Second Circuit Decides Issue of First Impression Concerning REMIC Tax Exempt Status
Addressing an issue of first impression with potentially far reaching consequences for the trillion dollar mortgage-backed securities market, the Second Circuit has held that origination and underwriting defects of the type allegedly widespread over the last decade do not destroy the tax exempt status of a real estate mortgage investment conduit (REMIC).
In the first ever suit of its kind, qui tam plaintiff Elizabeth Jacobson challenged the tax exempt status of various REMICs organized by Friedman Kaplan client Wells Fargo due to alleged origination and underwriting deficiencies, and sought more than $1 billion in back taxes on behalf of the State and City of New York. (Unlike federal law and the law in most other states, New York law permits a qui tam plaintiff to sue for back taxes.)
A unanimous panel of the Second Circuit (Judges Kearse, Raggi and Wesley) affirmed the decision of the District Court (Judge Broderick) dismissing the action, holding that the federal statutes and regulations governing REMIC eligibility made clear that the only defect that could affect that eligibility of “qualified mortgages” (and the tax exempt status of the REMIC holding them) was whether the mortgages were principally secured by an interest in real property. Since all the mortgages in the allegedly affected REMICs remained secured by real property, the REMICs retained their tax exempt status.
The Second Circuit also affirmed the District Court’s decision to retain jurisdiction even though the action, which had originally been filed in New York State court, only asserted claims under State law. Finding that the lawsuit presented a substantial, disputed and necessary issue arising under the complex federal laws and regulations governing the trillion-dollar market for mortgage-backed securities, the Second Circuit concluded that resort to the “experience, solicitude, and hope of uniformity” offered by the federal courts on federal law issues was justified.
Please find the decision at the link below.