City of Spokane v. Federal National Mortgage Assn

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

CITY OF SPOKANE, on behalf of itself No. 13-35655
and all others similarly situated,
Plaintiff-Appellant, D.C. No.
2:13-cv-00020-
v. LRS

FEDERAL NATIONAL MORTGAGE
ASSOCIATION, AKA Fannie Mae, a OPINION
federally chartered corporation;
FEDERAL HOME LOAN MORTGAGE
CORPORATION, AKA Freddie Mac, a
federally chartered corporation;
FEDERAL HOUSING FINANCE
AGENCY, as conservator for Federal
National Mortgage Association and
Federal Home Loan Mortgage
Corporation,
Defendants-Appellees,

UNITED STATES OF AMERICA,
Intervenor-Appellee.

On Appeal from the United States District Court
for the Eastern District of Washington
Lonny R. Suko, District Judge, Presiding

Argued and Submitted
October 8, 2014—Seattle, Washington
2 CITY OF SPOKANE V. FED. NAT’L MORTGAGE ASS’N

Filed December 30, 2014

Before: Richard A. Paez, Jay S. Bybee, and Consuelo M.
Callahan, Circuit Judges.

Opinion by Judge Bybee

SUMMARY*

Statutory Exemption

The panel affirmed the district court’s judgment in favor
of the Federal National Mortgage Association (Fannie Mae)
and the Federal Home Loan Mortgage Corporation (Freddie
Mac), and held that Congress exempted Fannie Mae and
Freddie Mac from state and local taxation of real property
transfers, and that it had constitutional authority to do so.

The panel held that Fannie Mae and Freddie Mac were
statutorily exempt from paying real property transfer taxes in
Washington. The panel also held that because Congress had
power under the Commerce Clause to regulate the secondary
mortgage market, it had power under the Necessary and
Proper Clause not only to create Fannie Mae and Freddie Mac
but also to ensure their preservation by exempting them
from state and local taxes. Finally, the panel held that the
exemptions did not violate the Tenth Amendment.

*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 CITY OF SPOKANE V. FED. NAT’L MORTGAGE ASS’N 3

COUNSEL

Kevin J. Curtis, Winston & Cashatt, Lawyers, Spokane,
Washington; Charles T. Conrad, Jr. (argued), Dewsnup, King
& Olsen, Salt Lake City, Utah, for Plaintiff-Appellant.

Howard N. Cayne, Asim Varma, Michael A.F. Johnson
(argued), Dirk C. Phillips, Arnold & Porter LLP, Washington,
D.C., for Defendant-Appellee Federal Housing Finance
Agency.

Michael J. Ciatti, Merritt E. McAlister, King & Spalding
LLP, Washington, D.C., for Defendant-Appellee Federal
Home Loan Mortgage Corporation.

Michael D. Leffel, Foley & Lardner LLP, Madison,
Wisconsin; Jill L. Nicholson, Foley & Lardner LLP, Chicago,
Illinois, for Defendant-Appellee Federal National Mortgage
Association.

Kathryn Keneally, Assistant Attorney General; Tamara W.
Ashford, Principal Deputy Assistant Attorney General;
Gilbert S. Rothenberg, Jonathan S. Cohen, Patrick J. Urda
(argued), Attorneys, Tax Division, Department of Justice,
Washington, D.C.; Michael C. Ormsby, United States
Attorney, Of Counsel, for Appellee-Intervenor United States
of America.
4 CITY OF SPOKANE V. FED. NAT’L MORTGAGE ASS’N

OPINION

BYBEE, Circuit Judge:

Congress created Fannie Mae (the Federal National
Mortgage Association) and Freddie Mac (the Federal Home
Loan Mortgage Corporation) to foster the secondary market
for home mortgages. Fannie’s and Freddie’s statutory
charters exempt them from all state and local taxation, except
for taxes on the entities’ real property. In this appeal, we
must decide whether the statutes exempt Fannie and Freddie
from paying excise taxes on the transfer of real property and,
if so, whether the statutory exemptions exceed Congress’s
authority under the Commerce Clause.

This lawsuit, brought by the City of Spokane,
Washington, is part of a wave of similar lawsuits brought
throughout the country against Fannie, Freddie, and their
conservator, the Federal Housing Finance Agency (FHFA).
Several of those cases have made their way to the courts of
appeals, and at least six of our sister circuits have now issued
published decisions. Every circuit to address Spokane’s
statutory and constitutional arguments has rejected them. See
Town of Johnston v. Fed. Hous. Fin. Agency, 765 F.3d 80 (1st
Cir. 2014) (rejecting same statutory and constitutional
arguments); Bd. of Comm’rs v. Fed. Hous. Fin. Agency, 758
F.3d 706 (6th Cir. 2014) (same); Del. Cnty. v. Fed. Hous. Fin.
Agency, 747 F.3d 215 (3d Cir. 2014) (same); Montgomery
Cnty. v. Fed. Nat’l Mortg. Ass’n, 740 F.3d 914 (4th Cir.
2014) (same); DeKalb Cnty. v. Fed. Hous. Fin. Agency, 741
F.3d 795 (7th Cir. 2013) (same); Bd. of Cnty. Comm’rs v.
Fed. Hous. Fin. Agency, 754 F.3d 1025 (D.C. Cir. 2014)
(rejecting same statutory arguments); Hennepin Cnty. v. Fed.
Nat’l Mortg. Ass’n, 742 F.3d 818 (8th Cir. 2014) (same);
 CITY OF SPOKANE V. FED. NAT’L MORTGAGE ASS’N 5

