Duncan v. Governor of the V.I.

• Decision Date: 31 August 2022
• Docket Number: 21-3024
• Parties: Jennifer DUNCAN, Appellant v. GOVERNOR OF the VIRGIN ISLANDS; Kirk Callwood, Sr., Department of Finance; Director Virgin Islands Bureau of Internal Revenue ; Government of the Virgin Islands
• Court: U.S. Court of Appeals — Third Circuit

48 F.4th 195

Jennifer DUNCAN, Appellant

v.GOVERNOR OF the VIRGIN ISLANDS; Kirk Callwood, Sr., Department of Finance; Director Virgin Islands Bureau of Internal Revenue ; Government of the Virgin Islands

No. 21-3024

United States Court of Appeals, Third Circuit.

Argued May 9, 2022

Filed August 31, 2022

Joseph A. DiRuzzo, III [ARGUED], Alexander Golubitsky, Daniel M. Lader, DiRuzzo & Company, 401 East Las Olas Blvd. – Suite 1400, Fort Lauderdale, FL 33301, Counsel for Appellant

Kenneth Case, Aquannette Chinnery-Montell, Ian S.A. Clement [ARGUED], Ariel M. Smith-Francois, Office of Attorney General of Virgin Islands, Department of Justice, 34-38 Kronprindsens Gade, GERS Complex, 2nd Floor, St. Thomas, VI 00802, Counsel for Appellees

Before: JORDAN, MATEY, and ROTH, Circuit Judges.

OPINION OF THE COURT

JORDAN, Circuit Judge.

Jennifer Duncan brought a putative class-action lawsuit against the Government of the Virgin Islands and certain of its high-ranking officials (collectively, the "Territory"), seeking to end what Duncan describes as the Territory's practice of delaying income tax refund checks for most taxpayers but expediting refunds for certain favored taxpayers and government employees. This interlocutory appeal of the District Court's denial of class certification hinges largely on the legal effect of a single fact: Duncan's receipt of a refund check from the Territory during the pendency of her lawsuit. The District Court held that the refund check, while not in the amount Duncan says she is owed, called into question Duncan's standing to press certain claims and made all of her claims atypical of the claims of the putative class. The Court also held that Duncan failed to meet her burden of proving that she was an adequate representative of the class.

Although the District Court's handling of this class-certification dispute was thoughtful, we disagree with its conclusion that the mid-litigation refund check deprived Duncan of standing and rendered all of her claims atypical. And, in evaluating whether Duncan was an adequate representative, the District Court applied a legal standard inconsistent with our precedent. We will therefore vacate the order denying Duncan's motion for class certification and remand for further consideration.

I. BACKGROUND

A. The Lawsuit

Duncan makes no secret of what inspired her lawsuit. It was a similar class action against the Government of Guam. In Paeste v. Government of Guam , the Ninth Circuit affirmed the grant of summary judgment to Guam taxpayers in their class-action lawsuit against the territorial government. 798 F.3d 1228, 1231 (9th Cir. 2015). Struggling with budget deficits, Guam had excessively withheld income taxes to support government spending, rather than refunding the excess taxes. Id. Some taxpayers got their refunds, however, through an "expedited refund" process that devolved into arbitrariness and favoritism. Id. The Ninth Circuit held that the challenged process violated the Organic Act of Guam and the Equal Protection Clause of the Fourteenth Amendment. Id. As Duncan emphasizes here, the district court in Paeste certified a class of taxpayers who were entitled to, but did not receive, timely tax refunds. Id. at 1232 & n.3.

"Having been inspired by the Paeste litigation ..., Duncan brought her action seeking to cause systemic change" in the Virgin Islands income tax collection practices, those taxes being the Territory's largest source of revenue. (Opening Br. at 4-5.) In her original class-action complaint, filed in August 2018, Duncan alleged that the Territory owed taxpayers at least $97,849,992.74 in refunds for the years 2007 through 2017. She also alleged that, for the years 2011 through 2017, the Territory failed to comply with the requirement in title 33, section 1102(b) of the Virgin Islands Code, that the Territory set aside ten percent of collected income taxes for the purpose of paying refunds. As a consequence, she said, the Territory left underfunded by more than $150 million the required reserve for meeting those obligations.

