GRABLE & SONS METAL PRODUCTS, INC., Plaintiff-Appellant, v. DARUE ENGINEERING & MANUFACTURING, Defendant-Appellee.
No. 02-1678
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
Decided and Filed: July 27, 2004
2004 FED App. 0244P (6th Cir.)
RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit Rule 206. File Name: 04a0244p.06. Appeal from the United States District Court for the Western District of Michigan at Grand Rapids. No. 01-00037—David W. McKeague, District Judge. Argued: March 9, 2004.
Before: BOGGS, Chief Judge; DAUGHTREY, Circuit Judge; and ALDRICH, District Judge.
ARGUED: Charles E. McFarland, Campbellsburg, Kentucky, for Appellant. Michael C. Walton, RHOADES, McKEE, BOER, GOODRICH & TITTA, Grand Rapids, Michigan, for Appellee. ON BRIEF: Charles E. McFarland, Campbellsburg, Kentuсky, for Appellant. Michael C. Walton, RHOADES, McKEE, BOER, GOODRICH & TITTA, Grand Rapids, Michigan, for Appellee.
BOGGS, Chief Judge. Grable & Sons Metal Products Inc., (“Grable“) argues that the district court committed two errors in granting judgment to Darue Engineering & Manufacturing (“Darue“) in Grable‘s action to quiet title against Darue. First, Grable argues that its claim, although based on federal tax law, does not present a federal question, and, therefore, that the district court did not have subject matter jurisdiction to adjudicate the case after Darue removed it from Michigan state court. Secondly, Grable appeals the district court‘s judgment denying its quiet-title claim in property Darue had purchased at a tax sale after the IRS seized it from Grable in 1994.
Grable‘s quiet-title action is based on provisions of the Internal Revenue Code concerning рroper 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 literal, compliance with rеgulations regarding tax-seizure
I
The facts in this case are not disputed. In 1994, the IRS seized рroperty at 601-701 W. Plains Road, in Eaton Rapids, Michigan, to satisfy Grable‘s tax debt resulting from not paying its corporate income taxes for six years. The IRS served notice of the seizure by certified mail, although
On December 14, 2000, about six years after Darue bought the property, Grable challenged the sale in Eaton County Circuit Court by filing a quiet-title action. Darue removed the case to the United States Court for the Western District of Michigan under
Federal Question Jurisdiction
A defendant may remove to federal district court “any civil action brought in a state court of which the district courts of the United States have original jurisdiction.”
Federal courts also have original jurisdiction over claims “arising under the Constitution, laws, or treaties of the United States.”
The statute upon which Grable bases his complaint reads:
As soon as practicable after seizure of property, notice in writing shall be given by the Secretary to the owner of the property . . . or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district, the notice may be mailed to his last known address.
The long history of Supreme Court guidance concerning the meaning of “arising under” the laws of the United States has been synthesized into a three-part test. Although formulations differ slightly among the circuits, a federal question may arise out of a state law case or controversy if the plaintiff asserts a federal right that 1) involves a substantial question of federal law; 2) is framed in terms of state law; and 3) requires interpretation of federal law to resolve the case. Long v. Bando Mfg. of America, 201 F.3d 754, 759 (6th Cir. 2000); see e.g., Howery v. Allstate Insurance Co., 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), cert. denied sub nom. Abbott Labs v. Seinfeld, 514 U.S. 1126 (1995). The asserted federal right in this case, personal notification of seizure of property as provided by IRS regulations, fulfills these three requirements.
Substantial Federal Interest
To identify a federal question, we must make “a pragmatic assessment of the nature of the federal interest at stake,” Howery, 243 F.3d at 917 (citing commentators), a simple task in this context. The federal government cannot function without effective tax collection. See United States v. Kimbell Foods, 440 U.S. 715, 734 (1979) (citing McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 425, 428, 431 (1819)). Society has a strong interest in clear rules for handling delinquent taxpayers. The IRS must have transparent procedures for seizing and selling property so that people will be willing to purchase property at tax sales, allowing the IRS to provide a predictable stream of tax revenue. Determining the scope of the IRS‘s authority to seize property to satisfy a tax debt undoubtably implicаtes a substantial federal interest.
