Does the structure of the Federal Housing Finance Agency (“FHFA”) violate the separation of powers; and if so, must the Court invalidate FHFA’s conservatorship of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation?
This case asks the Supreme Court to determine whether the structure of the Federal Housing Finance Agency (“FHFA”) is unconstitutional. If so, this structure may render the placement of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) into FHFA’s conservatorship void. Respondent Secretary of the Treasury Steven T. Mnuchin argues that the succession and anti-injunction clauses of the Housing and Economic Recovery Act of 2008 (“Recovery Act”) bar Collin’s claim because that claim is derivative. Mnuchin asserts the Recovery Act’s removal clause does not invalidate the challenged amendment to the FHFA’s agreement with the Treasury Department and that the court should sever the removal clause from the rest of the statute. Petitioner Patrick J. Collins counters that neither the succession clause nor the anti-injunction clauses bar a direct suit under the Administrative Procedure Act (“APA”). Collins contends that the Court’s response to the removal clause should set aside both the challenged amendment to FHFA’s agreement with the Treasury and the Recovery Act’s conservatorship clause. This case's outcome has implications for the separation of powers and protections for “for-cause” removal. The case could impact private individuals' incentives to bring constitutional challenges to the court and the government’s ability to intervene in moments of economic crises.
Questions as Framed for the Court by the Parties
(1) Whether the Federal Housing Finance Agency’s structure violates the separation of powers; and (2) whether the courts must set aside a final agency action that FHFA took when it was unconstitutionally structured and strike down the statutory provisions that make FHFA independent.
Congress established the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to stabilize the housing market and to increase the public’s access to mortgage credit in 1938 and 1970, respectively. Collins v. Mnuchin at 564. These government-sponsored entities (“GSEs”) are private companies with shareholders, including Petitioner Patrick J. Collins. Id. at 563.
By the time of the 2008 economic crisis, Fannie Mae and Freddie Mac controlled almost half of the United States mortgage market—and despite billion-dollar losses that year, both remained solvent. Id. at 564. Nevertheless, the Housing and Economic Recovery Act of 2008 (“HERA”) created an independent agency called the Federal Housing Finance Agency (“FHFA”) tasked with their oversight. Id. The President appoints a single director to lead the FHFA five-year term, “unless removed before the end of such term for cause by the President.” 12 U.S. Code § 4512. The FHFA regulates normal GSE operations and—under special circumstances—also has the discretion to appoint itself conservator or receiver in which “all rights, titles, powers, and privileges of the regulated entity, and any stockholder, officer, or director of such regulated entity” succeed to the agency. Collins v. Mnuchin at 565. After the FHFA appointed itself conservator in September 2008, the GSEs entered Preferred Stock Purchase Agreements with the United States Department of the Treasury (“Treasury”) to keep the GSEs from defaulting (the “Agreement”). Id. at 567. Treasury received one million senior preferred shares in each Fannie Mae and Freddie Mac, and in exchange, made a capital investment capped at $100 billion. Id.
After Fannie Mae and Freddie Mac struggled to pay the quarterly dividend as required by the initial Agreement, Treasury and FHFA amended the Agreement so that the GSE could instead pay a variable dividend equal to the GSEs’ entire net worth, less it’s capital reserve (“Third Amendment”). Id. The GSEs could make the payments, but because the GSEs transferred billions to the Treasury, the GSEs could no longer accrue capital. Id.
In 2018, Collins sued Respondents FHFA, its Director Mark A. Calabria, Treasury, and its Secretary Steven T. Mnuchin (collectively “Mnuchin”) on four counts. Id. Collins also asked the court to declare the FHFA unconstitutional because it violates the Constitution’s separation of powers clause. Id. at 568. Mnuchin moved to dismiss all claims under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), which the district court granted as to the first three counts based on the Recovery Act’s anti-injunction clause. Id. Both Collins and the FHFA moved for summary judgment on the constitutional claim, and the district granted the motion in the FHFA’s favor. Id. Collins then appealed to the United States Court of Appeals for the Fifth Circuit. Id. The Fifth Circuit affirmed the motions to dismiss and reversed the district court’s grant of summary judgment. Id. Upon rehearing en banc, the Fifth Circuit held that the “for cause” removal limitation under 12 U.S. Code §4512 is unconstitutional. Id. at 563. The United States Supreme Court granted Collins’s petition for writ of certiorari on July 9, 2020.
