cherie Wrigley, contacted private investigator Esaun Pinto to locate Joanne and have her relocated to New York. After Joanne relocated, Bernard sought to become guardian of Joanne’s property while Wrigley fought to become her guardian.

Meanwhile, Joanne’s guardian ad litem in Denver discovered that Bernard had diverted much of Joanne’s inheritance to himself. She then hired Pamela Kerr to investigate Bernard and Pinto, who had been withdrawing funds from Joanne’s account.

A Denver probate court eventually suspended Bernard as Joanne’s conservator and ultimately resolved the dispute against Bernard after finding that he committed civil theft by stealing $1.5 million from Joanne. The court issued a $4.5 million judgment, which was affirmed on appeal.

Later on, Katherine submitted a letter to the New York court in the guardianship proceedings, which was on Northwestern University letterhead. Wrigley subsequently called the deans of Northwestern’s law and business schools to complain that Katherine had used Northwestern letterhead to make a false statement to the court.

Kerr also called the law school dean and Wrigley attached a letter Kerr had drafted to an ethics complaint submitted to Northwestern. Wrigley’s complaint asserted that Katherine was “using [Northwestern’s] letterhead to slander people and fight a personal case,” among other things.

Katherine sued Wrigley and Kerr in federal district court in Chicago, claiming both defamed her and that Wrigley intentionally inflicted emotional distress on Katherine. But the trial didn’t go as planned for Katherine, who on the last day attempted to present her own closing argument and was denied by the judge. Additionally, Katherine’s lead counsel requested a continuance that was eventually granted after he expressed being “physically ill” and was “not emotionally ready to do this right now.”

Regardless, the jury returned a verdict in favor of Wrigley and Kerr, prompting Katherine to appeal pro se.

Arguing on appeal that the district court erred in several ways, Katherine first posed that it had excluded numerous pieces of evidence that should have been admitted. She further argued that the district court erred in allowing improper statements by defense counsel in closing argument, by declining to give a jury instruction on one of her defamation claims, and by denying Katherine’s request to give her own closing argument, or hire new counsel to do so, after her lead lawyer suffered a breakdown after the close of evidence.

As to the exclusion of evidence, the 7th Circuit concluded that none of the district court’s evidentiary decisions warranted a new trial, finding no cause to overturn the jury’s verdict in Katherine Black v. Cherie Wrigley and Pamela Kerr, 20-2656.

Turning to Katherine’s argument regarding allegedly improper statements that defense counsel made during closing arguments, the appellate panel agreed with the district court that attorneys have leeway in their closing arguments to suggest inferences based on evidence. It therefore found no abuse of discretion in overruling Katherine’s objection that defense counsel “lied” when he argued in closing that she “invented another wrongdoer to deflect attention from Bernard Black. That’s poor Mr. Esaun Pinto.”

Noting that Katherine had good reason to expect an instruction on her defamation claim against Wrigley, the 7th Circuit observed that it was possible “that the district court committed plain error by omitting an instruction on that claim and by omitting the claim from the verdict form.” However, it concluded that the jury probably would have ruled for Wrigley even if properly instructed.

“Most tellingly, the jury found that Kerr did not commit defamation in making the exact same statements that formed the basis of the defamation claim against Wrigley. Katherine does not persuasively explain how or why the same jury probably would have come to a diametrically opposite conclusion on the defamation claim against Wrigley,” Circuit Judge Michael Kanne wrote for the 7th Circuit. “… In sum, Katherine falls short of showing that any error the court may have committed in its instructions affected her substantial rights.”

Finally, the 7th Circuit found that Katherine’s argument as to her counsel’s incapacity and her request to present closing arguments herself was “wholly without merit.”

“Moreover, even assuming an attorney’s incapacity could ever justify a new trial in a civil case, Katherine fails to mention that she had two lawyers. We have previously explained that ‘[t]he physical incapacity of one of the two lawyers representing plaintiff does not entitle plaintiff to relief … in the absence of a strong showing that other counsel could not have acted for h[er] under the circumstances then existing,’” it concluded.

