Tarrify Properties, LLC v. Cuyahoga County, Ohio

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF OHIO

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TARRIFY PROPERTIES, LLC, , :

: Case No. 1:19-cv-2293

Plaintiffs, :

:

vs. : OPINION & ORDER

: [Resolving Doc. 29]

CUYAHOGA COUNTY, OHIO, :

Defendant. :

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JAMES S. GWIN, UNITED STATES DISTRICT JUDGE:

Plaintiffs failed to pay taxes on their property. 1 The Cuyahoga County Treasurer

prosecuted a tax foreclosure against the properties and then transferred the properties to a

land reutilization corporation. 2 Plaintiffs allege that the value of their property exceeded

the taxes owed and that Defendant Cuyahoga County violated the federal and state Takings

Clauses when the County transferred that property without providing compensation for the

value that exceeded the tax liabilities.3

Defendant moved to dismiss, arguing that the Court does not have jurisdiction over

the controversy and that Plaintiffs do not state valid claims.4

For the following reasons, the Court GRANTS in part and DENIES in part

Defendant’s motion to dismiss.

1 Docs. 29-7, 29-8.

2 Docs. 29-1, 29-2, 29-5, 29-6, 29-9, 29-10.

3 Doc. 20 at 11-13.

I. Background

a. Ohio’s property-transfer mechanism

This case involves an Ohio procedure giving Counties an ability to transfer tax-

delinquent properties to third-parties even though the procedure collects no taxes in the

transfer and even though property owners have equity in the properties. Under this

procedure, a county treasurer or county auditor creates a list of properties the treasurer or

auditor claims have been abandoned.5 A county treasurer may then file a complaint with

the county board of revision to foreclose on listed properties6

Usually, when the taxes owed on the properties are less than the parcel’s fair market

value, the board of revision can put the property up for public auction.7 If the auction sale

price exceeds the taxes and liens owed, the balance goes to the owner.

This case involves a different Ohio procedure. As an alternative to recovering owed

taxes through a foreclosure sale, Ohio law allows the transfer of properties with tax

liabilities to a public-purpose entity. And Ohio law allows this transfer to an unrelated

party even with small tax liabilities and large property owner equity.

Under this foreclosure alternative, the county land reutilization corporation gives

the county treasurer or board of revision notice that it wants to acquire a tax-owing parcel.8

5 Ohio Rev. Code § 323.67. “Abandoned land” is defined as “delinquent lands or delinquent vacant lands,

including any improvements on the lands, that are unoccupied” and appear on certain compiled lists. Ohio Rev. Code §

323.65(A). One such list includes lands “on which taxes have become delinquent.” Ohio Rev. Code § 5721.03.

6 Ohio Rev. Code § 323.69(A). Ohio Rev. Code § 323.66 permits a county board of revision to “foreclose the

state’s lien for real estate taxes upon [the] abandoned land” “[i]n lieu of utilizing the judicial foreclosure proceedings.”

7 Ohio Rev. Code § 323.71(A).

The treasurer may invoke the “alternative redemption period.”9 Invoking this period

requires the county board of revision,

upon adjudication of foreclosure, [to] order . . . that the equity of redemption

and any statutory or common law right of redemption in the parcel by its

owner shall be forever terminated after [28 days] and that the parcel shall be

transferred by deed directly to the requesting [Land Bank] without appraisal

and without sale, free and clear of all impositions and any other liens on the

property, which shall be deemed forever satisfied and discharged.10

The transfer order is self-executing; “[n]o further act of confirmation or other order shall be

required for such a transfer.”11

b. Plaintiff’s foreclosures

Plaintiffs Tarrify Properties (“Tarrify”) and Denise Gutta owned real property in

Cuyahoga County.12 The Tarrify Properties real property involved commercial real estate

that once hosted a Kentucky Fried Chicken franchise location. The Gutta real property

involved a home. Both Plaintiffs were delinquent in property tax payments on those

properties.13 In July 2016, Defendant Cuyahoga County foreclosed on Gutta’s property.14

In August 2018, Defendant foreclosed on Tarrify’s property.15

In both cases, the Cuyahoga County Board of Revision determined that the

properties were “abandoned land” as defined in Ohio Revised Code § 323.65.16 And in

