Do federal courts have subject matter jurisdiction over lawsuits against the Federal National Mortgage Association (“Fannie Mae”) based soley on the sue-and-be-sued clause in its congressional charter?
The Supreme Court will decide whether the sue-and-be-sued clause in Fannie Mae’s congressional charter under 12 U.S.C. § 1723a(a) confers original jurisdiction to federal district courts for cases to which Fannie Mae is a party. Petitioners Crystal Lightfoot and Beverly Hollis-Arrington argue that the clause is not sufficient to confer federal question jurisdiction. In doing so, they contend that the clause requires an independent determination of subject matter jurisdiction, and that the Court’s decision in Am. Nat’l Red Cross v. S.G., 505 U.S. 247 (1992), did not establish an “if federal, then jurisdiction” rule, which diverges from the Court’s past methods of statutory interpretation and creates confusion. Respondent Fannie Mae argues that Lightfoot and Hollis-Arrington misconstrue Red Cross and asserts that the statutory language, legislative history, context, and purpose of Fannie Mae as a government sponsored enterprise (GSE) confirm that Fannie Mae’s charter confers federal question jurisdiction. This case will clarify the scope of jurisdiction for GSEs under Article III and will settle whether private individuals can file suit against GSEs in federal district court based on state-law causes of action.
Questions as Framed for the Court by the Parties
The congressional charter of the Federal National Mortgage Association (“Fannie Mae”) grants it the power “to sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal.” 12 U.S.C. § 1723a(a).
The questions presented are:
- whether the phrase “to sue and be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal” in Fannie Mae’s charter confers original jurisdiction over every case brought by or against Fannie Mae to the federal courts; and
- whether the majority’s decision in Am. Nat’l Red Cross v. S.G., 505 U.S. 247 (1992) (5-4 decision), should be reversed.
In 2001, Petitioner Hollis-Arrington filed a suit, pro se, in U.S. District Court for the Central District of California against Cendant Mortgage Corporation, Fannie Mae, and Attorneys Equity National Corporation, all of which had participated in foreclosure proceedings against the home that Hollis-Arrington shared with Petitioner Crystal Lightfoot in California. Hollis-Arrington alleged that Cendant and Fannie Mae had conspired to allow unqualified buyers access to mortgage loans knowing that Cendant could in turn acquire the properties once they went into foreclosure. The district court dismissed the case for failure to state a claim, and the Ninth Circuit affirmed.
In 2002, Lightfoot and Hollis-Arrington filed a joint action, again pro se, in California state court against the same parties from the 2001 federal action and alleging the same conspiracy. Fannie Mae successfully removed the case to federal court. The district court, after denying Lightfoot and Hollis-Arrington’s motion to remand to state court, dismissed the action on the grounds of res judicata and collateral estoppel because of the prior federal judgment. The court also denied Lightfoot and Hollis-Arrington’s Rule 60(b) motion for relief from judgment.
The Ninth Circuit initially affirmed but, while Lightfoot and Hollis-Arrington’s petition for rehearing was pending, “withdrew its disposition, appointed pro bono counsel [to represent Lightfoot and Hollis-Arrington], and ordered the parties to brief whether Fannie Mae’s federal charter granted the district court subject matter jurisdiction.” Upon review, the Ninth Circuit held that Fannie Mae’s charter confers federal question jurisdiction over every case brought by or against Fannie Mae. The court reasoned that the Supreme Court in Am. Nat’l Red Cross v. S.G., 505 U.S. 247 (1992), looked at substantial precedent to establish the “if federal, then jurisdiction” rule—that a sue-and-be-sued clause in a federal charter that expressly mentions federal courts is sufficient to grant federal question jurisdiction.
Judge Stein dissented, arguing that Red Cross differs from the issue at hand because it is not a “magic words test” and Fannie Mae’s charter specifically includes the “of competent jurisdiction” clause. While the majority reasoned that the “of competent jurisdiction” clause in the Fannie Mae charter is merely an add-on and does not create a difference in interpretive meaning from that of Red Cross, Judge Stein suggested that this clause explicitly requires Fannie Mae to establish an independent determination of subject matter jurisdiction.
