HomeMy WebLinkAboutSupplemental Communications CS from Robert GoldbergDear Council and Staff,
Item B on the Closed Session Agenda is an unspecified “Initiation of Litigation.” I do not
know who the City is considering suing. Assuming that it is California Resources
Corporation (CRC), I would like to offer the following comments. These are revised and
updated from those I previously emailed on March 24th. Since that time. I have obtained
additional correspondence between the City and CRC through June 28 th (see attached
pdf of correspondence from September 2018-June 2019). I have also attached a copy
of the relevant municipal code (“MC”) sections for reference to the citations below.
Foremost, before any discussion of “potential litigation” I think it is critically important for
the Council to “see the forest for the trees.” In this case, the “forest” is the actual amount
of money that CRC has failed to pay. By “failed to pay”, I specifically mean the
cumulative amount of business license tax that CRC would have paid if they had
complied with the applicable section of the MC and had obtained a business license in
FY 2004-05. This “failed to pay” amount is just over $60,000, a tiny fraction of the $9.3
million demanded as “owed” a year ago.
The derivation of this “failed to pay” figure is straightforward. It begins with the
determination of the applicable section of the MC. Per the second paragraph of the
City’s initial demand letter dated September 26, 2018, the City directly quotes from
Section 5.55.015.B in asserting that CRC was required to obtain a business license.
This MC section applies to “Out-City” oil producers (like CRC) who operate wells that
have a “well head [that] is not located in the city,” but are bottomed “under any real
property in the city.”
The next step in figuring the “failed to pay” amount is to dete rmine the business tax rate.
The applicable section of the MC (5.55.015.B) states in sub-section B.1 that the tax rate
is a penny per barrel for “oil produced by each well in excess of 300 barrels per
quarter.” In other words, per year, the first 1200 barrels per well are “free.” Every barrel
over 1200 barrels per well requires a payment of one penny.
The next step is to determine how many wells CRC have been operating and how much
each has produced per year since their production began in FY 2004-05. This
determination was done by Mr. Kirste through the end of February 2018, and is shown
in Exhibit C of the City’s letter dated September 26, 2018 (attached). Production after
February 2018 through June 30, 2019 was assumed to be at the same rate as earlier in
FY 2017-18.
Finally, the production figures and the tax rate can be combined into a spreadsheet to
calculate the amount that CRC failed to pay since FY 2004-05. The result, $60,410, is
shown in column F of the attached spreadsheet (oil.CRC).
So, what are the positions of CRC and the City vis-à-vis this “failed to pay” amount? I
will try to summarize the major points of both parties in a “forest through the trees”
perspective as best as I can from the available correspondence.
CRC has raised one major objection that may have merit. Their stated position is that
no business license was/is required because the ocean bottom does not meet the legal
definition of “real property” (see middle of page 2 in their letter of May 1, 2019). MC
Section 5.55.015.B (again, the code section the City has stated was violated) has very
specific language stating that any out-of-city well that would require payment of a
business license tax must pass “through or [be] bottomed under any real property in the
city.” The MC could have just said more succinctly “bottomed in the city,” but it doesn’t.
Therefore, the qualifying term “under real property” would appear to be meaningful. Of
note is that the City’s response on June 28th to CRC’s May 1st letter was silent on this
issue.
The City’s position on the amount that CRC “failed to pay” is not explicitly stated , but
can be found in their calculations underlying the September 26th demand for $9.3
million. The derivation of this demand figure in Exhibit C includes a “failed to pay” tax
amount of $4.06 million (see attached Exhibit C). The figure from Exhibit C is only
through February 2018. Assuming production levels remain the same, this figure rises
to $4.35 million when carried through to June 2019.
This very large figure for unpaid taxes results from the City’s use of the business tax
rates found in MC Section 5.55.015.A that are applicable only to “In-City” oil producers
with well heads and bottoms that are both within the city. This is the City’s position even
though the September 26th demand letter states that CRC’s well heads are in Long
Beach and that, therefore, CRC violated a different MC section-- 5.55.015.B.
The City’s use of “In-City” tax rates was questioned by CRC in their letter of May 1,
2019 (page 2). The City’s response on June 28th was that MC Section 5.10.065 allows
the City to appoint a collector (Mr. Kirste) and gives that collector the authority to
determine the amount of tax to be paid. The City’s letter then notes that CRC could
have contested the demand amount at an earlier date, and availed itself of opportunities
to meet with Mr. Kirste.
So is the amount of money that CRC “failed to pay” by not obtaining a business license
$0, $60,410, or a figure 72 times higher of $4.35 million?
Notwithstanding CRC’s “real property” argument which I cannot comment on, I would
strongly argue that the “reasonable person” figure is $60,410. I say this for two reasons.
Firstly, I think that a “reasonable person” would find that any “failed to pay” calculations
should be based on the specific MC section that was violated. While our MC does
empower an appointed collector to determine the amount of business license tax owed
by a delinquent business (MC Section 5.10.065.A), it also states that this determination
“shall be based on information available to the collector” (MC Section 5.10.065.B).
However, our collector appears to have to given no consideration to the most relevant
information available to him—the taxation rate in the sub-section of the MC that was
violated. His alternative selection of a taxation rate from a non-applicable MC sub-
section that was 72 times higher appears to be grossly arbitrary.
This leads to my second reason for support of the $60,410 figure. The 8th Amendment
of the US Constitution states that “Excessive bail shall not be required, nor excessive
fines imposed.” I am not a lawyer, nor familiar with related case law. However, I would
proffer that a “reasonable person” would consider an assessment of unpaid taxes
(before adding penalties) at 72 times higher than what would have otherwise been due
to be quite excessive.
If the Council does not agree, then please consider the precedent that would be
established. Any business that failed to obtain a business license could be subjected to
the same collection process as CRC. For example, the City could appoint a collector to
identify home-based consultants who failed to obtain the required $219 annual business
license. If this collector found such a consultant, he could make a determination that the
unpaid business license tax was that 70 times $219, or over $15,000 per year! This
would be before the additional assessment of 100% in delinquency penalties (another
$15,000) allowable under MC Section 5.10.085.B.
Such a determination would be obviously intolerable and considered outrageous by
every citizen in Seal Beach. I fail to understand why we should not consider Mr. Kirste’s
determination equally outrageous.
Thank you for your consideration and service,
Robert Goldberg
September 22, 2019