Washer & Refrigeration Supply Co., Inc. et al v. PRA Government Services, LLC et al

Filing 31

MEMORANDUM OPINION AND ORDER directing that this action is DISMISSED without prejudice; further ORDERING that Defendants' 23 Motion to Dismiss is DENIED as moot. A final judgment will be entered separately. Signed by Honorable William Keith Watkins on 9/8/10. (scn, )

W a s h e r & Refrigeration Supply Co., Inc. et al v. PRA Government Services, LLC et al

D o c . 31

IN THE UNITED STATES DISTRICT COURT F O R THE MIDDLE DISTRICT OF ALABAMA N O R T H E R N DIVISION W A S H E R & REFRIGERATION S U P P L Y CO., INC., et al., P l a i n t if f s , v. PRA GOVERNMENT SERVICES, L L C , et al., D e f e n d a n ts . ) ) ) ) ) ) ) ) ) )

C A S E NO. 2:09-CV-1111-WKW [ W O ]

M E M O R A N D U M OPINION AND ORDER P la in tif f s have raised the issue whether the court lacks subject matter jurisdiction b ec au se of the Tax Injunction Act ("TIA"), 28 U.S.C. § 1341, and the parties have briefed th is issue. (Docs. # 26, 27, 29.) Because the TIA deprives the court of subject matter ju ris d ic tio n , this action is due to be dismissed without prejudice. I . JURISDICTION AND VENUE W h e th e r the TIA deprives the court of subject matter jurisdiction is the topic of this o p in io n . There is no dispute as to personal jurisdiction or venue. I I . FACTS T h e discussion of facts will be limited to what is necessary to analyze the ju ris d ic tio n a l issue. This case is a putative class action, filed originally in state court and th e n removed to this court by Defendants (Doc. # 2), who asserted federal jurisdiction under th e diversity jurisdiction statute and the Class Action Fairness Act. 28 U.S.C. §§ 1332, 1453. P la in tif f s filed a motion to remand (Doc. # 14), but that motion was denied as moot when

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th e y filed the Amended Complaint appearing to raise federal questions, and thus giving rise to jurisdiction under 28 U.S.C. § 1331.1 (Doc. # 22 (Order explaining reasoning for the e x e rc ise of federal question jurisdiction).) Defendants had previously filed a motion to d ism iss (Doc. # 6), which was briefed after the denial of the motion to remand. Thereafter, P la in tif f s brought the TIA to the court's attention, and the parties engaged in an additional ro u n d of briefing with respect to that statute. T h e Amended Complaint alleges that Defendants contracted with approximately 250 A la b a m a counties and municipalities to "outsource tax assessment, collection, administration, a n d appeals services." (Doc. # 19, ¶ 2.) Named Plaintiffs are Washer & Refrigeration S u p p ly Co., Inc. ("WRS"), and its president, David R. Smith. (Doc. # 19, ¶¶ 7, 8.) WRS was a ss e ss e d approximately $50,000 in sales tax debt, interest, and penalties by Defendants for tax years 2003 through 2006; Defendants then caused WRS to execute an "Agreement to E n try of Final Assessment," agreeing to make installment payments on the debt, without inf o rm ing WRS that it had the right to administrative review. (Doc. # 19, ¶ 7.) Plaintiffs argue that the system of tax assessment and collection in which Defendants h a v e played a part violates Alabama law, because counties and municipalities are not

Upon further review, the court is skeptical whether the "federal question" raised in Count Eight of the Amended Complaint would suffice to confer jurisdiction. The claim is titled "violation of due process," and contains a single reference to the "United States Constitution," as well as that of Alabama. (Doc. # 19, at 57-58.) There is no freestanding cause of action against state officials in their individual capacities (or here, private parties with whom they act in concert) for violations of the federal constitution; such an action would have to proceed under a statute, such as 42 U.S.C. § 1983, creating a private right of action. But no such source of law is cited. Because the case will be dismissed for lack of subject matter jurisdiction under the TIA, however, it is unnecessary to decide whether federal question jurisdiction was created by Count Eight.