9 Ohio Rev. Code § 323.78.

10 Ohio Rev. Code § 323.78(B); Ohio Rev. Code § 323.65(J) (defining “alternative redemption period”).

11 Ohio Rev. Code § 323.78(B).

12 Docs. 29-7, 29-8.

13 Docs. 29-7, 29-8.

14 Docs. 29-2, 29-6.

15 Docs. 29-1, 29-5.

16 Ohio Rev. Code § 323.65(A) provides that “’Abandoned land’ means delinquent lands or delinquent vacant

lands, including any improvements on the lands, that are unoccupied and that first appeared on [a compiled list] or the

both cases the Board of Revision ordered the abandoned properties’ transfer to the

Cuyahoga County Land Reutilization Corporation (the “Land Bank”).17

On October 1, 2019, Plaintiffs sued Defendant Cuyahoga County on behalf of

themselves and those similarly situated.18 Plaintiffs contend that the delinquent taxes owed

on the properties were substantially less than the value of the properties.19 In Count I,

Plaintiffs argue that Defendant violated their federal constitutional rights when the County

Board of Revision transferred the properties to the Land Bank without providing

compensation for the excess property value.20 And in Count II, Plaintiffs argue that the

transfer also violated their state constitutional rights.21

On December 18, 2019, Defendant moved to dismiss the suit.22 Plaintiffs oppose.23

II. Analysis

a. Comity does not bar this suit.

Defendant Cuyahoga County argues that comity should stop this Court from

adjudicating Plaintiffs’ action.24

17 Docs. 29-9, 29-10.

18 Doc. 1. On December 2, 2019, Plaintiffs amended their complaint. Doc. 20.

19 Doc. 20 at 11-13. Plaintiff Tarrify claims that it owed $18,638.45 on a property worth $176,800.00, and Plaintiff

Gutta claims she owed $7,510.30 on a property worth $68,000.00. . at 7-8.

20 Doc. 20; U.S. Const. amend. V (“[N]or shall private property be taken for public use, without just

compensation.”)

21 Doc. 20; Ohio Const. art. I, § 19 (“[W]here private property shall be taken for public use, a compensation

therefor shall first be made in money.”).

22 Doc. 29.

23 Doc. 30. Defendant replied. Doc. 32.

24 Doc. 29 at 13. Defendant also argues that the Tax Injunction Act, 28 U.S.C. § 1341, prohibits this Court from

exercising jurisdiction. But Plaintiffs seek only monetary damages, while the Tax Injunction Act limits jurisdiction over

actions seeking injunctive and declaratory relief. , 847 F.3d 812, 822 (6th Cir.

2017) (citing , 515 U.S. 582, 586-87 (1995)). The Tax Injunction

Act’s limit on jurisdiction is not applicable here. But even if it were, “only one analysis is required” to review the Tax

Injunction Act and comity’s limit on jurisdiction. . As discussed below, the principle of comity does not bar the Court

Comity is a federal common-law doctrine that “governs constitutional challenges to

state tax administration.”25 When applied, comity “prohibits ‘taxpayers . . . from asserting

§ 1983 actions against the validity of state tax systems in [the lower] federal courts.’”26

Plaintiffs argue that comity does not stop this case because Plaintiffs do not

challenge the state’s tax administration.27 They also argue that the County was not

exercising a tax authority when it transferred the properties.28

Defendant counters that the foreclosure-transfer mechanism is part of the state’s tax

administration as “a statutory remedy provided by the General Assembly for the failure to

pay real estate taxes.”29 Defendant suggests that this remedy “is specifically designed to

collect outstanding property taxes because [the statute] specifically provide[s] a delinquent

property owner with to retain their ownership of the property by

paying their taxes.”30

Defendant’s argument is unavailing. 31 The transfer is not part of the County’s tax

administration because the County does not collect any tax when it transfers a property. It

does the opposite. By statute, when the County transfers properties under property-transfer

mechanism, the County forfeits any right to collect delinquent taxes when it transfers the

property, as “all impositions and any other liens on the property [are] deemed forever

25 , 365 F.3d 538, 541 (6th Cir. 2004).

26 . (alterations in original) (quoting , 454 U.S. 100, 116

(1981)).

27 Doc. 30 at 9.

28 .

29 Doc. 32 at 5.

30 . (emphasis in original). Doc. 32 at 5.

31 Defendant suggests that controls this issue. , 847

F.3d 812 (6th Cir. 2017). But involved challenges to the tax sale of properties, not transfers without any

satisfied and discharged.”32 The property-transfer mechanism stops tax collection from

both the entity taking the property and from the earlier owner who owed the taxes. A

remedy that waives tax payments is not so imbedded within a state’s tax system to be

isolated from federal courts’ review.

