In re Pontes

• Decision Date: 30 March 2004
• Docket Number: C.A. No. 02-420S.
• Citation: 310 F.Supp.2d 447
• Parties: In re Anthony J. PONTES, Debtor. Anthony J. Pontes, Plaintiff, v. Michael F. Cunha, Sunset Realty, and Deborah Lapatin, Defendants.
• Court: U.S. District Court — District of Rhode Island

310 F.Supp.2d 447

In re Anthony J. PONTES, Debtor Anthony J. Pontes, Plaintiff, v. Michael F. Cunha, Sunset Realty, and Deborah Lapatin, Defendants.

C.A. No. 02-420S.

United States District Court, D. Rhode Island.

March 30, 2004.

John Rao, Peace Dale, RI, for Plaintiff.

Pamela B. Quigley, Fernando S. Cunha, Esq., Fernando S. Cunha, Ltd., William J. Delaney, Tillinghast, Licht, Perkins, Smith & Cohen LLP, Providence, RI, Richard Riendeau, Pawtucket, RI, for Appellant.

DECISION AND ORDER

SMITH, District Judge.

This matter is before the Court on Michael F. Cunha's ("Cunha"), Deborah Lapatin's ("Lapatin"), and Sunset Realty's ("Sunset") (collectively, "Appellants") appeal¹ from an Opinion and Order of the U.S. Bankruptcy Court for the District of Rhode Island, which held the Rhode Island Tax Sales Statute (the "Tax Sale Statute"), R.I. Gen. Laws §§ 44-9-1 et seq., unconstitutional insofar as it fails to provide property owners notice of their right of redemption under Rhode Island law. For the reasons discussed below, the Opinion and Order of the Bankruptcy Court is AFFIRMED. This Court writes separately to provide additional analysis regarding several important questions raised in this appeal.

I. Appellate Jurisdiction and Standard of Review

District courts have jurisdiction to hear appeals from judgments, orders, and decrees of the bankruptcy court. See 28 U.S.C. § 158. Appeals from a bankruptcy court "are `taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeal from the district courts.'" In re Ryan, 282 B.R. 742, 747 (D.R.I.2002) (quoting 28 U.S.C. § 158(c)(2)). The standard of review is a bifurcated one. In re Edmonston, 107 F.3d 74, 75 (1st Cir.1997). While the bankruptcy court's findings of fact are reviewed for clear error, see Fed. R. Bankr.P. 8013, its conclusions of law are reviewed de novo. See id.

II. Background²

In August 1998, pursuant to R.I. Gen. Laws § 44-9-1 et seq., the Providence Tax Collector sold Anthony Pontes' ("Pontes" or the "Debtor") residence at tax sale to recover delinquent taxes due on his property. Prior to the sale, the Collector sent by certified mail a Tax Sale Notice (the "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 did not advise Pontes of the statutory right to redeem his property, R.I. Gen. Laws § 44-9-21,³ or of the existence of the procedures available to exercise the right of redemption.

The overdue taxes were not paid, the sale was held, and Sunset bought the property for $2,884.81 (the taxes owed plus accrued charges and penalties). Sunset received a "Collector's Deed" that is subject only to the Debtor's statutory right of redemption and exists for at least one year following the tax sale, and thereafter until the tax sale purchaser files a petition for foreclosure of redemption. See R.I. Gen. Laws §§ 44-9-21 and 44-9-25 (2000).⁴ After the tax sale, Sunset recorded the deed in the Providence 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 the amount of money required to redeem. 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. The petition, which initiated the procedure to foreclose the right of redemption, 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 sought protection under Chapter 13 of the Bankruptcy Code, and shortly thereafter brought an adversary proceeding challenging the constitutionality of the Tax Sale Statute. In that proceeding, Pontes alleged that the Tax Sale Statute violated due process because it failed to provide him meaningful notice of the right of redemption and the procedures available to redeem his property under the statute.

The City of Providence (the "City") and the State of Rhode Island (the "State") objected to the jurisdiction of this Court, first on the ground that principles of comity and the Tax Injunction Act ("TIA"), 28 U.S.C. § 1341, bar this type of case from being brought in any federal court. The City also objected to the merits of Pontes' argument by arguing that taxpayers are charged with knowledge of their rights under the law, and that the Tax Sale Statute as written provides due process.

