United States District Court, D. Minnesota
ATIF F. BHATTI; TYLER D. WHITNEY; and MICHAEL F. CARMODY, Plaintiffs,
THE FEDERAL HOUSING FINANCE AGENCY; MELVIN L. WATT, in his official capacity as Director of the Federal Housing Finance Agency; and THE DEPARTMENT OF THE TREASURY, Defendants.
G. Knudson and Michael M. Sawers, BRIGGS AND MORGAN, P.A.,
J. Katerberg, Howard N. Cayne, and Asim Varma, ARNOLD &
PORTER KAYE SCHOLER LLP; Mark A. Jacobson, Karla M. Vehrs,
and Christopher Proczko, LINDQUIST & VENNUM LLP, for
defendants Federal Housing Finance Agency and Melvin L. Watt.
Charles Merritt, UNITED STATES DEPARTMENT OF JUSTICE; Craig
R. Baune, UNITED STATES ATTORNEY'S OFFICE, for defendant
Department of the Treasury.
Patrick J. Schiltz United States District Judge
are shareholders in the Federal National Mortgage Association
(commonly known as “Fannie Mae” or
“Fannie”) and the Federal Home Loan Mortgage
Corporation (commonly known as “Freddie Mac” or
“Freddie”). Fannie and Freddie (collectively,
“the Companies”) are federally chartered,
for-profit, publicly traded corporations that are in the
business of purchasing and guaranteeing mortgages and
bundling them into securities. Both companies are regulated
by defendant Federal Housing Finance Agency
2008, in the midst of the Great Recession, FHFA placed Fannie
and Freddie into conservatorship-and then, acting in its
capacity as conservator on behalf of the Companies, FHFA
entered into preferred stock purchase agreements
(“PSPAs”) with the United States Department of
the Treasury (“Treasury”). Under the PSPAs,
Treasury made billions of dollars available to Fannie and
Freddie in exchange for shares of the Companies' stock.
Over the years, the parties amended the PSPAs from time to
time. In August 2012, FHFA and Treasury amended the PSPAs for
the third time in order to restructure the calculation of
dividends to be paid to Treasury. Under this Third Amendment
(which is still in effect), Fannie and Freddie pay a
quarterly dividend to Treasury that is roughly equal to the
amount by which their net worth exceeds zero.
Third Amendment is deeply unpopular among some of the
Companies' shareholders, and they have launched at least
two waves of lawsuits in an attempt to undo it. The first
wave of litigation attacked the Third Amendment directly.
When that wave largely failed, shareholders launched a second
wave of litigation (including this lawsuit). In the second
wave of litigation, shareholders are attacking the Third
Amendment indirectly by challenging the legality of FHFA
itself-hoping that, by killing the tree, they can kill one of
its fruits. Plaintiffs in this particular lawsuit challenge
the structure of FHFA (specifically, the fact that it is
headed by a single director who can be removed only for
cause). Plaintiffs also challenge the way that FHFA is funded
and limitations on judicial review of FHFA's actions as
conservator. Plaintiffs further challenge the length of the
term that was served by an acting director of FHFA. And
finally, plaintiffs challenge Congress's grant of
conservatorship powers to FHFA.
matter is before the Court on defendants' motions to
dismiss and plaintiffs' motion for summary judgment. For
the reasons that follow, defendants' motions are granted,
and plaintiffs' motion is denied.
and Freddie are for-profit, stockholder-owned corporations
whose activities include purchasing, guaranteeing, and
securitizing mortgages originated by private lenders. Am.
Compl. ¶ 10. From 1992 until 2008, the Companies were
regulated by the Office of Federal Housing Enterprise
Oversight (“OFHEO”). Am. Compl. ¶ 13.
2008, after the subprime mortgage crisis triggered the Great
Recession, Congress passed the Housing and Economic Recovery
Act (“HERA”), Pub. L. 110-289, 122 Stat. 2654
(July 30, 2008). Am. Compl. ¶¶ 7, 14, 25. HERA
established FHFA as the successor to OFHEO. Am. Compl.
