Patterson v. Gladwin Corp.

Decision Date17 May 2002
Citation835 So.2d 137
PartiesMichael L. PATTERSON, in his official capacity as Commissioner of the Department of Revenue v. GLADWIN CORPORATION et al.
CourtAlabama Supreme Court

Bill Pryor, atty. gen.; Pamela B. Slate and Susan E. Kennedy, dep. attys. gen., of Slate Kennedy, L.L.C., Montgomery; and Joe Espy III and James E. Williams, dep. attys. gen., of Melton, Espy, Williams & Hayes, P.C., Montgomery, for appellant.

Roger W. Kirby, Richard L. Stone, and Andrea Bierstein of Kirby, McInerney & Squire, L.L.P., New York, New York; Michael R. Pennington, Bruce P. Ely, Joseph B. Mays, Jr., and Thomas N. Carruthers of Bradley Arant Rose & White, L.L.P., Birmingham; Russell Jackson Drake of Whatley Drake, L.L.C., Birmingham; William J. Baxley and Charles A. Daughin of Baxley, Dillard, Dauphin & McKnight, Birmingham; and D.W. Wilson and Blake A. Madison of Tanner & Guin, L.L.C., Tuscaloosa, for appellees.

WOODALL, Justice.

This is a direct action against the State of Alabama seeking refunds of previously paid corporate franchise taxes. We dismiss the action for lack of subject-matter jurisdiction.

I. Factual and Procedural Background

This case is another chapter in long-running litigation over corporate franchise taxes collected pursuant to Ala.Code 1975, §§ 40-14-40, and -41, repealed by Act No. 665, 1999 Ala. Acts 131, Second Special Session. For the history of this litigation, see South Central Bell Telephone Co. v. Alabama, 526 U.S. 160, 119 S.Ct. 1180, 143 L.Ed.2d 258 (1999) (holding Alabama's franchise-tax statutes unconstitutional); on remand, South Central Bell Telephone Co. v. State, 789 So.2d 133 (Ala.1999)

("First Interim Order"), and 789 So.2d 147 (Ala.2000) ("Second Interim Order"); Ex parte Monroe, 723 So.2d 15 (Ala.1998); White v. Reynolds Metals Co., 558 So.2d 373 (Ala.1989) (upholding the franchise-tax statutes against a constitutional challenge), cert. denied sub nom., Reynolds Metals Co. v. Sizemore, 496 U.S. 912, 110 S.Ct. 2602, 110 L.Ed.2d 282 (1990). The initial complaint in this action was filed as a class action on May 24, 1996, while South Central Bell was pending, by Gladwin Corporation ("Gladwin") "on behalf of itself and all other corporations similarly situated." Ex parte Monroe, 723 So.2d 15, 17 (Ala. 1998) (an appeal from an interlocutory order in the case now before us). Gladwin sought a refund initially in the circuit court; it invoked none of the administrative procedures for relief set forth in the Taxpayers' Bill of Rights and Uniform Revenue Procedures Act, Ala.Code 1975, § 40-2A-1 et seq. ("the TBOR"). This case was placed on the administrative docket in the Montgomery Circuit Court, pending resolution of the issues in South Central Bell.

On remand of South Central Bell from the United States Supreme Court, this Court ordered the parties in that case to marshal evidence and present arguments that would be useful to this Court in fashioning a remedy consistent with the United States "Constitution and the holdings of the United States Supreme Court." 789 So.2d at 151. Instead, however, the parties settled the dispute, and South Central Bell was dismissed. Subsequently, this case proceeded.

The complaint as last amended on November 1, 2000, added Arizona Chemical Company ("ACC") as a class representative. Before joining this action, ACC had petitioned the Department of Revenue ("the Department") for a refund of franchise taxes it had paid from 1995 to 1999. The Department failed to respond to the petition within six months, and it was deemed denied by operation of law. § 40-2A-7(c)(3). Subsequently, ACC appealed, pursuant to § 40-2A-7(c)(5), to the administrative law division of the Department. While that appeal was pending, however, ACC asserted its claims in the amended class-action complaint.

Gladwin and ACC (hereinafter collectively referred to as "the Taxpayers") seek to represent a class of foreign corporations that have paid, or that have been assessed, franchise taxes under the invalid tax scheme. They seek "refunds with interest of the sums that Alabama already has collected, pursuant to its foreign franchise tax ... for tax years prior to 2000." On June 13, 2001, the trial judge certified, pursuant to Ala. R. Civ. P. 23(b)(3), an opt-out class consisting of approximately 18,000 class members and placing approximately $1 billion in controversy.

