Kyla Asbury Mar. 14, 2014, 3:35pm

MINNEAPOLIS (Legal Newsline) - A decision has been made regarding a lawsuit against the Federal National Mortgage Association wherein Hennepin County, Minn., claimed Fannie Mae and Freddie Mac failed to pay taxes on transfers of deeds.

Hennepin County brought the putative class action on behalf of similarly situated Minnesota counties seeking a declaratory judgment that the defendants violated state law by failing to pay a tax on transfers of deeds to real property.

The county is seeking recovery for unjust enrichment as well as injunctive relief. The district court granted the federal agencies' motion to dismiss for failure to state a claim. Hennepin County appealed to the U.S. Court of Appeals for the Eighth Circuit.

The decision was filed on Feb. 5.

"Fannie Mae and Freddie Mac are privately owned and publicly traded for profit entities created by Congress to generate financial stability in the secondary market for residential mortgages," according to circuit judges Diane E. Murphy, Kermit Edward Bye and Lavenski R. Smith's opinion.

Fannie Mae and Freddie Mac buy mortgages originated by third-party lenders, gather them into bundles, and sell them as securities.

Following the 2008 financial crisis, which was caused in part by a collapse in the value of these securities, Congress made the FHFA the conservator for Fannie Mae and Freddie Mac, the document states.

"Fannie Mae and Freddie Mac have acquired and sold mortgages on thousands of real properties in Minnesota, including in Hennepin County," according to the document. "Minnesota imposes a tax on 'each deed or instrument by which any real property in this state is granted, assigned, transferred, or otherwise conveyed...'"

The federal agencies have not paid state taxes on the deed transfers related to their real property transactions, and Hennepin County alleges that the agencies owe the state an estimated $5 million to $5.6 million in back taxes on these transfers, according to the document.

Fannie Mae, Freddie Mac and the FHFA assert that their federal charters exempt them from such taxes.

"Our review is de novo on a challenge to a dismissal for failure to state a claim, and we take the facts alleged in the complaint as true," the opinion states.

The judges state they disagree with Hennepin County's argument that the Supreme Court decision in United States v. Wells Fargo Bank, limited the meaning of "all taxation" in an exemption statute to mean only "all direct taxation."

"In Wells Fargo, the court was considering the scope of a tax exemption created by the Housing Act of 1937 for local financing instruments called 'project notes,' which had been created to address the national housing shortage," the opinion states.

"After reviewing its precedent involving statutory tax exemptions for certain types of property, the court concluded that '[w]ell before the Housing Act was passed, an exemption of property from all taxation had an understood meaning: the property was exempt from direct taxation, but certain privileges of ownership, such as the right to transfer the property, could be taxed.'"

The Housing Act had designated the project notes themselves to be exempt from taxation, saying nothing about their transfer.

Because the estate tax in the Wells Fargo case was an excise tax levied not on the notes themselves, but rather on their "use or transfer," the court concluded that the owners of the notes were subject to the tax, according to the opinion.

"Finally, we conclude that the district court did not err by denying Hennepin County's claims for unjust enrichment and injunctive relief," the opinion states. "Unjust enrichment under Minnesota law occurs when a party 'has knowingly received or obtained something of value for which [that party] in equity and good conscience should pay.'"

To state a claim, Hennepin County must allege that a party was unjustly enriched in the sense that the term "unjustly" could mean illegally or unlawfully.

Hennepin County alleges that the entities were unjustly enriched by their failure to pay the Minnesota deed transfer tax. However, since the federal entities were under no legal obligation to pay these taxes, there is no basis for an unjust enrichment claim nor for an injunction compelling payment, the decision says.

"Since Congress exempted Fannie Mae, Freddie Mac, and the FHFA from all state taxation except on real property, and Minnesota's deed transfer tax falls within this broad exemption, we affirm the district court's dismissal of Hennepin County's claims and the denial of its request for declaratory judgment," according to the opinion.

Hennepin County was represented by Daniel P. Rogan, Michael O. Freeman, Paul R. Hannah and Jane N.B. Holzer of Hennepin County Attorney's Office.

Federal National Mortgage Association was represented by Jill L. Nicholson of Foley & Lardner LLP; and Michael C. McCarthy of Maslon Edelman Borman & Brand LLP.

Federal Home Loan Mortgage was represented by Michael J. Ciatti of King & Spalding LLP and McCarthy.

Federal Housing Finance Agency was represented by Asim Varma, Howard N. Cayne and Michael A.F. Johnson of Arnold & Porter LLP; and Stephen E. Hart of the Federal Housing Finance Agency.

U.S. Court of Appeals for the Eighth Circuit case number: 13-1821

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