Fannie Mae v. John Acardo, No. 13-1559 (7th Cir. 2013)Annotate this Case
In the United States Court of Appeals For the Seventh Circuit ____________________ Nos. 13 1558, 1559, 1611, 2739 DEKALB COUNTY, et al., Plaintiffs Appellants, v. FEDERAL HOUSING FINANCE AGENCY, et al., Defendants Appellees, and UNITED STATES OF AMERICA, Intervening Appellee. ____________________ Appeals from the United States District Court for the Northern District of Illinois, Western Division. Nos. 12 C 50227, 50230 Frederick J. Kapala, Judge. Appeal from the United States District Court for the Eastern District of Wisconsin. No. 2:12 cv 00732 CNC Charles N. Clevert, Jr., Judge. ____________________ ARGUED DECEMBER 12, 2013 DECIDED DECEMBER 23, 2013 ____________________ Before BAUER, CUDAHY, and POSNER, Circuit Judges. 2 Nos. 13 1558, 1559, 1611, 2739 POSNER, Circuit Judge. These consolidated appeals, by Il linois counties, the state of Illinois, and a Wisconsin county, present a common question, to which the answer given by the district courts was no. It is whether a state and its local subdivisions (counties, in this case) can levy a tax on sales of real property by Fannie Mae (official name: Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), a similar entity that, to sim plify our opinion, we ll largely ignore. (So except where oth erwise indicated, whenever we say Fannie this should be understood to mean Fannie plus Freddie.) The plaintiffs grounds are both statutory and constitutional, and it is be cause there is a constitutional challenge to a federal statute (actually two statutes Fannie s and Freddie s) that the United States has intervened as an additional appellee. See 28 U.S.C. § 2403(a); Fed. R. Civ. P. 24(a)(1). Fannie Mae was created by Congress in 1938 to bolster the housing market by providing federal money to finance home mortgages. It was tasked by Congress with buying mortgages from banks that had made mortgage loans, thus pumping money into the banking industry that could be used to make more such loans. At the outset Fannie Mae was a federal agency, federally financed. Its charter, which de fined its function (just described), provided that it was ex empt from state or local taxation, except real property taxa tion. See National Housing Act Amendments of 1938, Pub. L. No. 75 424, 52 Stat. 8, 24. In 1968 Congress converted Fan nie to a private corporation, but its charter, and therefore its function (to support the home mortgage market, toward the end of creating a nation of homeowners, in President Roo sevelt s words), were unchanged. See Housing and Urban Development Act of 1968, Pub. L. No. 90 448, 82 Stat. 476, Nos. 13 1558, 1559, 1611, 2739 3 536 (codified, as amended, at 12 U.S.C. §§ 1716 et seq). No longer a government owned corporation, it was now what is called a Government Sponsored Enterprise. But like Fan nie s original statute (with a few changes irrelevant to the present case), the new statute made the corporation [i.e., Fannie], including its franchise, capital, reserves, surplus, mortgages or other security holdings, and income ¦ exempt 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. 12 U.S.C. § 1723a(c)(2). Freddie Mac was created two years later, as a private corporation with the same tax exemption as Fannie. See 12 U.S.C. § 1452(e). For purposes of the appeals, the two com panies are virtually identical. That is why, as we said at the outset, we can largely ignore Freddie, instead pretending that Fannie and Freddie are not merely Tweedledum and Tweedledee, but Tweedledumdee. (For a brief biography of Fannie, Freddie, and their relatives like Ginnie Mae see Office of the Inspector General, Federal Housing Finance Agency, History of the Government Sponsored Enter prises, http://fhfaoig.gov/LearnMore/History, visited Dec. 19, 2013.) Fannie traditionally followed conservative mortgage fi nancing practices, and foreclosures by it were very few. But beginning in 1995 and accelerating throughout the early 2000s, it bought risky mortgages and got caught up in the housing bubble; and when the bubble burst in September 2008, Fannie found itself owning an immense inventory of defaulted and overvalued subprime mortgages. In fact it 4 Nos. 13 1558, 1559, 1611, 2739 went broke, and since 2008 has been in conservatorship. The conservator is its regulatory agency, the Federal Housing Finance Agency hence the agency s presence in these ap peals as a party. See Office of the Inspector General, Federal Housing Finance