Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

KANSAS CITY SOUTHERN RAILWAY CO. v. KOELLER (July 27, 2011)

The Sny Island Levee Drainage District has operated a levee and drainage system in central Illinois for over 100 years. The system is designed to protect a 114,000-acre area from Mississippi River flooding. Over 99% of the affected area is agricultural. The rest is residential, commercial, utility, and railroads. The Kansas City Southern Railway Co. and the Norfolk Southern Railway Co. (the "Railroads") own a combined 355 acres. For decades, the District has funded its operations by assessing a per-acre fee for each landowner in the area. For the last 20 years, the fee has been $8.50 an acre. The District found itself in a precarious financial position after it experienced severe flooding in 2008 and a substantial increase in diesel fuel prices. The Commissioners decided they needed a $10 per acre fee increase. They also decided to stop charging the fee on a uniform basis. They decided pipelines, railroads, and utilities were under assessed. They hired an expert in flood protection projects and asked him to calculate the benefits for the non-agricultural properties. The expert did the analysis but he was short on hard data and used questionable methodologies. When the analysis resulted in a number that the Commissioners could not support, they "refined" the numbers. As a result, the assessments for the railroads increased by 4800-8300%. The Commissioners also exempted land within the municipalities, under the supposition that the cost of collecting the small assessments outweigh the benefits. Then they assumed that all the commercial and industrial properties other than the railroads, pipelines, and utilities were within municipal limits. The Commissioners filed a petition for authorization with the County Court, published notices in the local newspapers, and sent notices to landowners. The notice referred to a $10.00 increase per acre but did not mention the benefit-based assessments for railroads, pipelines, and utilities or the exemption for land within municipalities. The Railroads did not object and the court certified the assessment. When they first received their new assessments, the Railroads filed suit under the Railroad Revitalization and Regulatory Reform Act, which prohibits discriminatory taxes against railroads. The District moved to dismiss on Rooker-Feldmangrounds. Judge Scott (C.D. Ill.) denied the Rooker-Feldman motion and ruled that the assessment was a tax under the Act. She denied the preliminary injunction, however, because the Railroads did not submit evidence that their lands’ assessed value exceeded its true market value by 5%. After a bench trial, the court found in favor of the District, again because of the Railroads' failure to submit evidence of their lands' true market value. The Railroads appeal.

In their opinion, Seventh Circuit Judges Bauer, Wood, and Williams reversed and remanded. The Court first rejected the Rooker-Feldman argument. The doctrine only applies to state court "losers." The Railroads were not even present for, much less parties in, the state court proceedings. There is no judgment against them. Furthermore, they are not seeking a review of the state court order. They are asserting an independent federal cause of action under the Act. Two questions were presented to the Court on the merits: whether the assessment was "another tax" under the Act and, if so, whether the tax was an impermissible discrimination. With respect to the first, the Court looked to the statute, the Supreme Court, its own jurisprudence, and its sister circuits' interpretations to conclude that the assessment was a tax. It raises general revenues for use by the entire District. It is not tied to any specific project or landowner. The Court turned to whether it was discriminatory. It first had to decide who to compare the Railroads to: all property owners, other commercial and industrial property owners, or the Railroad's competitors. It recognized that the three other subsections of the section of the Act at issue dealt with different types of taxes but included reference to commercial and industrial taxpayers. Given that the fourth subsection addressed the same kinds of discrimination, the Court concluded the appropriate comparator group is the other commercial and industrial taxpayers. Since the Act does not define discrimination, the Court adopted the ordinary meaning of the word -- a failure to treat persons equally without reasonable distinction. Here, the record establishes that the Commissioners adopted a proportionately heavier tax on the Railroads. The Court cited the "inadvertent" exemption for the properties outside the municipal boundaries, the exemption for the commercial and industrial properties within the municipality, and the questionable methodology. In addressing the appropriate remedy, the Court noted that the Act provides an exemption to the Tax Injunction Act. Notwithstanding the exemption, however, the Court noted that a federal court should act with restraint in such matters. Therefore, an injunction should not enjoin the entire scheme but should eliminate the discriminatory effects by enjoining the 2009 recalculation and allowing the District another shot at a non-discriminatory assessment.

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EMPRESS CASINO JOLIET CORP. v. BALMORAL RACING CLUB (July 8, 2011)

Several years ago, the State of Illinois passed laws which required the state's four largest casinos to turn over 3% of their annual revenue to the State. The laws required the State to hold the funds in a segregated account and turn them over to certain Illinois racetracks within days. The casinos brought suit against the racetracks and the Governor, alleging that the racetracks "bought" the legislation in violation of RICO. They sought a constructive trust. Judge Kennelly (N.D. Ill.) ruled that the Tax Injunction Act did not allow such a remedy. On appeal, the Seventh Circuit reversed (opinion here and intheiropinion here). Some of the defendants sought rehearing en banc. The Court granted the petition and vacated that portion of its opinion that addressed the Tax Injunction Act.

