8 FSM Intrm. 122-128

The general rule is that to entitle a taxpayer to a refund of a tax paid pursuant to an unconstitutional law, the tax must have been paid under duress and protest. Chuuk Chamber of Commerce v. Weno, 8 FSM Intrm. 122, 125 (Chk. 1997).

Refund of taxes paid pursuant to an unconstitutional ordinance is an action for restitution, not damages. The principles governing recovery of payment which preclude recovery of voluntary payments are applicable to the recovery of tax payments. The "voluntary payment rule" has barred recovery in restitution. The general rule is that money paid voluntarily under a claim of right to the payment, and with knowledge of the facts by the person making the payment, cannot be recovered back on the ground that the claim was illegal. Chuuk Chamber of Commerce v. Weno, 8 FSM Intrm. 122, 125 (Chk. 1997).

The reason the voluntary payment rule bars recovery in restitution of unlawful taxes is that litigation should precede payment. It thus does not apply to payments made after the commencement of litigation because the rule ceases with the reason on which it is founded. Chuuk Chamber of Commerce v. Weno, 8 FSM Intrm. 122, 125-26 (Chk. 1997).

Normally, notice and an opportunity to be heard is given prior to governmental deprivation of property, but governments need not follow this in the case of taxes. Governments must, however, provide a post-deprivation opportunity to challenge the tax and a clear and certain remedy. Chuuk Chamber of Commerce v. Weno, 8 FSM Intrm. 122, 126 (Chk. 1997).

It is unavailing in tax cases, except in special circumstances, to seek a preliminary injunction against enforcement or to have the taxes escrowed pending the outcome. This is in order not to disrupt the financial stability of the governmental unit. Chuuk Chamber of Commerce v. Weno, 8 FSM Intrm. 122, 127 (Chk. 1997).

Refund of taxes unlawfully paid after commencement of suit is favored by the Innocenti guidelines concerning retrospective application of court decisions where the court decision was clearly foreshadowed by the Chuuk Constitutional provision, where there was no merit to be found in preventing the taxpayers from recovering unlawful taxes paid after the institution of litigation, and where the equitable considerations favor the taxpayers. Chuuk Chamber of Commerce v. Weno, 8 FSM Intrm. 122, 127-28 (Chk. 1997).

This case came before me on March 5 and 6, 1997 for a determination of whether Weno Municipality must refund any of the license fees collected unlawfully from the plaintiff businesses between 1989 and 1996, inclusive. On August 30, 1996, I entered partial summary judgment on the issue of constitutionality of the ordinances under which the fees were collected, and enjoined further enforcement. See Stinnett v. Weno, 7 FSM Intrm. 560 (Chk. 1996).

After all evidence was presented, counsel submitted oral and written arguments. Further memorandums requested by the court were submitted June 19 and 26. In its memorandum filed June 24, Weno suggests that I abstain from deciding the refund issue. I have not accepted the suggestion because even if it had merit, it comes too late.

1. The business license fees were due and payable annually on 15 July. It was common practice for municipal police officers, usually in groups of two or more, to deliver notices and reminders to the businesses.

2. On Sunday morning, July 16, 1989, municipal police ordered the clerk in the retail store of plaintiff Larry Bruton and his wife Flavia to close. The Brutons were absent from the premises at the time. When they returned the police had departed. They opened the store for business.

3. On July 17, 1989, four policemen went to the Bruton business. Three stood outside to prevent customers from entering. One told Mr. Bruton to go to the municipal office and pay the fees. Mr. Bruton refused. Shortly thereafter the mayor came and ordered Mrs. Bruton's arrest. She was taken to the municipal jail, but not confined. She was released after conferring with the mayor. On July 18, the Brutons paid the license fees "under duress and protest."

4. The fees paid covered the period of one year beginning July 1, 1989. The Chuuk Constitution became effective October 1, 1989, and contains the provision central to this case, "The State Government has the power to tax, and may delegate certain taxing powers to the municipal governments by statute." Chk. Const. art. VIII, § 7.

5. In 1989, Flavia M. Bruton filed an action against Moen Municipality which successfully invalidated the ordinance under which she had paid on July 18, 1989. See Bruton v. Moen Municipality, 5 FSM Intrm. 9 (Chk. 1991). (The name Weno came into effect officially with the Chuuk Constitution on October 1, 1989.)

6. Pursuant to his lawyer's advice, plaintiff Ray Setik delayed paying the municipal fees on July 15, 1992. As a result, Weno sent reminders of the delinquency. In the middle of September, 1992, a "force of police" came to the retail store and told the manager in charge (plaintiff Setik was off-island at the time) to come to the municipal office and pay the fee, that it was way overdue. The manager told the police why it had not been paid. Because of the police presence the manager felt compelled to close the store. He then telephoned plaintiff Setik who instructed him to pay the fee under protest. The manager followed this instruction, wrote the check and reopened the store. The police again ordered the manager to go to the municipal office, but he was allowed to proceed there in his own car because he had shown them the check.

