The Art of The Lie, by First Circuit Judge Sandra Lynch

A. FHFA, as the GSEs’ Conservator, Is Not a Government Actor Subject to Appellants’ Due Process Claims

Adopting the district court’s reasoning in Sisti, 324 F. Supp. 3d at 281-84, appellants argue that because FHFA is a government agency, any action it takes as conservator, like directing the GSEs to nonjudicially foreclose on appellants’ mortgages, is government action subjecting it to appellants’ constitutional claims.

That analysis is simply wrong and contrary to law.

We hold that, in its role as the GSE’s conservator, FHFA is not a government actor because it has “stepped into the shoes” of the private GSEs.

First, it is undisputed that FHFA is a federal agency that sometimes acts as the government. 12 U.S.C. § 4511(a).

But this fact is not dispositive.

That a federal agency exercising a portion of its statutory powers in one role is a government actor does not as a matter of law mean that it is a government actor for all purposes or in all exercises of its statutory powers.

See Faiella v. Fed. Nat’l Mortg. Ass’n, 928 F.3d 141, 148 (1st Cir. 2019).

We must determine if FHFA acted as the government in its role as the GSEs’ conservator.

Under HERA’s “succession clause,” when FHFA became the GSEs’ conservator, it succeeded to “all rights, titles, powers, and privileges of the regulated entity, and of any stockholder, officer, or director of such regulated entity with respect to the regulated entity and the assets of the regulated entity.”

12 U.S.C. § 4617(b)(2)(A).

One of these rights was the GSEs’ private contractual right to nonjudicially foreclose on appellants’ mortgages, which FHFA instructed the GSEs’ loan servicers to exercise. Appellants do not allege that FHFA relied on any power other than the GSEs’ contractual rights in carrying out the nonjudicial foreclosures.

The Supreme Court has interpreted a succession clause in the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) with nearly identical language4 to the one in HERA to mean that when a government agency acts as receiver for an entity, it “‘steps into the shoes’ of the failed [institution]” and exercises that entity’s rights.

O’Melveny & Myers v. FDIC, 512 U.S. 79, 86 (1994).

Other circuits have interpreted HERA to mean that when acting as the GSEs’ conservator and exercising their rights, FHFA steps into the GSEs’ shoes.

See Herron v. Fed. Nat’l Mortg. Ass’n, 861 F.3d 160, 169 (D.C. Cir. 2017) (holding that when FHFA “step[ped] into Fannie Mae’s private shoes,” it became a private actor);

Meridian Invs., Inc. v. Fed’l Home Loan Mortg. Corp., 855 F.3d 573, 579 (4th Cir. 2017) (“[T]hough FHFA is a federal agency, as conservator it steps into Freddie Mac’s shoes, shedding its government character and also becoming a private party.”);

see also U.S. ex rel. Adams v. Aurora Loan Servs., Inc., 813 F.3d 1259, 1261 (9th Cir. 2016) (holding that FHFA’s conservatorship “places [it] in the shoes of Fannie Mae and Freddie Mac, and gives the FHFA their rights and duties”).

We agree that, after stepping into the GSEs’ shoes under HERA and exercising their private contractual rights to nonjudicially foreclose on appellants’ properties, FHFA did not act as the government.

Appellants, again relying on Sisti, argue that O’Melveny is inapplicable here because it involved a government agency acting as receiver, not as a conservator.

See Sisti, 324 F. Supp. 3d at 282-83.

We disagree.

O’Melveny was decided based on what the statute’s “language appears to indicate.” 512 U.S. at 86. Section 4617(b)(2)(A) says that FHFA succeeds to the GSE’s rights when it acts “as conservator or receiver” (emphasis added). Similarly, the statute at issue in O’Melveny says that the FDIC succeeds to the rights of failed depository institutions when it acts “as conservator or receiver.” 12 U.S.C. § 1821(d)(2)(A) (emphasis added).

