The U.S. District Court for the Western District of Tennessee recently upheld a class action lawsuit against an out-of-state law firm that the city of Memphis, Tennessee, hired to collect past-due property taxes. Wright v. Linebarger Goggan Blair & Sampson, 2011 WL 1100462 (W.D. Tenn. Mar. 22, 2011). A class of Memphis taxpayers filed suit against a Texas-based law firm, Linebarger Goggan Blair & Sampson, LLP (Linebarger), that the city hired to collect overdue property taxes. The suit filed in federal court alleged that Linebarger’s bills included a line item listed as “other charges,” which included 20% attorneys’ fees that the city paid to Linebarger in violation of the statutory 10% cap.  

One of Linebarger’s many motions filed with the Court was a motion to dismiss based on lack of federal court jurisdiction. Linebarger argued that the Tax Injunction Act (TIA) precluded federal court jurisdiction because the action would impede the City’s ability to collect taxes and that a plain, speedy, and efficient remedy existed in state court. However, after noting that Linebarger was unable to point to any authority holding that the TIA applied to private parties, the Court held that the TIA does not deprive federal courts of jurisdiction in actions against private parties engaged in the tax collection process. 

Interestingly, the taxpayers’ complaint alleges that Linebarger received over $16.5 million in attorneys’ fees, up to half of which Linebarger may have received in violation of Tennessee law. Taxpayers should consider payment and other types of limitations when confronted with a third-party audit firm.