Last month, the Fifth Circuit Court of Appeals issued its opinion in Collins v. Mnuchin, in which shareholders of Fannie Mae and Freddie Mac challenged the so-called “Net Worth Sweep.” This policy transfers most of the government-sponsored enterprises’ (GSEs) net earnings to the Treasury Department.
Bloomberg News declared the ruling a “big victory” for the shareholders. But there’s more to the case than that. SFA member and current co-chair of the SFA Legal Counsel Committee Chris DiAngelo, partner at Katten Muchin Rosenman, has written a detailed analysis that takes a more cautious look at the outcome. Here are three of his key takeaways:
- The court gave the shareholders a partial victory, deciding that their statutory claims were not subject to dismissal and sending those claims back to the lower court.
The decision is important because addressing the Net Worth Sweep, apart from any impact on the shareholders, is critical to any plan to recapitalize the GSEs, as the Department of the Treasury recently proposed to do.
- With the Collins decision, the Fifth Circuit has come to a different conclusion on constitutionality than have the Ninth Circuit and the D.C. Circuit.
That sets the issue up for likely consideration by the Supreme Court. The Fifth Circuit held that the Federal Housing Finance Agency’s governance structure was unconstitutional, and, as a result, it exceeded its authority when it entered into the Net Worth Sweep.
- The court was sharply divided on what declaring the FHFA’s governance structure unconstitutional means for GSE shareholders.
A nine-member majority of the Court held that the proper remedy for unconstitutionality is to sever the restriction on removal of the FHFA director only “for cause” — presumably subjecting the FHFA to increased Presidential oversight.
But seven members of the Court dissented. They questioned whether a court can rewrite or “strike down” a statute, rather than just not apply it to the case at hand. They also pointed out that the “severing” remedy, in and of itself, would not remedy the injury to the shareholders. Rather, the dissenting judges would nullify the Net Worth Sweep.
SFA continues to monitor Collins and similar cases, and we’ll keep you updated on developments. When appropriate, and with the backing of membership, we’re prepared to weigh in through amicus curia briefs to the courts.