Mortgage Banking and Consumer
Products Alert
February 19, 2010
Authors:
Mortgage Tax under Fire in New York
Eli R. Mattioli
eli.mattioli@klgates.com
+1.212.536.4019
Sarah P. Kenney
sarah.kenney@klgates.com
+1.212.536.4880
K&L Gates includes lawyers practicing
out of 35 offices located in North
America, Europe, Asia and the Middle
East, and represents numerous GLOBAL
500, FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies,
entrepreneurs, capital market
participants and public sector entities.
For more information, visit
www.klgates.com.
For many years, the New York State Department of Taxation and Finance has levied
recording taxes on mortgages granted to secure loans made by federal credit unions
(“FCUs”) to their members. New York has done so despite wide recognition that
FCUs, as federal instrumentalities, are immune from state taxation under both the
Supremacy Clause of the United States Constitution and the Federal Credit Union
Act of 1934, as amended (the “FCU Act”). However, until recently, this New York
tax has gone unchallenged in the courts. This alert discusses the tax, FCUs’
exemption from taxation, and pending litigation which challenges the
constitutionality and legality of the tax as applied to FCUs.
The New York Mortgage Tax
Article 11 of the New York Tax Law provides for the imposition of tax on each
mortgage of real property located in New York based on the amount of the debt or
obligation secured. The statute provides in part:
A tax of fifty cents for each one hundred dollars and each remaining major
fraction thereof of principal debt or obligation which is, or under any
contingency may be secured at the date of the execution thereof or at any
time thereafter by a mortgage on real property situated within the state
recorded on or after the first day of July, nineteen hundred and six, is hereby
imposed on each such mortgage, and shall be collected and paid as provided
in this article.
The statute is silent as to which party to the mortgage shall pay the tax (except for a
so-called “special additional tax”). The tax must be paid at the time a mortgage is
presented to the county clerk for recording, and the statute effectively prohibits the
use of mortgages not so recorded. Moreover, under New York’s general recording
statute, unrecorded mortgages are void and unenforceable as against subsequent
good-faith purchasers for value.
FCUs’ Exemption from Taxation
FCUs are member-owned, not-for-profit cooperative associations subject to
regulation by the National Credit Union Administration, an independent federal
agency. The FCU Act authorized the creation of FCUs “to establish a further market
for securities of the United States and to make more available to people of small
means credit for provident purposes through a national system of cooperative credit,
thereby helping to stabilize the credit structure of the United States.” Federal Credit
Union Act, 73 Pub. L. No. 467, 48 Stat. 1216 (1934). In keeping with this purpose,
FCUs are empowered to make first and second mortgage loans to their members.
Mortgage Banking and Consumer Products Alert
Three years after passing the FCU Act, Congress
amended the Act to exempt FCUs and their property
from all federal taxation as well as most state,
territorial and local taxation. Congress deemed this
tax exemption necessary because: “[e]xperience with
Federal credit unions since the passage of the
original act indicates that the taxation of these
organizations in a manner similar to the taxation of
domestic banks places a disproportionate and
excessive burden on the credit unions.” H.R. Rep.
75-1579, at 4 (1937) (emphasis added). This
exemption provides in part:
The Federal credit unions organized
hereunder, their property, their franchises,
capital, reserves, surpluses, and other funds,
and their income shall be exempt from all
taxation now or hereafter imposed by the
United States or by any State, Territorial or
local taxing authority; except that any real
property and any tangible personal property
of such Federal credit unions shall be
subject to Federal, State, Territorial, and
local taxation to the same extent as other
similar property is taxed. (emphasis added)
In 1998, Congress enacted legislation that broadened
the membership criteria for FCUs. This legislation
incorporated Congress’ findings that FCUs
“continue to serve [their] public purpose” – i.e.,
“meeting the credit and savings need of consumers,
especially persons of modest means” – and are taxexempt because of that purpose. The findings state
in relevant part:
Credit unions . . . are exempt from Federal
and most State taxes because they are
member-owned, democratically operated,
not-for-profit organizations generally
managed by volunteer boards of directors
and because they have the specified mission
of meeting the credit and savings needs of
consumers, especially persons of modest
means. (emphasis added). Credit Union
Membership Access Act, Pub. L. No. 105219, 112 Stat. 913, § 2 (1998).