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May 12

Civil Plenary – Traffic Accident/Monell Claim

Soraida Flores v. City of South Bend and Justin Gorny

20-1603

The 7th Circuit Court of Appeals has reversed against a former South Bend police officer that struck and killed a motorist while plowing through a red light, concluding the deceased’s personal representative is entitled to proceed with her case.

The case began in 2018 after now-former South Bend police officer Justin Gorny responded to a non-emergency call at a South Bend “hot spot” where a speeding vehicle was seen, despite not being assigned to the call and five other officers already on their way there.

While driving to the scene, Gorny reached speeds of 78 miles per hour in a residential neighborhood and nearly 100 miles per hour at an intersection when he disregarded a red light, striking and killing Eric Flores’ as she drove through the green light.

Soraida Flores, personal representative of the Estate of Erica Flores, sued the City of South Bend and Gorny, alleging that he violated Flores’ substantive due process rights under the 14th Amendment and under 42 U.S.C. § 1983, and that the city was liable under Monell v. Department of Social Services, 436 U.S. 658 (1978), for failing adequately to train its police officers.

The U.S. District Court for the Northern District of Indiana, however, dismissed Flores’ case.

She successfully challenged the district court’s dismissal on appeal, with the 7th Circuit concluding that Flores’s allegations plausibly stated claims against both defendants. It therefore found she is entitled to proceed with her case.

First addressing her individual claim against Gorny, the 7th Circuit found opposite of the district court’s conclusion that Flores’s complaint failed to allege sufficient facts to permit the inference that Gorny subjectively knew of the danger he created and consciously disregarded it, similar to Hill v. Shobe, 93 F.3d 418, 421 (7th Cir. 1996).

“Here, Gorny’s reckless conduct, unjustified by any emergency or even an order to assist in a routine traffic stop that five officers had under control, allows the inference that he subjectively knew about the risk he created and consciously disregarded it. Unlike the minimally detailed complaint in Hill, which again was limited to an accusation of speeding, the complaint here paints a far more troubling picture,” Circuit Judge Diane Wood wrote for the 7th Circuit.

“The defendants counter that Gorny could not have known that he created an imminent risk of fatal injury if he had an obstructed view of oncoming traffic. But the law does not require perfect knowledge on his part: Criminal recklessness is enough, and driving blind through an intersection at 78 to 98 miles per hour could certainly be viewed by a jury as meeting that standard,” it wrote. “The law does not provide a shield against constitutional violations for state actors who consciously take extreme and obvious risks.”

The 7th Circuit next turned to Flores’ Monell claim against the City of South Bend for failing to train its police to refrain from reckless driving. Stressing that while it is still at the pleading stage, the appellate panel concluded that Flores’s complaint plausibly alleges that the city acted with deliberate indifference by failing to address the known recklessness of its police officers as a group and Gorny in particular.

“Driving with deliberate indifference to the consequences of one’s action — in effect, turning oneself into a speeding bullet — can reach the level of criminal recklessness before the worst happens. Flores’s allegations are enough to survive a motion to dismiss,” it wrote.

The 7th Circuit therefore reversed the district court’s dismissal of Flores’ section 1983 and failure-to-train claims in Soraida Flores v. City of South Bend and Justin Gorny, 20-1603, remanding for further proceedings.

Concurring in a separate opinion, Circuit Judge Michael B. Brennan addressed the majority’s discussion of the failure-to-train liability under Monell to order to remind future courts and litigants to “recall the intricacies of Monell jurisprudence” and to “not misread precedent in this area.”

The concurring judge pointed out that liability for failure to train under the single-incident theory remains “rare,” adding that while the majority stated at least one of its sister circuits has upheld Monell liability under a failure-to-train theory without any sign of disapproval from the Supreme Court, “This sentence, which is followed by citations to a number of decisions, could be overread to suggest that liability under this theory is widely endorsed.”

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May 14

Criminal – Wire Fraud/Warrantless Search

United States of America v. Ethel Shelton

19-3388

The administrative assistant to the former Calumet Township Trustee who pled guilty to federal charges has had her own convictions related to wire fraud reversed after the 7th Circuit Court of Appeals found she should have been granted a mistrial on Fourth Amendment grounds.

