Grable & Sons Metal v. Darue Engineering

• Court: Court of Appeals for the Sixth Circuit
• Decided: July 27, 2004
• Docket: 02-1678
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206 2 Grable & Sons Metal Products No. 02-1678 ELECTRONIC CITATION: 2004 FED App. 0244P (6th Cir.) v. Darue Engineering File Name: 04a0244p.06 _________________ UNITED STATES COURT OF APPEALS COUNSEL FOR THE SIXTH CIRCUIT ARGUED: Charles E. McFarland, Campbellsburg, _________________ Kentucky, for Appellant. Michael C. Walton, RHOADES, McKEE, BOER, GOODRICH & TITTA, Grand Rapids, GRABLE & SONS METAL X Michigan, for Appellee. ON BRIEF: Charles E. McFarland, PRODUCTS, INC., - Campbellsburg, Kentucky, for Appellant. Michael C. Plaintiff-Appellant, - Walton, RHOADES, McKEE, BOER, GOODRICH & - No. 02-1678 TITTA, Grand Rapids, Michigan, for Appellee. - v. > _________________ , - OPINION DARUE ENGINEERING & - _________________ MANUFACTURING, - Defendant-Appellee. - BOGGS, Chief Judge. Grable & Sons Metal Products Inc., - (“Grable”) argues that the district court committed two errors N in granting judgment to Darue Engineering & Manufacturing Appeal from the United States District Court (“Darue”) in Grable’s action to quiet title against Darue. for the Western District of Michigan at Grand Rapids. First, Grable argues that its claim, although based on federal No. 01-00037—David W. McKeague, District Judge. tax law, does not present a federal question, and, therefore, that the district court did not have subject matter jurisdiction Argued: March 9, 2004 to adjudicate the case after Darue removed it from Michigan state court. Secondly, Grable appeals the district court’s Decided and Filed: July 27, 2004 judgment denying its quiet-title claim in property Darue had purchased at a tax sale after the IRS seized it from Grable in Before: BOGGS, Chief Judge; DAUGHTREY, Circuit 1994. Judge; and ALDRICH, District Judge.* Grable’s quiet-title action is based on provisions of the Internal Revenue Code concerning proper procedures for notifying delinquent taxpayers that their property has been seized. Its claim implicates a substantial federal interest, thereby presenting a federal question. Furthermore, the district court correctly denied Grable’s action because the * Internal Revenue Code allows for substantial, rather than The Honorab le Ann Aldrich, United States District Judge for the literal, compliance with regulations regarding tax-seizure Northern District of Ohio, sitting by designation.

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notification. Neither federal law nor principles of equity II supports Grable’s claim, asserted six years after the sale of its property, that notice by certified mail, rather than in person, Federal Question Jurisdiction rendered the IRS sale to Darue invalid. Accordingly, we affirm the judgment of the district court in its entirety. A defendant may remove to federal district court “any civil action brought in a state court of which the district courts of I the United States have original jurisdiction.” 28 U.S.C. § 1441(a). District courts have original jurisdiction over any The facts in this case are not disputed. In 1994, the IRS civil action “arising under any Act of Congress providing for seized property at 601-701 W. Plains Road, in Eaton Rapids, internal revenue . . . .” 28 U.S.C. § 1340. This court reviews Michigan, to satisfy Grable’s tax debt resulting from not district court decisions regarding subject matter jurisdiction paying its corporate income taxes for six years. The IRS de novo. Caudill v. N. Am. Media Corp., 200 F.3d 914, 916 served notice of the seizure by certified mail, although 26 (6th Cir. 2000). Because we may not rule on the merits of a U.S.C. § 6335(a), the relevant statute, provides that notice case over which a district court did not have subject matter must be “given” personally to the owner of the property. The jurisdiction, we must decide that issue first. See Thomas v. parties agree that the IRS failed to adhere to the exact United States, 166 F.3d 