Horizon Bank & Trust Co. v. Massachusetts

• Decision Date: 08 December 2004
• Docket Number: No. 04-1480.,04-1480.
• Citation: 391 F.3d 48
• Parties: HORIZON BANK & TRUST CO., Plaintiff, Appellee, v. Commonwealth of MASSACHUSETTS, Department of Revenue, Defendant, Appellant, Paul Flaherty, Trustee of Custom House Associates Realty Trust; Custom House Associates Limited Partnership; Susan Manning, Trustee of Custom House Associates Realty Trust; United States of America, Internal Revenue Service; Giarrusso, Norton, Cooley, and McGlone, P.C.; and Eastern Bank, Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

391 F.3d 48

HORIZON BANK & TRUST CO., Plaintiff, Appellee, v. Commonwealth of MASSACHUSETTS, Department of Revenue, Defendant, Appellant, Paul Flaherty, Trustee of Custom House Associates Realty Trust; Custom House Associates Limited Partnership; Susan Manning, Trustee of Custom House Associates Realty Trust; United States of America, Internal Revenue Service; Giarrusso, Norton, Cooley, and McGlone, P.C.; and Eastern Bank, Defendants, Appellees.

No. 04-1480.

United States Court of Appeals, First Circuit.

Heard November 1, 2004.

Decided December 8, 2004.

COPYRIGHT MATERIAL OMITTED

Thomas A. Barnico, Assistant Attorney General, with whom Thomas F. Reilly, Attorney General, and Eileen Ryan McAuliffe, Counsel, Department of Revenue, were on brief, for defendant, appellant Commonwealth of Massachusetts, Department of Revenue.

Thomas J. Clark, Attorney, Tax Division, with whom Eileen J. O'Connor, Assistant Attorney General, and Randolph L. Hutter, Attorney, Tax Division, were on brief, for defendant, appellee United States, Internal Revenue Service.

Before LYNCH, Circuit Judge, LEVAL,^* Senior Circuit Judge, and LIPEZ, Circuit Judge.

LYNCH, Circuit Judge.

On the merits this case presents very difficult issues under the Eleventh Amendment about whether the United States, asserting a tax claim, may remove an interpleader action to federal court when an unconsenting state, which is also a party with its own tax claim, asserts its Eleventh Amendment immunity and argues that it is an indispensable party. We never reach those merits issues because the appeal is moot. The state has conceded that two other creditors including the United States have superior claims, and that satisfaction of those claims leaves no remaining assets to satisfy the state's tax claims.

I.

Horizon Bank & Trust Company ("Horizon") brought an interpleader action in state court to determine the proper distribution of a surplus pool of money that it had obtained after foreclosing on a piece of property and after satisfying its own monetary interests in that property. The United States Internal Revenue Service, the Commonwealth of Massachusetts Department of Revenue, and a law firm creditor, Giarrusso, Norton, Cooley, and McGlone, P.C. ("Giarrusso"), holding another mortgage on the same property, were named as defendants. The United States removed the entire action to federal court. The Commonwealth then moved to dismiss claims seeking adjudication of the Commonwealth's interest because of its Eleventh Amendment immunity and simultaneously to dismiss the entire interpleader action because it was an indispensable party to that action. The issue of indispensability had arisen in Massachusetts federal district courts in several other interpleader actions involving both the United States and the Commonwealth, with varying results.

The court here held that the Commonwealth was entitled, because of its Eleventh Amendment immunity, to dismissal of claims seeking adjudication of its rights relative to those of private parties, but not of adverse claims of the United States. The court ruled that the entire interpleader case need not be thrown out because the Commonwealth was a necessary but not indispensable party under Fed.R.Civ.P. 19. Horizon Bank & Trust Co. v. Flaherty, 309 F.Supp.2d 178, 184, 198 (D.Mass.2004). The court simultaneously held, on Giarrusso's motion for summary judgment, that Giarrusso should receive the entire value of its interest in the property, the federal government should receive the remaining funds, a partial but not total satisfaction of its tax liens on the property, and the Commonwealth should receive no money at all. Id. at 198-200.

The Commonwealth, seeking to get an appellate ruling on an issue that had divided the Massachusetts federal district courts, appealed the district court's judgment, arguing that the entire interpleader action should have been dismissed because it was an indispensable party. But the Commonwealth has also stated in its brief and at oral argument to this court that it "does not contest the District Court's determination of the relative priorities or rights to the surplus funds." Because the Commonwealth has not contested the distribution of funds, no case or controversy remains as required by Article III of the United States Constitution and we hold that the appeal must be dismissed as moot.