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p e r m itte d to delegate their taxing authority to private entities. (Doc. # 19, ¶ 14); see Ala. C o n st. 1901 art. XI § 212. The scheme is further said to violate the Alabama Taxpayers' Bill o f Rights ("TBOR"), a set of statutes enacted in 1992. See Ala. Code §§ 40-2A-1, et seq. T B O R was made applicable to local taxing authorities by the 1998 Local Tax Simplification A c t. Ala. Code §§ 11-51-210 (municipalities); 11-3-11.2 (counties); see GMAC v. City of R e d Bay, 894 So. 2d 650, 653 (Ala. 2004). Plaintiffs concede that TBOR "presupposes" that lo c a l governments may hire private firms "to perform a limited range of tax-administration s u p p o rt services," including "(A) collecting taxes that have previously been levied and a ss e ss e d by counties and municipalities, and (B) auditing taxpayers' books and records for th e purpose" of determining correct assessments. (Doc. # 19, ¶ 18.) Plaintiffs assert that D e f e n d a n ts have illegally been permitted not just to collect taxes and perform audits, but to " e n ter assessments and conduct administrative procedures," functions reserved to g o v ern m en t bodies by TBOR. (Doc. # 19, ¶ 19.) Another provision of TBOR, referred to by Plaintiffs as its "Bounty Hunter P r o v is io n ," but perhaps more accurately described as an anti-bounty hunter provision, re stric ts the scope of contracts between local governments and private firms for tax a s s e s s m e n t and collection. See Ala. Code § 40-2A-6(a). Plaintiffs assert that this provision h a s been violated because Defendants receive contingent awards for examining taxpayers' b o o k s and discovering tax liabilities, and for allowing firms to be involved both in d e te rm in in g the amount of taxes due and collecting the same taxes. (Doc. # 19, ¶¶ 22, 23.)

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S till other provisions of TBOR prohibit certain compensation arrangements for private firms, a n d establish bonding requirements for the firms; Plaintiffs allege both have been violated h ere . (Doc. # 19, ¶¶ 27-32.) Finally, TBOR guarantees a right to appeal to the circuit court o f the county wherein an assessment was made, a right Plaintiffs claim was not granted to th e m when Defendants assessed and collected taxes. (Doc. # 19, ¶¶ 33-36.) T h e Amended Complaint makes lengthy and detailed allegations about the contracts a n d business practices of Defendants; it is unnecessary to repeat those details here. It is h e l p f u l to explain that Plaintiffs allege the existence of two contracts, a "Discovery C o n tr a c t," and an "Administration Contract" between Defendants and local governments. (S e e , e.g., Doc. # 19, ¶ 43.) Both contracts are said to violate TBOR for multiple reasons, in c lu d in g its anti-bounty hunter provision, its prohibition on compensation being tied to c o lle c tio n s , its prohibition on private firms conducting assessments, and denial of appeal r ig h ts . The Amended Complaint then proceeds to make allegations in furtherance of class c e rtif ic a tio n , which are not relevant at this stage of the lawsuit. The Amended Complaint pleads twelve counts against all Defendants. The first four c o u n ts seek declaratory judgments that TBOR has been violated, by, respectively, the D isco v ery Contract, the Administration Contract, the receipt of prohibited compensation, and th e failure to comply with its bond requirements. (Doc. # 19, ¶¶ 144, 149, 154, 157.) These co u n ts seek orders stating that the contracts between Defendants and taxing authorities are " v o id and unenforceable" and that "any and all tax assessments, liens, levies, and collections

