Fannie Mae: Perry Capital's Path To The Appellate Court And Reversal

| About: Fannie Mae (FNMA)


On September 30, 2014, claims against Fannie Mae before Judge Lamberth were dismissed.

One of the plaintiffs, Perry Capital, LLC, appealed two days later.

This article is a primer on the federal appellate standard of review and why Judge Lamberth’s ruling will be reversed and remanded.

Now that Judge Lamberth's September 30, 2014, Memorandum Order dismissing the claims against Fannie Mae (OTCQB:FNMA) in his court have been appealed, it seems appropriate to discuss the federal appellate process and the likelihood Judge Lamberth will be reversed. Reversal with a remand for further proceedings before Judge Lamberth is highly likely.

As background, remember that a trial court can make findings of fact, findings of law or both. A finding of fact is determining what happened. A finding of law is the rule to be applied to that fact. In all cases, the trial court must apply the law. This is critical; the appellate court will apply different standards depending on whether, or the extent, to which the lower court determined the facts or just applied the law. The more fact intense the ruling, the more deference the appellate court will show to the lower court decision.

The reasoning is that the trial court heard the evidence and viewed the witness demeanor, placing the trial court in the best position to ascertain the facts. If the trial court is not determining facts but only determining the law or applying the law, the appellate court will give the least deference to the trial court since the appellate court is in an equal position with the trial court to determine or apply the law.

That leads to the "Standard of Review."

The standard of review is a legal way of defining how much deference an appellate court will give to the decision of a lower court. There are four main standards of review:

1. Abuse of Discretion

2. Substantial Error

3. Clearly Erroneous, and

4. De novo (a Latin phrase meaning "from the new").

Abuse of discretion the most deferential of all the reviews. The reviewing court will not reverse unless the decision is unreasonable or arbitrary, based on an error of law or the record contains no evidence upon which the lower court could rationally have based its decision.

Substantial Error is slightly less deferential to the lower court. The reviewing court will not reverse unless there is no evidence that a reasonable mind might accept as adequate to support the ruling.

Clearly erroneous is less deferential still. The reviewing court will only reverse if it is left with the definite and firm conviction that a mistake has been made.

Finally, de novo is the least deferential. Here, the trial court has only made rulings of law or applied the law to undisputed facts. The appellate court feels free to look at the record for itself and make a clean ruling with no deference to the trial court.

To understand the standard of review the appellate court must use in this case, recall the "procedural posture" of the case. The FHFA and Treasury asked the court to dismiss the plaintiff's (Perry) claims. In a motion to dismiss, the court must "accept as true all well pled facts." In other words, in a motion to dismiss, the court makes no findings of fact but only determines or applies the law.

Thus, in ruling on the motion to dismiss, Judge Lamberth only made rulings of law, not fact. So the appropriate standard of review by the appellate court will be de novo, the least deferential. In other words, the three judges of the federal appellate court for the District of Columbia will accept Perry's facts as true (solely for the purposes of the motion) and decide whether Judge Lamberth correctly applied the law. Only two of three appellate justices have to agree that Judge Lamberth made an error on only one material point of law to reverse his ruling.

Consider the length of the Memorandum opinion dismissing the claims, 52 pages, and the complexity of the legal issues (very complex). In my view, one of the most critical issues revolves around 12 USC 4617(f):

[N]o court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.

Based in part on his reading of this statute, Judge Lamberth dismissed Perry's claims. Yet, recall Judge Sweeney of the Federal Court of claims, quoted at length in a prior Seeking Alpha article, who took a diametrically different view of the critical HERA §4617(f) reasoning.

The likelihood that Judge Lamberth interpreted HERA §4617(f) correctly and was correct on every other material point of law in a 52-page opinion is very slight.

My money, and my long position in Fannie common, is on Judge Lamberth being reversed on at least one significant issue with the case sent back down to the trial court for further proceedings consistent with the appellate court's ruling on the law.

Disclosure: The author is long FNMA.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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