In their opinion, Chief Judge Easterbrook and Judges Bauer (dissenting), Posner, Kanne (dissenting), Wood, Sykes (dissenting), Tinder, and Hamilton affirmed. In relevant part, the TIA does not allow a federal district court to enjoin or restrain the collection of a state tax. Although the case before it does not technically seek to enjoin the collection of a tax, the Court stated that the imposition of the constructive trust would amount to the same thing. The Court was critical of some TIA jurisprudence that used "open-ended, multifactor tests" to decide if the Act applied. Instead, the Court noted a strong preference for a simple and clear rule that would distinguish between a tax and other collections of money by a state. The Court concluded that the only material distinction is that a tax generates revenue while a fine punishes and a fee pays for goods or services. The money at issue in this case must, therefore, be a tax because it is not meant to punish or pay for goods or services. The only aim of the statute only aim is to raise revenue. The fact that most taxes go to the state’s general funds and that these taxes passed through a segregated fund directly to the racetracks is irrelevant. The Court noted that lawmakers on the federal and state level frequently use their powers to redistribute wealth from one group to another.

Judge Sykes (joined by Judges Bauer and Kanne) dissented. The dissent noted that a) the suit was a civil RICO case, not a challenge to a State tax, b) not one cent of State money is at issue, c) the State is not even a party to the litigation, d) the State is simply acting as a trustee for the transfer of funds, e) the case poses no threat to Illinois' revenue. The TIA does not, therefore, prevent the case from proceeding.

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KATHREIN v. EVANSTON (March 11, 2011)

Evanston, Illinois adopted a Demolition Tax as part of its policy to maintain affordable housing. Under the ordinance, every residential demolition carries with it a tax. There are exemptions if the owner replaces the building with an affordable housing, if the owner otherwise provides a affordable housing, or if the owner has lived in the building for three years and will continue to live in it for three years. Shortly after Michael and Victoria Kathrein agreed to sell their home in Evanston, the purchaser learned of the tax and demanded a reduction in the purchase price. The Kathreins refused and the sale was not consummated. The Kathreins brought suit pursuant to § 1983, alleging that the tax violated the United States and the Illinois Constitutions, as well as Illinois law. The Kathreins also challenged the constitutionality of the Tax Injunction Act (TIA). Judge Guzman (N.D. Ill.) granted Evanston's motion to dismiss. He concluded that he had no jurisdiction because of the TIA and that the Kathreins lacked standing to challenge either the TIA or the tax. The Kathreins appeal.

In their opinion, Judges Ripple, Kanne, and Sykes affirmed with respect to the TIA challenge but reversed and remanded in all other respects. The Court began with a discussion of the TIA. The TIA prevents a federal court from enjoining or restraining the collection of a state tax if a state court provides a speedy and efficient remedy. But it applies only to taxes, not to every payment to the state. The Court identified four kinds of payments that are not taxes, including what it called "regulatory devices." A regulatory device uses monetary incentives to regulate behavior -- behavior that the state wants to deter. The Court concluded that the Demolition Tax was a regulatory device, not a tax, after considering several factors: a) it was part of a complex scheme aimed at deterring only those demolitions considered harmful, b) the substantial amount of the tax ($10,000), given the price elasticity of the market, deters developers from demolishing less expensive homes, c) the tax raises an insubstantial amount of revenue relative to Evanston's total revenue, and d) the revenue does not go to the general fund but instead is used to promote affordable housing in the city in other ways. Because the Court noted that the TIA did not divest the court of jurisdiction, it also concluded that it caused no injury to the Kathreins. They therefore had no standing to challenge its constitutionality. The Court concluded, however, that the Kathreins did have standing to challenge the tax ordinance. After identifying several bases for standing set forth by the Kathreins and amicus that did not confer standing (e.g., their status as tax payers, the increased cost of demolishing their house, the failed real estate transaction), the Court identified one that did. The uncontradicted testimony of the Kathreins and the developer who wanted to purchase the property established that the tax decreased the market value of the property. This reduction in value is an "injury in fact" and confers standing, even if the Kathreins have no present intent to sell their home. The Court remanded for consideration of their challenge on the merits.

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On April 13, 2011, the Court granted petitions for rehearing en banc with respect to the Tax Injunction Act issue. On July 8, the en banc Court, in a 5-3 vote, disagreed with the panel and affirmed the district court’s conclusion that the Tax Injunction Act applied.

