Tomaiolo v. Mallinoff

• Decision Date: 19 February 2002
• Docket Number: No. 01-1456.,01-1456.
• Citation: 281 F.3d 1
• Parties: Marie E. TOMAIOLO, et al., Plaintiffs, Appellants, v. Michael D. MALLINOFF, et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 1

281 F.3d 1

Marie E. TOMAIOLO, et al., Plaintiffs, Appellants, v. Michael D. MALLINOFF, et al., Defendants, Appellees.

No. 01-1456.

United States Court of Appeals, First Circuit.

Heard December 3, 2001.

Decided February 19, 2002.

Thomas W. Kelly for appellants.

Marc DeSisto with whom Kathleen M. Powers was on brief for appellees Michael D. Mallinoff, Joel Johnson, David B. Okun, John Day, Audrey Cornell, George Cross, Pamela J. Fontaine, Jane A. Steere, Frances Shocket, Claudette A. Paine, William A. Hanlon, David L. Krugman, Henrietta T. Delaga, Carolyn A. Joaquin, Doris M. Yeaw, Janette H. Hopkins, Dorothy E. Caldwell, Kenneth L. Richardson Jr., Robert E. Gordon, Diane Larisa, Dennis Finlay, Maryann Packer, Nancy Mello, Kathleen A. Raposa, Carol A. Touzin, John Mainville, Bruce Young, and the towns and cities of Barrington, Bristol, Central Falls, Coventry, Cumberland, Exeter, Foster, Glocester, Jamestown, Lincoln, Middletown, Narragansett, North Smithfield, West Warwick, Scituate, Charlestown, Johnston, Pawtucket, Portsmouth, Smithfield, South Kingstown, Tiverton, Warren, Woonsocket, and Burrillville, Rhode Island.

Mark W. Freel with whom Annemarie M. Carney and Edwards & Angell, LLP were on brief for appellees Transamerica Corporation, James Houghton, Mark Williams, and Beni Osuna.

Before TORRUELLA, LYNCH, and LIPEZ, Circuit Judges.

LYNCH, Circuit Judge.

Twenty-three owners of real property in Rhode Island were disadvantaged by being part of a group required to pay their real estate taxes annually rather than quarterly. These property owners, whose mortgage companies held their tax payments in escrow, were required to pay taxes in one lump sum; other property owners, who paid their taxes directly to the municipalities, could choose to pay quarterly. The quarterly payment method is more favorable to the taxpayer because it permits the taxpayer to receive the interest on the escrowed funds until the quarter in which payment is due.

The desires of aggrieved local taxpayers to assert their claims against municipal tax collectors in federal court are pitted against the comity interests urging restraint in the exercise of federal court jurisdiction over state tax matters. The comity interests prevail: the plaintiffs are left to the recourse available to them in state court. We reject as well the claim that certain private actors are state actors and affirm the dismissal of pendent state claims.

I.

The escrow accounts relevant to this case were held by federally regulated banks, mortgage companies, and escrow agents. Under the authority of the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 2601-2617 (2000), the federal Department of Housing and Urban Development (HUD), has promulgated a regulation, known as Regulation X, which reads in relevant part:

For the payment of property taxes from the escrow account, if a taxing jurisdiction offers a servicer a choice between annual and installment disbursements, the servicer must also comply with this paragraph (k)(3). If the taxing jurisdiction neither offers a discount for disbursements on a lump sum annual basis nor imposes any additional charge or fee for installment disbursements, the servicer must make disbursements on an installment basis.

63 Fed. Reg. 3214, 3237 (Jan. 21, 1998) (emphasis added) (codified at 24 C.F.R. § 3500.17(k)(3) (2001)).¹ This requirement benefits the borrower because quarterly payment generally makes more sense for borrowers than does an up-front lump sum annual payment. The following paragraph of the regulation permits the borrower and loan servicer to agree otherwise, provided the agreement is voluntary and uncoerced. 24 C.F.R. § 3500.17(k)(4). RESPA regulates the mortgage and escrow companies; it does not regulate municipalities.

After the passage of Regulation X, many lenders in Rhode Island continued to make annual, rather than quarterly, payments of property taxes from escrow accounts. The difference in treatment between payments from escrow accounts and direct payments from taxpayers had arisen because the taxing municipalities took the position that taxpayers who paid through escrow accounts were not "persons assessed" entitled to make payment on a quarterly basis under the relevant statute, R.I. Gen. Laws § 44-5-7.² On this interpretation of Rhode Island law, the municipalities were not "taxing jurisdiction[s which] offer[ed]... a choice," 24 C.F.R. § 3500.17(k)(3), between annual and quarterly payment, so that Regulation X did not apply. Understandably unhappy with the "overescrowing" of their accounts, the taxpayers took their problem to the Attorney General of Rhode Island, who agreed with them that Rhode Island law, properly read, did not permit a distinction between the two groups of taxpayers. In 1998 the Attorney General so advised the various municipalities and threatened to sue them if they did not mend their ways.

