The U.S. Court of Appeals for the Fifth Circuit has reaffirmed a 2018 decision that the Federal Housing Finance Agency’s structure violates constitutional separation of powers requirements. However, the court made no effort to imply anything about the Consumer Financial Protection Bureau’s organization.
Sixteen judges of the U.S. Court of Appeals for the Fifth Circuit have generated eight separate opinions in an effort to resolve challenges raised by Fannie Mae and Freddie Mac shareholders against the Federal Housing Finance Agency—Treasury Department financial arrangement under which Treasury has provided support to the GSEs. In the end, two distinct majority opinions addressing the issues separately concluded that:
- the shareholders should be able to raise claims that, in reaching the agreement, the FHFA exceeded its statutory authority;
- the FHFA’s organization violated the Constitution’s separation-of-powers principle; and
- the only remedy available for the constitutional violation was to convert the FHFA from an independent agency to an executive branch agency whose director can be removed by the president at will.
However, various dissenting opinions disagreed with the separate majority opinions on one or more points (Collins v. Mnuchin, Sept. 6, 2019, Willett, D.).
Genesis of dispute. As described by the majority opinion, which was joined in by nine judges, the dispute began when the FHFA became the GSEs’ conservator under the Housing and Economic Recovery Act. Seeking a way to ensure the GSEs could survive, the FHFA and Treasury entered into an agreement under which Treasury provided needed capital in exchange for preferred shares in the GSEs, liquidation preferences, dividends, and related rights.
The agreement later was amended three times. Under the Third Amendment, the Treasury’s original right to a specified dividend was exchanged for what has been termed the net worth sweep. This required the GSEs to make quarterly payments to the Treasury equal to their entire net worth.
- The shareholders challenged the net worth sweep for four reasons:
- Count I—the FHFA exceeded its authority as conservator when it agreed to the Third Amendment.
- Count II—the Treasury exceeded its time-limited authority to buy stock in the GSEs.
- Count III—the Treasury’s adoption of the Third Amendment was arbitrary and capricious.
Count IV—the FHFA’s structure, featuring a single director who can be removed by the president only for cause, was unconstitutional.
Previous decisions. The district court judge relied on a HERA section that denied court jurisdiction over suits that would interfere with the FHFA’s exercise of its powers as conservator to dismiss the first three counts. The judge then granted the government summary judgment on the constitutionality issue.
A three-judge panel of the Fifth Circuit disagreed, in part. While the panel agreed that there was no jurisdiction over the three statutory claims, it reversed the district court judge’s decision on the separation-of-powers issue. In fact, the panel decided the FHFA was indeed unconstitutional.
The panel then went on to determine that the proper remedy was to sever the director’s for-cause protection from HERA and leave the rest of the Act intact. In other words, the shareholders won their argument but did not improve their position.
The Fifth Circuit then decided to vacate the panel’s opinion and rehear the appeal en banc.
Statutory claims decision. The majority began by rejecting the government’s assertion that HERA’s "anti-injunction provision" deprived the court of jurisdiction. HERA says that courts have no jurisdiction over "any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or receiver" (12 U.S.C. §4617(f)). However, the deprivation of jurisdiction applies to claims that the FHFA misused its statutory powers, the majority said. Courts have jurisdiction over claims that the FHFA took an action that was beyond its statutory powers, and the shareholders were asserting such a claim.
HERA also said that, as conservator, the FHFA succeeded to any shareholder claims "with respect to the regulated entity and the assets of the regulated entity" (12 U.S.C. §4617(b)). This meant the agency took over derivative claims—those that could be brought by one of the GSEs—but not direct claims that could be brought by a shareholder individually, according to the majority.
Count I asserted claims by the shareholders that they had been excluded from the GSEs’ profits. These were direct claims, the majority said.
However, the statutes on which the shareholders relied in Counts II and III were not passed by Congress to protect them. The statutes were intended to protect taxpayers, consumers, and the markets. These claims were not direct claims, so they passed to the FHFA as the GSEs’ conservator.
The majority then determined that, in Count I, the shareholders had described actions that went beyond the FHFA’s powers as conservator. HERA gave the agency different powers depending on whether it was acting as conservator or receiver. The net worth sweep exceeded the powers of a conservator, the majority said. A conservator’s powers were intended to preserve the GSEs’ assets and return them to solvency. Instead of doing that, the agency appeared to be acting as a receiver, winding down the companies.
As a result, the dismissal of Count I was reversed and that part of the suit was ordered to be returned to the trial judge. The dismissal of the other two statutory claims was affirmed.
Constitutionality. After first deciding that the shareholders had standing to raise the constitutionality issue, the majority adopted the relevant part of the three-judge panel’s opinion and determined the FHFA’s structure violated the separation-of-powers requirement (see Banking and Finance Law Daily, July 18, 2018). The panel had based this decision not on a single factor but on the combined effects of five factors:
- The agency was led by a single individual, not a multi-member commission.
- The director could be removed only for cause.
- There was no opportunity for bipartisan balance in the agency’s organization.
- The agency was not subject to the appropriations process.
- There was no formal executive branch control over the agency’s operations.
Effect on CFPB challenges. Several attacks on the constitutionality of the CFPB’s single-director structure are pending, including one petition for certiorari filed in the Supreme Court. The shareholders’ arguments against the FHFA’s organization parallel many of those raised against the Bureau.
However, the opinion deciding that the FHFA’s structure violated separation of powers principles simply reinstated the earlier opinion of the three-judge panel on the issue. That opinion explicitly disclaimed any intent to consider the constitutionality of the CFPB. According to the three-judge panel’s opinion, the ability of the Financial Stability Oversight Council to block regulations adopted by the CFPB, as noted, restrained the Bureau’s powers in a way that effectively distinguished the Bureau from the FHFA.
Remedy. A majority of nine judges also agreed that the remedy for the constitutional defect was severance of the offending for-cause provision, turning the FHFA from an independent agency into an executive branch agency. However, only two of the 16 judges who decided the case voted with both majorities.
Seven of the judges who were part of the majority opinion on the constitutionality issue would have gone beyond severing the for-cause protection. They also would have vacated the Third Amendment, eliminating the net worth sweep and possibly returning the payments to the GSEs for the benefit of the shareholders. Two of these judges wrote a separate opinion in which they asserted the court "does not have the power under Article III to order a remedy that does not redress Plaintiffs’ injuries."
Other opinions. Four of the judges wrote, in two opinions, that the separation of powers principle had not been violated. One of these pointed out that Treasury was considering ending the conservatorship and argued that this demonstrated the executive branch’s ultimate authority over the FHFA. The other attempted to belittle the strength of the shareholders’ argument, saying "I see only reasons for caution and skepticism, and none for action."
Finally, as if to demonstrate the Fifth Circuit’s inability to reach anything that resembled a consensus on any part of the case, seven of the 16 judges wrote that the HERA anti-injunction provision did deprive the courts of jurisdiction over the statutory claims because the FHFA had acted within its statutory authority.
The case is No. 17-20364.
Attorneys: Charles Justin Cooper (Cooper & Kirk PLLC) for Patrick J. Collins. Abby Christine Wright, U.S. Department of Justice, for Steven T. Mnuchin, Secretary, U.S. Department of Treasury. Howard N. Cayne (Arnold & Porter Kaye Scholer LLP) for Federal Housing Finance Agency.
Companies: Fannie Mae; Freddie Mac
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