DAVID JACOBS; GARY HINDES, Aрpellants v. FEDERAL HOUSING FINANCE AGENCY, IN ITS CAPACITY AS CONSERVATOR OF THE FEDERAL NATIONAL MORTGAGE ASSOCIATION AND THE FEDERAL HOME LOAN MORTGAGE CORPORATION; UNITED STATES DEPARTMENT OF THE TREASURY; FEDERAL NATIONAL MORTGAGE ASSOCIATION; FEDERAL HOME LOAN MORTGAGE CORPORATION
No. 17-3794
United States Court of Appeals, Third Circuit
November 14, 2018
BIBAS, Circuit Judge
PRECEDENTIAL
Before: HARDIMAN, KRAUSE, and BIBAS, Circuit Judges
(Filed: November 14, 2018)
Christopher N. Kelly, Esq.
Michael A. Pittenger, Esq. [ARGUED]
Alan R. Silverstein, Esq.
Potter Anderson & Corroon
1313 North Market Street
6th Floor
Wilmington, DE 19801
Myron T. Steele, Esq.
Potter, Anderson & Corroon
800 North State Street
Suite 401
Dover, DE 19901
Counsel for Appellants
David B. Bergman, Esq.
Howard N. Cayne, Esq. [ARGUED]
Ian S. Hoffman, Esq.
Dirk Phillips, Esq.
Asim Varma, Esq.
Arnold & Porter Kaye Scholer
601 Massachusetts Avenue, N.W.
Washington, D.C. 20001
Robert J. Stearn, Jr., Esq.
Richards Layton & Finger
920 North King Street
One Rodney Square
Wilmington, DE 19801
Counsel for Appellee Federal Housing Finance Agency
Gerard J. Sinzdak, Esq. [ARGUED]
Abby C. Wright, Esq.
United States Department of Justice
Civil Division
950 Pennsylvania Avenue, N.W.
Washington, D.C. 20530
Counsel for Appellee United States Department of Treasury
Robert C. Maddox, Esq.
Robert J. Stearn, Jr., Esq.
Richards Layton & Finger
920 North King Street
One Rodney Square
Wilmington, DE 19801
Meaghan M. Vergow, Esq.
O‘Melveny & Myers
1625 I Street, N.W.
Washington, DC 20006
Counsel for Appellee Federal National Mortgage Association
King & Spalding
1700 Pennsylvania Avenue, N.W.
Suite 200
Washington, D.C. 20006
Robert C. Maddox, Esq.
Robert J. Stearn, Jr., Esq.
Richards Layton & Finger
920 North King Street
One Rodney Square
Wilmington, DE 19801
Counsel for Appellee Federal Home Loan Mortgage Corporation
OPINION OF THE COURT
BIBAS, Circuit Judge.
In 2008, the U.S. government strove to rescue the collapsing economy. Its extreme measures helped many, but others suffered as a result. One of the rescue measures, the Housing and Economic Recovery Act, authorized the government to act as conservator for Fannie Mae and Freddie Mac, two government-sponsored enterprises with critical roles in the home-mortgage market. Under that conservatorship, Fannie and Freddie made a deal with the Department of Treasury. The deal guaranteed Fannie and Freddie access to hundreds of billions of dollars. But in return, they had to give their net profits to the
We reject the shareholders’ challenge on all fronts. First, the Recovery Act gave the government broad, discretionary power to enter into the deal. Second, the deаl complies with the requirements of the Recovery Act, as well as Delaware and Virginia corporate law. And third, the relief sought would “restrain or affect the exercise of [the government‘s] powers” as conservator, which the Recovery Act forbids.
I. BACKGROUND
A. Statutory framework
1. Fannie Mae and Freddie Mac. In the wake of the Great Depression, Congress created Fannie, and later Freddie, to support the home-mortgage market.
By buying mortgages and then guaranteeing the resulting securities, Fannie and Freddie make the mortgage market both more liquid and more stable. Perry Capital LLC v. Mnuchin, 864 F.3d 591, 599 (D.C. Cir. 2017) (Perry Capital), cert. de-
Fannie and Freddie are government-sponsored enterprises; they were created by congressional charter but are owned by private shareholders.
