Fannie And Freddie: An Unconstitutionally Structured FHFA And Voiding Net Worth Sweep

| About: Freddie Mac (FMCC)

Summary

This article continues to examine the litigation thesis supporting a speculative investment in FNMA and FMCC that I have addressed in two prior Seeking Alpha articles.

I will focus in this article on the argument asserted as Claim IV in the Collins case that FHFA is an unconstitutionally structured executive agency.

If the Collins federal district court in the Southern District of Texas so holds, the next important question is what is the proper remedy for the constitutional violation.

This article will assess possible alternative Court remedies. It is possible that if the Court finds FHFA to be unconstitutionally structured, it may ask for additional briefing regarding remedies.

It is important to remember that Collins Claim IV was not argued or considered in the Perry case. This is a new legal path towards invalidating the Net Worth Sweep.

Introduction

In Fannie (OTCQB:FNMA) And Freddie (OTCQB:FMCC): The Litigation Thesis Remains Viable After Perry, I argued that the litigation thesis supporting a speculative investment in FNMA and FMCC ("GSEs") was still alive and well.

This thesis suffered an unexpected setback when the DC Circuit Court of Appeals majority opinion in Perry held that the Housing and Economic Recovery Act of 2008 ("HERA") did not impose a duty on FHFA to conserve and preserve the assets and rehabilitate the GSEs when acting as conservator. This permitted the single FHFA director acting as conservator to nationalize the GSEs by administrative fiat when it entered into the Net Worth Sweep ("NWS").

In that article I focused on three strands of legal attack that remain viable after the Perry majority opinion, in order of strength of argument:

i) the Hindes/Jacobs case, arguing that the NWS contains terms that are not authorized by Delaware corporate law, and since there is nothing in HERA that expands upon or preempts Delaware law relating to the power of FHFA to cause FNMA to issue preferred stock, the NWS is illegal and void;

ii) the Collins case, which argues that FHFA is an unconstitutionally structured executive agency with a single director not removable by POTUS at will, so that the NWS is void as an act of an illegal agency and, at a minimum, the NWS must be readopted by a constitutionally constituted FHFA in order to be valid (Collins Claim IV), and

iii) arguments in Collins and other cases in other federal circuits that the Perry dissent was right as a matter of proper statutory construction, and that FHFA does have statutory limits upon its conservatorship authority that were violated by the NWS.

In If Perry Majority is Correct, FHFA Director Watt is Kinge George, and Fannie Mae and Freddie Mac Shareholders are Serfs, I discussed how Perry could formulate a SCOTUS appeal for writ of certiorari by essentially arguing the combination of ii) and iii) above. This appeal would join the argument that the Perry dissent is correct, as a matter of statutory interpretation, with the argument that if, in the alternative, the Perry majority is correct, then Congress delegated excessive legislative authority to a single executive officer, the FHFA Director, who is not removable at will by POTUS, in violation of the separation of powers doctrine.

I now want to address the Collins case in ii) above more closely, and assess whether

i) the FHFA is an unconstitutionally structured executive agency;

ii) if so, whether the NWS is subject to invalidation because it was adopted by an unconstitutionally structured executive agency; and

iii) if both are so, what the FHFA must do as a constitutional minimum if FHFA considers whether to ratify or readopt the NWS.

HERA provides the FHFA with broad statutory powers over a vast swath of the American economy, but the FHFA is governed by a single director who is removable by POTUS only for cause. In Collins motion for summary judgment, Collins argues in its Claim IV that "FHFA's status as an independent agency headed by a single Director with regulatory authority over a large sector of the national economy is without precedent not only in the United States Reports [all decided cases] but also the annals of American history...[It is) a grave threat to the individual liberty that the separation of powers safeguards..."

As such, Collins argues, FHFA is unconstitutionally structured, and the NWS, as a decision of an unconstitutional agency, must be vacated. The NWS must be reconsidered and readopted, or not, by an FHFA that has been restructured in a constitutional manner.

Let's examine these claims step by step.

The Constitutionality of a Single Director Executive Agency Removable by POTUS only For Cause

The development of the law relating to the constitutionality of limits upon the power of POTUS to remove executive officers has proceeded upon an uncertain path, and I have no choice other than to proceed upon each twist and turn on that path, because it is not clear whether that path has reached a settled endpoint.

