Banking and Finance Law Daily Supreme Court questions FHFA’s actions regarding GSE oversight and agency’s structure
Wednesday, December 9, 2020

Supreme Court questions FHFA’s actions regarding GSE oversight and agency’s structure

By John M. Pachkowski, J.D.

The Supreme Court heard oral arguments in two consolidated cases challenging actions taken by the FHFA in its conservatorship of Fannie Mae and Freddie Mac. The Court also entertained claims that the FHFA’s structure was unconstitutional.

The U.S. Supreme Court heard oral arguments, on Dec. 9, 2020, in consolidated cases seeking resolution as to whether a Third Amendment to a Net Worth Sweep agreement between the Federal Housing Finance Agency, acting as conservator for Fannie Mae and Freddie Mac (Government-Sponsored Enterprises/GSEs), and the Treasury Department was valid. The Court also heard arguments on whether the structure of the FHFA was constitutional (Collins v. Mnuchin, Dkt. No. 19-422 and Mnuchin v. Collins, Dkt. No. 19-563).

The appeal to the Court stems from a case decided by the U.S. Court of Appeals for the Fifth Circuit. In Mnuchin v. Collins, Fannie Mae and Freddie Mac shareholders claimed that an amendment to the agreement under which the Treasury provided Fannie Mae and Freddie Mac needed capital in exchange for preferred shares in the GSEs, liquidation preferences, dividends, and related rights. The amendment exchanged the Treasury Department’s original right to a specified dividend for what has been termed the "net worth sweep."

After 16 judges for the Fifth Circuit generated eight separate opinions in order to resolve the shareholders’ challenges, two distinct majority opinions addressing the issues separately concluded that: the shareholders should be able to raise claims that, in reaching the agreement with the U.S. Treasury, 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.

In seeking the Court’s review, in Collins v. Mnuchin, Dkt. No. 19-422, it is contended that the FHFA’s organization—featuring a single director who can be removed by the president only for cause—violates the Constitution’s separation of powers requirements. The shareholders’ complaint is not with that ruling, with which they agree. Instead, they want the Court to reverse the Fifth Circuit’s remedy, which would fall well short of invalidating the entire agency.

On the other hand, the government in Mnuchin v. Collins, Dkt. No. 19-563, argued that the anti-injunction clause found in the Housing and Economic Recovery Act of 2008 (Recovery Act) precludes federal courts from setting aside the Third Amendment since that action would "restrain or affect the exercise of powers or functions of the [FHFA] as a conservator." Similarly, the government argued that under the Recovery Act’s succession clause, the FHFA, as conservator, inherited the shareholders’ rights to bring derivative actions on behalf of Fannie Mae and Freddie Mac thereby precluding the shareholders from challenging the Third Amendment.

During oral arguments, the Court questioned the attorney for the shareholders, the Solicitor General, representing the Treasury Department, and a Court-appointed amicus curiae, who supported the position that the FHFA’s structure did not violate the Constitution’s separation-of-powers provisions.

Regarding the Third Amendment to the Net Sweep Agreement, the government argued that the shareholders’ claims fail "for many reasons," but highlighted "three key defects." On the issue of whether the shareholders’ claims were derivative and barred by the Recovery Act’s succession clause, Chief Justice John G. Roberts asked whether the shareholders’ claims were distinct from the corporation as a whole and therefore not derivative. Justice Clarence Thomas sought an example of a direct claim that would not be barred by the succession clause. Justice Stephen G. Breyer asked the government’s counsel whether the Net Sweep Agreement amounted to a nationalization of the GSEs. Justice Sonia Sotomayor pondered whetherthere is no court review of a decision by the FHFA as conservator that could give shareholders the right to challenge the agency’s action.

Counsel for the shareholders stated that the FHFA "abandoned its conservatorship mission when it imposed the Net Worth Sweep." He added, "The Net Worth Sweep needlessly dissipated the assets of the companies FHFA is charged with rehabilitating."

Justice Samuel A. Alito, in his questioning of the government, sought insight into the constitutionality of the FHFA’s structure. Justice Sotomayor also sought insight on the constitutionality issue asking how this was different from the structure of the Consumer Financial Protection, which was deemed a violation of the Constitution’s separation-of-powers provisions in Seila Law LLC v. Consumer Financial Protection Bureau.

The Court-appointed amicus curiae sought to distinguish the Court’s Seila Law holding, noting that the FHFA "does not wield significant executive power because it does not regulate purely private actors" and that the "FHFA isn't in the same league as the CFPB when it comes to liberty."

The consolidated case includes Nos. 19-422 and 19-563.

Attorneys: Hashim M. Mooppan, Counselor to the Solicitor General, Department of Justice; David H. Thompson, Cooper & Kirk, PLLC;

Companies: Fannie Mae; Freddie Mac

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