Delaware County v. Federal Housing Finance Agency , 747 F.3d 215 ( 2014 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______
Nos. 13-2163/13-2501/13-3175
______
DELAWARE COUNTY, PENNSYLVANIA;
CHESTER COUNTY, PENNSYLVANIA,
Appellants No. 13-2163
v.
FEDERAL HOUSING FINANCE AGENCY AS
CONSERVATOR FOR FEDERAL
NATIONAL MORTGAGE ASSOCIATION AND
FEDERAL HOME LOAN MORTGAGE
CORPORATION; FEDERAL MORGTGAGE
ASSOCIATION, a/k/a FANNIE MAE;
FEDERAL HOME LOAN MORTGAGE CORPORATION,
a/k/a FREDDIE MAC
UNITED STATES OF AMERICA,
Intervenor in USCA
______
1
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(E.D. Pa. No. 2-12-cv-04554)
District Judge: Honorable Gene E. K. Pratter
______
CAPE MAY COUNTY, NEW JERSEY,
a Municipal Corporation; RITA MARIE FULGINITI,
County Clerk and Registar of Deeds and Mortgages in and for
Cape May County, New Jersey on behalf of themselves and
all others similarly situated,
Appellants No. 13-2501
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION;
FEDERAL HOME LOAN MORTGAGE CORPORATION;
FEDERAL HOUSING FINANCE AGENCY
UNITED STATES OF AMERICA,
Intervenor in USCA
______
On Appeal from the United States District Court
for the District of New Jersey
(D. N.J. No. 1-12-cv-04712)
District Judge: Honorable Robert B. Kugler
______
EVIE RAFALKO MCNULTY RECORDER OF DEEDS OF
LACKAWANNA COUNTY, PENNSYLVANIA,
2
Appellant in No. 13-3175
v.
FEDERAL HOUSING FINANCE AGENCY, as conservator
for Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation; FEDERAL
NATIONAL MORTGAGE ASSOCIATION,
a federally chartered corporation; FEDERAL HOME LOAN
MORTGAGE CORPORATION, a
federal chartered corporation
UNITED STATES OF AMERICA,
Intervenor in USCA
______
On Appeal from the United States District Court for the
Middle District of Pennsylvania
(M.D. Pa. No. 3-12-cv-01822)
District Judge: Honorable Malachy E. Mannion
______
Argued January 22, 2014
Before: FUENTES and FISHER, Circuit Judges, and
STARK,* District Judge.
(Filed: March 18, 2014)
*
The Honorable Leonard P. Stark, District Judge for
the United States District Court for the District of Delaware,
sitting by designation.
3
Jeremy J. Brandon, Esq. ARGUED
Susman Godfrey
901 Main Street
Suite 5100
Dallas, TX 75202
Attorney for Appellants Delaware County, Chester
County of Pennsylvania, Cape May County, Rita Marie
Fulginiti and Lackawana County Recorder of Deeds.
Nicholas E. Chimicles, Esq.
Alison G. Gushue, Esq.
Benjamin F. Johns, Esq.
Joseph G. Sauder, Esq.
Chimicles & Tikellis
361 West Lancaster Avenue
One Haverford Centre
Haverford, PA 19041
Attorneys for Appellants Delaware County and
Chester County of Pennsylvania
Lewis B. April, Esq.
Jeffrey Ryan Lindsay, Esq.
Cooper, Levenson, April, Niedelman & Wagenheim
1125 Atlantic Avenue
3rd Floor
Atlantic City, NJ 08401
4
Bryan L. Clobes, Esq.
Cafferty Faucher
1717 Arch Street
Suite 3610
Philadelphia, PA 19103
Attorneys for Appellants Cape May County and Rita
Marie Fulginiti
Jennifer E. Agnew, Esq.
Trujillo, Rodriguez & Richards
1717 Arch Street
Suite 3838
Philadelphia, PA 19103
Warren T. Burns, Esq.
Katherine L.I. Hacker, Esq.
Terrell W. Oxford, Esq.
Susman Godfrey
901 Main Street
Suite 5100
Dallas, TX 75202
Carol H. Lahman, Esq.
Larry D. Lahman, Esq.
202 West Broadway Avenue
Enid, OK 73701
Todd J. O'Malley, Esq.
O'Malley & Langan
201 Franklin Avenue
Scranton, PA 18503
5
Ira N. Richards, Esq.
Trujillo, Rodriguez & Richards
1717 Arch Street
Suite 3838
Philadelphia, PA 19103
Elaine A. Ryan, Esq.
Patricia N. Syverson, Esq.
Bonnett, Fairbourn, Friedman & Balint
2325 East Camelback Road
Suite 300
Phoenix, AZ 85016
Howard J. Sedran, Esq.
Levin, Fishbein, Sedran & Berman
510 Walnut Street
Suite 500
Philadelphia, PA 19106
Joseph Siprut, Esq.
17 North State Street
Suite 1600
Chicago, IL 60602
Stewart M. Weltman, Esq.
