In it’s bumper-sized opinion, the 5th Circuit reach the conclusion the FHFA is unconstitutional.
Fannie-Freddie Investors Fighting Profit Sweep Get Key Win
Fannie Mae and Freddie Mac investors won a big victory in their long battle to reap benefits from their stakes in the mortgage giants with a court ruling letting them pursue claims that the U.S. sweep of the companies’ earnings is illegal.
A panel of federal appeals court judges in New Orleans overturned a ruling that backed the government’s right to take all of the mortgage giants’ profits. The judges also concluded that the structure of Fannie and Freddie’s regulator, the Federal Housing Finance Agency, is unconstitutional because of job protections for the agency’s director.
“Congress created FHFA amid a dire financial calamity, but expedience does not license omnipotence,” a majority of judges on a 16-member panel said in Friday’s ruling.
The ruling came a day after the Treasury Department unveiled its long-awaited plan to end more than a decade of federal control of Fannie and Freddie. The plan disappointed investors, in part because it lacked specifics on key details that would determine how to end the government’s conservatorship of the companies. Shares of the companies fell the most since January after the report’s release.
Fannie and Freddie don’t make loans themselves. Instead, they keep the nation’s mortgage market humming by buying mortgages from lenders and packaging them into bonds that are sold to investors with guarantees of interest and principal.
The companies were put into federal conservatorship in 2008 as the housing market cratered and were sustained by taxpayer aid. They have since returned to profitability and paid in $115 billion more in dividends to the Treasury than they received in bailout funds. Since 2013, nearly all of their profits have been sent to the Treasury under a policy called the “net-worth sweep.”
The companies’ shareholders, including hedge-fund luminaries such as John Paulson and Bill Ackman, have griped for years about the terms of conservatorship. Investors have sued regulators multiple times seeking to end the sweep and gain access to the Fannie and Freddie’s profits. Those lawsuits have mostly been unsuccessful and this case, a full court review of a ruling of a three-judge panel, was seen as a last hope by many of the shareholders.
“We are delighted that the court has made clear that the net worth sweep will not be allowed to stand,” the shareholders’ lawyer, David Thompson, said of Friday’s ruling.
The U.S. Supreme Court last year declined to consider a case arising from a Washington appeals court decision that blocked another group of investors’ attempt to sue the FHFA over its authority to impose the sweep.
A U.S. Treasury Department spokesman referred a request for comment to the Justice Department, which declined to comment. An FHFA spokeswoman didn’t immediately reply to a request for comment.
The case is Collins v. Mnuchin, 17-20364, U.S. Court of Appeals for the Fifth Circuit (New Orleans).
Fabulous voice. Hat tip. The National Anthem is not a blood-thirsty, militaristic song, but a narrative of military triumph allowing for the continued moral victory of democracy. Judge Elrod softens that, unlike the #CA5 opinions that often grace her pen. Maybe change is possible
— LawsInTexas (@lawsintexasusa) September 7, 2019
The remaining question is what remedy the Shareholders are entitled to?
A different majority of the en banc court holds that prospective relief is the proper remedy.
In Judge Haynes’s opinion, a majority holds that the Shareholders can only obtain a declaration that the FHFA’s structure is unconstitutional.
Chief Judge Stewart, Judge Dennis, Judge Owen, Judge Southwick, Judge Graves, Judge Higginson, Judge Costa, and Judge Duncan join Judge Haynes’s constitutional remedy opinion.
The complaint states a plausible claim that FHFA exceeded its statutory authority.
Judge Haynes’s dissent suggests that the Shareholders could waive the legal standard for reviewing the grant of a motion to dismiss. But the Supreme Court explained in Iqbal that “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” (56 U.S. at 678 (quoting Twombly, 550 U.S. at 570)).
The standard is generally applicable, and we see no exception here. When we reverse the grant of a motion to dismiss, the district court may decide if fact issues require trial or if summary judgment should be granted. The proper remedy is to reverse the motion-to-dismiss denial and remand Count I for further proceedings.
See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986) (holding that trial court shall grant a motion for summary judgment if there is no genuine issue for trial); 5B CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1349 (3d ed. 2019) (These seven defenses [in Rule 12(b)(1)(7)] are permitted to be asserted prior to service of a responsive pleading because they present preliminary or threshold matters that normally should be adjudicated early in the action.).
We love stats. We asked Dr Feldman about them too before this @USSupremeCourt denial…. in our humble opinion, Heroism is realizing when you are in a position to make change that impacts tens of millions of people and follow your heart. Some in that position freeze. Others act. pic.twitter.com/zcSAPzKqNd
— LawsInTexas (@lawsintexasusa) September 7, 2019
What was anticipated [in 2018] before this latest Ruling?
If you’re the government, the en banc will prevail. 2018 has offered several close votes about en banc review, often showing the importance of the new Trump appointees to the overall makup of the Fifth Circuit.
The Court recently voted to rehear en banc the case of Collins v. Mnuchin, an important administrative law dispute about the structure and authority of the Federal Housing Finance Agency (a regulator for Fannie Mae and Freddie Mac created by Congress after the 2008 financial crisis).
The difficult issues produced three opinions by the panel members.
The Court’s order requested supplemental briefing about, inter alia, the appropriate remedy if the Court concluded that the agency had a structural problem. Net Worth Sweep, did Obama move funds from sweep to other parts of government?
The argument will be in January 2019 and should bring more insight about the direction of the modern Fifth Circuit.