In two of my prior SA articles, Fannie, Freddie And The Difference Between Power And Authority (Part II) and Why Hindes/Jacobs Plaintiffs Will Prevail In The Fannie Mae And Freddie Mac Delaware Litigation, I analyzed the Hindes/Jacobs plaintiffs case seeking to invalidate the NWS under the Delaware General Corporation Law (DGCL). After analyzing the Hindes/Jacobs complaint and FHFA's reply motion to dismiss (Motion to Dismiss), I agree with the Hindes/Jacobs plaintiffs that the NWS is void, so that approximately $130 billion of excess dividends paid on Treasury's senior preferred stock should be recharacterized as principal repayment, inuring to the benefit of FNMA's and FMCC's public shareholders.
My analysis in these SA articles concludes that i) as opposed to FHFA's assertions in its Motion to Dismiss, DGCL rather than federal law applies to the NWS, and the terms of the NWS violate the ""priority and relation" requirement of preferred dividends under DGCL Section 151c, ii) because Delaware law applies and the NWS violates Section DGCL 151c, FHFA as Conservator had no power to cause the issuance of the NWS by FNMA and FMCC, and iii) because FHFA as Conservator had no power to cause the issuance of the NWS, the anti-injunction provision of the Housing and Economic Recovery Act of 2008 (HERA) (which provides "no court may take any action to restrain or affect the exercise of powers or functions of FHFA as a conservator") (Anti-Injunction Provision) does not foreclose judicial inquiry into the merits of the NWS. Therefore, FHFA's Motion to Dismiss must fail, and I believe that the Hindes/Jacobs plaintiffs will prevail on the merits.
In this article, I want to dig deeper into FHFA's legal argument contained in its Motion to Dismiss, because I believe FHFA asserts a very troublesome scope of Executive Branch power that is unprecedented in matters that do not affect national security and sovereignty. This involves FHFA's assertion of plenary conservator power to operate FNMA and FMCC.
FHFA's assertion of plenary conservator power goes well beyond the analytical scope of Judge Lamberth's opinion (Lamberth Opinion) in the Perry case, which FHFA also invokes to seek to insulate the NWS from judicial review.
In Why Hindes/Jacobs Plaintiffs Will Prevail In The Fannie Mae And Freddie Mac Delaware Litigation, I discussed how FHFA's Motion to Dismiss misapplied the Lamberth Opinion. I noted that even assuming that the Lamberth Opinion is "good law" at the time the Hindes/Jacobs case is decided (Perry is now on appeal to the DC Circuit Court of Appeals), and one applies the analytical framework of the Lamberth Opinion to the Hindes/Jacobs claim that the NWS is void under DGCL, the Hindes/Jacobs court should decide that this claim is not barred from judicial review by the Anti-Injunction Provision.
The Lamberth Opinion established a dichotomy between a judicial inquiry into i) the motive (or as Judge Lamberth put it, the why) for the exercise of a conservator action (which is barred by the Anti-Injunction Provision), and ii) the existence of a conservator power for conservator action (or as Judge Lamberth put it, the what) (which is not barred by the Anti-Injunction Provision).
Since a judicial inquiry into the existence of power to consummate the NWS is a what analysis of conservator action, I concluded that the FHFA Motion to Dismiss must fail. In effect, because the Hindes/Jacobs claim asserts that i) FHFA as conservator did not have the power to cause the issuance of the NWS, rather than ii) FHFA's action to cause the issuance of the NWS was improperly motivated or is otherwise an invalid exercise of a conservator power, the Anti-Injunction Provision does not apply.
However, FHFA's Motion to Dismiss also contains another strand of argument which, if it prevails, is not only adverse to the interests of FNMA and FMCC shareholders, but is a dangerous and alarming assertion of Executive Branch power that should be repudiated by the Hindes/Jacobs court.
This is the assertion by FHFA in its Motion to Dismiss that FHFA had "plenary" or unlimited power as conservator over FNMA's and FMCC's affairs. Under this plenary conservator power argument, any and all conservator action is insulated from judicial review since FHFA as conservator had plenary power to operate FNMA and FMCC, so that any and all conservator action must be viewed to be merely an exercise of this plenary power.
Under FHFA's plenary conservator power argument, the Hindes/Jacobs court would necessarily apply the Anti-Injunction Provision to bar judicial inquiry into a claim that FHFA as conservator did not have the power to cause the issuance of the NWS. Indeed, a court would necessarily always refrain from reviewing a FHFA action under FHFA's plenary conservator power argument.
FHFA's Plenary Power Argument
Understanding that the Anti-Injunction Provision does not bar judicial inquiry into claims that a purported conservator power does not exist, as opposed to claims that a conservator power was improperly exercised, one would think it would be quite easy for a court to resolve FHFA's Motion to Dismiss. It should fail.
Hindes/Jacobs plaintiffs assert that FHFA as conservator did not have the power to cause the issuance of the NWS. There is no Hindes/Jacobs claim that the NWS is an improper exercise of a conservator power. However, FHFA seeks to recast the Hindes/Jacobs claim as an allegation that FHFA improperly exercised its conservator power to manage the affairs of FNMA and FMCC so that, as an exercise of conservator managerial or operational power, the Anti-Injunction Provision should bar judicial review.
Now, it is clear that FHFA as conservator might take many actions with respect to FNMA and FMCC, and it is equally clear that FHFA must have the power to take those actions in order for those actions to be valid and enforceable. Therefore, any FHFA action is susceptible to a claim that FHFA did not have the conservator power to take such action. Except under FHFA's plenary power argument of conservator power, no FHFA action would be susceptible to such a claim.