Suite 364
53 West Jackson
Chicago, IL 60604
Attorneys for Lackawana County Recorder of Deeds
6
Scott J. Etish, Esq.
Gibbons
18th & Arch Streets
1700 Two Logan Square
Philadelphia, PA 19103
Michael A. Johnson, Esq. ARGUED
Dirk Phillips, Esq.
Arnold & Porter
555 Twelfth Street, N.W.
Washington, DC 20004
Attorneys for Appellees Federal Housing Finance
Agency, Federal National Mortgage Association, RP, AKA
Fannie Mae and Federal Home Loan Mortgage Corp, AKA
Freddie Mac
Howard N. Cayne, Esq. No. 13-2501
Michael A. Johnson, Esq.
Dirk Phillips, Esq.
Asim Varma, Esq. No. 13-3175
Arnold & Porter
555 Twelfth Street, N.W.
Washington, DC 20004
Jared P. Duvoisin, Esq. No. 13-2501
Tompkins, McGuire, Wachenfeld & Barry
100 Mulberry Street
Four Gateway, Suite 5
Newark, NJ 07102
Attorneys for Appellee Federal Housing Finance
Agency
7
Michael D. Leffel, Esq.
Foley & Lardner
150 East Gilman Street
Suite 5000
Madison, WI 53703
Attorney for Appellee Federal National Mortgage
Association, RP, AKA Fannie Mae
Michael J. Ciatti, Esq.
King & Spalding
1700 Pennsylvania Avenue, N.W.
Suite 200
Washington, DC 20006
Nicholas Deenis, Esq.
Joseph T. Kelleher, Esq.
Stradley, Ronon, Stevens & Young
30 Valley Stream Parkway
Great Valley Corporate Center
Malvern, PA 19355-0000
Jill L. Nicholson, Esq.
Foley & Lardner
321 North Clark Street
Suite 2800
Chicago, IL 60654
Ann Marie Uetz, Esq.
Foley & Lardner
500 Woodward Avenue
One Detroit Center, Suite 2700
Detroit, MI 48226
8
William T. Mandia, Esq. No. 13-3175
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
2005 Market Street
Philadelphia, PA 19103
Attorneys for Appellee Federal National Mortgage
Association, RP, AKA Fannie Mae. and Federal Home Loan
Mortgage Corp, AKA Freddie Mac
Patrick J. Urda, Esq. ARGUED
United States Department of Justice
Tax Division
950 Pennsylvania Avenue, N.W.
P.O. Box 502
Washington, DC 20044
Attorney for Intervenor-appellee
______
OPINION OF THE COURT
______
FISHER, Circuit Judge.
In this consolidated appeal, we are asked to interpret
the scope of a statutory tax exemption and to determine if, in
enacting that exemption, Congress acted unconstitutionally.
9
For the reasons to be discussed, we will affirm.
I.
A.
Consolidated for our review in this appeal are three
District Court actions, brought in the Eastern and Middle
Districts of Pennsylvania and the District of New Jersey.
Appellants in No. 13-2501 are Cape May County, New
Jersey, and County Clerk Rita Marie Fulginiti. Appellants in
No. 13-2163 are Delaware and Chester Counties,
Pennsylvania. Appellant in No. 13-3175 is Evie Rafalko
McNulty, Recorder of Deeds for Lackawanna County,
Pennsylvania. We will refer to these parties, collectively, as
“Appellants.” Appellees are the Federal National Mortgage
Association (“Fannie Mae” or “Fannie”), the Federal Home
Loan Mortgage Corporation (“Freddie Mac” or “Freddie”),
and the Federal Housing Finance Agency (the “FHFA”). For
reasons that we will discuss, Appellees are identically situated
10
for purposes of this appeal. We will therefore refer to them,
collectively, as the “Enterprises.” The United States was not
involved in these cases at the district court level, but we
granted its request for leave to intervene on appeal in the
District of New Jersey and the Eastern District of
Pennsylvania cases, to defend the constitutionality of the tax
exemptions at issue here. The United States appears as
amicus curiae with respect to the Middle District of
Pennsylvania case.
Fannie Mae and Freddie Mac are federally-chartered
but privately owned corporations that issue publicly traded
securities. Congress created Fannie and Freddie to establish
and stabilize secondary markets for residential mortgages in
order to “promote access to mortgage credit throughout the
Nation.” 12 U.S.C. § 1716 (Fannie Mae); see also 12 U.S.C.
§ 1451 note (Freddie Mac). Fannie and Freddie pursue their
mission by purchasing mortgages from third-party lenders,
11
pooling them together and selling securities backed by those
mortgages. In the wake of the housing market collapse of
2008, Fannie and Freddie found themselves owning a great
many defaulted and overvalued subprime mortgages. They
went bankrupt, and on July 30, 2008, Congress created the
FHFA to act as conservator for Fannie and Freddie. “A
conservatorship is like a receivership, except that a
conservator, like a trustee in a reorganization under Chapter
11 of the Bankruptcy Code, tries to return the bankrupt party
to solvency, rather than liquidating it.” DeKalb Cnty. v. Fed.
