Another look at Skelly Oil and Franchise Tax Board.

Author:Salamanca, Paul E.

In recent years, members of the Supreme Court of the United States have twice cited Skelly Oil Co. v. Phillips Petroleum Co. (1) for the proposition that the federal Declaratory Judgment Act, (2) which Congress enacted in 1934, is "procedural only" and does not enlarge the scope of federal jurisdiction. (3) By this, they probably mean that Skelly allows no case into federal court in the presence of the act that could not find its way there in its absence. (4) But whether this assertion is accurate today, or was accurate in 1950 when Justice Frankfurter wrote Skelly, is not entirely clear. Depending on how one reads Skelly and how one defines "enlargement," the act as currently interpreted may in fact "enlarge" the scope of federal jurisdiction, and it may even have done so under Skelly. In particular, Skelly may construe the act to allow certain cases to be heard in federal court earlier than they might otherwise have been heard, and at the instance of the party that may otherwise have been the defendant in a conventional action for coercive (i.e., non-declaratory) relief. (5) This may constitute a form of jurisdictional "enlargement," depending on how one defines the term. Given Skelly's status as an icon of federal jurisdiction, issues such as this merit attention. In particular, we should ask ourselves what Justice Frankfurter meant by Skelly, if the Court pays homage to Skelly in the breach, and what, if anything, is left of the case. (6)

Nor would any discussion of Skelly be complete without attention to its adoptive child, Franchise Tax Board v. Construction Laborers Vacation Trust. Again, depending on how one reads Skelly, Franchise Tax Board represents either a vindication or a partial repudiation of the earlier case's approach. If only because Franchise Tax Board has confounded a generation of lawyers, (7) it too merits attention. More to the point, we should ask ourselves if the case yields a rule that can be applied to other cases. I conclude that it does, although stating the rule is about as awkward as making a three-point turn in a Winnebago. To wit, Franchise Tax Board stands for the proposition that, if and only if a state (or one of its instrumentalities) brings an action for declaratory relief under its own laws, in its own courts, and the party against whom it seeks such relief is sitting on (i.e., declining to bring) a coercive action that arises under the laws of the United States, that party may not remove the case to federal court. (8)

In the first part of this article, I will discuss Skelly and assess its current vitality, (9) with particular reference to so-called "mirror-image" cases, a complex category that includes Franchise Tax Board as an example. (10) In the second part, I will take up Franchise Tax Board. (11) In the final part, I will offer a conclusion.


    Close analysis reveals that Skelly is very much alive, although perhaps not quite as much so as the Justices' references suggest. (12) In fact, Skelly still performs most, if not all, of the work Justice Frankfurter might have expected. (13) Most significantly, it continues to exclude from federal court so-called "federal-defense" and "federal-reply" cases. (14) In these cases, a party seeking a declaration from a federal court has a distinct action under state law for coercive relief that anticipates a federal response, but the complaint for which, properly pleaded, lacks a federal component. (15) In other words, Skelly continues to exclude from federal court declaratory actions in which the plaintiff has a claim for coercive relief that would fail the well-pleaded complaint rule, even if a federal issue were certain to present itself later in the case. (16)

    On the other side of the ledger, however, Skelly (as currently deployed) does not exclude from federal court the vast majority of mirror-image cases. (17) In these cases, a party seeking declaratory relief from a federal court lacks an action for coercive relief that satisfies the well-pleaded complaint rule, but the party against whom the declaration is sought has an action for coercive relief that does satisfy the rule. (18) Depending on how one reads Skelly, this nearly universal access either departs from or is consistent with Justice Frankfurter's vision. (19) But here one finds a wrinkle. Although federal courts now entertain almost all such actions, there are some situations where they will not, as is exemplified by Franchise Tax Board. (20) Again, depending on how one reads Skelly, Franchise Tax Board either reflects or defies the earlier case.