Presentation as a state law claim
Grable sued to quiet title, which is generally a state law cause of action. However, the scope of a taxpayer‘s right to due process in the form of notice of the tax seizure and sale is the essential element of this claim. Grable would not have any cause of action, and Darue would have undisputed title to the property, were it not for the technical notice requirements of
Disposition of all the aspects of this case, including thosе related to the traditional state law property issues, turn on construction of federal tax law. Both parties agree that the only way to resolve the underlying controversy is to evaluate whether
In sum, Grable‘s quiet title action presents a federal question because it is rooted in the Internal Revenue Code, the correct interpretation of which represents a substantial federal interest.
III
Action to Quiet Title
The district court also correctly granted summary judgment to the appellee, Darue. At issue is whether serving notiсe through a certified letter, which Grable in fact received, constitutes sufficient compliance with the statute to make the resulting quitclaim deed valid. Evaluating whether substantial compliance is applicable is a question of law that is reviewed de novo. In re Eagle-Picher Indus., Inc. 285 F.3d 522, 527 (6th Cir. 2002) (applying substantial compliance analysis to notice requirements in a bаnkruptcy case). However, the rule itself is an equitable doctrine, so that a district court‘s decision to apply it is reviewed for abuse of discretion. Id. at 529. See Cleveland Newspaper Guild Local 1 v. Plain Dealer Pub. Co., 839 F.2d 1147, 1155 (6th Cir. 1988).
The Internal Revenue Code states that:
b) Deed of real property.--In the case of the sale of real property pursuant to
section 6335 --. . .
(2) Deed as conveyance of title.--If the proceedings of the Secretary as set forth have been substantially in accordance with the provisions of law, such deed shall be considered and operate as a conveyance of all the right, title, and interest thе party delinquent had in and to the real property thus sold at the time the lien of the United States attached thereto.
Grable counsels against reading the substantial compliance provision of
Allowing substantial compliance does not undermine the purpose of
Ignoring the provisions of
The Third Circuit approved the application of the substantial compliance doctrinе to
Protеcting the interests of bona fide purchasers is an important aspect of quiet title analysis. In the one opportunity the Sixth Circuit has had to address the question of substantial compliance in the context of a tax seizure and sale, we too held that procedural irregularities could not void a tax sale. PM Group Inv. Corp. v. PYK Enter., No. 97-1335, 1998 WL 242337, at **3 (6th Cir. May 8, 1998) (unpublished opinion) (holding that issuance of a certificate of sale was conclusive evidence of the regularity of the sale). We noted that
Grable argues that “provisions of law” in
Some courts have determined that substantial compliance is not acceptable in the context of a tax seizure. This view follows that of Chief Justice Marshall that “the person invested with such a power [to convey land] must pursue with precision the cоurse prescribed by the law, or his act is invalid . . . .” Thatcher v. Powell, 19 U.S. (6 Wheat.) 119, 125 (1821). In Reece v. Scroggins, the leading case advocating strict construction, the court voided a tax sale because the IRS “handled this sale of land in a somewhat casual fashion,” including failure to comply with notice requirements and irregularities in the subsequent public auction. Reece, 506 F.2d at 970. The main rationale behind the court‘s holding was a recognition of the “Damoclean nature” of the IRS‘s ability to seize property to satisfy legitimate tax deficiencies and of the importance of strict adherence to the statute to protect the taxpayer. Id. at 971; Aqua Bar & Lounge, Inc. v. United States Dept. of Treasury, 539 F.2d 935, 939 (2d Cir. 1976) (same).
Although the statute allows for substantial compliance, the district court also analyzed the case under equitable principles, coming to the same favorable conclusion for Darue. Because we may affirm the district court оn any ground supported by the record, we do not have to review the district court‘s application of equity, Shaw v. Deaconess Hosp., 355 F.3d 496, 498 (6th Cir. 2004), but we make two short points. In a case with similar defects in notice, the United States District Court for the Eastern District of Michigan applied equity in holding that substantial compliance was sufficient to validate the sale. Howard, 538 F. Supp. at 508 (applying Michigan law to resolve the quiеt title action). Secondly, the district court‘s decision to apply equity to dismiss Grable‘s quiet title motion does not contradict an earlier Michigan Court of Appeals quiet-title action that was decided in Grable‘s favor. Village of Dimondale v. Grable, 618 N.W.2d 23 (Mich. App. 2000). In defending an action to quiet title to another piece of property that Mr. Grable owned personally, he argued that the tax sale 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 any valid defense. Dimondale, 618 N.W.2d at 31-32. The court also noted that “equity is a shield, not a sword.” Id. at 32. The district court properly relied on that maxim when it
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.
BOGGS
CHIEF JUDGE