Hous. Fin. Agency, 741 F.3d 795, 798 (7th Cir. 2013)
(discussing the FHFA conservatorship in the context of a
lawsuit identical to the instant appeal). The FHFA is thus a
party to this litigation in its role as conservator, but for
purposes of our analysis, all three entities are identically
situated.
Congress exempted the Enterprises from all state and
12
local taxation. Fannie Mae‟s exemption statute states:
[Fannie Mae], including its franchise, capital,
reserves, surplus, mortgages or other security
holdings, and income, shall be exempt from all
taxation now or hereafter imposed by any State,
. . . or by any county, . . . except that any real
property of the corporation 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). Both Freddie Mac and the FHFA‟s
exemption statutes are materially identical to Fannie‟s. 12
U.S.C. § 1452(e) (Freddie Mac); 12 U.S.C. § 4617(j)(2)
(FHFA). The Enterprises are thus exempt from “all taxation”
by any state or local government, with the exception that they
are still subject to taxes on real property.
Pennsylvania and New Jersey, like other states, tax the
transfer of real estate. In Pennsylvania, each “person who
makes, executes, delivers, accepts or presents for recording
any document” must pay a tax in the amount of one percent
of the value of the real estate transferred. 72 Pa. Cons. Stat.
13
Ann. § 8102-C. “Document” means “[a]ny deed, instrument
or writing which conveys, transfers, devises, confirms or
evidences any transfer or devise of title to real estate in this
Commonwealth.” Id. § 8101-C. Pennsylvania also allows
local authorities to impose real estate transfer taxes. Id. §
8101-D.
Similarly, New Jersey law requires the grantor of a
deed to pay a fee to the county recording officer “at the time
the deed is offered for recording.” N.J. Stat. Ann. § 46:15-7a.
The fee consists of “(a) a State portion at the rate of $1.25 for
each $500.00 of consideration or fractional part thereof
recited in the deed, and (b) a county portion at the rate of
$0.50 for each $500.00 of consideration or fractional part
thereof so recited.” Id. § 46:15-7a(1). Grantors must also
pay a “supplemental fee” for each property conveyance or
transfer. Id. § 46:15-7.1.
14
B.
Delaware and Chester Counties filed an amended
complaint in the Eastern District of Pennsylvania on behalf of
themselves and a putative class of all similarly situated
counties in Pennsylvania, seeking a declaratory judgment that
the Enterprises were not exempt from paying state and local
real estate transfer taxes and a judgment awarding the
proposed-class damages in the amount of the unpaid taxes.
The Enterprises filed a motion to dismiss, which the District
Court granted.
The District of New Jersey action proceeded similarly.
Cape May County and its County Clerk filed an amended
complaint on behalf of all New Jersey counties seeking
declaratory relief and damages. After hearing argument on a
motion to dismiss, the District Court dismissed the case.
Lackawanna County‟s Recorder of Deeds filed suit in
the Middle District of Pennsylvania, on behalf of herself and
15
a putative class consisting of all similarly situated
Pennsylvania counties, municipalities, and state entities,
seeking a declaration that the Enterprises were subject to state
and local transfer taxes, money damages, and other relief.
The District Court granted the Enterprises‟ motion to dismiss.
The Middle District of Pennsylvania action differed slightly
from the other two, in that the District Court did not consider
the constitutionality of the exemptions, which is why the
United States appears only as amicus curiae with respect to
that case.
Appellants in each case timely appealed, and we
consolidated the cases for appellate review.
II.
The District Courts had jurisdiction pursuant to 28
U.S.C. § 1331, because of the presence of a federal question.
The District Courts also had jurisdiction pursuant to 12
U.S.C. § 1452(f), which provides for original district court
16
jurisdiction over all civil actions to which Freddie Mac is a
party “without regard to amount or value” “nowithstanding . .
. any other provision of law.” 12 U.S.C. § 1452(f). We have
jurisdiction over the District Courts‟ final orders of dismissal
pursuant to 28 U.S.C. § 1291. We apply “a plenary standard
of review to issues of statutory interpretation, and to
questions regarding a statute‟s constitutionality.” United
States v. Walker, 473 F.3d 71, 75 (3d Cir. 2007).
III.
Appellants present both statutory and constitutional
challenges to the Enterprises‟ claimed tax exemptions. As we
will discuss in detail below, we disagree with their arguments.
A.
“It is the cardinal canon of statutory interpretation that
a court must begin with the statutory language.” In re
Philadelphia Newspapers, LLC, 599 F.3d 298, 304 (3d Cir.
2010). We presume that Congress expresses its intent
17
through the ordinary meaning of the words it uses. Murphy v.
Millennium Radio Group LLC, 650 F.3d 295, 302 (3d Cir.
2011). When that meaning is plain, our “sole function . . . –
at least where the disposition required by the test is not absurd
– is to enforce [the statute] according to its terms.” Id.(quoting Alston v. Countrywide Fin. Corp., 585 F.3d 753, 759
(3d Cir. 2009)) (internal quotation marks omitted).
