NERIS MONTILLA, on behalf of herself and all others so similarly situated; MICHAEL KYRIAKAKIS, on behalf of himself and all others so similarly situated, Plaintiffs, Appellants, ROSELIA MONTUFAR, on behalf of herself and all others so similarly situated; RUBEN VELASQUEZ, on behalf of himself and all others so similarly situated, Plaintiffs, v. FEDERAL NATIONAL MORTGAGE ASSOCIATION; FEDERAL HOUSING FINANCE AGENCY, Defendants, Appellees, MR. COOPER, f/k/a Nationstar Mortgage, LLC; SETERUS, INC.; C.I.T. BANK, N.A., Defendants.
No. 20-1673
United States Court of Appeals For the First Circuit
June 8, 2021
Before Lynch and Kayatta, Circuit Judges, and Woodcock, District Judge.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND [Hon. William E. Smith, U.S. District Judge]
Michael A.F. Johnson, with whom Dirk C. Phillips and Arnold & Porter Kaye Scholer LLP were on brief, for appellee Federal Housing Finance Authority.
Steven Fischbach for amici curiae Direct Action for Rights and Equality, National Center for Law and Economic Justice, National Housing Law Project, and Virginia Poverty Law Center.
LYNCH, Circuit Judge. Plaintiffs-appellants obtained loans secured by mortgages on their real property in Rhode Island. These agreements gave their lenders the right to nonjudicially foreclose on the mortgages. The loans and mortgages were later sold to the Federal National Mortgage Association (“Fannie Mae“) while the Federal Housing Finance Agency (“FHFA“), a federal agency, was acting as Fannie Mae‘s conservator. Appellants defaulted on their loans, and Fannie Mae, consistent with Rhode Island law, conducted nonjudicial foreclosure sales of the mortgaged properties.
Appellants brought suit in federal court alleging that Fannie Mae and FHFA are government actors and that the nonjudicial foreclosure sales violated their Fifth Amendment procedural due process rights. They appeal from the district court‘s holding that Fannie Mae and FHFA are not subject to their Fifth Amendment claims and its order dismissing those claims. See Montilla v. Fed. Hous. Fin. Agency, No. 18-cv-00632, slip op. at 9-11 (D.R.I. May 26, 2020), ECF No. 40. We affirm.
I. Facts
A. Fannie Mae, Freddie Mac, and FHFA
Fannie Mae and the Federal Home Loan Mortgage Corporation (“Freddie Mac“) (collectively, the “government-sponsored enterprises” or “GSEs“) are “private, publicly traded corporations . . . created by federal charter to support the development of the secondary mortgage market.” Town of Johnston v. Fed. Hous. Fin. Agency, 765 F.3d 80, 82 (1st Cir. 2014); see
In July 2008, as the housing market crashed and the value of the GSEs’ loan portfolios declined, Congress established FHFA through the Housing and Economic Recovery Act of 2008 (“HERA“). See
In September 2008, FHFA‘s director exercised this authority and placed both entities into conservatorship. As conservator, FHFA “immediately succeed[ed] to” the “rights, titles, powers, and privileges” of Fannie Mae, Freddie Mac, and the entities’
HERA also amended the GSEs’ charters to allow the Secretary of the Treasury to “purchase any obligations and other securities issued by the corporation[s].”
B. Foreclosures on Appellants’ Properties
In 2011, acting as the GSEs’ conservator, FHFA established the Servicing Alignment Initiative (“SAI“) to improve loan servicer performance and to limit the GSEs’ financial losses. Plaintiffs allege that the SAI “directed [the GSEs’ loan] servicers to use non-judicial foreclosure procedures when foreclosing on residential properties in Rhode Island.”
