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Ghost Player, LLC v. Iowa Department of Economic Development

Supreme Court of Iowa

January 19, 2018


         Appeal from the Iowa District Court for Polk County, Michael D. Huppert, Judge.

         An agency appeals from the district court's reversal of its decision to revoke an award of tax credits.

          Thomas J. Miller, Attorney General, Jeffrey S. Thompson, Solicitor General, and David L.D. Faith II, Assistant Attorney General, for appellant.

          Van T. Everett of Whitfield & Eddy, P.L.C., Des Moines, for appellee Ghost Player, LLC.

          Richard O. McConville of Coppola, McConville, Coppola, Hockenberg & Scalise, P.C., West Des Moines, for appellee CH Investors, LLC.

          APPEL, Justice.

         The Iowa Department of Economic Development (IDED)[1] appeals from a district court's reversal of the agency's May 26, 2016 decision to revoke tax credits that had been previously awarded by IDED to Ghost Player, LLC (Ghost Player), on February 22, 2012.[2] The district court had held that the IDED's 2016 action revoking the tax credits was an invalid collateral attack on the agency's 2012 action and was barred under the doctrine of claim preclusion.

         The IDED appealed. On appeal, the IDED asserts that the district court erred because the elements of claim preclusion as applied to administrative actions have not been met. Even if the elements of claim preclusion were met, the "scheme of remedies" exception should apply to enable it to impose remedies for breach of contract.

         For the reasons expressed below, we reverse the decision of the district court and remand the case.

         I. Factual and Procedural Background.

         A. Introduction.

         In 2007, the Iowa legislature passed the Film, Television, and Video Project Promotion Program (Film Program). 2007 Iowa Acts ch. 162, §§ 1-13. The legislature repealed the Film Program in 2012. 2012 Iowa Acts ch. 1136, § 38. The purpose of the Film Program was to encourage film, television, and video projects to be produced in Iowa. Iowa Code § 15.392 (2009). The statute establishing the Film Program required projects seeking to receive tax credits to register with the IDED, and IDED rules required the IDED and the project to enter into a contract containing terms and conditions for the receipt of tax credit benefits. Id. § 15.393(1); Iowa Admin. Code r. 261-36.5 (eff. July 15, 2009).

         B. Ghost Player and the IDED Agreement and Request for Tax Credits.

         On January 8, 2009, Ghost Player entered into an agreement with the IDED to produce a documentary project originally entitled Field of Dreams Ghost Players. The agreement provided that upon the completion of the project and after "submittal and approval by IDED of Recipient's qualified project expenditures (as submitted in Form Z, Schedule of Qualified Expenses), IDED will issue to each Investor a tax credit certificate." The agreement defined a "qualified expenditure" as "a payment to an Iowa resident or an Iowa-based business for the sale, rental, or furnishing of tangible personal property or for services directly related to the registered project, including, but not limited to [26 enumerated items]." The agreement provided that the total tax credit award would not exceed twenty-five percent of qualified expenditures for the project.

         In the event of a default, the agreement provided that IDED would give Ghost Player at least thirty days to cure the default. If the default was uncured, Ghost Player would be required to repay all or a portion of the tax credits. The agreement provided that a material misrepresentation would be an event of default. The agreement defined a material misrepresentation as when

[a]ny representation or warranty made by the Recipient in this Contract or in any statement or certificate furnished by it pursuant to this Contract, or made in its Application, or in connection with any of the above, proves untrue in any material respect as of the date of the issuance or making thereof.

         On October 22, 2009, the IDED requested a status update with respect to the project and an itemization of total expenses and qualified expenditures incurred up until September 18. On December 10, Ghost Player provided a draft of Form Z, a budget summary, and a report on the project. In the budget summary, Ghost Player listed $625, 000 spent on in-kind promotions. The Louisville Slugger Museum & Factory (Louisville Slugger), Ringor, and the Cedar Rapids Kernels (Kernels) were not listed as sponsors of in-kind promotions. In the report on the project, however, Ringor and Louisville Slugger were listed as providing grants to the project.

         In May of 2010, Ghost Player submitted its final Form Z to the IDED. The list of expenditures now included in-kind payments of $25, 000 to Ringor, $25, 000 to the Kernels, and $200, 000 to Louisville Slugger. The total listed as being spent on in-kind promotions was $900, 000. Ghost Player provided to IDED what purported to be copies of the "like-exchange of services" agreements between various other parties and Ghost Player, none of which were signed or dated. In total, Ghost Player claimed $2, 034, 227.88 in qualified expenditures. The IDED sent the financial information to the Iowa Department of Revenue for a review and audit.

