Board of Commissioners of Montgomery County v. Federal Housing Finance Agency

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit I.O.P. 32.1(b)

File Name: 14a0144p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

_________________

BOARD OF COMMISSIONERS OF MONTGOMERY ┐

COUNTY, OHIO, and BOARD OF COMMISSIONERS OF │

SENECA COUNTY, OHIO, │

│ No. 13-4429

Plaintiffs-Appellants,

│

>

│

v.

│

│

FEDERAL HOUSING FINANCE AGENCY, FEDERAL │

NATIONAL MORTGAGE ASSOCIATION, and FEDERAL │

HOME LOAN MORTGAGE CORPORATION, │

Defendants-Appellees, │

│

│

UNITED STATES OF AMERICA, │

Intervenor. │

┘

Appeal from the United States District Court

for the Southern District of Ohio at Dayton

No. 3:12-cv-00245—Thomas M. Rose, District Judge.

Argued: June 24, 2014

Decided and Filed: July 10, 2014

Before: SUHRHEINRICH, MOORE, and WHITE, Circuit Judges.

_________________

COUNSEL

ARGUED: Nathaniel C. Giddings, HAUSFELD LLP, Washington, D.C., for Appellants.

Michael A.F. Johnson, ARNOLD & PORTER LLP, Washington, D.C., for Appellees. Patrick J.

Urda, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Intervenor. ON

BRIEF: Nathaniel C. Giddings, James J. Pizzirusso, HAUSFELD LLP, Washington, D.C., Don

Springmeyer, WOLF, RIFKIN, SHAPIRO, SCHULMAN & RABKIN, LLP, Las Vegas,

Nevada, Mark H. Troutman, Mark Landes, ISAAC, BRANT, LEDMAN & TEETOR LLP,

Columbus, Ohio, for Appellants. Michael A.F. Johnson, Howard N. Cayne, Asim Varma, Dirk

C. Phillips, ARNOLD & PORTER LLP, Washington, D.C., Michael J. Ciatti, Merritt E.

1

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McAlister, KING & SPALDING LLP, Washington, D.C., Michael D. Leffel, FOLEY &

LARDNER LLP, Madison, Wisconsin, Jill L. Nicholson, FOLEY & LARDNER LLP, Chicago,

Illinois, for Appellees. Patrick J. Urda, Jonathan S. Cohen, UNITED STATES DEPARTMENT

OF JUSTICE, Washington, D.C., for Intervenor.

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OPINION

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KAREN NELSON MOORE, Circuit Judge. Two Ohio counties brought this suit on

behalf of a class of all Ohio counties against the Federal National Mortgage Association (“Fannie

Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), as well as the

Federal Housing Finance Agency (“FHFA”), as conservator for both Fannie Mae and Freddie

Mac. In their suit against Fannie Mae and Freddie Mac (collectively, the “Enterprises”) and

FHFA, the Ohio counties sought unpaid real property transfer taxes under Ohio law. The

Enterprises claim that they are exempt, per their federal charters, from such state taxes.

The state real property transfer taxes at issue are encompassed in the Enterprises’

statutory exemptions from all taxation. Moreover, real property transfer taxes are excise taxes

rather than taxes on real property which are an exception to those tax exemptions. Finally,

Congress had the power to enact the exemptions under the Commerce Clause, and the enactment

does not run afoul of any constitutional provision. Therefore, because constitutionally sound

federal statutes exempt Fannie Mae and Freddie Mac from real property transfer taxes, we

AFFIRM the district court’s judgment dismissing the case.

I. BACKGROUND

Fannie Mae was established by congressional enactment of its charter in 1938 “to

establish secondary market facilities for residential mortgages.” 12 U.S.C. § 1716. This added

liquidity allows lenders to sell mortgages and use the proceeds to fund new loans. Fannie Mae

became a privately held corporation in 1968. Fannie Mae’s charter spells out that:

The corporation, including its franchise, capital, reserves, surplus, mortgages or

other security holdings, and income, shall be exempt from all taxation now or

hereafter imposed by any State, territory, possession, Commonwealth, or

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dependency of the United States, or by the District of Columbia, or by any

county, municipality, or local taxing authority, except that any real property of the

corporation shall be subject to State, territorial, county, municipal, or local

taxation to the same extent as other real property is taxed.