When Stafford Garbutt was demoted from his government job and took $15,000 pay cut, he tipped off a local newspaper and the United States Attorney’s office that his former boss, Calumet Township Trustee Mary Elgin, was performing criminal conduct in while in office. Specifically, he accused her and his co-workers of political campaigning while on the clock, which he had also engaged in for the past 10 years.

Garbutt then formed a partnership with an FBI agent, who directed him to conduct warrantless searches of his coworkers’ offices. His actions ultimately ensnared both Elgin and her administrative assistant, Ethel Shelton.

Following Elgin’s agreement to a plea deal, a jury convicted Shelton of conspiracy to commit wire fraud and conspiracy to commit honest services wire fraud related to her actions as an employee of the Calumet Township Trustee’s Office.

When Shelton learned mid‐trial that the FBI agent had directed Garbutt to conduct warrantless searches of her office, the district court tried to mitigate any damage by allowing Shelton to move post‐trial for relief. But at the end of the day, the court ultimately denied Shelton’s motion.

In reversing that decision, the unanimous 7th Circuit Court of Appeals concluded that the district court erred when it found that Shelton lacked any reasonable expectation of privacy in her office, among other things.

It began by addressing the seven factors on which the district court relied in determining Shelton had no reasonable expectation of privacy in her office or desk against intrusions by Garbutt. Among them, the 7th Circuit found the district court erred in concluding that the Employee Handbook was a source of any authority for Garbutt to enter Shelton’s office. It also found that neither the security cameras nor those workplace policies gave Garbutt any right of access to Shelton’s office, which had a door.

“There is no doubt that Shelton had as much right to exclude the police, the public, and co-workers as did the union official in the shared office or the state doctor in a private office. She had a reasonable expectation that co-workers (including Garbutt) and other visitors would not access her office or desk outside of regular office hours at times when she was not present, except for brief and very limited purposes. Like any office worker with a private office, she had a reasonable expectation that, although her employer or supervisor might intrude into her space and peruse her desk for work‐related purposes, her co‐workers had no license to do so,” Judge Ilana Rover wrote for the 7th Circuit.

“Behavior such as Garbutt’s, where he entered Shelton’s private office outside of normal business hours and lingered beyond any legitimate, anticipated or permissible purpose in order to review and copy the papers on top of her desk would be unacceptable in any workplace. Because he was acting as an agent of the government at the time, and because he possessed no warrant to conduct this search, his actions violated the Fourth Amendment,” Rovner concluded.

Moving to the issue of whether a search warrant would still have been issued if the unlawfully obtained materials were excised from the warrant application, the 7th Circuit again veered away from the district court’s conclusion.

“We agree with (FBI Agent Nathan Holbrook), who candidly conceded that he would not have been in a position to seek a warrant without the information that Garbutt provided in his capacity as an agent of the government. The evidence gained from the warrant and presented at trial was therefore the fruit of the initial, multi-month unlawful search, and should have been suppressed,” Rovner wrote, concluding that Shelton’s motion to suppress and motion for a mistrial should have been granted.

As such, the 7th Circuit vacated Shelton’s conviction and remanded for proceedings consistent with its opinion in United States of America v. Ethel Shelton, 19-3388.

Indiana Court of Appeals

May 13

Agency Action – Utilities/Rate Increase

Indiana Office of Utility Consumer Counselor, et al. v. Duke Energy Indiana, LLC, et al.

20A-EX-1404

Duke Energy successfully defended itself from a lawsuit brought by a group of its customers after the Indiana Utility Regulatory Commission partially granted the electric giant’s petition to raise its base rates.

In July 2019, Duke Energy filed with the IURC a petition for authorization to increase its retail rates and charges for electric utility service. In the petition, Duke requested the IURC to investigate all aspects of its operations and to approve its suggested rate increases.

The Indiana Office of Utility Consumer Counselor, along with a group of Duke’s industrial electricity customers and other entities, opposed the petition, arguing that revenue requirements should be reduced rather than increased, resulting in lower electricity rates for Duke’s retail customers. After extensive proceedings, however, the IURC issued an order granting in part and denying in part Duke’s petition.

As a result, the OUCC and customer group claimed on appeal that the IURC erred in allowing Duke to recover from ratepayers money that it spent to dispose of coal ash.