825, 828 (6th Cir. 1999). The parties provisions of the statute but that Grable nevertheless received do not have diversity of citizenship, 28 U.S.C. § 1332(a), nor actual notice of the seizure. The IRS sold the property to is the United States a party to this action.1 Darue on December 13, 1994, for $44,500. The record before us contains no clear evidence that Grable challenged the sale Federal courts also have original jurisdiction over claims at the time or attempted to redeem the property at issue in this “arising under the Constitution, laws, or treaties of the United case. Following its standard procedure, the IRS executed a States.” 28 U.S.C. § 1331. Whether a claim presents a quitclaim deed to Darue on November 13, 1995. federal question “must be determined from what necessarily appears in the plaintiff’s statement of his own claim.” Taylor On December 14, 2000, about six years after Darue bought v. Anderson, 234 U.S. 74, 75-76 (1914). In its original the property, Grable challenged the sale in Eaton County complaint to quiet title, Grable alleged that Darue’s quitclaim Circuit Court by filing a quiet-title action. Darue removed the deed was invalid because it “was given with improper notice case to the United States Court for the Western District of pursuant to 26 U.S.C. § 6331 et seq. . . . [and] since the tax Michigan under 28 U.S.C. § 1441(b). Grable filed a motion deed was given pursuant to improper notice as required by 26 to remand based on lack of subject matter jurisdiction. U.S.C. § 6335(a), said transfer and claim through the tax deed 28 U.S.C. § 1447(c). The district court held that it had is null and void and void ab initio.” The key question is jurisdiction to hear the case because the application of whether Grable’s quiet-title action, based as it is on the faulty § 6335(a) implicates a substantial federal interest, meaning that Grable’s claim was based on a federal question. On March 29, 2002, the district court denied Grable’s motion to quiet title and awarded judgment to Darue. Grable appealed 1 to this court in a timely manner. In order to be a pa rty to a quiet title action, the United States m ust have an interest in the property, which it no longer has in this case. 28 U.S.C. § 2 410 (a). No. 02-1678 Grable & Sons Metal Products v. Darue 5 6 Grable & Sons Metal Products No. 02-1678 Engineering v. Darue Engineering

process in a tax seizure, “arises under” federal law and thus (6th Cir. 2000); see e.g., Howery v. Allstate Insurance Co., invokes federal court jurisdiction. We hold that it does. 243 F.3d 912, 918 (5th Cir.), cert. denied, 534 U.S. 993 (2001); Seinfeld v. Austen, 39 F.3d 761, 763 (7th Cir. 1994), The statute upon which Grable bases his complaint reads: cert. denied sub nom. Abbott Labs v. Seinfeld, 514 U.S. 1126 (1995). The asserted federal right in this case, personal As soon as practicable after seizure of property, notice in notification of seizure of property as provided by IRS writing shall be given by the Secretary to the owner of regulations, fulfills these three requirements. the property . . . or shall be left at his usual place of abode or business if he has such within the internal Substantial Federal Interest revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of To identify a federal question, we must make “a pragmatic business within such district, the notice may be mailed to assessment of the nature of the federal interest at stake,” his last known address. Howery, 243 F.3d at 917 (citing commentators), a simple task in this context. The federal government cannot function 26 U.S.C. § 6335(a) (emphasis added). The parties agree that without effective tax collection. See United States v. Kimbell the IRS failed to “give” or “leave” notification and that Foods, 440 U.S. 715, 734 (1979) (citing McCulloch v. therefore the service of notice did not comply with the statute. Maryland, 17 U.S. (4 Wheat.) 