8. The same delay in payment occurred in 1993, with notice received to pay. On August 25, 1993, three police officers came and gave the same manager a municipal court default judgment and a summons requiring appearance before the municipal judge. The police were to escort him at that time to appear before the municipal judge. The plaintiff paid the delinquent fee the same day.

9. The manager of the Ray Setik business was aware of the arrest of Flavia Bruton in 1989 and the closing of that business. That knowledge informed his expectations as to police action in 1992 and 1993.

11. The testimony of the plaintiffs Christina Stinnett, Craig Wainit (on behalf of Tadasy Wainit), and James Fritz (on behalf of Susumu Aizawa) does not establish by a preponderance of the evidence that their payments were made under duress.

12. I do find that the 1989 Bruton incident became generally known among the plaintiffs, but it alone did not create such a climate of fear of arrest or of business closing to constitute duress.

1. Although plaintiff Larry Bruton unquestionably paid in 1989 under duress, it does not form a basis for refund of that fee in this case since it was paid before the Chuuk Constitution took effect. One provision of that constitution is the only basis asserted in this case for the unlawfulness of the fee, and the basis upon which I concluded that the fee was unconstitutional.

2. Plaintiff Ray Setik is entitled to the refund of the fees paid in 1992 and 1993 because they were paid under duress and protest. These payments must also be refunded because they were made after the commencement of this action as is discussed later.

3. The general rule for justifying a refund is the precedent1 of Innocenti v. Wainit, 2 FSM Intrm. 173, 186-87 (App. 1986), which is binding on me and agreed by the parties to be the controlling law. To entitle the taxpayer to a refund of a tax paid pursuant to an unconstitutional law, the tax must have been paid under duress and protest. Innocenti did not need to consider payments before and after suit because it involved a classic case of duress ) the taxpayers' imported goods were not released from the dock until the tax was paid.

Refund of taxes paid pursuant to an unconstitutional ordinance is an action for restitution, not damages. Dan B. Dobbs, Handbook on the Law of Remedies 656 (1973). It is an action in assumpsit as Weno points out. See also 72 Am. Jur. 2d State and Local Taxation § 1080 (1974) ("The principles governing recovery of payment which preclude recovery of voluntary payments are applicable to the recovery of payment made in discharge of tax assessments . . . ."). The "voluntary payment rule" has barred recovery in restitution. "The general rule is that money paid voluntarily under a claim of right to the payment, and with knowledge of the facts by the person making the payment, cannot be recovered back on the ground that the claim was illegal . . . ." Pacific Mut. Life Ins. Co. of Calif. v. McCaskill, 170 So. 579, 582 (Fla. 1936) (action for recovery of insurance premiums, paid by a policyholder claiming disability and under threat of cancellation of policy).

"`The reason of the rule that money voluntarily paid with full knowledge of the facts can never be recovered and its propriety are quite obvious when applied to a case of payment on a mere demand of money unaccompanied with any power or authority to enforce such demand, except by suit at law. In such case if the party would resist an

unjust demand he must do so at the threshold. The parties treat with each other on equal terms, and if litigation is intended by the one of whom the money is demanded, it should precede payment. When the person making the payment can only be reached by a proceeding at law, he is bound to make his defense in the first instance, and he cannot postpone the litigation by paying the demand in silence and afterward suing to recover the amount paid. Otherwise, the privilege is left to him of selecting his own time and convenience for litigation, delaying it, as the case may be, until the evidence on which his adversary would have relied to sustain his claim may be lost by the lapse of time and the many casualties to which human affairs are exposed.'"

The phrase, "The parties treat each other on equal terms . . ." requires a comment. The taxpayer and the government are not equal in power, and the cases recognize this. For example, in a case of a taxpayer being "put to serious disadvantage in the assertion of his legal, and in this case, constitutional rights . . ." the U.S. Supreme Court allowed the taxpayer its action for refund because of the "implied duress." Atchison, T. & S.F. Ry. v. O'Connor, 223 U.S. 280, 285-86, 32 S. Ct. 216, 217, 56 L. Ed. 436, 438 (1912) (state franchise tax apportioned to business conducted outside state). However, the element of duress is still required.

The payment of the fees in this case after the action commenced is not within the reason for requiring duress as a prerequisite for refund. The passage above states "[litigation] should precede payment." The plaintiffs' payments in 1993, 1994, 1995 and 1996 and Ray Setik's in 1992 were all made after the commencement of this action.

The passage also states that the payor should not have the "privilege . . . of selecting his own time and convenience for litigation," and thus payment must be made under duress in order to be refundable. As to the four years, 1993-1996, five in Ray Setik's case, Weno is under no such threat of a future action. The action is pending. (The threat of suit would be especially burdensome at this time in Chuuk because a taxpayer would have six years in which to decide whether to seek a refund. 6 TTC 305.)

