Farmer v. DEPT. OF REVENUE & REGULATION

Decision Date21 April 2010
Docket NumberNo. 25095.,25095.
Citation2010 SD 35,781 N.W.2d 655
CourtSouth Dakota Supreme Court
PartiesJames W. FARMER, f/d/b/a J.W. Farmer & Associates, Inc., Plaintiff and Appellee, v. SOUTH DAKOTA DEPARTMENT OF REVENUE AND REGULATION, Defendant and Appellant.

COPYRIGHT MATERIAL OMITTED

Sarah Baron Houy, Michael M. Hickey of Bangs, McCullen, Butler, Foye and Simmons, LLP, Rapid City, South Dakota, Attorneys for plaintiff and appellee.

Matthew R. Fonder, South Dakota Department of Revenue and Regulation, Pierre, South Dakota, Attorneys for defendant and appellant.

KONENKAMP, Justice.

¶ 1. Under South Dakota law, when a jeopardy assessment for unpaid sales tax is made and a lien for such tax is filed with the county, if the taxpayer fails to contest the assessment through an administrative appeal, the lien becomes final. In 1982, the South Dakota Department of Revenue and Regulation imposed a tax lien against a taxpayer for certain unpaid sales tax in Pennington County, South Dakota. In 1985, the Department brought suit against the taxpayer for his tax obligation. The suit was later dismissed under SDCL 15-6-41(b) for the Department's failure to timely prosecute the action. In 2006, the taxpayer sought to purchase real estate in Pennington County and a title search revealed the 1982 lien. When the Department refused to release the lien, the taxpayer brought a declaratory judgment action seeking to have the lien declared null and void based on the doctrine of res judicata. The circuit court entered a judgment in favor of the taxpayer and ordered the lien released. The court also awarded the taxpayer attorney's fees, concluding that the position taken by the Department was not substantially justified. On appeal, we affirm in part and reverse in part.

Background

¶ 2. In August 1982, the Department concluded its audit of James Farmer, d/b/a J.W. Farmer & Associates, Inc. From January 1979 through March 1982, Farmer had allegedly failed to pay sales and use tax. A notice of jeopardy assessment was issued for $11,368.41. See SDCL 10-45-37 (repealed).1 Farmer was sent notice of this assessment by certified mail. The Department then issued a notice of tax lien, and on September 1, 1982, a tax lien for $11,452.41 was filed against Farmer with the Pennington County Register of Deeds. See SDCL 10-45-37; SDCL 10-45-39 (repealed).2 Farmer did not appeal the jeopardy assessment or the imposition of the lien. See SDCL 10-45-35.

¶ 3. Three years later, in April 1985, a contract attorney for the Department brought suit against Farmer seeking a judgment for $8,997.44, plus penalty and interest. The complaint alleged that Farmer was indebted to the Department for delinquent sales tax due and owing between January 1979 and June 1982. In May 1990, after five years of Department inaction, Farmer moved the circuit court to dismiss under SDCL 15-6-41(b) for failure to timely prosecute the case. The court granted Farmer's motion and entered an order of dismissal on June 19, 1991. There was no appeal.

¶ 4. In July 2006, Farmer sought to purchase real estate in Pennington County. A title search showed the Department's 1982 tax lien. The Department refused to release the lien unless Farmer paid the face value. He declined. Farmer brought a declaratory judgment action against the Department averring that the lien was extinguished when the circuit court dismissed the Department's 1985 action against him. He sought release of the tax lien and satisfaction of the jeopardy assessment. He also requested attorney's fees on the ground that the position taken by the Department in refusing to release the lien was not substantially justified. See SDCL 10-59-34.3

¶ 5. Farmer argued that the doctrine of res judicata prevented the Department from relitigating whether the lien was valid and enforceable, since the circuit court's dismissal of the Department's 1985 civil action rendered the lien null and void. While the Department conceded that Farmer's unpaid sales tax was the subject of both the lien and the 1985 civil action, it insisted that the dismissal of the 1985 action did not implicate res judicata against any other action to enforce the lien against Farmer. In particular, the Department claimed that despite the dismissal of its civil action the Department could still maintain its distress warrant against Farmer for his unpaid taxes. The Department also argued that because Farmer failed to contest the jeopardy assessment through an administrative appeal, he could not now challenge the validity of the lien.