There is no reason O’Melveny‘s textual logic does not apply to both conservators and receivers.5

Appellants’ final argument is that another Supreme Court case, FDIC v. Meyer, 510 U.S. 471 (1994), controls this case and requires a finding in their favor.

Neither contention is accurate.

Meyer concerned whether a plaintiff could bring a Bivens claim against the Federal Savings and Loan Insurance Corporation (“FSLIC”), a federal agency acting as receiver for a failed bank.6

See 510 U.S. at 473-75; see generally Bivens v. Six Unknown Named Agents of Fed. Bureau of Narcotics, 403 U.S. 388 (1971).

The Court in Meyer held: (1) that the “sue-and-be-sued” clause in FSLIC’s organic statute waived FSLIC’s sovereign immunity; and (2) that a plaintiff cannot bring a Bivens claim against a federal agency like FSLIC. Meyer, 510 U.S. at 483-84.

Focusing on the “sue-and- be-sued” holding, appellants’ argument proceeds as follows:

(1) FSLIC was a federal agency acting as receiver;

(2) the plaintiff  brought a constitutional claim against FSLIC for actions it took as receiver;

(3) a federal court could not hear the case if FSLIC had sovereign immunity;

(4) only government actors can have (and waive) sovereign immunity;

(5) Meyer held that FSLIC waived sovereign immunity through its “sue-and-be-sued” clause;

so

(6) by deciding the sovereign immunity issue, the Court must have thought that FSLIC is a government actor potentially liable for a constitutional tort when it acts as receiver.

Applying that logic here, they say that FHFA, as a government agency, must be acting as the government when it acts as the GSEs’ conservators. See Sisti, 324 F. Supp. 3d at 281-82.

Appellants misread Meyer.

Meyer decided a threshold jurisdictional question.7    See 510 U.S. at 475 (explaining that sovereign immunity is “jurisdictional in nature”).

It held that FSLIC, through its “sue-and-be-sued” clause, waived any right it may have had to argue that a federal court does not have the power to address the merits of the plaintiff’s claim. Id. at 479; see also Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89 (1998) (distinguishing between “the absence of a valid . . . cause of action” and “subject-matter jurisdiction, i.e., the courts’ statutory or constitutional power to adjudicate the case”).

Meyer never addressed the merits of the plaintiff’s claim, including the argument that his claim must fail because FSLIC was not acting as the government. See id. at 486 n.12 (“[W]e do not reach the merits of [Meyer’s] due process claim.”).

Indeed, FDIC never made such an argument to the Supreme Court and the Court had no reason to reach it.

Properly viewing Meyer‘s “sue-and-be-sue” holding as jurisdictional, Meyer did not decide that a federal agency is a government actor whenever it acts as a receiver or conservator. Such a categorical reading of Meyer is inconsistent with post-Meyer Supreme Court cases, including O’Melveny, decided only four months later, making clear that an agency acting as receiver is not necessarily the government for all purposes.

See O’Melveny, 512 U.S. at 85 (“[T]he FDIC is not the United States, and even if it were we would be begging the question to assume that it was asserting its own rights rather than, as receiver, the rights of [the failed bank].”); Atherton v. FDIC, 519 U.S. 213, 225 (1997)

(“[A]s in O’Melveny, the FDIC is acting only as a receiver of a failed institution; it is not pursuing the interest of the Federal Government . . . .” (emphasis added)).

It is also inconsistent with post-Meyer case law from other circuits holding that an agency is not necessarily the government when it acts as a conservator or receiver.

See Collins v. Mnuchin, 938 F.3d 553, 590 (5th Cir. 2019) (en banc), cert. granted, 141 S. Ct. 193 (2020)

(“Whether an agency exercises government power as conservator or receiver ‘depends on the context of the claim.'” (quoting Slattery v. United States, 583 F.3d 800, 827 (Fed. Cir. 2009), vacated then reinstated as modified on reh’g en banc, 635 F.3d 1298 (Fed. Cir. 2011));

United States v. Heffner, 85 F.3d 435, 439 (9th Cir. 1996) (“The [federally-owned Resolution Trust Corporation] in its corporate character as receiver is not the federal sovereign”);

United States v. Ely, 142 F.3d 1113, 1121 (9th Cir. 1997) (“Meyer did not purport to determine the status of the FDIC when . . . taking over a failed bank as receiver . . . .”).

