State v. Wells Fargo National Bank, N.A., 060216 FED2, 15-1152
|Opinion Judge:||KEARSE, CIRCUIT JUDGE.|
|Party Name:||STATE OF NEW YORK and CITY OF NEW YORK ex rel. Elizabeth A. Jacobson, Plaintiffs-Appellants, v. WELLS FARGO NATIONAL BANK, N.A. and WELLS FARGO ASSET SECURITIES CORPORATION, Defendants-Appellees.[*]|
|Attorney:||GEOFFREY G. BESTOR, Washington, D.C. (The Bestor Law Office, Washington, D.C.; Jonathan K. Tycko, Lorenzo B. Cellini, Tycko & Zavareei, Washington D.C.; Peter J. Gallagher, Julie Martin, Johnson Gallagher Magliery, New York, New York, on the brief), for Plaintiff-Appellant Jacobson. DANIEL B. RAP...|
|Judge Panel:||Before: KEARSE, RAGGI, and WESLEY, Circuit Judges.|
|Case Date:||June 02, 2016|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued: November 20, 2015
Appeal from a judgment of the United States District Court for the Southern District of New York, Vernon S. Broderick, Judge, dismissing pursuant to Fed.R.Civ.P. 12(b)(6) a qui tam action brought on behalf of the State and City of New York under the New York False Claims Act ("NYFCA"). The complaint, originally filed in state court, alleged that defendants filed fraudulent federal tax forms to claim Real Estate Mortgage Investment Conduit ("REMIC") tax exemptions for trusts used to issue mortgage-backed securities, and that, because New York law exempts from State and City taxation an entity that is treated as a REMIC for federal income tax purposes, defendants thereby fraudulently avoided paying State and City taxes. Plaintiff Jacobson challenges the ruling that the complaint failed to state a claim under the NYFCA, arguing that the district court misinterpreted federal tax law; she also challenges the denial of her motion to remand the action to state court, arguing that the district court erred in ruling that the complaint, although pleading only state-law claims, raised federal-law issues that justified federal-question jurisdiction, see Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308 (2005).
Plaintiff Elizabeth A. Jacobson appeals from a judgment of the United States District Court for the Southern District of New York, Vernon S. Broderick, Judge, dismissing pursuant to Fed.R.Civ.P. 12(b)(6) her qui tam complaint asserting two claims under the New York False Claims Act (or "NYFCA"), N.Y. State Fin. Law § 187 et seq. (McKinney Supp. 2012), on behalf of the State of New York ("State") and the City of New York ("City") (collectively "New York") against defendants Wells Fargo National Bank, N.A., and Wells Fargo Asset Securities Corporation (collectively "Wells Fargo") for fraudulent avoidance of New York tax obligations. The action was originally filed in State Supreme Court and was removed by defendants to federal court. The complaint alleged that Wells Fargo, having created trusts to pool residential mortgages for the purpose of issuing mortgage-backed securities, filed false Real Estate Mortgage Investment Conduit ("REMIC") income tax returns with the Internal Revenue Service ("IRS") to claim federal income tax exemptions for those trusts, see 26 U.S.C. §§ 860A-860G (2012); it alleged that because New York law exempts a trust from State and City taxation if it is treated as a REMIC for federal income tax purposes, the false federal filings meant that defendants also fraudulently avoided paying New York taxes. The district court denied a motion by Jacobson to remand the action to state court for lack of subject matter jurisdiction, ruling that although the complaint asserted claims only under the New York False Claims Act, it was based on federal-law issues that justified federal-question jurisdiction, see, e.g., Gunn v. Minton, 133 S.Ct. 1059 (2013); Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308 (2005). The court granted defendants' motion to dismiss the complaint for failure to state a claim, ruling that the alleged fraudulent conduct was insufficient, in light of the relevant provisions of the Internal Revenue Code (or "Code") and the regulations thereunder, to deprive the trusts of REMIC status for federal income tax purposes. The complaint thus failed to allege plausibly that the trusts were not entitled to the New York tax exemptions and, accordingly, it failed to state a claim on which relief could be granted under the NYFCA. Jacobson challenges both rulings, contending that the district court erred in evaluating the importance of the federal tax issue and in interpreting the federal tax laws. For the reasons that follow, we agree with the rulings of the district court and affirm the judgment.
