Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No 81 C 3403 -- Bernard M. Decker, Judge.
Cummings, Chief Judge, Eschbach, Circuit Judge, and Swygert, Senior Circuit Judge.
SWYGERT, Senior Circuit Judge.
The plaintiffs in this case are certain local government units in Will County, Illinois, and a group of local taxpayers; the defendants are the County of Will, the county tax assessor, and two banks that act as collectors and depositories of taxes. On appeal the plaintiffs challenge the district court's dismissal, in deference to parallel state court proceedings, of their federal complaint, which charged that the defendants violated state law by failing to distribute collected tax revenues plus interest to the local public entities, thereby conspiring to deprive and actually depriving them of property without due process, and of the equal protection of the laws, in violation of 42 U.S.C §§ 1983 and 1985 (1976 & Supp. V 1981).
On June 17, 1981, the Board of Education of Valley View Community Unit School District No. 365U ("the Board") and the school district itself, recipients of county tax revenues, and eleven individual taxpayers filed suit in federal district court on behalf of themselves and all other similarly situated individuals and public entities within Will County (except Will County itself). Their complaint alleged that Kent Bosworth, the Will County Treasurer and ex officio County Collector, by retaining tax revenues for substantial periods and transferring accrued interest to the county treasury, violated his duty under Illinois law to distribute collected taxes allocated to each of the public entities by the first of each month,*fn1 his duty to distribute to the entities any interest earned on the money withheld,*fn2 and his obligation under the Illinois Constitution not to be compensated out of collected fees.*fn3 The plaintiffs also alleged that the two bank defendants, as deputy tax collectors, see Ill. Rev. Stat. ch. 120 P605 (1981), and as depositories of taxes, see id. P674, equally breached these duties. Finally, they alleged that the banks and Will County conspired with Bosworth to breach these duties, the banks profiting by the investment of the tax revenues at below-market rates, and the county profiting by the transfer of the interest earned on the revenues to its treasury. The Board and the school district alleged that these violations deprived them of property and of the equal protection of the laws (because another local public entity -- Will County itself -- was not subject to these deprivations). The individual plaintiffs claimed that the violations of Illinois law deprived them of property by subjecting them to possible increases in assessments for the public entities' debt financing or possible losses of services. The plaintiffs sought various forms of relief, including a declaratory judgment that the taxes and interest were unlawfully withheld, an injunction against further withholding, an accounting of all interest earned on the taxes, damages for the difference between the market rate of interest and the amount of interest actually earned, and punitive damages.
On the defendants' motion to dismiss, the district court first addressed the various plaintiffs' standing to sue. It concluded that the public entities lacked standing on the ground that political subdivisions of a state have no constitutional rights that they may invoke against their creator, citing Williams v. Mayor & City Council of Baltimore, 289 U.S. 36, 40, 77 L. Ed. 1015, 53 S. Ct. 431 (1933), and Village of Arlington Heights v. Regional Transportation Authority, 653 F.2d 1149, 1151-53 (7th Cir. 1981). It also concluded that the individual plaintiffs lacked standing to the extent that the alleged violations simply redistributed funds from one unit of government whose services they enjoyed to another, reasoning that they then suffered no actual net injury. It held that they did have standing to sue, however, to the extent they alleged that investing the tax revenues at below-market rates was a breach of duty, because such a violation would result in a net loss directly felt by the local taxpayers.