2. The Housing and Economic Recovery Act of 2008. Then the housing bubble burst. House prices plunged, slashing the value of Fannie‘s and Freddie‘s mortgage portfolios. Fannie‘s and Freddie‘s guarantees put them on the hook not only for the mortgages they owned, but also for many mortgage-backed securities based on loans gone bad. Congress feared that they might default, threatening not only the housing market but the
To ward off that threat, Congress passed the Recovery Act. The Recovery Act created the Federal Housing Financing Agency and empowered it to supervise and regulate Fannie and Freddie.
3. Section 4617(f) of the Recovery Act. Having given the Agency sweeping authority and discretion, the Recovery Act strictly limits judicial review: “[N]o court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or receiver.”
B. Factual background
In 2008, the collapse of the housing market cost Fannie and Freddie billions of dollars, threatening the U.S. mortgage market. The Treasury quickly took steps to prop up Fannie and
Under the Agency‘s direction, they entered into funding agreements with the Treasury. The Treasury gave each enterprise a funding commitment. When Fannie‘s or Freddie‘s liabilities exceed their assets, they can draw on that funding commitment to keep their net worth in the black.
In return, the Treasury received one million shares of senior preferred stock in each of Fannie and Freddie. These shares gave the Treasury a liquidation preference in each enterprise equal to $1 billion plus all the money drawn from the Treasury‘s funding commitment. The shares also gave the Treasury an annual dividend equal to 10% of the liquidation preference, if paid in cash.
The Treasury initially capped its funding commitment at $100 billion per enterprise. That was not enough, at least for Fannie. Two amendments to the funding agreement more than doubled that cap, and Fannie and Freddie wound up drawing $116.1 billion and $71.3 billion from the Treasury. But as Fannie and Freddie drew more and more money from the Treasury, they owed it larger and larger dividends. In a vicious cycle, they sometimes had to draw money from the Treasury just to pay the Treasury‘s dividends.
In 2012, the Treasury and the Agency renegotiated the funding agreements and agreed to the Third Amendment. The Third Amendment replaced the 10% annual dividend with a quarterly variable dividend. It set that variable dividend equal
In other words, under the Third Amendment, if Fannie or Freddie has a positive net worth, it pays all that worth out as a dividend to the Treasury. If its net worth is zero or negative, it pays nothing. Fannie and Freddie pay only what they can. That way, they need never again draw from the Treasury to pay the Treasury‘s dividends. But they also have no money left over to pay dividends to junior shareholders or to redeem the Treasury‘s shares, exit conservatorship, and return to private control.
C. Procedural history
David Jacobs and Gary Hindes filed this class-action suit against the Agency, Treasury, Fannie, and Freddie to challenge the Third Amendment. Their original complaint asserted claims for breach of contract, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and violations of Delaware and Virginia corporate law.
The challengers later amended their complaint, voluntarily dismissing their claims for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing. The amended complaint contains four counts: two asserting that the Third Amendment violates Delaware and Virginia corporate law, and two new claims against the Treasury for unjust enrichment. It seeks declaratory, injunctive, and
The Agency, Treasury, Fannie, and Freddie moved to dismiss. The District Court granted that motion, holding that
This appeal followed. Like the District Court, we do not rely on those assertions, so we will affirm the refusal to take judicial notice of the challengers’ documents. We review the District Court‘s dismissal de novo. Hindes v. FDIC, 137 F.3d 148, 153 (3d Cir. 1998).
II. THE RECOVERY ACT EMPOWERED THE AGENCY TO ENTER INTO THE THIRD AMENDMENT
Section 4617(f) bars claims when 1) the government acts as a conservator, 2) it does not exceed its statutory authority, and 3) the remedy sought would affect the exercise of that authority. So to figure out whether § 4617(f) bars the challengers’ claims, we first identify “the powers or functions of the Agency as a conservator.” In this pаrt of the opinion, we hold that the Act empowers the Agency to enter into the Third Amendment.
