FYI: 9th Cir Affirms Denial of Class Cert on Predominance Grounds, But Holds Appellate Jurisdiction Inheres in Stip to Dismiss w/o Settlement

The U.S. Court of Appeals for the Ninth Circuit recently held appellate jurisdiction existed under 28 U.S.C. § 1291 because, in the absence of a settlement, a class plaintiff’s stipulated dismissal with prejudice of claims against a home improvement retailer does not destroy the adversity in that judgment necessary to support an appeal. 

 

The  Ninth Circuit also  affirmed  the  denial  of  class  certification because the district court did not abuse its discretion in holding that the proposed classes that the Plaintiff was capable of representing did  not  meet the  requirement that  common questions predominated over individual issues under Fed. R. Civ. P. 23(b)(3).  More specifically, the factual circumstances surrounding whether a customer had knowledge of the Retailer’s damage waiver charge was optional required individual determinations, which precluded class treatment.

 

A copy of the opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2014/02/03/11-55592.pdf

 

The Plaintiff appealed from the stipulated dismissal with prejudice of his putative class-action claims against the Retailer.   He alleges that the Retailer automatically imposed a ten percent surcharge for a damage waiver on tool rentals in its California stores, and the Retailer’s failure to inform customers of their ability to decline the surcharge was a violation of California’s Unfair Competition Law (“UCL”), the California Consumer Legal Remedies   Act (“CLRA”),   and   common-law   theories   of   unjust enrichment. 

 

When the Retailer rents tools to customers, it offers a “damage waiver.” The damage waiver allows the customer to avoid liability if a tool is damaged during the period of the rental. The Plaintiff alleged that when he rented a tool from the Retailer, he purchased the damage waiver without notice that it was optional.  He further alleged that the Retailer does not tell customers that this waiver is an optional add-on. He claims that the cost of the waiver is automatically added to the rental price.  The Retailer did not deny that its computers default to adding the damage waiver to a customer’s  receipt,  but  customers are told of the optional nature of the waiver in three ways: 1) by the sales associate, 2) by signs posted in its stores, and 3) the final sales contract. 

 

The district court denied Plaintiff’s motion for class certification, concluding   that   the   proposed   class was not ascertainable and that Plaintiff did not meet the commonality, typicality, and   adequacy   of representation requirements of Fed.   R. Civ. P. 23(a). 

 

Plaintiff then stipulated with the Retailer to dismiss the action with prejudice, intending to appeal the denial of class certification. In the stipulation, the Retailer contested the Plaintiff’s ability to appeal.  The district court dismissed the action under Rule 41(a)(2), and the Plaintiff filed a timely notice of appeal.

 

The Retailer challenged appellate jurisdiction, relying on the Ninth Circuit’s ruling in Seidman v. City of Beverly Hills, 785 F.2d 1447 (9th Cir. 1986). In Seidman, the Ninth Circuit concluded that it had no jurisdiction to hear an appeal from a stipulated dismissal of a putative class action after the lead plaintiff settled his individual claims against the defendant.   Id. at 1447–48.

 

However, the Ninth Circuit distinguished Seidman.  Under Seidman, a final judgment must be adverse to a party in order to be appealable.  Id. at 1448.  While a stipulated dismissal pursuant to a settlement does not have the adversity required for appellate jurisdiction, absent a settlement, a stipulation alone does not destroy that adversity. See Coursen v. A.H. Robins, Co., Inc., 764 F.2d 1329 (9th Cir. 1985).

 

Here, the Ninth Circuit noted there was no allegation that the parties have entered into a settlement. Rather, the Plaintiff voluntarily  stipulated  to  the dismissal of his complaint with prejudice. The Ninth Circuit concluded that the stipulated dismissal was sufficiently adverse to allow him to appeal.

 

The Ninth Circuit began its substantive analysis of the class issues by examining Rule 23.  As you may recall, a putative class-action plaintiff has the burden of showing that his  or  her  claim  meets  the requirements of Rule 23.  Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011).

 

The Plaintiff argued that each of his proposed classes fall under Rule  23(b)(3),  which  required  him  to  “demonstrate  the superiority of maintaining a class action and show ‘that the questions  of  law  and  fact  common  to  class  members predominate over any questions affecting only individual members.’” Mazza v. American Honda Motor Co., Inc., 666 F.3d 581, 589 (9th Cir. 2012).  To meet this requirement, the common questions must be “a significant aspect of the case . . . [that] can be resolved   for   all   members   of   the   class   in   a   single adjudication.”    Id.  

 

The Ninth Circuit then examined the UCL claim.  As you may recall, the UCL bans “unlawful, unfair or fraudulent business act[s] or practice[s] and unfair, deceptive, untrue or misleading advertising.” Cal. Bus. & Prof. Code § 17200.   The UCL focuses on the perpetrator’s behavior; a plaintiff must show only that members of the public are likely to be deceived.  In re Tobacco II Cases, 46 Cal. 4th 298, 312, 207 P.3d 20, 29–30, 93 (2009).