¶ 6. Concluding that res judicata prevented the Department from enforcing its lien against Farmer, the circuit court issued findings of fact and conclusions of law and a judgment granting Farmer's requested relief. The court further ruled that the position taken by the Department in refusing to release the lien was not substantially justified, and therefore, awarded attorney's fees against the Department. On appeal, the Department asserts that the court erred when it ruled the lien null and void and abused its discretion in awarding Farmer attorney's fees.4

Analysis and Decision

¶ 7. Both parties assert that res judicata applies. For its part, the Department contends that res judicata prevents Farmer from contesting the validity of the lien because he failed to timely challenge the 1982 tax assessment. Farmer, on the other hand, claims res judicata prevents the Department from enforcing its lien because the Department's 1985 civil action (seeking essentially the same taxes) was dismissed on its merits. "The doctrine of res judicata disallows reconsidering an issue that was actually litigated or that could have been raised and decided in a prior action." Ramos v. Weber, 2000 SD 111, ¶ 8, 616 N.W.2d 88, 91 (citing SDDS, Inc. v. State, 1997 SD 114, ¶ 16, 569 N.W.2d 289, 295 (quoting Hogg v. Siebrecht, 464 N.W.2d 209, 211 (S.D.1990))). When examining whether the doctrine applies, "a court should construe the doctrine liberally, unrestricted by technicalities." L.S., 2006 SD 76, ¶ 22, 721 N.W.2d at 90. "However, because the doctrine bars any subsequent litigation, it should not be used to defeat the ends of justice." Id.

¶ 8. This appeal presents a case of conflicting finalities: an uncontested tax lien in favor of the Department and a final judgment on the merits against the Department. Both outcomes cover the same delinquent taxes. Farmer concedes that he failed to timely challenge the assessment and lien, which would ordinarily mean that the lien remains valid and enforceable. The Department acknowledges that when it failed to timely prosecute its civil collection action for the same delinquent taxes, the case was dismissed under SDCL 15-6-41(b). A dismissal under SDCL 15-6-41(b) is an adjudication on the merits, and is therefore, in effect, a ruling that the taxes imposed against Farmer by the State were invalid. So to which finality, if either, will res judicata apply?

¶ 9. "For a claim to be barred by res judicata, the claim need not have been actually litigated at an earlier time. Rather, the parties only need to have been provided `a fair opportunity to place their claims in the prior litigation.'" Mack v. Trautner, 2009 SD 13, ¶ 15, 763 N.W.2d 121, 124 (emphasis omitted) (quoting Black Hills Jewelry Mfg. Co. v. Felco Jewel Indus., Inc., 336 N.W.2d 153, 157 (S.D.1983)). Res judicata is implicated when four elements are present:

(1) a final judgment on the merits in an earlier action; (2) the question decided in the former action is the same as the one decided in the present action; (3) the parties are the same; and (4) there was a full and fair opportunity to litigate the issues in the prior proceeding.

L.S., 2006 SD 76, ¶ 22, 721 N.W.2d at 89-90 (citing Moe v. Moe, 496 N.W.2d 593, 595 (S.D.1993) (citation omitted)). Here, the parties do not dispute the existence of the third element, or that the dismissal of the 1985 action was a final judgment on the merits. The parties differ, however, on whether the question in the 1985 action was the same question to be decided in the present action. The Department also disputes that it had a full and fair opportunity to litigate the issue of the present action in the 1985 action.

¶ 10. When examining whether the question in one action was the same as in a subsequent action, our review is not restricted to whether the specific question posed by the parties in both actions was the same or whether the legal question posed by the nature of the suit was the same. See Equity Resources Mgmt., Inc. v. Vinson, 723 So.2d 634, 637-38 (Ala.1998) (citation omitted). Rather, we review whether the claims asserted in both suits arose out of a single dispute and whether one claim has been brought to a final judgment on the merits. Id. at 638; Lewton v. McCauley, 460 N.W.2d 728, 731 (S.D.1990) ("it is the underlying facts which give rise to the cause of action that must determine the propriety or necessity of presenting a specific issue within the prior proceedings"); see also Yankton Sioux Tribe v. U.S. Dept. of Health and Human Services, 533 F.3d 634, 641 (8th Cir.2008) (doctrine applies when the claims arise out of the same operative facts); Silcox v. United Trucking Serv., Inc., 687 F.2d 848, 852 (6th Cir.1982); Palmer Exploration, Inc. v. Dennis, 759 F.Supp. 332, 335 (S.D.Miss.1991); Eichman v. Fotomat Corp., 147 Cal.App.3d 1170, 197 Cal.Rptr. 612, 614 (1983). If the claims arose out of a single act or dispute and one claim has been brought to a final judgment, then all other claims arising out of that same act or dispute are barred. Equity Resources Mgmt., Inc., 723 So.2d at 638. This is true regardless of whether there were different legal theories asserted or different forms of relief requested in a subsequent action. Id.; see also Moe, 496 N.W.2d at 595 (the final judgment "`is conclusive as to all rights, questions, or facts directly involved and actually, or by...

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