316, 425, 428, 431 (1819)). See Goodwin v. United States, 935 F.2d 1061, 1064 (1991) Society has a strong interest in clear rules for handling (noting government concession that the literal meaning of the delinquent taxpayers. The IRS must have transparent statute requires personal service); Howard v. Adle, 538 F. procedures for seizing and selling property so that people will Supp. 504, 507 (E.D. Mich. 1982) (demonstrating that be willing to purchase property at tax sales, allowing the IRS certified mailing is insufficient for compliance with the to provide a predictable stream of tax revenue. Determining statute by quoting 26 C.F.R. § 301.6335-1(b)(1)(1981) and the scope of the IRS’s authority to seize property to satisfy a IRS Manual § 5356.1(2)(1980); the latter specifies that the tax debt undoubtably implicates a substantial federal interest. “original notice of sale will be delivered to the taxpayer personally”). Although Grable’s complaint hinges on a Presentation as a state law claim violation of the Internal Revenue Code, Grable insists that its cause of action does not arise under federal law. Grable sued to quiet title, which is generally a state law cause of action. However, the scope of a taxpayer’s right to The long history of Supreme Court guidance concerning the due process in the form of notice of the tax seizure and sale is meaning of “arising under” the laws of the United States has the essential element of this claim. Grable would not have been synthesized into a three-part test. Although any cause of action, and Darue would have undisputed title to formulations differ slightly among the circuits, a federal the property, were it not for the technical notice requirements question may arise out of a state law case or controversy if the of § 6335(a). Therefore the Internal Revenue Code, not state plaintiff asserts a federal right that 1) involves a substantial property law, lies at the center of this dispute. The state and question of federal law; 2) is framed in terms of state law; federal claims are sufficiently entwined to allow us to find and 3) requires interpretation of federal law to resolve the that Grable has presented a federal question. case. Long v. Bando Mfg. of America, 201 F.3d 754, 759 No. 02-1678 Grable & Sons Metal Products v. Darue 7 8 Grable & Sons Metal Products No. 02-1678 Engineering v. Darue Engineering

Interpretation of the federal law required Local 1 v. Plain Dealer Pub. Co., 839 F.2d 1147, 1155 (6th Cir. 1988). Disposition of all the aspects of this case, including those related to the traditional state law property issues, turn on The Internal Revenue Code states that: construction of federal tax law. Both parties agree that the only way to resolve the underlying controversy is to evaluate b) Deed of real property.--In the case of the sale of real whether § 6335(a), which mandates notice for IRS seizure of property pursuant to section 6335 -- property for non-payment of taxes in person, requires strict, or merely substantial, compliance with its provisions to allow ... the IRS deed to convey title. If strict compliance is necessary, then Grable is entitled to get his property back because the (2) Deed as conveyance of title.--If the proceedings of IRS did not comply with the letter of the statute. If the Secretary as set forth have been substantially in substantial compliance is sufficient, then further analysis and accordance with the provisions of law, such deed shall be weighing of the equities of the situation is required. considered and operate as a conveyance of all the right, Therefore the final requirement is met: interpretation of the title, and interest the party delinquent had in and to the federal tax code is necessary to resolve the state law issue. real property thus sold at the time the lien of the United States attached thereto. In sum, Grable’s quiet title action presents a federal question because it is rooted in the Internal Revenue Code, 26 U.S.C. § 6339(b)(2) (emphasis added). Therefore, if the the correct interpretation of which represents a substantial IRS substantially complied with the provisions of § 6335(a), federal interest. then the tax sale is valid.

