Saturday, February 21, 2015

FYI: West Virginia Sup Ct Agrees With MERS, Holds Assignments of Security Instruments Need Not Be Recorded

The Supreme Court of Appeals of West Virginia recently held that West Virginia’s recording statutes do not require that an assignment of a trust deed or mortgage securing a promissory note for the purchase of real estate be recorded in the office of the clerk of the county commission.

 

The Court also held that the failure to record an assignment means that the assignee is vulnerable to claims of priority by other creditors or bona fide purchasers without notice of the unrecorded assignment. 

 

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

 

The case was filed as a class action by a West Virginia county on behalf of itself and other similarly situated counties against banks serving as trustees under various trust deeds. The trustees had registered trust deed assignments with Mortgage Electronic Registration Systems, Inc. (“MERS”), rather than recording them in county public records. The trustees moved to dismiss the complaint, arguing that trust deed assignments do not have to be recorded in county record books under West Virginia law.

 

The trial court denied the trustee’s motion to dismiss, ruling that trust deed assignments are required to be recorded in county public records and the lead plaintiff was entitled to show that the trustees had been unjustly enriched by using MERS instead of paying county recording fees.

 

The trustees appealed, a seeking writ of prohibition and dismissal of the putative class action.  West Virginia is one of only eleven states with a single appellate court.

 

The West Virginia Supreme Court first described the housing finance industry’s practice of loan pooling and securitization and the creation of MERS by the mortgage industry as a way of eliminating the need and expense of recording the assignment or transfer of rights under the trust deeds from lenders to loan trusts that issue certificates to investors.  The Court noted that MERS plays two roles in loan pooling and securitization: first, it serves as a registry for the transfer of ownership rights under the trust deed or mortgages; second, it serves as the mortgagee under the trust deeds or mortgages.

 

In the case at bar, the deeds conveying the residential real property and the trust deeds or mortgages securing payment of the purchase money loans were recorded in the public records.

 

The West Virginia Supreme Court analyzed West Virginia’s recording statutes, finding that nothing in those statutes requires the public recording of trust deed assignments as a matter of law. The Court held that it is not mandatory to record an assignment of a trust deed under the recording statutes in the office of the clerk of the county commission. The Court held that an assignment is valid between the parties thereto, but the failure to record in the public records renders the assignment invalid as to other creditors and bona fide purchasers of the property without notice of the unrecorded assignment.

 

The Court noted that the fact that the trust deeds or mortgages and assignments thereof were registered in the MERS database did not change the result, agreeing with the trustees that because MERS is named in the trust deed or mortgage as the beneficial owner of the debt secured by the trust deed, as well as the nominee for the lender and its successors and assigns, MERS is the mortgagee of record, rendering any additional recording with the county clerk unnecessary.

 

The West Virginia Court cited with approval four federal district court decisions rendered in 2012 and 2013 in Kentucky, Illinois, Florida and Iowa, all of which dismissed similar challenges to the MERS registry system, concluding that the most important factor is the specific wording of the recording statutes of the jurisdiction in question, and that the recording statutes in recording in the public records.

 

The Court granted the trustee’s writ prohibiting enforcement of the trial court’s order and directed the lower tribunal to dismiss the case with prejudice.  

 

 

 

Ralph T. Wutscher
McGinnis Wutscher 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

 

 

 

 

 

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Friday, February 20, 2015

FYI: 9th Cir Holds Undersecured, Non-Recourse Mortgage Loans Count Toward Statutory "Aggregate Debts" Limitation For Chpt 12 BK

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of a debtor’s Chapter 12 bankruptcy petition, where the debtor’s aggregate debts exceeded the statutory limitation for Chapter 12 eligibility. 

 

In so ruling, the Ninth Circuit determined that “aggregate debts” include the unsecured portions of the undersecured mortgage loans that remain enforceable against the debtor’s property, even though the loans are not enforceable against the debtor personally.

 

A copy of this opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2015/02/17/12-60069.pdf

 

As you may recall, “[o]nly a family farmer . . . with regular annual income may be a debtor under chapter 12.”  11 U.S.C. §109(f).  In addition, Section 101(18)(A) further limits eligibility to be a chapter 12 debtor by mandating that the debtor’s aggregate debts not exceed a statutory maximum and that those debts arise mostly out of the farming operation. 11 U.S.C. § 101(18)(A).