Cynthia Underwood, in her official capacity as Commissioner of the Department of Revenue ("the Commissioner"),1 appeals from the class-certification order. On appeal, she contends that this action is due to be dismissed, on the ground that the Taxpayers have not invoked the trial court's jurisdiction. This is so, she argues, because the Taxpayers have not availed themselves of the refund procedures provided in the TBOR. She cites § 40-2A-7(c)(5), which states:

"a. A taxpayer may appeal from the denial in whole or in part of a petition for refund by filing a notice of appeal with the administrative law division within two years from the date the petition is denied, and the appeal, if timely filed, shall proceed as hereinafter provided for appeals to the administrative law division.
"b. In lieu of appealing to the administrative law division, the taxpayer may appeal from the denial of a petition for refund by filing a notice of appeal with the Circuit Court in Montgomery County... within two years from the date the petition is denied....
"c. If an appeal is not filed with the Administrative Law Division or the circuit court within two years of the date the petition is denied, then the appeal shall be dismissed for lack of jurisdiction."

(Emphasis added.) She also cites Ala. Code 1975, § 40-2A-9(g)(1), which similarly states:

"Either the taxpayer or the department may appeal to circuit court from a final order issued by the administrative law judge by filing a notice of appeal with the Administrative Law Division and with the circuit court within 30 days from the date of entry of the final order.... The circuit court shall dismiss any appeal that is not timely filed with the Administrative Law Division and the circuit court as herein provided...."

(Emphasis added.) It is undisputed that the Taxpayers are not proceeding under the TBOR, but, instead, are attempting to prosecute a direct action in the circuit court. Thus, the Commissioner contends, the trial court lacks subject-matter jurisdiction of the Taxpayers' claims.

The Taxpayers, however, define the issue, not in terms of subject-matter jurisdiction, but in terms of "exhaustion of remedies." In fact, they rely on certain exceptions to that doctrine as authority for bypassing the TBOR. The right to commence a direct action in the circuit court, they insist, turns "on what sort of challenge is being made to the tax." Taxpayers' Brief, at 26 (emphasis added). More specifically, they argue that a taxpayer seeking a refund from the State treasury "need not exhaust administrative remedies when challenging the overall validity or constitutionality of a tax." Id. We disagree with this contention.

To be sure, Alabama recognizes the doctrine of exhaustion of administrative remedies. City of Huntsville v. Smartt, 409 So.2d 1353, 1357 (Ala.1982). "This doctrine `requires that where a controversy is to be initially determined by an administrative body, the courts will decline relief until those remedies have been explored and, in most instances, exhausted.'" Id. (quoting Fraternal Order of Police, Strawberry Lodge No. 40 v. Entrekin, 294 Ala. 201, 209, 314 So.2d 663, 670 (1975)). Also, we recognize exceptions to the doctrine, such as where "[q]uestions of law and of statutory and constitutional construction preponderate over questions of fact." Mingledorff v. Vaughan Regional Med. Ctr., Inc., 682 So.2d 415, 416 (Ala. 1996). In Alabama, however, the exhaustion-of-remedies doctrine "is a judicially imposed prudential limitation, not an issue of subject-matter jurisdiction." Budget Inn of Daphne, Inc. v. City of Daphne, 789 So.2d 154, 157 (Ala.2000)

(emphasis added).

The Commissioner's position—indeed, the centerpiece of her subject-matter jurisdiction argument—is that a direct action in the circuit court seeking a tax refund from the State treasury is barred by the principle of sovereign immunity, as that principle is expressed in Ala. Const.1901, § 14. Section 14 provides: "That the State of Alabama shall never be made a defendant in any court of law or equity."

The wall of immunity erected by § 14 is nearly impregnable. Sanders Lead Co. v. Levine, 370 F.Supp. 1115, 1117 (M.D.Ala.1973); Taylor v. Troy State Univ., 437 So.2d 472, 474 (Ala.1983); Hutchinson v. Board of Trustees of Univ. of Alabama, 288 Ala. 20, 24, 256 So.2d 281, 284 (1971). This immunity may not be waived. Larkins v. Department of Mental Health & Mental Retardation, 806 So.2d 358, 363 (Ala.2001) ("The State is immune from suit, and its immunity cannot be waived by the Legislature or by any other State authority."); Druid City Hosp. Bd. v. Epperson, 378 So.2d 696 (Ala.1979) (same); Opinion of the Justices No. 69, 247 Ala. 195, 23 So.2d 505 (1945) (same); see also Dunn Constr. Co. v. State Bd. of Adjustment, 234 Ala. 372, 175 So. 383 (1937). "This means not only that the state itself may not be sued, but that this cannot be indirectly accomplished by suing its officers or agents in their official capacity, when a result favorable to plaintiff would be directly to affect the financial status of the state treasury." State Docks Comm'n v. Barnes, 225 Ala. 403, 405, 143 So. 581, 582 (1932) (emphasis added); see also Southall v. Stricos Corp., 275 Ala. 156, 153 So.2d 234 (1963).

This Court has recognized several species of action that are not "against the State" for § 14 purposes. They include:

"(1) Actions brought to compel State officials to perform their legal duties. Department of Industrial Relations v. West Boylston Manufacturing Co., 253 Ala. 67, 42 So.2d 787 [(1949)]; Metcalf v. Department of
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