12 U.S.C. § 1723a(c)(2).

Freddie Mac was established in 1970 to compete with Fannie Mae, expand and stabilize

the secondary mortgage market, and provide further liquidity for mortgages. See Federal Home

Loan Mortgage Corporation Act, Pub. L. No. 91–351, 84 Stat. 450, 451 (1970) (codified, as

amended, at 12 U.S.C. §§ 1451 et seq.); see also DeKalb Cnty. v. Fed. Hous. Fin. Agency,

741 F.3d 795, 797–98, 803 (7th Cir. 2013). Freddie Mac’s charter provides that:

The Corporation, including its franchise, activities, capital, reserves, surplus, and

income, shall be exempt from all taxation now or hereafter imposed by any

territory, dependency, or possession of the United States or by any State, county,

municipality, or local taxing authority, except that any real property of the

Corporation shall be subject to State, territorial, county, municipal, or local

taxation to the same extent according to its value as other real property is taxed.

12 U.S.C. § 1452(e).

FHFA, an independent federal agency, was established in 2008. Pub. L. No. 110-289,

122 Stat. 2654 (codified in part at 12 U.S.C. § 4617 et seq.). Fannie Mae and Freddie Mac have

been placed into conservatorship under FHFA “for the purpose of reorganizing, rehabilitating, or

winding up [their] affairs.” 12 U.S.C. § 4617(a)(2). FHFA has its own exemption from state

taxes:

The Agency, including its franchise, its capital, reserves, and surplus, and its

income, shall be exempt from all taxation imposed by any State, county,

municipality, or local taxing authority, except that any real property of the

Agency shall be subject to State, territorial, county, municipal, or local taxation to

the same extent according to its value as other real property is taxed . . . .

12 U.S.C. § 4617(j)(2).

The Ohio counties in this dispute seek enforcement of real property transfer taxes under

Ohio law. See Ohio Rev. Code §§ 319.54(G)(3), 322.02(A) (stating that “any county may levy

and collect a tax to be known as the real property transfer tax on each deed conveying real

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property or any interest in real property located wholly or partially within the boundaries of the

county”).

The district court granted the defendants’ motion to dismiss on October 23, 2013. R. 74

(Entry and Order Granting Defs.’ Mot. To Dismiss Pls.’ Consol. Amended Class Action Compl.

(Doc. 24) and Terminating Case.) (Page ID ##1260–69). In its opinion, the district court

reasoned that the case was “largely governed” by our decision regarding Michigan’s real

property transfer tax. Id. at 7 (Page ID #1266) (quoting County of Oakland v. Fed. Hous. Fin.

Agency, 716 F.3d 935 (6th Cir. 2013)). It then rejected the counties’ “request[]” to “create a

strict scrutiny of legislation that limits a state’s ability to levy taxes.” Id. at 8 (Page ID #1267).

Rather, the district court deemed that the congressional enactment, which includes the statutory

tax exemption, “is not aimed at state property transfer taxes, but at facilitating the secondary

mortgage market.” Id. Thus, the district court performed a traditional analysis of the

congressional enactment and determined that the legislation’s subject was the “secondary

mortgage market, which has a substantial nexus with interstate commerce,” that “[e]xempting

Defendants from state and local taxation is reasonably adapted to the end Congress sought to

achieve—more equitable and efficient allocation of mortgage credit throughout the nation”—and

that the means for achieving this end are “rational.” Id. at 9 (Page ID #1268). Having implicitly

concluded that Congress intended to preempt state taxation, the district court held that this

preemption did not run afoul of the Constitution. See id.

This circuit has previously reviewed and rejected a challenge on statutory grounds by

Michigan counties attempting to force Fannie Mae and Freddie Mac to pay the Michigan real

estate transfer tax. See County of Oakland, 716 F.3d 935. In that case, the Sixth Circuit panel

held that the exemption from “all taxation” includes the Michigan real estate transfer tax. See id.

at 940.1 In a footnote, the panel noted that the Michigan counties were, for the first time on

appeal, arguing in the alternative that the real estate transfer tax while falling under the ban of

“all taxation” is excluded from that ban by the real property tax exception in the various statutes.

1

While the counties would like to argue that Ohio’s real property transfer tax does not fall under “all

taxation” as provided in the various statutory enactments, they concede that this panel is bound by the decision in

Oakland County and do not argue for a different result here.

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Id. at 939 n.6. The panel determined that the argument was forfeited because it was not argued

in the district court, but that even if it were not forfeited, “the transfer tax, as a privilege tax, does

not fit into the carve out allowing for taxes on real property.” Id.

II. DISCUSSION

We review the district court’s grant of the motion to dismiss de novo. Buck v. Thomas M.

Cooley Law Sch., 597 F.3d 812, 816 (6th Cir. 2010). Similarly, we review “de novo a district

court’s purely legal determinations, including determinations regarding statutory construction

and the constitutionality of a federal statute.” United States v. Felts, 674 F.3d 599, 602 (6th Cir.