PLLC, filed an action in the New York State
Supreme Court which challenges New York’s
mortgage tax as applied to mortgages granted to
FCUs. HVFCU’s lawsuit is believed to be the first
of its kind and raises a question of first impression
in the New York courts. The action contends that
the New York mortgage tax is wholly inapplicable
and unconstitutional as applied to FCUs on dual
grounds – first, that FCUs’ status as federal
instrumentalities renders them immune from state
and local taxation under the Supremacy Clause of
the United States Constitution; second, that
Congress amended the FCU Act specifically to
exempt FCUs and their property from state and
local taxation as well as federal taxation. On this
basis, HVFCU’s lawsuit seeks declaratory relief to
prevent New York’s future taxation of mortgages
given to FCUs.
The Defendants – the New York State Department
of Taxation and Finance, Commissioner Robert L.
Megna, and the State of New York – have filed a
motion to dismiss the action. The motion challenges
HVFCU’s complaint on narrow procedural grounds,
asserting that HVFCU had previously applied to the
Department of Taxation and Finance for a refund of
mortgage tax, but had not exhausted its
administrative remedies before bringing a court
action seeking to prevent future imposition of the
tax on mortgages securing FCU loans. HVFCU has
responded that such arguments fail where, as here, a
complaint challenges the validity of a statute on
constitutional grounds.
As to the merits, the Defendants assert that it is
irrelevant whether FCUs and their property are
immune from state taxation because the tax at issue
applies only to the “privilege of recording”
mortgages, and is usually paid by FCU members as
borrowers, rather than by the FCUs themselves.
Based on longstanding U.S. Supreme Court
precedent, however, HVFCU counters that neither
the State’s characterization of the tax nor its legal
incidence (i.e., whether it is nominally paid by
mortgagor or mortgagee) changes the fact that the
State is unlawfully levying a property tax on FCU
mortgages.
The Legal Action Challenging the Tax
On May 15, 2009, Hudson Valley Federal Credit
Union (“HVFCU”), represented by K&L Gates LLP
and HVFCU’s general counsel, Quartararo & Lois
The broad implications of this case – which extend
beyond New York and potentially impact FCUs in
all other states with similar taxes – are evident from
February 19, 2010
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Mortgage Banking and Consumer Products Alert
the fact that the United States Department of Justice
and several other high-profile parties have filed
amicus curiae briefs in support of HVFCU’s
position. The Department of Justice, whose mission
is to defend the interests of the United States and to
ensure fair and impartial administration of justice,
contends in its brief that HVFCU and other FCUs
are federal instrumentalities which are immune from
State taxation. Similarly, the National Association of
Federal Credit Unions (“NAFCU”), a nonprofit
collective of federal credit unions throughout the
United States, filed an amicus brief that emphasizes
that New York’s practice of taxing FCUs is
discriminatory and irrational. The Credit Union
Association of New York (“CUANY”) and the
Credit Union National Association (“CUNA”),
which represent hundreds of credit unions in New
York and thousands more FCUs nationwide, filed a
joint amicus brief aggressively challenging New
York’s characterization and interpretation of the
relevant law. This impressive collection of amici –
the Department of Justice, NAFCU, CUANY and
CUNA – all stand with HVFCU in calling for an end
to the New York State’s taxation of mortgages
granted to FCUs. In sharp contrast, no amici have
come forward to support New York’s position.
successful outcome in this case for HVFCU could
significantly impact the economic interests and
constitutional rights of FCUs throughout New York,
consistent with the Congressionally-stated purpose
for which FCUs were created, i.e., to “meet[ ] the
credit and savings needs of consumers, especially
persons of modest means.” Credit Union
Membership Access Act, Pub. L. No. 105-219, 112
Stat. 913, § 2 (1998). Such a result would be
especially beneficial in light of the nation’s current
economic crisis and the credit crunch afflicting
many New Yorkers, including and especially firsttime home buyers and individuals looking to
refinance their homes. A successful challenge to the
constitutionally dubious New York tax could also
potentially benefit FCUs in other states that
currently levy similar recording taxes on mortgages
securing FCU loans.
For more information about this alert, please contact
Eli Mattioli (eli.mattioli@klgates.com,
212.536.4019) or Sarah Kenney
(sarah.kenney@klgates.com, 212.536.4880). We
acknowledge with thanks the assistance of our cocounsel, Dale Lois, Esq. of Quartararo & Lois,
PLLC, who can be reached at dlois@qualaw.com,
845.231.1535.
In early February 2010, the Defendants’ motion to
dismiss was submitted to the Court for a ruling. A
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February 19, 2010
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