Banking and Finance Law Daily Sue-and-be-sued clause doesn’t create federal jurisdiction over suits involving Fannie Mae
Wednesday, January 18, 2017

Sue-and-be-sued clause doesn’t create federal jurisdiction over suits involving Fannie Mae

By Richard A. Roth, J.D.

A federal law that says Fannie Mae has the power to sue and be sued "in any court of competent jurisdiction, State or Federal," does not confer on federal courts subject matter jurisdiction over litigation simply because Fannie Mae is a party, the Supreme Court has unanimously decided. As a result, the government sponsored agency’s claim of federal question subject matter jurisdiction did not allow it to remove to federal court a state-court suit filed by homeowners seeking relief from what they claimed was an improper foreclosure (Lightfoot v. Cendant Mortgage Corp., Jan. 18, 2017, Sotomayor, S.).

Contesting a foreclosure. According to the Court’s opinion, a homeowner who was unable to keep up with her payments tried to avoid foreclosure, first by attempting to work out a forbearance agreement with the loan servicer and then using a bankruptcy court plan that involved transferring ownership to her daughter. These efforts failed, resulting in a trustee’s sale of the property.

After two failed federal court suits, the homeowners sued in state court on claims that deficiencies in the financing, foreclosure, and sale imposed liability on Fannie Mae, which had purchased the loan from the original creditor. Fannie Mae removed the suit to federal court, and the federal court judge dismissed it due to the two earlier suits.

On appeal, a two-judge majority of a U.S. Court of Appeals for the Ninth Circuit panel affirmed the dismissal. In doing so, the panel considered the federal question jurisdiction issue and decided that the sue-and-be-sued clause conferred jurisdiction. However, the dissenting judge argued that was not the case and there was no federal court jurisdiction (see Lightfoot v. Cendant Mortgage Corp., discussed in Banking and Finance Law Daily, Oct. 3, 2014).

Issue on appeal. At the Nov. 8, 2016, oral arguments, the homeowner’s attorney described their position as being that a court of competent jurisdiction is a court that has "an independent source of subject matter jurisdiction." That independent source would be the law that created the court and described its jurisdiction (Banking and Finance Law Daily, Nov. 8, 2016).

The argument in favor of jurisdiction, offered by the mortgage loan servicer, was that under American Nat. Red Cross v. S.G., 505 U.S. 247 (1992) the explicit reference to federal courts showed that Congress was granting jurisdiction to those courts.

No grant of jurisdiction. According to the Court, the sue-and-be-sued language of 12 U.S.C. §1723a(a) addresses Fannie Mae’s corporate capacity to participate in litigation. Including the phrase "any court of competent jurisdiction, State or Federal," is not a grant of subject matter jurisdiction; rather, it permits a suit in any court that already has subject matter jurisdiction, as argued by the homeowners and the government, which appeared as amicus curiae.

The Court noted that the effect of sue-and-be-sued clauses in federal charters had been considered on five previous occasions. Three of the clauses were determined to have conferred jurisdiction on the federal courts, while the other two did not. Red Cross was the most recent of the five cases and the decision was in favor of jurisdiction.

The explicit mention of federal courts in the Fannie Mae clause supported the argument in favor of jurisdiction, the opinion said. However, the Fannie Mae clause fell short of the three clauses that were said to confer jurisdiction because it included the restriction "any court of competent jurisdiction." The three clauses that conferred jurisdiction on federal courts did not include such a qualification.

"Court of competent jurisdiction" refers to a court that has "an existing source of subject-matter jurisdiction," the opinion said. Fannie Mae’s chartering law, which included the sue-and-be-sued clause, did not provide jurisdiction. Red Cross did not establish a rule that explicit reference to federal courts was enough to confer jurisdiction, the opinion added.

Counter-arguments rejected. The Court also considered and rejected three arguments offered by Fannie Mae in favor of federal court jurisdiction.

First, Fannie Mae asserted that "court of competent jurisdiction" had a special meaning, referring to a court that had personal jurisdiction over the parties, was the proper venue, or was a court of general rather than special jurisdiction. The phrase did not mean that jurisdiction had to arise from some other law.

This amounted to another attempt to rely on the theory that Red Cross said reference to federal courts automatically conferred jurisdiction, the Court said. Moreover, even if "court of competent jurisdiction" did mean something more than a court with an independent jurisdiction source, Fannie Mae’s argument was not advanced. The examples cited always were required for a court to hear a case.

Second, the GSE claimed that at the time its charter was enacted by Congress, "court of competent jurisdiction" already had a settled meaning of conferring jurisdiction. Congress had relied on those previous interpretations. However, the Court rejected the precedents as being insufficiently authoritative or not addressing the issue.

Third, Fannie Mae noted that its sibling GSE, Freddie Mac, clearly could invoke federal question jurisdiction whenever it was involved in litigation. Congress would not have intended the two GSEs to have different levels of access to the federal courts.

The Court was unconvinced. The laws governing Freddie Mac use different language that explicitly gives Freddie Mac the authority to sue in federal courts or remove suits when it is the defendant. There was a plausible reason why Congress would have put the two GSEs in different positions, the opinion added——Freddie Mac was a government-owned company when its jurisdictional provisions were enacted, while Fannie Mae had become a privately-owned company.

In cases where federal court jurisdiction existed due to diversity of citizenship or the existence of a federal question, Fannie Mae had access to the federal courts, the opinion noted. There was no reason to believe that allowing Freddie Mac, but not Fannie Mae, the ability to move state-law cases to federal court gave Freddie Mac a competitive advantage that Congress would have thought to avoid.

The case is No. 14-1055.

Supreme Court docket. For details about this and other petitions and cases pending before the Supreme Court, please consult this list of selected banking and finance law cases awaiting action in the 2016 term. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each case.

Attorneys: E. Joshua Rosenkranz (Orrick, Herrington & Sutcliffe LLP) for Crystal Monique Lightfoot. Jan T. Chilton (Severson & Werson APC) for Cendant Mortgage Corp. d/b/a PHH Mortgage. Ann O’Connell, Assistant to the Solicitor General, for the United States, as amicus curiae, supporting the petitioners.

Companies: Cendant Mortgage Corp. d/b/a PHH Mortgage; Fannie Mae; Freddie Mac

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