The reasons justifying the voluntary payment rule are inapplicable to the 1993-96 payments. The rule, lacking support in reason, itself falls. This is because "the rule ceases with the reason on which it is founded." Hunt v. Rousmanier's Adm'rs, 21 U.S. (8 Wheat.) 174, 205, 5 L. Ed. 589, 597 (1823) (Marshall, C.J.).

Weno's insistence that it pay no refund at all raises due process issues. The plaintiffs have been deprived of property. They are entitled to contest the deprivations. Normally, notice and an opportunity to be heard is given prior to deprivation, but governments need not follow this in the case of taxes. McKesson Corp. v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18, 37, 110 S. Ct. 2238, 2250, 110 L. Ed. 2d 17, 36 (1990). The government must, however, provide a post-deprivation opportunity to challenge the tax and a "clear and certain remedy." Id. at 39, 110 S. Ct. at 2251, 110 L. Ed. 2d at 37. Weno provides no such opportunity. This present action is the taxpayers' only recourse. It is in a sense a predeprivation hearing because all payments being considered by me were made after this action was filed and served on September 1, 1992.

Weno argues that an order requiring refunds would result in "total disruption" of the municipality resulting in "extreme injustice and hardship" since the funds are "already budgeted, allocated and spent." This equitable argument is unavailing. Although Weno may have had a good faith belief in the

validity of Ordinance 01-01-93, once Weno received the complaint, a responsible view of its position would be that the plaintiffs' contention had substance and there was a fair probability they would prevail. Under such circumstances it was incumbent on Weno to make some provision against this probability. Thus it is unpersuasive for Weno to argue at this point that refund should not be allowed because of circumstances brought on by its own improvidence.

Weno also argues that the plaintiffs should have sought a preliminary injunction against Weno enforcing its ordinance; or have escrowed their fees pending the outcome. I am not influenced by either point. Both avenues are unavailing in tax cases, except in "special circumstances," in order not to disrupt the financial stability of the governmental unit. O'Connor, 223 U.S. at 285, 32 S. Ct. at 217, 56 L. Ed. at 438; Stinnett v. Weno Municipality, Civil Action No. 1992-1036, Order (Aug. 20, 1993)2 (in this companion to the present case, in which all four plaintiffs are plaintiffs in present case, the four requested escrow; Weno opposed; and motion was denied relying on McKesson, 496 U.S. at 37 n.19, 110 S. Ct. at 2250 n.19, 110 L. Ed. 2d at 36 n.19).

"First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied or by deciding an issue of first impression whose resolution was not clearly foreshadowed." Id. at 185.

In this case the decision of unconstitutionality was clearly foreshadowed by the language of the Chuuk Constitution already quoted, "The State Government has the power to tax, and may delegate certain taxing powers to the municipal government by statute." Chk. Const. art. VIII, § 7. Weno has not been granted any power to tax by the state government.

"Second, we must weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation." Innocenti, 2 FSM Intrm. at 185.

The court in Innocenti adopted the threefold test of retroactivity from Chevron Oil Co. v. Huson, 404 U.S. 97, 106, 92 S. Ct. 349, 355, 30 L. Ed. 2d 296, 306 (1971). The discussion of this second guideline found at 404 U.S. at 107-08, 92 S. Ct. at 356, 30 L. Ed. 2d at 306-07 assists in its application. I conclude that this guideline also favors retroactivity. There is no merit to be found in preventing the taxpayers from recovering the license fees they paid after the institution of this civil action. On the contrary, it would be manifestly lacking in merit. Considering Weno's position I find no merit in nonretroactivity. I see no principle which would justify protecting it from having to make the refunds.

The plaintiffs argue that retroactivity is meritorious lest Weno continue to collect license fees which were delinquent on August 30, 1996. I cannot judge this point because I have no information about this ) whether there are any delinquent or whether Weno is collecting them under Ordinance 01-01-93.

This third guideline favors retroactivity. It only reaches license fees paid by these plaintiffs while this case was pending; the state constitutional provision is clear; and Weno twice enacted license fee ordinances after the effective date of the Constitution. The number of years that must be refunded (four for all, plus a fifth for Ray Setik) is in part due to Weno which successfully moved for certification, which proved futile. The delay attributed to that attempt is regrettable. As stated throughout these conclusions of law concerning refund, equities are the basic consideration. All equitable considerations discussed apply to this third guideline and militate against prospective application.

2. The voluntary payment rule is inapplicable as to payments made during the pendency of this action, in which the plaintiffs are exercising their due process right to a determination of the lawfulness of Ordinance 01-01-93. Having prevailed in that, I also conclude that the effect of the judgment is retroactive to the date the action was filed.