The Recovery Act defines the Agency‘s “powers . . . as a conservator.”
- the power to take over Fannie‘s and Freddie‘s assets.
Id. § 4617(b)(2)(B)(i) . - the power to operate Fannie and Freddie, using all of the officers‘, directors‘, and shareholders’ powers.
Id. - the power to “preserve and conserve” Fannie‘s and Freddie‘s assets.
Id. § 4617(b)(2)(B)(iv) . - the power to “take such action as may be . . . necessary to put [Fannie and Freddie] in a sound and solvent condition,” and appropriate to carry on their business.
Id. § 4617(b)(2)(D) .
These powers authorized the Agency to enter into the Third Amendment. To begin, the Third Amendment is an exercise of the Agency‘s power to take over Fannie and Freddie‘s assets and operate their businesses.
Next, the Third Amendment falls within the Agency‘s power to “preserve and conserve [Fannie‘s and Freddie‘s] assets” and to do what is “necessary to put [Fannie and Freddie] in a sound and solvent condition.”
Before the Third Amendment, the challengers admit, Fannie and Freddie sometimes had to draw funds from the Treasury just to pay the Treasury‘s dividend. App. 51-52. That dug Fannie and Freddie deeper and deeper into the hole, increasing their future dividend obligations while also reducing their available funds. “The Third Amendment permanently eliminated” that Catch-22, as well as the associated “risk that cash-dividend payments would consume [Fannie‘s and Freddie‘s] lifeline.” Roberts v. FHFA, 889 F.3d 397, 404-05 (7th Cir. 2018). So the Agency could reasonably conclude that the Third Amendment would “preserve аnd conserve [Fannie‘s and Freddie‘s] assets” in the long run, putting them on a “sound and solvent” footing.
III. THE THIRD AMENDMENT IS CONSISTENT WITH THE RECOVERY ACT‘S LIMITATIONS
The Third Amendment does not violate any other provision of the Recovery Act. The challengers assert that it violates Delaware and Virginia corporate law, as supposedly incorporated by two provisions of the Recovery Act (known as the succession clause and the repudiation-of-contracts clause). They also assert that it violates the Act‘s liquidation-of-assets procedures and its alleged requirement to serve Fannie‘s and Freddie‘s interests, rather than the government‘s. But that is not so.
A. The Recovery Act‘s provisions supposedly incorporating Delaware and Virginia law
Federal regulation required each enterprise to pick a state‘s laws for its corporate governanсe.
The challengers’ argument fails because the Third Amendment is consistent with both states’ laws. So we need not decide whether and to what extent the Act itself requires the Agency to follow Delaware and Virginia law. We also need not decide whether federal law preempts these states’ laws.
1. The Third Amendment complies with Delaware law. The challengers claim that the Third Amendment does not specify a rate at which to pay the Treasury‘s dividend. They also claim that it does not pay the Treasury in preference to or in relation to other classes of shareholders. Both arguments miss the mark.
a. The dividend rate. Delaware‘s corporate law entitles “holders of preferred or special stock . . . to receive dividends at such rates . . . as shall be stated in the certificate of incorporation or in the [board] resolution or resolutions providing for the issue of such stock.”
b. The dividend preference. That same provision of Delaware law authorizes dividends “payable in preference to, or in such relation to, the dividends payable on any other class . . . of stock.”
This argument fails too. The Treasury‘s dividend is payable in preference to all other classes of stock. It is always paid first and with all available funds. The challengers cite no Delaware authority suggesting that this preference is unlawful or that it must reserve funds to pay junior stockholders. Indeed,
2. The Third Amendment complies with Virginia law. The challengers reiterate their dividend-preference argument for
Virginia law authorizеs corporations to issue classes of stock that have preference over other classes.