When Judge Atlas in the Collins case decides the merits of the Collins Claim IV, I believe the Court will have to proceed on this same path. While I believe that when Judge Atlas takes this path, the Court will uphold the Collins Claim IV and hold the FHFA to be unconstitutionally structured, one must appreciate the opportunities available to her to distinguish Collins Claim IV in a way adverse to Collins.

As I discuss below, the constitutional analysis has moved beyond an initial stage, what I refer to as the tug of power between the legislative and executive branches, as seen in the Myers and Humphreys Executor cases, to a more coherent and mature analytic stage, which is the necessity to preserve individual liberty and democratic accountability, as seen in Justice Robert's extraordinary majority opinion in the Free Enterprise case. These cases are discussed below.

Once the constitutional analysis regarding POTUS's removal power is understood more as a battleground for individual liberty than for the intramural contest of legislative and executive branch power, then the strength of the Collins Claim IV emerges.

For purposes of analyzing the constitutionality of an executive agency whose single director is not removable at will by POTUS, one must begin with the US Constitution. The relevant parts of Article II of the Constitution are as follows:

"Section 1. The executive Power shall be vested in a President of the United States of America…"

"Section 3. [POTUS] shall…take Care that the Laws be faithfully executed…"

Article II, Section 2 states POTUS "…shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the Supreme Court, and all other Officers of the United States whose Appointments are not herein otherwise provided for, and which shall be established by Law," but that with respect to "inferior officers", that "the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments." (the Appointments Clause)

Notice, Section 2 does not state that when Congress provides for Senate consent of POTUS appointments of future Officers (i.e. executive officers who exercise "significant authority pursuant to the laws of the United States," and not mere employees who are supervised by executive officers), as Congress may establish by law, Congress may at the same time condition or limit POTUS's power to remove such executive officers. Section 2 is silent on POTUS removal power specifically. Note also that while Article I vests legislative power in a multi-member bicameral Congress, Article II vests executive power in a single person, the President.

In Myers v United States, the seminal SCOTUS case dealing with the removal powers of POTUS in 1926, the Myers Court considered a Congressional requirement passed in 1876 that POTUS secure the consent of the Senate in order to both appoint and remove a postmaster. The Myers Court examined closely both the constitutional language, and Congress's and POTUS's historical understanding of this language. This included a lengthy recitation of the first Congress's deliberations with respect to the removal powers of POTUS (including debate transcripts and writings of Madison, Hamilton and other Framers) in 1789, as well as subsequent legislative practice and judicial precedent. The majority stated:

"As [POTUS] is charged specifically to take care that [laws] be faithfully executed, the reasonable implication, even in the absence of express words, was that as part of his executive power he should select those who were to act for him under his direction in the execution of the laws. The further implication must be, in the absence of any express limitation respecting removals, that as his selection of administrative officers is essential to the execution of the laws by him, so must be his power of removing those for whom he cannot continue to be responsible."

Justice Brandeis in dissent argued that, in the case of the postmaster Myers, postmasters were "inferior officers," or civil service positions, and the conditions for their appointment and removal resided with Congress. As Justice Brandeis's dissent makes clear, postmasters were political patronage positions, and therefore the Myers dispute was essentially a low level congressional and executive branch squabble over which agency could control patronage spoils in the case of postmasters, and Congress had the power to specify in advance that it would be the winner of that controversy.

The Myers Court majority essentially sidestepped the question as to whether a mere postmaster was an inferior officer by noting that "we have no doubt that when Congress by law vests the appointment of inferior officers in the heads of departments, it may limit and restrict the power of removal as it deems best for the public interest." But Congress did not vest the appointment of postmaster Myers in the Postmaster General, but rather in POTUS, and while Article II, Section 2 permits Congress to condition POTUS's appointment power on the consent of the Senate, Congress had no power to similarly condition POTUS's removal power under Article II, Section 2.

One should appreciate that the scope of POTUS's removal power is simply one example of the tension established by constitutional design between Congressional and Presidential power, usually expressed as the degree to which Congress may limit Presidential discretion. This tension continued after Myers, with the Humphrey's Executor case decided just nine years after Myers.

Before proceeding to Humphrey's Executor, it makes sense to consider Justice Holmes's succinct separate dissent in Myers, which I quote in full below:

"The arguments drawn from the executive power of the President, and from his duty to appoint officers of the United States (when Congress does not vest the appointment elsewhere), to take care that the laws be faithfully executed, and to commission all officers of the United States, seem to me spider's webs inadequate to control the dominant facts.