 

The Ninth Circuit noted,  the  question  of  likely  deception  does  not automatically  translate  into  a  class-wide  question.   In a recent case, the Ninth Circuit held that class certification of UCL claims is available only to those class members who were actually exposed to the business practices at issue. Mazza, 666 F.3d at 595–96.

 

In Mazza, the Ninth Circuit reversed class certification on a claim against a car company that allegedly made deceptive and misleading claims about a particular brake system.   Id. at 585–88.   In distinguishing Mazza from Stearns (and Tobacco II), the Ninth Circuit relied on two crucial facts about the car company’s advertising program: first, that it did not constitute a fraudulent advertising campaign; and second, that its advertising materials do not deny that limitations existed. Id. at 596.  It was “unreasonable to presume” that all class   members   were   exposed   to   the manufacturer’s   misleading statements, and that without such exposure, consumers were not likely to be deceived. Id.

 

The Ninth Circuit found that the instant action was similar to Mazza. The Plaintiff had not alleged that all of the members of his proposed class were exposed to the Retailer’s alleged deceptive practices.  Each of the five contracts used by the Retailer required an independent legal analysis to determine whether the language and design of that contract did or did not suffice to alert customers that the damage waiver was an optional purchase, and thereby did or did not expose that group of customers to a potentially misleading or deceptive statement. Accordingly, the Ninth Circuit upheld the district court’s determination that any common questions shared by Plaintiff’s primary class do not predominate over the individual questions of contract interpretation.

 

With respect to subclass one - each member of which rented  tools  under  the  first  contract -  the Ninth Circuit found that Plaintiff similarly had not alleged that each individual was exposed to the  same  misrepresentations  or  deceptions.    The Ninth Circuit further noted that the existence and content of signs within the stores alerting customers of the optional damage waiver was a crucial issue, which the district court reasonably held must be resolved on an individual rather than a class-wide basis.

 

Likewise, oral notice given by the Retailer’s employees about the nature of the damage waiver during a particular rental transaction constitutes a unique occurrence.  It was not an abuse of discretion for the district court to determine that maintaining a cause of action based on those statements would require each individual consumer to show that he or she had personally been exposed to misleading information.  See In re LifeUSA Holding, Inc., 242 F.3d 136, 145–46 (3rd Cir. 2001); Wang v. Chinese Daily News, 709 F.3d 829, 835 (9th Cir. 2013).

 

The Ninth Circuit next examined Plaintiff’s CLRA claim, which provides a cause of action for “unfair methods of competition and unfair or deceptive acts or practices” in consumer sales. Cal. Civ. Code § 1770. Unlike the UCL, the CLRA demands that each potential class member have both an actual injury and that the  injury was  caused  by the  challenged practice. Steroid Hormone Product Cases, 181 Cal. App. 4th 145, 155–56 (2010).  However, if a “material misrepresentation ha[s] been made to the entire class, an inference of reliance arises as to the class.” Stearns, 655 F.3d at 1022.

 

Because the contracts used by the Retailer at different times contained distinct terms, the question of whether a material misrepresentation was made to  the  entire  class  requires  an  individualized determination that the district court reasonably found predominates over any common questions.  Accordingly, the Ninth Circuit affirmed dismissal of the CLRA claim for the primary class.

 

Lastly, the Ninth Circuit examined whether Plaintiff’s common law claims were susceptible to class treatment.  The elements of unjust  enrichment are “receipt of a benefit and unjust retention of the benefit at the expense of another.” Lectrodryer v. SeoulBank, 77 Cal. App. 4th 723, 726, 91 Cal. Rptr. 2d 881 (2000). This equitable test requires injustice. Doe I v. Wal-Mart Stores, Inc., 572 F.3d 677, 684 (9th Cir. 2009).

 

Whether the Retailer’s receipt of funds for the damage waiver   was   unjust   or   inequitable,   thereby   justifying restitution, depends on whether the Retailer told its tool rental customers that the waiver was an optional product. As explained above, this determination required individualized determinations. 

 

As with the UCL and CLRA claims, the individual issues could reasonably be found to predominate over the common questions in the common-law claims, and the Ninth Circuit  affirmed  the  district  court’s dismissal of both the primary class and proposed subclass one.

 

 

 

 

 

 

 

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
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

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FYI: 9th Cir Interprets "Foreclosure" Under SCRA Broadly, to Include Fees Relating to Notice of Default

Reversing the lower court’s dismissal, the U.S. Court of Appeals for the Ninth Circuit recently held that, for purposes of the federal Servicemembers Civil Relief Act (“SCRA”), the term “foreclosure” is broadly defined and encompasses more than just a formal foreclosure proceeding seeking the transfer of ownership or the sale of property. 