         On December 20, the IDED sent Ghost Player a "Notice of Preliminary Tax Credit Determination" for the project. Of the over two million dollars in qualified expenditures claimed, the preliminary total of qualified expenditures allowed was $246, 455.68. The auditor's report explained that the expenditures for the in-kind contracts would not be allowed. The auditor wrote, "Iowa Code section 15.393(2)(a)(2) requires 'payments, ' not promises to pay." Therefore, the auditor categorically concluded in-kind payments were not "qualified expenditures." Additionally, the auditor's report found that DreamCatcher Productions, an entity owned and operated by the same people who owned and operated Ghost Player, actually made the payments to vendors. DreamCatcher Productions then charged Ghost Player for the payments at a mark-up that was sometimes substantial. The auditor also found other expenditures that were disallowed.

         Ghost Player disputed the IDED's preliminary tax credit determination. While seeming to concede that unreasonable mark-ups should not be allowed, Ghost Player defended the payments made by Ghost Player to DreamCatcher Productions, insisting several times that DreamCatcher was not a shell company. Ghost Player also argued that the in-kind agreements should be included as qualified expenditures, asserting that Ghost Player received valuable goods and services from the agreements, including sponsorships, advertising, and promotions.

         The IDED sent a "Revised Preliminary Tax Credit Determination" to Ghost Player in response. The IDED wrote, "The department stands by its prior determination that 'in-kind' contributions and 'deferred' payments are not expenditures for purposes of the statute." The IDED, however, revised is determination of qualified expenditures down to $239, 967.41, subtracting the amount of funds received from the State of Iowa in grants. Ghost Player disputed the determination.

         The IDED issued its "Final Tax Credit Determination" on February 22, 2012. The final tax credit determination reiterated the conclusion that in-kind contributions were not payments for the purposes of the statute. The IDED awarded Ghost Player a tax credit of $59, 991.85, or twenty-five percent of the total qualified expenditures.

         C. First District Court Action: Breach of Contract Action for Failure to Issue Appropriate Tax Credits.

         Disappointed with the amount of tax credits granted by IDED, Ghost Player filed a breach of contract action in district court on November 6, 2013, claiming that IDED had breached the contract with Ghost Player by failing to issue tax credits for all qualified expenditures. Ghost Player, L.L.C. v. State (Ghost Player I), 860 N.W.2d 323, 325-26 (Iowa 2015). The State filed a motion to dismiss, arguing that Ghost Player failed to exhaust its administrative remedies by means of a section 17A.19(7) hearing. Id. at 326.

         The State claimed in Ghost Player I that the final tax credit determination was an "other agency action" which required Ghost Player to seek judicial review under the Iowa Administrative Procedures Act. Id. at 327. The Ghost Player I court discussed applicable caselaw, noting that when

the action or inaction of the agency in question bears a discernible relationship to the statutory mandate of the agency as evidenced by express or implied statutory authorization, a party must first present the claim to the agency for other agency action before the party can proceed to district court.

Id. at 328-29; see Papadakis v. Iowa State Univ. of Sci. & Tech., 574 N.W.2d 258, 260 (Iowa 1997).

         As a result, the court held that the final tax credit determination was an "other agency action" and Ghost Player had failed to exhaust its administrative remedies. Ghost Player I, 860 N.W.2d at 329. The Ghost Player I court explained that the legislature mandated that the IDED verify eligibility for the tax credit and verify the issuance of credit. Id. The court further observed that the contract, which declared that "IDED shall have the authority to reasonably assess whether the Recipient has complied with the terms of this Contract, " reinforced the legislative mandate. Id. at 327, 329. Thus, Ghost Player I held that the agency's action qualified as an "other agency action" because it was made subject to express statutory authorization. Id. at 329.

         D. Second District Court Action: Appeal of the Final Tax Credit Determination Awarding Tax Credits as an "Other Agency Action."

         After the decision in Ghost Player I, Ghost Player filed an action in district court seeking to appeal the February 22, 2012 final tax credit determination. In this action brought under Iowa Code chapter 17A, Ghost Player sought discovery both before and after the IDED filed the administrative record with the agency. The district court held a hearing on the discovery issue on ...

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