The challengers also rely on two century-old Virginia cases. One of them described the “common understanding” that preferred shareholders get first dibs on earnings through “limited dividends,” while common shareholders get the “hope of unlimited gain” through the company‘s “surplus profits.” Johnson v. Johnson & Briggs, Inc., 122 S.E. 100, 103 (Va. 1924). But a “common understanding” is not a rigid rule. And nothing about this case is “common.” Fannie and Freddie are public-private entities in conservatorship under an intricate statutory scheme tailored to respond to an economic catastrophe. The ordinary case does not control.
The challengers’ other case is likewise inapt. That case held that a corporation may not agree to pay preferred dividends when it lacks earnings with which to pay them. Drewry, Hughes Co. v. Throckmorton, 92 S.E. 818, 819 (Va. 1917). But the Third Amendment abides by this rule. Fannie and Freddie pay Treasury a dividend оnly when they have funds to pay.
B. The Recovery Act‘s priorities for liquidating assets
Next, the challengers argue that the Third Amendment violates the Recovery Act‘s specified priorities for distributing assets on liquidation, codified at
Perry Capital is not to the contrary. Though it allowed a liquidation-preferences claim to go forward, it did so because the stock certificates themselves guaranteed a liquidation preference. The wording of the certificates gave the plaintiffs there a claim for anticipatory breach of contract. Perry Capital, 864 F.3d at 632-33.
But here, there is no claim that the stock certificates create a liquidatiоn priority; the challengers’ liquidation claim rests entirely on the Recovery Act. And the challengers voluntarily dismissed their breach-of-contract claim. So Perry Capital is inapt.
The challengers next assert that the Agency as conservator should have focused solely on maximizing Fannie‘s and Freddie‘s financial returns. They charge the Agency with “acting in Treasury‘s interest, and not [Fannie‘s and Freddie‘s] interest, and acting in a manner [in which Fannie and Freddie] themselves had no power to act, when implementing the” Third Amendment. Jacobs Br. 49. But the Recovery Act аuthorizes the Agency to do just that.
1. The Agency‘s multiple constituencies. When the Agency acts as conservator, it need not act solely in Fannie‘s and Freddie‘s interests, as a traditional conservator would. It may also act to protect its own interests and those of the public.
At common law, a conservator could not “act[] for the benefit of [himself] or a third party.” Perry Capital, 864 F.3d at 641 (Brown, J., dissenting). But the Agency is no “common-law conservator.” Id. at 613 (majority opinion). The Recovery Act authorizes the Agency to use its powers as conservator in whatever way it “determines is in the best interests of [Fannie or Freddie] or the Agency.”
That authorization implements the Recovery Act‘s mandate that the Agency “ensure that” Fannie and Freddie “operate[] [in a manner] consistent with the public interest.”
While the Agency must consider the public interest, it need not consider the interests of Fannie‘s and Freddie‘s shareholders. That becomes clear when we compare the Recovery Act with its predecessor. Much of the Recovery Act is closely patterned on an earlier financial-institution-rescue law, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). For instance, the Recovery Act‘s limitation on judicial review is copied almost verbatim from the one in FIRREA. Compare
FIRREA permits the Federal Deposit Insurance Corporation to act as conservator “in the best interests of the [bank], its depositors, or the [FDIC].”
The Third Amendment thus threw Fannie and Freddie a $200-billion-plus lifeline to safeguard not just their own interests, but also the government‘s and the public‘s interests. These other constituencies benefit from a risk-averse approach. Even if the economy collapses again, the Agency, the government, and the public will be assured that Fannie and Freddie can continue to stabilize the housing market.
The Third Amendment also serves Fannie‘s and Freddie‘s own interests. They did not give away their future net worth for nothing. In consideration, the Treasury gave up its right to an unconditional 10% dividend, which sometimes cost Fannie and Freddie more than their positive net worth and forced them to borrow even more. The Third Amendment thus insured Fannie and Freddie against downturns and “death spirals,” preventing unpayable dividends from ratcheting up their debt loads to unsustainable levels. Saxton, 901 F.3d at 962 (Stras, J., concurring).