¶¶ 7, 14; 12 U.S.C. § 4511. Congress
established FHFA because it found that “more effective
Federal regulation is needed to reduce the risk of
failure” of Fannie and Freddie. 12 U.S.C. §
4501(2). Under HERA, FHFA is responsible for overseeing the
“prudential operations” of Fannie and Freddie and
ensuring that they operate “in a safe and sound
manner” consistent with the public interest; that they
“‘foster liquid, efficient, competitive, and
resilient national housing finance markets”; and that
they have “adequate capital and internal
controls.” 12 U.S.C. § 4513(a)(1).
headed by a single director nominated by the President and
confirmed by the Senate. 12 U.S.C. § 4512(a), (b)(1).
The director serves a term of five years but can be removed
by the President for cause. Id. § 4512(b)(2).
FHFA also has three deputy directors appointed by the
director. Id. § 4512(c)-(e). If the director
leaves office or is incapacitated before his or her term
concludes, the President must designate one of the three
deputies to serve as acting director until a successor is
appointed or the director returns. Id. §
gives FHFA the authority to place Fannie and Freddie into a
conservatorship or receivership under certain circumstances
“for the purpose of reorganizing, rehabilitating, or
winding up the affairs” of the Companies. 12 U.S.C.
§ 4617(a)(2). Upon appointment as conservator or
receiver, FHFA succeeds to “all rights, titles, powers,
and privileges of the regulated entity, and of any
stockholder, officer, or director of such regulated entity
with respect to the regulated entity and the assets of the
regulated entity[.]” Id. § 4617(b)(2)(A).
When FHFA acts as a conservator, the agency is “not . .
. subject to the direction or supervision of any other agency
of the United States . . . .” Id. §
4617(a)(7). In addition, HERA limits the extent to which
courts may “take any action to restrain or affect the
exercise of powers or functions of the [FHFA] as a
conservator . . . .” Id. § 4617(f).
independently funded from annual assessments imposed on
Fannie and Freddie-assessments that are “not . . .
construed to be Government or public funds or appropriated
money.” 12 U.S.C. § 4516(a), (f)(2).
to statute, FHFA's first director was James Lockhart, who
at the time of the enactment of HERA was serving as director
of OFHEO. Am. Compl. ¶ 42; see also 12 U.S.C.
§ 4512(b)(5). Lockhart resigned as FHFA director in
August 2009. Am. Compl. ¶ 42. President Obama then
designated deputy director Edward DeMarco to serve as acting
director. Am. Compl. ¶ 43. In November 2010, President
Obama nominated Joseph Smith, Jr., to serve as FHFA director.
Am. Compl. ¶ 44. The Senate failed to confirm Smith,
however. Am. Compl. ¶ 44. In May 2013, President Obama
nominated Melvin Watt to serve as FHFA director. Watt was
confirmed by the Senate on December 10, 2013 and sworn into
office on January 6, 2014. Am. Compl. ¶¶ 44.
The Conservatorship and the PSPAs
noted, FHFA placed Fannie and Freddie into conservatorship on
September 6, 2008. Am. Compl. ¶ 28. The next day, Fannie
and Freddie (acting through their conservator, FHFA) entered
into the PSPAs with Treasury. Am. Compl. ¶ 31. Under the
original PSPAs, Treasury committed to provide up to $100
billion to each Company to ensure that it maintained a
positive net worth. Am. Compl. ¶ 32. For any quarter in
which a Company's liabilities exceeded its assets, the
PSPAs authorized the Company to draw on Treasury's
commitment up to the amount of the shortfall. Am. Compl.
¶ 32. In return, Treasury received a million shares of
senior preferred stock in the Companies and warrants
entitling it to purchase up to 79.9 percent of the
Companies' common stock at a nominal price. Am. Compl.
¶¶ 34-35. By operation of law, Treasury's right
to purchase common stock in the Companies expired on December
31, 2009. Am. Compl. ¶ 30.
preferred stock has a liquidation preference of $1 billion,
which increases by one dollar for every dollar the Companies
draw on Treasury's funding commitment. Am. Compl. ¶
35. In the event of liquidation, Treasury will be entitled to
recover the full amount of its preference before any other
stockholder receives payment. Am. Compl. ¶ 35. Treasury
is also entitled to receive dividends, which, under the
original PSPAs, the Companies could elect to pay by
increasing the amount of the liquidation preference. Am.
Compl. ¶¶ 36-37.
PSPAs have been amended several times. In May 2009, the
parties doubled Treasury's funding commitment from $100
billion to $200 billion. Am. Compl. ¶ 41. In December
2009, the parties increased the funding commitment even more,
establishing a formula that permits Treasury's funding
commitment to exceed $200 billion. Am. Compl. ¶ 41.