The Enterprises are statutorily exempt from “all
taxation” imposed by the states or their local subdivisions,
with one notable exception – the states may tax the
Enterprises‟ real property. See 12 U.S.C. § 1723a(c)(2)
(Fannie Mae); id. § 1452(e) (Freddie Mac); id. § 4617(j)(2)
(FHFA). The Enterprises‟ charters do not define the words
“all” or “taxation.” “When words are left undefined, we have
turned to „standard reference works such as legal and general
dictionaries in order to ascertain‟ their ordinary meaning.”
Eid v. Thompson, 740 F.3d 118, 123 (3d Cir. 2014) (quoting
18
United States v. Geiser, 527 F.3d 288, 294 (3d Cir. 2008)).
“All” of something is the “whole amount or quantity of” it; it
is “every member or individual component,” “the whole
number or sum” of that thing. Webster’s Third New
International Dictionary, Unabridged 54 (1981). “Taxation”
is the act of imposing a tax, and a tax is “[a] charge
. . . imposed by the government on persons, entities,
transactions or property to yield public revenue” and, in its
broadest sense, “embraces all governmental impositions on
the person, property, privileges, occupations, and enjoyment
of the people, and include[s] duties, imposts, and excises.”
Black’s Law Dictionary 1594, 1598 (9th ed. 2009) (emphasis
added). Under the canon of statutory construction expressio
unius est exclusio alterius (“the express mention of one thing
excludes all others”), the solitary exception subjecting the
Enterprises to real property taxation implies strongly that they
are exempt from all other types of taxes. See In re Federal-
19
Mogul Global, Inc., 300 F.3d 368, 388 (3d Cir. 2002).
The Enterprises‟ exemption from taxation is thus
clearly expansive. Fighting against such a capacious reading,
Appellants urge that “all taxation” means something other
than it says; that it is instead a term of art meaning only
“direct” taxes. There are only three types of direct taxes:
capitations, also known as poll taxes, which are fixed taxes
levied on people, see Black’s, supra, at 1596; taxes on real
property; and taxes on personal property. See Murphy v.
I.R.S., 493 F.3d 170, 181 (D.C. Cir. 2007). The transfer taxes
are not direct taxes but rather are an excise tax, an indirect tax
“imposed on the manufacture, sale, or use of goods.”
Black’s, supra, at 646. They tax the transfer of property, not
the property itself.
In support of their argument, Appellants rely on the
Supreme Court‟s decision in United States v. Wells Fargo
Bank. There, the Court interpreted a provision of the Housing
20
Act of 1937 that gave state and local housing authorities the
power to issue tax-free financing instruments, termed “Project
Notes.” 485 U.S. 351, 353 (1988); see also Hennepin Cnty. v.
Fed’l Nat. Mortg. Ass’n, 933 F. Supp. 2d 1173, 1177 (D.
Minn. 2013) (noting that the Project Notes were property
issued by state and local housing authorities during the
housing shortage of the 1930s), aff’d 742 F.3d 818 (8th Cir.
2014). Congress had exempted the Project Notes “from all
taxation now or hereafter imposed by the United States.”
Wells Fargo, 485 U.S. at 355. Wells Fargo sought a refund
of estate taxes paid on its Project Notes, arguing that the taxes
fell within the ambit of “all taxation” from which the Notes
were exempt. Rejecting Wells Fargo‟s argument, the Court
observed that “[f]or almost 50 years after the Act‟s passage, it
was generally assumed that this exempted the Notes from
federal income tax, but not from federal estate tax.” Id. at
353. The Court understood as a background principle against
21
which the Housing Act was passed that “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.” Id. at 355 (second emphasis in
original). In Appellants‟ view, the Supreme Court‟s exegesis
of the meaning of “all taxation” in Wells Fargo controls our
interpretation here.
The flaw in this argument, as both the Enterprises and
the United States observe, is that Wells Fargo involved an
exemption of specific property from all taxation, whereas this
case involves exemptions of entities. The estate tax that the
Court considered in Wells Fargo was an excise tax on the
transfer of property at death, and “transfer of the notes, as by
bequest or sale, was not property and so could be taxed.”
DeKalb County, 741 F.3d at 800 (emphasis omitted).
Contrary to Appellants‟ argument, the distinction between a
22
property exemption and an entity exemption renders Wells
Fargo inapposite.
Rather, our interpretation is guided by Federal Land
Bank of St. Paul v. Bismarck Lumber Co., 314 U.S. 95(1941). In Bismarck, the Supreme Court considered whether
a provision of the Federal Farm Loan Act that exempted
Federal Land Banks from paying state taxes included a state
sales tax on property. The relevant portion of the Farm Loan
Act stated “[t]hat every Federal land bank . . . shall be exempt
from Federal, State, municipal, and local taxation.” The
Court determined that the “unqualified term „taxation‟ used in
[the Farm Loan Act] clearly encompasses within its scope a
sales tax such as the instant one.” Id. at 99.