Rhode Island permits nonjudicial foreclosures through a statutory power of sale when that power is specified in the mortgage contract. See Bucci v. Lehman Bros. Bank, FSB, 68 A.3d 1069, 1084-85 (R.I. 2013);
Appellant Neris Montilla executed a mortgage in July 2008 on a property in Providence. This mortgage was assigned to Fannie Mae in April 2015 and serviced by C.I.T. Bank, N.A. (“CIT“). On September 10, 2016, CIT began nonjudicial foreclosure proceedings under Rhode Island law against Montilla‘s property. The mortgage was foreclosed on October 14, 2016. Similarly, appellant Michael Kyriakakis‘s mortgage on his property was assigned to Fannie Mae in May 2016. The loan servicer conducted a nonjudicial foreclosure sale in December 2017 and recorded a foreclosure deed in March 2018.
II. Procedural History
Montilla filed a putative class action against Fannie Mae, FHFA, and CIT on November 19, 2018 in federal district court in Rhode Island.2 The complaint was amended in December 2018 to include Kyriakakis‘s claims. It alleged that FHFA and Fannie Mae deprived Montilla, Kyriakakis, and others similarly situated of property without “adequate notice and opportunity for meaningful hearings” in violation of the Fifth Amendment. The plaintiffs
sought “declaratory relief, injunctive relief, actual, monetary, punitive and exemplary damages, restitution, an accounting, attorney‘s fees and costs, and all other relief as provided by law.”
FHFA and Fannie Mae moved to dismiss the case in February 2019. FHFA argued that it and Fannie Mae are not government actors for the purposes of the plaintiffs’ Fifth Amendment claims. Fannie Mae joined FHFA‘s arguments and alternatively argued that, even if it and FHFA were subject to the Fifth Amendment, the plaintiffs’ claims failed because there was no due process violation.
The court, applying Lebron v. Nat‘l R.R. Passenger Corp., 513 U.S. 374 (1995), also held that FHFA‘s conservatorship over Fannie Mae did not make Fannie Mae a government actor for the purposes of the plaintiffs’ constitutional claims because the government does not exercise sufficient control over Fannie Mae. See Montilla, slip op. at 6-9; see also Lebron, 513 U.S. at 398-99 (holding that a corporation is subject to constitutional claims if, among other things, the government “retains for itself permanent authority to appoint a majority of the directors of [the] corporation“). The court again disagreed with Sisti, which had held that because the “decision to end [FHFA‘s] conservatorship is left entirely to the discretion of the government,” its control over the GSEs is “effectively permanent.” Sisti, 324 F. Supp. 3d at 280-81.
Montilla and Kyriakakis timely appealed. FHFA, Fannie Mae, and Freddie Mac timely appealed the decision in Sisti which had reached the contrary result.3 We heard oral argument in these appeals on May 4, 2021.
III. Analysis
We review an order granting a motion to dismiss de novo. See Sterling Suffolk Racecourse, LLC v. Wynn Resorts, Ltd., 990 F.3d 31, 35 (1st Cir. 2021). To avoid dismissal, a plaintiff‘s complaint must include factual allegations sufficient to state a plausible claim to relief. See Abdisamad v. City of Lewiston, 960 F.3d 56, 59 (1st Cir. 2020).
A. FHFA, as the GSEs’ Conservator, Is Not a Government Actor Subject to Appellants’ Due Process Claims
Adopting the district court‘s reasoning in Sisti, 324 F. Supp. 3d at 281-84, appellants argue that because FHFA is a government agency, any action it takes as conservator, like directing the GSEs to nonjudicially foreclose on appellants’ mortgages, is government action subjecting it to appellants’ constitutional claims. That analysis is simply wrong and contrary to law. We hold that, in its role as the GSE‘s conservator, FHFA is not a government actor because it has “stepped into the shoes” of the private GSEs.
First, it is undisputed that FHFA is a federal agency that sometimes acts as the government.
Under HERA‘s “succession clause,” when FHFA became the GSEs’ conservator, it succeeded 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.”