 

The Court then concluded that a loan servicer’s failure to remove fees relating to a notice of default rescinded by a previous loan servicer, while the borrower was on active duty, constituted a violation of the SCRA. 

 

A copy of the opinion is available at: http://cdn.ca9.uscourts.gov/datastore/opinions/2014/02/07/12-56560.pdf

 

The case involves a consumer who was a member of the United States Marine Corps Reserve who obtained a mortgage loan on a property located in California before he was called to active duty.  He was called up to active duty on three occasions between 2008 and 2011, including an overseas deployment from October of 2010 to March of 2011. 

 

During that time, he failed to make full payments on the mortgage.  The initial loan servicer started foreclosure proceedings in December 2009 by recording a notice of default, which included various fees associated with the initiation of the foreclosure. The loan servicer rescinded the notice of default in August 2010 but did not remove the associated fees from his account. 

 

In November of 2010, the original servicer transferred the servicing to a different servicer.  The second loan servicer did not remove the fees, and attempted to recover the fees during a five month period while the plaintiff was on active duty, including three and a half months while he was deployed overseas.

 

The servicemember filed suit against both loan servicers, alleging a violation § 533 of the SCRA when they charged and maintained the fees related to the rescinded notice of default on his account while he was on active duty .  The second loan servicer filed a motion to dismiss, asserting that the term “foreclosure” under the SCRA should be read to only apply to the proceedings that were terminated before it acquired the rights to service the loan.  The lower court agreed with the second servicer, and dismissed the SCRA claim.  This appeal followed.

 

The Ninth Circuit noted that the issue to be decided on appeal was the scope of the term “foreclosure” for purposes of the SCRA.

 

As you may recall, the SCRA provides that “[a] sale, foreclosure, or seizure of property for a breach of an obligation described in subsection (a) [a mortgage that originated before the servicemember’s military service] shall not be valid if made during, or within one year after, the period of the servicemember’s military service” unless the foreclosure is approved by a court.  See 50 U.S.C. app. § 533(c).

 

The Ninth Circuit provided a brief analysis of the SCRA, noting that the statute imposed limitations on proceedings that could take place while a member of the armed forces is on active duty, including insurance, taxation, loans, contract enforcement and other civil actions.  The Ninth Circuit then recognized that the limitations are “always to be liberally construed to protect those who have been obliged to drop their own affairs to take up the burdens of the nation.” 

 

In attempting to determine the scope of the term “foreclosure” under the SCRA, the Ninth Circuit first looked at the statute’s plain language and concluded that the plain language suggests two reasons the term encompasses more than just the formal foreclosure proceeding seeking the transfer of ownership or the sale of property.  First, according to the Court, the SCRA refers to foreclosure “proceedings,” implying that it involved a process rather than single act. The second reason for the broad interpretation was that the statute specifically barred a “sale, foreclosure, or seizure of property,” which, to the Court, suggested that foreclosure meant more than just a sale or seizure. 

 

The Court then looked beyond the statute’s explicit terms to determine what the term “foreclosure” encompassed.  In doing so, the Court turned its attention to California Civil Code § 2924, which describes the steps that make up a foreclosure proceeding in California.  Among other things, that statute includes numerous requirements relating to fees, establishing when fees can be imposed, creating time limits on the imposition of fees and requiring the fees to be in a reasonable amount.  Based on this language, the Ninth Circuit concluded that the statutory definition of foreclosure included proceedings related to fees, and because the U.S. Supreme Court has “unambiguously required courts to give a broad construction to the language of the SCRA to effectuate the Congressional purpose of granting active-duty members of the armed forces repose from some of the trials and tribulations of civilian life,” the Ninth Circuit concluded that attempting to collect on fees related to a notice of default on California property constitutes a violation of § 533 of the SCRA.

 

The Ninth Circuit also rejected the second servicer’s argument that it never actually collected the fees and removed them after the consumer filed the lawsuit.  According to the Court, the fact that the servicer never actually collected the fees goes to the amount of the consumer’s damages, but it does not impact the analysis of whether the SCRA was violated.  The Ninth Circuit held that the attempted collection of the fees incident to a notice of default was itself part of the foreclosure proceedings barred by § 533.

 

Finally, the Ninth Circuit made it clear that it did not matter that the second servicer did not issue the notice of default that began the foreclosure proceedings.  According to the Court, the failure to remove the fees incidental to that notice of default was a continuation of the proceedings and constituted a violation of § 533. 

 

Accordingly, the Ninth Circuit reversed district court’s dismissal of the consumer’s lawsuit and remanded the matter to the district court for proceedings consistent with its opinion. 

 

 

 

 

 

 

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
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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FYI: 7th Cir Affirms FDCPA Rulings in Favor of Debt Collectors on Debt Verification Notice Claims, Holds Other Statements Mere Non-Actionable Puffery

The U.S. Court of Appeals for the Seventh Circuit recently affirmed judgments in favor of several debt collectors in cases brought pursuant to 15 U.S.C. § 1692g(a)(4) of the federal Fair Debt Collection Practices Act (“FDCPA”).