Agency, Conservatorship FAQs, http://fhfaoig.gov/LearnMore/FAQ (visited Dec. 19, 2013). A conservatorship is like a receivership, except that a conserva tor, like a trustee in a reorganization under Chapter 11 of the Bankruptcy Code, tries to return the bankrupt party to sol vency, rather than liquidating it. (Fannie and Freddie proba bly are not subject to the Bankruptcy Code and thus not eli gible for Chapter 11 reorganization. For a thoughtful discus sion, see Richard Scott Carnell, Handling the Failure of a Government Sponsored Enterprise, 80 Wash. L. Rev. 565, 609 12 (2005). The hit that Fannie took beginning in 2008 coincided with the decline in states fiscal fortunes caused by the effect on their tax base of the financial crisis and ensuing economic depression. So at the same time that Fannie found itself for the first time making frequent sales of property that it had foreclosed on (since the owner of the mortgage usually ob tains title to the mortgaged property in the event of a de fault), the states (including their subdivisions, such as coun ties) found themselves in dire need of additional tax reve nues but reluctant to impose or increase taxes that would drive businesses and people to lower tax states. Illinois and Wisconsin, like all the other states, have a tax, called a real estate transfer tax, applicable when real prop erty changes hands. Illinois s tax is 50 cents for every $500 of the property s total value. 35 ILCS 200/31 10. Illinois counties are allowed to piggyback on the state tax by imposing their Nos. 13 1558, 1559, 1611, 2739 5 own real estate transfer tax of 25 cents per $500 of value. 55 ILCS 5/5 1031(a). Wisconsin counties get to keep 20 percent of the revenue from the Wisconsin real estate transfer tax, which is 30 cents per $100 of value. Wis. Stat. §§ 77.22(1), 77.24. Wisconsin imposes the tax explicitly on the seller, as is normal for sale or other excise taxes. This is customary in Il linois as well, but not explicit in the statute authorizing the real estate transfer tax and so it is conceivable that Illinois might try to impose the tax on buyers of property from Fan nie if it can t impose it on Fannie itself. (The indirect effect, however, might be to reduce the price that Fannie could get for property that it sold.) Illinois and its subdivisions and many other states and their subdivisions (such as Milwaukee County) decided to impose the real estate transfer tax on Fannie s sales of fore closed property to home buyers notwithstanding Fannie s statutory exemption from state taxation. There was no dan ger that taxing Fannie would drive people or businesses out of a state, and the number of foreclosures made it possible that the imposition of such a tax on Fannie would produce significant revenue for a state and its counties. Fannie s 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, e.g., United States v. Wells Fargo Bank, 485 U.S. 351, 355 (1988); Fernandez v. Wiener, 326 U.S. 340, 352 (1945); Erik M. Jensen, The Apportionment of Di rect Taxes : Are Consumption Taxes Constitutional?, 97 Colum. L. Rev. 2334, 2365 66 (1997). The distinction is part of the historical distinction (found in the Constitution) between direct and indirect taxes. The former term now em 6 Nos. 13 1558, 1559, 1611, 2739 braces just capitation taxes (taxes per head, such as a poll tax poll being a Middle English word for head ) and taxes on real and personal property, and the latter term em braces all other taxes, see Hylton v. United States, 3 U.S. 171, 175 (Chase, J.), 176 (Paterson, J.), 183 (Iredell, J.) (1796); Mur phy v. IRS, 493 F.3d 170, 181 (D.C. Cir. 2007); Jensen, supra, at 2393 97, including therefore real estate transfer taxes. Article I, § 9, cl. 4 of the Constitution requires that direct taxes be apportioned among the states according to popula tion. Indirect taxes various forms of excise tax, including sale or transfer or inheritance taxes were thought not to re quire apportionment because, as Hamilton argued in The Federalist No. 21 (Federalist, George W. Carey & James McClellan eds. 1990, p. 105), the market could be relied on to prevent excessive excise taxation, as excise taxes add to the price of goods and services. (The Sixteenth Amendment re moved income taxes from the class of taxes that require ap portionment.) The direct indirect terminology relates to Hamilton s point. A sales tax is indirect because the tax is imposed on the seller, and he will try and usually succeed in passing on a