Jacobson, who originally filed her suit in 2012, claims that Wells Fargo knowingly packaged and sold toxic mortgage-backed securities to investors and that those securities did not qualify for a tax exemption under law. Wells Fargo claims the securities qualify as real estate mortgage investment conduits, which made them eligible for both city and state tax exemptions in New York. The law states that nearly all mortgages in a securities bundle must be qualified mortgages—defined by a lower court as being secured by real property.
The lawsuit, filed by Jacobson on behalf of both the city and the state of New York, claims that Wells Fargo engaged in the scheme to gain the both city and state tax exemptions by falsely qualifying the mortgage-backed securities as REMICs. Jacobson claims the tax exemptions saved the bank more than $1 billion.
Jacobson’s attorney, Geoffrey Bestor, told the three-judge panel in the Second Circuit Court that the Wells Fargo loans in the securities bundle fit the IRS’s definition of “defective obligations.” Under that definition, a) the borrower reasonably expected to default on the loan, b) the borrower committed fraud with the loan, c) the mortgage isn’t secured by real property, or d) the loan doesn’t conform to RMBS investors’ usual representations and warranties. Based on that definition, Bestor told the judges that a “defective obligation” cannot be defined as a qualified mortgage.
Wells Fargo attorney Daniel Rapport contended that the law requires only an interest in real probably and does not require the REMICs to be perfect.
Jacobson also made an attempt to have her case remanded to state court, making an appeal to the Second Circuit Court to reverse the district court’s decision that denied her bid to remand. Jacobson contended that there is no federal cause of action in her case; although New York uses a federal standard to determine if some companies qualify for state tax exemptions, Jacobson claimed in her appeal that this is irrelevant. Wells Fargo’s attorney, Rapport, countered that the case is an issue of federal law and that the Supreme Court has said the U.S. Supreme Court has said the federal courts should decide a certain category of cases.
The panel of judges reserved a decision on Jacobson's appeal.