Freed v. Thomas

• Decision Date: 30 September 2020
• Docket Number: No. 18-2312,18-2312
• Citation: 976 F.3d 729
• Parties: Donald FREED, Plaintiff-Appellant, v. Michelle THOMAS; County of Gratiot, Defendants-Appellees, Michigan Department of Attorney General, Intervenor-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

976 F.3d 729

Donald FREED, Plaintiff-Appellant,

v.Michelle THOMAS; County of Gratiot, Defendants-Appellees,Michigan Department of Attorney General, Intervenor-Appellee.

No. 18-2312

United States Court of Appeals, Sixth Circuit.

Argued: May 9, 2019

Decided and Filed: September 30, 2020

Rehearing En Banc Denied November 4, 2020^*

SILER, Circuit Judge.

After Donald Freed fell behind on his property taxes by about $1,100, the State of Michigan foreclosed on his real property, sold it at auction for about half of its fair market value, and kept all the proceeds of the sale. Freed got nothing. So he filed this lawsuit in federal court under 42 U.S.C. § 1983 alleging, inter alia, an unconstitutional taking by state and local officials in violation of the Fifth Amendment.

We do not address the merits of Freed's claims. We hold only that neither the Tax Injunction Act ("TIA") nor the related doctrine of comity forestall Freed's suit from proceeding in federal court. Thus, we reverse the judgment of the district court and remand for further proceedings.

I.

Freed owed $735.43 in taxes on his property valued at about $97,000. The amount owed grew to $1,109.06 once administrative expenses, costs, and interest were added. Freed claims he did not know he was behind on his taxes because he cannot read or write well.

When a property owner falls behind on his taxes in Michigan, the local county treasurer can file an in-rem action in circuit court under the General Property Tax Act ("GPTA"), MCL § 211.78 et seq . Michelle Thomas, Gratiot County's treasurer, did so in June 2016, and the state court ordered foreclosure in February 2017. Thomas sold the property six months later at a public auction to a third party for $42,000. Freed got nothing; he lost his home and all its equity.

Freed sued Thomas and Gratiot County in October 2017, claiming they (1) took his property without paying just compensation in violation of the Fifth Amendment's Takings Clause, and (2) imposed an excessive fine against him in violation of the Eighth Amendment. Freed filed his lawsuit under 42 U.S.C. §§ 1983, 1988 and sought monetary damages, a declaration, and injunctive relief.

Defendants moved to dismiss, arguing that the district court lacked subject-matter jurisdiction because Freed did not first pursue remedies in state court. Under the Supreme Court's then Williamson County doctrine, federal courts refrained from hearing Takings Clause cases until plaintiffs exhausted their claims in the state courts. Williamson Cnty. Reg'l Plan. Comm'n v. Hamilton Bank of Johnson City , 473 U.S. 172, 186, 105 S.Ct. 3108, 87 L.Ed.2d 126 (1985). Defendants also argued that our decision in Wayside Church v. Van Buren Cnty. , 847 F.3d 812 (6th Cir. 2017), doomed Freed's claims.

Initially, the district court disagreed and denied defendants’ motion. Acknowledging that, at that time, Williamson County required a plaintiff to first "seek compensation through the procedures the State provided for doing so," the district court determined that Freed need not comply with that command because he met an exception: Michigan did not provide "reasonable, certain, and adequate" remedies for Freed's claims. And when the state does not provide such remedies, a plaintiff could go around Williamson County and enter the federal courthouse. 473 U.S. at 194, 105 S.Ct. 3108. Yes, the district court said, Michigan has an inverse condemnation process, but that had not been used in the GPTA context. Not only that, but a Michigan intermediate appellate court had held that GPTA claims like Freed's do not constitute a taking. See Rafaeli, LLC v. Oakland Cnty. , No. 330696, 2017 WL 4803570, *4 (Mich. Ct. App. Oct. 24, 2017) (" Rafaeli I "), rev'd , 2020 WL 4037642, ––– Mich. ––––, ––– N.W.2d –––– (Mich. 2020) (" Rafaeli II "). And if the state courts had already said that GPTA challenges fail under the Fifth Amendment, does the state really provide "reasonable, certain, and adequate" remedies? The district court said no because Rafaeli I "casts serious doubt on the notion that plaintiff could use inverse condemnation to obtain the surplus equity at issue here." So, the court held Williamson County did not apply.

But to continue his lawsuit, Freed also had to successfully navigate the TIA and comity principles. The TIA tells district courts not to "enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1341. If a plaintiff challenges the enforcement of a tax, then, he must go to state court first, unless such remedies are not plain, speedy and efficient. Wayside Church , 847 F.3d at 821–23.

