RTC Commercial Assets Trust 1995-NP3-1 v. Phoenix Bond & Indem. Co.

• Citation: 169 F.3d 448
• Decision Date: 17 February 1999
• Docket Number: No. 97-3243,97-3243
• Parties: RTC COMMERCIAL ASSETS TRUST 1995-NP3-1, a Delaware business trust, Plaintiff-Appellant, v. PHOENIX BOND & INDEMNITY CO., et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 448

169 F.3d 448

RTC COMMERCIAL ASSETS TRUST 1995-NP3-1, a Delaware business

trust, Plaintiff-Appellant, v. PHOENIX BOND & INDEMNITY CO., et al., Defendants-Appellees.

No. 97-3243.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 19, 1998.

Decided Feb. 17, 1999.

Jill A. Glickstein, Rudnick & Wolfe, Edward S. Weil (argued), Schwartz, Cooper, Greenberger & Krauss, Rodney C. Slutzky, Chicago, IL, for Plaintiff-Appellant.

Stanford D. Marks (argued), Andrew W. Marks, Chicago, IL, for Defendants-Appellees Phoenix Bond & Indemnity Company and Thomas C. Hynes.

Donna M. Lach (argued), Dean M. Victor, Office of State's Attorney of Cook County, Chicago, IL, for Defendants-Appellees Edward J. Rosewell, David Orr, James Houlihan.

Before COFFEY, MANION, and DIANE P. WOOD, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

This case presents an aspect of the fallout from the savings and loan debacle of the 1980s. On one level, it concerns local real estate taxes on property held by a failed institution, and the liens and penalties associated with those taxes. As a preliminary matter, however, it requires us to decide whether the Tax Injunction Act (TIA), 28 U.S.C. § 1341, precludes the district court from adjudicating some or all of the claims presented. The district court thought that the TIA barred jurisdiction for three out of four counts of the complaint, on the ground that the remedies sought effectively would impair the ability of Cook County, Illinois, to collect taxes. It exercised jurisdiction over a fourth count, which raised the question whether tax penalties could attach to properties held by the Resolution Trust Corporation ("RTC"). RTC Commercial Assets Trust 1995-NP3-1 ("RTC Trust"), which purchased interests in the property from RTC itself, has appealed both the jurisdictional ruling and the aspects of the court's substantive ruling that were adverse to it.

I

The facts of the case are uncontested and relatively straightforward. When the TransOhio Federal Savings Bank folded in July 1992, RTC was appointed the bank's receiver pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub.L. No. 101-73, 103 Stat. 183. Among the assets the bank then held were two notes secured by interests in six adjoining parcels of land at 185 North Wabash Street in Chicago. The first note secured a loan to the 185 North Wabash Partnership of approximately $904,000 with the assignment of 100% of the beneficial interest in a land trust that held interests in the property. The second evidenced a leasehold mortgage transferred as security for a separate $15,000,000 loan. As receiver, RTC succeeded to TransOhio's interests in the property. On October 24, 1995, RTC assigned those interests to the present plaintiff, RTC Trust.

No one had paid the real estate taxes on the property due to Cook County since 1991. On March 1, 1995, the county held a tax sale at which Phoenix Bond & Indemnity Company ("Phoenix") purchased a tax certificate representing the real estate taxes levied against the property for 1993. Later, Phoenix purchased tax certificates for the second installment of the 1991 real estate taxes, all of the 1992 taxes, and the first installment of the 1994 taxes. For the time being, therefore, the county had its tax monies, and it was Phoenix's job to pursue the tax debtor. Complicating matters somewhat is the fact that under Illinois law, if the liens Phoenix acquired under the tax certificates are declared void, it has the right to file a petition in the court that ordered the property sold to have the sale declared a "sale in error." 35 ILCS 200/21-310(b). One of the express grounds for finding a sale in error is that there is "an interest held by the United States in the property sold which could not be extinguished by the tax deed." Id., 21-310(b)(3). Upon such a declaration, the county clerk must refund the amount paid for the property (with interest) and cancel the certificate. Id., 21-310(b), final paragraph. The only person who may bring an action for a refund based on a sale in error is the tax buyer. See LaSalle Nat'l Bank v. Hoffman, 1 Ill.App.3d 470, 274 N.E.2d 640, 645 (1971). At this point, however, Phoenix, the buyer, has taken no such action in the Circuit Court of Cook County. Instead, on November 18, 1996, it filed a notice and petition for a tax deed for the property represented by its tax certificates.