The exemption in Bismarck is materially identical to
the Enterprise exemptions in two important ways. First, in
Bismarck, as here, the exemption applied to entities, not to
specific property, unlike the exemption in Wells Fargo.
23
Second, like the transfer taxes at issue here, “a sales tax[] is
an excise or privilege tax different in kind from a tax on
property.” Sullivan v. United States, 395 U.S. 169, 177 n.28
(1969). Both taxes are measured by reference to the value of
the property involved in the transaction, and both are taxes on
the privilege of transferring ownership of the property, not
taxes on the property itself.
To date, three Courts of Appeals have considered and
rejected Appellants‟ contention. In DeKalb County, the
Seventh Circuit observed that the Wells Fargo “Court was
saying that an exemption from property taxes, such as a tax
on project notes, is not an exemption from transfer taxes as
well, because a transfer tax is not a property tax even when
the transfer is of property.” 741 F.3d at 800. “Had the
Supreme Court meant to hold that the term „all taxation‟
means just property taxation – a very strange reading,
equivalent to interpreting „all soup‟ to mean „all lobster
24
bisque‟ – it would have had to overrule [Bismarck]. . . . Wells
Fargo does not even cite Bismarck.” Id. Similarly, in County
of Oakland v. Federal Housing Finance Agency, the Sixth
Circuit reversed the only court in the country to have agreed
with Appellants‟ argument. 716 F.3d 935, 938 n.5 (6th Cir.
2013), rev’g 871 F. Supp. 2d 662 (E.D. Mich. 2012). The
Sixth Circuit held that Bismarck controlled, and that
Appellants‟ “argument would require us to stretch Wells
Fargo beyond its clear language.” Id. at 943.1 The Eighth
Circuit has ruled likewise. See Hennepin Cnty., 742 F.3d at
1
We also note the Sixth Circuit‟s observation that
Appellants‟ argument would lead to absurd results. As noted
supra, there are only three types of direct taxes: capitations,
and taxes on real and personal property. “The transfer taxes
here are clearly not capitations, and the statutes here
separately provide an exclusion for taxes directly on real
property . . .[;] the only direct tax remaining would be a tax
on personal property.” Id. at 943-44. It would be absurd for
Congress to “exempt [the Enterprises] from „all taxation‟ if it
only meant they were exempt from personal property taxes.
This cannot be correct and this conclusion is not supported by
the plain language of the statute.” Id. at 944.
25
822 (“We disagree with Hennepin County‟s argument that . . .
[Wells Fargo] limited the meaning of „all taxation‟ in an
exemption statute to mean only „all direct taxation‟”) (citation
omitted; emphasis in original).2
Appellants‟ argument is fundamentally incompatible
with the statutory text. Accordingly, we will join our sister
circuits, interpret the phrase “all taxation” to mean precisely
what it says, and hold that the Enterprises are statutorily
exempt from paying state and local real estate transfer taxes.
B.
Before turning to Appellants‟ constitutional
arguments, we pause briefly to consider their alternative
2
The Fourth Circuit has also rejected an attempt to
force the Enterprises to pay real estate transfer taxes.
However, the court in Montgomery County, Maryland v.
Federal National Mortgage Association, did not consider the
“all taxation” question. Rather, it considered only whether
the real estate transfer taxes fell into the real property carve-
out, and whether the Enterprises‟ exemptions were
constitutional as applied to the transfer taxes. See generally
740 F.3d 914 (4th Cir. 2014).
26
statutory argument. They contend that even if the transfer
taxes fall within the scope of “all taxation,” the Enterprises
are still not exempt because the transfer taxes fall within the
exception for taxes on real property. We disagree.
As we previously noted, the Enterprises‟ statutory
exemption from all taxation contains a single exception – they
are not exempt from state and local taxes on real property. 12
U.S.C. § 1723a(c)(2) (Fannie Mae); id. § 1452(e) (Freddie
Mac); id. § 4617(j)(2) (FHFA). Appellants posit that the
transfer taxes are effectively taxes on real property because
under Pennsylvania law an owner cannot perfect an interest in
real property until the deed is recorded and the transfer taxes
paid. Appellants‟ Br. at 25.3
We reject this argument as foreclosed by both United
States Supreme Court and Pennsylvania Supreme Court
3
Appellants do not make a similar argument under
New Jersey law.
27
precedent, and as manifestly contrary to the well-recognized
difference between direct and indirect taxes (the very
difference, indeed, that Appellants rely upon so heavily in
their principal statutory argument). In Wells Fargo, the
Supreme Court 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 on the property itself.” 485 U.S. at 355. The
Pennsylvania real estate transfer tax is an excise tax because
it “is not a tax on the real estate itself . . . [but a] tax [on]
certain transactions pertaining to real estate.” Sablosky v.
Messner, 372 Pa. 47, 50 (1952) (discussing a prior version of
the Pennsylvania transfer tax).
