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Federal National Mortgage Association v. City of Chicago

United States District Court, N.D. Illinois, Eastern Division

September 29, 2016

FEDERAL NATIONAL MORTGAGE ASSOCIATION; FEDERAL HOME LOAN MORTGAGE CORPORATION; FEDERAL HOUSING FINANCE AGENCY, in its capacity as an agency of the federal government and in its capacity as Conservator of Fannie Mae and Freddie Mac; AMY WETTERSTEN; RAMA GROUP INTERNATIONAL, INC.; ANGEL RAMOS; BARBARA RAMOS; and VEERAL PATEL, Plaintiffs,
v.
CITY OF CHICAGO; CHICAGO DEPARTMENT OF FINANCE; CITY OF CHICAGO DEPARTMENT OF ADMINISTRATIVE HEARINGS; RAHM EMANUEL, in his official capacity as Mayor of the City of Chicago; DANIEL WIDAWSKY in his official capacity as Comptroller of the City of Chicago; and PATRICIA JACKOWIAC, in her official capacity as Director of the City of Chicago Department of Administrative Hearings, Defendants.

          OPINION AND ORDER

          Sara L. Ellis, Judge

         Plaintiffs Federal National Mortgage Association (“Fannie”) and Federal Home Loan Mortgage Corporation (“Freddie”)-supervised and regulated by Plaintiff Federal Housing Finance Agency (“FHFA”)-(collectively the “Federal Plaintiffs”) sell homes owned by Fannie and Freddie to private buyers, including Plaintiffs Amy Wettersten, Rama Group International, Inc., Angel Ramos, Barbara Ramos, and Veeral Patel (collectively the “Buyer Plaintiffs”). Defendant City of Chicago (the “City”) taxes these sales with a “Transfer Tax” that the Chicago Department of Finance (the “Department of Finance”) imposes and collects. Plaintiffs allege that Congress exempted Fannie, Freddie, and FHFA from all taxation, except for real property taxes, and they seek injunctive and declaratory relief in the form of a ruling that the City cannot impose the Transfer Tax on transfers of Fannie and Freddie real estate, regardless of which party, buyer or seller of the property, pays the Transfer Tax. Defendants City and its mayor, Rahm Emanuel, the Department of Finance and its comptroller, Daniel Widawsky, and City Department of Administrative Hearings (the “Department of Administrative Hearings”) and its director, Patricia Jackowiac, move to dismiss Plaintiffs' claims for lack of subject matter jurisdiction and for failure to state a claim. Plaintiffs, in addition to opposing Defendants' motion, also move for summary judgment on their claims. Because the Federal Plaintiffs have articulated a concrete injury, satisfying the standing requirement to pursue their claims, and because the Court has jurisdiction when FHFA brings suit, the Court denies Defendants' motion to dismiss for lack of subject matter jurisdiction. Because Fannie's, Freddie's, and FHFA's statutory tax exemptions apply to the excise taxes on real property sales involving Federal Plaintiffs and because it would frustrate the purpose of the tax exemptions to allow the City to require buyers of Fannie and Freddie properties to pay the Transfer Tax, the Court finds that the tax exemptions apply to and preempt the Transfer Tax as a matter of law. Thus, the Court denies Defendants' motion to dismiss and grants Plaintiffs' motion for summary judgment as to the Federal Plaintiffs and their request for declaratory relief. The Court defers ruling on the motion for summary judgment as to the Buyer Plaintiffs, however, because they have not fully addressed whether a declaratory judgment and reversal of the tax assessments is procedurally proper.

         BACKGROUND[1]

         Fannie and Freddie are Government-chartered private corporations tasked with establishing a secondary market for residential mortgages and providing stability to that market: both entities provide liquidity to the home mortgage markets by infusing cash to lenders, holding mortgages, and selling homes that they acquire after default and foreclosure.

         Congress created Fannie in 1938 as a federal agency, providing in Fannie's charter a tax exemption from state or local taxation, except real property taxation. In 1968, Fannie became a private corporation, but its function and charter did not change. Regarding the payment of taxes, Fannie's tax exemption remained the same:

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 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).

         Congress created Freddie, a private corporation, after Fannie became a private corporation and enacted a similar tax exemption:

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).

         After observing the financial struggles for Fannie and Freddie resulting from the 2008 economic downturn, Congress created FHFA to serve as Fannie and Freddie's regulatory agency, with the power to place Fannie and Freddie into conservatorship. FHFA became their conservator later in 2008, succeeding to all rights, titles, powers, and privileges of each corporation. Congress also provided FHFA with a broad tax exemption:

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, except that, notwithstanding the failure of any person to challenge an assessment under State law of the value of such property, and the tax thereon, shall be determined as of the period for which such tax is imposed.

12 U.S.C. § 4617(j)(2) (collectively, with §§ 1723a(c)(2) and 1452(e), the “Tax Exemption Clauses”).

         In the course of their operations, Fannie and Freddie purchase mortgages on real estate located in Chicago. Many of these mortgages were the subject of foreclosure proceedings. Foreclosures often result in Fannie and Freddie obtaining title and ownership of the mortgaged homes, and to mitigate their losses on their mortgage purchases, Fannie and Freddie sell these homes to third-party private buyers.

         The Transfer Tax, adopted in 1992 and amended in 2008 and 2011, levies a $3.75 tax on every $500.00 of transfer price, which the buyer of the real property must pay unless exempt (the “Buyer Portion”), and a supplemental $1.50 tax on every $500.00 of the transfer price, which the seller must pay (the “Seller Portion”), unless the seller is exempt from paying the tax, in which case the buyer must pay the Supplemental Tax. City of Chicago Municipal Code § 3-33-030.

         The parties to the real estate sale pay the Transfer Tax by purchasing tax stamps, to be affixed on the deed, assignment, or other instrument of transfer. Id. § 3-33-040.

         The Buyer Plaintiffs purchased homes from Fannie in 2013, and in March 2015, they received tax determination and assessments from the Department of Finance, which indicated that they owed money for failing to pay the Transfer Tax and penalties, including interest (the “Tax Assessments”). The Buyer Plaintiffs protested the Tax Assessments, which the Department of Administrative Hearings heard. The Administrative Law Judge (“ALJ”) assigned to all four protests decided that all of the Buyer Plaintiffs were liable for the tax assessment. The Buyer Plaintiffs then petitioned Jackowiac, the Director of the Department of Administrative Hearings, to review the decisions, which she upheld. Plaintiffs allege that purchasers of Freddie properties and other Fannie properties in Chicago have received the same tax treatment from Defendants. Defendants did not require the Federal Plaintiffs to pay any Transfer Tax or send them any tax assessments.

         LEGAL STANDARD

         Defendants move to dismiss Plaintiffs' claims under Rule 12(b)(1) and Rule 12(b)(6). A motion to dismiss under Rule 12(b)(1) challenges the Court's subject matter jurisdiction. Fed.R.Civ.P. 12(b)(1). The party asserting jurisdiction has the burden of proof. United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003), overruled on other grounds by Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012). The standard of review for a Rule 12(b)(1) motion to dismiss depends on the purpose of the motion. Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 443-44 (7th Cir. 2009). If a defendant challenges the sufficiency of the allegations regarding subject matter jurisdiction (a facial challenge), the Court must accept all well-pleaded factual allegations as true and draw all reasonable inferences in the plaintiff's favor. See id.; United Phosphorus, 322 F.3d at 946. If, however, the defendant denies or controverts the truth of the jurisdictional allegations (a factual challenge), the Court may look beyond ...


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