2012).

A. Statutory Issue: Real Property Exception

Fannie Mae’s charter prohibits state and local taxation of Fannie Mae “except that any

real property of the corporation shall be subject to State, territorial, county, municipal, or local

taxation to the same extent as other real property is taxed.” 12 U.S.C. § 1723a(c)(2). Similarly,

Freddie Mac’s charter prohibits state and local taxation of Freddie Mac “except that any real

property of the Corporation shall be subject to State, territorial, county, municipal, or local

taxation to the same extent according to its value as other real property is taxed.” 12 U.S.C.

§ 1452(e). As for FHFA, taxation is prohibited “except that any real property of the Agency

shall be subject to State, territorial, county, municipal, or local taxation to the same extent

according to its value as other real property is taxed.” 12 U.S.C. § 4617(j)(2). The Ohio

counties argue that the state and local real property transfer taxes fall into the statutory

exceptions for taxation of real property. See Appellants Br. at 47–52. If so, then the defendants

are statutorily required to pay the tax. We first address this statutory argument in order to avoid

the constitutional issues if possible. Ashwander v. Tenn. Valley Auth., 297 U.S. 288, 347 (1936)

(Brandeis, J., concurring) (“The Court will not pass upon a constitutional question although

properly presented by the record, if there is also present some other ground upon which the case

may be disposed of.”).

The parties disagree whether the County of Oakland panel’s statement that real estate

transfer taxes “do[] not fit into the carve out allowing for taxes on real property,” County of

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Oakland, 716 F.3d at 939 n.6, is binding precedent in the Sixth Circuit. The County of Oakland

panel held that the Michigan plaintiffs in that case had “forfeited this argument by not pressing it

below in any meaningful way.” Id. The declaration that transfer taxes are not subject to the real

property exception was made only as a counterfactual. See id. (providing the conclusion only

after stating “[e]ven if [the Michigan counties] had not forfeited the argument”). Because the

forfeiture conclusion disposed of the argument, the declaration that real estate transfer taxes are

not subject to the real property exception was not necessary to the outcome of the case, and is,

thus, mere dicta. See United States v. Stevenson, 676 F.3d 557, 561–62 (6th Cir. 2012). While

the defendants urge this panel “to treat [both reasons] as alternative bases of decision,” Appellees

Br. at 10 (quoting MacDonald, Sommer, & Frates v. Yolo Cnty., 477 U.S. 340, 346 n.4 (1986)),

the cases cited do not actually support the conclusion that the real property exception declaration

should be treated as binding precedent in this circuit. By determining that the Michigan counties

had forfeited their argument, the Oakland County panel made clear that it did not need to reach

the question whether real estate transfer taxes are part of the real property exception. Thus, we

do not consider that panel’s statements to be binding precedent.

The Oakland County panel’s conclusion that real estate transfer taxes do not fit into the

real property tax carve out, however, is sound. While a county may levy the transfer tax “on

each deed conveying real property or any interest in real property,” the transfer tax is “levied

upon the grantor named in the deed.” Ohio Rev. Code § 322.02(A). Ohio courts have held that

this transfer tax is an excise tax. Okey v. Walton, 302 N.E.2d 895, 902 (Ohio App. 1973) (“We

hold that R.C. Section 322.02 is an excise tax that comes under Section 10, Article XII of the

Ohio Constitution.”). The Supreme Court of Ohio has distinguished between an excise tax,

which is levied on a privilege, and a property tax levied directly against the property. General

Am. Transp. Corp. v. Limbach, Tax Comm’r, 473 N.E.2d 814, 818 (Ohio 1984) (“An excise tax

is one levied on a privilege and not one levied directly against the property.”). Thus, we

conclude that the real property transfer tax at issue is an excise tax upon the grantor of real

property for the privilege of transferring real property rather than a real property tax levied

directly against the property.

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Our sister circuits have reached the same conclusion regarding real property transfer

taxes. See, e.g., Del. Cnty., Pa. v. Fed. Hous. Fin. Agency, 747 F.3d 215, 224 (3d Cir. 2014)

(holding that “transfer taxes are an excise tax, not a direct tax on real estate, and therefore are not

within the scope of the [real property] exception”); Montgomery Cnty., Md. v. Fed. Nat’l Mortg.

Ass’n, 740 F.3d 914, 920 (4th Cir. 2014) (holding similarly because “every legal and common

understanding distinguishes a property tax from a transfer or sales tax”); Hennepin Cnty. v. Fed.