The Ninth Circuit denied Lightfoot and Hollis-Arrington’s petition for rehearing. Lightfoot and Hollis-Arrington filed a petition for writ of certiorari in February of 2015. In October of 2015, the Supreme Court invited the Solicitor General to file a brief on behalf of the United States. The Supreme Court granted certiorari on June 28, 2016.
INTERPRETATION OF THE SUE-AND-BE-SUED CLAUSE IN FANNIE MAE’S CORPORATE CHARTER
Lightfoot and Hollis-Arrington argue that the sue-and-be-sued clause in Title III of Fannie Mae’s corporate charter allows Fannie Mae to bring suit on its behalf and allows others to bring suit against it. The clause does not, according to Lightfoot and Hollis-Arrington, confer federal subject-matter jurisdiction over all claims by or against Fannie Mae. In support of this interpretation, Lightfoot and Hollis-Arrington first look to the plain meaning of the language in the clause. They argue that the plain meaning of the clause’s reference to “court[s] of competent jurisdiction” is that an outside source of jurisdiction is necessary for suits by or against Fannie Mae. They also note that in other statutes chartering federal entities, Congress has included language that specifically establishes independent federal jurisdiction over the agency along with a sue-and-be-sued clause. Because Fannie Mae’s charter does not contain this language, Lightfoot and Hollis-Arrington argue that it would be wrong to read it as though it did. Additionally, they assert that if the sue-and-be-sued clause conferred subject-matter jurisdiction by itself, the language specifically establishing federal jurisdiction in these other charters would be superfluous, an outcome that is contrary to statutory interpretation.
Lightfoot and Hollis-Arrington also argue that Congress’s 1954 and 1974 amendments to Fannie Mae’s charter and the context in which they occurred support its interpretation of the sue-and-be-sued clause. They note that case law in existence in 1954, when Congress was transitioning Fannie Mae from public to private ownership, raised the possibility that courts might interpret the sue-and-be-sued clause to confer federal jurisdiction over Fannie Mae. However, because Congress wanted Fannie Mae to be treated like all other private entities once it was privatized, Lightfoot and Hollis-Arrington contend that Congress added the clause’s “competent jurisdiction” language to ensure that the clause did not confer federal jurisdiction. Further, they assert that the purpose of Congress’s 1974 amendment to Fannie Mae’s charter specifying that it is a District of Columbia corporation for purposes of jurisdiction and venue was to establish Fannie Mae’s citizenship for purposes of federal diversity jurisdiction. Lightfoot and Hollis-Arrington argue that this amendment would have been pointless if the sue-and-be-sued clause already conferred federal subject-matter jurisdiction.
Fannie Mae counters that Lightfoot and Hollis-Arrington’s interpretation of the language in the sue-and-be-sued clause is incorrect because it renders the words “State or Federal” superfluous. If the clause was only supposed to grant a general capacity to sue and be sued, it would have sufficed to authorize suit in any court of competent jurisdiction without reference to state or federal courts, Fannie Mae argues. Fannie Mae also contends that Lightfoot and Hollis-Arrington are incorrect when they assert that “court of competent jurisdiction” necessarily refers to a court with independent basis for exercising subject-matter jurisdiction. Instead, Fannie Mae notes that the Court has held that this language can also refer to a court with personal jurisdiction rather than subject-matter jurisdiction. Fannie Mae further notes that in the years before 1954, courts routinely interpreted this language as conferring jurisdiction without requiring an independent basis for subject-matter jurisdiction.