The customers group raised two additional issues on appeal:

Whether the IURC erred in accepting Duke’s jurisdictional separation study allocating costs between Duke’s retail and wholesale electricity customers; and

Whether the IURC erred in granting in full Duke’s request to recover operating and maintenance costs at its Edwardsport, Indiana, power plant.

Finding the IURC did not err in either regard, the Indiana Court of Appeals affirmed in Indiana Office of Utility Consumer Counselor, et al. v. Duke Energy Indiana, LLC, et al., 20A-EX-1404.

Deciding a mixed question of law and fact, the appellate court initially concluded that the IURC did not err in approving Duke’s coal ash remediation costs. Neither, it found, was there an error in the IURC’s approval of Duke’s jurisdictional separation study.

“The Group claims that the IURC should not have accepted the study as the basis for allocating revenue and costs between wholesale and retail customers, arguing that the study inappropriately burdens Duke’s retail customers with unneeded production capacity that Duke had previously dedicated to its wholesale customers,” Senior Judge John Baker wrote.

“The IURC, as the finder of fact, weighed the parties’ evidence and credited Duke’s analysis of its production capacity over that of the Group. We will not second-guess the finder of fact,” it concluded. “The IURC did not err on this issue.”

Lastly, the appellate court concluded that the IURC did not err in granting Duke’s request to recover in full its requested amount of O&M costs for the Edwardsport plant. It found that for the purposes of the question of Duke’s O&M expenses at Edwardsport, Ayres and City of Evansville were factually distinguishable.

“The IURC’s final order in this case considered the parties’ arguments in detail and directly addressed the question of whether Duke should be allowed to recover O&M [operations and maintenance] costs, including gasification-related costs,” the appellate court wrote.

“By contrast, the Commission’s decisions in (L.S. Ayres & Co. v. Indianapolis Power & Light Co., 169 Ind. App. 652, 662, 351 N.E.2d 814, 822 (1976)) and (City of Evansville v. S. Ind. Gas & Elec. Co., 167 Ind. App. 472, 516, 339 N.E.2d 562, 589 (1975)) did not address the claims at issue in depth, if at all. We conclude the IURC did not err in granting Duke’s request to recover in full its requested amount of O&M costs for the Edwardsport plant.”

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May 14

Civil Tort – Vicarious Liability/Non-hospital Facilities

Harold Arrendale v. American Imaging & MRI, LLC a/k/a Marion Open MRI, et al.

20A-CT-2184

In a lawsuit over a missed areteriovenous fistula, the Indiana Court of Appeals has ruled the Indiana Supreme Court precedent which holds that a hospital can be held vicariously liable for the negligence of an independent-contractor physician also applies to a non-hospital facility.

Harold Arrendale sued Marion Open MRI and Alexander Boutselis, M.D., claiming they failed to diagnose and treat his fistula. Boutselis is an independent radiologist who worked on contract for the MRI facility.

In granting summary judgment to Marion Open MRI, the Allen Superior Court noted Sword v. NKC Hospitals, Inc., 714 N.E.2d 142 (Ind. 1999) was specifically about hospitals being liable for their contract employees. The ruling did not include any mention of non-hospital facilities.

“The consideration of expanding present law beyond the confines of a hospital is left to the wisdom of the Indiana appellate courts,” Allen Superior Judge Craig Bobay wrote.

In reversing the trial court and finding Sword does cover non-hospital facilities, the Court of Appeals also allowed its decision to be applied retroactively to Harold Arrendale v. American Imaging & MRI, LLC, a/k/a Marion Open MRI, 20A-CT-2184.

Arrendale argued in his appeal that Sword applied to non-hospitals because a patient receiving medical care “reasonably expects or believes” the health care professionals working there are employees or agents of the facilities.

In an amicus brief in support of Arrendale, the Indiana Trial Lawyers Association asserted there is no logical justification for holding hospitals are liable for independent contractors but non-hospital health care providers are not.

Both Marion Open MRI and the Defense Trial Counsel of Indiana maintained Sword should be limited to hospitals. They argued hospitals are full-service institutions that provide a range of services provided by employees and independent contractors and the patient would have no way of knowing whether their health care provider is an employee or an independent contractor.

