Thursday, August 29, 2013

FYI: Ill Fed Ct Holds Chicago Vacant Housing Ordinance Does Not Apply to Fannie/Freddie

The US. District Court for the Northern District of Illinois recently held that the City of Chicago's ordinance requiring mortgagees to register vacant properties unlawfully attempts to regulate the Federal Housing Financing Agency, Fannie Mae, Freddie Mac and those acting on behalf of those entities.


Accordingly, the Court granted the FHFA's request for a declaratory judgment that it is exempt from the Ordinance, and an injunction against the enforcement of said ordinance against the FHFA, the GSEs, and those acting on their behalf.    A copy of the opinion is attached. 


As you may recall, the City of Chicago (the "City") enacted an ordinance (the "ordinance") requiring among other things that mortgagees register vacant buildings with the City and pay a $500 fee, where the owners of such buildings failed to do the same.  Municipal Code of Chicago, Sec. 13-12-126(a)(1).  The ordinance also provides that mortgagees secure and maintain vacant buildings in accordance with the City's requirements.  Id.  at Sec. 13-12-126(b). 


The Federal Housing Financing Agency ("FHFA"), acting in its capacity as conservator for Fannie Mae and Freddie Mac, filed a lawsuit against the City, contending that the ordinance unlawfully attempts to regulate it and was preempted by federal law.  The FHFA also argued that the $500 registration fee violates its immunity from state and local taxation.  The FHFA sought a declaratory judgment that it is exempt from the ordinance, and an injunction preventing the City from enforcing the ordinance against the FHFA, Fannie Mae, Freddie Mac, and those acting on the behalf of those entities.


The City filed a motion to dismiss, attacking the FHFA's claims on four grounds:  (1) that the FHFA's claims were not ripe; (2) that the FHFA lacked standing to sue, as only the Director of the FHFA is authorized to initiate litigation on its behalf, and the current FHFA director was not validly appointed; (3) that the statute relied upon by FHFA in connection with its preemption argument does not apply to municipalities; and (4) that the FHFA's claim related to its immunity from state and local taxation was not applicable here.  The FHFA filed a cross motion for summary judgment. 


The Court had little difficulty in rejecting the City's first two arguments.  The Court observed that counsel for the City confirmed the City's intent to enforce the ordinance against FHFA, and that there was not dispute that the FHFA had already reimbursed servicers for registration fees as to numerous properties.  Accordingly, the Court held that FHFA's claims were ripe and properly before the Court. 


Similarly, the Court found little merit in the City's contention that the FHFA lacked standing to sue consequent to the allegation that the FHFA's director was not validly appointed.  In rejecting this claim, the Court relied on a recent determination by the Second Circuit that the FHFA's director was properly appointed.  See Federal Housing Finance Agency v. UBS Americas, Inc., 712 F.3d 136, 144 (2d Cir. 2012).  The Court scrutinized the Second Circuit's reasoning in reaching that determination, and found it to be persuasive.  Emphasizing that "Congress could not have intended for FHFA to take over the business of Fannie and Freddie but then have no ability to seek court action on their behalf," the Court held that the director was validly appointed, and accordingly rejected the City's related arguments. 


Next, the Court considered the FHFA's arguments concerning preemption.  It began its analysis by reviewing the language of the Housing and Economic Recovery Act of 2008 ("HERA"), noting that it provides that "[w]hen acting as conservator or receiver, [FHFA] shall not be subject to the direction or supervision of any other agency of the United States or any State in the exercise of the rights, powers and privileges of [FHFA]."  12 U.S.C. Sec. 4617(a)(7).  


The Court then analyzed whether the ordinance might be expressly preempted by Congress.  It answered in the negative, holding that "because the express language of Sec. 4617(a)(7) does not contain any reference to local or municipal laws, HERA does not expressly preempt the Ordinance." 


The Court then considered whether preemption might be implied - either in the form of field preemption, or conflict preemption - as to the ordinance.  The Court determined that HERA occupied the field, noting that its provisions make clear that "Congress intended FHFA to assume complete control of [Fannie Mae and Freddie Mac]..." 


The City argued against that conclusion, contending that courts have found a presumption against preemption in cases involving local governments exercising traditional police powers.  The Court disagreed, emphasizing that HERA explicitly precluded other federal agencies and states from regulating the FHFA.  Accordingly, the Court observed that in enacting HERA, "Congress could not have intended to preclude other federal agencies and states from regulating FHFA's operations, but permit thousands of municipalities all over the country to impose varying ordinances and obligations on FHFA."


The Court also analyzed the parties' arguments concerning conflict preemption.  Because "the Ordinance obstructs Congress's intent to have one conservator take control of Fannie Mae and Freddy Mac...", the Court determined that "conflict preemption exists in this case."


Finally, the Court addressed the FHFA's argument that registration fee and related fines and penalties violate the FHFA's immunity from such charges.  The Court explained that to differentiate between impermissible state taxes and permissible fees, courts must look to whether the revenue will be used to provide a general benefit to the public,  or whether it defrays an agency's cost of regulation and/or provides a narrow benefit to a regulated company. 


The FHFA argued that the registration fee constituted an impermissible tax, because the City's ordinance does not provide a benefit to the FHFA.  The City argued that the fee was permissible because it was connected to the City's costs incurred in monitoring vacant properties. 


The Court again sided with the FHFA, emphasizing that "the FHFA does not receive any service from the City in exchange for the registration fee, and that vacant property is not a necessary consequence of FHFA's mortgage lending business."  Accordingly, the Court determined that "it is not permissible for the City to require FHFA to bear the costs associated with the City's regulation of vacant buildings."


Based on the reasoning above, the Court denied the City's motion to dismiss, and granted FHFA's motion for summary judgment.   





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
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