Fannie Mae then argues that because courts had interpreted the “court of competent jurisdiction” language in this way, Congress would not necessarily have understood that amending the charter in 1954 to add this language would ensure that the clause did not confer federal jurisdiction. Further, Fannie Mae notes that the language for this amendment was identical to language in Title I of the charter, and two federal courts had already held that the language in Title I conferred federal jurisdiction. As such, Fannie Mae contends that Congress may have in fact thought that it was conferring federal jurisdiction by using this language in its amendment. Additionally, Fannie Mae claims that Lightfoot and Hollis-Arrington must be wrong that Congress wanted the 1954 amendment to ensure that there was no federal jurisdiction because the amendment also deemed Fannie Mae a federal agency controlled entirely by the government, and federal courts have jurisdiction over such agencies under 28 U.S.C. § 1345. Fannie Mae also asserts that if Congress did not want to confer federal jurisdiction with the 1954 amendment, it would have removed the word “federal” from the statute, which it did do in two other provisions of the 1954 Act. Fannie Mae also argues that because neither the text nor the legislative history of the 1974 amendment to the charter refer to diversity jurisdiction, Lightfoot and Hollis-Arrington are incorrect when they claim that the purpose of this amendment was to establish Fannie Mae’s citizenship for purposes of diversity jurisdiction.
DOES RED CROSS RESOLVE THIS CASE?
Lightfoot and Hollis-Arrington claim that the Ninth Circuit erred when it found a clear rule in Am. Nat’l Red Cross v. S.G., 505 U.S. 247 (1992), that if a charter contains the word “federal,” it confers federal jurisdiction. Instead, Lightfoot and Hollis-Arrington look to the Court’s language and analysis in Red Cross and argue that it stands for the rule that the word “federal” is necessary but not sufficient to confer federal jurisdiction. They maintain that if Red Cross does stand for the rule that the word “federal” in a charter confers federal jurisdiction, the Court should overrule Red Cross. A “magic language” rule such as this, they argue, is incompatible with the Court’s standard approach to statutory interpretation.
Lightfoot and Hollis-Arrington then contend that the rule that they find in Red Cross does not resolve this case. Further, they distinguish the facts of Red Cross from those in this case and assert that this distinction calls for a reversal of the Ninth Circuit’s holding. Because Fannie Mae’s charter contains the “competent jurisdiction” language, which expressly points to a need for an outside source of jurisdiction, and the charter in Red Cross did not contain this language, Lightfoot argues that Red Cross does not support the Ninth Circuit’s holding in this case.
Fannie Mae counters that Lightfoot and Hollis-Arrington are misinterpreting the rule stated in Red Cross. Fannie Mae argues that both the language of Red Cross and two centuries of precedent support interpreting the case’s rule to state that express authorization to sue in federal court is sufficient to confer federal jurisdiction. Fannie Mae then contends that because Lightfoot and Hollis-Arrington are wrong about the rule in Red Cross, the Court need not overturn the case. Further, Fannie Mae notes that this rule follows from at least two recognized principles of statutory construction—it gives independent meaning to each term in the clause and it recognizes that Congress is presumed to be aware of the Court’s prior interpretations of statutory language. Fannie Mae also maintains that the rule of stare decisis, under which the Court does not overturn its precedents lightly, prevents the Court from overturning Red Cross.
Fannie Mae contends that because Red Cross states that express authorization to sue in federal court is sufficient to confer federal jurisdiction, Red Cross resolves this case. Fannie Mae also notes that the language in its original charter was materially identical to language in the relevant amendment to Red Cross’s charter that the Court held to confer federal jurisdiction. Because Fannie Mae maintains that the amendment to its charter adding the “court of competent jurisdiction” language does not remove this grant of federal jurisdiction, Fannie Mae argues that Red Cross supports its interpretation of the charter’s sue-and-be-sued clause despite the difference in language.