The Court of Appeals cited what it described as the “highly persuasive” federal court ruling in Webster v. Center for Diagnostic Imaging, Inc., 1:16-cv-02677-JMS-DML, 2017 WL 3839377 (S.D. Ind. Aug. 31, 2017). There a patient sought to hold a diagnostic imaging center vicariously liable for the negligence of an independent-contractor radiologist and the district court held there are no meaningful differences between a hospital and a diagnostic imaging center under Sword.

Writing for the Court of Appeals, Judge Nancy Vaidik concluded, “In short, just as it is reasonable for a hospital patient to believe that doctors providing care in a hospital are employees or agents of the hospital, it is reasonable for a patient of a diagnostic imaging center to believe that the radiologists interpreting images for the center are employees or agents of the center, unless the center informs the patient to the contrary.”

Also, in a footnote, the appellate panel respectfully disagreed with the trial court’s belief that the lower courts have no role to play in the expansion of Indiana law. “As demonstrated by the court’s thorough twenty-five page order, trial courts are fully capable of contributing to the development of the law,” it wrote.

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May 19

Criminal – Child Molesting/Depositions of Minor Victims

Donnie Louis Sawyer v. State of Indiana

20A-CR-1446

In a case of first impression, the Indiana Court of Appeals has struck down a law limiting a defendant’s ability to depose an alleged victim of child abuse. The law enacted in 2020 received widespread support from lawmakers and prosecutors but had been challenged by the defense bar.

In Donnie Louis Sawyer v. State of Indiana, 20A-CR-1446, appellant-defendant Donnie Sawyer was charged in 2019 with two counts of felony child molesting – one count each for allegations against D.S. and A.S., both of whom were under 10 years old. The minors had provided statements, as had their parent, alleging child molesting before Sawyer was charged.

While the case was in its preliminary stages, Senate Enrolled Act 206 was enacted, restricting a defendant’s ability to depose a minor alleged to be a victim of a sex offense absent prosecutorial consent or “extraordinary circumstances.” The state did not consent to Sawyer deposing D.S. or A.S., and the Hamilton Circuit Court declined to authorize the depositions.

Sawyer appealed, claiming in oral arguments in April that the statute, Indiana Code § 35-40-5-11.5, conflicted with the Indiana Trial Rules, specifically Rules 26 and 30. The appellate panel agreed, reversing in Sawyer’s favor.

“Considering Ind. Code § 35-40-5-11.5 in light of the Indiana Trial Rules, we find that they are incompatible to the extent that both cannot apply in Sawyer’s situation,” Judge Elaine Brown wrote. “The former contemplates that a defendant ‘may depose a child victim only in accordance with this section,’ whereas Ind. Trial Rule 26 provides that, unless in the case of protective orders, the frequency of use of discovery methods including depositions ‘is not limited,’ and Ind. Trial Rule 30(A) provides that ‘any party may take the testimony of any person, including a party, by deposition upon oral examination’ after commencement of the action.

“The statute further conflicts with the Indiana Trial Rules when it necessitates the prosecutor’s permissions … and when it requires a defendant to move for a hearing when the permission sought is not forthcoming and otherwise places the burden of proof on the defendant at the contemplated hearing,” Brown continued. “… Because the procedural provisions in the statute conflict with those of the Indiana Trial Rules, the provisions of the Indiana Trial Rules govern.”

The COA’s holding included a finding that I.C. 35-40-5-11.5 is a procedural law, not substantive, as the state had argued. Quoting Key v. State, 48 N.E.3d 333 (Ind. Ct. App. 2015), the panel noted “(i)t is a fundamental rule of Indiana law that when a procedural statute conflicts with a procedural rule adopted by the supreme court, the latter shall take precedence.”

Petition for Tax Deed – Tax Sale/Ownership Dispute

S&C Financial Group, LLC v. Pinky Khan and Ahmad Khan

20A-TP-1934

A dispute over a misspelled name that led to two entities both thinking they owned an Indianapolis property has been resolved in favor of the entity holding the tax deed, with the Indiana Court of Appeals finding the opposing party did not sufficiently rebut the validity of the tax deed.