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p e rf o rm e d in relation to Defendants'[] contracts are invalid, void, and constitute unlawful ta k i n g s ." (Doc. # 19, ¶ 148.) Count Four also requests that Defendant RDS forfeit its license f o r six months for failure to comply with the bonding requirements. (Doc. # 19, ¶ 160.) C o u n t Five is for unjust enrichment, and seeks the imposition of a constructive trust o n all monies resulting from the unjust enrichment. (Doc. # 19, ¶ 161.) Count Six is for " n e g lig e n c e , recklessness and/or wantonness," and seeks damages including "a d is g o rg e m e n t, refund and return of all monies improperly assessed and collected." (Doc. # 1 9 , ¶ 167.) Count Seven seeks injunctive relief prohibiting Defendants from any conduct v io latin g TBOR or other Alabama statutes, invalidating and removing all liens improperly im p o s e d by Defendants, "returning all real and personal property . . . seized" by Defendants, " e n jo in in g Taxing Jurisdictions from using or relying upon taxpayer information obtained, direc tly or indirectly, from Defendants," and "mandating Defendants to recoup taxes remitted to Taxing Jurisdictions through" their previous contractual arrangements. (Doc. # 19, ¶ 169.) C o u n t Eight asserts claims for violation of Plaintiffs' state and federal constitutional rig h ts to due process; it seeks "disgorgement, refunds and return" of funds seized as relief. (D o c . # 19, ¶ 172.) Count Nine is entitled "Claim for Refund," and requests that Defendants b e required to refund all monies they improperly seized from Plaintiffs. (Doc. # 19, ¶ 173.) C o u n t Ten is entitled "Disgorgement," and requests disgorgement of all "revenues and p ro f its which Defendants have received" through their improper relationship with local g o v e rn m e n ts . (Doc. # 19, ¶¶ 176-78.) Count Eleven is for breach of contract, and argues

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th a t, even if the Discovery and Administration Contracts are not void, Defendants have b re a c h e d them, and Plaintiffs are entitled to damages as a result. (Doc. # 19, ¶ 183.) Finally, C o u n t Twelve, for slander of title, asserts that Defendants' illegal practices have slandered title s to various property owned by Plaintiffs as a result of the attachment of unlawful tax lien s. (Doc # 19, ¶¶ 184-87.) III. STANDARD OF REVIEW A court has an ongoing "obligation . . . to examine its own [subject matter] ju ris d ic tio n . . . at each stage of the proceedings." Bochese v. Town of Ponce Inlet, 405 F.3d 9 6 4 , 975 (11th Cir. 2005). Here, Plaintiffs have raised the issue of the court's subject matter ju ris d ic tio n under the TIA. The court is bound to consider the merits of the jurisdictional q u e stio n , despite it being raised by Plaintiffs only after their original motion to remand was d e n ied as moot. I V . DISCUSSION T h e TIA imposes a jurisdictional limitation on the subject matter of cases a federal c o u rt may hear. Amos v. Glynn Cnty Bd. of Tax Assessors, 347 F.3d 1249, 1255 (11th Cir. 2 0 0 3 ). It provides: "The district courts shall not enjoin, suspend or restrain the assessment, le v y or collection of any tax under State law where a plain, speedy and efficient remedy may b e held in the courts of such State." 28 U.S.C. § 1341. The TIA applies when two c o n d itio n s are met: "`(1) the relief requested by the plaintiff will enjoin, suspend, or restrain a state tax assessment, and (2) the state affords the plaintiff a plain, speedy and efficient

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rem ed y.'" Amos, 347 F.3d at 1255 (quoting Williams v. City of Dothan, 745 F.2d 1406, 1411 (1 1 th Cir. 1984) (internal quotation marks omitted)). "`[T]he mere illegality or

