824 F.3d 308
2d Cir.2016Background
- Plaintiff Elizabeth Jacobson filed a qui tam suit under the New York False Claims Act (NYFCA) on behalf of New York State and City, alleging Wells Fargo caused trusts holding securitized residential mortgages to claim REMIC federal tax exemptions by filing false IRS Form 1066s.
- Complaint alleged widespread mortgage-origination fraud (fabricated income/W-2s, inflated assets) that made defaults reasonably foreseeable and breached customary representations, rendering the mortgages "defective obligations" under Treasury regulations.
- New York tax law exempts entities "treated for federal income tax purposes" as REMICs; Jacobson alleged the trusts were not qualified REMICs under federal law and thus New York taxes were unlawfully avoided.
- Wells Fargo removed the action to federal court; Jacobson moved to remand. The district court denied remand, finding the claim necessarily raised substantial federal tax issues under Grable/Gunn.
- The district court then dismissed under Rule 12(b)(6), holding that the alleged origination fraud did not, under the Internal Revenue Code and 26 C.F.R. § 1.860G-2, deprive the mortgages (or the trusts) of REMIC/qualified-mortgage status. Jacobson appealed.
- The Second Circuit affirmed, agreeing federal jurisdiction was proper and that the complaint failed plausibly to allege the trusts lacked REMIC status because the alleged defects did not negate the "principally secured by an interest in real property" requirement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether federal courts have jurisdiction over state-law NYFCA claims that necessarily raise federal tax questions | Jacobson: federal tax issues are not sufficiently "substantial"; remand to state court appropriate | Wells Fargo: claim "necessarily" raises and "actually disputes" federal tax law (REMIC status), so federal-question jurisdiction under Grable/Gunn exists | Court: Federal jurisdiction proper — the federal REMIC question is necessarily raised, actually disputed, substantial to the federal system, and federal forum does not disrupt federal-state balance |
| Whether alleged mortgage-origination fraud deprives loans of "qualified mortgage" status under 26 U.S.C. § 860G(a)(3) and related regulations | Jacobson: fraud (foreseeable defaults, false representations) makes mortgages "defective obligations" that negate qualified-mortgage/REMIC status | Wells Fargo: alleged defects fall into regulatory categories that do not necessarily affect qualified-mortgage status; only lack of being principally secured by real property does so | Court: Dismissed — complaint fails to plausibly allege loss of REMIC status because allegations do not show mortgages were not principally secured by real property; regulatory "defective obligation" categories include defects that do not affect qualified status |
| Whether New York tax exemption requires an entity to "be" a REMIC or only to be "treated" as one for federal tax purposes | Jacobson: reads statute to require entity actually "be" a REMIC as defined in § 860D | Wells Fargo: New York law exempts entities "treated for federal income tax purposes" as REMICs — focus is federal treatment, not independent state determination | Court: Not dispositive here; even under plaintiff's reading, federal-law REMIC status (which plaintiff challenged) was the governing inquiry and plaintiff failed to allege loss of that status |
| Whether plaintiff pleaded false statement/record under NYFCA tied to federal tax exemption | Jacobson: Form 1066 filings were false because trusts were not REMICs; thus NYFCA claim stated | Wells Fargo: Form 1066 filings were truthful because trusts met federal REMIC requirements | Court: Plaintiff failed to plead falsity plausibly because alleged defects do not show trusts were ineligible for REMIC treatment; NYFCA claim dismissed |
Key Cases Cited
- Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., 545 U.S. 308 (2005) (framework for federal-question jurisdiction over state-law claims that necessarily raise substantial federal issues)
- Gunn v. Minton, 568 U.S. 251 (2013) (articulates four-factor test for Grable-type federal jurisdiction: necessarily raised, actually disputed, substantial, and preserves federal-state balance)
- Empire HealthChoice Assurance, Inc. v. McVeigh, 547 U.S. 677 (2006) (limits on exercising federal jurisdiction over state-law claims implicating federal law)
- Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1 (1983) (federal jurisdiction restraint where federal interests do not create original jurisdiction over state claims)
- Blockbuster, Inc. v. Galeno, 472 F.3d 53 (2d Cir. 2006) (standard of review for subject-matter jurisdiction determinations)
- NASDAQ OMX Group, Inc. v. UBS Sec., LLC, 770 F.3d 1010 (2d Cir. 2014) (examples of when state-law claims implicate federal securities law and justify federal jurisdiction)