 

In so ruling, the Seventh Circuit held that collection letters to debtors which stated that “[i]f you notify this office within 30 days from receiving this notice, this office will obtain verification of the debt or obtain a copy of the judgment and mail you a copy of such judgment or verification,” but omitted the specific phrase “that the debt, or any portion thereof, is disputed,” did not violate the FDCPA  because any written request for verification of the debt constitutes a dispute for the purposes of the FDCPA.

 

Additionally, the Seventh Circuit held that the statement in a collection letter that “[w]e believe you want to pay your just debt” does not violate the FDCPA because it is mere puffery.

 

A copy of the Court’s opinion is available at:  Link to Opinion

 

This action primarily concerns whether a letter sent to a debtor to collect a debt must include the language in 15 U.S.C. § 1692g(a)(4) “that the debt, or any portion thereof, is disputed.”

 

Four plaintiffs brought suit against four separate defendants alleging that similar debt collection letters were sent in violation of 15 U.S.C. § 1692g(a)(4) of the FDCPA.

 

Between 2012 and 2013, the plaintiffs received letters from the defendants that read, in pertinent part, as follows:

 

“Unless you notify this office within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will assume this debt is valid. If you notify this office within 30 days from receiving this notice, this office will obtain verification of the debt or obtain a copy of the judgment and mail you a copy of such judgment or verification.”

 

The Seventh Circuit noted that the first sentence of this letter is an attempt to comply with 15 U.S.C. § 1692g(a)(3), which requires the debt collector to include “a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector.”

 

The Court also noted that the second sentence is an attempt to comply with 15 U.S.C. § 1692g(a)(4), which requires the debt collector to include a “statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector.” 

 

The plaintiffs asserted that the letter does not adequately provide the notice required by 15 U.S.C. § 1692g(a)(4).

 

Because the second sentence in the notice omits the phrase “that the debt, or any portion thereof, is disputed,” the plaintiffs contend that it directs the consumer to request verification instead of directing the consumer to dispute the debt. In other words, under the plaintiffs’ theory, the second sentence should have read, “[i]f you notify this office within 30 days from receiving this notice that you dispute the debt or any portion of the debt, this office will obtain verification of the debt or obtain a copy of the judgment and mail you a copy of such judgment or verification.”

 

Additionally, one of the consolidated plaintiffs’ letters contained the statement: “[w]e believe you want to pay your just debt” immediately preceding the notice language above. The plaintiff alleged that using the phrase “just debt” is misleading and improperly suggests that the debt’s validity has been confirmed.

 

The district courts dismissed all four actions for failure to state a claim. The plaintiffs appealed, and this consolidated appeal followed.

 

At issue in the appeal was whether defendants’ letters to the plaintiffs violated 15 U.S.C. § 1692(g)(a)(4).

 

As you may recall, FDCPA claims are  evaluated  under  the  objective  “unsophisticated  consumer” standard.  However, under Seventh Circuit law, an unsophisticated consumer is not the least sophisticated  consumer.  Zemeckis  v.  Global  Credit  &  Collection  Corp.,  679  F .3d  632,  634 (7th  Cir.  2012).

 

The plaintiffs argued that because  the  second  sentence  of  the  defendants’  letters  omits  the  phrase  “that  the  debt, or any portion thereof, is disputed,” it creates the risk that an unsophisticated  consumer who may wish to exercise their rights would fail to properly do so because they might be misled to request verification instead of disputing the debt.

 

The Seventh Circuit had little trouble rejecting this argument because “the consumer can, without giving a reason, require that  the  debt collector  verify  the  existence  of  the  debt  before  making  further efforts to collect it.” DeKoven v. Plaza Assocs., 599 F. 3d 578, 582 (7th Cir . 2010). 

 

According to the Court, any consumer that wrote and sought verification of a debt would be disputing the debt for the purposes of the FDCPA and would be entitled to all of the same protections under the FDCPA as if they had written to dispute the debt. Thus, the Court held, a request to verify the existence of a debt constitutes a “dispute” under the FDCPA.

 

One of the plaintiffs also argued that because the statement  “[w]e  believe  you  want  to  pay  your  just  debt” appears immediately before the obligatory 15 U.S.C. § 1692g language, it overshadows and is inconsistent with the notice, rendering the letter misleading in violation of the FDCPA.  Alternatively, the plaintiff argued that the phrase “just debt” implies that judgment has already been rendered against the  recipient of the letter.

 

The Seventh Circuit also found this argument unavailing. The Seventh Circuit determined that the cases the plaintiff cited in support of this argument are distinguishable because they involved notices containing  incoherent and contradictory language.

