Midland States Bank v. Ygrene Energy Fund Inc.

Decision Date29 September 2021
Docket Number4:21-CV-00354 JAR
Citation564 F.Supp.3d 805
Parties MIDLAND STATES BANK, Plaintiff, v. YGRENE ENERGY FUND INC., et al., Defendants.
CourtU.S. District Court — Eastern District of Missouri

Brooke Robbins, Lathrop GPM LLP, Minneapolis, MN, Danielle N. Twait, Wendi S. Alper-Pressman, Lathrop GPM LLP, Clayton, MO, Alicia Michelle Goedde, Eyecare Partners LLC, Ballwin, MO, for Plaintiff.

Caroline L. Hermeling, Husch Blackwell LLP, St. Louis, MO, for Defendants Ygrene Energy Fund Inc., Ygrene Energy Fund Missouri, LLC, Energy Equity Funding, LLC, St. Louis County Clean Energy Development Board.

Tom D. Appelbaum, St. Louis County Counselors Office, Clayton, MO, for Defendants St. Louis County, Mark R. Devore.



This matter is before the Court on DefendantsMotion to Dismiss (Doc. Nos. 19, 21)1 and Plaintiff's Motion for Remand (Doc. No. 22). The motions are fully briefed and ready for disposition.

I. Background

Plaintiff Midland States Bank ("Midland") filed this action in the Circuit Court of St. Louis County, Missouri on February 15, 2021 against Defendants Ygrene Energy Fund Inc., Ygrene Energy Fund Missouri LLC and Energy Equity Funding, LLC (collectively, "Ygrene"); St. Louis County Clean Energy Development Board (the "Board"); St. Louis County (the "County"); and the St. Louis County Collector of Revenue, Mark R. Devore (the "Collector"). See Midland States Bank v. Ygrene Energy Fund Inc., et al., No. 21SL-CC00715 (21st Jud. Cir.). According to the complaint, Barat Academy Foundation and Barat Academy (collectively "Barat Academy"), previously owned property located at 17815 and 17803 Wild Horse Creek Road in Chesterfield, Missouri ("the Property"). (Compl., Doc. No. 7 at ¶ 40). Barat Academy secured financing for the Property through a certain bond backed by an irrevocable letter of credit ("LOC") issued by Midland and secured by a Deed of Trust executed on May 1, 2012. (Id. at ¶ 42). From its inception, Barat Academy struggled financially (id. at ¶ 41) and in early 2020, defaulted under the bond. When Barat Academy was unable to repay Midland for the LOC, Midland foreclosed on the Property in August 2020, making it the current owner of the Property. (Id. at ¶ 43).

Prior to foreclosure and without Midland's knowledge, Barat Academy applied for financing with Ygrene under Missouri's Property Assessed Clean Energy ("PACE") Program for certain improvements to the school and was approved. (Id. at ¶¶ 44-45). By way of background, Missouri's PACE Program allows for financing of energy efficiency and renewable energy improvements on private property. These improvements are paid for through special assessments, which are given priority over any mortgages. (Id. at ¶¶ 9, 16, 27, 28).

Missouri enacted its PACE legislation in 2010, see R.S. Mo. § 67.2800 et seq. The PACE Act authorizes the formation of clean energy development boards by one or more municipalities to establish PACE programs. (Id. at ¶ 17). These boards are political subdivisions of the state with the power "to levy and collect special assessments" and "to finance a project under an assessment contract." (Id. at ¶¶ 18-19). Missouri's PACE Act provides that the Board may establish requirements for financing, but mandates that the Board "ensure that any property owner approved by the [B]oard ... shall have good creditworthiness or shall otherwise be considered a low risk for failure to meet the obligations of the program or conduit financing." (Id. at ¶ 20). The Act also provides that the "special assessments shall be collected by the county collector in the same manner and with the same priority as ad valorem real property taxes." (Id. at ¶ 21). If the property owner fails to pay the special assessments, the Board may foreclose on the lien. (Id. at ¶ 28.) As a result, PACE Program administrators such as Ygrene are required to provide notice to the record lien holders, including mortgagees, and in commercial cases, consent of the lien holder is required. This provides an opportunity for the lender to object prior to the issuance of the assessment. (Id. at ¶ 29.)

The Board entered into certain agreements with Ygrene to provide program administration services for residential properties and with RMC Pace Administrator-STL County, LLC ("RMC") to provide program administration services for commercial properties. (Id. at ¶¶ 25-26). According to the commercial PACE Handbook, commercial property owners must secure mortgage or senior lender consent as a requisite to participating in the PACE Program. (Id. at ¶¶ 35-36). The property owned by Barat Academy was a commercial property. (Id. at ¶ 52).