RTC Trust responded to Phoenix's petition on March 14, 1997, by filing the present suit in federal court against Phoenix, Thomas Hynes, in his official capacity as Cook County Assessor (for whom we have now substituted James Houlihan, Hynes' successor in office), Edward Rosewell, in his official capacities as County Treasurer and County Collector, and David Orr, in his official capacity as County Clerk (collectively, the "County defendants"). Counts I and II of its claim requested a declaratory judgment under FIRREA to the effect that any tax liens under Illinois law that purported to have attached after RTC acquired the notes are invalid, and thus neither Phoenix nor the County defendants have a valid interest in the property; Count III alleged that, as RTC's assignee, RTC Trust was not obligated to pay any interest or penalties on the liens; and Count IV asserted that, in the event the liens were valid, RTC Trust had the right under FIRREA to challenge any valuation assessments made while RTC held the notes.

After an abortive attempt to assert federal question jurisdiction directly under FIRREA (which RTC Trust has now abandoned), the complaint was amended to assert diversity jurisdiction. RTC Trust is a Delaware business trust with its principal place of business in Maryland; all of its equity interest holders, and all partners involved in the holders, are citizens of states other than Illinois. Phoenix is an Illinois corporation with its principal place of business in Illinois, and the County defendants are named in their representative capacity for Cook County, Illinois. The jurisdictional paragraph of the complaint erroneously alleges that in excess of $50,000 was in controversy--an amount superseded by amendments to § 1332 effective January 17, 1997 raising the amount to $75,000. Nevertheless, read as a whole the complaint clearly indicates that the amount in controversy exceeds $75,000: paragraph 9 sets forth the value of the two mortgage interests at issue, each of which was substantially in excess of the jurisdictional minimum. That is enough to sustain diversity jurisdiction.

The alert reader might wonder why this federal litigation was proceeding at all, since there was apparently a pending state court action in the courthouse several blocks down the street. The abstention doctrine established in Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), generally requires a federal court to refrain from adjudicating an action when certain kinds of state court actions are proceeding with respect to the same subject matter, including some civil proceedings. See, e.g., Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 107 S.Ct. 1519, 95 L.Ed.2d 1 (1987); Moore v. Sims, 442 U.S. 415, 99 S.Ct. 2371, 60 L.Ed.2d 994 (1979); Trainor v. Hernandez, 431 U.S. 434, 97 S.Ct. 1911, 52 L.Ed.2d 486 (1977). There is nothing about federal preemption claims that prevents a court from considering Younger abstention. See New Orleans Public Serv., Inc. v. New Orleans, 491 U.S. 350, 365, 109 S.Ct. 2506, 105 L.Ed.2d 298 (1989) (NOPSI). Nevertheless, in a parallel line of cases the Court has recognized that the state may choose not to request Younger abstention, and the federal court will respect its preference. See, e.g., Ohio Civil Rights Comm'n v. Dayton Schools, 477 U.S. 619, 626, 106 S.Ct. 2718, 91 L.Ed.2d 512 (1986); Ohio Bureau of Employment Servs. v. Hodory, 431 U.S. 471, 479-80, 97 S.Ct. 1898, 52 L.Ed.2d 513 (1977). Although the State of Illinois itself is not a party here, it appears that neither the Cook County defendants nor Phoenix said a word about Younger abstention in the district court. It is quite clear that neither one has raised such a contention in this court. We therefore conclude that it is now too late in the day to consider whether this might have been an appropriate ground for dismissal of the federal action, and we proceed to the issues actually litigated.

As we noted above, the district court granted the defendants' motion to dismiss Counts I, II, and IV for want of subject matter jurisdiction. It concluded that the TIA barred federal jurisdiction because the practical effect of the relief RTC Trust sought would be to impair the county's effort to collect its taxes. It reached the opposite conclusion with respect to its jurisdiction over Count III, because it found that Illinois law does not treat penalties imposed for failure to pay taxes as taxes themselves, and thus the TIA does not apply. On the merits of Count III, the court ruled that RTC Trust was not immune as a matter of law from penalties assessed before RTC was appointed as TransOhio's receiver, but that it was entitled to summary judgment on its claim that it could not be held liable for penalties that accrued after RTC's appointment. RTC Trust has now appealed the ruling under the TIA and the adverse portion of the court's decision on Count IV; there is no cross-appeal.

II

A. Tax Injunction Act

In light of the frequency with which tax issues must have arisen in conjunction with RTC's assumption of assets during the course of the savings-and-loan bailout, there is a surprising dearth of case law about the relation between the TIA and FIRREA. The question whether the TIA precludes federal jurisdiction over claims brought not by RTC or a successor federal agency, but by a private-party assignee of the federal government, is one of first impression in this circuit. If the United States were a co-plaintiff, the judicial exception to the TIA for suits brought by...