We have to deal with an office that owes its existence to Congress and that Congress may abolish tomorrow. Its duration and the pay attached to it while it lasts depend on Congress alone. Congress alone confers on the President the power to appoint to it and at any time may transfer the power to other hands. With such power over its own creation, I have no more trouble in believing that Congress has power to prescribe a term of life for it free from any interference than I have in accepting the undoubted power of Congress to decree its end. I have equally little trouble in accepting its power to prolong the tenure of an incumbent until Congress or the Senate shall have assented to his removal. The duty of the President to see that the laws be executed is a duty that does not go beyond the laws or require him to achieve more than Congress sees fit to leave within his power."

While Myers may have sufficed for the removal of a postmaster, Congress had by the time of Humphrey's Executor passed laws establishing commissions to regulate matters relating to antitrust (FTC), interstate commerce (ICC) and securities regulation (SEC), among others. Congress intended these commissions to be composed of multiple members with no more than a majority belonging to a single political party, who were nonpartisan experts and who would profit from accumulated expertise during fixed terms not subject to removal at will by POTUS.

The emerging principle of good governance was that Congress could obtain the enlightened administration of law through an expert "independent" administrative bureaucracy that would promulgate laws, subject to broad grants of legislative discretion from Congress, apart from the pernicious effects of political partisanship. The notion was that Congress would legislate, for example, that free trade and competition was the legislative goal, and the FTC would impartially determine when, how and where to implement this in a quasi-legislative and quasi-judicial way based upon nuance to practical details and industry expertise. As such, POTUS was to have no removal power since the independent commissioners weren't executive officers in the strict sense, but mini-legislators and mini-judges making law and deciding cases and controversies arising from their quasi-legislative decisions.

All of which gives rise to Humphrey's Executor, where FDR tried to remove an FTC commissioner, and in which SCOTUS voided FDR's removal and distinguished Myers as a case limited to POTUS's power to remove an executive exercising "executive power," as opposed to independent commissioners. FDR understood this decision as a simple contest of legislative versus executive power, and would attempt to tilt the scales in his favor by means of a plan to "pack" the Court.

SCOTUS understood in Humphrey's Executor the fragility of this distinction between multi-member, non-partisan expert commissions exercising quasi-legislative and quasi-judicial power, not removable except "for cause" (essentially "inefficiency, neglect of duty, or malfeasance in office") by POTUS, and single executive agency directors exercising executive power that are to be removable at will by POTUS. SCOTUS stated in Humphrey's Executor: "[t]o the extent that, between the decision in the Myers case, which sustains the unrestrictable power of the President to remove purely executive officers, and our present decision that such power does not extend to an office such as that here involved, there shall remain a field of doubt, we leave such cases as may fall within it for future consideration and determination as they may arise."

This uneasy tension over limits to POTUS power of removal based upon an intellectually suspect distinction relating to "executive power" prevailed until SCOTUS reaffirmed analytic stability in Free Enterprise Fund in 2010.

In Free Enterprise, the Court considered the constitutionality of the provisions of Sarbanes-Oxley that created the Public Company Accounting Oversight Board (PCAOB), which had expansive powers to regulate the accounting industry, and whose members were appointed by the SEC but could not be removed except for cause. In turn, the members of the SEC were likewise not removable by POTUS except for cause. This created a "dual layer" of insulation of the PCAOB members from POTUS removal power, which the majority in Free Enterprise found unconstitutional.

The DC Circuit Court of Appeals had found for PCAOB below, utilizing then existing analysis of parsing whether POTUS's removal power had been unduly limited by Congress. The DC Court of Appeals majority reasoned that although the President "does not directly select or supervise the Board's members," the Board is subject to the comprehensive control of the [SEC] Commission, and thus the President's influence over the Commission implies a constitutionally sufficient influence over the Board as well."

On some basis, the DC Circuit majority concluded that if POTUS had sufficient influence over SEC Commissioners, even though POTUS couldn't remove these Commissioners at will, then somehow that influence filtered down to the PCAOB members even though, in turn, the SEC Commissioners couldn't remove PCAOB members at will.