The present action concerns Wells Fargo's securitization of residential mortgages by pooling them and placing them in trusts, ownership interests in which can be sold to investors. (See Complaint ¶ 1.) See generally BlackRock Financial Management Inc. v. Segregated Account of Ambac Assurance Corp., 673 F.3d 169, 173 (2d Cir. 2012) (In the securitization process, "a mortgage lender sells pools of mortgages into trusts created to receive the stream of interest and principal payments from the mortgage borrowers. The right to receive trust income is parceled into certificates and sold to investors, called certificateholders."). If such a trust is a REMIC and files an IRS Form 1066 each year, its income is taxable only to the certificateholders; the REMIC itself is exempt from federal income taxation (see Complaint ¶ 71). See 26 U.S.C. §§ 860A(a), (b).
A REMIC is exempt from federal income taxation only "as long as the mortgages deposited in the REMIC are 'qualified mortgages' under federal tax law and regulation" (Complaint ¶ 1); see 26 U.S.C. § 860D(a)(4). A "'qualified mortgage'" is defined in the Internal Revenue Code, in pertinent part, as "any obligation (including any participation or certificate of beneficial ownership therein) which is principally secured by an interest in real property." Id. § 860G(a)(3).
Under New York law, "[a]n entity that is treated for federal income tax purposes as a real estate mortgage investment conduit, hereinafter referred to as a REMIC, as such term is defined in section 860D of the internal revenue code, " is also "exempt from all [New York] taxation." N.Y. Tax Law § 8 (McKinney 2005); N.Y.C. Admin. Code § 11-122 (2012).
A. The Present Qui Tam Complaint
The complaint alleged that in 2005-2007, "Wells Fargo securitized over $12 billion of subprime and other non-conforming mortgages into REMICs" and that it sold substantially more than $26 billion of other such mortgages to other institutions for securitization into REMICs. (Complaint ¶ 2; see also id. ¶¶ 62-65). Each Wells Fargo trust annually filed a Form 1066 with the IRS in order to claim REMIC tax exemptions. (See id. ¶ 82.)
However, the complaint alleged, "[m]any, if not most, of the mortgages in the REMICs contained false information fabricated by Wells Fargo" (id. ¶ 3). The allegedly fraudulent practices included "fabricat[ing borrowers'] income and employment information"; inflating borrowers' stated assets to levels sufficient to correspond to the amounts of principal, interest, taxes, and insurance that would be due on their loans, without determining the borrowers' actual assets; and the "[f]orging of W-2s and credit reports." (Id.; see, e.g., id. ¶¶ 23-45.) The complaint alleged that because of these fraudulent practices the Wells Fargo mortgages were not "qualified mortgages" for REMIC purposes because they were "defective obligation[s]" within the meaning of federal tax law (id. ¶¶ 75-77).
Federal regulations define "defective obligation" to include a "mortgage [that] is in default" or as to which "a default . . . is reasonably foreseeable"; or a "mortgage [that] was not in fact principally secured by an interest in real property"; or a "mortgage [that] does not conform to a customary representation or warranty given by the sponsor or prior owner of the mortgage regarding the characteristics of the mortgage, " 26 C.F.R. §§ 1.860G-2(f)(1)(i), (iii), and (iv) (2015). (See Complaint ¶ 75.) The complaint alleged that given the Wells Fargo falsifications and inflations as to the income and assets of borrowers who "could not afford" the mortgages, "[d]efault on mortgages fraudulently originated as described above was eminently foreseeable." (Id. ¶ 76.) It also alleged that since it is a federal crime to provide false information on a loan application to an FDIC-insured bank, Wells Fargo's conduct did not conform to the required "customary representation[s]" that, inter alia, the loans in the REMIC "complied in all material respects with applicable federal, state, and local laws." (Id. ¶ 77; see also id. ¶¶ 78-79.) The complaint alleged that "[a]s a result, the trusts created to securitize Wells Fargo's subprime mortgages did not and do not qualify as REMICs under federal law. Since the trusts' tax exemption under New York [State] and New York City law depends on their qualification as REMICs under federal law, the trusts are liable to [sic] New York [State] and New York City tax" (id. ¶ 80) on the net interest they received on the mortgages (see id. ¶ 84).
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