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Long v. Federal Home Loan Mortgage Corp.

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

March 30, 2017

JULIE LONG, individually and on behalf of all others similarly situated, Plaintiff,
v.
FEDERAL HOME LOAN MORTGAGE CORPORATION, Defendant. CLARENCE LUNA, individually and on behalf of all others similarly situated, Plaintiff,
v.
FEDERAL NATIONAL MORTGAGE ASSOCATION, Defendant.

          MEMORANDUM OPINION AND ORDER

          Joan B. Gottschall United States District Judge.

         Plaintiffs Julie Long (“Long”) and Clarence Luna (“Luna') (collectively, “Plaintiffs”) in this consolidated action have sued Federal Home Loan Mortgage Corporation (“Freddie”) and Federal National Mortgage Association (“Fannie”) (collectively, “Defendants”), alleging violations of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq. (“ICFA”) in connection with their respective purchases of foreclosure properties from Defendants (Long from Freddie and Luna from Fannie). Plaintiffs contend that Defendants refused to properly fill out Transfer Tax Declarations in connection with the property sales, and also made false statements in a form letter that each Plaintiff received from Defendants, the consequence of which was that Plaintiffs were forced to pay taxes that were not actually owed. Defendants now move jointly to dismiss Plaintiffs' respective complaints pursuant to Federal Rule of Civil Procedure 12(b)(6) [Dkt. 22]. Because Plaintiffs have failed to plead an unfair practice under the ICFA, Defendants' joint motion to dismiss is granted.

         I. BACKGROUND

         Fannie and Freddie are Government-chartered private corporations whose mission includes the establishment of a secondary market for residential mortgages by, among other things, selling homes that they acquire after default and foreclosure. See DeKalb County v. Federal Housing Finance Agency, 741 F.3d 795, 797 (7th Cir. 2013). Congress created Fannie in 1938 as a federal agency, providing in Fannie's charter that it was exempt from all taxation, except real property taxation. Id.; see 12 U.S.C. § 1723a(c)(2) (exempting Fannie from “all taxation now or hereafter imposed by any State … or local taxing authority, except that any real property of the corporation shall be subject to State … or local taxation to the same extent as other real property is taxed”). Fannie became a private corporation in 1968, but its tax exemption status did not change. DeKalb, 741 F.3d at 797. Congress created Freddie as a private corporation after Fannie became private and enacted for Freddie a similar tax exemption. Id.; see also 12 U.S.C. § 1452(e).

         In 2008, as a consequence of a severe economic downturn, Fannie and Freddie went broke, so Congress created the Federal Housing Finance Agency (“FHFA”), a regulatory agency charged with serving as Fannie's and Freddie's conservator. DeKalb, 741 F.3d at 798. As with Fannie and Freddie, Congress imbued FHFA with broad tax exemption status. See 12 U.S.C. § 4617(j)(2) (stating that FHFA “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 ….”).

         In the course of their operations, Fannie and Freddie purchase mortgages that are subject to foreclosure proceedings and sell the homes to third-party private buyers. Complicating these sales, however, is the fact that the State of Illinois has a real estate “transfer tax” that is imposed whenever real property changes hands. See 35 ILCS 200/31-10. This tax, which is a tax on the transfer of property, as opposed to a tax on real property (the latter of which falls outside of Fannie's and Freddie's statutory taxation exemption), allows a tax of 50 cents for every $500.00 of the property's total value. See id.; DeKalb, 741 F.3d at 798. Illinois counties may “piggyback” on the state tax by imposing their own real estate transfer tax of 25 cents for every $500.00 of property value. DeKalb, 741 F.3d at 798; 55 ILCS 5/5-1031(a).[1] Illinois and its subdivisions have imposed these taxes on the sales of foreclosed properties sold by Fannie and Freddie, notwithstanding Fannie's and Freddie's statutory exemption from taxation, by either directly seeking the taxes directly from Fannie and Freddie or by shifting the burden of the tax to the third-party buyer. See Fed. Nat'l Mortg. Ass'n v. City of Chicago, No. 15 C. 9150, 2016 WL 5477539 (N.D. Ill. Sept. 29, 2016), appeal filed, No. 16-4140 (Dec. 13, 2016). As a consequence of the imposition of transfer taxes by the state and its counties, numerous lawsuits have been filed that directly address the issue of taxation of real estate sales involving Fannie and Freddie.

         In Fannie Mae v. Hamer, No. 12 C 50230, 2013 WL 591979 (N.D. Ill. Feb. 13, 2013), Fannie, Freddie and FHFA sued the director of the Illinois Department of Revenue and the clerks and recorders of numerous Illinois counties, seeking a declaratory judgment that Fannie and Freddie are exempt from the defendants' attempts to collect real estate transfer taxes from them. The defendants sought to impose state and county transfer taxes in the amount of 50 cents for every $500.00 of value (state tax), plus 25 cents for every $500.00 of value (county tax). They also refused to record a document that listed Fannie and Freddie as exempt from the taxes and sent Fannie and Freddie a letter demanding back payment of several years' worth of transfer taxes. Id. at *1. In ruling on the legality of these actions, the court considered the statutory purpose of Fannie and Freddie (to bring stability to the secondary mortgage market by, for instance, promoting less expensive, more predictable markets), and the precise language of Fannie's and Freddie's statutory charter as to its tax exempt status. After analyzing these issues, the court concluded that Fannie and Freddie are indeed exempt from the real estate transfer taxes; however, the court declined to determine the broader question of whether a transaction involving Fannie and Freddie is entirely tax exempt. Id. at *6-7. Consequently, the court's narrow ruling left undecided the question of whether third party buyers may be saddled with the defendants' transfer taxes. Id. at *7, *9.

