Monday, August 27, 2018

Fannie/Freddie shareholders running out of circuit courts

By R. Jason Howard, J.D.

The United States Court of Appeals for the Eighth Circuit has joined with four sister circuits—the Fifth, Sixth, Seventh, and D.C. Circuits—in denying shareholder claims against Fannie Mae and Freddie Mac over the government-sponsored enterprises’ net worth sweep (Saxton v. Federal Housing Finance Agency, August 23, 2018, Kelly, J.).

Net worth sweep. Three shareholders of Fannie Mae and Freddie Mac claimed that the Federal Housing Finance Agency (FHFA), which Congress created to serve as conservator of the entities, had exceed its powers under the Housing and Economic Recovery Act (HERA) and acted capriciously by agreeing to a “net worth sweep,” whereby Fannie and Freddie pay to the Treasury their entire net worth minus a small buffer. Importantly, HERA includes a provision limiting judicial review: “Except as provided in this section or at the request of the Director, no court may take any action to restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or a receiver.”

Claim. The shareholders sought an injunction to set aside the net worth sweep and declined to pursue a claim seeking money damages. They asserted that “HERA’s limitation on judicial review does not apply when FHFA exceeds its statutory powers under the Act” and that the net worth sweep “exceeds, and is antithetical to, FHFA’s statutory powers.”

Judicial review. The shareholders argued that the court must construe an anti-injunction provision narrowly and cited the presumption of reviewability “which generally requires that only upon a showing of ‘clear and convincing evidence’ of a contrary legislative intent should the courts restrict access to judicial review.” The Eighth Circuit agreed with its sister circuits that the judicial review provision in HERA “bars only equitable relief, and only does so if the challenged action is within the powers given FHFA by HERA.”

Conservatorship powers. Next, the Eighth Circuit considered whether FHFA exceeded its conservatorship powers. Here, the panel examined two portions of HERA. The first was subsection (B), which grants FHFA general powers that apply when it is acting as either a conservator or a receiver. Those powers “are phrased permissively: [FHFA] may, as conservator or receiver, do such things as take over the assets and operate [the companies], perform all functions of [the companies], and preserve and conserve the assets and property of the [companies].”

The second subsection the Court considered was (D). That subsection sets out powers specific to FHFA’s role as a conservator, and those powers are also phrased permissively: “[FHFA] may, as conservator, take such actions as may be (i) necessary to put the [companies] in a sound and solvent condition; and (ii) appropriate to carry on the business and preserve and conserve the assets and property of the regulated entity.”

Shareholder contentions. The shareholders argued that although the passages use the permissive “may,” they are actually mandatory. They can be rephrased to say, for instance, that “FHFA may not take actions that would not put the companies in a sound and solvent condition.” The court did not accept this interpretation, citing the D.C. Circuit’s explanation that the most natural reading of HERA is that it permits FHFA to preserve and conserve Fannie’s and Freddie’s assets and to return the companies to private operation. However, it does not compel it “in any judicially enforceable sense,” the panel reasoned.

Next, the shareholders argued that the net worth sweep does more harm to Fannie and Freddie than good and it is thus “antithetical to FHFA’s role as conservator.” The court, however, noted that HERA does not subscribe to the traditional notions of conservatorship in that “HERA authorizes FHFA to act ‘in the best interests’ of either Fannie and Freddie or itself,” and, as such, FHFA is not limited by HERA to the discretion traditionally ascribed to conservators.

The shareholders’ final argument for a narrow construction of FHFA’s powers was that it would avoid nondelegation problems. To this the court said that HERA’s plain language speaks clearly enough.

In response to this argument, the court noted that, according to the complaint, FHFA is stripping Fannie and Freddie of its capital in an effort to make money for Treasury. However, the panel agreed with the district court that FHFA has not exceeded its powers in assenting to the net worth sweep. The panel found that HERA’s anti-injunction provision applied, ending the case against FHFA.

Injunction. The shareholders had also sought an injunction barring Treasury from participating in the net worth sweep, arguing that the anti-injunction provision does not apply because the injunction they sought would have restrained Treasury and not FHFA. The panel dismissed this quickly, noting that the argument ignored the plain language of the anti-injunction provision, which bars injunctions that “restrain or affect the exercise of powers or functions of [FHFA] as a conservator or a receiver.”

The panel affirmed the dismissal of the shareholders’ suit.

Concurrence. Judge David R. Stras concurred, acknowledging that the shareholders had made a compelling argument “that the FHFA, created to stem the tide of a massive financial crisis, has grown into a monster,” but, he continued, “judges are not superheroes; we cannot run to the rescue every time danger looms. Our job is to follow the law wherever it leads us. And here, the law leads to a single conclusion: the FHFA did not exceed its statutory powers by agreeing to the Net Worth Sweep, however troubling the scope of the Agency’s powers and its willingness to seize them may be.”

The case is No. 17-1727.