SHAREHOLDERS’ RIGHT TO BRING THE CHALLENGE
Collins asserts that the claim is a direct suit rather than a derivative action, therefore the challenge is not barred by the succession clause. Brief for Petitioner, Patrick J. Collins, et al. at 15. Collins contends that the challenge is based upon the shareholders’ personal interest and is a direct claim under the APA because the shareholders are personally “aggrieved . . . within the meaning of a relevant statute,” 5 U.S.C. § 702. Id. at 16. Collins argues that the case law established a “zone-of-interests” test to determine whether a plaintiff seeking judicial review under the APA maintains interests that are covered by the statute and may therefore make a direct claim. Id. at 16–17. Collins asserts both precedent and the APA’s legislative history support applying the “zone-of-interests" test and that Collins’s claim is squarely within the zone of interests because the Recovery Act provides that the conservator should seek to preserve the enterprises’ assets. Id. at 17–18. Collins contends that Mnuchin’s reliance on the stipulation in 5 U.S.C. § 702 regarding no other limitations on judicial review is misguided because a broad abrogation of sovereign immunity marks the statute’s context. Id. at 21–22. Collins further maintains that even if the Court uses the principles of corporation law, the challenge would still be direct because the effects of the dividend restructuring with Treasury negatively affected the individual shareholders’ interests, not those of Fannie Mae and Freddie Mac. Id. at 24–27. Collins finally suggests that even if the challenge is a derivative suit, it is not barred because the succession clause does not bar shareholder derivative suits where the conservator has a conflict of interest. Id. at 30–32. Collins asserts that interpreting the clause to bar such derivative suits would require the Court to find it unconstitutional for due process reasons. Id. at 37.
Furthermore, Collins argues that the anti-injunction clause does not bar the challenge because FHFA acted contrary to its statutory role as conservator when agreeing to the Third Amendment’s dividend restructuring. Brief for Petitioner at 38–39. Collins posits that the Recovery Act granted FHFA powers to undertake rehabilitative actions that would improve the solvency of Fannie Mae and Freddie Mac and would conserve the enterprises’ assets. Id. at 40. Collins claims that the statute does not give the conservator broad powers but, consistent with the more general constitutional system, defines specific ways in which the conservator could act. Id. at 43. Collins argues that FHFA did not further its narrow statutory function and instead violated its obligations by pursuing actions that diminished the enterprises’ capital to the Treasury’s benefit. Id. at 44, 47. Collins further maintains that Mnuchin’s argument that the Third Amendment helped the enterprises avoid a vicious debt cycle does not withstand scrutiny because the financial mechanisms that characterized the relationship with the Treasury would have allowed the enterprises to avoid the conjectured danger. Id. at 52–53.
Mnuchin counters that the Recovery Act’s succession clause bars Collins’s challenge to the Third Amendment because it is a derivative claim. Brief for Respondent, Steven T. Mnuchin, Secretary of the Treasury, et al. at 18, 22–23. Mnuchin contends that the succession clause transfers the right to litigate Fannie Mae’s and Freddie Mac’s claims to FHFA as the conservator and that this right includes the shareholders’ power to bring derivative suits. Id. at 19–20. Mnuchin claims that Collins’s challenge is a derivative claim under a widely accepted two-part test because Collins’s claim alleges that Fannie Mae and Freddie Mac—instead of the shareholders—suffered the harm; and accordingly, the GSEs receive the benefit of recovery. Id. at 20–21. Mnuchin also asserts that the cause of action created by the Administrative Procedure Act (“APA”) does not displace the two-part test, nor does it convert Collins’s derivative challenge into a direct one. Id. at 25–26. Mnuchin argues that the APA grants a right of review but does not impose additional limitations on judicial review, thereby leaving intact the foundational principle of corporation law that shareholders do not have the right to sue over the harm done to the corporation. Id. at 26–28. Mnuchin further maintains that the succession clause unambiguously transfers all rights to FHFA, as conservator, and that the statutory context demonstrates that Congress would have explicitly created a conflict-of-interest exception had it intended to allow shareholders to sue over corporate injuries. Id. at 29–30.