Appellants attempt to blur this clear distinction by
arguing that the transfer taxes amount to direct real property
taxes because they are calculated by reference to the value of
the property, and because failure to pay the tax can result in
28
the creation of a lien on the property. We find neither
contention persuasive. With respect to the former, the
Supreme Court rejected a similar argument in Southern
Railway Co. v. Watts, recognizing that “a privilege tax is not
converted to a property tax because it is measured by the
value of the property.” 260 U.S. 519, 530 (1923) (emphasis
added). With respect to the latter, the argument proves too
much. Under Pennsylvania law, an individual‟s failure to pay
the transfer tax results in the creation of a lien in favor of the
affected local government on all of the individual‟s property
– both real and personal. See 72 Pa. Cons. Stat. Ann. § 8110-
D. By Appellants‟ logic, then, the transfer tax is a direct tax
on both real property and personal property. To see the
absurdity of this reading, one need only consider that the
United States may place a lien on a delinquent taxpayer‟s
home for failure to pay income taxes, but that does not
transform the federal income tax into a tax on real property.
29
See 26 U.S.C. § 6321 (“If any person liable to pay any tax
neglects or refuses to pay the same after demand, the amount .
. . shall be a lien in favor of the United States upon all
property and rights to property, whether real or personal,
belonging to such person.”).
The transfer taxes are an excise tax, not a direct tax on
real estate, and therefore are not within the scope of the
exception. Accord Montgomery Cnty., 740 F.3d at 919-21.
C.
We turn now to Appellants‟ constitutional arguments.
They offer two: first, that as applied to state and local real
estate transfer taxes, the Enterprise exemptions exceed
Congress‟s power under the Commerce Clause; and second,
that by requiring state and local governments to record deed
transfers at no cost, Congress has engaged in an
unconstitutional commandeering under the Tenth
Amendment. We find neither argument persuasive. But
30
before proceeding to the merits, we first consider Appellants‟
contention that we should review the constitutionality of the
exemptions under heightened scrutiny.
1.
Ordinarily, we review the constitutionality of social or
economic legislation under a deferential rational basis
standard of review. See Brian B. ex rel. Lois B. v. Commw. of
Pa. Dep’t of Educ., 230 F.3d 582, 586 (3d Cir. 2000).
Appellants, however, argue that we should depart from that
practice and apply some (undefined) manner of heightened
scrutiny to the exemptions because they place a burden on the
ability of the states to collect taxes. We are not persuaded by
Appellants‟ argument.
The Supremacy Clause provides that the laws of the
United States “shall be the supreme Law of the Land . . . any
Thing in the Constitution or Laws of any State to the contrary
notwithstanding.” U.S. Const. art. VI., cl. 2. Where state and
31
federal laws conflict, the state law is “without effect.”
Mutual Pharm. Co., Inc. v. Bartlett, --- U.S. ---, 133 S. Ct.
2466, 2472-73 (2013). Appellants‟ assertion that a state‟s
taxing authority “stands on equal footing with” Congress‟s
power under the Commerce Clause, see Appellants‟ Br. at 30,
was flatly rejected by the Supreme Court nearly 200 years
ago:
It has been contended, that this construction of
the power to regulate commerce, as was
contended in construing the prohibition to lay
duties on imports, would abridge the
acknowledged power of a State to tax its own
citizens, or their property within its territory.
We admit this power to be sacred; but cannot
admit that it may be used so as to obstruct the
free course of a power given to Congress. We
cannot admit, that it may be used so as to
obstruct or defeat the power to regulate
commerce. It has been observed, that the
powers remaining with the States may be so
exercised as to come in conflict with those
vested in Congress. When this happens, that
which is not supreme must yield to that which is
supreme. . . . It results, necessarily, from this
principle, that the taxing power of the States
must have some limits. It cannot reach and
32
restrain the action of the national government
within its proper sphere. . . . It cannot interfere
with any regulation of commerce.
Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 448-49 (1827)
(Marshall, C.J.) (paragraph break omitted; emphasis added);
see also DeKalb County, 741 F.3d at 801 (rejecting the
argument pressed here by Appellants as foreclosed by Brown
and “an unbroken line of decisions since”). More recent
precedent confirms that Congress may constitutionally
supersede state tax laws as a rational part of an interstate
regulatory regime. See, e.g., CSX Transp., Inc. v. Ga. State
Bd. of Equalization, 552 U.S. 9, 20-22 (2007) (recognizing
that a federal statute prohibits states from imposing certain
taxes on railroads); Exxon Corp. v. Hunt, 475 U.S. 355, 376
(1986) (holding that a federal environmental statute
preempted New Jersey‟s ability to impose certain taxes); Ariz.
Pub. Serv. Co. v. Snead, 441 U.S. 141, 149-50 (1979)
(holding that, because “Congress had a rational basis” for
33
finding that a state tax interfered with interstate commerce, it
was within the power of Congress to “select[] a reasonable
method to eliminate that interference”). As Judge Posner
succinctly stated, “[n]o provision of the Constitution insulates
state taxes from federal powers granted by the Constitution,
which include of course the power of Congress „to regulate
Commerce with foreign Nations, and among the several
States‟. . . .” DeKalb County, 741 F.3d at 801 (quoting U.S.