Here, FHFA is not acting as the government in its capacity as the GSEs’ conservator.  Appellants’ constitutional claims against it fail for that reason.

B. Fannie Mae and Freddie Mac Are Not Government Actors Subject to Appellants’ Due Process Claims

Appellants next argue that Fannie Mae and Freddie Mac are themselves government actors.

In Lebron, the Supreme Court articulated a three-part test to determine when a private corporation is a government actor for purposes of certain constitutional claims against it.

It held that if

“[1] the Government creates a corporation by special law,

[2] for the furtherance of governmental objectives,

and

[3] retains for itself permanent authority to appoint a majority of the directors of that corporation,”

then the corporation’s actions “are subject to the constraints of the Constitution.”

Lebron, 513 U.S. at 376, 399.

The parties do not dispute that the first two prongs of the Lebron test are satisfied.

Appellants also do not dispute that, pre- conservatorship, the GSEs were private actors not subject to their claims.

See Am. Bankers Mortg. Corp. v. Fed’l Home Loan Mortg. Corp., 75 F.3d 1401, 1406 (9th Cir. 1996) (applying Lebron before FHFA’s conservatorship began to hold that “Freddie Mac is not a government agency subject to the Fifth Amendment’s Due Process Clause”).

The issue before us is whether, through FHFA’s conservatorship over the GSEs, the government has “retain[ed] for itself permanent authority” over Fannie Mae and Freddie Mac.

Lebron, 513 U.S. at 399.

We hold that FHFA’s temporary conservatorship over the GSEs does not constitute permanent authority.

FHFA controls the GSEs for the limited purpose of “reorganizing, rehabilitating, or winding up the[ir] affairs.”

12 U.S.C. § 4617(a)(2); see also id. 4617(b)(2)(D)(i) (authorizing FHFA, as conservator, to take actions “necessary to put the regulated entity in a sound and solvent condition”).

The statutory language confirms, as other courts have held, that a conservatorship has “an inherently temporary purpose.”

Herron, 861 F.3d at 169 (quoting Rubin v. Fed. Nat’l Mortg. Ass’n, 587 F. App’x 273, 275 (6th Cir. 2014));

see also Kerpen v. Metro. Wash. Airports Auth., 907 F.3d 152, 158 (4th Cir. 2018) (“Temporary control — as when the federal government steps in as a conservator — is not sufficient [under Lebron].”);

Sprauve v. W. Indian Co. Ltd., 799 F.3d 226, 233 n.8 (3d Cir. 2015) (noting that control is temporary “where the Government is acting as a conservator”).

Given the conservatorship’s limited purpose, Congress is not required to assign a definite endpoint to FHFA’s conservatorship to make the government’s control temporary.

See Herron, 861 F.3d at 169.

Similarly, appellants’ argument that the conservatorship has “continued to exist well past its intended purpose” fails.

The housing and mortgage financial markets are highly complex, as are the various indicators of their financial health, so the fact that FHFA has maintained the conservatorship for almost thirteen years does not mean that the government’s control is permanent.

Appellants have failed to plead a plausible claim, particularly in light of indications that the government is working to eventually bring the conservatorship to an end.8

Appellants’ main argument is that FHFA’s conservatorship over the GSEs is temporary in name but permanent in practice.

They say that we should focus on the practical reality of the government’s control over the GSEs because the “permanent authority” prong of the Lebron test was qualified by the Supreme Court’s decision in Department of Transportation v. Association of American Railroads, 575 U.S. 43 (2015).

Both Lebron and American Railroads involved whether the National Railroad Passenger Corporation (commonly known as Amtrak) is a government entity for certain purposes.