The Supreme Court has interpreted a succession clause in the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA“) with nearly identical language4 to the one in HERA to mean that when a government agency acts as receiver for an entity, it “‘steps into the shoes’ of the failed [institution]” and exercises that entity‘s rights. O‘Melveny & Myers v. FDIC, 512 U.S. 79, 86 (1994). Other circuits have interpreted HERA to mean
that when acting as the GSEs’ conservator and exercising their rights, FHFA steps into the GSEs’ shoes. See Herron v. Fed. Nat‘l Mortg. Ass‘n, 861 F.3d 160, 169 (D.C. Cir. 2017) (holding that when FHFA “step[ped] into Fannie Mae‘s private shoes,” it became a private actor); Meridian Invs., Inc. v. Fed‘l Home Loan Mortg. Corp., 855 F.3d 573, 579 (4th Cir. 2017) (“[T]hough FHFA is a federal agency, as conservator it steps into Freddie Mac‘s shoes, shedding its government character and also becoming a private party.“); see also U.S. ex rel. Adams v. Aurora Loan Servs., Inc., 813 F.3d 1259, 1261 (9th Cir. 2016) (holding that FHFA‘s conservatorship “places [it] in the shoes of Fannie Mae and Freddie Mac, and gives the FHFA their rights and duties“). We agree that, after stepping into the GSEs’ shoes under HERA and exercising their private contractual rights to nonjudicially foreclose on appellants’ properties, FHFA did not act as the government.
Appellants, again relying on Sisti, argue that O‘Melveny is inapplicable here because it involved a government agency acting as receiver, not as a conservator. See Sisti, 324 F. Supp. 3d at 282-83. We disagree. O‘Melveny was decided based on what the statute‘s “language appears to indicate.” 512 U.S. at 86. Section 4617(b)(2)(A) says that FHFA succeeds to the GSE‘s rights when it acts “as conservator or receiver” (emphasis added). Similarly, the statute at issue in O‘Melveny says that the FDIC succeeds to the rights of failed depository institutions when it acts “as conservator or receiver.”
brought a constitutional claim against FSLIC for actions it took as receiver; (3) a federal court could not hear the case if FSLIC had sovereign immunity; (4) only government actors can have (and waive) sovereign immunity; (5) Meyer held that FSLIC waived sovereign immunity through its “sue-and-be-sued” clause; so (6) by deciding the sovereign immunity issue, the Court must have thought that FSLIC is a government actor potentially liable for a constitutional tort when it acts as receiver. Applying that logic here, they say that FHFA, as a government agency, must be acting as the government when it acts as the GSEs’ conservators. See Sisti, 324 F. Supp. 3d at 281-82.
Appellants misread Meyer. Meyer decided a threshold jurisdictional question.7 See 510 U.S. at 475 (explaining that sovereign immunity is “jurisdictional in nature“). It held that FSLIC, through its “sue-and-be-sued” clause, waived any right it may have had to argue that a federal court does not have the power to address the merits of the plaintiff‘s claim. Id. at 479; see also Steel Co. v. Citizens for a Better Env‘t, 523 U.S. 83, 89
(1998) (distinguishing between “the absence of a valid . . . cause of action” and “subject-matter jurisdiction, i.e., the courts’ statutory or constitutional power to adjudicate the case“). Meyer never addressed the merits of the plaintiff‘s claim, including the argument that his claim must fail because FSLIC was not acting as the government. See id. at 486 n.12 (“[W]e do not reach the merits of [Meyer‘s] due process claim.“). Indeed, FDIC never made such an argument to the Supreme Court and the Court had no reason to reach it.
