In re Pontes

• Decision Date: 24 June 2002
• Docket Number: Bankruptcy No. 99-13945.,Adversary No. 99-1133.
• Citation: 280 B.R. 20
• Parties: In re Anthony J. PONTES, Debtor. Anthony J. Pontes, Plaintiff, v. Deborah Lapatin, Acting City Collector for the City of Providence Sunset Realty, a Rhode Island Partnership; Michael F. Cunha, a Managing Partner of Sunset Realty, Defendants.
• Court: U.S. Bankruptcy Court — District of Rhode Island

280 B.R. 20

In re Anthony J. PONTES, Debtor Anthony J. Pontes, Plaintiff, v. Deborah Lapatin, Acting City Collector for the City of Providence Sunset Realty, a Rhode Island Partnership; Michael F. Cunha, a Managing Partner of Sunset Realty, Defendants.

Bankruptcy No. 99-13945.

Adversary No. 99-1133.

United States Bankruptcy Court, D. Rhode Island.

June 24, 2002.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John Rao, Esq., Rhode Island Legal Services, Providence, RI, for Plaintiff.

Richard Riendeau, Esq., Pawtucket, RI, for Deborah Lapatin, Acting City Collector for the City of Providence.

Fernando S. Cunha, Esq., Providence, RI, for Michael F. Cunha and Sunset Realty.

OPINION AND ORDER

ARTHUR N. VOTOLATO, Bankruptcy Judge.

At issue apparently for the first time in this District is the constitutionality of the Rhode Island tax sale statute which has been routinely used in all of the cities and towns of this State since 1896.

The Debtor, a Providence resident, contends that the tax sale of his home, conducted pursuant to Rhode Island law, failed to provide him with meaningful notice of the right to redeem his property, and that the present statutory scheme violates the Due Process Clause of the Fourteenth Amendment of the United States Constitution and 42 U.S.C. § 1983. The Debtor maintains that if the tax sale statute is unconstitutional, the deed conveying the property to the tax sale purchaser, Sunset Realty, is void, thereby restoring the title to him, and limiting the taxes owed to the assessed amount plus statutory interest.¹ The amount of this debt and how it gets paid are essential parts of the Debtor's Chapter 13 plan and financial rehabilitation.

The Collector of Taxes for the City of Providence ("the Collector") concedes that notice of the right of redemption is not provided in the statute, but argues that such omission does not constitute a deprivation of due process.

The constitutional question was raised on cross motions for summary judgment in this adversary proceeding involving the sale of the Debtor's residence by the City of Providence, for unpaid taxes. It is stipulated that: (1) the City conducted a tax sale pursuant to R.I. Gen. Laws § 44-9-1 et seq; (2) the City did not provide notice to the Debtor of his statutory right of redemption; (3) the Debtor did not have actual knowledge of the right to redeem;² and (4) notice of this right is not required under the statute.³

Threshold issues that need to be answered before the due process question is addressed are: (1) whether this Court has jurisdiction to determine the constitutionality of the state tax sale statute, vis-a-vis the Tax Injunction Act of 1937 (the T.I.A.); (2) whether the State of Rhode Island is an indispensable party; and (3) if the State is a party, whether Eleventh Amendment sovereign immunity bars this Court from deciding the instant dispute. Based on the arguments, the applicable law, and for the reasons discussed below, I find and/or conclude: (1) that notwithstanding the T.I.A., the Bankruptcy Court has jurisdiction to hear this matter; (2) that the State is not an indispensable party; and (3) that sovereign immunity does not apply in this proceeding. As to the constitutional question, I conclude that the Rhode Island tax sale statute fails to provide meaningful notice of the right to redeem property after a tax sale, and that this omission violates the Federal Due Process Clause of the Fourteenth Amendment.

BACKGROUND

In August 1998, pursuant to R.I. Gen. Laws § 44-9-1 et seq, the Collector sold Anthony Pontes' residence at tax sale to recover delinquent taxes due on the property. Prior to the sale, the Collector sent by certified mail a Tax Sale Notice, advising Pontes of the time and place of the sale, and that the sale could be prevented by payment of the overdue taxes. The Notice neither advised Pontes of the statutory right to redeem his property, nor of the existence of or the procedures available to exercise the right of redemption.

