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Tribe v. Gerlach

United States District Court, D. South Dakota, Southern Division

December 18, 2015

FLANDREAU SANTEE SIOUX TRIBE, a federally recognized Indian Tribe Plaintiff,
ANDY GERLACH, Secretary of the State of South Dakota Department of Revenue; and DENNIS DAUGAARD, Governor of the State of South Dakota, Defendants.


LAWRENCE L. PIERSOL, District Judge.

Secretary of the State of South Dakota Department of Revenue, Andy Gerlach, and Governor of South Dakota, Dennis Daugaard (collectively, Defendants or the State) move the Court to dismiss the Flandreau Santee Sioux Tribe's (Plaintiff or the Tribe) complaint. Defendants assert three principal arguments why the action should be dismissed. First, Defendants maintain that the Tribe's action is barred by the claim preclusive, or res judicata, effect of a South Dakota administrative hearing. Second, Defendants ask that this Court abstain from hearing the case pursuant to the doctrine of Younger abstention. Third, Defendants argue they should be granted judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c).


The Tribe is federally recognized. It operates Royal River Casino on the Flandreau Indian Reservation in Moody County in eastern South Dakota. Operating as a single business enterprise under the Royal River name, the Tribe owns and operates the Royal River Casino, the Royal River Bowling Center, and the First American Mart (collectively, the "Casino"). Within these three businesses, the Casino is divided further into various departments: gaming, hotel/hospitality, gift shops, restaurants, entertainment venues, bowling alley, and a convenience store. As a unitary business, the entire enterprise is overseen by the Tribe's elected governing body, the Flandreau Santee Sioux Executive Committee. Revenue, including that from casino gaming activities, is calculated in the aggregate as "net revenues." Of that sum, 45% is disbursed to tribal members.

Pursuant to the Indian Gaming Regulatory Act (IGRA), the Tribe and the State have in place a Tribal-State gaming compact (the "Compact"), which controls the Tribe's gaming operations. The Compact contemplates neither explicitly nor impliedly the State's authority to apply its alcohol regulatory laws to the Tribe's "gaming facility, " nor does it contemplate a State's authority to impose its use taxes on nonmember activity made at the Casino, nor does it contemplate the State's requirement that the Tribe collect and remit the use taxes from nonmember activities or purchases.

The Casino's patron base is approximately 60% South Dakota residents. Irrespective of residential or tribal status, the Tribe offers its patrons "goods and services, " which include "bowling, shows and other live entertainment, lodging, food, beverages, package cigarettes, and other sundry items." Consequently, it is undisputed that the Tribe sold these various goods and services to nonmembers at the Casino. It is also undisputed that the Tribe has not remitted the relevant use taxes on nonmember sales to the State.

The State has issued the Tribe three alcohol licenses, one for each of the three Casino- encompassed businesses. These licenses are, however, conditioned on the Tribe's remittance of the State use tax pursuant to S.D.C.L. § 35-2-24. See, infra, Part.C.1. The South Dakota statute does not differentiate between alcohol tax and use tax on other goods and services. Id. In 2009 and 2010, the Tribe sought from the State a renewal of its three alcohol licenses. Based on S.D.C.L. § 35-2-24, both requests were denied by the State as the statute directs that licenses are not to be reissued until use taxes incurred by nonmembers have been remitted.

As a result, the Tribe, pursuant to S.D.C.L. § 1-26-16, requested a hearing before the South Dakota Office of Hearing Examiners to review the State's alcohol license denial.[1] At the hearing, the Hearing Examiner concluded that all nonmember purchases at the Casino are subject to the use tax scheme, that the Tribe failed to remit the use taxes, and, therefore, the Tribe was not entitled to alcohol license renewal. Prior to the Hearing Examiner's decision becoming final, the Tribe filed this action in federal court on November 18, 2014. The Tribe simultaneously moved the Court for preliminary injunction enjoining state action pursuant to the Hearing Examiner's decision. The Tribe and State made the motion for preliminary injunction moot by entering into a stipulation whereby the State recognized the three alcohol licenses' continuing validity pending a decision on the merits in this case. The Tribe did not appeal the Hearing Examiner's decision to South Dakota state court.