Lebron held that Amtrak “is part of the Government for purposes of the First Amendment.” 513 U.S. at 399. American Railroads held that Amtrak

“acted as a governmental entity for purposes of the Constitution’s separation of powers provisions.”

575 U.S. at 54.

At issue in American Railroads was whether Congress’s directive that Amtrak

“is not a department, agency, or instrumentality of the United States Government,”

49 U.S.C. § 24301(a)(3), precluded Congress from giving it joint authority with the Federal Railroad Administration to issue “metrics and standards” governing passenger railroad services.

American Railroads, 575 U.S. at 45.

The Court found that Lebron provided “necessary instruction” on whether Congress’s “disclaimer of Amtrak’s governmental status” meant that it could not be a federal actor. Id. at 54-55.

It held that the “practical reality of federal control and supervision prevail[ed]” over Congress’s directive. Id. at 55.

Appellants read American Railroads‘s “practical reality” language to say that the degree of control the government actually exercises over an entity informs whether its control is permanent.

They argue that because FHFA has all the powers of the GSEs’ boards of directors, see 12 U.S.C. § 4617(b)(2)(A), and has discretion to determine when the conservatorship will end, 12 U.S.C. 4617(a)(2), it permanently controls the GSEs. See also Sisti, 324 F. Supp. 3d at 280

(“The practical reality here is that the government effectively controls Fannie Mae and Freddie Mac permanently.”)

This argument fails.

American Railroads did not alter Lebron‘s requirement that the government retain “permanent authority” over an entity for it to be governmental. American Railroads says nothing about Lebron‘s “permanent authority” requirement, and the Supreme Court “does not normally overturn, or so dramatically limit, earlier authority sub silentio.”

Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1, 18 (2000).

Indeed, American Railroads had no reason to address whether the federal government retained “permanent authority” over Amtrak. The Court had already held in Lebron that it did. See 513 U.S. at 399; Herron, 861 F.3d at 168 (“Because the government’s permanent control over Amtrak was already established in Lebron, the Court had no occasion to revisit that question in [American Railroads].”).

Appellants next argue, again relying on Sisti, that 12 U.S.C. § 4617(a)(2), which authorized FHFA’s conservatorship “for the purpose of reorganizing, rehabilitating, or winding up the affairs [of the GSEs],” should be ignored.

They say that, like the statute at issue in American Railroads, it is a disclaimer of governmental status entitled to no deference. Sisti, 324 F. Supp. 3d at 280.

We disagree that Section 4617(a)(2) can be properly read as a disclaimer or that its statutory command can be bypassed. Section 4617(a)(2) confirms that FHFA’s conservatorship has a temporary purpose.

It is directly relevant to whether FHFA exercises “permanent authority” over the GSEs.

Finally, amici for appellants argue9 that Lebron‘s three-part test is not the only relevant precedent.

They say that whether FHFA’s conservatorship over the GSEs constitutes federal government action must be analyzed under a series of other state action theories, specifically the “coercive power” theory, the “joint participation” theory, the “entwinement” theory, and the “government control” theory.

See Brentwood Acad. v. Tenn. Secondary Sch. Athletic Ass’n, 531 U.S. 288, 296-97 (2001)(discussing these theories).

All of these theories attempt to determine whether “there is such a ‘close nexus between the State and the challenged action’ that seemingly private behavior ‘may be fairly treated as that of the State itself.'”

Id. at 295 (quoting Jackson v. Metro. Edison Co., 419 U.S. 345, 351 (1974)); id. (holding that “state action may be found if, though only if” such a “close nexus” exists).

As the Supreme Court has stated, “a host of facts . . . bear on the fairness of” attributing private action to the government. Id. at 296.

Here, because we have held that FHFA10 acted privately and not as the government in its role as the GSEs’ conservator, we do not need to address whether FHFA’s private actions on behalf of the private GSEs constituted state action.

IV.  Conclusion

Affirmed.