Thereafter, in 1999, the Rhode Island General Assembly amended the statute. Under that amendment, "persons assessed" now expressly includes mortgage companies and escrow agents. The legislature also provided, however, that local tax collectors who had read the statute otherwise in the past would be considered to have followed the law. See 1999 R.I. Pub. Laws ch. 493 (codified at R.I. Gen. Laws § 44-5-7 (1999)). The local governments of Rhode Island appear now to comply with the law.

Although the practice of overescrowing had ended, the plaintiff group of taxpayers still faced the problem of the loss of the use of their money due to overescrowing from 1995 to 1998. The municipalities, and not the taxpayers, had received the interest on the sums paid prematurely. The taxpayers felt they were entitled to be made whole.

II.

Marie E. Tomaiolo and a group of other named plaintiffs (for simplicity, we will refer from now on to Tomaiolo alone) sued the tax collectors and almost all of Rhode Island's municipalities (the "municipal defendants"), Transamerica Corporation, and individuals employed by Transamerica Real Estate Tax Service (TRETS). TRETS is the nation's largest tax servicing firm and a division of Transamerica. Tomaiolo alleged that Transamerica and the individual employees (the "escrow defendants") were state actors and that all the defendants collectively:

1. deprived affected taxpayers of their property (the tax payments, or at least the interest on them) without due process of law (because the process due was that provided by RESPA, Regulation X, and § 44-5-7) in violation of the Fourteenth Amendment's Due Process Clause;

2. interfered with the taxpayers' rights to fair and equal taxation under that Amendment's Equal Protection Clause;

3. violated the taxpayers' rights under Article 1, Section 2 of the Rhode Island Constitution, requiring equal distribution of the burdens of government and guaranteeing due process and equal protection of the laws;

4. intentionally interfered with the taxpayers' contractual relationships with their banks.

Tomaiolo alleged other claims, but has since abandoned them.

The parties filed cross-motions for summary judgment. In a thoughtful opinion, Tomaiolo v. Transamerica Corp., 131 F.Supp.2d 280 (D.R.I.2001), the district court:

1. dismissed without prejudice all federal claims against the municipal defendants as barred by both the Tax Injunction Act and the principles of comity articulated in Fair Assessment in Real Estate Ass'n, Inc. v. McNary, 454 U.S. 100, 102 S.Ct. 177, 70 L.Ed.2d 271 (1981);

2. dismissed all federal claims against the escrow defendants because they were not state actors;

3. exercised supplemental jurisdiction over the state law claims against the escrow defendants and granted summary judgment for those defendants.

The district court never reached the question whether to certify this case as a class action. This appeal followed.

III.

We review the district court's rulings de novo. See McCarthy v. Northwest Airlines, 56 F.3d 313, 314-15 (1st Cir.1995) (reviewing de novo a grant of summary judgment); Murphy v. United States, 45 F.3d 520, 522 (1st Cir.1995) (same for a dismissal for lack of subject matter jurisdiction); Garita Hotel Ltd. P'ship v. Ponce Fed. Bank, F.S.B., 958 F.2d 15, 17 (1st Cir.1992) (same for a dismissal for failure to state a claim).

We address the questions presented by this appeal in the following order. First, we hold that Tomaiolo's claims for injunctive and declaratory relief are moot. Second, we hold that she may not recover money damages against the municipal defendants under the authority of Fair Assessment. Third, we hold that the district court correctly granted summary judgment on her claim under § 1983 against the escrow defendants because those defendants were not acting under color of state law, as that statute requires. Fourth, we hold that the district court did not abuse its discretion in exercising supplemental jurisdiction over some, but not all, of the state law claims, and that it dealt correctly with those it addressed.

A. Mootness of Claims for Injunctive and Declaratory Relief

Tomaiolo's claims for injunctive and declaratory relief are moot and indeed were moot before the district court dismissed them. The conduct by the municipal defendants of which Tomaiolo complains — that is, their demand in alleged violation of federal and state law that she and her class pay their property taxes annually rather than quarterly — has ceased. There is, of course, the familiar principle that a request for injunctive or declaratory relief does not become moot simply because a defendant voluntarily ceases the allegedly unlawful conduct. E.g., Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 189-93, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000). The actions of the municipal defendants, however, were not voluntary but rather compelled by superior state officials: the Attorney General in 1998, and the state legislature in 1999. Tomaiolo's claims for...