Case No. 19-422 & 19-563 | 5th Cir.
December 9, 2020
Preview by Nick Mastria, Member
The Fair Housing Finance Agency (“FHFA”) was established in 2008 by the Housing and Economic Recovery Act (“HERA”) to regulate Fannie Mae and Freddie Mac (“the Companies”). 12 U.S.C. § 4617(a) (2018). The Companies are government-sponsored entities created in the mid-1900s to back the American housing market by purchasing mortgages from lenders, bundling them into mortgage-backed securities, and selling them to investors. Collins brings this suit against the FHFA and the Treasury Department to enjoin the Treasury from enforcing an agreement known as the Net Worth Sweep. Collins and the other petitioners are private stockholders of the Companies who allege FHFA violated its statutory authority and the Constitution.
In 2008, Congress created FHFA to replace the Companies’ previous governmental regulators. HERA confers on FHFA the power to appoint itself the conservator or receiver of the Companies to ensure the Companies’ solvency and to promote the public good.
In September 2008, FHFA assumed purported conservatorship of the Companies. After several deficient agreements where the Companies paid the Treasury quarterly dividends for a credit line, the FHFA agreed to the Net Worth Sweep. This agreement requires the Companies to pay their net worth’s minus a capital buffer to the Treasury each quarter for a credit line. In quarters where they perform poorly, the Companies pay the Treasury nothing. Collins argues that the Net Worth Sweep injures his economic interest in the Companies because the Companies could no longer retain capital. Brief of Patrick J. Collins, et al. at 6–8, Collins v. Mnuchin, Nos. 19-422 & 19-563 (U.S. filed Sept. 16, 2020).
The first issue is whether HERA’s succession clause bars all derivative suits. As conservator, FHFA assumes “all rights, titles, powers, and privileges” of the Companies and of “any stockholder, officer, or director.” § 4617(b)(2)(A)(i). The government argues that FHFA thus assumes the power to litigate this claim because the harm is to the Companies and not to the shareholders. Brief for Federal Parties at 20, Mnuchin v. Collins, No. 19-563 (U.S. filed Aug. 17, 2020). This would bar Collins’ suit. Collins responds that he was also harmed by the Net Worth Sweep because FHFA favored the Treasury over Collins as a shareholder. Brief of Patrick J. Collins at 13. According to Collins, this warrants classifying the action as a direct suit.
Second, the parties disagree if FHFA’s actions violate its statutory authority as conservator. § 4617(f). As conservator, HERA authorizes FHFA to take any action “necessary to put [the Companies] in a sound and solvent condition” and “conserve [its] assets.” § 4617(b)(2)(D). If FHFA acted as a conservator, HERA bars any suit under the anti-injunction clause. If FHFA acted outside its statutory authority, the Net Worth Sweep cannot be enforced. Collins argues that the Net Worth Sweep was not within the role of conservator because it surrenders most of its profits to the Treasury every quarter. It is not preserving assets; it is liquidating them to benefit the Treasury. Brief of Patrick J. Collins at 46–49. According to Collins, the agreement puts the Companies in unsound condition, not a solvent one. The government argues that the Net Worth Sweep is necessary for future solvency and therefore FHFA was acting as a conservator. Brief for Federal Parties at 40–41. This appears to be the main issue on appeal.
Third, the Court will decide whether the Net Worth Sweep is severable from FHFA’s unconstitutional structure. Like its sister agency, the Consumer Finance Protection Bureau (“CFPB”), FHFA is headed by a single Director who can only be removed by the President for good cause. Last term, in Seila Law L.L.C. v. Consumer Finance Protection Bureau, the Court found that this structure violates separation of powers. 140 S. Ct. 2183, 2197 (2020). However, the Court found that “for-cause” removal was severable from the Bureau’s action. See id. at 2211. The government concedes that FHFA’s sole-directorship structure is unconstitutional but argues that the for-cause removal provision here is also severable and does not warrant invalidating the entire Net Worth Sweep program. Reply and Response Brief for Federal Parties at 28, 37, Collins v. Mnuchin, Nos. 19-422 & 19-563 (U.S. filed Oct. 23, 2020). Collins argues that there is no sufficient legal remedy other than total invalidation.
This case is about the authority of Congress and agencies to intervene in markets for stabilization and regulation purposes. If the Net Worth Sweep is affirmed, agencies would have wider latitude in structuring enterprises like Fannie Mae and Freddie Mac, which may deter investment in those entities. It would also greatly limit stockholder rights in these enterprises, such as their power to litigate to hold governmental agencies accountable. Finally, severability has been a major issue for the Court in the recent terms, so further evolution of this doctrine will be informative for future cases.