Colorado-based Rainier Properties LLC came into possession of an Arnolda Avenue property in 2016 but failed to pay taxes. Thus, the property was scheduled for a tax sale in October 2017. However, when the deed for the property was recorded in 2016, the name of the owner was misspelled as Rainer, another Colorado property group.

A series of notices – notice of tax sale, notice of S&C Financial’s purchase of the property and notice of filing of a petition for tax deed – were sent to Rainier’s correct address but the wrong name, Rainer’s address and the Arnolda Avenue property. Notices sent via certified mail were returned, while those sent via first-class mail were delivered.

Shortly after S&C petitioned for the tax deed, Rainier conveyed the property to GPS Property Acquisition LLC, which then conveyed it to Ahmad and Pinky Khan. The title search did not identify a tax sale, and the Khans claimed they had no knowledge of the sale when they recorded their deed in February 2019.

But just 45 minutes before the Khan recorded their deed, S&C Financial had recorded its tax deed for the property. When the Khans learned of the competing deeds, they filed an emergency motion to set aside the tax deed.

The trial court ruled in the Khans’ favor, finding the notices were sufficient but the Khans “were bona fide purchasers with no actual or constructive knowledge of the tax sale which ‘overrules the sufficiency of the notices.’” But the Indiana Court of Appeals reversed, remanding for the entry of judgment in S&C’s favor in S&C Financial Group, LLC v. Pinky Khan and Ahmad Khan, 20A-TP-1934.

As an initial matter, the appellate court rejected S&C’s argument that the Khans lacked standing.

“As the Khans explained in their response to S&C Financial’s summary judgment motion, ‘The Khans’ personal stake in the outcome of this lawsuit is whether they own the Property. They will sustain a direct injury if they are not deemed title holders of the Property, as they paid valuable consideration … and have expended additional funds to maintain the Property and in paying a mortgage on the property.’ We therefore conclude that they have standing,” Judge Margret Robb wrote.

The appellate panel also rejected S&C’s argument that the Khans’ challenge to the tax deed was not timely, with Robb noting “there is an exception to the sixty-day requirement ‘where a motion for relief from judgment alleges a tax deed is void due to constitutionally inadequate notice, in which case an appeal must be brought within a reasonable time rather than within sixty days.’ Edwards v. Neace, 898 N.E.2d 343, 348 (Ind. Ct. App. 2008).”

However, the panel went on to note that actual notice is not required. Instead, notice must be “reasonably calculated under all the circumstances to apprise the owner of the action and give them an opportunity to respond.”

Here, the panel held, because only the notices sent by certified mail were returned, not those sent by first-class mail, notice of tax sale in this case was sufficient. It was not the auditor’s fault that Rainier’s name was misspelled, the panel added, but rather was the fault of whoever prepared the deed and of the parties.

“The issuance of the tax deed created a rebuttable presumption that the tax sale and all the steps leading up to the issuance of the tax deed were proper,” Robb continued. “… The Khans had the burden to rebut the presumption of the validity of the tax deed and they have not done so.”

The COA also rejected the argument that the Khans were “bona fide purchasers,” trumping S&C’s status as the tax sale purchaser. The validity of a tax deed can only be challenged under factors enumerated in Indiana Code § 6-1.1-25-16, and bona fide purchaser status is not a factor, the court held.

“Second, the Khans’ argument that they can both stand in the shoes of Rainier for purposes of challenging the sufficiency of notice and be bona fide purchasers is contradictory: if they are standing in Rainier’s shoes in this action, then the constitutionally sufficient notice to Rainier that there was a tax sale proceeding precludes the Khans from being bona fide purchasers,” Robb wrote. “Third, although the redemption statute does not deprive a delinquent taxpayer of his right to convey the property after a tax sale and prior to its redemption … there are statutory restrictions on such a conveyance,” including I.C. 32-21-8.

Finally, the COA distinguished Kumar v. Bay Bridge, LLC, 903 N.E.2d 114 (Ind. Ct. App. 2009), and determined the Khans were not entitled to summary judgment on legal or equitable grounds. “Instead,” Robb concluded, “S&C Financial is entitled to summary judgment in its favor because the presumption that the tax sale and all of the statutory steps leading to the issuance of the Tax Deed were proper was not rebutted by the Khans.”