 

In 1997, the Debtor attempted to establish a vineyard on her ranch. In 2006, however, her efforts failed, and she defaulted on three loans.

 

In July 2010, the Debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code. Thereafter she received a discharge, which released her from personal liability for the unsecured claims associated with the properties. See 11 U.S.C. § 727(b).  But the creditors retained the “right to enforce a valid lien, such as a mortgage or security interest, against the debtor's property after the bankruptcy.”

 

In March 2011, the Debtor filed a second voluntary petition, this time under chapter 12 of the Code, which contains special provisions for family farmers whose “aggregate debts” do not exceed a statutory dollar amount. See 11 U.S.C. §§ 101(18)(A), 109(f).

 

At the time of the second petition, the statutory limit was $3,792,650, and the appraised value of the Debtor's properties totaled about $1.6 million, but the amount of the liens encumbering the properties totaled about $4.1 million. Thus, on the schedules that she attached to her petition, the Debtor listed debts of $4.1 million; of that amount, $2.5 million was unsecured.

 

The bankruptcy court dismissed the Debtor's petition on the ground that she had “aggregate debts” of $4.1 million, exceeding the statutory limitation for chapter 12 eligibility.

 

The Debtor appealed to the Bankruptcy Appellate Panel.  The Debtor contended that the unsecured portion of her secured creditor's claims should not be included in her “aggregate debts” and, therefore, should not bar chapter 12 eligibility, because her personal liability for those claims had been discharged in her earlier chapter 7 case.  The Debtor argued that because the secured portions of her creditors’ claims were limited to the value of the secured collateral, the value of her “aggregate debts” fell well below the statutory limitation for chapter 12 eligibility.

 

The Bankruptcy Appellate Panel rejected the Debtor’s arguments and affirmed the bankruptcy court.  The Bankruptcy Appellate Panel concluded that “obligations enforceable against the debtor's property but for which the debtor has no personal liability are nonetheless ‘claims’ and ‘debts’ within the meaning of the Bankruptcy Code.” In re Davis, 2012 Bankr. LEXIS 3631, 2012 WL 3205431, *5.

 

As you may recall, the bankruptcy code defines a “debt” as “liability on a claim.”  11 U.S.C. § 101(12).  In turn, the bankruptcy code defines “claim” to mean: 

 

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right of payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

 

11 U.S.C. § 101(5).

 

On appeal, the Ninth Circuit noted that the Supreme Court had found that “the meanings of ‘debt’ and ‘claim’ [were intended by Congress to] be coextensive.” Pa. Dep't of Pub. Welfare v. Davenport, 495 U.S. 552, 558, 110 S. Ct. 2126, 109 L. Ed. 2d 588 (1990).

 

The Ninth Circuit also noted the Supreme Court’s decision in Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991), wherein the Supreme Court determined that a “claim” can be an enforceable obligation against either the debtor or the debtor's property.  In Johnson, the Supreme Court had considered the related question of whether a debtor must include a mortgage lien in a chapter 13 reorganization plan after the obligation secured by the mortgage had been discharged in an earlier chapter 7 proceeding. 

 

The Supreme Court reasoned that “[e]ven after the debtor's personal obligations have been extinguished, the mortgage holder still retains a ‘right to payment’ in the form of its right to the proceeds from the sale of the debtor's property. Alternatively, the creditor's surviving right to foreclose on the mortgage can be viewed as a ‘right to an equitable remedy’ for the debtor’s default on the underlying obligation. Either way, there can be no doubt that the surviving mortgage interest corresponds to an ‘enforceable obligation’ of the debtor.”

 

The Ninth Circuit determined that “claim” is broadly defined to include any right to payment or any right to an equitable remedy giving rise to a right of payment.  The Ninth Circuit found that a creditor’s claim remains a “debt” so long as it is enforceable against either the debtor or the debtor's property. 

 

Accordingly, the Ninth Circuit held that Debtor's “aggregate debts” include the unsecured portions of the undersecured mortgage loans that remain enforceable against the Debtor’s property, even though the loans are not enforceable against the Debtor personally.