u n c o n stitu tio n a lity of a state . . . tax is not in itself a ground for equitable relief in the courts o f the United States. If the remedy at law is plain, adequate, and complete, the aggrieved p a rty is left to that remedy in the state courts.'" Id. at 1256 (quoting Moe v. Confederated S a lis h & Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 470 (1976) (alteration in th e original)). In Amos, the suit "plainly [sought] to enjoin a state tax assessment," so the first prong o f the test was not discussed by the court. Id. at 1255. Here, somewhat more analysis is re q u ire d . As in Amos, Plaintiffs have proceeded by seeking a declaratory judgment, although th e judgments sought are not identical. In Amos, the suit was brought directly against a c o u n ty tax assessing body; the plaintiffs asserted that its method of selectively re-evaluating c e rta in properties each year violated their constitutional right to equal protection. Id. a t 1251-53. Here, the suit is brought against private companies that have contracted with lo c a l taxing authorities to perform certain services related to taxes owed to those bodies. D e f en d a n ts argue that their private nature is itself fatal to any claim that this suit is barred b y the TIA. While Defendants are correct that no cited cases have applied the TIA to a case a g a in s t a private defendant, that is not dispositive. The arrangements at issue here, are, a p p a re n tly, relatively novel ones, and it is understandable that the vast majority of lawsuits c o n c ern in g the TIA would have been brought directly against governmental entities. But

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n e i th e r the statute nor the Eleventh Circuit's test makes the identity of the defendants a p re re q u is ite to applying the TIA. Regardless of the identity of the defendants, then, the question is whether the "relief re q u e ste d . . . will enjoin, suspend or restrain a state tax assessment." It is noteworthy that th e focus is not on the precise contours of the causes of action brought or factual averments m a d e by plaintiffs, but on the bottom line relief they seek. That point is particularly salient in this case, where Plaintiffs have brought twelve counts of various descriptions, but have s o u g h t similar and overlapping forms of relief in many of the counts. For example, the four d e c la ra to ry judgment counts all seek declarations that the contracts between the taxing a u th o r i t i e s and Defendants are void and unenforceable, and further that "any and all tax a ss e ss m e n ts, liens, levies, and collections performed in relation to Defendants'[] contracts a re invalid, void, and constitute unlawful takings." (Doc. # 19, ¶ 148.) Count Seven seeks s im ila r injunctive relief, including an injunction against the non-party taxing authorities c o n c e rn in g their use of information obtained from Defendants. (Doc. # 19, ¶ 169.) Counts F iv e , Six, Eight, Nine, and Ten all seek equitable remedies, such as disgorgement, the im p o sitio n of constructive trusts, and "refund[s]" of taxes improperly collected. Counts E le v e n and Twelve, although stating distinct causes of action for breach of contract and s la n d e r of title, again seek relief "including a disgorgement, refund, and return of all monies im p rop erly assessed and collected." (Doc. # 19, ¶ 183.)

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D e f e n d a n ts simply fail to explain how the relief sought, if obtained, would not at least " re stra in " the assessment and collection of taxes, if not actually "enjoin [and] suspend" them in some cases as well. Defendants claim that a "refund" would be impossible, given that the ta x in g authorities are not parties to this suit. (Doc. # 28, at 2.) First, this argument depends o n accepting Defendants' view on the merits, rather than simply evaluating the relief sought b y Plaintiffs. Second, it depends on defining the word "refund" to include only funds paid o u t directly by the taxing authorities. But there is no indication this is what Plaintiffs mean b y the word, and that definition seems overly restrictive in light of the arrangements between D e f en d a n ts and the taxing authorities. If Defendants were compelled to pay substantial d a m a g e s to Plaintiffs, whether under the guise of a "refund," "disgorgement," or " c o n stru c tiv e trust," it would have a significant impact on the taxing authorities' ability to c o n tra c t with private companies as permitted under Alabama law. Deciding that such d a m a g e s were due would require this court to make substantive declarations concerning state ta x law that would necessarily including passing judgment on the taxing authorities' own c o n d u c t in making and enforcing contracts with Defendants. This would necessarily place a "restraint" on the assessment and collection of taxes in the way the taxing authorities see f i t .2

Nor is there any requirement, as Defendants imply, that for a suit to be barred by the TIA, it must be directed at the constitutionality of a state statute or of particular taxes or ordinances enacted by the taxing authorities. (Doc. # 12, at 2, 3.) Amos itself concerned the manner in which the taxing authority assessed property taxes, not the taxes themselves or underlying state laws.