Justice Roberts and the Free Enterprise majority would have none of this, but the true merit of the opinion is the way the Free Enterprise majority changed the analysis from a contest of inter-government branch power to the need to preserve individual liberty. As a side note, the Free Enterprise SCOTUS majority adopted much of the analysis made by DC Circuit Judge Kavanaugh in his Free Enterprise dissent; we will come across Judge Kavanaugh writing for the majority in the PHH case discussed below.

Free Enterprise rejected an analysis that would have the POTUS removal power ebb and flow as a result of legislative and executive compromise, as if the Board was "the kind of practical accommodation between the Legislature and the Executive that should be permitted in a 'workable government.'"

Instead the Free Enterprise majority reasoned, quoting Hamilton, without a clear and effective chain of command, the public cannot "determine on whom the blame or the punishment of a pernicious measure, or series of pernicious measures ought really to fall."

Continuing and quoting Madison in The Federalist No. 51, Free Enterprise held that the Framers created a structure in which "[a] dependence on the people" would be the "primary control on the government." That dependence is maintained, not just by "parchment barriers," but by letting "[a]mbition . . . counteract ambition," giving each branch "the necessary constitutional means, and personal motives, to resist encroachments of the others." A key "constitutional means" vested in the President-perhaps the key means-was "the power of appointing, overseeing, and controlling those who execute the laws." And while a government of "opposite and rival interests" may sometimes inhibit the smooth functioning of administration, "[t]he Framers recognized that, in the long term, structural protections against abuse of power were critical to preserving liberty."

It is important to realize that Free Enterprise does not represent an invalidation of all limits of POTUS removal power, and it does not specifically invalidate removal for cause. Humphrey's Executor upholds removal for cause for multi-member administrative agencies, and Morrison upheld a for cause removal by the Attorney General of an independent prosecutor. The Free Enterprise majority characterized these cases to represent "limited restriction" under "certain circumstances."

The "certain circumstances" to date are an independent agency composed as a multi-member body constituted in a non-partisan manner (no more than a majority of the members belonging to a single party) in the case of Humphrey's Executor, and the need for preserving independence for a prosecutor charged with investigating ethical breaches within the Executive branch itself, in the case of Morrison.

But Free Enterprise did change the analysis of limiting POTUS removal power to good cause to an analysis of individual liberty, which is where the PHH case, and Judge Kavanaugh now writing for the majority, takes the analytical baton.

PHH v CFPB presents the clearest formulation of the POTUS removal power as analyzed under considerations of individual liberty. Judge Kavanugh addressed straight on the applicability of Humphrey's Executor exception to Myers, and whether authorizing the "for cause" POTUS removal limitation for multi-member commissions was applicable to the situation of a single director agency. Just as the Myers Court searched history for indication of legislative and executive expectations in practice, so too did Judge Kavanaugh look for precedents of single director agencies removable by POTUS only for cause. Judge Kavanaugh found only two anomalies, FHFA and the Controller of the Currency (perhaps leading Collins to amend its complaint with Claim IV).

Quoting Judge Kavanaugh, "the independent agencies collectively constitute, in effect, a headless fourth branch of the U.S. Government. They exercise enormous power over the economic and social life of the United States. Because of their massive power and the absence of Presidential supervision and direction, independent agencies pose a significant threat to individual liberty and to the constitutional system of separation of powers and checks and balances. To help mitigate the risk to individual liberty, the independent agencies, although not checked by the President, have historically been headed by multiple commissioners, directors, or board members who act as checks on one another. Each independent agency has traditionally been established, in the Supreme Court's words, as a "body of experts appointed by law and informed by experience." The multi-member structure reduces the risk of arbitrary decisionmaking and abuse of power, and thereby helps protect individual liberty. In other words, to help preserve individual liberty under Article II, the heads of executive agencies are accountable to and checked by the President, and the heads of independent agencies, although not accountable to or checked by the President, are at least accountable to and checked by their fellow commissioners or board members."

The PHH Court chose as a remedy to excise the unconstitutional removal provision and to leave the rest of the statutory provisions regarding the CFPB intact. The statute in question, Dodd-Frank, had a severability clause, stating that if any provision of the statute should be found unconstitutional, the rest of the statute should remain in effect and enforced without the unconstitutional provision. Judge Kavanugh noted the presence of the severability clause without indicating that he placed great weight upon it in the selection of his remedy.