 

For  example, in Avila v.  Rubin,  84 F .3d  222  (7th  Cir .  1996),  the  disputed  notice  informed  the consumer of their right to dispute or verify the debt.  However,  the  notice  was  followed  by  the  language  “[i]f  the above  does  not  apply  to  you,  we  shall  expect  payment  … within ten (10) days from the date of this letter .” Id. at 226.   Thus, “telling a debtor  he has 30 days to  dispute the debt and following that with a statement that  ‘[i]f  the  above  does not  apply’  you  have  ten  days  to  pay  up  or  real  trouble  will  start is  entirely  inconsistent”  with  the  FDCPA.  Id.

 

Similarly,  in Chuway v. Nat. Action Fin. Servs,  Inc.,  362  F .3d  944 (7th  Cir .  2004),  the  issue  was whether  the  letter  clearly  stated  the  amount  of  the  debt that  the debt  collector  was  attempting  to  collect.  The  letter stated  the  balance  was  $367.42.  However,  the  letter  also directed  the  consumer to  call  a  1-800  number to  obtain  current balance  information.  The letter  was confusing to  the  unsophisticated  consumer because  its  reference  to  the “current balance” could be interpreted to  mean that  the  debt collector was trying to  collect a debt higher than $367.42 that could only be discovered  by  calling  the  1-800  number.  Here,  plaintiffs do not allege that the amount of the debt is unclearly stated.

 

Thus, the Seventh Circuit held that a letter containing the statement “[w]e  believe you want to pay your just debt” does not direct the consumer to take any action at all.  Instead, the Court held, it merely characterizes the debt as “just.”  Considered in the context of the letters in this record,  the  phrase  “just  debt” is simply a congenial  introduction to the verification notice and is best characterized as “puffing, in the sense  of  rhetoric  designed  to  create  a  mood  …  .”  Taylor  v. Cavalry Inv., LLC, 365  F. 3d  572,  575  (7th  Cir.  2004).  Mere puffery  does not  violate  §  1692g(a)(4).  Id.  Consequently ,  the  statement  “[w]e believe  you want  to  pay your  just  debt” does not  violate  the FDCPA.

 

Thus, the Seventh Circuit held that the defendants’  notices  to  the  plaintiffs  did  not  violate 15 U.S.C. § 1692g(a)(4) of the FDCPA because any written request for verification of the debt constitutes a dispute for the purposes of the  FDCPA.  Furthermore, the Court held that the statement “[w]e  believe  you want to  pay  your  just  debt”  does  not  violate  the  FDCPA because  it  is mere puffery.

 

Accordingly, the Seventh Circuit affirmed the judgments entered for the defendants.

 

 

 

 

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
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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FYI: 4th Cir Holds Fannie and Freddie Exempt from State Transfer Taxes, Rejects Interpretive and Constitutional Challenges to Exemption

The U.S. Court of Appeals for the Fourth Circuit recently affirmed lower court rulings that the general tax exemptions applicable to Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), although not applicable to real property taxes, did cover real property transfer taxes in Maryland and South Carolina, thus making a distinction between property taxes and transfer taxes.  12 U.S.C. §§ 1723a(c)(2) and 1452(e).

 

The Fourth Circuit also upheld the South Carolina and Maryland district courts’ rulings that Congress, in providing the tax exemptions to Fannie Mae and Freddie Mac, acted within its Commerce Clause power.  In exempting Fannie Mae and Freddie Mac from such taxes, the Fourth Circuit held that Congress could rationally have believed that state taxation would substantially interfere with or obstruct the legitimate purposes of Fannie Mae and Freddie Mac of regulating and stabilizing the secondary mortgage market.

 

A copy of the opinion is available at: http://www.ca4.uscourts.gov/Opinions/Published/131691.P.pdf.

 

In the course of their business, Fannie Mae and Freddie Mac acquired real property in both Maryland and South Carolina through foreclosures on mortgages that they owned or guaranteed.

 

When selling these properties to third persons, they refused to pay the transfer taxes and recording fees, claiming to be exempt under 12 U.S.C. §§ 1723a(c)(2) and 1452(e), respectively.

 

Maryland and South Carolina impose taxes on the ownership of real property, as well as excise taxes on the transfer of real property.  Maryland’s property tax is imposed annually on owners of real property located in the State, based on the assessed value of the property. See Md. Code Ann., Tax-Prop. §§ 5-102(a), 6-101(a), 6-201(a). In addition, Maryland imposes a recordation tax on “instrument[s] of writing” (e.g., deeds, leases, and mortgages) that are recorded with the clerk of a circuit court, as well as a transfer tax on the same “instrument[s] of writing.” See id. §§ 12-102, 13-202. The amount of the recordation and transfer taxes are based on the “consideration” paid for the real property or the principal amount of debt secured. See id. §§ 12-103, 13-203. Maryland also authorizes counties to impose transfer taxes.

