FHFA Loses Big Michigan Fee Case

The case was originally filed on June 20, 2011, in U.S. District Court for the Eastern District of Michigan by Oakland County, Michigan, against the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.

Oakland County claims that Fannie Mae and Freddie Mac failed to pay real estate transfer taxes when they conveyed property in the county, as required by the Michigan State Real Estate Transfer Tax, MCL § 207.521 et seq., and the County Real Estate Transfer Tax, MCL § 207.501 et seq. The state tax is $7.50 per $1,000 in value on properties sold, while the county’s rate is $1.10 per $1,000.

“These taxes are not taxes on real property; rather, they are excise taxes (not direct taxes), paid on the recording of deeds, when ownership of property is transferred,” according to a March 23 decision from U.S. District Judge Victoria Roberts. “An ‘excise tax’ is a tax levied upon the use and transfer of property.”

Oakland County claims that it alone is owed “in excess of millions of dollars.”

On July 20, the Federal Housing Finance Agency moved to intervene on behalf of Fannie and Freddie, a motion which was granted on Sept. 20.

The Michigan Department of Attorney General moved to intervene on behalf of Oakland County on Nov. 1, and the state and the county stipulated to the intervention on Nov. 23 and filed separate motions for summary judgment raising substantially the same arguments.

The plaintiffs claim that Fannie and Freddie are private corporations and not federal entities, and their federal statutory exemptions from certain taxes do not include the transfer taxes. The say that the Supreme Court has long interpreted an exemption from “all taxation” to cover only direct taxation, not excise taxes like the transfer taxes.

But FHFA argued that Congress expressly exempted Fannie and Freddie from “all taxation.”

Roberts granted a summary judgment in favor of the plaintiffs.

In a statement, an FHFA spokeswoman said, “We are reviewing the decision to determine what, if any action, we should take.”

The decision rested on whether it was determined that transfer taxes are considered excise taxes. The plaintiffs cited the case, United States v. Wells Fargo Bank, in which the Supreme Court ruled that “project notes” used to finance housing projects were not exempt from the federal estate tax — an excise tax.

The Michigan transfer taxes are considered an excise tax because they are implicated only when a property is conveyed and a deed is recorded.

“Like the exemption in Wells Fargo, the exemptions here exempt defendants from ‘all taxation,’ ” the judge wrote in her decision. “The transfer taxes, like the estate tax in Wells Fargo, are excise taxes. The Supreme Court in Wells Fargo made clear that where a statute prohibits the collection of ‘all taxation,’ an excise tax is still due ‘even where the latter [a property tax] has been constitutionally or statutorily forbidden.’ … Wells Fargo dictates that defendants’ statutory exemptions do not cover the transfer taxes.”

FHFA said that the Wells Fargo case didn’t apply in this case because the Supreme Court considered an exemption of specific property from all taxation, whereas in the Michigan case the court must consider whether entire corporations are exempt. But the judge said that didn’t make a difference.

Roberts said the cases cited by FHFA just didn’t apply to this case.

The plaintiffs also argued that a Michigan law that exempts government entities from taxation doesn’t apply in this case because the defendants already said they were exempt under a federal exemption which is controlled by way of the Supremacy Clause of the Constitution.

The judge cited a federal case in Nevada, Nevada v. Countrywide Home Loans, that found that Fannie is “essentially a privately owned mortgage banker,” which means they are not exempt under the Michigan statute.

The Nevada ruling is very significant, and FHFA didn’t bring up the case in court likely because it would have hurt its defense.

“In the end, this case turns on a single question: whether a statutory exemption from ‘all taxation’ includes excise taxes such as the Michigan transfer taxes,” Roberts concluded. “Wells Fargo dictates that it does not.

“Accordingly, the enterprises are liable for the transfer taxes.”

It is likely that a final outcome won’t be known until an appellate decision is made.

The decision is likely to impact many other similar cases pending around the country, such as several against MERS, according to Patrick McManemin, a partner at the Washington, D.C.-based law firm of Patton Boggs LLP.

A MERS spokeswoman declined to comment.