Looking to Freed's complaint, the district court first determined that the TIA did not apply to two claims asking the court to enjoin defendants from keeping the surplus equity in his home. The court reasoned that because Freed was not challenging his tax liability and was not trying to stop the state from collecting it, the TIA did not bar his suit. As to Freed's request that the court enjoin enforcement of the GPTA against him and declare it unconstitutional, the district court held the TIA applied, but that Freed could pursue the claims because no plain, speedy, and efficient remedy existed in state court. The district court used the same reasoning to reject defendants’ arguments that comity principles compelled dismissal.

After discovery, the parties filed motions for summary judgment. And then the district court reversed course. In a November 2018 opinion and order, the district court sua sponte dismissed Freed's case for lack of subject matter jurisdiction. Calling the GPTA process "unconscionable" and an "unfair" scheme that "calls out for relief," the district court concluded that it could not hear the case. It determined Wayside Church was "factually and legally indistinguishable," where the Sixth Circuit required a Michigan plaintiff to challenge the GPTA in state court. Its hands tied, the district court vacated its prior order, dismissed the case, and entered judgment in favor of defendants, despite recognizing that it was "doubtful" Freed could win in state court. The district court held that, together, Williamson County and Wayside Church meant Freed could not go forward, so the case ended. Freed appealed.

After oral argument in this appeal, the Supreme Court overruled Williamson County , holding that "[a] property owner may bring a takings claim [in federal court] under § 1983 upon the taking of his property without just compensation by a local government."

Knick v. Township of Scott , ––– U.S. ––––, 139 S. Ct. 2162, 2179, 204 L.Ed.2d 558 (2019).

As a result, the parties filed supplemental briefing on how the Knick decision affected the legal issues in the case. Thomas, Gratiot County, and the Michigan Attorney General argue that this case may not proceed in federal court, notwithstanding the Knick decision, because Freed is seeking to enjoin the state's collection of a tax in violation of the TIA. Moreover, they argue that the principle of comity encourages federal court abstention in this case regarding state tax administration. Alternatively, Freed argues that this case may proceed in federal court because this is not a tax case. Freed contends that this lawsuit is only about just compensation after collection of a delinquent tax. This appeal is ripe for review.

II.

We review a district court's decision to dismiss a complaint for lack of subject-matter jurisdiction de novo. Shweika v. Dep't of Homeland Sec. , 723 F.3d 710, 714 (6th Cir. 2013). But, after the Supreme Court's ruling in Knick , the remaining issues are questions of law pertaining to whether the TIA or doctrine of comity bar federal jurisdiction. In any event, the standard of review is unchanged because we review questions of law de novo. United States v. Potter , 927 F.3d 446, 450 (6th Cir. 2019).

III.

This case presents two primary issues. First, does the TIA preclude federal court jurisdiction? Second, should this court refrain from exercising jurisdiction in this case based on the principle of comity between federal and state courts?

A.

The Tax Injunction Act . The TIA does not preclude the exercise of federal jurisdiction in this case because Freed is not attempting to enjoin Michigan's assessment, levy, or collection of a state tax. First, Freed does not dispute his tax liability or delinquency. As such, he is not challenging the assessment or levy of taxes. Second, Freed does not quarrel with Michigan's authority to foreclose, sell his property, and satisfy his tax debt from the proceeds of the sale. As a result, Freed does not challenge or seek to enjoin state tax collection procedures. Instead, Freed challenges Michigan's post-collection failure to reimburse him for the excess proceeds from the sale of his property and the State's refusal to compensate him for the excess after-tax equity of his property. Thus, this is a case about post-collection federal constitutional violations that may proceed in federal court, not a tax case barred by the TIA.

The TIA provides that "[t]he district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1341.

The Act is "first and foremost a vehicle to limit drastically federal district court jurisdiction to interfere with so important a local concern as the collection of taxes." Rosewell v. LaSalle Nat'l Bank , 450 U.S. 503, 522, 101 S.Ct. 1221, 67 L.Ed.2d 464 (1981) (citations omitted). To that end, the TIA restricts suits seeking injunctions or declaratory judgments in federal court pertaining to the collection of state taxes, including challenges to a state's seizure or forfeiture of a delinquent taxpayer's property. See id. ; see also Direct Mktg. Ass'n v. Brohl , 575 U.S. 1, 10, 135 S.Ct. 1124, 191 L.Ed.2d 97 (2015).

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