 

South Carolina similarly imposes an annual tax on the ownership of real property located in the State, based on its assessed valuation. See S.C. Code Ann. §§ 12-37-30, 12-37-210, 12-37-610. In addition, South Carolina imposes “recording fees” “for the privilege of recording deeds in which land . . . is transferred to another person.” Id. § 12-24-10(A).

 

As you may recall, Congress has exempted Fannie Mae and Freddie Mac generally from state and local taxes, “except that any real property of [either Fannie Mae or Freddie Mac] 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) (as to Fannie Mae); see also id. § 1452(e) (as to Freddie Mac); id. § 4617(j)(2) (as to the FHFA).

 

The Maryland and South Carolina counties (collectively, the “Counties”) that collect these taxes disputed Fannie Mae’s and Freddie Mac’s claimed exemptions, contending that the exemptions did not cover state and local transfer taxes, including recording fees, insofar as they related to real property.  The Counties commenced these actions (one in Maryland and two in South Carolina) for a declaratory judgment that Fannie Mae and Freddie Mac are liable for transfer taxes and recording fees and to recover as damages the taxes and fees that they refused to pay. The FHFA, as conservator of Fannie Mae and Freddie Mac, was also named a defendant in the Maryland case and intervened as a defendant in the South Carolina cases.

 

The South Carolina district court consolidated the two actions pending there and certified the consolidated action as a class action. The district court rejected the counties’ claims on the merits, concluding that the exclusion from the general tax exemptions covered only real property taxes and not transfer taxes. The court also rejected the South Carolina counties’ claim that the tax exemptions were unconstitutional. The Maryland district court did not reach the class action certification question but dismissed the Maryland county’s claims as a matter of law, again concluding that the exclusion from the general tax exemptions did not apply and that the exemptions themselves were a constitutional exercise of Congress’s Commerce Clause power.

 

The Counties appealed to the Fourth Circuit.

 

In conducting its analysis, the Fourth Circuit began by examining tax exemptions that applied to Fannie Mae and Freddie Mac.  The general tax exemptions for Fannie Mae and Freddie Mac do not apply – and explicitly exclude -- state and local taxes on their “real property” “to the same extent as other real property is taxed.” 12 U.S.C. §1723a(c)(2); id. § 1452(e).

 

The Counties argued that “real property,” as used in the statutes, includes deeds to the property recorded by Fannie Mae and Freddie Mac because “deeds are ‘indispensable’ to ownership of real property; they are the principal evidence of ownership and true title.” The Counties reason that such a construction follows from the concept that real property ownership is a “bundle of sticks” that includes the right to transfer title. Consequently, by their account, a real property transfer tax is a tax on real property, which is excluded from the general tax exemptions provided for Fannie Mae and Freddie Mac.

 

Thus, according to the Counties, when a statute refers to a real property tax, it is also referring to transfer taxes. The Fourth Circuit did not agree.  It stated that such a blur of the two taxes would mean analogously that any reference to a personal property tax (a tax on the ownership of personal property) must also be a reference to sales taxes imposed on the transfer of personal property.

 

The Fourth Circuit looked to Supreme Court precedent, noting that the Supreme Court made this very point clear when it stated that a property tax is “levied upon the property itself,” whereas a transfer tax is levied upon the “transfer of property.” United States v. Wells Fargo Bank, 485 U.S. 351, 355 (1988).  As the Supreme Court explained, “an exemption of property from all taxation ha[s] an understood meeting: the property [is] exempt from direct taxation, but certain privileges of ownership, such as the right to transfer the property, [can] be taxed. Underlying this doctrine is the distinction between an excise tax, which is levied upon the use or transfer of property even though it might be measured by the property’s value, and a tax levied upon the property itself.”  Id. at 355.

 

When that distinction is recognized, according to the Fourth Circuit, it becomes apparent that the exclusions allowing for the taxation of real property as “other real property is taxed,” refers to real property taxes imposed on the ownership of real property and not to transfer taxes imposed on the transfer of real property.

 

The Fourth Circuit noted that the Supreme Court applied the same distinction in Pittman v. Home Owners’ Loan Corp., 308 U.S. 21 (1939). In Pittman, the Court considered whether Maryland could impose a mortgage  recordation tax on the Home Owners’ Loan Corporation. That corporation was subject to a statutory tax exemption with a real property exclusion materially identical to the ones in the present case. See id. at 31 n.3. The Court found that the corporation was exempt from the recordation tax, which necessarily meant that the real property exclusion did not apply to the recordation tax. Id. at 33.  The Fourth Circuit found that the transfer taxes in the present case were analogous to the recordation tax in Pittman, and both are distinct from property taxes.

 

Moreover, the Fourth Circuit also recognized that the South Carolina and Maryland statutory schemes themselves confirm the divide between excise taxes and property taxes. Both States, in addition to imposing a tax on the transfer of real property, impose a separate direct tax on real property, using the same “subject to” language used in the federal exemption statutes.