Shortly after filing her original complaint, Duncan moved for class certification. The District Court ordered class discovery, during which Duncan deposed Marcella Somersall, a recently retired employee of the Virgin Islands Bureau of Internal Revenue (the "Bureau") who was "familiar with the process of expedited refunds[.]" (J.A. at 54.) Somersall explained that the Bureau makes expedited refunds available on an ad hoc basis to taxpayers experiencing a hardship, such as a medical emergency or home displacement, if they write a letter requesting an expedited refund. The director of the Bureau reviews each request and decides whether to approve or reject it. That decision is not subject to further review. According to Somersall, the existence of the expedited refund process has not been made public, and at least some procedures for approving and denying requests are not written down. She also testified that refunds were expedited automatically, without a request, for all Bureau employees and for the employees at the Department of Finance who processed refund checks, as a "test to make sure that the files that went to Finance [were] correct[.]" (J.A. at 85-86, 88-89.)

Armed with Somersall's deposition testimony, Duncan filed the now-operative First Amended Class Action Complaint (the "Amended Complaint"). In general, that pleading alleges that the Territory failed to timely pay income tax refunds to nearly all taxpayers, while secretly allowing expedited refunds for certain taxpayers, including all Bureau employees and some Department of Finance employees. The Amended Complaint sets forth five causes of action:

1. A refund action, pursuant to 26 U.S.C. ("I.R.C.") § 7422 and title 33, section 1692 of the Virgin Islands Code ;

2. A petition for a writ of mandamus ordering the commissioner of the Department of Finance and the director of the Bureau to set aside ten percent of income taxes for refunds, as required by title 33, section 1102(b) of the Virgin Islands Code ;

3. A request for declaratory and injunctive relief based on violations of the Fourteenth Amendment by delaying refunds to taxpayers generally while creating a separate class of taxpayers given expedited refunds;

4. A request for declaratory and injunctive relief based on violations of the Fourteenth Amendment by automatically expediting refunds for all Bureau employees and some Department of Finance employees; and

5. A request for declaratory and injunctive relief based on violations of the Virgin Islands' equivalent of the Administrative Procedure Act, V.I. Code Ann. tit. 3, §§ 911 et seq. , by creating an expedited refund process outside of the prescribed rulemaking process.

The Amended Complaint also spells out the following proposed class:

All persons and entities who: (a) have filed a timely claim for refund of an overpayment of the Virgin Islands Territorial Income Tax for any tax year from at least 2003 to the present, (b) have not been given by the USVI or the [Bureau], via certified or registered mail, a timely notice of disallowance of such claims, and (c) have not been paid such refunds by the USVI.

(J.A. at 139.)

B. Duncan's Refund

During class discovery, Duncan received from the Territory a notice of "Arithmetic Correction" for her 2016 tax return – the one year for which she claimed an unpaid refund. (J.A. at 27.) The tax refund she sought for that year was $7,104, but the Territory reduced the amount to $2,474, for reasons unexplained by the notice. The Territory and Duncan's attorney subsequently corresponded "regarding [Duncan's] refund check[,]" and while the exact substance of those conversations is unclear, Duncan's attorney did "indicate[ ] that [he] would let [the Territory] know" whether Duncan would accept the reduced refund. (J.A. at 31.) Ultimately, without a response from Duncan, the Territory went ahead and issued her a refund check for $2,738.30 on July 19, 2019.¹

Duncan later represented to the District Court that she contested the validity of the Arithmetic Correction, and she testified in a deposition that she did not cash the check because she disagreed with the reduced refund amount. She also told the Court that, "[p]ursuant to [I.R.C.] § 6213(b), as mirrored to the United States Virgin Islands,"² the fact that she contested the notice "invalidates such notice, and the Virgin Islands Bureau of Internal Revenue must issue[ ] a Statutory Notice of Deficiency should it wish to assert the proposed adjustments again." (J.A. at 25-26.)

C. The District Court's Class-Certification Decision

Following the close of class discovery, the District Court denied Duncan's motion to certify the proposed class. In its analysis of the prerequisites for class certification set out in Federal Rule of Civil Procedure 23(a),³ it concluded that Duncan had met the first two: numerosity, because the proposed class consists of 24,364 individuals and 49 corporations; and commonality, because the question of whether the Territory has been delinquent in paying income tax refunds is common to the class.

The Court held, however, that Duncan failed to meet the typicality prerequisite under Rule 23(a)(3) because she had received a refund check. Even though Duncan disagreed with the refund amount and did not cash the check, her dispute with the Territory had become one about calculation, not about nonpayment, the Court said, and so her claim was different from those of the rest of the class. The Court also decided, in the context of its typicality analysis, that Duncan lacked Article III standing to pursue her claims for declaratory and injunctive relief. It determined that she could not rely on the Virgin Islands' taxpayer-suit statute, V.I. Code Ann. tit. 5, § 80,⁴ to establish standing, because standing in federal court is determined by federal law.

Duncan likewise failed to convince the District Court that she was an adequate representative under Rule 23(a)(4). The Court...