Vadnais v. Fed. Nat’l Mortg., 754 F.3d 524 (8th Cir. 2014)
(rejecting same constitutional arguments). We agree with our
sister circuits and likewise reject Spokane’s arguments.

I

Spokane first argues that Fannie and Freddie are not
statutorily exempt from paying real property transfer taxes
because such taxes fall under each statute’s carve-out for
taxes on real property. See 12 U.S.C. §§ 1452(e) (providing
that Freddie “shall be exempt from all [state and local]
taxation, . . . except that any real property of [Freddie] shall
be subject to State [and] local taxation to the same extent . . .
as other real property is taxed”), 1723a(c)(2) (same, with
respect to Fannie).1 We disagree. Courts have long
recognized “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.” United States v. Wells Fargo Bank,
485 U.S. 351, 355 (1988).

Indeed, this distinction is apparent from Washington’s
statutory scheme. Washington law separately imposes taxes
directly on real property, located in the “Property Taxes” title
of the state code, see Wash. Rev. Code tit. 84, and taxes on
the conveyance of real property, located in the “Excise
Taxes” title, see id. tit. 82. The transfer taxes at issue here are
of the latter type. See id. §§ 82.45.060 (imposing “an excise
tax upon each sale of real property”), 82.46.010(2)(a)

1
FHFA’s organic statute contains a materially identical exemption. See
12 U.S.C. § 4617(j)(2). Because FHFA is sued here only in its capacity
as conservator of Fannie and Freddie, we focus our analysis on Fannie and
Freddie.
6 CITY OF SPOKANE V. FED. NAT’L MORTGAGE ASS’N

(authorizing cities and counties to impose a similar “excise
tax on each sale of real property”).

When considered in light of this distinction, it is clear that
the statutory carve-outs allowing for the taxation of real
property as “other real property is taxed” encompass only
property taxes, not excise taxes. See Montgomery Cnty., 740
F.3d at 920. Thus, Fannie and Freddie are statutorily exempt
from paying the transfer taxes in Washington.

II

Spokane next argues that the statutory exemptions exceed
Congress’s authority under the Commerce Clause. The
Supreme Court has identified three broad categories of
activity that Congress may regulate under the Commerce
Clause: (1) channels of interstate commerce; (2)
instrumentalities of interstate commerce, or persons or things
in interstate commerce; and (3) activities that substantially
affect interstate commerce. United States v. Lopez, 514 U.S.
549, 558–59 (1995). In determining whether certain activities
substantially affect interstate commerce, we may consider the
aggregate effect of economic activities, but not the aggregate
effect of noneconomic activities. Compare United States v.
Morrison, 529 U.S. 598, 617 (2000) (rejecting “the argument
that Congress may regulate noneconomic . . . conduct based
solely on that conduct’s aggregate effect on interstate
commerce”), with Gonzalez v. Raich, 545 U.S. 1, 26 (2005)
(distinguishing Morrison because the statute in Raich
“directly regulate[d] economic, commercial activity”).

Moreover, Congress is authorized to enact laws
“necessary and proper for carrying into Execution” the
powers “vested by th[e] Constitution in the Government of
 CITY OF SPOKANE V. FED. NAT’L MORTGAGE ASS’N 7

the United States.” U.S. Const. art. I, § 8, cl. 18. “[T]he
Necessary and Proper Clause makes clear that the
Constitution’s grants of specific federal legislative authority
are accompanied by broad power to enact laws that are
‘convenient, or useful’ or ‘conducive’ to the authority’s
‘beneficial exercise.’” United States v. Comstock, 560 U.S.
126, 133–34 (2010) (quoting McCulloch v. Maryland, 17 U.S.
(4 Wheat.) 316, 413, 418 (1819)). The court must therefore
“look to see whether the statute constitutes a means that is
rationally related to the implementation of a constitutionally
enumerated power.” Id. at 134.