III Grable counsels against reading the substantial compliance provision of §6339(b)(2) as applying to § 6335(a) seizures, in Action to Quiet Title spite of the statutory language to the contrary, since doing so would render the notice provisions “totally ineffective.” The district court also correctly granted summary judgment Appellant Br. at 31. This argument is not persuasive. Grable to the appellee, Darue. At issue is whether serving notice is correct that a basic rule of statutory construction mandates through a certified letter, which Grable in fact received, that a court should read statutes as a whole and not interpret constitutes sufficient compliance with the statute to make the one provision in a way that would render another meaningless resulting quitclaim deed valid. Evaluating whether or superfluous. Beck v. Prupis, 529 U.S. 494, 506 (2000) substantial compliance is applicable is a question of law that (calling the rule a “longstanding canon of statutory is reviewed de novo. In re Eagle-Picher Indus., Inc. 285 construction”); Lake Cumberland Trust v. EPA, 954 F.2d F.3d 522, 527 (6th Cir. 2002) (applying substantial 1218, 1222 (6th Cir. 1992). compliance analysis to notice requirements in a bankruptcy case). However, the rule itself is an equitable doctrine, so that Allowing substantial compliance does not undermine the a district court’s decision to apply it is reviewed for abuse of purpose of § 6335(a), nor make its provisions superfluous. discretion. Id. at 529. See Cleveland Newspaper Guild Should the IRS fail to adhere to the strict statutory notice No. 02-1678 Grable & Sons Metal Products v. Darue 9 10 Grable & Sons Metal Products No. 02-1678 Engineering v. Darue Engineering

provisions, it then has the burden of showing it substantially Like Grable, Kabakjian owed the IRS taxes, and his property complied with them. Proving that a recalcitrant taxpayer was seized and sold at auction. He sued the government, actually received notice of a seizure or sale could be quite claiming that the notices he received pursuant to § 6335(a) difficult. No court would uphold a seizure without notice. were defective because he received them by certified mail, Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, rather than personal delivery. The Third Circuit held that the 313 (1950) (stating that “there can be no doubt that at a notices “were not so defective as to void the seizure of minimum [the due process clause] require[s] that deprivation property and its transfer to third parties” because § 6339(b)(2) of life, liberty or property by adjudication be preceded by allowed for substantial compliance. Ibid. Because Kabakjian notice and opportunity for hearing appropriate to the nature of could not demonstrate any prejudice beyond a theoretical the case”). deprivation of his right to notice, the court ruled that all his property rights had transferred to a third party, and his claim Ignoring the provisions of § 6335(a) puts the IRS at risk failed on the merits. Ibid. that a court will find its alternative notification procedures inadequate and invalidate the tax sale. Gauging how much Protecting the interests of bona fide purchasers is an variation will be tolerated puts the IRS in very uncertain important aspect of quiet title analysis. In the one opportunity territory. For instance, a simple public announcement of a tax the Sixth Circuit has had to address the question of substantial sale, as provided for in 26 U.S.C. § 6335(b), is compliance in the context of a tax seizure and sale, we too “constitutionally inadequate.” Verba v. Ohio Cas. Ins. Co., held that procedural irregularities could not void a tax sale. 851 F.2d 811, 816 (6th Cir. 1988). Attempting twice to notify PM Group Inv. Corp. v. PYK Enter., No. 97-1335, 1998 WL the taxpayer in person of the public sale of his property, and 242337, at **3 (6th Cir. May 8, 1998) (unpublished opinion) then sending a certified letter, which was returned, and a (holding that issuance of a certificate of sale was conclusive regular letter, which was not, is insufficient notice to validate evidence of the regularity of the sale). We noted that the tax sale. Reece v. Scroggins, 506 F.2d 967, 969 (5th Cir. § 6339(b)(2) was enacted to protect bona fide purchasers, 1975). Nor will a court be swayed by the facts that taxpayer such as Darue in this case. Ibid. (citing United States v. received proper notice of the initial property seizure and Whiting Pools, 462 U.S. 198, 211 (1983)). found out about the auction before the bidding began. Ibid. Adjudication of substantial compliance cases is very fact- Grable argues that “provisions of law” in § 6339(b)(2) specific, and the outcome is uncertain for the litigants. We do means provisions of state law, citing Fuentes v. United not believe that the latitude allowed by § 6339(b)(2) States, 14 Cl. Ct. 157, 167 (1987), and, therefore, that strict undermines the strong motivation for the IRS to follow the adherence to the statute is required. Fuentes dealt with a letter of § 6335(a). Only by doing so can it ensure the homeowner’s suit against the IRS for delivering a quitclaim validity of its tax sales, effectively collect back taxes, and deed that was invalid under Puerto Rican law. The Court of avoid litigation. Claims noted “that a sharp focus must be placed on the distinction between the law applicable to the efficacy of a tax The Third Circuit approved the application of the sale and the law applicable to the execution of a deed substantial compliance doctrine to §6335(a) in Kabakjian v. stemming therefrom. As to the former, we find that federal United States, 267 F.3d 208, 213 (2001), a case that is law is applicable; and as to the latter, local law governs.” Id. directly on point, and upon which the district court relied. at 166. This case deals with the efficacy of the tax sale, rather No. 02-1678 Grable & Sons Metal Products v. Darue 11 12 Grable & Sons Metal Products No. 02-1678 Engineering v. Darue Engineering

