Shareholders and PSPAs: Summary of Collins v. Mnuchin Oral Arguments
- Dallin Merrill, Directors MBS and CMBS Policy, Structured Finance Association
On December 9, 2020, the Supreme Court heard oral arguments in Collins v. Mnuchin, consolidated cases. These cases arise out of litigation initiated by shareholders of Fannie Mae and Freddie Mac (collectively, GSEs) who argued that the Third Amendment to the Preferred Stock Purchase Agreements (PSPAs), which govern the terms of the 2008 bailout of the GSEs and were entered into by the Federal Housing Finance Agency (FHFA) as the conservator of the GSEs and the US Treasury Department, should be vacated due to the unconstitutional structure of the FHFA. The plaintiffs contended that the Housing and Economic Recovery Act (Recovery Act) impermissibly limited the president’s ability to remove the director of the FHFA at-will, violating the separation of power of the Constitution and making the actions of the director void. Plaintiffs further argued that such an outcome would entitle shareholders to a portion of the payments that the GSEs paid to Treasury under the terms of the PSPAs.
In opening arguments, Justice Department Attorney Hashim Mooppan set forth three reason why the plaintiffs’ arguments should fail:
- First, the claims of shareholders were derivative of the claims of the corporation, rather than direct claims of damage to the shareholders, and the Recovery Act prohibits shareholders from bringing derivative claims on behalf of the GSEs while they are in conservatorship;
- Second, the statutory claims are barred by the Recovery Act’s anti-injunction clause, which prohibits courts from interfering with the FHFA exercising its powers as conservator;
- Third, any claims about the unconstitutionality of the Third Amendment on grounds that Recovery Act impermissibly limited the President’s ability to remove the director of the FHFA fail because the each of the signatories to the Third Amendment—Acting FHFA Director DeMarco and Treasury Secretary Geithner—could have been removed by the President without cause as an acting FHFA director is not covered by the Recovery Act’s for-cause removal requirement.
Justice Thomas and Justice Barrett questioned the government’s attorney as to the nature of derivative vs. direct claims, and whether having the shareholders wiped out while the GSEs continued to operate makes plaintiffs’ claims direct, rather than derivative. Justice Breyer questioned whether the Third Amendment wasn’t effectively a nationalization without compensation, with Mr. Mooppan stating that the anti-injunction clause of the Recovery Act does not hold the conservator to a reasonableness standard in choosing to exercise his powers as conservator of the GSEs. Mr. Mooppan argued the unique agreement was a mere renegotiating of a financial agreement between Treasury and FHFA.
Questions from Justice Alito and Justice Gorsuch delved into the constitutionality of the power of Acting Director DeMarco, with Mr. Mooppan arguing that both Acting Director DeMarco and Secretary Geithner were in fact removable by the President, and thus not unconstitutionally insulated from proper Presidential oversight. Mr. Mooppan also reaffirmed the government’s position that the removability of the FHFA director should be upheld, in accordance with the decision in Seila Law, which struck down an identical statutory limitation on removal of the Director of the Consumer Financial Protection Bureau (CFPB), but that the removability issue was severable from the relief sought by plaintiffs.
Counsel for plaintiffs then engaged with the Justices on questions about the relief sought by shareholders, which relief would include being repaid a portion of the net profits that the GSEs currently pay to Treasury under the terms of the Third Amendment. Questions from Justice Alito and Justice Breyer centered on the kind of power that FHFA was exercising in signing the Third Amendment, and whether such power was executive power pursuant to broad executive powers under Article II of the Constitution, or whether they were merely administrative powers outside of Article II powers. Plaintiffs’ counsel argued for the latter.
As to the relief sought by plaintiffs, Chief Justice Roberts noted that the shares of Fannie Mae and Freddie Mac had some residual value, which perhaps negated the argument that the shareholders had been wiped out completely. Counsel for the plaintiffs argued that the value arose from the prospects of the shareholders prevailing in this case and the potential for Congressional reform of the GSEs. Justice Breyer stated that shareholders purchased the stock of the GSEs with the knowledge of the unique public mission and status of the GSEs. Justice Gorsuch told plaintiffs’ counsel that “Your remedial ask is a big one and hard for us to swallow,” with Justice Sotomayor stating it would be “counterintuitive, perhaps illogical” to issue any ruling beyond that the FHFA director can be removed by the president at any time.
Overall, the line of questioning provided little insight for how the Court will ultimately rule on the substantive issues before it. Even if one assumes a ruling on the Constitutionality of the FHFA’s leadership structure that mirrors the ruling of the CFPB in Seila Law, it does not necessarily dictate whether a particular form of relief would necessarily follow. At the heart of these complex issues is the still-unresolved nature of Fannie Mae and Freddie Mac. Are they private entities? Public companies? Their unique nature as corporations chartered by Congress gives rise to a number of unprecedented questions—questions that have now been presented at the highest levels to all three branches of Federal Government. More than twelve years into Conservatorship, not only do such questions remain unanswered, but it is extremely unlikely that any Supreme Court decision will adequately answer these questions. The Court’s decision is expected next June.