The DC Circuit asked for en banc reconsideration of the case, asking whether the constitutionality of a single director removable only for cause needed to be addressed, given that the Court had ruled in addition that the CFPB had misapplied the underlying substantive law that was challenged by the plaintiffs in PHH. Another basis for avoiding the constitutional question would be to hold that the CFPB administrative law judge (ALJ) was unconstitutionally appointed under the Appointments Clause (i.e. that the ALJ was an Officer and not an employee).

By asking for en banc rehearing, the DC Circuit vacated the PHH order holding unconstitutional a single agency director removable for cause, without commenting upon the merits of the PHH opinion by Judge Kavanaugh. The rehearing en banc has been fully briefed by the parties and numerous amici, and oral argument has been scheduled for May 24, 2017. It is noteworthy that the Department of Justice (DOJ) agrees with PHH and disagrees with CFPB that the CFPB is unconstitutionally structured, but also disagrees with PHH insofar as DOJ argues that the proper remedy is to sever the unconstitutional provision and leave the remainder of the statute intact, as opposed to PHH's argument to strike down the CFPB as an unconstitutional agency.

We have now traveled the path of constitutional analysis of POTUS removal power, and I think it is fair to say Judge Atlas will have guidance in analyzing Collins Claim IV without feeling compelled to decide in any one manner. There is room under Humphrey's Executor as explicated by Free Enterprise to uphold a "for cause" limitation upon POTUS' removal of a single officer if Judge Atlas declines to follow Judge Kavanaugh's extension of Free Enterprise to PHH.

For example, an amicus brief by "Separation of Powers Scholars" in the PHH en banc hearing argues that what is determinative for purposes of constitutional separation of powers analysis is not the number of directors exercising authority subject to "for cause" removal (as discussed by Judge Kavanaugh), but rather the nature of the executive officers regulatory function, and the amicus brief further argues that financial regulatory oversight has historically been accorded substantial independence.

This amicus brief assesses the extent to which POTUS' power to execute the laws has in fact been diminished, along the lines of the legislative versus executive power contest analysis, as opposed to an analysis that considers the potential abuse of individual liberty by a single director not removable at will by POTUS.

If I am right, the individual liberty analysis has displaced the legislative versus executive power contest analysis as the proper basis for decision, and both the DC Circuit en banc and the Collins Court will invalidate as unconstitutional the structuring of a single agency director removable by POTUS only for cause. Indeed, Judge Atlas may wish to delay her decision in Collins pending an eventual en banc DC Circuit Court decision in PHH (though an ultimate PHH appeal to SCOTUS on writ of certiorari can be expected irrespective of decision outcome; the wait may become excessive).

The question is whether Judge Atlas believes that POTUS control over an executive officer, even when that executive officer acts alone, has not been unduly diminished by a "for cause" removal standard, such that the executive officer's accountability to POTUS has not been unduly impaired, such that individual liberty represented by POTUS's accountability to the electorate is not unduly burdened.

I believe that the better answer is to hold that FHFA is unconstitutionally structured insofar as a single director can exercise broad discretion (indeed, under the Perry majority analysis, unfettered discretion) across a huge swath of the national economy, and not be subject to POTUS removal except for malfeasance, or dereliction of duty. But if Judge Atlas so holds, the next step of the Claim IV analysis is presented.

Is the NWS Subject to Invalidation if Adopted by an Unconstitutionally Structured Executive Agency?

Assuming the Collins Court finds that the FHFA was unconstitutionally structured at the time the NWS was adopted, the Court has several options as to how to proceed by way of remedy. The Court could:

i) uphold the NWS as a valid agency action, since the agency had not been determined to be unconstitutionally structured at the time of decision, and excise the removal for cause provision on a going-forward basis (even though HERA does not contain a severability clause);

ii) invalidate the NWS as an action by an unconstitutional agency, and excise the removal for cause provision on a going-forward basis; or

iii) invalidate the NWS as an action by an unconstitutional agency, and strike down FHFA as the creation of HERA, an unconstitutional statute.

In the case of ii) above, i will consider in the next section of this article what the Collins Court might require of FHFA in the event FHFA wishes to reconsider or readopt the NWS.

The status of agency action if the director removal provision is found unconstitutional is not directly presented in PHH. There, the DC Circuit found that the CFPB action imposing a fine against PHH was wrong as a matter of the substantive financial regulatory law being applied by the CFPB director; the PHH Court did not have to invalidate the fine because of the constitutional claim. The en banc DC Circuit could uphold that determination, invalidating the agency fine against PHH without considering the effect an unconstitutional removal provision itself might have upon the agency action. Of course, the Collins Court can also sidestep the constitutional question if it finds that the Perry dissent was right and the Court calls for a trial to determine whether the NWS is inconsistent with HERA as a matter of statutory interpretation.