2. The Agency‘s powers extend beyond Fannie‘s and Freddie‘s powers. Finally, it does not matter if the Agency acted in a way that Fannie and Freddie could not have. The Recovery
IV. SECTION 4617(f) BARS THE REQUESTED RELIEF
The Recovery Act empowered the Agency to enter into the Third Amendment. And the Third Amendment does not violate any of the Recovery Act‘s limitations. So entering into the Third Amendment was a legitimate exercise of the Agency‘s powers as conservator.
The only remaining issue is whether the challengers’ requested relief would “restrain or affect the exercise of [the Agency‘s] powers . . . as a consеrvator.”
A. The challengers concede that they seek to undo the Third Amendment
At oral argument, the challengers admitted that the relief they seek would undo the entire Third Amendment. They would have us void it and force the Treasury to disgorge all the dividends that it received under the Third Amendment. Undoing the Third Amendment would restrain the Agency‘s powers. So the challengers’ concession dooms their case.
The challengers argue, however, that their concession does not bar their claims for monetary relief. They claim that § 4617(f) applies only to “equitable and injunctive relief,” not damages claims. Appellants’ Br. 41-43. They even call that subsection an “anti-injunction clause.” Id. at 19. But that label is inaccurate.
Their argument has some support. Some courts of appeals likewise call § 4617(f) an “anti-injunction” clause. E.g., Saxton, 901 F.3d at 957; Robinson, 876 F.3d at 227. And some interpret § 4617(f) as barring only equitable relief, not damages сlaims. E.g., Saxton, 901 F.3d at 957; Perry Capital, 864 F.3d at 606, 613-14.
We decline to adopt this interpretation for two reasons. First, the text of § 4617(f) is not limited to declaratory, injunctive, or other equitable relief. Second, our FIRREA precedent suggests that § 4617(f) also bars some monetary claims.
1. The text of § 4617(f) extends to monetary relief. Section 4617(f) reads, in full: “Except as provided in this section or at the request of the Director, no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.”
Nothing in that text refers to the type or form of remedy a plaintiff seeks. It says nothing about law vеrsus equity or damages versus injunctions. Rather, the text forbids courts to take
2. Our FIRREA precedent supports applying § 4617(f) to some monetary relief. That interpretation accords with our cases interpreting FIRREA‘s parallel provision. In Rosa v. Resolution Trust Corp., 938 F.2d 383, 399 (3d Cir. 1991), we held that
Our later precedent continued to apply Rosa‘s approach. Hindes, for example, recognized that
Here, the challengers’ claims fall into none of these categories. They are not constitutional. They have not gone through the Recovery Act‘s administrative process. They do not flow from ultra vires agency action. And they are not claims for breach of contract.
Their claims would also restrain or affect the Agency‘s exercise of its statutory powers. The Recovery Act empowered the Agency to enter into the Third Amendment. And all parties agree that § 4617(f) bars declaratory and injunctive relief. But granting the challengers’ claims for damages, restitution, or disgorgement would require us to find the Third Amendment unlawful. The challengers cannot evade the bar on declaratory relief by asking for such a declaration as the basis for awarding damages. No mattеr how we label the relief, striking down the Third Amendment would interfere with the Agency‘s exercise of its powers as conservator.
Even apart from the declaratory aspect, awarding monetary relief would restrain or affect the Agency‘s conservatorship. The request for damages, disgorgement, and restitution, against both the Agency and the Treasury, would (as the challengers concede) unravel the Third Amendment, reverse the monetary payments made under it, and prevent or at least deter the Agency from implementing it further. Those are the same
* * * * *
The challengers are in an unfortunate spot. They invested in Fannie and Freddie, expecting regular dividend payments in return. The Third Amendment destroyed those expectations.
But the Recovery Act is clear. It empowered the Agency to enter into the Third Amendment. That deal complies with Delaware law, Virginia law, and the Recovery Act itself. And the challengers’ requested relief would effectively unwind the Third Amendment. Doing so would restrain or affect the Agency‘s exercise of its powers as conservator.
This we cannot do. So we will affirm.