Const. art. I, § 8, cl. 3).
It is true, as Appellants suggest, that the Supreme
Court has respected the authority to tax as a critical
component of state sovereignty. But the Court has
manifested that respect not by placing state taxation power on
an equal constitutional plane with Congress‟s commerce
power (or any other enumerated power), but by requiring that
Congress speak clearly when it intends to exercise its lawful
authority under the Supremacy Clause to preempt traditional
34
state powers. See, e.g., Dep’t of Rev. of Or. v. ACF Indus.,
Inc., 510 U.S. 332, 345 (1994) (“When determining the
breadth of a federal statute that impinges upon or pre-empts
the States‟ traditional powers, we are hesitant to extend the
statute beyond its evident scope. We will interpret a statute to
pre-empt the traditional state powers only if that result is „the
clear and manifest purpose of Congress.‟” (citations
omitted)). Our general reluctance to hold traditional state
powers preempted is an interpretive principle that guides how
we construe statutes, not a heightened constitutional standard
of review. Accordingly, we review Congress‟s action here
under the rational basis standard of review.
2.
Our national Government is one of enumerated
powers, and accordingly “[e]very law enacted by Congress
must be based on one or more of those powers.” United
States v. Comstock, 560 U.S. 126, 133 (2010) (quoting United
35
States v. Morrison, 529 U.S. 598, 607 (2000) (internal
quotation marks omitted)). Congress has the power to
“regulate Commerce with foreign Nations, and among the
several States . . . .” U.S. Const. art. I, § 8, cl. 3. Through the
Necessary and Proper Clause, Congress can exercise its
commerce authority by “enact[ing] laws that are „convenient,
or useful‟ or „conducive‟ to the authority‟s „beneficial
exercise.‟” Comstock, 560 U.S. at 133-34. “„Let the end be
legitimate, let it be within the scope of the constitution, and
all means which are appropriate, which are plainly adapted to
that end, which are not prohibited, but consist with the letter
and spirit of the constitution, are constitutional.‟” Id. at 134(quoting McCulloch v. Maryland, 4 Wheat. 316, 421 (1819)).
Put simply, a statute is “Necessary and Proper” if it
“constitutes a means that is rationally related to the
implementation of a constitutionally enumerated power.” Id.(citing Sabri v. United States, 541 U.S. 600, 605 (2004)).
36
The Commerce Clause authorizes Congress to regulate
“the channels of interstate commerce, persons or things in
interstate commerce, and those activities that substantially
affect interstate commerce.” Nat. Fed’n of Indep. Bus. v.
Sebelius, 132 S. Ct. 2566, 2578 (2012) (quoting Morrison,
529 U.S. at 609) (internal quotation marks omitted). This
case implicates Congress‟s power to regulate those activities
that substantially affect interstate commerce, a power that
“can be expansive.” Id. The Supreme Court has “firmly
establishe[d]” that Congress has the authority under the
Commerce Clause to regulate activities purely local in nature,
so long as they form “part of an economic „class of activities‟
that have a substantial effect on interstate commerce.”
Gonzales v. Raich, 545 U.S. 1, 17 (2005) (emphasis added).
In evaluating whether a statute is valid under the
Commerce Clause, our “task . . . is a modest one.” Id. at 22.
We need only determine whether Congress had a rational
37
basis for determining that the regulated activity, in the
aggregate, substantially affects interstate commerce. Id.(citing United States v. Lopez, 514 U.S. 549 (1995); Hodel,
452 U.S. at 276-80; Perez v. United States, 402 U.S. 146,
155-56 (1971); Katzenbach v. McClung, 379 U.S. 294, 299-
301 (1964); Heart of Atlanta Motel, Inc. v. United States, 379
U.S. 241, 252-53 (1964)). “That the regulation ensnares
some purely intrastate activity is of no moment.” Id.Congress created the Enterprises to establish and
stabilize a nationwide secondary market in home mortgages
and to increase the supply of mortgage lending capital. See
12 U.S.C. § 1716 (Fannie Mae); id. § 1451 note (Freddie
Mac). Fannie and Freddie both were “tasked by Congress
with buying mortgages from banks that had made mortgage
loans, thus pumping money into the banking industry that
could be used to make more such loans.” DeKalb County,
741 F.3d at 797. Congress could rationally have believed that
38
exempting the Enterprises from the burden of state and local
taxation would allow them to more efficiently pursue their
directives. Reducing the transaction costs that the Enterprises
incur in the course of buying and selling mortgages would
free up liquidity to purchase more of them. And the savings
are not inconsequential. The Delaware County Appellants
alleged that for the fiscal year ending in June 2011, the state
of Pennsylvania collected over $279 million in real estate
transfer taxes. Although Appellants have not alleged a dollar
amount that Fannie and Freddie failed to pay, it can hardly be
gainsaid that it is a substantial sum. It strains credulity to
argue that the transfer taxes, aggregated nationally, do not
substantially affect “the home mortgage market[, which] is
nationwide, and indeed worldwide, with home mortgages
being traded in vast quantities across state lines.” Id. at 11.