portion, sometimes the entirety, of the tax to his customers by folding the tax into the price of the good sold. The result is that the real taxpayer is, at least to a large ex tent, not the nominal taxpayer (the seller), but the nominal taxpayer s customer. Jensen, supra, at 2393 96. The appellants argue that the statutory term all taxa tion does not include excise taxes. The appellees reply that all means all (unless explicitly qualified, as by all ex cept, which is what the Fannie Mae statute does with real property taxation). That isn t always true, however; often there are implicit exceptions. If a sign reads All vehicles Nos. 13 1558, 1559, 1611, 2739 7 must be out of the park grounds by 8 p.m., this doesn t nec essarily include police cars and other public safety vehicles. See H.L.A. Hart, Positivism and the Separation of Law and Morals, 71 Harv. L. Rev. 593, 606 07 (1958). But the taxation provision in the Fannie Mae statute is not comparable. It says all taxation ¦ except taxes on real property, and hav ing carved an express exception for one type of tax Congress could be expected to make an express exception for any other type of tax that it wanted state and local governments to be permitted to levy on Fannie. Moreover, had states wanted to be permitted to tax prop erty sales by Fannie, why wouldn t Congress have included an express exception from the exemption for such taxation in the 1968 statute? After all, members of Congress are well at tuned to the financial interests of the states and localities they represent. See, e.g., The Federalist No. 36 (Hamilton) (pp. 173 74 of Federalist, supra). They may have felt that their con stituents would be disserved by allowing state taxation of Fannie, because by increasing Fannie s costs it would reduce its ability to purchase mortgages, to the detriment of the state s home buyers. Against this the appellants argue that to all taxation exemptions there is a well recognized (albeit implicit) excep tion for excise taxes, which, they say, was codified in the Su preme Court s decision in United States v. Wells Fargo Bank, supra, but was so well established by earlier case law that it must have been implicit in the statute that converted Fannie to a private corporation. They are wrong. Wells Fargo con strued a federal statute that provided that certain project notes (obligations, for present purpose equivalent to bonds, issued by state and local authorities to finance housing pro 8 Nos. 13 1558, 1559, 1611, 2739 jects) shall be exempt from all taxation now or hereafter imposed by the United States. The Court held that the ex emption did not apply to federal estate tax on a bequest of project notes, because such a tax is an excise tax and the all taxation exemption was intended only for direct taxation, namely (since head taxes are out of favor) a property tax. 485 U.S. at 355 56. The project notes were property, and so could not be taxed by for example requiring the owner of the notes to pay a specified amount in tax every year, like a tax on real estate. But the transfer of the notes, as by bequest or sale, was not property and so could be taxed. The appellants latch on to the fact that the exception the Court recognized for transfer taxes was not express; the statute said all taxation and not all taxation except trans fer taxes. But they misread the statute. It said that the pro ject notes themselves were nontaxable not that their transfer was nontaxable. The Court was saying that an exemption from property taxes, such as a tax on project notes, is not an exemption from transfer taxes as well, because a transfer tax is not a property tax even when the transfer is of property. Had the Supreme Court meant to hold that the term all taxation means just property taxation a very strange read ing, equivalent to interpreting all soup to mean all lobster bisque it would have had to overrule Federal Land Bank of St. Paul v. Bismarck Lumber Co., 314 U.S. 95 (1941). In that case the Court had held that a statute which stated that every Federal land bank ¦ shall be exempt from Federal, State, municipal, and local taxation, except taxes upon real estate held, purchased, or taken, id. at 96 n. 1, exempted land banks from sales taxes on property that they bought. Id. at 99 100. Wells Fargo does not even cite Bismarck. Nos. 13 1558, 1559, 1611, 2739 9 Fannie s tax exemption, like that of the federal land banks in Bismarck, exempts an entity Fannie and not just its property, which was the issue