Indiana Tax Court

May 14

Tax – Summary Judgment/Revenue Source

Express Scripts Incorporated v. Indiana Department of State Revenue

19T-TA-18

The Indiana Tax Court has ruled for a pharmaceutical-services giant and against the Indiana Department of State Revenue, finding that the company receives its Indiana income from the provision of services and not from selling prescription drugs.

Express Scripts Inc., a major pharmacy benefit management company, appealed the Indiana Department of State Revenue’s final determination assessing it with additional adjusted gross income tax and interest for the 2011, 2012 and 2013 tax years.

The dispute revolves around Indiana adjusted gross income tax returns it filed for those years. Express Scripts apportioned its income in accordance with Indiana’s statutory provisions applicable to service providers and, in doing so, “determined that none of its revenue … should be sourced to Indiana because the greater proportion of its income producing activities were incurred in a state other than Indiana.”

A subsequent audit of Express Scripts by the department resulted in a determination that Express Scripts was not a service provider because “[its] primary ‘revenue stream’ was attributable to buying, selling, and delivering prescription drugs in transactions which occurred within the state.”

As such, the department determined that Express Scripts’ receipts from its sale of prescription drugs should have been sourced to Indiana as required for sales of tangible personal property under Indiana Code § 6-3-2-2(e).

Express Scripts protested the proposed assessments, but the department ultimately issued a Letter of Findings that upheld them in their entirety. After Express Scripts launched a tax appeal, the department brought a motion for partial summary judgment, noting that a judgment in its favor would still not address the calculation of Express Scripts’ income from its retail sales in Indiana.

Bringing a single issue before the Indiana Tax Court, the department argued whether Express Scripts receives its Indiana income from selling prescription drugs or from providing services.

In a May 14 opinion, the Indiana Tax Court found in favor of Express Scripts, granting it summary judgment and concluding that the pharmacy company receives its Indiana income from the provision of services.

First, the Tax Court noted that the Department failed to explain why Express Scripts’ “stated desire to contract with local pharmacies to provide certain services” establishes that it is selling prescription drugs. It likewise failed to explain why a certain section of the contract, which merely states that the local pharmacy “will work with [Express Scripts] in good faith to carry out any and all of its obligations hereunder and shall … comply with all terms and conditions of the . . . Agreement,” demonstrated that Express Scripts was selling prescription drugs.

“These explanations are necessary because without them, the Department’s inference – i.e., that Express Scripts is selling prescription drugs – is not clear to the Court and therefore not reasonable,” Judge Martha Blood Wentworth wrote for the Tax Court.

Additionally, the tax court found unreasonable the department’s inference that Express Scripts’ 2011 Form 10-K filed with the U.S. Securities and Exchange Commission is a declarative admission that it receives its income from selling prescription drugs. Neither did it find that Express Scripts, Inc. v. Department of Revenue, 437 P.3d 747 (Wash. Ct. App. 2019), review denied, supported the department’s position that Express Scripts has taken the stance in other jurisdictions that it sold prescription drugs.

Lastly, on the issue of Express Scripts’ calculation and recording of deductions for “cost of goods sold,” the tax court concluded that the department “offered bare conclusions and non sequiturs as connective tissue, concluding, without explaining, that reporting COGS for federal income tax purposes ‘establishes that [Express Scripts] is buying the prescription drugs for resale.’”

“Accordingly, without any accompanying explanation, the Department’s inference that reporting COGS on federal tax returns mandates Express Scripts’ Indiana apportionment conclusions is no more than speculation or conjecture, and therefore is unreasonable and insufficient to meet its prima facie summary judgment burden,” it wrote. “The Department has not made a prima facie showing that there is no genuine issue of material fact that would shift the evidentiary burden to Express Scripts to demonstrate an issue for trial. Consequently, the Department is not entitled to judgment as a matter of law. See T.R. 56(C).”

Thus, the tax court concluded that to the extent Express Scripts’ Indiana returns for the years at issue reported its Indiana tax base in accordance with Indiana Code § 6-3-2-2(f), Express Scripts is entitled to judgment as a matter of law.

It therefore denied the department’s motion and granted summary judgment to Express Scripts in Express Scripts Incorporated v. Indiana Department Of State Revenue, 19T-TA-18.•