Nat’l Mortg. Ass’n, 742 F.3d 818, 822 (8th Cir. 2014) (“Minnesota’s deed transfer tax is a tax

imposed by the state on the transfer of real property, not on the real property itself. It therefore

does not fall within the real property exception to the agencies’ broad tax exemptions. We

conclude that Fannie Mae, Freddie Mac, and the FHFA are exempt from Minnesota’s deed

transfer tax.”);2 Board of Cnty. Comm’rs Kay Cnty., Okla. v. Fed. Hous. Fin. Agency, -- F.3d --,

2014 WL 2619884, at *4 (D.C. Cir. 2014) (“The Transfer Tax, which is measured by the value

of the property but triggered only at its transfer, is clearly an excise tax. . . . Appellant’s attempt

to convert the Transfer Tax into a property tax fails.”); DeKalb Cnty., 741 F.3d at 799 (“[The]

exemption is from ‘all taxation’ except real property taxation, and a tax on a real estate sale is a

tax not on property but on the transfer of property—a well-recognized distinction.”); see also

United States v. Wells Fargo Bank, 485 U.S. 351, 355 (1988) (noting “the distinction between an

excise tax, which is levied upon the use or transfer of property even though it might be measured

by the property’s value, and a tax levied upon the property itself”). Thus, we now hold similarly

that the Ohio real property transfer tax is not a real property tax that fits within the statutory

exceptions to the exemptions.

B. Constitutional Issue: Congressional Authority

Having concluded that the congressionally enacted charters exempt the enterprises from

state and local real property transfer taxes, we turn now to the constitutional question whether

Congress had the authority under the Commerce Clause to enact such exemptions.3 We answer

2

This conclusion was recently reiterated in Vadnais v. Federal National Mortgage, -- F.3d --, 2014 WL

2535276, at *3 (8th Cir. 2014).

3

We reject the Ohio counties’ argument that we should apply strict scrutiny in evaluating the charter tax

exemptions, see Appellants Br. at 45–47. The Ohio counties assert that “the rights of the States to exercise police

powers and impose taxes are just as fundamental, from a constitutional standpoint, as the rights of individuals’ due

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in the affirmative the question whether the state tax exemptions in the federal charters of these

Enterprises “arise out of or are connected with a commercial transaction, which viewed in the

aggregate, substantially affects interstate commerce.” United States v. Lopez, 514 U.S. 549, 561

(1995).

In creating Fannie Mae and Freddie Mac, Congress’s purpose was to add liquidity to the

secondary mortgage market. In effect, Congress was creating purchasers of mortgages who

would provide cash to the original lenders, who could then lend that money back out. The

creation of corporations that bought mortgages on the secondary market thus produced greater

availability of credit for home purchases.

The Enterprises argue that by including exemptions from state and local taxes, Congress

was attempting to accomplish two objectives: to reduce the cost of mortgage finance and to

ensure the equitable provision of mortgages anywhere in the nation. In purchasing the

mortgages, the Enterprises take on risk that the borrowers will default. When defaults invariably

occur, the Enterprises will foreclose on the homes and gain ownership of real property in various

states and localities. In order to recoup their money, the Enterprises will have to sell the

property. The tax exemptions lower the costs of selling the homes, allowing the Enterprises to

recoup more of their losses. Because the cost of a default is lowered, the Enterprises are willing

to pay more originally for the mortgages they purchase. This greater demand for mortgages on

the secondary market and the greater amount that the original lenders receive when they sell the

mortgages leads to more lending and the greater availability of mortgages throughout the nation.

Thus, the tax exemptions reduce the cost of mortgage finance in the nationwide secondary

mortgage market.

process and equal protection.” Id. at 46. Rather than evaluate whether this assertion is accurate, we note simply that

even if it is, we can find no legal precedent for applying strict scrutiny where a congressional enactment interferes

with “the rights of the States to exercise police powers and impose taxes.” This lack of precedent is far from

surprising, as we see no reason to apply strict scrutiny to defend states which are well-represented in our republic

and which do not require special protection from the federal courts. Moreover, applying strict scrutiny to all federal

legislation that interferes with “the rights of the States to exercise police powers and impose taxes” would be absurd,

as much of today’s federal legislation likely in some way interferes with states’ exercise of their police powers or

imposition of taxes.

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The tax exemptions also ensure the equitable provision of mortgages across state lines.

With non-uniform state and local tax rates, the Enterprises would suffer greater losses in states

and localities that have high real property transfer taxes than in those with lower taxes. As a

result, the Enterprises would be willing to pay more for mortgages in lower-tax locations than in

higher-tax locations. Thus, lenders would be better compensated for selling mortgages from low

tax locations and would be willing to make more home loans in these locations. Overall, the

differing state and local real property transfer taxes would lead to more mortgage credit being

available in some localities than others. The uniform exemption from all state and local taxes,

thus not only leads to greater availability of mortgage credit, but also ensures its equitable

distribution to all states and localities across the nation.