The district court then considered whether it should abstain from deciding the case despite the existence of a live issue. It concluded that abstention was proper because of the existence of parallel state court proceedings, under the rationale of Colorado River Water Conservation District v. United States, 424 U.S. 800, 47 L. Ed. 2d 483, 96 S. Ct. 1236 (1976). At the time of its decision, two similar state suits had been filed in the Circuit Court for the Twelfth Judicial Circuit, Will County, Illinois:*fn4 Board of Education of Valley View Community Unit School District No. 365U v. Bosworth, No. 80 MR 42, filed March 17, 1980, in which one of the named plaintiffs in the present case alleged the same violations of state law relied on in the federal complaint, and sought a writ of mandamus to compel the distribution of withheld taxes, an accounting, a constructive trust on the interest, damages, removal of Kent Bosworth from office, and a declaratory judgment that the county collector's practices were unlawful; and Board of Commissioners of Bolingbrook Park District v. County of Will, No. 81 CH 415, filed June 23, 1981 (nearly simultaneously with the present case), a class action on behalf of all public entities in Will County alleging that the defendants unlawfully failed to distribute interest earned on withheld tax revenues and seeking a declaratory judgment that the interest was unlawfully retained, injunctive relief, an accounting, and attorney's fees. The district court concluded that abstention was appropriate because the state proceedings, unlike the federal proceedings, in which only one claim of the individual plaintiffs could be pursued, could furnish complete relief; because the federal proceedings had not progressed beyond the filing of the complaint and motions to dismiss; and because the case involved sensitive issues of local taxation.
On appeal the plaintiffs challenge both the district court's rulings on standing and its decision to abstain, and the defendants urge reversal of the ruling that the plaintiffs have standing on any claim, as an alternative ground for affirming the judgment. Because we affirm the decision to abstain, though for reasons somewhat different than those relied on by the district court, we need not reach the standing questions addressed below.
The defendants urge numerous grounds for abstention or dismissal in support of the district court's judgment. Their first argument is based on the Tax Injunction Act, which provides:
The district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.
28 U.S.C. § 1341 (1976). They argue that compelling the distribution of collected taxes is as disruptive to state autonomy as suspending the collection of taxes, and conclude that the Act's prohibition applies. They cite California v. Grace Brethren Church, 457 U.S. 393, 102 S. Ct. 2498, 73 L. Ed. 2d 93 (1982), which held that the prohibition on injunctions cannot be evaded by framing the complaint to seek declaratory relief, for the proposition that the Act's reach is broader than its literal terms. But Grace Brethren Church is based on the rationale that injunctive and declaratory relief are near-equivalents, id. 102 S. Ct. at 2508-09; cf. Samuels v. Mackell, 401 U.S. 66, 70-73, 27 L. Ed. 2d 688, 91 S. Ct. 764, 766-68 (1971); it does not justify expanding the Act to bar types of relief different in kind from its enumerated list. We cannot agree that compelling the distribution of collected taxes in accordance with state law is nearly equivalent to enjoining tax collection.
Despite the inapplicability of the Tax Injunction Act itself, a federal court may nevertheless exercise its discretion to withhold equitable relief in reliance on the "fundamental principle of comity between federal courts and state government that is essential to 'Our Federalism, ' particularly in the area of state taxation," that underlies the Act. Fair Assessment in Real Estate Association v. McNary, 454 U.S. 100, 103, 70 L. Ed. 2d 271, 102 S. Ct. 177 (1981). In Fair Assessment, the Supreme Court held it proper to abstain from deciding a claim that assessments of new and old property were unequal and that reassessment was used as a retaliatory tool, because any relief granted would operate to suspend the collection of taxes assessed at the higher rates, thereby interfering with the exercise of a central sovereign power. Id. at 114-15. It thus invoked the same principle of comity that animated its decision in Younger v. Harris, 401 U.S. 37, 44-45, 27 L. Ed. 2d 669, 91 S. Ct. 746 (1971), not to enjoin state criminal proceedings. 454 U.S. at 112-13; see Colorado River, 424 U.S. at 816-17. Younger and similar cases are based on a desire not to interfere with a state's sovereign functions. In the present case no such sovereign function is at stake because the plaintiffs do not challenge the policies or means by which the state assesses and collects taxes; on the contrary, they defend that system and seek to compel compliance with it by enforcing its requirement that collected taxes be distributed. Their claim thus vindicates state policy rather than interfering with it. Cf. Heritage Farms, Inc. v. Solebury Township, 671 F.2d 743, 747-48 (3d Cir.) ("There is no danger that a federal court decision in this case [challenging building and zoning decisions] will disrupt Pennsylvania's policies or plans with ...