Mnuchin also posits that even if the succession clause does not bar Collins’s challenge, the Recovery Act’s anti-injunction clause does because FHFA, as conservator, acted within its statutory rights when renegotiating the dividend structure in the Third Amendment. Brief for Respondent at 33. Mnuchin asserts that the GSEs’ congressional charters demonstrate that Congress provided the conservator with significant discretionary power. Id. at 34–37, 40. Mnuchin argues that the Third Amendment was an appropriate exercise of that power because the amendment avoided the potential for a vicious cycle of ballooning dividend payments to the Treasury. Id. at 38–41. Mnuchin further maintains that the Fifth Circuit incorrectly found that the Third Amendment fell outside FHFA’s conservatorship powers because the amendment involved potentially placing the GSEs in liquidation, a power the Fifth Circuit held was reserved for receiverships. Id. at 42–43. Mnuchin contends that the Third Amendment was not a liquidation action but a proper exercise of the statutory power to preserve and conserve the GSEs’ assets. Id. at 44. Mnuchin asserts that even if the Third Amendment enabled a future liquidation, the Court should interpret the anti-injunction clause to allow a conservatorship to undertake such action. Id. at 44–45.
SEVERABILITY OF THE REMOVAL CLAUSE
Collins concurs that the removal clause violates Article II of the Constitution and asserts that the violation is particularly severe because many of FHFA’s actions are not subject to presidential oversight or to judicial review. Brief for Petitioner at 61. Collins contends that the Court’s precedent supports invalidating the Third Amendment because the President does not oversee the FHFA’s actions. Id. at 62–64. Collins explains that the Court set aside similar past actions both due to those actions being void under the Constitution and the need to ensure that plaintiffs are furnished with incentives to litigate matters relating to constitutional structural limitations. Id. at 65–66. Collins argues that the harmless error rule is not suited for the separation of powers’ as the structural nature of the separation of powers creates difficulties in determining exact harms. Id. at 66–67. Collins reasons that the Court should enact retroactive remedies even where the violation likely did not impact the government action in question because of the prophylactic nature of the separation of powers. Id. at 67. Collins asserts that if the Court does decide to use a harmless error rule in this case, the Court should follow the rule as defined by the Court of Appeals for the District of Columbia Circuit: an error is not judged to be harmless if there is any uncertainty as to its effect. Id. at 70–71. Collins argues that FHFA cannot meet this high burden and that a meaningful remedy is to invalidate the Third Amendment. Id. at 74–75. Collins further maintains that the Court should invalidate the conservatorship clause because the Recovery Act lacks a severability clause, and Mnuchin stipulates that the conservatorship clause provides broad discretion to FHFA. Id. at 77–78.
Mnuchin concedes that the removal clause granting the Director of the FHFA for-cause removal protection violates the separation of powers because
Article II of the U.S. Constitution provides the President with the power to remove executive officers, subject to several exceptions not applicable to FHFA’s director. Reply and Response Brief, Steven T. Mnuchin, Secretary of the Treasury, et al. at 23–24. However, Mnuchin notes that the Court has opted in similar situations to sever the removal clause and leave the rest of the statute intact. Id. at 27. Mnuchin contends that a textual or structural analysis of the statute demonstrates the lack of a specific connection between the removal clause and the conservatorship clause that necessitates severing the latter clause along with the removal clause. Id. Mnuchin argues that the succession clause bars Collins’s constitutional claim against the Third Amendment because neither the Constitution itself nor the APA provides a cause of action by which Collins’s derivative claim could proceed. Id. at 29–30. Mnuchin claims that the Third Amendment did not violate the Article II principle because the amendment was adopted by an acting director who could be removed at will by the President. Id. at 31–32. Mnuchin also asserts that because FHFA acted in its capacity as the conservator in adopting the amendment and doing so as a private corporation, approving the Third Amendment did not involve Article II executive powers. Id. at 37–40. Mnuchin further maintains that a harmless-error analysis, a component of the standard law of remedies, should be applied to Collins’s constitutional claim in light of precedent and the difficulty in determining unfairness. Id. at 40–45.