    In its essence, Shelly was about a commodities future. Phillips Petroleum Co. ("Phillips"), acting as a broker, wanted to compel the Skelly Oil Company ("Skelly") to adhere to a contract for the sale of natural gas. (21) Skelly, meanwhile, thought it had validly terminated the agreement. (22) Phillips sued Skelly in federal court for a declaration that the contract remained enforceable. (23) Because they were not diverse, jurisdiction required a federal question. (24) Phillips thought it could satisfy this requirement by explaining in its complaint for declaratory relief that the only real issue in the case was the validity of Skelly's purported termination, (25) which in turn depended on whether the Federal Power Commission ("Commission") had granted a third party--the Michigan-Wisconsin Pipe Line Company ("Michigan-Wisconsin")--a certificate of public convenience and necessity on or before December 1, 1946, (26) (the idea being that Skelly and others would sell natural gas to Phillips, which would then sell the gas to Michigan-Wisconsin). (27)

    Under the contract, Skelly could terminate if Michigan-Wisconsin did not obtain its certificate by the specified date. (28) Skelly maintained this had happened; Phillips said it had not. (29) (In fact, the Commission had granted a certificate, but subject to conditions.) (30) Describing this dispute in its request for declaratory relief, and classifying the completeness and timeliness of the certificate as federal issues, Phillips argued that it satisfied the requirement that a federal issue appear on the face of its well-pleaded complaint. (31)

    Writing for the Court, Justice Frankfurter refused to allow Phillips to proceed on this basis. (32) By his lights, federal courts could not hear a case simply because a federal issue appeared on the face of a well-pleaded complaint for declaratory relief. (33) Presumably, this was because any competent request for a declaration must anticipate the other side's arguments, such that the existence of a live dispute is clear. (34) If this were permitted, the well-pleaded complaint rule would become a nullity, because any party whose complaint for coercive relief would lack a federal issue could simply ask for declaratory relief as well, thus circumventing the rule. (35)

    Unwilling to tolerate such a development, Justice Frankfurter concluded that, when federal judges receive requests for declaratory relief, they should ignore the words of the actual request and instead hypothesize an action for coercive relief that underlies, or comes close to underlying, the ostensible action. (36) If this hypothesized claim would satisfy the well-pleaded complaint rule, a federal court may hear the case. (37) If not, the federal court must dismiss the action and the plaintiff must go to state court. (38) Applying this approach to the case at hand, Justice Frankfurter concluded that Phillips' action could not proceed in federal court. (39) The hypothetical coercive action that most nearly underlay Phillips' action for declaratory relief was an action for anticipatory repudiation of contract, the complaint for which, he concluded, would not have included a federal issue. (40) Such an issue, he wrote, would have appeared only in Skelly's answer, where it would assert valid termination as an affirmative defense, on the ground that the certificate had been incomplete or untimely. (41) Skelly's possession of a federal defense to Phillips' claim for breach, or Phillips' possession of a federal reply to Skelly's defense, was not sufficient to sustain federal jurisdiction. (42) Justice Frankfurter thus construed the act to exclude federal-defense and federal-reply cases. (43)

    The application of Skelly to mirror-image cases is more complex, however, because Justice Frankfurter never addressed the possibility that Skelly--the party against whom Phillips sought declaratory relief--might have had an action for coercive relief under federal law, or that the existence of such an action might have allowed Phillips to proceed. (44) There are two possible explanations for this. First, Justice Frankfurter might have assumed that Skelly did not have a coercive action against Phillips under federal law, thus eliminating the need to reach the issue. If Skelly had a cause of action against Phillips, it would have been one for a judgment of non-liability on a contract. (45) Although such an action is plausible and in fact well-known in the area of insurance, it bears all the characteristics of an action for declaratory, not coercive, relief. (46) Second, Justice Frankfurter might have considered Skelly's putative action for coercive relief beside the point. In other words, he might have squarely rejected the idea that the Declaratory Judgment Act would allow a mirror-image case into federal court. (47)

    Given Justice Frankfurter's general distrust of courts, particularly federal courts, (48) it would not be unreasonable to assume that he intended Skelly to mean what exactly it has often been taken to mean--that a federal court may hear a request for declaratory relief if and only if the party seeking such relief also has a valid claim for coercive relief that would satisfy the well-pleaded complaint rule, or at least would come close to having such a claim. (49) In fact, he wrote an article while still a professor in which he took aim at the very idea of...

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