If the Collins Court holds as per i) above, the Court will have followed the suggestion of the FHFA brief that there is a distinction between agency action where a court finds that there has been a violation of the Appointments Clause in the appointment of the agency director, and agency action where a court finds that the removal provisions for that agency director are unconstitutional.

In essence, FHFA argues that even if the single director removal for cause provision is unconstitutional (and FHFA argues that it isn't), agency action remains valid if taken prior to the time that constitutional determination has been made. While the DOJ agrees with Collins that the single director removal for cause provision is unconstitutional, DOJ agrees with FHFA that the NWS remains valid notwithstanding the constitutional violation, and the proper constitutional remedy is to excise the removal for cause provision. Of course, Collins argues that at a minimum, the NWS must be invalidated and if the Collins Court chooses excision of the removal for cause provision as the constitutional remedy, FHFA with a constitutionally removable director must readopt the NWS.

FHFA's principal argument in its Collins reply brief is that there is a distinction between an Appointments Clause violation, where the unconstitutionally appointed officer was never acting lawfully, so that its actions are therefore unlawful and subject to invalidation, and a separation of powers violation, where the officer is lawfully acting notwithstanding the unconstitutional removal provision as a de facto officer.

FHFA and DOJ must distinguish Intercollegiate Broadcasting System v Copyright Royalty Judges (Intercollegiate I) a prominent DC Circuit Court of Appeals case in which the Court found that the appointment of the copyright royalty judges by the Librarian of Congress violated the Appointments Clause because the Librarian could only remove the judges for cause, and the Court remedied the constitutional violation by excising the unconstitutional provision from the relevant statute.

Because the constitutional violation existed at the time of the agency decision (although that determination of unconstitutionality was made well after the agency decision), the Intercollegiate I Court invalidated the copyright judges' decision without reaching the substantive merits, and remanded the case back to the copyright judges for reconsideration as officers removable by the Librarian at will.

It seems to me that just as Myers viewed appointment and removal as two sides of the same coin, treating the appointment and removal powers of POTUS as cojoined separation of powers issues, it is likely that the Collins Court will look to Appointments Clause judicial remedies, such as found in Intercollegiate I, and Intercollegiate II discussed below, as a proper standard for fashioning removal power judicial remedies.

The proper action that the agency must take after remand arose as Intercollegiate II, and after the Librarian appointed three new judges to reconsider the case and set the same royalty rate. Plaintiffs challenged the manner in which the new properly appointed judges conducted the proceeding after remand. It is helpful to understand in detail what the copyright royalty judges did upon remand.

As stated by the Court in Intercollegiate II, "First, the Board interpreted this court's remand as directing it to review the entire record and to issue a new determination on all issues, not just the $500 minimum fee that Intercollegiate had challenged on appeal.

Second, because the court did not reach the merits of the dispute, the Board understood that it "could, after an appropriate process, issue a new final determination that . . . reaches the same conclusions . . . as the prior Final Determination." The Board recognized, however, that it was "also free to reach completely different conclusions in [its] new final determination."

Third, the Board decided neither to "rubber stamp" the prior Board's decision, nor to conduct a "complete 'do over' of the entire original process." Instead, it would conduct an independent, de novo review of the entire written record of the proceeding. The Board decided not to hold new evidentiary hearings because Intercollegiate had "fail[ed] . . . to point to any instance of an exclusion of relevant evidence that affected the outcome of the proceeding, or to any portion of the Final Determination that turned on witness credibility." Likewise, the Board decided not to accept additional submissions because "no party ha[d]provided any specific reason . . . to reopen the record," and because each party "had ample opportunity to present its case.''

In sum, the Board concluded that "it would be neither fair, nor efficient, nor economical to proceed . . . with additional submissions, discovery, and evidentiary hearings." Accordingly, as authorized by 17 U.S.C. § 803(b)(5), the Board stated its intention to "conduct[] only a paper proceeding, consisting of a review of the existing record in this proceeding, and then issu[e] a determination at the conclusion of that review." The Board established a ten-day period for comments on the Notice. "[T]o the extent that any party disagree[d]" with the plan to go forward with a paper proceeding, the Board directed such party to "identify in its comments to this notice specific examples where it believes the outcome of the original proceeding turned on elements, such as witness demeanor, that are not readily determined from a review of the written record."