         The defendants in Hamer appealed, and the Seventh Circuit consolidated the case with two others to answer the common question of whether a state and its local counties can levy a tax on sales of real property by Fannie and Freddie. DeKalb, 741 F.3d 795. In its analysis, the Seventh Circuit went through a similar analysis as the district court in Hamer, examining Fannie's and Freddie's congressional creation, the reasons for their establishment, and the Constitutional underpinnings of their tax exempt status. The court then affirmed the lower court rulings, concluding in relevant part that the real estate transfer tax is not a real property tax but instead is a tax on the transfer of property, and that Fannie and Freddie are exempt from real estate transfer taxes levied by state and local governments. Id. at 804. The court did not rule on the broader question of whether real estate transactions involving Fannie and Freddie are completely tax exempt.

         In October 2015, Fanny, Freddie, FHFA, and numerous individual plaintiffs who had purchased homes from Fannie and Freddie in 2013 and 2015 filed suit against the City of Chicago, the Chicago Department of Finance, and Rahm Emanuel, among others, seeking injunctive and declaratory relief in the form of a ruling that the City of Chicago could not impose a transfer tax (as collected by the Chicago Department of Finance) on transfers of real estate from Fannie and Freddie to new buyers: in other words, a ruling that the entire real estate transaction between Fannie and Freddie and a third party buyer is exempt from taxation. See Fed. Nat'l Mortg. Ass'n v. City of Chicago, 2016 WL 5477539. A ruling in the plaintiffs' favor would prevent state and local taxing bodies from shifting a tax that is unrecoverable from Fannie and Freddie onto the third party buyer.

         In that case, the transfer tax at issue sought to levy a $3.75 tax on every $500.00 of transfer price, to be paid by the buyer of the real property, as well as a supplemental tax of $1.50 on every $500.00 of the transfer price, to be paid by the seller (the “Transfer Tax”). Id. at *3; see also City of Chicago Municipal Code, § 3-33-030. The parties to the real estate sale paid the Transfer Tax by buying tax stamps that were then affixed to the deed, assignment, or other instrument of assignment. Id.; § 3-33-040. The plaintiffs argued that the entire transaction should be exempt from the Transfer Tax, while the defendants maintained otherwise, arguing that since the property buyers are not included in Fannie's and Freddie's tax exemption clauses, they are not immune from the Transfer Tax. In ruling for the plaintiffs, the court turned to the Seventh Circuit's ruling in DeKalb (finding Fannie and Freddie exempt from taxes on the transfer of real estate), and the Supreme Court case of Laurens Fed. Sav. & Loan Ass'n v. S.C.

         Tax Comm'n, 365 U.S. 517 (1961) (holding that a state or local entity cannot flip an excise tax from a federal entity to its private counterparty because doing so still negatively affects the federal entity), to conclude that Fannie's and Freddie's tax exemption clauses prevent the defendants from applying the Transfer Tax to Fannie's and Freddie's real estate agent sales, regardless of whom the defendants require to pay the tax. Id. at *9. The court noted that a contrary ruling would “frustrate . . . Fannie's and Freddie's Congressional mandate . . . which was to increase and ensure national access to mortgage liquidity, ” id. at *8, because it would force them to discount their selling price in order to offset the increased transactions to buyers, and potentially cause them to ignore localities with increased transaction costs. Id. The ruling is currently on appeal before the Seventh Circuit.

         The court turns now to the facts of this case, beginning with Plaintiff Long. Long filed her “Class Action Complaint” on March 11, 2016. [Case No. 16 cv 3072, Dkt. 1]. In her complaint, Long alleges as follows: On December 10, 2015, Long made an offer to purchase a home owned by Freddie in Sheridan, Illinois. (Compl., Dkt. 1, ¶ 9). Freddie accepted the offer on December 23, 2015 for the price of $205, 000.00. (Id., ¶¶ 10, 11). Prior to the closing, on December 29, 2015, Freddie's attorney Brian Tracy of Codilis & Associates, P.C. (“Codilis”) sent Thomas Gosselin, presumably Long's attorney, a letter (the “Long Letter”) that stated in relevant part:

The seller [Freddie] is no longer considered exempt from all state, county and municipality transfer tax stamps. The Buyer is responsible for the payment of the stamps at closing. Where a municipality honors the seller's federal exempt status, an exempt stamp will be requested. The state and county do not honor the seller's federal exempt status.

(Id., ¶ 13; Exh. A (Long Letter)). Also prior to the closing (which occurred on January 15, 2016), Codilis prepared a Transfer Tax Declaration required for all sales of real property in Illinois except for certain statutorily exempt sales. (Id. ¶ 17; Exh. B (Long Transfer Tax Declaration)). In the Transfer Tax Declaration, Freddie (through Codilis) “refused to check the appropriate boxes on the form to indicate that the sale was exempt from transfer taxes because Freddie Mac was a government body” and similarly refused to let the buyer check the “appropriate boxes to exempt the sale from transfer taxes . . . .” (Id., ΒΆ 18). As a consequence of both the Long Letter and Freddie's refusal to mark that the sale was exempt from transfer taxes on the Transfer Tax ...


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