In FHFA's Motion to Dismiss, FHFA argues that it has the plenary, or unlimited, power as conservator to manage the affairs of FNMA and FMCC, and any and all actions taken by FHFA as conservator must be understood as an exercise of this conservator power to manage their affairs. Since the Anti-Injunction Provision bars inquiry into the exercise of conservator power, the courts have no power to review any and all conservator action. Period, full stop. For what would a conservator action be if it wasn't part of a conservator's management or operation of the conservatee.
This would include any conservator action that the conservator has no power to perform, such as the issuance of the NWS, since any such unempowered conservator action can always be subsumed by FHFA as an exercise of plenary conservator managerial power.
This construction of FHFA's conservator power would become an Executive Branch wand making illegal conservator action unreviewable by courts.
In FHFA's Motion to Dismiss, FHFA states that "FHFA…has express plenary power to …conduct all business of [FNMA and FMCC]" (p. 6) and "[r]einforcing and facilitating the exercise of the Conservator's plenary operational authority, Congress explicitly barred any judicial review of the Conservator's actions" (p. 6) (citations omitted; emphasis added).
Now, before we proceed to understand this bold assertion, it is clear that the FHFA is wrong to state that "Congress explicitly barred any judicial review of the Conservator's actions". Congress barred the judicial review of the exercise of conservator power. Congress did not bar the judicial review of conservator action.
But the danger in this FHFA assertion is that if any and all conservator action can be construed as only an exercise of conservator managerial or operational power, and if no conservator action can be independently tested to determine if the conservator possessed the power to take such action, then the conservator has unlimited and unfettered power, including the power to nationalize FNMA and FMCC, because no court would have the jurisdiction to say otherwise.
So, does the FHFA have plenary managerial or operational power as conservator? I will now proceed to examine the implications of a conservator assertion of plenary power. An Executive Branch claim to plenary power is both fraught with danger to civil liberties, and is highly topical, given candidate Trump's recent call to bar United States immigration to all Muslims. FHFA's claim should be subjected to the same outrage as candidate Trump's call.
The Danger of FHFA's Plenary Power Argument
To put it succinctly, whenever the Executive Branch has asserted plenary power under the "plenary power doctrine", federal courts have allowed the Executive Branch to do whatever it wants to do, no matter how egregious and violative of civil rights and liberties that Executive Branch action may be.
Federal courts first enunciated the "plenary power doctrine' in the so-called Chinese Exclusion Cases, and the doctrine stands for the proposition that in the area of immigration where matters of national security and sovereignty are at stake, constitutional rights and liberties do not apply, and the provisions of immigration law are simply whatever Congress and the Executive Branch decide they should be.
For an excellent discussion of the Chinese Exclusion Cases and the development of the "plenary power doctrine," I invite you to read Professor Natsu Taylor Saito's article, The Enduring Effect of the Chinese Exclusion Cases: The Plenary Power Justification for On-Going Abuses of Human Rights.
The "plenary power doctrine" asserts that in political matters such as immigration that intimately affect national security and sovereignty, the Executive Branch may take any action affecting non-United States citizens that it believes is appropriate without judicial review. The "plenary power doctrine" has been applied beyond immigration matters to matters relating to Native American affairs and affairs relating to United States territories (where "the constitution does not follow where the flag goes").
The "plenary power doctrine' has authorized the Executive Branch to arrest and imprison people without formal charges and without "due process", and detain and deport and bar entrance to people based solely upon their race, religion and national origin.
As Professor Saito states in her article, "[m]any have criticized these executive acts as unconstitutional, and if the acts were being undertaken in the context of criminal rather than immigration cases, they would clearly violate a number of constitutional guarantees. These include the First Amendment's protections of freedom of speech and association; the Fourth Amendment's prohibition of unlawful searches and seizures; the Fifth Amendment rights to due process and equal protection; the Sixth Amendment's right to a fair trial, including the right to counsel; and the Eighth Amendment's prohibition of both excessive bail and cruel and unusual punishment. All of these are rights which, outside of the immigration context, apply to all persons, not just to citizens." (p. 23-24, emphasis added)
It is under the "plenary power doctrine" that candidate Trump recently called for the barring of all Muslims from entrance into the United States, which (presumably after consultation with a lawyer) he quickly amended to a call for exclusion from entry of all Muslim non-United States citizens.
So, I started this analysis by asking, in effect, how could a court apply the Anti-Injunction Provision to bar judicial inquiry into a claim that FHFA as conservator did not have the power to cause the issuance of the NWS?
It should be now clear that to do so, the court must adopt FHFA's view of its own conservator power. This is a view that asserts that FHFA possesses plenary conservator power, so that the mere assertion of a conservator power, such as the power to manage or operate FNMA and FMCC, precludes any judicial inquiry into whether FHFA had the requisite power to consummate any and all individual conservator actions.
It should be clear that FHFA's assertion of plenary conservator power goes far beyond the analytical framework of the Lamberth Opinion.
It also should be clear that FHFA's assertion of plenary conservator power seeks to transform the Anti-Injunction Provision from a legislative directive that precludes courts from micro-managing FHFA action when it is clear that FHFA had the power to perform such action, into a dangerous and unnecessary assertion of Executive Branch power to nationalize any private financial institution and destroy private property rights.
The Hindes/Jacobs plaintiffs will prevail because it is abundantly clear the Congress did not endow FHFA under HERA with unreviewable and unfettered plenary conservator power. Put another way, to agree with FHFA's theory of its conservator power, you have to buy into a theory of Executive Branch plenary power that is wholly inappropriate to the fiduciary duty of a conservator.
Disclosure: I am/we are long FNMA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.