Properly viewing Meyer‘s “sue-and-be-sue” holding as jurisdictional, Meyer did not decide that a federal agency is a government actor whenever it acts as a receiver or conservator. Such a categorical reading of Meyer is inconsistent with post-Meyer Supreme Court cases, including O‘Melveny, decided only four months later, making clear that an agency acting as
B. Fannie Mae and Freddie Mac Are Not Government Actors Subject to Appellants’ Due Process Claims
Appellants next argue that Fannie Mae and Freddie Mac are themselves government actors. In Lebron, the Supreme Court articulated a three-part test to determine when a private corporation is a government actor for purposes of certain constitutional claims against it. It held that if “[1] the Government creates a corporation by special law, [2] for the furtherance of governmental objectives, and [3] retains for itself permanent authority to appoint a majority of the directors of that corporation,” then the corporation‘s actions “are subject to the constraints of the Constitution.” Lebron, 513 U.S. at 376, 399. The parties do not dispute that the first two prongs of the Lebron test are satisfied. Appellants also do not dispute that, pre-conservatorship, the GSEs were private actors not subject to their claims. See Am. Bankers Mortg. Corp. v. Fed‘l Home Loan Mortg. Corp., 75 F.3d 1401, 1406 (9th Cir. 1996) (applying Lebron before FHFA‘s conservatorship began to hold that “Freddie Mac is not a government agency subject to the Fifth Amendment‘s Due Process Clause“). The issue before us is whether, through FHFA‘s conservatorship over the GSEs, the government has “retain[ed] for itself permanent authority” over Fannie Mae and Freddie Mac. Lebron, 513 U.S. at 399.
We hold that FHFA‘s temporary conservatorship over the GSEs does not constitute permanent authority. FHFA controls the GSEs for the limited purpose of “reorganizing, rehabilitating, or winding up the[ir] affairs.”
The fact that Treasury owns senior preferred stock in the GSEs and warrants that, if exercised, would give it 79.9% of the GSEs’ common stock does not change the analysis. Lebron says that “a private corporation whose stock comes into federal ownership” can still be “in the temporary control of the Government.” 513 U.S. at 398. Here, neither HERA nor Treasury‘s agreements with the GSEs require the government to permanently retain its interest in them.
Appellants’ main argument is that FHFA‘s conservatorship over the GSEs is temporary in name but permanent in practice. They say that we should focus on the practical reality of the government‘s control over the GSEs because the “permanent authority” prong of the Lebron test was qualified by the Supreme Court‘s decision in Department of Transportation v. Association of American Railroads, 575 U.S. 43 (2015).
Both Lebron and American Railroads involved whether the National Railroad Passenger Corporation (commonly known as Amtrak) is a government entity for certain purposes. Lebron held that Amtrak “is part of the Government for purposes of
Appellants read American Railroads‘s “practical reality” language to say that the degree of control the government actually exercises over an entity informs whether its control is permanent. They argue that because FHFA has all the powers of the GSEs’ boards of directors, see
This argument fails. American Railroads did not alter Lebron‘s requirement that the government retain “permanent authority” over an entity for it to be governmental. American Railroads says nothing about Lebron‘s “permanent authority” requirement, and the Supreme Court “does not normally overturn, or so dramatically limit, earlier authority sub silentio.” Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1, 18 (2000). Indeed, American Railroads had no reason to address whether the federal government retained “permanent authority” over Amtrak. The Court had already held in Lebron that it did. See 513 U.S. at 399; Herron, 861 F.3d at 168 (“Because the government‘s permanent control over Amtrak was already established in Lebron, the Court had no occasion to revisit that question in [American Railroads].“).
Appellants next argue, again relying on Sisti, that
Finally, amici for appellants argue9 that Lebron‘s three-part test is not the only relevant precedent. They say that whether FHFA‘s conservatorship over the GSEs constitutes federal government action must be analyzed under a series of
“joint participation” theory, the “entwinement” theory, and the “government control” theory. See Brentwood Acad. v. Tenn. Secondary Sch. Athletic Ass‘n, 531 U.S. 288, 296-97 (2001) (discussing these theories). All of these theories attempt to determine whether “there is such a ‘close nexus between the State and the challenged action’ that seemingly private behavior ‘may be fairly treated as that of the State itself.‘” Id. at 295 (quoting Jackson v. Metro. Edison Co., 419 U.S. 345, 351 (1974)); id. (holding that “state action may be found if, though only if” such a “close nexus” exists). As the Supreme Court has stated, “a host of facts . . . bear on the fairness of” attributing private action to the government. Id. at 296. Here, because we have held that FHFA10 acted privately and not as the government in its role as the GSEs’ conservator, we do not need to address whether FHFA‘s private actions on behalf of the private GSEs constituted state action.
IV. Conclusion
Affirmed.