Finally, in August 2012, the parties entered into the Third
Amendment, which is the focus of this litigation. Am. Compl.
Third Amendment replaced the fixed-rate annual dividend to
which Treasury was entitled-and which could be paid by
increasing Treasury's liquidation preference rather than
with cash-with a quarterly cash dividend equal to the amount
by which the Companies' net worth exceeds zero, less a
capital buffer that decreases over time (and reaches zero in
2018). Am. Compl. ¶ 55. Plaintiffs refer to this
dividend requirement as the “Net Worth Sweep.”
Am. Compl. ¶ 55.
conservatorship in general and the Third Amendment in
particular are bitterly opposed by plaintiffs and other
shareholders participating in the second wave of legal
attacks designed to undo the Third Amendment. According to
plaintiffs, the conservatorship and the Third Amendment were
parts of a nefarious plot to seize control of Fannie and
Freddie and operate them for the exclusive benefit of the
federal government. Am. Compl. ¶ 28. Plaintiffs claim
that Fannie and Freddie did not need the hundreds of billions
of dollars of financing that Treasury provided to the
Companies during the Great Recession. To the contrary,
plaintiffs claim, the Companies were always in a strong
financial position and could have weathered the Great
Recession by raising additional capital through the financial
markets. Am. Compl. ¶¶ 25-29. Plaintiffs'
assertion that Fannie and Freddie could have remained solvent
without the help of the federal government is dubious,
see, e.g., Perry Capital LLC v. Mnuchin,
864 F.3d 591, 598-602 (D.C. Cir. 2017), pets. for cert.
denied, 138 S.Ct. 978 (2018) (Nos. 17-578, 17-580,
17-591), but the Court is required to treat it as true at
this stage of the litigation.
filed this action in June 2017 against FHFA, its director
Melvin Watt, and Treasury. In their first amended complaint,
plaintiffs assert five claims: (1) that FHFA's
single-director leadership structure is unconstitutional; (2)
that, even if the single-director structure is itself
constitutional, it is unconstitutional when combined with
other features insulating FHFA from congressional and
judicial review; (3) acting director Edward DeMarco's
tenure was unconstitutionally long; (4) FHFA's
conservatorship powers violate the non-delegation doctrine;
and (5) in the alternative, if FHFA acts in a private
capacity as conservator, then its powers violate the private
non- delegation doctrine. The goal of all of these attacks is
bringing about the demise of the Third Amendment.
Standard of Review
moves to dismiss Counts I and II of plaintiffs' first
amended complaint for lack of jurisdiction and,
alternatively, for failure to state a claim. FHFA also moves
to dismiss Counts III, IV, and V for failure to state a
claim. Treasury moves to dismiss all counts for failure to
state a claim.
reviewing a motion to dismiss for lack of jurisdiction under
Fed.R.Civ.P. 12(b)(1), a court must first determine whether
the movant is making a “facial” attack or a
“factual” attack. Branson Label, Inc. v. City
of Branson, Mo., 793 F.3d 910, 914 (8th Cir. 2015). In
analyzing a facial attack, the Court “restricts itself
to the face of the pleadings and the non-moving party
receives the same protections as it would defending against a
motion brought under Rule 12(b)(6).” Osborn v.
United States, 918 F.2d 724, 729 n.6 (8th Cir. 1990)
(citation omitted). As FHFA did not submit any materials
outside of the complaint in support of its motion, the agency
appears to be mounting a facial attack on the Court's
jurisdiction. The Court therefore proceeds as it would under
reviewing a motion to dismiss for failure to state a claim
under Fed.R.Civ.P. 12(b)(6), a court must accept as true all
of the factual allegations in the complaint and draw all
reasonable inferences in the plaintiff's favor. Aten
v. Scottsdale Ins. Co., 511 F.3d 818, 820 (8th Cir.
2008). Although the factual allegations need not be detailed,
they must be sufficient to “raise a right to relief
above the speculative level . . . .” Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 555 (2007). The
complaint must “state a claim to relief that is
plausible on its face.” Id. at 570.
if the parties present, and the court considers, matters
outside of the pleadings, a Rule 12(b)(6) motion must be
treated as a motion for summary judgment. Fed.R.Civ.P. 12(d).