Specific to this federal action, the Tribe alleges that the State lacks authority to impose its use tax scheme on reservation land against nonmember Casino patrons. In its Complaint, the Tribe alleges that IGRA preempts the field of taxation thereby barring the State's imposition. To that end, the Tribe argues that all activity engaged in under the Royal River Casino name is "gaming activity" untaxable by the State by virtue of IGRA (Claims for Relief One, Two and Six). Outside of IGRA, the Tribe maintains that the use tax and remittance requirements are preempted by the Indian Commerce Clause of the Federal Constitution, federal common law, and infringe on inherent tribal sovereignty (Claims for Relief Three and Five); that the State's tax imposition is unlawfully discriminatory as applied to the Tribe (Claim for Relief Four); that, as a predicate to funds contained in an escrow account pursuant to a 1994 Deposit Agreement between the Tribe and State being disbursed to the Tribe, the State is without power to impose its taxation scheme on the Tribe's Casino (Claim for Relief Seven)[2]; and that the alcohol licenses are conditioned on the S.D.C.L. § 35-2-24 tax remittance requirement is violative of 18 U.S.C. § 1161 (Claim for Relief Eight).

The State has moved the Court to dismiss the action in its entirety based on the separate doctrines of res judicata and Younger abstention. Alternatively, the State argues that Claims for Relief One, Two, Four, Five, Six and Eight should be dismissed. For reasons explained herein, the motion is denied.


A. Res Judicata

"District Courts are required to consider preclusion matters before reaching the merits of a claim." Krull v. Jones, 46 F.Supp.2d 997, 1000 (D.S.D. 1999) (citing Peery v. Brakke, 826 F.2d 740, 744 n.4 (8th Cir. 1987)). "Claim preclusion, or res judicata, bars relitigation of the same claim between parties or their privies where a final judgment has been rendered upon the merits by a court of competent jurisdiction.' Plough By and Through Plough v. West Des Moines Community School Dist. (Plough), 70 F.3d 512, 517 (8th Cir. 1995) (quoting Smith v. Updegraff, 744 F.2d 1354, 1362 (8th Cir. 1984)). See Allen v. McCurry, 449 U.S. 90, 94 (1980) ("Under res judicata, a final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action.").[3] In order for the previous adjudicatory decision to have preclusive effect, however, the party defending against res judicata "must have had a full and fair opportunity to investigate and litigate the matter concluded." Id.

It should be noted that the previously cited cases have all been in the context of 42 U.S.C § 1983 actions, and as is explained infra, the Supreme Court abrogated the necessity of § 1983 plaintiff's exhausting state administrative procedure. Instead, Defendants move to apply res judicata doctrine in the context of an Ex parte Young action against South Dakota officials. "Ex parte Young established the power of the federal courts to enforce the Constitution against state legislative and executive action." 17A CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE & PROCEDURE § 4231 (3d ed. 2015). More to the point, Ex parte Young removes the Eleventh Amendment immunity hurdle a plaintiff would normally encounter when suing a State. Id . Ex Parte Young, therefore, permits a federal court to enjoin a state official from contravening the Constitution or federal statute. Id. There does exist, however, a limitation on when a litigant may pursue an Ex parte Young action in federal court:

The rule can be fairly simply stated. A litigant must normally exhaust state "legislative" or "administrative" remedies before challenging the state action in federal court. He need not normally exhaust state "judicial" remedies. The rationale for this distinction is that until the administrative process is complete, it cannot be certain that the party will need judicial relief, but when the case becomes appropriate for judicial determination, he may choose whether he wishes to resort to a state or federal court for such relief.

Id. at § 4233 (emphasis added). See Prentis v. Atlantic Coast Line Co., 211 U.S. 210 (1908); Bacon v. Rutland Railroad Co., 232 U.S. 134 (1914). The Supreme Court stated the rule narrowly in Monroe v. Pape, 365 U.S. 167 (1961). There, the Court stated that, in the context of a 42 U.S.C. § 1983 action, it is unnecessary for a plaintiff to pursue state judicial remedies. In addition, two years after the Pape decision, the Court extended the exhaustion exception to state administrative remedies in McNeese v. Board of Education, 373 U.S. 668 (1963).