The transfer is a land redevelopment program that gives tax-delinquent properties to

non-governmental entities.33 The Court has jurisdiction to consider the constitutionality of

these transfers.

b. Res judicata does not bar this suit.

Defendant County next argues that the doctrine of res judicata stops Plaintiffs’

claims.34 The res judicata doctrine states that “a valid, final judgment rendered upon the

merits bars all subsequent actions based upon any claim arising out of the transaction or

occurrence that was the subject matter of the previous action.”35 Applied here, the County

argues that Plaintiffs could have raised takings arguments in appeals from the foreclosure

proceedings. By failing to do so, the County argues, Plaintiffs have given up their right to

contest the transfer.

Ohio law has four res judicata elements:

(1) a prior final, valid decision on the merits by a court of competent

jurisdiction; (2) a second action involving the same parties, or their privies, as

the first; (3) a second action raising claims that were or could have been

32 Ohio Rev. Code § 323.78(B). , 575 U.S. 1, 10 (2015) (“‘[C]ollection’ is the

act of obtaining payment of taxes due.”).

33 The act creating the foreclosure-transfer mechanism described its purpose as “facilitat[ing] the reclamation,

rehabilitation, and reutilization of vacant, abandoned, tax-foreclosed, or other real property.” 127th General Assembly, SB

353, eff. April 7, 2009.

34 Doc. 29 at 17.

35 , 653 N.E.2d 226, 229 (Ohio 1995); , 127 F.3d 490,

litigated in the first action; and (4) a second action arising out of the

transaction or occurrence that was the subject matter of the previous action.36

Here, the only final decisions were the Board of Revisions’s foreclosure

proceedings. The County correctly notes that these administrative proceedings satisfy the

first element.37

The County also satisfies the second element. In the foreclosure action, the County

Treasurer enjoys privity with Cuyahoga County.38 Ohio applies a broad definition of

privity and has stated that that “a mutuality of interest, including an identity of desired

result, may create privity.”39 The County Treasurer represents the County when

prosecuting the foreclosures. The County Treasurer and the County are in privity.

The third element—whether the issue could have been litigated in the earlier

foreclosure action—is also satisfied. Although it is unclear if Plaintiffs could have raised

their constitutional claims in the foreclosure proceedings, they could have raised them on

appeal. Ohio Revised Code § 323.79 provides that any party “aggrieved in any of the

proceedings of the county board of revision . . . may file an appeal in the court of common

pleas pursuant to Chapters 2505. and 2506. of the Revised Code.” On appeal, the court of

common pleas proceeds “de novo and may include issues raised or adjudicated in the

proceedings before the county board of revision, as well as other issues that are raised for

the first time on appeal.”40 “Res judicata applies to administrative actions, where a party

36 , 127 F.3d at 493.

37 , 522 F. App’x 299, 303-04 (6th Cir. 2013) (citing ,

456 N.E.2d 829, 831-32 (Ohio 1982)).

38 , 805 N.E.2d 1089, 1092 (Ohio 2004) (applying a “broad definition” of privity and finding

that “a mutuality of interest, including an identity of desired result, may create privity” (internal quotation marks omitted)).

39 . (internal quotation marks omitted).

has failed to properly appeal the administrative ruling under R.C. 2506.01.”41 Plaintiffs

could have litigated their constitutional claims in a Chapter 2506 appeal, so this element is

satisfied.

The fourth element—whether the second action comes out of the transaction or

occurrence that was the subject matter of the previous action—is also satisfied. Ohio

defines a “transaction” as a “common nucleus of operative facts.”42 Both the foreclosure

and this case rely on the same common set of facts, so this element is satisfied.

Still, the Court declines to apply res judicata. “The binding effect of res judicata has

been held not to apply when fairness and justice would not support it.”43 The Ohio

Supreme Court has cautioned that res judicata “should be applied [to administrative

proceedings] with flexibility” and “should be qualified or rejected when its application

would contravene an overriding public policy or result in manifest injustice.”44

It would be manifestly unjust to apply res judicata to this case. Plaintiffs do not

challenge the County’s right to foreclose on their properties, only the subsequent order to

transfer the properties without providing the property owners compensation. The

foreclosure proceedings themselves offered no opportunity to challenge the transfer. And

it would be inappropriate to block any challenge to the transfer of property worth

41 , 972 N.E.2d 132, 135 (Ohio Ct. App. 2012).