Plaintiff Intercollegiate Broadcasting had argued that the Copyright Royalty Judges were required to conduct "conduct a new hearing, not merely a de novo review of the record assembled by the constitutionally invalid tribunal." The Court disagreed and held that it could not find that the subsequent determination by different judges was not reached on an independent basis from that of the unconstitutionally valid judges.

If the Collins Court agrees with Collins that the NWS must be invalidated since that decision was made at a time the unconstitutional removal provision was in place, the Collins Court might be expected to use Intercollegiate II upon remand as a guide for FHFA to use in connection with any reconsideration of the NWS (although this would still leave Collins to argue that the independent de novo review that Intercollegiate II calls for must be made by a new director as decision maker, as this was the case in Intercollegiate II).

What Must FHFA Do In Connection With Any Reconsideration of the NWS Upon Remand?

It is crucial to distinguish between the legal power FHFA has to enter into the NWS, and the proper factual basis upon which FHFA determines to exercise its discretion to do so.

As to legal power, the Perry majority opinion held that FHFA had no legal limitation upon its power to enter into the NWS based upon its duties as conservator to rehabilitate FNMA and FMCC, and preserve and conserve their assets. This legal conclusion may or may not be followed by other federal circuits or by SCOTUS upon any appeal of Perry. Moreover, the Perry majority did not consider any limitation upon its legal power as conservator based upon the argument raised in Hindes/Jacobs relating to the permissible terms of preferred stock FHFA could cause FNMA and FMCC to issue. So the Perry majority may not have the last word as to the legal power of FHFA as conservator to enter into the NWS.

But even granting FHFA the legal power to enter into the NWS, in the event the Collins Court finds that the FHFA single director removal for cause provision is unconstitutional, and the Collins Court also follows the Appointments Clause remedy in Intercollegiate II of vacating the NWS in order for it to be reconsidered by a constitutionally structured FHFA in a de novo proceeding, the question before the FHFA arising from Collins Claim IV is not whether it has the power to enter into the NWS, but whether it is an appropriate decision to do so, based upon a de novo consideration.

Following Intercollegiate II, Collins plaintiff should have ample opportunity to petition FHFA to point to "instance[s] of an exclusion of relevant evidence that affected the outcome of the proceeding" when FHFA originally adopted the NWS. Moreover, the passage of time since 2012 to 2017 has provided FHFA the wisdom to assess the appropriateness of the NWS in a way that only hindsight can provide.

It is not a question, as the Perry majority put it, whether, based upon what the FHFA director reasonably knew in 2012, including the view without the benefit of hindsight that FNMA and FMCC were in a "death spiral", it was appropriate for the FHFA director to enter into the NWS.

The FHFA director now has the benefit of hindsight. The FHFA director now knows that Fannie and Freddie made $158 billion in sweep payments to Treasury in the six quarters after it was imposed. It can't un-know this.

Any de novo reconsideration of the administrative record relating to FHFA's adoption of the NWS must necessarily assess the completeness of that record and the accuracy of the FHFA's judgments made in 2012, then under conditions of uncertainty as to the future economic performance of FNMA and FMCC, but now with that uncertainty lifted.

This de novo consideration is to be made in 2017. There is no longer any judgment under uncertainty. There was no death spiral, and the 11,000 documents improperly withheld under claim of privilege in the Fairholme case should be deemed material in connection with any attempt to establish a complete administrative record.

Unlike in Intercollegiate II, Collins can point to those 11,000 documents, as well as those documents presented to the Perry Circuit Court, such as the FNMA's CFO statement just before adoption of the NWS that FNMA was about to enter into a new era of unprecedented FNMA profitability, as documents that must be considered in connection with any de novo review of the administrative record compiled in connection with any re-adoption of the NWS.

The question would be not whether FHFA has the power to re-adopt the NWS in 2017, but whether it can justify doing so after a de novo review of the record in 2017 reveals facts known in 2017 that it did not know, or couldn't know, or purposely failed to know in 2012.

I don't know how FHFA can conduct a de novo reconsideration of the NWS in 2017 by restricting itself to the 2012 administrative record. Any reconsideration of the NWS in 2017 must result in a determination that the NWS was inappropriate then in 2012, and now in 2017.

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.

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