But the court may consider materials that are necessarily
embraced by the complaint as well as any exhibits attached to
the complaint without converting the motion into one for
summary judgment. Mattes v. ABC Plastics, Inc., 323
F.3d 695, 697 n.4 (8th Cir. 2003). In this case, plaintiffs
and Treasury have submitted materials outside of the
pleadings. The Court has considered the PSPAs because they
are embraced by the complaint, but it has not considered any
other materials submitted by the parties and therefore need
not convert defendants' motions into motions for summary
Counts I and II: Separation of Powers
Count I, plaintiffs allege that the structure of FHFA-that
is, an independent agency with a single director removable
only for cause-violates the President's constitutional
removal authority. In Count II, plaintiffs allege that, even
if the single- director structure is itself constitutional,
that structure in combination with other features of FHFA
violates the principle of separation of powers. Plaintiffs
argue that the appropriate remedy for these violations is to
vacate the Third Amendment and invalidate those provisions of
HERA that make FHFA independent from the President (and, with
respect to Count II, independent from the legislative and
judicial branches as well). Defendants respond that (1)
plaintiffs lack standing to bring these claims and (2) even
if plaintiffs had standing, these claims fail on the merits.
is a jurisdictional requirement “rooted in the
traditional understanding of a case or controversy.”
Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 1547 (2016).
To have standing, a plaintiff “must have (1) suffered
an injury in fact, (2) that is fairly traceable to the
challenged conduct of the defendant, and (3) that is likely
to be redressed by a favorable judicial decision.”
Id. Plaintiffs bear the burden of establishing
heart of the claims made by plaintiffs in Counts I and II is
their contention that the President lacks sufficient control
over FHFA and, as a result, the agency is too independent.
The injury that plaintiffs allege is the Third Amendment,
which purportedly harms their interests as shareholders in
the Companies by being too favorable to Treasury. To remedy
this injury, plaintiffs ask the Court to vacate the Third
Amendment and strike down the director's tenure
protection-and, if necessary, any other provisions that
unconstitutionally insulate FHFA from oversight- so that a
less independent FHFA (that is, an FHFA under more
presidential control) may reconsider its decision to enter
into the Third Amendment.
problem with plaintiffs' claims is glaring: There is no
causal connection between their injury-a Third Amendment that
(in plaintiffs' view) is too favorable to the Executive
Branch-and the lack of Executive Branch influence over FHFA.
Nor is there any reason to believe that increasing Executive
Branch influence over FHFA will somehow result in a
“revised” Third Amendment that is less favorable
to the Executive Branch.
Third Amendment is part of a contract between FHFA and
Treasury. Treasury is an executive department that is fully
under the President's control. Thus, in a very real
sense, the President has already approved the Third
Amendment. Plaintiffs have no coherent theory for how their
injury-a Third Amendment that, in plaintiffs' view, is
unduly favorable to the President-could have resulted from
the President having too little control over FHFA.
Nor do plaintiffs have a coherent theory as to why giving the
President more control of FHFA will lead to him
renegotiating the Third Amendment so that it is less
favorable to himself. It simply makes no sense to argue that
the Third Amendment is “fairly traceable” to the
lack of presidential control or that increasing presidential
control will cause FHFA to reject the Third
Amendment.(Notably, nothing would prevent the
President from undoing the Third Amendment right now
by directing Treasury to decline to accept the quarterly
dividend payments or to negotiate a deal that is more
favorable to FHFA.) For these reasons, plaintiffs cannot show
either causation or redressability and therefore cannot
respond by arguing that mere speculation about what decision
the government might have reached in the absence of the
alleged constitutional violation cannot defeat standing.
See, e.g., Free Enter. Fund v. Pub. Co.
Accounting Oversight Bd., 561 U.S. 477, 512 n.12 (2010)
(“We cannot assume, however, that the Chairman would
have made the same appointments acting alone; and
petitioners' standing does not require precise proof of
what the Board's policies might have been in that
counterfactual world.”). In Free Enterprise
Fund, however, the plaintiff was seeking to enjoin the
agency's investigation into its accounting practices.
Id. at 487. In those circumstances, it would be
impossible for a plaintiff to prove a causal connection
between, one the one hand, the alleged separation-of-powers
violation and, on the other hand, the complex decisionmaking
process that resulted in the plaintiff becoming the subject
of a formal agency investigation. Similarly, in cases