in Wells Fargo. For an excise tax, such as the real estate transfer tax, is a tax imposed on the entity, rather than just on the entity s property. Of course the entity pays the tax in both cases (though in the case of the excise tax the entity may as we noted shift the burden of the tax to its customers), but the cases distinguish between exempting the entity from all taxes not specifically excepted from the exemption, and a tax limited to a specific activity or specific assets of the entity. The structure of the real property exception to Fannie s tax exemption is different from the (implicit) exception in Wells Fargo, because the statute lists what is exempt: the corporation, including its franchise, capital, reserves, sur plus, mortgages or other security holdings, and income. Be cause the list consists largely of different forms of property, and capital might be thought to include Fannie s real es tate, prudence required making the exception for real prop erty express. There is no suggestion in the Fannie Mae stat ute of an exception for transfers of real property. But why the exception for real property? The parties do not tell us (maybe they don t know). We conjecture that it s because state and local government provides a variety of services to buildings (police and fire protection, for exam ple), financed to a considerable extent by taxes on real prop erty. It would seem odd, and even rather petty, for the fed eral government to say we want those services for our build ings but we don t want to pay for them. It would be espe cially odd for Fannie to enjoy an exemption from real estate taxes on houses that it had obtained in foreclosure sales. 10 Nos. 13 1558, 1559, 1611, 2739 But this is a detail. The important point is that, as is plain from reading Wells Fargo, and plainer still when it is read in conjunction with Bismarck, the Fannie Mae statute exempts Fannie from real estate transfer taxes levied by state or local government, as has been held by the only other federal court of appeals to have addressed the issue: County of Oakland v. Federal Housing Finance Agency, 716 F.3d 935 (6th Cir. 2013). (Illinois and Wisconsin are not the only states that in recent years have tried to impose their real estate transfer taxes on Fannie and Freddie.) Milwaukee County argues in the alternative that its real estate transfer tax is a property tax and is therefore excluded from Fannie Mae s tax exemption. The Wisconsin statute imposes on the grantor of real estate a real estate transfer fee ¦ [that] shall be collected by the [county] register [of deeds] at the time the instrument of conveyance [ordinarily a deed] is submitted for recording. Wis. Stat. § 77.22(1). (There is no contention that fee bears a different meaning in the statute from tax. ) The County states in its opening brief that the term real property includes deeds recorded by [Fannie] because deeds are indispensable to ownership of real property. No. A deed is not real estate, any more than a car title is a car. And in neither its opening brief nor its reply brief does the County cite Wells Fargo, and it cites Bismarck only in a quotation from the district court s opinion. The appellants fallback position is that if (as we have just held) the Fannie Mae statute does exempt Fannie from trans fer taxes, the statute is unconstitutional. We confine our dis cussion to the appellants non frivolous constitutional argu ments. Nos. 13 1558, 1559, 1611, 2739 11 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. But the ap pellants argue that statutes authorized by the commerce clause must be subordinated to state and local tax statutes because taxation is fundamental to state sovereignty. Wrong. No provision of the Constitution insulates state taxes from federal powers granted by the Constitution, which include of course the power of Congress to regulate Commerce with foreign Nations, and among the several States ¦ . Art. I, § 8, cl. 3. The argument made by the appellants in this case was rejected by the Supreme Court in Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 448 49 (1827) (Marshall, C.J.), and in an unbroken line of decisions since. See, e.g., CSX Transporta tion, Inc. v. Georgia State Board of Equalization, 552 U.S. 9, 20 22 (2007); Exxon Corp. v. Hunt, 475 U.S. 355, 376 (1986); State Board of Insurance v. Todd Shipyards Corp., 370 U.S. 451, 456 (1962). It s true that the Constitution presupposes the existence of the states and their quasi sovereign status (although the reference to We the People in the preamble makes clear that the Constitution, unlike the Articles of Confederation that preceded it, is not a compact of the states), and that for Congress to outlaw all state taxation, leaving the states at the complete fiscal mercy of the federal government, would de stroy the vestiges of sovereignty that states possess. But in contrast to that Doomsday scenario, the appellants cannot even tell us how much money they hope to collect from im posing transfer taxes on Fannie. 