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O th e r cases cited by Defendants relate to the distinguishable situation in which statutes o r ordinances contain some portions related to taxation, and other portions with a more g en era l regulatory purpose. (Doc. # 12, at 4-5.) In such situations, the TIA does not bar a f e d era l court from hearing constitutional challenges to the non-tax portions of the regulations c h a lle n g e d . See Miami Herald Pub. Co. v. City of Hallandale, 734 F.2d 666, 671 (11th Cir. 1 9 8 4 ) (holding that a provision requiring full compliance with the city code before any v e n d in g machine licenses could be issued was "regulatory," and did not have a "tax p u rp o s e " ). By contrast, the whole of this lawsuit concerns the methods by which the taxing a u th o ritie s have chosen to contract with Defendants to further the operation of their tax s ys te m s ; there is no "regulatory" provision to be severed away and considered separately. Defendants discuss the Sixth Circuit's opinion in BellSouth Telecommunications., Inc. v . Farris, 542 F.3d 499, 501 (6th Cir. 2008). There, a state law both imposed a tax on phone c a r rie r s, and prohibited the carriers from passing the tax through to their customers. Id. The c o u rt held that the TIA did not bar a First Amendment claim against the latter provision, b e c au s e the plaintiffs did not seek "`orders enabling them to avoid paying state taxes.'" Id. (q u o tin g Hibbs v. Winn, 542 U.S. 88, 107 (2004) (emphasis in the original)). To the contrary, Plaintiffs here seek precisely such orders; the fact that the taxes are re m itte d through private corporations under contract to taxing authorities does not make the m o n ies paid any less taxes assessed and collected under state law. It would plainly "hinder" th e authorities' "interest in collecting" taxes to impose injunctions and substantial damages

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o n the corporations with which they have chosen to contract in furtherance of their tax s ys te m s . See id. Nor is this case like Wells v. Malloy, 510 F.2d 74 (2d Cir. 1975), in which a taxpayer sought to contest the penalty of losing his driver's license for nonpayment of state ta x e s . The challenged acts here include the imposition of liens and levies, described by Wells a s encompassed by the TIA, and not just a "general use of coercive power." Id. at 77. W h ile this case is unusual, that does not mean the TIA's jurisdictional bar is in a p p lic a b le if its requirements are met. The relief sought in this case would enjoin, restrain, a n d suspend the assessment and collection of state taxes, albeit not by directly enjoining ta x in g authorities. But the TIA does not say who must be enjoined; it only says what must be. A c c o rd in g ly, the relief sought by Plaintiffs in this lawsuit would "enjoin, suspend or restrain" th e assessment and collection of state taxes, meeting the first prong of the TIA test. T h e second prong of the test is that an adequate remedy for the injury exists in state c o u rt. Plaintiffs claim that such remedies do exist, and Defendants do not dispute this a s s e rtio n . Moreover, even in the unique context of this case, this issue would seem less s u s c e p tib le to any potential "gaming" by Plaintiffs. If Plaintiffs are incorrect and there is no a d e q u ate state court remedy for their claims, they will be out of luck, having already requested an d secured dismissal of their case from federal court on TIA grounds. There is neither a c o n te n tio n nor other reason to think that state courts could not provide an adequate remedy in this case. Accordingly, the second prong of the TIA test is also met.

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V . CONCLUSION T h e TIA deprives this court of subject matter jurisdiction over this case. Accordingly, it is ORDERED that this action is DISMISSED without prejudice. It is further ORDERED th a t Defendants' motion to dismiss (Doc. # 23) is DENIED as moot. A final judgment will be entered separately. D O N E this 8th day of September, 2010.

/s/ W. Keith Watkins UNITED STATES DISTRICT JUDGE

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