Banking and Finance Law Daily Fannie Mae not liable for unauthorized acts of its agents
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Thursday, June 27, 2019

Fannie Mae not liable for unauthorized acts of its agents

By Nicole D. Prysby, J.D.

Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine.

The federal First Circuit Court of Appeals held, in an issue of first impression, that Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine, and therefore not liable for the unauthorized act of its agents. A consumer sued Fannie Mae, alleging that it was vicariously liable for deceit and negligent misrepresentation committed by employees of his mortgage servicer, which caused him to lose his home in a foreclosure. But, the court concluded, because Fannie Mae serves an important government objective, it is a federal instrumentality for purposes of the Merrill doctrine. Therefore, the consumer’s claims are barred (Faiella v. Federal National Mortgage Association, June 26, 2019, Selya, B).

Consumer’s allegations against Fannie Mae. The consumer’s home mortgage was assigned to Fannie Mae, which arranged for it to be serviced by Ditech Financial LLC. After he missed a payment in the summer of 2015, the consumer received a statement with arrearages and a notation to call his assigned representative to bring the account current. He contacted the Ditech representative and sent Ditech a check for the requested amount. Two days later he received a foreclosure notice. He contacted Ditech and was first told that his check was for the wrong amount (Ditech then returned the check). The consumer was subsequently told that the problem was that it was a personal check, not a cashier’s check. He sent a cashier’s check, but the foreclosure sale proceeded, and Fannie Mae acquired the mortgaged property at that sale on Oct. 16, 2015. The consumer again contacted Ditech and was told that Ditech did not know the amount required to wipe out the foreclosure and reinstate the loan. The consumer sued Fannie Mae, alleging that Fannie Mae was vicariously liable for deceit and negligent misrepresentation committed by Ditech employees.

Liability for actions of agent. Fannie Mae argued that it cannot be held liable for Ditech’s actions, per the Merrill doctrine (i.e., that the federal government cannot be bound by the unauthorized acts of its agents). No court has yet decided whether Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine, and the First Circuit concluded that it is. The court rejected the consumer’s argument that because Fannie Mae is not a federal instrumentality for the purposes of sovereign immunity or the Federal Tort Claims Act, that status is precluded in the Merrill context. The fact that Fannie Mae is deemed not to be a federal instrumentality for a particular purpose does not prevent it from being deemed to be a federal instrumentality for some other purpose. The court also rejected the consumer’s argument that as a shareholder-owned corporation, Fannie Mae should not receive the protections of the Merrill doctrine. The question of instrumentality status is not determined either by Fannie Mae’s corporate form or by whether Fannie Mae serves a "proprietary" (as opposed to a "sovereign") function.

The court found that the correct question is whether Congress created Fannie Mae to serve an important governmental objective. It noted that Freddie Mac has been found to be a federal instrumentality for purposes of the Merrill doctrine. Both Fannie Mae and Freddie Mac are shareholder-owned and operate under a congressional charter. Both serve an important governmental objective: to maintain the secondary mortgage market and assist in meeting low- and moderate-income housing goals. As with Freddie Mac, allowing Fannie Mae to be held liable for the unauthorized acts of its agents, particularly those who are employees of a private entity, would frustrate Congress’s intent as expressed in the prescribed nature of Fannie Mae’s authority.

The court also rejected the consumer’s argument that language in Fannie Mae’s governing statute allowing it "to sue and be sued," 17 U.S.C. § 1723a(a), precludes application of the Merrill doctrine. The question is not whether a federal instrumentality can sue and be sued as a general matter but, rather, whether the federal instrumentality can be sued for the unauthorized acts of its agents. The court also held that application of the Merrill doctrine is not limited to contract claims; thus, the consumer’s tort claims are precluded. The court rejected an argument that Fannie Mae should be held liable because Ditech acted with apparent authority; the federal government can be held vicariously liable only when it has granted actual authority to its allegedly culpable agents.

The case is No. 18-1063.

Attorneys: William C. Sheridan (Reed Smith LLP) for Ralph Faiella. Richard E. Briansky (Eckert Seamans Cherin & Mellott) for Green Tree Servicing, LLC, a/k/a Ditech Financial, LLC and Federal National Mortgage Association, a/k/a Fannie Mae.

Companies: Federal National Mortgage Association, also known as Fannie Mae; Freddie Mac; Green Tree Servicing, LLC, also known as Ditech Financial, LLC

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