Assuming arguendo that this Court accepted that the state administrative decision qualifies for res judicata effect, the Supreme Court decisions and an abundance of case law relied upon by the State have all been in the contexts of either collateral estoppel in state courts or § 1983 actions. See McCurry, 449 U.S. at 96 ("It is against this background that we examine the relationship of § 1983 and collateral estoppel, ..."); 28 U.S.C. § 1738 (federal courts shall give full faith and credit to other state court decisions); Peery v. Brakke, 826 F.2d 740, 746 (8th Cir. 1987) (applying collateral estoppel doctrine to a § 1983 claim); General Drivers and Helpers Union v. Wilson Trailer Co., 827 F.Supp.2d 1048, 1053 (D.S.D. 2011) (collateral estoppel case wherein it was held that S.D.C.L. § 61-7-24's "unambiguous language" barred admittance of an administrative judge's "finding of facts, conclusions of law, decision or final order... for any purpose..."). In March 2015, the Supreme Court revisited the issue of collateral estoppel doctrine's application to state administrative proceedings. It held that "[Noth this Court's cases and the Restatement make clear that issue preclusion is not limited to those situations in which the same issue is before two courts. Rather, where a single issue is before a court and an administrative agency, preclusion often applies." B & B Hardware, Inc v. Hargis Industries, Inc., 135 S.Ct. 1293, 1303, 191 L.Ed.2d 222 (2015). It has never been held by the Supreme Court, however, that claim preclusion emanates from a state administrative proceeding.

The State, however, does cite to a single case that suggests that res judicata may apply when a state administrative hearing results in a final order. In Krull v. Jones , relying on Plough from the Eighth Circuit, it was held that a plaintiff's resort to South Dakota administrative procedure effectively foreclosed his federal action as barred by the res judicata effect of the state decision. Distinguishing both Krull and Plough from the instant case, however, is that each exists in the context of 42 U.S.C. § 1983 claims. As has been previously discussed, a plaintiff to a § 1983 action is "not required to exhaust his state administrative remedies before instituting [the action] in federal court." Krull, 46 F.Supp.2d at 1004 (citing Patsy v. Board of Regents of State of Fla., 457 U.S. 496, 500 (1982)). The Krull court was persuaded that because the plaintiff was not required to exhaust his state administrative remedies he was bound by its conclusion if he chose to pursue state administrative remedies. If it were otherwise, then the plaintiff would have the ability to choose to litigate anew in each forum.

Here, however, the Tribe, by virtue of Ch. 1-26 of the South Dakota Code and the Ex parte Young doctrine, was required to exhaust state administrative procedure prior to instituting this federal action. The Court agrees with the Tribe that to find claim preclusion stemming from a compelled administrative action would provide inequitable outcomes in this and future cases. The Court is unaware of and has not been directed to any case law, Supreme Court or otherwise, that establishes that state administrative decisions, outside of 42 U.S.C. § 1983, are entitled to claim preclusion foreclosing a claim in its entirety. "Whatever else can be said, it cannot be argued that determination of such [administrative] adjudicators as these, even when reviewed by the review standards ordinarily applied in state courts, are equal to the independent determinations of the federal courts." Wright, supra, at § 4471.3.

The State maintains, however, that it is South Dakota law (the law of the original forum) that controls the res judicata effect of the administrative proceeding and not federal law (the law of the second forum). To be sure, "it is fundamental that the res judicata effect of the first forum's judgment is governed by the first forum's law, not by the law of the second forum." Canady v. Allstate Ins. Co., 282 F.3d 1005, 1014 (8th Cir. 2002) (brackets omitted), overruled on other grounds by Syngenta Crop Protection Inc. v. Henson, 537 U.S. 28 (2002). To reiterate, however, the Court has not been directed to any authority showing what effect an administrative "judgment" has on a subsequent federal action that is not a § 1983 action under South Dakota law. Furthermore, a threshold question that must be determined before applying state res judicata doctrine is "not whether administrative estoppel is wise but whether it is intended by the legislature.' Iowa Network Services, Inc. v. Qwest Corp., 363 F.3d 683, 690 (8th Cir. 2004) (quoting Astoria Fed. Say. & Loan Ass'n v. Solimino, 501 U.S. 104, 108 (1991)). "Courts do not, of course, have free rein to impose rules of preclusion, as a matter of policy, when the interpretation of a statute is at hand." See Solimino, 501 U.S. at 108. See also Hargis Industries, 135 S.Ct. at 1305 ("[A]bsent a contrary indication, Congress presumptively intends that an agency's determination (there, a state agency) has preclusive effect."). "Congress, and not the Judiciary, defines the scope of federal jurisdiction within the constitutionally permissible bounds." New Orleans Public Service, Inc., v. Council of City of New Orleans (NOPSI), 491 U.S. 350, 359 (1989) (citing Kline v. Burke Construction Co., 260 U.S. 226, 234 (1922)).