12 Nos. 13 1558, 1559, 1611, 2739 It s true that out of respect for state quasi sovereignty (quasi because of course the states are not independent na tions) the Supreme Court has ruled that a federal statute preempts state taxation only if that result is the clear and manifest purpose of Congress. Department of Revenue of Or egon v. ACF Industries, Inc., 510 U.S. 332, 345 (1994) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)). The word manifest in the formula adds emphasis, not mean ing. The scope of the exemption in the Fannie Mae statute could not be clearer. The appellants acknowledge as they must that a state or local government can t tax a federal agency. E.g., McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 431 (1819) (Marshall, C.J.) (because the power to tax involves the power to destroy ); United States v. New Mexico, 455 U.S. 720, 730 (1982). So it couldn t tax Fannie when it was a federally owned corpora tion; but it can now, the appellants argue, because it s pri vately owned. We doubt that Fannie lacks the protection of the implied constitutional immunity from state taxation, cre ated by McCulloch. (We ll come back to this point momentar ily.) But if it does, that would make no difference; for Fannie is not invoking the implied constitutional immunity created by McCulloch but rather an express statutory immunity. See First Agricultural Nat l Bank of Berkshire County v. State Tax Comm n, 392 U.S. 339, 341 (1968). The appellants argue that the constitutional and statutory exemptions must be identi cal. That is nonsense; it would curtail Congress s power un der the commerce clause, with no basis in the Constitution. See Arizona Dep t of Revenue v. Blaze Construction Co., 526 U.S. 32, 35 36 (1999); Carson v. Roane Anderson Co., 342 U.S. 232, 233 34 (1952). Nos. 13 1558, 1559, 1611, 2739 13 The reason we doubt that the conversion stripped Fannie of its implied constitutional tax exemption is that if Fannie was a federal instrumentality before its privatization as clearly it was and was therefore, as the appellants concede, immune then from taxation by virtue of the McCulloch line of cases, it is a federal instrumentality now. Congress s purpose in creating Fannie in the first place to expand home mortgage lending in the United States remains federal pol icy, and therefore remains the policy that private Fannie is obligated, as its sole mission, to promote. Its charter was un changed when Fannie was privatized, and can t be altered by Fannie only by Congress, for the charter is statutory. See Housing and Urban Development Act of 1968, Pub. L. No. 90 448, 82 Stat. 476, 536 46, (codified, as amended, at 12 U.S.C. §§ 1716 et seq). Fannie could not, without persuading Congress to revise its charter, decide that it would be a more profitable company if it filmed financial thrillers, financed for profit no kill cat shelters, or built and sold perpetual motion machines, than if it continues to just finance home buying. Fannie was privatized in the hope (fulfilled for a time, then shattered by the housing and credit bubbles of the 2000s and the ensuing financial crisis) of making it more effi cient in pursuit of the federal policy that its charter requires it to pursue. The appellants want to make federal govern ment less flexible by insisting on a rigid distinction between types of federal instrumentality. Congress could in 1968 have expanded Fannie s resources in a variety of ways, in cluding taxation; it chose to make it a private company so that it could raise money in equity markets. The objective was governmental, and unchanged; only the means of achieving it was changed. 