EMPRESS CASINO JOLIET CORP. v. BLAGOJEVICH (March 2, 2011)

In 2006, Illinois Governor Rod Blagojevich signed into law the 2006 Horse Racing Act. The Act required the state's four highest grossing casinos to pay 3% of their adjusted gross revenue into a fund. The fund was kept separate from other state funds and was not available to any state agency or program. Instead, the money in the fund was paid to five horseracing tracks in Illinois. The purpose of the Act, according to legislative findings, was to assist the horseracing industry, which had suffered financially after casinos were allowed to operate in Illinois. The casinos challenged the Act in state court. The Illinois Supreme Court upheld the Act against state and federal constitutional challenges. A few months later, the United States brought political corruption charges against Blagojevich. In an affidavit attached to the criminal complaint, an FBI agent described conversations in which Blagojevich discussed receiving money in return for his support of the Horse Racing Act. The casinos returned to state court and sought post-judgment relief based on this information. The state court denied relief, concluding that the legislature's motive in passing the Act was irrelevant to its constitutionality. The casinos then brought suit in federal court against Blagojevich, the racetracks, and the owner of two of the racetracks. The complaint alleged a RICO conspiracy and sought a constructive trust to prevent the racetracks from receiving any money. Blagojevich moved to dismiss on legislative immunity grounds. One or more of the defendants also moved to dismiss the RICO claim on res judicata and for failure to state a claim and moved to dismiss the constructive trust claim on several grounds: that it was barred by the Tax Injunction Act, that it was premature, that there was no unjust enrichment, res judicata, and Colorado River abstention. Judge Kennelly (N.D. Ill.) rejected the legislative immunity claim and denied the motions to dismiss the RICO claim, but dismissed the constructive trust claim on the grounds that the Tax Injunction Act eliminated jurisdiction. Blagojevich appealed the legislative immunity ruling and the casinos appealed the constructive trust ruling.

In their opinion, Judges Bauer, Posner (dissenting), and Sykes reversed both with respect to the legislative immunity claim and the constructive trust claim. With respect to legislative immunity, the Court cited Tenney for the proposition that state officials are absolutely immune from damages suits arising from their legislative activity. Although the Supreme Court has never applying that principle to a governor, the Court saw no reason that it would not apply and noted that other circuits have so extended the principle. The principle applies even when the legislative activity is illegal or improper. The Court rejected the casinos’ argument that Blagojevich’s immunity should be decided in reference to state law, relying on the Supreme Court's decision in Lake Country Estates. The Court also expressed its view that the Illinois Supreme Court's decision in Jorgensen (where it rejected Blagojevich’s claim of legislative immunity) would not control even if state law did apply. Jorgensen was not a damages case, but was a constitutional attack on Blagojevich's judicial pay raise veto. Therefore, Blagojevich is immune and the RICO claim should be dismissed. The Court moved on to consider the Tax Injunction Act argument. That Act prohibits a federal court from interfering with the collection of state taxes where there is a sufficient remedy in state court. The only real issue presented under the Act is whether the 3% casino surcharge is a tax. The Court concluded that it was not because it had none of the normal indicia of a tax. The Act never referred to as a tax, the only targets of the Act are four casinos, the only beneficiaries of the Act are five racetracks, the money is segregated from all state funds, the money is not available to any state program or agency, the Act has a regulatory purpose (protecting the racetracks from competition), and the Act was enacted under the state's police power, not its taxing power. Therefore, the Tax Injunction Act does not apply and the constructive trust claim can be considered. Given the Court's treatment of the Tax Injunction Act issue, it proceeded to consider the defendants’ alternate grounds to dismiss the constructive trust claim. First, it rejected the argument that the Illinois Supreme Court's decision on the casinos’ constitutional challenge had any preclusive effect on the case. Both the causes of action and the parties were different. Next, it rejected the argument that the state court’s denial of post-judgment relief had preclusive effect on the case. In fact, the state court denied relief because the allegations of corruption were unrelated to the constitutional challenge before the court. The Court rejected the collateral estoppel and Colorado River abstention arguments for much the same reason -- a constitutionality challenge is fundamentally different from a RICO claim. Finally, the Court rejected defendants' argument that their actions were not the proximate cause of the casinos' injuries.

Judge Posner dissented both with respect to the legislative immunity issue and the Tax injunction Act issue. With respect to immunity, he agreed that the general rule is that a state official is entitled to legislative immunity. But if Illinois grants its officials less than complete immunity, federal common law should do the same. There is no federal interest served in affording a state official more protection in federal court that he would enjoy in a state court. Because it was not clear in Jorgensen whether the Illinois Supreme Court would grant legislative immunity in a civil damages case, judge Posner would certify the question to that court. With respect to the Tax Injunction Act issue, Judge Posner agreed that the only question was whether the surcharge was a tax -- and he concluded that it was. He agreed that not every state receipt of money was a tax, but he distinguished between taxes and fees by asking whether the charge was based on a reasonable estimate of the cost of some service provided. The charge imposed on the casinos here is not a fee for a service but a subsidy for the racetracks. Therefore, it is a tax and the Tax Injunction Act applies.