The statute the Tribe alleges the State to be contravening, and the one necessarily interpreted by the Court and, previously, the South Dakota Hearing Examiner, is the IGRA. The Court must, therefore, search for congressional intent when it enacted the IGRA as it pertains to res judicata. "[A]lthough states have no constitutional authority over Indian reservations, Congress [has] consistently authorized states to regulate or prohibit certain activities on the reservations." Texas v. US., 497 F.3d 491, 500 (5th Cir. 2007). One such grant is embodied in Congress' enactment of the IGRA in 1988. Among the many provisions contained therein is a "carefully crafted and intricate remedial scheme whereby, if a tribe and state do not voluntarily enter a compact for Class III gaming, the principal alternative is for the tribe to sue the state in federal court and secure a determination that the state had not negotiated in good faith." Id. (quoting Seminole Tribe of Florida v. Florida, 517 U.S. 44, 71-73 (1996)). The IGRA travelled through several iterations before "[t]he legislature [] settled on IGRA's judicial remedy and the tribal-state compact requirement as the best mechanism to assure that the interests of both sovereign entities are met with respect to the regulation of complex gaming enterprises." Id. at 507 (internal quotations and citations omitted). Today, IGRA is understood as, "passed by Congress under the Indian Commerce Clause, impos[ing] upon the States a duty to negotiate in good faith with an Indian tribe toward the formation of a compact, ..." Seminole Tribe, 517 U.S. at 47 (internal citations omitted). Pursuant to the IGRA, a Tribal-State compact may, inter alia, provide provisions of taxation. See 25 U.S.C. § 2710(d)(3)(C)(iii) and (iv).

While in Seminole Tribe the Supreme Court held 25 U.S.C. § 2710(d)(7)'s remedial scheme allowing states to be sued to be an unconstitutional abridgment of the Eleventh Amendment, the congressional intent emanating from that scheme should not be ignored. In enforcing the provisions agreed upon in a tribal-state compact, Congress intended for the federal courts to be the principal forum for tribal-state disputes related to gaming compacts. Even after § 2710(d)(7)'s abrogation, a multitude of authority over IGRA procedure still exists with the United States Department of the Interior, National Indian Gaming Commission (NIGC), see 25 U.S.C. §§ 2704, 2706, and the Chairman of the NIGC, see 25 U.S.C. § 2705. IGRA was passed as a congressional response to the Supreme Court decision in California v. Cabazon Band of Mission Indians, 480 U.S. 202 (1987). See Texas v. U.S., 497 F.3d at 500. Specifically, it "was intended to expressly preempt the field in governance of gaming activities on Indian lands." Mashantucket Pequot Tribe v. Town of Ledyard (Pequot), 722 F.3d 457, 469-70 (2nd Cir. 2013) (quoting Gaming Corp. of Am. v. Dorsey & Whitney, 88 F.3d 536, 544 (8th Cir. 1996)). While the Court does not yet express an opinion on whether South Dakota's excise tax violates the IGRA or the Tribal-State Compact in issue, the IGRA is still a focal point of this dispute. Given the statutory history and current composition of the IGRA, the Court finds that to give the South Dakota Hearing Examiner's opinion claim preclusive effect would contravene congressional intent when the IGRA was enacted.

Notwithstanding federal congressional intent, S.D.C.L. § 1-26-30, the statute the State contends mandates that the Tribe appeal to South Dakota Circuit Court, states that it does not limit other means of judicial review. The statute reads, in pertinent part, "This section does not limit utilization of or the scope of judicial review available under other means of review, redress, or relief, when provided by law." S.D.C.L. § 1-26-30. Thus, by its very terms, South Dakota law allows for an aggrieved plaintiff to pursue other courses of judicial action not explicitly provided for in chapter 1-26. Confronted with a similar situation, the Fourth Circuit, in Moore v. Bonner, 695 F.2d 799 (4th Cir. 1982), stated that:

[t]he choice of whether to proceed in a state or federal forum [] necessarily belongs to the plaintiff's and they cannot be deprived of it by a state rule which gives preclusive effect to unappealed state administrative decisions. A contrary rule would frequently force plaintiff's to choose between foregoing the opportunity to resolve their problems before state ...

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