 

In so ruling, the Ninth Circuit also relied upon its decision in Quintana v. Commissioner, 107 B.R. 234, 235-36 (B.A.P. 9th Cir. 1989), aff’d, Quintana II, 915 F.2d 513.  In Quintana, the debtors had borrowed $1 million, which was secured by real property valued at $600,000. The debtors defaulted on the loan, so the creditor brought an action in Idaho state court for a decree of foreclosure and an order of sale. Id., 235. In that action, the creditor waived its right to seek a post-sale deficiency judgment. Id., 236.

 

On appeal, the Ninth Circuit determined that the creditor's decision to waive its right to seek a deficiency judgment did not limit the value of the debtors’ “aggregate debts” to the value of the secured collateral. 

 

The Ninth Circuit in Quintana observed that “[a]lthough, as a practical matter, [the creditor] will only be able to collect the value of the property, it has the right to payment of the entire obligation if under some circumstance, the property is sold for more than its present value.” Id., 239.

 

Accordingly, the Ninth Circuit affirmed the dismissal of the Debtor’s Chapter 12 bankruptcy petition.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher 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

 

 

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Thursday, February 19, 2015

FYI: Ill App Ct Confirms Loan Mods Not Subject to TILA, Rejects Borrowers' Allegations of Failure to Deliver Acceleration Notice

The Illinois Appellate Court, First District, recently confirmed that the federal Truth in Lending Act, 15 USC 1601, et seq. (“TILA”) did not apply to loan modifications, and that the mortgagee’s alleged failure to provide a notice required under the Illinois Mortgage Escrow Account Act did not give rise to a TILA claim.

 

The Appellate Court also rejected the borrowers’ allegations that the mortgagee failed to provide a notice of acceleration under the terms of the mortgage, holding that these allegations did not give rise to an affirmative defense, and in any event were not supported by admissible evidence.

 

A copy of the opinion is available at:  http://www.illinoiscourts.gov/Opinions/AppellateCourt/2015/1stDistrict/1140780.pdf

 

The mortgagee (“Lender”) filed a complaint to foreclose mortgage against the mortgagors in February 2012 alleging a default in payment of monthly installments of the loan beginning in October 2011.  Lender attached a mortgage and note dated November 21, 2007 and loan modification agreement executed on June 24, 2010 to its Complaint.  The loan modification adjusted the interest rate on the loan and changed the maturity date. 

 

The mortgagors each filed answers on August 23, 2012, raising two matters denominated as “affirmative defenses.”

 

The first defense claimed that that they did not receive a notice of acceleration from Lender.  The mortgagors’ second defense alleged that when the loan was modified and the mortgagors were required to establish an escrow account for the payment of real estate taxes, Lender failed to provide notice of the requirements of the Illinois Mortgage Escrow Account Act, thus supposedly violating TILA.

 

Lender filed a motion to dismiss the affirmative defenses.  Lender argued that the first affirmative defense was not a proper affirmative defense because it was premised on the claim that a condition precedent to the foreclosure action had not been met.  Further, Lender contended that the mortgagors failed to allege that they had performed as required under the mortgage, note and loan modification agreement.  Lender also attached a copy of the notice addressed to the mortgagors on November 7, 2011 and provided the affidavit of its business operations analyst attesting to the mailing of the notice on that date. 

 

As to the claimed TILA violation, Lender argued that TILA did not apply to loan modifications and that, in any event, a TILA violation in connection with the loan modification would not invalidate the loan.

 

The trial court granted Lender’s motion to dismiss the mortgagors’ defenses.  Lender moved for summary judgment.  The mortgagors’ response recited the standards for affidavits under Illinois Supreme Court Rule 191 but made no substantive argument that the affidavits submitted by Lender did not meet those requirements.  The mortgagors also failed to supply any affidavit to support their claimed non-receipt of the acceleration notice. 

 

The trial court granted Lender’s motion for summary judgment and entered a judgment of foreclosure and sale.  A judicial sale was held in November 2013, and the sale was confirmed in February 2014.  The mortgagors then appealed.