The State, appearing specially, argued in the Bankruptcy Court that it is an indispensable party to the suit and dismissal of the adversary proceeding was required based on its sovereign immunity.

Based on the stipulated record submitted to the Bankruptcy Court, and the arguments of counsel on cross-motions for summary judgment, the Bankruptcy Court found as follows: (1) that notwithstanding the TIA, the Bankruptcy Court had jurisdiction to hear this matter; (2) that the State was not an indispensable party; and (3) that sovereign immunity does not apply in this proceeding.⁵ As to the constitutional question, the Bankruptcy Court concluded that the Tax Sale Statute fails to provide meaningful notice of the right to redeem property after a tax sale, and that this omission violates the Due Process Clause of the Fourteenth Amendment.

III. The Question of Jurisdiction

The City's argument that the TIA bars the Court from exercising jurisdiction requires this Court to examine both the TIA (and its historical origins and scope) and the so-called "bankruptcy exception" to the TIA. As the discussion below illustrates, this is not a well-lit path. No case in the First Circuit and few courts anywhere have confronted the question presented here.

A. The TIA

The journey starts with the TIA itself, which states simply: "The 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. When the Constitution's framers "split the atom of sovereignty," U.S. Term Limits, Inc. v. Thornton, 514 U.S. 779, 838, 115 S.Ct. 1842, 131 L.Ed.2d 881 (1995) (Kennedy, J., concurring), they recognized that the states' taxing power is an essential element of state sovereignty, which could not be abridged by the federal government.

[T]he individual States should possess an independent and uncontrollable authority to raise their own revenues for the supply of their own wants.... [T]hey would under the plan of the Convention retain that authority in the most absolute and unqualified sense; and ... an attempt on the part of the national Government to abridge them in the exercise of it would be a violent assumption of power unwarranted by any article or clause of its Constitution.

The Federalist No. 32, at 199 (Alexander Hamilton)(Jacob E. Cooke, 1961). Very early in the Nation's history, in McCulloch v. Maryland, 4 Wheat. 316, 17 U.S. 316, 425, 4 L.Ed. 579 (1819), the Supreme Court recognized that interference with state taxing power could jeopardize the delicate balance of state-federal relations. Fifty years later, the Court reiterated the point:

It is upon taxation that the several States chiefly rely to obtain the means to carry on their respective governments, and it is of the utmost importance to all of them that the modes adopted to enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting the taxes may derange the operation of government, and thereby cause serious detriment to the public.

Dows v. City of Chicago, 11 Wall. 108, 78 U.S. 108, 110, 20 L.Ed. 65 (1870).

The TIA was enacted to ensure the continuity of these fundamental principles after the Supreme Court's landmark decision in Ex parte Young, 209 U.S. 123, 28 S.Ct. 441, 52 L.Ed. 714 (1908), which held that federal courts may enjoin state officers from enforcing an unconstitutional law. In passing the TIA, Congress "recognized that the autonomy and fiscal stability of the States survive best when state tax systems are not subject to scrutiny in federal courts." Fair Assessment in Real Estate Ass'n. v. McNary, 454 U.S. 100, 102-03, 102 S.Ct. 177, 70 L.Ed.2d 271 (1981); Arkansas v. Farm Credit Servs. of Central Arkansas, 520 U.S. 821, 826-27, 117 S.Ct. 1776, 138 L.Ed.2d 34 (1997) ("Enactment of the [TIA] reflects a congressional concern to confine federal-court intervention in state government, a concern prominent after ... Ex parte Young. ..."); Nat'l Private Truck Council, Inc. v. Okla. Tax Comm'n., 515 U.S. 582, 590-91, 115 S.Ct. 2351, 132 L.Ed.2d 509 (1995) ("the [TIA] may be best understood as but a partial codification of the federal reluctance to interfere with state taxation"); California v. Grace Brethren Church, 457 U.S. 393, 409 n. 22, 102 S.Ct. 2498, 73 L.Ed.2d 93 (1982) ("Congress worried not so much about the form of relief available in the federal courts, as about divesting the federal courts of jurisdiction to interfere with state tax administration"). Moreover, the Supreme Court has emphasized that the TIA is to be interpreted broadly and that federal courts are to "guard against...