 

In sum, the Fourth Circuit held that the real property exclusions from the general tax exemptions of 12 U.S.C. §§ 1723a(c)(2) and 1452(e) do not include transfer and recordation taxes.

 

Next, the Fourth Circuit addressed the Counties’ contention that Congress acted impermissibly in providing Fannie Mae and Freddie Mac with exemptions from state and local transfer taxes. Disputing the district courts’ conclusion that the exemptions were justified under the Commerce Clause, the Counties asserted that the transfer taxes were “assessed on local, intrastate activity -- the buying and selling of parcels of real estate,” and therefore any efforts to regulate them were not justified by the Commerce Clause but instead amounted to nothing less than an infringement on the States’ sovereign power to tax -- a power “indispensable to their existence” as Counties.

 

Initially, the Fourth Circuit addressed the Counties’ contention that it should review Congress’s authority to exempt Fannie Mae and Freddie Mac from state and local taxes under the strict-scrutiny standard of review. They argued that the “rights of the states to . . .impose taxes are just as fundamental, from a Constitutional standpoint, as the rights of individuals to Due Process and Equal Protection under the Fifth and Fourteenth Amendments.”

 

The Counties provided no authority for this position. The Fourth Circuit further noted that it is not required to formulate a new standard, as it is established that for a federal statute to pass constitutional muster under the Commerce Clause, there need only exist a “‘rational basis’ . . . for . . . concluding” that the regulated activities “taken in the aggregate, substantially affect interstate commerce.” Gonzales v. Raich, 545 U.S. 1, 22 (2005); see also Hodel v. Va. Surface Mining & Reclamation Ass’n, 452 U.S. 264, 276 (1981).

 

The Fourth Circuit noted the Supreme Court has often recognized Congress’s power to exempt entities from state taxation, but it has never indicated that such an exercise of power would be subject to strict scrutiny. See, e.g., Ariz. Dep’t of Revenue v. Blaze Constr. Co., 526 U.S. 32, 38 (1999);United States v. New Mexico, 455 U.S. 720, 737 (1988); United States v. City of Detroit, 355 U.S. 466, 474 (1958).

 

In the absence of a particular constitutional right that would trigger heightened scrutiny, the Fourth Circuit held that a congressional exemption from state taxation under the Commerce Clause is subject to rational-basis review.

 

The Fourth Circuit next addressed the merits of the Counties’ contention that the Commerce Clause does not authorize Congress to regulate local, intrastate activity, such as collecting taxes on “the buying and selling of parcels of real estate,” and therefore, the district courts erred in holding that Congress could reasonably conclude that state and local taxation would interfere with the stated missions of Fannie Mae and Freddie Mac.

 

In examining Congress’s authority, the Fourth Circuit noted that Congress has the power to “‘make all Laws which shall be necessary and proper’ to ‘regulate  Commerce . . . among the several States.’” Raich, 545 U.S. at 22 (omission in original) (quoting U.S. Const., Art. I, § 8). As you may recall, the Supreme Court has identified three forms of regulation that are authorized by the Commerce Clause: (1) “Congress can regulate the channels of interstate commerce”; (2) “Congress has authority to regulate and protect the instrumentalities of interstate commerce”; and (3) “Congress has the power to regulate activities that substantially affect interstate commerce.” Id. at 16-17. Moreover, “when Congress enacts a general statutory framework regulating economic activity, its power is not limited to the regulation only of interstate economic activity, but extends to the regulation of purely intrastate economic activity as well.” Brzonkala v. Va. Polytechnic Inst. & State Univ., 169 F.3d 820, 835 (4th Cir. 1999) (en banc) (emphasis omitted), aff’d sub nom. United States v. Morrison, 529 U.S. 598 (2000).

 

The Fourth Circuit found that the overall statutory schemes establishing Fannie Mae and Freddie Mac are clearly directed at the regulation of interstate economic activity. Congress created the corporations to “promote access to mortgage credit throughout the Nation” and to foster a nationwide secondary mortgage market. 12 U.S.C. § 1716 (with respect to Fannie Mae); id. § 1451 note (with respect to Freddie Mac). According to the Fourth Circuit, the relevant inquiry was whether the statutory exemptions from state and local taxes are necessary and proper to Congress’s legitimate exercise of its Commerce Clause power. See Raich, 545 U.S. at 34-35 (Scalia, J., concurring).

 

“[I]n determining whether the Necessary and Proper Clause grants Congress the legislative authority to enact a particular federal statute, courts should look to see whether the statute constitutes a means that is rationally related to the implementation of a constitutionally enumerated power.” United States v. Comstock, 560 U.S. 126, 134 (2010).  “The relevant inquiry is simply ‘whether the means chosen are reasonably adapted to the attainment of a legitimate end under the commerce power.’” Id. at 135 (quoting Raich, 545 U.S. at 37 (Scalia, J., concurring) (internal quotation marks omitted)).