than the validity of the deed,2 and is thus a question of federal In this case, however, Grable was amply protected. It law. See also Reece, 506 F.2d at 970 (holding that faulty received actual notice of the tax sale, which was one of notice provisions made the sale voidable ab initio) (emphasis several resulting from a six-year hiatus from paying taxes. It added). We also adopt the district court’s analysis rejecting has not alleged any actual prejudice as a result of receiving Grable’s reading of Fuentes. The district court correctly notice through certified mail, nor did it take any action pointed out that the substantial compliance language of against Darue for six years. The protections in the statute are § 6339(b)(2) does not refer to the execution of the deed, but designed to prevent the government from seizing property rather to the proceedings by which the Secretary sells real without warning. The district court did not err in refusing to property pursuant to § 6335, and therefore the statute directly extend these protections to a delinquent taxpayer who knew contradicts Grable’s theory that the substantial compliance that its property was being seized but waited years to assert its provisions only apply to state law. Grable & Sons Metal rights. Products, Inc. v. Darue Engineering & Mfg., 207 F. Supp. 2d 694, 697 (W.D. Mich. 2002) (emphasis in the original). Although the statute allows for substantial compliance, the district court also analyzed the case under equitable Some courts have determined that substantial compliance principles, coming to the same favorable conclusion for is not acceptable in the context of a tax seizure. This view Darue. Because we may affirm the district court on any follows that of Chief Justice Marshall that “the person ground supported by the record, we do not have to review the invested with such a power [to convey land] must pursue with district court’s application of equity, Shaw v. Deaconess precision the course prescribed by the law, or his act is Hosp., 355 F.3d 496, 498 (6th Cir. 2004), but we make two invalid . . . .” Thatcher v. Powell, 19 U.S. (6 Wheat.) 119, short points. In a case with similar defects in notice, the 125 (1821). In Reece v. Scroggins, the leading case United States District Court for the Eastern District of advocating strict construction, the court voided a tax sale Michigan applied equity in holding that substantial because the IRS “handled this sale of land in a somewhat compliance was sufficient to validate the sale. Howard, 538 casual fashion,” including failure to comply with notice F. Supp. at 508 (applying Michigan law to resolve the quiet requirements and irregularities in the subsequent public title action). Secondly, the district court’s decision to apply auction. Reece, 506 F.2d at 970. The main rationale behind equity to dismiss Grable’s quiet title motion does not the court’s holding was a recognition of the “Damoclean contradict an earlier Michigan Court of Appeals quiet-title nature” of the IRS’s ability to seize property to satisfy action that was decided in Grable’s favor. Village of legitimate tax deficiencies and of the importance of strict Dimondale v. Grable, 618 N.W.2d 23 (Mich. App. 2000). In adherence to the statute to protect the taxpayer. Id. at 971; defending an action to quiet title to another piece of property Aqua Bar & Lounge, Inc. v. United States Dept. of Treasury, that Mr. Grable owned personally, he argued that the tax sale 539 F.2d 935, 939 (2d Cir. 1976) (same). was not valid because of defective IRS notice. The state appeals court held that, as a defendant, he did not have to worry about sleeping on his rights but was entitled to assert 2 any valid defense. Dimondale, 618 N.W.2d at 31-32. The See Robert Kratovil, Real Estate Law 49 (6th ed. 1974) (explaining court also noted that “equity is a shield, not a sword.” Id. at that a “quitclaim deed pu rports to convey only the grantor's present interest in the la nd, if any, rather than the land itself . . . . If he has no 32. The district court properly relied on that maxim when it interest, no ne will be conveyed.”) (Emph asis in original.) No. 02-1678 Grable & Sons Metal Products v. Darue 13 Engineering

held that a delay of approximately six years in pressing a claim provided sufficient basis in equity to deny Grable relief. IV For the reasons set out above, we AFFIRM the decision of the district court to deny Grable summary judgment and to award judgment to Darue.