 

The Appellate Court noted that Lender correctly argued that the proposed “notice defense” was not a proper affirmative defense because it did not “give color” to Lender’s complaint.  Rather, it was an assertion that Lender had not satisfied a condition precedent to its right to bring the suit.  If Lender had not sent an acceleration notice, it would not have been entitled to foreclose.  Thus, the mortgagors’ assertion that Lender failed to send the notice attacked Lender’s ability to maintain the action and did not raise new matter that defeated the claim.  See Hartmann Realtors v. Biffar, 2014 IL App (5th) 130543, ¶ 25. 

 

In addition, the Appellate Court concluded that the mortgagors’ mere denial that they received the acceleration notice was insufficient to create a genuine issue of material fact, which would defeat Lender’s motion for summary judgment.  The Court noted that a party defending against summary judgment is not entitled to rely on the allegations of a pleading to raise a genuine issue of material fact, but must affirmatively controvert evidenced adduced by the moving party.  See Purtill v. Hess, 111 Ill. 2d 229, 240-41 (1986).  The Appellate Court concluded that unsupported allegations that the mortgagors did not receive the notice was insufficient to create a genuine issue of material fact.

 

Finally, the Appellate Court noted that TILA did not apply in the context of loan modifications.  See Drake v. Ocwen Financial Corp., 2010 WL 1910337 at *7-*9 (N.D. Ill. 2010).  The Appellate Court found the mortgagors’ appeals to “public policy” unpersuasive, and concluded that Lender’s alleged failure to provide a notice pursuant to the Illinois Mortgage Escrow Account Act did not give rise to a TILA claim.

 

Accordingly, the Court affirmed the dismissal of the mortgagor’s affirmative defenses and the entry of summary judgment in favor of Lender.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher 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

 

 

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Wednesday, February 18, 2015

FYI: 4th Cir Holds Fannie/Freddie State Tax Exemptions Apply to Real Property Transfer Taxes

The U.S. Court of Appeals for the Fourth Circuit recently held 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 held that, in providing the tax exemptions to Fannie Mae and Freddie Mac, Congress 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

 

Fannie Mae and Freddie Mac carry out their missions by purchasing mortgages originated by third-party lenders, pooling the mortgages into investment instruments, and selling those mortgage-backed securities to raise capital for further purchases. By providing capital to lenders, these activities promote access to mortgage credit throughout the Nation and stabilize the secondary market for residential mortgages.

 

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 from them 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”), which collect these taxes, disputed Fannie Mae 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, and they 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 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). The Supreme Court explained: [A]n 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, 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 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.”

 

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. Further, that its 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 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

 

 

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Tuesday, February 17, 2015

FYI: Fla App Ct (5th DCA) Holds Mortgagee Failed to Provide Sworn Copy of Acceleration Notice, Reverses Foreclosure Judgment

The District Court of Appeals of the State of Florida, Fifth District, recently held that a trial court erred in granting a mortgagee’s motion for summary judgment where the mortgagee failed to provide an authenticated notice of acceleration in support of its motion for summary judgment. 

 

The Appellate Court also held that the borrower sufficiently plead a condition precedent defense by pleading that the mortgagee failed to comply with the terms of two paragraphs of the mortgage. 

 

In addition, the Appellate Court held that the borrower, as a party opposing a motion for summary judgment, had no initial obligation to submit affidavits or proof to establish his affirmative defenses, and that the mortgagee had to evidence the nonexistence of a question of material fact before the borrower was required to submit evidence in support of its affirmative defense.

 

A copy of the opinion is available at:  http://www.5dca.org/Opinions/Opin2015/020215/5D14-1191.op.pdf

 

In January 2013, the mortgagee (Lender) filed a verified amended complaint seeking for foreclose a mortgage executed by the borrower (Borrower).  Borrower filed an answer generally denying Lender’s allegations that Lender had fulfilled all conditions precedent prior to filing the foreclosure action.   Borrower also filed an affirmative defense stating that Lender failed to comply with a condition precedent contained in Paragraph 22 of the Mortgage.