The overdue taxes were not paid, the sale was held, and Sunset Realty bought the property for $2,884.81 (the taxes owed, plus accrued charges and penalties). The "Collector's Deed" is subject only to the Debtor's statutory right of redemption, which exists for at least one year following the tax sale, and thereafter until the tax sale purchaser files a notice of foreclosure to quiet title. See R.I. Gen. Laws §§ 44-9-21⁴ and 44-9-25 (1999).⁵ After the tax sale, Sunset Realty recorded the deed in the Providence County land evidence records. Pontes received no notice, actual or otherwise, that the sale took place, nor did he receive any post sale notice of the right of redemption, the length of time that he had to redeem, or amount of money required to redeem.⁶ In fact, Pontes received no notice of any kind until one year after the tax sale, in September 1999, when he received a copy of an amended "Petition To Foreclose Tax Lien," filed in the Rhode Island Superior Court by Sunset Realty. The petition, which initiates the procedure to foreclose the right of redemption, basically advised Pontes of the existence of the action, and the deadline for filing an answer. The petition stated in part:

Whereas, an amended petition has been presented to said Court by SUNSET REALTY ... to foreclose all rights of redemption from the tax lien proceedings described in said petition in and concerning a certain parcel of land .... If you desire to make any objection to said petition you or your attorney must file a written appearance and answer, under oath, setting forth clearly and specifically your objections or defense....

See Joint Statement of Stipulated Facts, Docket No. 99-13945, Ex. C, ¶¶ 1, 4-5.

Less than two months after receiving a copy of the "Petition To Foreclose Tax Lien," Pontes filed a case under Chapter 13 of the Bankruptcy Code, and shortly thereafter he brought the instant adversary proceeding challenging the constitutionality of the State/City's tax sale procedure, on the grounds mentioned above.

The City of Providence and the State of Rhode Island object to the jurisdiction of this Court, first on the ground that the principles of comity, and the Tax Injunction Act (now 28 U.S.C. § 1341) bar this kind of case from being brought in any federal court. See 28 U.S.C. § 1341. The City also objects to the merits of Debtor's argument on the ground that a taxpayer is charged with knowledge of his/her rights under the law, and that the statute as written provides due process.

In addition, the State of Rhode Island, appearing specially, argues that it is an indispensable party to the suit, that it therefore must be joined as a defendant, and that as a result of this alleged compulsory (and presumably automatic) joinder, dismissal of this adversary proceeding is required based on State sovereign immunity.

DISCUSSION

I. Jurisdiction

a. The Tax Injunction Act, Federalism, and Comity:

The City objects to this Court's jurisdiction on the ground that the Tax Injunction Act (the "T.I.A."), and longstanding principles of comity prevent Federal Courts from hearing constitutional challenges to state tax statutes. The dueling statutes are the Tax Injunction Act of 1937, and 11 U.S.C. § 505, which was enacted twenty-nine years later, in 1966. 11 U.S.C. § 505 provides that the bankruptcy court "may determine the amount or legality of any tax, any fine or penalty relating to a tax or any addition to tax ..." unless "such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction." 11 U.S.C. § 505(a)(1)-(2)(2000) (emphasis added). The T.I.A., on the other hand, says that "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 a state." 28 U.S.C. § 1341.

The resolution of this issue in the Debtor's favor is not difficult. As the Debtor correctly points out, "the Defendant has relied upon authority of questionable application in the bankruptcy context and completely ignored this Court's clear grant of jurisdiction under § 505 of the Bankruptcy Code and those decisions that squarely address the interplay between the Tax Injunction Act and § 505." Memorandum in Support of Plaintiff's Objection, Docket No. 38, at 1-2. Federal Appeals Courts have uniformly ruled that 11 U.S.C. § 505 carves out a well recognized exception to both the T.I.A. and the principles of comity, for cases being adjudicated within a bankruptcy court. For example, the Seventh Circuit held that the T.I.A. does not bar the bankruptcy court, or the district court on appeal, from reexamining state use tax liability. In re Stoecker, 179 F.3d 546, 549 (7th Cir.1999), aff'd sub nom., Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000); the Tenth Circuit has stated that "the T.I.A. will not preclude the determination of state tax liability where federal courts have jurisdiction under the Bankruptcy Code." 11 U.S.C. § 505. City Vending of Muskogee, Inc. v. Okla. Tax Comm'n, 898 F.2d 122, 123-24 (10th Cir.), cert. denied, 498 U.S. 823, 111 S.Ct. 75, 112 L.Ed.2d 48 (1990); and the Ninth Circuit has held that the T.I.A. does not bar the jurisdiction specifically granted to the bankruptcy court to enforce provisions of the Bankruptcy Act. See California State Bd. of Equalization v. Goggin, 191 F.2d 726, 728 (9th Cir.1951), cert. denied, 342 U.S. 909, 72 S.Ct. 302, 96 L.Ed. 680 (1952); see also Lyford v. City of New York, 137 F.2d 782, 787 (2nd Cir.1943) (the T.I.A. does not supercede the bankruptcy laws). Moreover, the Tenth Circuit has held that in a bankruptcy setting 11 U.S.C. § 505 confers jurisdiction in the bankruptcy court to review a state tax assessment even where the taxpayer has failed to pursue the state remedy. City Vending of Muskogee, Inc., 898 F.2d at 122.

The City...