42 , 127 F.3d at 493 (citing , 653 N.E.2d at 229).

43 , 903 N.E.2d 311, 317 (Ohio 2009);

, 756 N.E.2d 657, 659 (Ohio 2001) (“[T]he doctrine of res judicata is to be applied in particular situations as

fairness and justice require, [but]

.”) (emphasis in original) (internal quotation marks omitted).

44 , 529 N.E.2d 1255, 1259 (Ohio 1988) (citing ,

substantially more than the taxes assessed based solely on the limited foreclosure

proceedings.

c. Plaintiffs have stated a valid claim.

Defendant argues that Plaintiffs have failed to state a takings claim because the

County transferred the properties using its tax authority, not its eminent domain power.45

As the United States Supreme Court has recognized, “[t]he government may not be

required to compensate an owner for property which it has already lawfully acquired under

the exercise of governmental authority other than the power of eminent domain.”46 But, as

noted above, the County did not transfer the property using its tax authority.

Defendant also argues that Plaintiffs’ claims must be dismissed because they lost all

“right, title, and interest in the foreclosed properties.”47 But Ohio courts have long

recognized that property owners retain an equitable right to the surplus value of their

property after tax liabiities.48 Plaintiffs have an equitable right to this value, so this is not a

valid grounds for dismissing their claims.

d. Plaintiffs must seek a writ of mandamus to remedy the state constitutional

violation.

In Plaintiffs’ Count Two, they claim that the transfer violated Ohio’s Constitution.49

In response to Plaintiffs’ Ohio Constitutional claim, Defendant argues that this claim must

be dismissed because Ohio law does not provide a private right of action to remedy state

45 Doc. 29 at 20.

46 , 516 U.S. 442, 452 (1996).

47 Doc. 29 at 23.

48 , , 142 N.E.3d 1200 (Ohio Ct. App. 2019) (acknowledging

lien-holder’s equitable interest in surplus proceeds); , 87 N.E.3d 591 (Ohio Ct. App. 2017) (evaluating

mortgagee and dower interests in surplus proceeds).

constitutional violations.50 Defendant is correct. The Ohio Supreme Court has stated that,

“[w]here a taking is made by the state, the property owner's redress must be obtained by

bringing an action in mandamus to compel the director to appropriate the property so

taken.”51

The Court dismisses Count Two.

e. The statute of limitations bars Plaintiff Gutta’s federal claim.

Finally, Defendant argues that Plaintiff Denise Gutta’s § 1983 claim should be

dismissed because she failed to bring it within the applicable statute of limitations.52 In the

Sixth Circuit, courts look to Ohio law for the applicable statute of limitations in § 1983

cases.53 And in Ohio, plaintiffs must file claims for property injuries within two years of

their accrual.54 The County foreclosed on Gutta’s property on November 2, 2016,55 and

the sheriff transferred her property to the land bank on December 16, 2016.56 But Plaintiffs

did not file this case until October 1, 2019.57 Plaintiff Gutta’s claim is thus barred by the

statute of limitations.

III. Conclusion

Defendant Cuyahoga County was not exercising taxing authority when it transferred

Plaintiffs’ properties to the Land Bank. Thus the Court has jurisdiction to consider

Plaintiffs’ 42 U.S.C. §1983 claims based on violations of the federal takings clause. But the

50 Doc. 29 at 24.

51 , 175 N.E.2d 725, 728 (1961).

52 Doc. 29 at 24.

53 , 103 F.3d 516, 519 (6th Cir. 1997).

54 . (citing , 869 F.2d 989, 989 (6th Cir. 1989); Ohio Rev. Code § 2305.10).

55 Doc. 29-8.

56 Doc. 29-12.

statute of limitations bars the Court from considering Gutta’s federal claim. Further, Ohio

courts have not recognized a common-law cause of action to remedy violations of the

Ohio Constitution’s taking clause, so the Court dismisses Count Two, Plaintiffs’ claim

based on the Ohio Constitution.

For the foregoing reasons, the Court GRANTS in part and DENIES in part

Defendant’s motion to dismiss.

IT IS SO ORDERED.

Dated: July 17, 2020

JAMES S. GWIN

UNITED STATES DISTRICT JUDGE