We conclude that the transfer tax exemptions are connected to the sale of mortgages

across state lines on the secondary mortgage market, and these sales, when viewed in the

aggregate, substantially affect interstate commerce. Thus, Congress had the power under the

Commerce Clause to enact this statutory provision.

Moreover, we find nothing that suggests Congress cannot exercise its Commerce Clause

power to supersede state tax laws. The counties’ argument that “the Supreme Court has

consistently construed statutory exemptions from state taxation in favor of the States and has

never implied the existence of such exemptions,” Appellants Br. at 20 (citing Hoge v. R.R. Co.,

99 U.S. 348, 355 (1879)), actually proves that Congress can enact such statutory exemptions.

The Supreme Court has recognized that Congress can expand tax immunity “beyond its narrow

constitutional limits” “by so expressly providing.” United States v. New Mexico, 455 U.S. 720,

737 (1982). Here, Congress has expressly exempted Fannie Mae and Freddie Mac from all

taxation by states and localities (except for real property taxes).

Our sister circuits that have considered the issue all agree that the exemptions are

necessary and proper to regulate the secondary mortgage market, which is without a doubt a

national market that Congress has the authority under the Commerce Clause to regulate. See

Del. Cnty., Pa., 747 F.3d at 227–28 (noting that “[t]he transfer tax exemptions aid the

Enterprises in regulating the secondary mortgage market, which is clearly of an economic

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nature,” and holding that “Congress acted well within the bounds of the Commerce Clause when

it exempted the Enterprises from paying state and local real estate transfer taxes”); Montgomery

Cnty., Md., 740 F.3d at 924 (“[T]he ultimate goals of the statutory scheme at issue in this case

are to stabilize the secondary mortgage market and to promote liquidity in that market, which are

quintessentially interstate and economic aims.”); DeKalb Cnty., 741 F.3d at 801 (“The

constitutional basis for the statute is the commerce clause, and it is obvious that the home

mortgage market is nationwide, and indeed worldwide, with home mortgages being traded in

vast quantities across state lines.”). Our sister circuits also agree that where congressional

enactments conflict with state tax laws, the Supremacy Clause ensures that the federal statute

overrides any contrary imposition of state taxes. See DeKalb Cnty., 741 F.3d at 801 (rejecting

the argument that “statutes authorized by the commerce clause must be subordinated to state and

local tax statutes because taxation is fundamental to state sovereignty” and stating that “[n]o

provision of the Constitution insulates state taxes from federal powers granted by the

Constitution, which include of course the [Commerce Clause] power”); Del. Cnty., Pa., 747 F.3d

at 225 (rejecting any assertion that state taxing authority can supersede or even equal Congress’s

Commerce Clause power and later reiterating that “considerations of state sovereignty yield

under the Supremacy Clause,” id. at 227); Vadnais v. Fed. Nat’l Mortg., -- F.3d --, 2014 WL

2535276, at *4–5 (8th Cir. 2014) (holding that the statutory exemptions not only supersede

Minnesota state tax laws, but are proper exercises of the Commerce Clause power). The charter

exemptions are constitutional exercises of Congress’s Commerce Clause power that supersede

state tax laws.

Finally, the Tenth Amendment plays no role in this analysis because the Enterprises’

charters were enacted by Congress exercising the power “[t]o regulate Commerce with foreign

Nations, and among the several States, and with the Indian Tribes,” U.S. CONST. art. I, § 8, cl. 3.

This power was explicitly “delegated to the United States by the Constitution.” U.S. CONST.

amend. X. Consequently, the Enterprises are statutorily exempt from paying state real property

transfer taxes.4

4

Because we hold that the Enterprises are statutorily exempt from state and local real property transfer

taxes, we do not need to reach the question whether they are constitutionally exempt from such taxes as federal

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III. CONCLUSION

For the foregoing reasons, we AFFIRM the district court’s judgment dismissing this suit.

instrumentalities. See First Agric. Nat’l Bank of Berkshire Cnty. v. State Tax Comm’n, 392 U.S. 339, 341 (1968)

(stating that congressional legislation limiting state power to tax national banks makes it “unnecessary to reach the

constitutional question of whether today national banks should be considered nontaxable as federal

instrumentalities”); see also Del. Cnty., Pa., 747 F.3d at 228 n.4 (determining that “because we find that Congress

acted constitutionally in extending statutory tax immunity to the Enterprises, we need not reach the question of

whether they are also entitled to constitutional immunity as instrumentalities of the United States”).