Appellants cite Lopez and Morrison in an effort to
show that Congress here exceeded the bounds of the
39
Commerce Clause by seeking to regulate purely local activity,
but neither case advances their argument. In Lopez, the Court
struck down a federal statute making it a crime to possess a
firearm in a school zone. 514 U.S. at 551. Recognizing first
that it had “upheld a wide variety of congressional Acts
regulating intrastate economic activity” that substantially
affected interstate commerce, the Court held the statute
unconstitutional because “by its terms [it] has nothing to do
with „commerce‟ or any sort of economic enterprise, however
broadly one might define those terms.” Id. at 561. By the
same token, the Morrison Court struck down a statute
creating a civil damages remedy under the Violence Against
Women Act because “[g]ender-motivated crimes of violence
are not, in any sense of the phrase, economic activity.” 528
U.S. at 613. The lesson to be drawn from Lopez and
Morrison is that whether the activity is economic in nature is
central to our analysis: “Where economic activity
40
substantially affects interstate commerce, legislation
regulating that activity will be sustained.” Id. at 610 (quoting
Lopez, 514 U.S. at 560 (internal quotation marks omitted)).
Appellants attempt to shift the analysis away from the
obviously economic nature of the secondary mortgage market
by arguing that the collection of taxes is not economic
activity but rather “[t]he sovereign right of states.”
Appellants‟ Br. at 34. We find this argument unpersuasive.
The transfer tax exemptions aid the Enterprises in regulating
the secondary mortgage market, which is clearly of an
economic nature. As previously discussed, considerations of
state sovereignty yield under the Supremacy Clause.
Appellants simply have no support for the notion that
congressional preemption of state taxation as a rational part of
an interstate regulatory regime is verboten. Accordingly, we
hold that Congress acted well within the bounds of the
Commerce Clause when it exempted the Enterprises from
41
paying state and local real estate transfer taxes.4
3.
In a single paragraph appended to their Commerce
Clause argument, Appellants contend that by requiring state
and local governments to register deed transfers involving the
Enterprises at no cost, Congress has violated the anti-
commandeering principle of the Tenth Amendment. This
argument is frivolous.
Only two Supreme Court cases have found a federal
statute to unlawfully commandeer state government actors.
4
The parties debated at some length in their briefs
whether the Enterprises are federal instrumentalities for
purposes of tax immunity and whether it was necessary for us
to reach that question. It is, of course, axiomatic that the
States may not tax an organ of the federal government. See
McCulloch v. Maryland, 4 Wheat. 316, 436-37 (1819).
However, because we find that Congress acted
constitutionally in extending statutory tax immunity to the
Enterprises, we need not reach the question of whether they
are also entitled to constitutional immunity as
instrumentalities of the United States. See First Agric. Nat’l
Bank of Berkshire Cnty. v. State Tax Comm’n, 392 U.S. 339,
340-41, 345 (1968).
42
In Printz v. United States, the Supreme Court invalidated a
federal statute requiring state and local law enforcement
officers to perform background checks on prospective
handgun purchasers, holding that the Tenth Amendment
precludes Congress from commanding state executive
officers to administer or enforce a federal regulatory scheme.
521 U.S. 898, 904, 932-33 (1997). In New York v. United
States, 505 U.S. 144, 149-54 (1992), the Court considered a
federal regulatory regime involving the disposal of low-level
radioactive waste by the states. One aspect of the regime
required states to take title to the waste if they had not
arranged for disposal by a specified date. Id. The Court
struck that provision down because it required states either to
enact a regulatory regime of their own, or expend resources in
taking title to the radioactive waste. Id. at 176. Neither case
bears the slightest resemblance to the situation before us.
The Enterprise exemptions do not run afoul of Printz
43
or New York for the simple reason that they do not “issue
directives requiring the States to address particular problems,
nor command the States‟ officers . . . to administer or enforce
a federal regulatory program.” Nat’l Collegiate Athletic
Ass’n v. Governor of New Jersey, 730 F.3d 208, 229 (3d Cir.
2013) (quoting Printz, 521 U.S. at 935) (internal quotation
marks omitted). The anti-commandeering principle does not
“suspend[] the operation of the Supremacy Clause on
otherwise valid laws.” Id. at 230. Rather than impose an
affirmative obligation on state or local officials, the
exemptions simply preclude them from imposing the transfer
taxes on the Enterprises. 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.
IV.
We conclude that the statutory language “all taxation”
44
includes within its scope state and local real estate transfer
taxes and that the carve-out for real property taxation does not
apply to the transfer taxes. We further hold that Congress
was within its constitutional authority to grant the Enterprises
such immunity. Our decision is in accord with each Court of
Appeals to have addressed these issues. The orders of the
District Courts dismissing Appellants‟ complaints are
affirmed.
45