14 Nos. 13 1558, 1559, 1611, 2739 Freddie was private from the beginning, but its charter like that of Fannie makes clear that its sole purpose, like Fannie s, is to promote federal home financing policy. Fed eral 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). There is one loose end to tie up: a question of jurisdiction over Brian Hamer, the Director of the Illinois Department of Revenue. What for the sake of simplicity we ve been treating as two suits, an Illinois suit and a Wisconsin suit, is actually three suits: a suit by Illinois counties, a suit by Milwaukee County, and a suit by Fannie, Freddie, and their conservator, the Federal Housing Finance Agency. Although Fannie, Freddie, and the agency were the defendants in the Illinois county suit and so were free to make their claims as counter claims, they wanted relief against all the county recorders who had sent Fannie and Freddie demand letters. They also wanted relief against Hamer because, as we know, the State of Illinois and not just its counties wants to impose the real estate transfer tax on Fannie and Freddie. The appellees want to scotch that prospect by obtaining declaratory relief against the Illinois taxing authority. (They are suing Hamer in his official capacity, which means they re suing the state s Department of Revenue the state s tax collector.) Of course even without such a judgment, a suit by the Department against Fannie and Freddie would be blocked by stare de cisis. But they and their conservator want the even greater protection that a judgment against the Department would provide by virtue of the doctrine of res judicata. Hamer makes wild claims for immunity on grounds of sovereign immunity, comity, and federalism, which we ll Nos. 13 1558, 1559, 1611, 2739 15 ignore. His principal claim is that he (by which he means the state) is immune from the suit against him by virtue of the Tax Injunction Act, 28 U.S.C. § 1341. The Act forbids a fed eral district court to enjoin a state tax levy, provided there is an adequate state court remedy as there is. If the state sued Fannie and Freddie in an Illinois state court to collect the real estate transfer, they could plead by way of defense their fed eral immunity from such taxation. Alternatively they could file the same claim they ve made against Hamer in their pre sent, federal suit in a suit in an Illinois state court. Landfill, Inc. v. Pollution Control Board, 387 N.E.2d 258, 261 (Ill. 1978). Fannie does not contest the applicability to it of the Tax Injunction Act; Freddie does contest it, on the basis of a statutory provision, having no counterpart in the Fannie Mae statute, that provides that notwithstanding ¦ any other provision of law, ¦ the district courts of the United States shall have original jurisdiction of all [civil] actions to which Freddie is a party. 12 U.S.C. § 1452(f). The district court concluded on the basis of this provision that the Tax Injunction Act did not bar Freddie s suing Hamer in federal court. The United States argues that this was a mistake. It may well have been. Cf. Arkansas v. Farm Credit Services of Central Arkansas, 520 U.S. 821, 830 32 (1997). But we needn t decide, given that the Federal Housing Finance Agency is also a plaintiff in the suit against Hamer. The Tax Injunction Act does not constrain the power of federal courts if the United States sues to protect itself or its instrumentalities from state taxation. Id. at 823 24. A suit by a federal agency to enforce federal interests is a suit by the United States. NLRB v. Nash Finch Co., 404 U.S. 138, 144 47 (1971); Bank of New England Old Colony, N.A. v. Clark, 986 F.2d 600, 602 03 16 Nos. 13 1558, 1559, 1611, 2739 (1st Cir. 1993); cf. Arkansas v. Farm Credit Services of Central Arkansas, supra, 520 U.S. at 831. The appellants ask us to pierce the veil, as it were, in rec ognition of the fact that if the tax is paid, it will be paid from assets or income of Fannie or Freddie. But as long as their conservator is the United States, and the assets and income in question are those of entities charged with a federal duty (that of promoting the federal policy of encouraging home ownership), the conservator s suit against a state s tax collec tor is a suit by the United States, and so the Tax Injunction Act falls away. For consider why a federal agency is the con servator of private companies: it is because those private companies have a public duty, which the federal govern ment s housing finance agency seeks to protect by marshal ing the companies assets. And so the Federal Housing Fi nance Agency is entitled, as the district court ruled, to the declaratory relief it seeks against Hamer. In sum, except for the ruling that Freddie was also enti tled to sue Hamer (an issue we leave open), the judgments appealed from are AFFIRMED.