SEPARATION OF POWERS & ACCOUNTABILITY
In support of Collins, the Americans for Prosperity Foundation (“AFPF”) suggests that the limited remedy offered by the Fifth Circuit discourages individuals from seeking redress in the court, therefore undermining the American peoples’ liberty. Brief for Amicus Curiae Americans for Prosperity Foundation, in Support of Petitioner et al. at 28. Furthermore, the Pacific Legal Foundation (“PLF”) contends that by structuring the FHFA so that the President may only remove its Director for cause, Congress wrongfully usurped the power vested in the Executive under Article II. Brief Amicus Curiae of Pacific Legal Foundation, in Support of Petitioner et al. at 6. PLF argues that the clause impairs the function of “checks and balances” because it allows the agency to act without accountability, “blur[ring] the lines of responsibility” to an extent that “pos[es] a significant threat to individual liberty and the constitutional system.” Id. at 7.
In support of Mnuchin, the Constitutional Accountability Center (“CAC”) claims that Congress maintains broad authority to shape the federal government’s structure. Brief of Constitutional Accountability Center as Amicus Curiae, in Support of Court-Appointed Amicus Curiae at 5–6. As such, CAC argues that vesting the ability to remove all officers for any reason with the President would grant a power far outside the bounds of what the Founders intended. Id. at 7–8. Moreover, CAC contends that deeming the FHFA structure unconstitutional would limit the ability to provide oversight of government-sponsored entities. Id. at 20–22. Accordingly, CAC asserts that the GSEs’ private investors voluntarily invested because of the government’s oversight, and as such, arrangements of these do not create a regulatory overreach. Id. at 23. Similarly, Court-Appointed Amicus Curiae (“Court-Appointed Amicus”) argues that the FHFA does not offend principles of liberty because the GSEs are not purely private actors; and as such, the government needs the ability to regulate agencies where its property is at issue. Brief for Court-Appointed Amicus Curiae at 29–30.
POWER TO ACT IN MOMENTS OF CRISES
In support of Collins, Amici Curiae Scholars (the “Scholars”) notes that imposing a high barrier on removal presents a particularly problematic result given that in moments of economic crises, “ordinary legal guardrails on administrative action…are likely to be much more limited, or even absent altogether.” Brief of Amici Curiae Scholars, in Support of Petitioner et al. at 13. This lack of oversight, the scholars posit, permits government agencies to pursue their preferred policies without utilizing normal processes. Id. at 14–15. The Scholars further contend that this will enable agencies a broad range of power that would remain unchecked by the judicial process. Id. at 17. PLF also notes that the remedies for these violations create incentives for plaintiffs to bring challenges to court to ensure that newly created agencies adhere to the norms of constitutional design by the threat of litigation. Brief of PLF at 7, 31.
In support of Mnuchin, CAC maintains that federal agencies need narrow powers to enable effective regulatory schemes and respond to a crisis as it arises. Brief of CAC at 21–23. CAC asserts that these powers are needed to enable institutions that function under the federal government’s oversight. Id. at 22. Court-Appointed Amicus agrees with CAC and asserts that guardrails exist to protect against overreach because Congress intended for agencies like the FHFA to have constrained powers. Brief of Court-Appointed Amicus at 22–23. Court-Appointed Amicus contends that agencies will not face a barrage of litigation because “the President can fire someone for not following lawful commands,” which removes any incentive to sue when an agency’s director is subject to for-cause removal. Id. at 49–50.
- Lawrence Hurley, U.S. Supreme Court to Weigh Shareholder Suit Over Fannie Mae, Freddie Mac, Reuters (Jul. 9, 2020).
- Joseph A. Smith, Jr., A Tale of Two Agencies: The Travails of the CFPB and FHFA – Chapter 2: The Seila Law Decision, Global Financial Markets Center, Duke University School of Law (Jul. 8, 2020).