Spokane contends that the regulated activity here is state
and local taxation and that taxation is not commerce, but
rather “the State exercising its sovereign duties.” Spokane
also argues that the tax “is assessed on local, intrastate
activity—the buying and selling of parcels of real property in
the State of Washington.” Spokane does not dispute,
however, that Congress has power under the Commerce
Clause to regulate the national secondary mortgage market.
Nor does it dispute that chartering Fannie and Freddie was a
means rationally related to Congress’s regulation of the
secondary mortgage market. Congress created Fannie and
Freddie to “establish secondary market facilities for
residential mortgages,” to “provide stability in the secondary
market for residential mortgages,” and to “promote access to
mortgage credit throughout the Nation.” 12 U.S.C. § 1716
(regarding Fannie); see also id. § 1451 note (regarding
Freddie). Cf. McCulloch, 17 U.S. at 424 (holding that
Congress had authority under the Necessary and Proper
Clause to charter the Bank of the United States in furtherance
of Congress’s enumerated powers).
8 CITY OF SPOKANE V. FED. NAT’L MORTGAGE ASS’N

If Congress had the power to create Fannie and Freddie,
it follows that it had the power to protect their statutory
mission by exempting them from state and local taxes. As
Chief Justice Marshall observed in McCulloch, because “the
power to tax involves the power to destroy,” “a power to
create implies a power to preserve.” Id. at 426, 431. Thus,
for example, in Pittman v. Home Owners’ Loan Corp. of
Washington, D.C., 308 U.S. 21, 33 (1939), the Court
concluded that a federal statute exempting another federally
chartered corporation from state and local taxes showed that
“Congress ha[d] undertaken to safeguard the operations of the
Home Owners’ Loan Corporation by providing . . . [tax]
immunity.” “This power to preserve,” the Court reasoned,
“necessarily comes within the range of the express power
conferred upon Congress to make all laws which shall be
necessary and proper for carrying into execution all powers
vested by the Constitution in the Government of the United
States.” Id.

So too here. Congress could rationally have believed that,
“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.” Montgomery Cnty., 740
F.3d at 924. Moreover, Congress might rationally have
believed that, without the exemptions, Fannie and Freddie
would be exposed to inconsistent taxation, driving them to
shift their purchasing activities to states with lower tax rates,
thus undermining their statutory mission to increase mortgage
liquidity throughout the country. See id.

In sum, because Congress has power under the Commerce
Clause to regulate the secondary mortgage market, it has
 CITY OF SPOKANE V. FED. NAT’L MORTGAGE ASS’N 9

power under the Necessary and Proper Clause not only to
create Fannie and Freddie but also to ensure their
preservation by exempting them from state and local taxes.
We accordingly hold that the entities’ exemption statutes do
not exceed Congress’s constitutional authority.

III

Finally, Spokane contends that the exemptions violate the
Tenth Amendment. Spokane raises two arguments in this
regard. We reject both.

First, Spokane argues that the exemptions “are tantamount
to congressional commandeering of state employees” because
county clerks “would be required to record deeds from the
Enterprises free of charge.” But the exemptions do not
impose any new affirmative obligation on municipalities. See
Reno v. Condon, 528 U.S. 141, 151 (2000) (holding that a
federal statute did not commandeer state officials where it
neither required state legislatures to enact laws or regulations
nor required state officials to assist in the enforcement of
federal statutes). Rather, they simply preclude state and local
governments from enforcing preempted tax laws against
Fannie and Freddie. See Del. Cnty., 747 F.3d at 228 (“A state
official’s compliance with federal law and non-enforcement
of a preempted state law—as required by the Supremacy
Clause—is not an unconstitutional commandeering.”).

Second, Spokane argues more broadly that the
exemptions violate general principles of federalism enshrined
in the Tenth Amendment. But nothing in the text or structure
of the Constitution categorically immunizes state taxation
from federal preemption. On the contrary, Congress’s
dormant commerce authority precludes state taxation that
10 CITY OF SPOKANE V. FED. NAT’L MORTGAGE ASS’N

improperly burdens interstate commerce, and the
Constitution’s Supremacy Clause precludes state taxation of
federal instrumentalities. More to the point, the Supreme
Court has long made clear that when Congress properly
exercises its enumerated powers, it may lawfully abridge the
states’ ability to tax. See, e.g., Brown v. Maryland, 25 U.S.
(12 Wheat.) 419, 448–49 (1827) (reasoning that “the taxing
power of the States must have some limits” and that “[i]t
cannot reach and restrain the action of the national
government within its proper sphere” or “restrain the
operation of any law which Congress may constitutionally
pass”).

The exemptions neither commandeer state and local
officials nor transgress general principles of federalism. We
therefore reject Spokane’s Tenth Amendment arguments.2

IV

We hold that Congress exempted Fannie and Freddie
from state and local taxation of real property transfers and
that it had constitutional authority to do so. Accordingly, the
district court’s judgment is AFFIRMED.

2
Because we conclude that Congress had constitutional authority to
exempt Fannie and Freddie from state and local taxation of real property
transfers, we need not determine whether Fannie and Freddie are federal
instrumentalities such that they are nontaxable under the Supremacy
Clause. See First Agric. Nat’l Bank v. State Tax Comm’n, 392 U.S. 339,
341 (1968).