The U.S. Court of Appeals for the Third Circuit has rejected a challenge by Freddie Mac and Fannie Mae junior shareholders to the conservatorship deal with the Treasury Department. The Third Circuit affirmed the dismissal of the case by the U.S. District Court for the District of Delaware, rejecting the claims to future profits. Reviewing the case de novo, the court held that the Housing and Economic Recovery Act of 2008 gave the government broad, discretionary power to enter into the deal, which complies with the requirements of the Act, as well as Delaware and Virginia corporate law (Fannie Mae’s corporate governance is under Delaware law, while Freddie Mac’s is under Virginia law). According to the court, the relief sought would "restrain or affect" the exercise of the government’s powers as conservator, which the Act forbids under Section 4617(f) (Jacobs v. Federal Housing Finance Agency, Nov. 14, 2018, Bibas, S.).
The conservatorship agreement requires the Enterprises—Fannie Mae and Freddie Mac—to pay dividends to the Treasury Department. The agreement was amended in 2012, replacing the 10 percent annual dividend with a quarterly variable dividend equal to the Enterprises’ positive net worth above a capital buffer, which was set to decrease with each dividend payment and is now down to zero. The case challenged this amendment, known as the Third Amendment.
The shareholders argued that each quarter, the dividend consumes each Enterprise’s entire positive net worth—if either Fannie Mae or Freddie Mac has a positive net worth, it pays that worth out as a dividend to the Treasury. If its net worth is zero or negative, it pays nothing.
Limited judicial review. The Housing and Recovery Act strictly limits judicial review in Section 4617(f), which bars claims when: the government acts as a conservator; it does not exceed its statutory authority; and the remedy sought would affect the exercise of that authority. The district court had dismissed the case, holding that this subsection bars all claims, that the agency acted within its statutory powers, and that the Act did not incorporate state law. The Third Circuit agreed, finding that the Act empowered the Federal Housing Finance Agency to enter into the amendment; the amendment does not violate any of the Act’s limitations, entering into the amendment was a legitimate exercise of the agency’s powers as conservator; and the requested relief would "restrain or affect" the exercise of the FHFA’s powers as conservator. Sec. 4617(f) bars the requested relief.
According to the court, by entering into the amendment, the agency was in essence renegotiating an existing lending agreement. Additionally, the court found that the amendment falls within the FHFA’s power to "preserve and conserve" the Enterprise’s assets and to do what is necessary to put them in a sound and solvent condition. The court stated that since the agency may exercise the powers as appropriate, it only needed to ask whether the FHFA picked a suitable action, not the best alternative.
The court also did not agree with the argument that the amendment violates the Housing and Recovery Act’s specified priorities for distributing assets on liquidation, agreeing with the district court that these provisions do not apply because neither Enterprise is in liquidation.
The shareholders also charged the FHFA with not acting in the best interest of the Enterprises and acting in a manner in which the Enterprises themselves had no power to act, when implementing the Amendment; and contended that, as conservator, the FHFA should have focused solely on maximizing the Enterprises’ financial returns.
The court found that the Recovery Act authorizes the agency to do just that, and stated that the Act requires the agency to consider the public interest, but that "it need not consider the interests of Fannie’s and Freddie’s shareholders."
The case is No. 17-3794.
Attorneys: Christopher N. Kelly (Potter Anderson & Corroon LLP) for David Jacobs. David B. Bergman (Arnold & Porter Kaye Scholer LLP) and Robert C. Maddox (Richards, Layton & Finger, P.A.) for Federal Housing Finance Agency. Deepthy Kishore, U.S. Department of Justice, for U.S. Department of Treasury.
Companies: Fannie Mae; Freddie Mac
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