 

The Fourth Circuit held that Congress could rationally have believed that state taxation would substantially interfere with or obstruct the legitimate purposes of Fannie Mae and Freddie Mac of regulating and stabilizing the secondary mortgage market.  In addition, the Congressional decision to exempt Fannie Mae and Freddie Mac from most state taxation was a reasonable means of avoiding that risk of interference or obstruction. First, excessive state taxation of Fannie Mae and Freddie Mac could undermine their ability to purchase mortgages by reducing their access to capital. Second, exposure to state taxation would subject Fannie Mae and Freddie Mac to inconsistencies in transaction costs that would vary from state to state. Such a patchwork might undermine the goal of providing mortgage liquidity to all parts of the country. See, e.g., 12 U.S.C. § 1716(4). Third, absent the statutory exemptions, states might be tempted to target Fannie Mae and Freddie Mac with large taxes, given the sheer volume of their mortgage portfolios and their statutory obligations to continue purchasing and guaranteeing mortgages throughout the country.

 

Accordingly, the Fourth Circuit agreed with the district courts that Congress could rationally have believed that insulating Fannie Mae and Freddie Mac from most state taxation would substantially further those entities’ purposes. Thus, the Fourth Circuit held that the statutory exemptions are valid exercises of Congress’s constitutional powers.

 

The Fourth Circuit next addressed the Counties’ argument that Morrison and Lopez, two Commerce Clause cases, suggest the opposite result, asserting that the transfer taxes here are completely localized and “no more commercial in nature than the activities” that Congress was attempting to regulate in those cases because “[t]axes are not commerce between or among the States.”

 

As you may recall, in Morrison, the Supreme Court struck down a federal statute that imposed a civil penalty for gender-motivated violence, 529 U.S. at 601-02, and in Lopez, it struck down a federal statute that criminalized possession of a firearm in a school zone, 514 U.S. at 551.

 

In both of those cases, the Fourth Circuit recognized that the object of Congress’s regulation was intrastate, non-economic activity. See Morrison, 529 U.S. at 613 (“Gender-motivated crimes of violence are not, in any sense of the phrase, economic activity”); Lopez, 514 U.S. at 561 (“[The statute] has nothing to do with ‘commerce’ or any sort of economic enterprise, however broadly one might define those terms”). In contrast, the ultimate goals of the statutory scheme at issue in this case were to stabilize the secondary mortgage market and to promote liquidity in that market, which are quintessentially interstate and economic aims.

 

Thus, the Fourth Circuit concluded that Congress may exempt Fannie Mae and Freddie Mac from state and local transfer taxes, even though they are collected in the context of intrastate transactions, because the taxes could substantially interfere with or obstruct the constitutionally justified missions of Fannie Mae and Freddie Mac in bolstering the secondary mortgage market.

 

Finally, the Fourth Circuit briefly addressed the Counties’ remaining arguments for finding the statutory tax exemptions unconstitutional.

 

First, the Counties argued that the statutory exemptions inappropriately “commandeer” state employees by requiring them “to record deeds from [Fannie Mae and Freddie Mac] free of charge.” See Printz v. United States, 521 U.S. 898 (1997); New York v. United States, 505 U.S. 144 (1992). The federal statutes in question, however, do not impose upon the states or local officers any affirmative obligation. Surely, South Carolina and Maryland could scrap their title recording systems if they so desired. The mere fact that federal statutes give rise to state action does not amount to commandeering. See South Carolina v. Baker, 485 U.S. 505, 514 (1988) (“Any federal regulation demands compliance”).

 

Second, the Counties argued that Fannie Mae and Freddie Mac are not federal instrumentalities entitled to immunity from state taxation, implying that Congress may only statutorily exempt federal instrumentalities from taxation. The Fourth Circuit was not persuaded, because, absent waiver, federal instrumentalities are immune from state taxation under the Supremacy Clause of the Constitution, regardless of statutory enactment. See New Mexico, 455 U.S. at 735; McCulloch, 17 U.S. at 436. Moreover, the Supreme Court has repeatedly stated that Congress may grant statutory tax immunity broader than what the Supremacy Clause would otherwise provide. See Blaze Constr. Co., Inc., 526 U.S. at 38; New Mexico, 455 U.S. at 737; City of

Detroit, 355 U.S. at 474.

 

Third and finally, the Counties argued that the statutory exemptions violate the Tenth Amendment. To be sure, the Tenth Amendment reserves to the States powers not granted to Congress. But because the Fourth Circuit held that Congress acted within its Commerce Clause power in granting Fannie Mae and Freddie Mac statutory tax exemptions, the Tenth Amendment is inapplicable. See New York, 505 U.S. at 156 (“If a power is delegated to Congress in the Constitution, the Tenth Amendment expressly disclaims any reservation of that power to the States”).

 

Accordingly, the Fourth Circuit affirmed the district courts’ rulings.

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Email: RWutscher@mwbllp.com

 

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