 

Paragraph 22 of the mortgage provided:

 

 

Acceleration; remedies.  Lender shall give notice to borrower prior to acceleration following borrower s breach of any covenant or agreement in this security instrument (but not prior to acceleration under section 18 unless applicable law provides otherwise).  The notice shall specify: (a) the default; (b) the action required to cure the default; (c) the date not less than 30 days from the date the notice is given to borrower, by which the default must be cured; (d) the failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by this security instrument, foreclosure by judgment proceeding and sale of the property.  The notice shall further inform borrower of the right to reinstate after acceleration and the right to assert in the foreclosure proceeding the non-existence of a default or any other defense of borrower to acceleration and foreclosure.  If the default is note cured before the date specified in the notice, lender at its option may require immediate payment in full of all sums secured by this security instrument by judicial proceeding.  Lender shall be entitled to collect all expenses incurred in pursing the remedies provided in this section 22, including, but not limited to, reasonable attorney’s fees and costs of title evidence.

 

 

In July 2013, Lender filed a motion for summary judgment together with an affidavit of indebtedness establishing that Borrower defaulted on his mortgage obligations and the amounts then due and owing under the note and mortgage. 

 

However, in its motion and affidavit, Lender did not respond to Borrower’s affirmative defense of the lack of the condition precedent, and Lender did not attach to its affidavit a copy of an acceleration letter.

 

Lender argued: (1) the verified amended complaint signed under oath by its designated representative specifically alleged that it complied with all conditions precedent; (2) the affirmative defense was insufficiently pleaded; and (3) Borrower had not filed an affidavit in opposition to the motion for summary judgment.  Borrower contended that as there was no summary judgment evidence “authenticating the breach letter,” he was not obligated to file an affidavit in opposition.

 

The trial court entered summary judgment in favor of Lender, and Borrower appealed.

 

On appeal, the Appellate Court rejected Lender’s argument that Borrower’s affirmative defense was insufficiently pleaded. 

 

The Appellate Court noted that Borrower specifically plead that Lender failed to comply with the notice requirements contained in paragraphs 15 and 22 of the mortgage, and noted that the Second District Court of Appeals had previously deemed such a pleading sufficient.   See DiSalvo v. SunTrust Mortg., Inc., 115 So. 3d 438, 439-41 (Fla 2d DCA 2013).

 

The Appellate Court also noted that there was some dispute as to whether Lender provided Borrower with a copy of the acceleration letter during discovery or at the summary judgment hearing.  However, it was undisputed that Lender never filed an authenticated copy of the letter pursuant to Florida Rule of Civil Procedure 1.510(c), which requires a movant to serve at least 20 days before the time fixed for the hearing of all summary judgment evidence on which the movant relies.  See Green v. JPMorgan Chase Bank, N.A., 109 So. 3 1285, 1288 n.2 (Fla. 5th DCA 2013) (noting that unauthenticated documents cannot be used in support of a motion for summary judgment).

 

Lender also argued on appeal that summary judgment should still be affirmed because Borrower did not raise a genuine issue of material fact.  However, the Appellate Court noted that a party opposing a motion for summary judgment has no initial obligation to submit affidavits or proof to establish its affirmative defenses.  See Stop & Shoppe Mart, Inc. v. Mehdi, 854 So. 2d 784, 786 (Fla. 5th DCA 2003).  Only when the party moving for summary judgment has properly met its burden of proof demonstrating the nonexistence of a genuine issue of material fact that the opposing party is then obligated to prove the existence of an issue of material fact.  See Lindsey v. Cadence Bank, N.A. 135 So. 3d 1164, 1167 (Fla. 1st DCA 2014).

 

Finally, the Appellate Court rejected Lender’s argument that the verified complaint proved Lender complied with paragraph 22 of the mortgage.  The Appellate Court noted that the verified complaint failed to comply with Florida Rule of Civil Procedure 1.510(e). 

 

According to the Appellate Court, in order to factually refute Borrower’s affirmative defense, Lender needed to have a competent witness execute a legally sufficient affidavit authenticating the letter, attach the letter to the affidavit and timely file the letter.  See Lindgren v. Deutsche Bank National Trust Co., 115 So. 3d 1076 (Fla. 4th DCA 2013).

 

Accordingly, the Appellate Court reversed the entry of summary judgment in favor of Lender and remanded the case to the trial court for further proceedings.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher 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

 

 

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.


Our updates are available on the internet, in searchable format, at:


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