Midland alleges upon information and belief that with the Board's consent, RMC delegated the operation and funding of "small commercial" projects, valued at $750,000 or less, to Ygrene. (Id. at ¶ 37). According to the Small Commercial PACE Handbook, once the property owner receives notice of approval, Ygrene is required to notify any lenders. (Id. at ¶ 38). Such notification does not prevent a lender from asserting that the execution of a special assessment contract is a breach of the loan documents. (Id. at ¶ 39). Midland alleges that Ygrene and the Board improperly deemed the improvements at Barat Academy to be a "small commercial" project. (Id. at ¶ 53).

Barat Academy executed two Assessment contracts with the Board – one on June 5, 2019 for LED lighting in the amount of $132,872.50, plus program fees and interest, and one on September 27, 2019 for HVAC improvements in the amount of $736,059.00, plus program fees and interest. (Id. at ¶¶ 46-50). Midland alleges upon information and belief that Ygrene split the improvements into two assessment contracts to avoid triggering the requirement that the mortgage lender, i.e., Midland, consent to the improvements. (Id. at ¶ 54). In those contracts, Ygrene affirmed it had notified any lenders, yet at no time did Ygrene or the Board provide Midland with notice and/or seek Midland's consent for the improvements prior to the execution of the contracts. (Id. at ¶¶ 51, 55).

On June 6, 2019 and September 27, 2019, Ygrene sent notices of the Assessment contracts to Midland Mortgage, an Oklahoma community bank with no connection to Midland, the lender in this case. (Id. at ¶¶ 56-60). Midland never received notice until its counsel contacted Ygrene directly – more than a year after the Assessment contracts were executed. (Id. at ¶ 62). In December 2020, Midland paid the annual assessments due in the amount of $93,408.90 under protest. (Id. at ¶ 63).

In Count I of its complaint (against the Board and the County), Midland seeks a declaration that the Missouri PACE Act and St. Louis County Ordinance No. 26,164, granting lien priority to PACE assessments created thereunder, violate the United States Constitution and Missouri Constitution by depriving it of property without due process of law. In Count II (against the Board), Midland alleges the PACE assessments constitute an unconstitutional taking under the Fifth Amendment of the United States Constitution. Midland further alleges claims of Fraud (Count III) and Negligence (Count VI) against Ygrene and the Board based on the alleged lack of notice of the PACE assessments; and Slander of Title (Count IV) and Quiet Title (Count V) against the Board. In Count VII (against the Board and the Collector), Midland seeks a declaration that the PACE assessments are not due or are not valid liens on the Property. In Count VIII (against the Collector), Midland seeks a refund of the PACE Assessments it paid in protest.

Defendants removed the action to this Court on March 22, 2021 based on federal question jurisdiction (Doc. No. 1) and moved to dismiss the case (Doc. Nos. 19, 21). Midland filed its motion to remand on April 2, 2021, arguing that the Tax Injunction Act ("TIA"), 28 U.S.C. § 1341, divests this Court of subject matter jurisdiction. Midland further argues that even if the Court finds the TIA does not apply, principles of comity prevent this Court from exercising jurisdiction.

II. Motion for remand

First, the Court will address Midland's motion for remand. "A defendant may remove a state law claim to federal court only if the action originally could have been filed there." In re Prempro Prods. Liab. Litig., 591 F.3d 613, 619 (8th Cir. 2010). See also 28 U.S.C. § 1441(a). After removal, a plaintiff may move to remand the case to state court, and the case should be remanded if it appears that the district court lacks subject matter jurisdiction. 28 U.S.C. § 1447(c). The party invoking federal jurisdiction and seeking removal bears the burden of establishing federal jurisdiction, and all doubts about federal jurisdiction are resolved in favor of remand. Hubbard v. Federated Mut. Ins. Co., 799 F.3d 1224, 1227 (8th Cir. 2015).

Tax Injunction Act

The TIA prohibits federal courts from exercising jurisdiction over certain kinds of claims involving state taxation: "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. Thus, "[t]wo conditions must be satisfied to invoke the protection of the TIA: first, the surcharges must constitute ‘taxes,’ and second, the state remedies available to plaintiffs must be ‘plain, speedy and efficient.’ " Ass'n for Accessible Medicines v. James, 974 F.3d 216, 221 (2d Cir. 2020). The Act's prohibition extends to declaratory judgment actions as well as to suits for injunctive relief. Burris v. City of Little Rock, 941 F.2d 717, 720 (8th Cir. 1991) ; Coon v. Teasdale, 567 F.2d 820, 822 (8th Cir. 1977). Moreover, the TIA applies to taxes imposed by municipalities as well as those imposed by states. See Soo Line R.R. Co. v. City of Harvey, 424 F. Supp. 329, 330 (D.C.N.D. 1976) (holding that a special assessment levied by a municipal...

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    ...States Bank v. Ygrene Energy Fund Inc., 564 F.Supp.3d 805, 812-13 (E.D. Mo. 2021). The TIA also applies to taxes imposed by municipalities. Id. at 813. TIA essentially transfers jurisdiction over a taxpayer's constitutional objections to the state courts. Rosewell v. LaSalle Nat'l Bank, 450......

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