II.

There are no contested facts in the case. Custom House Associates Realty Trust ("Custom House") mortgaged a piece of property to Giarrusso on August 6, 1998, to secure repayment of a promissory note with a principal of $255,960. Custom House subsequently mortgaged the property a second time to Horizon, as security for a $395,000 loan. Giarrusso subordinated its mortgage to Horizon's. The United States filed tax liens against the Custom House property on February 10, 2000, July 18, 2000, and September 14, 2001, in amounts totaling $212,564.46. The Commonwealth Department of Revenue filed three tax liens against the property on December 13, 2002, totaling $257,747.77. Custom House defaulted on its payments to Horizon on or around January 1, 2003, leading Horizon to accelerate all payments due. Horizon ultimately foreclosed on the property, sold it at public auction for $800,000, and satisfied its own debt out of the proceeds.

Horizon filed this interpleader action to determine who owned the remaining funds, $303,153.27. The claim was filed in Massachusetts Superior Court. The United States removed the case to federal court in the District of Massachusetts pursuant to 28 U.S.C. §§ 1444 and 2410, which give the United States this right in any interpleader action where it has been named as a party.

The Commonwealth then filed a two-part motion to dismiss the entire case. It asserted first that because it had, by state statute, waived its Eleventh Amendment immunity only for cases in state court and not for cases in federal court, it had a right to be dismissed as a defendant from this case on Eleventh Amendment immunity grounds. Second, it argued that once it was dismissed from the case, it must be seen as both a necessary party under Fed.R.Civ.P. 19(a) and an indispensable party under Fed.R.Civ.P. 19(b). If the Commonwealth was indispensable, the case could not go forward at all.

The district court issued an opinion on January 13, 2004, and a judgment two days later; the judgment was amended and a new opinion issued on February 5, 2004. The district court's amended opinion held that the state's Eleventh Amendment immunity applied to the case and had not been waived by the state, so the Commonwealth needed to be dismissed from the action vis-a-vis the private parties. Horizon Bank, 309 F.Supp.2d at 181-90. The district court also held that any claims between the federal government and the Commonwealth should not be dismissed. Id. at 192-95.

On the issue of indispensability, the court agreed with the Commonwealth that it was a necessary party under Rule 19(a). Id. at 191-92. But it held that the Commonwealth was not an indispensable party. The district court stated that it would craft its judgment so that any relief would only have preclusive effect between the different private parties, between the United States and the private parties, and between the United States and the Commonwealth. The judgment would not carry preclusive effect between the Commonwealth and the private parties. This protective measure, in its view, would ensure that the Commonwealth was not prejudiced by a judgment in which it did not participate. Id. at 194-95.

The court also granted Giarrusso's motion for summary judgment on the claim that it was entitled to $264,942 from the surplus fund, the amount of its debt plus interest. Id. at 199. Indeed, the United States had consented to the motion. Id. Sua sponte, the court resolved the issue of priority on the remaining funds as between the United States and the Commonwealth. Holding that the United States's liens had priority over the Commonwealth's because they were assessed earlier, the court granted summary judgment for the United States for the entire remainder of the funds, $38,211.67, which was only a fraction of the amount of the United States's total tax liens. Id. at 199-200. This distribution meant that the Commonwealth ended up with none of the money.

The Commonwealth appealed the judgment on the grounds that it is an indispensable party and thus the entire action should have been dismissed. But it has not contested the finding that the claims of Giarrusso and the United States are superior to its claim, and that those claims exhaust the fund. Its claim of indispensability hangs on its assertion that despite the district court's efforts to tailor the effects of the judgment, the district court's disposition might have persuasive or binding effect on a later state court, thus prejudicing the Commonwealth, and that hypothetically, there might be more litigation. The state court, it argues, is an adequate alternative forum where all claims of all parties could have been resolved in one attempt instead of the piecemeal approach adopted by the federal court.

The United States, the only other party to file a brief on appeal, argues that the Commonwealth's appeal is moot because the Commonwealth has not challenged the district court's holding that the funds are exhausted by the claims of superior creditors. The United States further argues that even if the claim is not moot, the district court judgment should be affirmed because the Commonwealth never should have received Eleventh Amendment immunity, for two reasons. First, the United States argues that recent Supreme Court precedent, see Tennessee Student Assistance Corp. v. Hood, ___ U.S. ___, ___-___, 124 S.Ct. 1905, 1912-13, 158 L.Ed.2d 764 (2004), stands for the proposition that an unconsenting state can be sued in an in rem action without infringing Eleventh Amendment immunity. And despite recent circuit precedent...