RISK OF OVERLOADING FEDERAL COURTS WITH STATE-LAW CLAIMS
Lightfoot and Hollis-Arrington argue that extending federal question jurisdiction to Fannie Mae, or any other government sponsored enterprises (GSE), would create a “flood of litigation” in federal courts. They contend that Congress enacted 28 U.S.C. § 1349 to avoid granting automatic federal jurisdiction to privatized GSEs like Fannie Mae, of which the United States does not own more than one-half of its capital stock. The American Association for Justice (“AAJ”) argues that allowing congressionally chartered corporations to automatically bring state-law based claims into federal court would unnecessary divert resources away from the federal judiciary. AAJ contends that an “if federal, then jurisdiction” rule would change the scope of federal court from one of limited jurisdiction to one of general jurisdiction. AAJ also argues that state courts have superior expertise to handle these type of claims based solely on state law.
In contrast, Fannie Mae argues that automatic federal question jurisdiction protects its “important public mission”—to facilitate federal housing policy. They contend that Congress bestows upon GSEs unique federal purposes, and thus GSEs should be distinguished from regular private corporations. Rather than being a burden to federal courts, they maintain that the privatization of GSEs is consistent with automatic access to federal courts when the claims could affect their federal mission. Furthermore, Fannie Mae argues that Lightfoot and Hollis-Arrington rely on an incorrect basis for jurisdiction under 28 U.S.C. § 1349 and that this reliance is contrary to the appropriate scope of jurisdiction articulated in Am. Nat’l Red Cross v. S.G., 505 U.S. 247 (1992). Even if the scope of jurisdiction as articulated in Red Cross is in doubt, Fannie Mae contends that the Court would not overrule it due to its the strong adherence to the doctrine of stare decisis for matters of statutory interpretation. The American Red Cross agrees, arguing that overruling Red Cross on the grounds of statutory interpretation would create separation of powers concerns between the Legislative Branch and Judicial Branch. They maintain that, after the Court rules on statutory interpretation, the power rests with Congress to alter the language of the statute if it so chooses.
SCOPE OF ARTICLE III AND THE CONSTITUTIONAL AVOIDANCE DOCTRINE
Lightfoot and Hollis-Arrington argue that the “imperative to avoid constitutional difficulty” under the constitutional avoidance doctrine would preclude Fannie Mae from having automatic federal question jurisdiction. They argue that the Ninth Circuit’s interpretation of the sue-and-be-sued clause raises a “thorny question” regarding the scope of Article III as it applies to Congress. They suggest that Congress’s authority to confer jurisdiction to federal courts, and hence expand judicial power, under Article III is not without limits. The United States argues that Congress limited the scope of “arising under” jurisdiction by enacting § 1349 and a privatization qualification to GSEs. Taking the rule from Osborn v. Bank of the U.S., 22 U.S. 738 (1824), that Congress can confer federal question jurisdiction over any claim in which the parties could potentially raise a federal issue, Lightfoot and Hollis-Arrington contend that an attorney with even a minimal level of creativity could find a federal issue in nearly every case, invariably creating “constitutionally absurd results” in a judicial system that would provide for the limitless application of Article III’s “arising under” clause.
In contrast, Fannie Mae argues that there is no “thorny question” because Osborn firmly settled Article III’s scope. Fannie Mae contends that Red Cross reaffirmed the decision from Osborn, holding that Congress’s power under Article III is broad enough as to allow legislative bestowal of federal question jurisdiction for GSEs. Disagreeing that this extends Article III’s scope such as to create “constitutionally absurd results,” Fannie Mae maintains that it would be wrong to apply the constitutional avoidance doctrine. Fannie Mae claims that the Court would not overrule a rule that is so grounded and settled in its application. AAJ agrees, arguing that it would be “inappropriate” to overrule Osborn, and the subsequent decisions reaffirming Osborn, given that Article III’s “arising under” jurisdiction is already broader than federal question jurisdiction laid out in 28 U.S.C. § 1331 and that federal law authorizes the power and obligations of GSEs.
- Karen Kidd, Supreme Court Decision to Take Up Fannie Mae Case Not Surprising, Northern California Record (Aug. 3, 2016).
- Jacob Passy, Supreme Court to Hear Case Involving Where Fannie Can Be Sued, National Mortgage News (June 29, 2016).