A Surprise Twist in the Fannie and Freddie Appeal
By JOHN CARNEY
Jun 21, 2016 3:51 pm ET
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A federal appeals panel has more questions for some on the plaintiffs in the Fannie Mae and Freddie Mac litigation.
At the very least, this suggests that a decision in the case is not imminent.
The United States Court of Appeals for District of Columbia Circuit Tuesday ordered the class action plaintiffs to submit supplemental briefs addressing a series of questions about the role of sovereign immunity in the case.
The class action plaintiffs are investors in the common and junior preferred shares of Fannie and Freddie. They are represented by Boies, Shiller & Flexner, LLP, the law firm that last year won a high-profile lawsuit contesting the terms of the bailout of American International Group
In the order, the court instructed the class action plaintiffs to answer the following questions:
1. Regarding the class plaintiffs’ claim against Treasury for breach of fiduciary duty, is there a grant of subject matter jurisdiction and a waiver of sovereign immunity that is not the Federal Tort Claims Act?
2. Regarding all the class plaintiffs’ other claims:
a. Is each defendant subject to suit absent a waiver of sovereign immunity and, if not, is there such a waiver? The answer to this question should include a discussion of whether the FHFA’s challenged actions were taken solely in the agency’s capacity as conservator for Fannie Mae and Freddie Mac, or whether they were taken in whole or in part in a regulatory capacity.
b. What is the source of subject matter jurisdiction over the claims?
Under U.S. law, the federal government cannot be sued for money damages unless a law waives its sovereign immunity. The Federal Tort Claims Act waives sovereign immunity in certain cases where a private individual could be held liable in similar circumstances.
Fannie and Freddie were placed into conservatorship under the supervision of the Federal Housing Finance Authority in 2008. The U.S. Treasury provided $187.5 billion in rescue funding and agreed to provide hundreds of billions more in exchange for senior preferred shares in both companies as well as warrants for just under 80% of their common equity.
The senior preferred shares originally paid a fixed 10% dividend. This was changed 2012 to a variable dividend, effectively meaning they are required to pay all profits to Treasury but owe no dividends when they suffer a loss. Investors have sued in both state and federal court over the change, arguing that they have been unfairly cut off from the profits of the companies.
The D.C. Circuit panel is considering the appeal of a trial court’s dismissal of some of those suits, including those filed by the class action plaintiffs as well as individual suits filed by Perry Capital, LLC, Fairholme Funds, Inc. and Arrowood Indemnity Company. Those cases were dismissed in 2014 when a judge interpreted the 2008 law governing Fannie and Freddie’s conservatorships as denying federal courts from exercising jurisdiction over the challenges.
While the questions from the court do not necessarily indicate which way it is leaning in the case, there are hints. Most notably, the questions are directed at the class action plaintiffs and not the individual plaintiffs. This could mean that the court is not inclined to accept the demands for injunctive relief—namely, the reversal of the 2012 change to the bailout terms–that were emphasized in their briefs.
The questions may also suggest that the court has not found any of the previous claims for jurisdiction persuasive. That is to say, the court may be leaning toward agreeing with the trial court that the 2008 law does operate to deny jurisdiction.
That hardly guarantees a government win. After all, the court is allowing the class action a chance to argue that other laws may give courts jurisdiction. One possibility is that the court is more open to the idea that the government could be liable for monetary damages while enjoying immunity to injunctive relief.
New briefs are due from the class action plaintiffs on July 1. The government has until July 8 to respond. A final reply briefs from the plaintiffs is due July 15.
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