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JOHNSON v. ORR (December 04, 2008)

David Johnson obtained a certificate of purchase for a tax-delinquent piece of land in Cook County (the “County”). The certificate allowed him to acquire the property by following certain notice requirements and by then petitioning the court. He complied with the notice requirements. Before he petitioned the court, the County realized that its determination of delinquency was in error. The County and Johnson agreed to an order, entered by the court, declaring the tax sale in error and directing the cancellation of the certificate and return of the purchase price. Notwithstanding the order, Johnson petitioned the state court for a deed. Johnson later filed suit in federal court. He alleged that the County’s failure to issue the deed violated his constitutional rights and the Interstate Land Sales Full Disclosure Act, as well as various other state statutory and common laws. The court granted defendant’s motion to dismiss, ruling that the complaint sought review of a state court decision in violation of the Rooker-Feldman doctrine and that jurisdiction was barred by the Tax Injunction Act (“TIA”). Johnson appeals.

In their opinion, Judges Ripple, Evans and Tinder affirmed. The Court first addressed the Rooker-Feldman doctrine. That doctrine deprives federal courts (except the Supreme Court) of jurisdiction to hear a party complain about the effects of a state court judgment. Although Johnson attempted to style his request for relief as something other than an attack on the state court judgment, the Court looked beyond the complaint to identify the actual injury. Johnson’s injury, the state court’s failure to grant him a tax deed, comes directly from the order entered by the court canceling the certificate. The gravamen of his complaint is that the court’s order was erroneous. The district court therefore lacked subject matter jurisdiction of Johnson’s constitutional claims. Johnson also alleged a violation of the Interstate Land Sales Full Disclosure Act (the “Act”), a federal statute. Although a claim pursuant to a federal statute would normally provide subject matter jurisdiction, the Court stated that such a claim should be dismissed if it is “wholly insubstantial and frivolous.” The Court concluded that Johnson’s claim was just that. The Act applies only to sales of real estate. Here, the County did not sell the property and Johnson did not buy the property. Even if there was a sale, the Court observed that the Act would not apply because it contains an exemption for a sale by a government body. Although it did not have to, the Court did briefly address the TIA issue. It disagreed with the district court’s conclusion that the TIA applied. The TIA only applies where the relief requested would reduce the State’s tax benefit or impede the collection of taxes. The Court found neither present in the case.
 

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SCOTT AIR FORCE BASE PROPERTIES, LLC v. COUNTY OF ST. CLAIR (November 14, 2008)

Scott Air Force Base Properties, LLC (“Scott”) entered into a 50-year lease with the United States for property located on Scott Air Force Base. The lease was entered into pursuant to the Military Housing Privatization Initiative (“MHPI”), under which private companies can lease military land for the purposes of constructing, maintaining, and operating rental housing for military personnel. The County of St. Clair, in which the property is located, added the leaseholds to its tax rolls and assessed an ad valorem tax on each parcel. Scott filed a suit for a declaratory judgment that the leasehold interest and all transactions under the MHPI were exempt from state taxation. Scott asserted that the assessment violated the U.S. Constitution, federal law, and state law. The district court dismissed for lack of subject matter jurisdiction because of the Tax Injunction Act (“TIA”). Scott appeals.

In their opinion, Judges Ripple, Manion, and Sykes affirmed. The Court stated that the TIA bars federal jurisdiction of any suit in which the relief sought would reduce state tax revenue. It prevents both injunctive and declaratory relief. It applies even where the basis of the relief sought is a constitutional claim. The bar is expressly conditioned, added the Court, on the availability of a “plain, speedy, and efficient remedy” in state court. Scott has the burden of demonstrating the failure of the state remedy under the TIA test. Here, the Court found that Scott was clearly seeking to avoid paying state taxes. The TIA applied unless an adequate remedy was not available to Scott in the Illinois courts. Scott only challenged the “efficiency” of the Illinois remedy. Scott asserts that the Illinois remedy does not meet the TIA test because it requires that Scott pursue both an exemption application and a valuation protest. The Court rejected the argument, while conceding that a more efficient procedure might exist than the one provided by Illinois. The TIA does not require the most efficient remedy. The Court also noted that Scott will be able to raise its constitutional and federal statutory challenges to the tax in state court. Given a remedy in state court that meets the TIA test, the Court agreed that it lacked subject matter jurisdiction.

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