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On Dec. 9, the Supreme Court heard oral argument in Collins v. Mnuchin. The case was initiated by Fannie Mae and Freddie Mac shareholders challenging the constitutionality of the Federal Housing Finance Agency (FHFA) as well as a 2012 agreement the FHFA entered into with the Treasury Department that dramatically reduced the shareholders’ ownership interests.
Many see the case as a sequel to Seila Law, the recent Supreme Court case related to the Consumer Financial Protection Bureau (CFPB). The court’s ruling stripped the director of the CFPB of removability protections after concluding that limiting the president’s ability to remove the director would violate the separation of powers. In this case, the justices again are asked to define to what extent, if any, Congress can limit the president’s ability to remove agency heads.
Background and Judicial History
The housing market crash of 2007 prompted government intervention. Front and center were the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). While not government agencies themselves, the pair operate under congressional charters and serve “important public missions,” which includes providing “liquidity, stability and affordability to the mortgage market.” They either hold mortgages from lenders or package them into mortgage-backed securities, a type of investment product. As the housing crisis rippled through the financial system, Fannie and Freddie came close to collapsing as the value of their assets shrunk.
Congress passed the Housing and Economic Recovery Act of 2008 (HERA), which created the FHFA. The agency was charged with ensuring Fannie and Freddie, as well as the Office of Finance Federal Home Loan Bank System and the various Federal Home Loan Banks, operate in a “safe and sound manner” and foster “liquid, efficient, competitive, and resilient national housing finance markets.” What would prove to be a matter of contention later, Congress structured the FHFA to be headed by a single director who enjoys a five-year term unless removed by the president “for cause.”
Soon after HERA’s passage, then-Director James Lockhart invoked one of HERA’s powers and brought Fannie and Freddie under conservatorship. During conservatorship, the agency succeeds to “all rights, titles, powers, and privileges” of the two companies (this is referred to as the “succession clause” in the litigation). As conservator, the FHFA may take actions that are “necessary to put the regulated entity in a sound and solvent condition” and “appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity[.]” The FHFA and Treasury came to an agreement where Treasury provided funding through preferred stock purchases in exchange for various interests and payments from Fannie and Freddie. The ensuing years saw several amendments to the initial funding agreement. In 2012, the FHFA and the Treasury Department came to a new arrangement, which became the source of the current challenge.
The 2012 amendment implemented a payment structure by which Fannie and Freddie paid a dividend to the Treasury Department equal to each of their net worth minus a specified capital reserve. Private shareholders claimed this arrangement enriched the government at the expense of Fannie and Freddie’s private shareholders.
In the litigation, the 2012 agreement is referred to as either the “Third Amendment” or “Net Worth Sweep.” The former reflects the third change to the initial FHFA-Treasury agreement while the latter references the way Fannie and Freddie pay dividends, a “sweep” of their net worth.
Private shareholders assert in the suit that the FHFA is unconstitutionally structured. The president can remove a director only “for cause.” They contend, relying heavily on the Supreme Court’s decision in Selia Law, that such removability protections in an agency like the FHFA violate the separation of powers. They also posed a statutory challenge, claiming that the FHFA exceeded its authority when it initiated the 2012 agreement.
The case eventually found itself in front of the entire U.S. Court of Appeals for the Fifth Circuit in an en banc hearing. A majority of the Fifth Circuit ruled that the shareholders’ complaint “states a plausible claim that FHFA exceeded its statutory authority.” By a 12 to four majority, the court ruled that the FHFA is unconstitutionally structured. However, a different majority of nine judges held the appropriate remedy was to strike the “for cause” provision in HERA but keep the 2012 amendment intact. In their reasoning, the nine-judge majority noted that doing otherwise would “wipe out an action approved or ratified by two different Presidents’ directors under the guise of respecting the presidency.”
Both the shareholders and the government filed for certiorari. The shareholders contend that the 2012 amendment should be set aside since it was “imposed by an unconstitutional agency.” While the government agrees with the Fifth Circuit’s determination about the unconstitutionality of the “for cause” removal provision in HERA, it argues that the shareholders are barred from suing under HERA.
In short, the government asserts that the “succession clause” bars derivative suits during conservatorship. In corporate law, shareholders can sue “directly” when they are challenging an action that affects their status as shareholders. The private shareholders here contend they are challenging the 2012 amendment in a direct action. The government disagrees, though, and argues that this suit is a derivative action. In such an action, the shareholders bring a suit on behalf of the corporation. In the government’s view, because the succession clause has the FHFA as conservator succeed to “all rights, titles, powers, and privileges” of not only directors and officers but also of shareholders, the private shareholders are barred from bringing their suit.
The government also contends that HERA’s “anti-injunction” clause bars the action. The clause states, save some exceptions, that “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[.]”
The government refused to defend the constitutionality of the FHFA, so the Supreme Court appointed an amicus curiae. His brief argued the court can sidestep this issue because the 2012 amendment was enacted by an acting director who does not enjoy the removal protections that apply to a confirmed director. The amicus contends that FHFA’s role as conservator does not “implicate executive power” because of its limited purview. Additionally, the amicus argues that the “for cause” provision in HERA is different from the removal protections of the CFPB director found unconstitutional in Seila Law. Lastly, the amicus claims an adverse ruling would have far-reaching effects to other single-headed agencies and potentially multi-members ones like the Federal Reserve.
The summary below omits some repetition of questions by the justices or responses by the advocates. Additionally, this synopsis places a greater focus on the constitutionality questions of the case than on the regulatory law questions.
Oral Argument for the Federal Government
Hashim Mooppan, representing the federal government, begins by summarizing what he views as three key defects of the shareholders’ case. First, their claims are barred by HERA’s succession clause because their challenge is a derivative suit, not a direct one. Second, HERA’s anti-injunction clause “prevents courts from restraining exercises of the conservator’s powers or functions.” The shareholders cannot “second-guess the wisdom or motives behind that business judgment.” Lastly, their constitutional claim fails, he argues. Despite the invalidity of HERA’s restriction on the president’s removal power, President Obama could have removed both officials who signed the Third Amendment, then-Secretary Timothy Geithner, who was always removable at will, and then-FHFA Acting Director Edward DeMarco, who was serving in an acting capacity and therefore also removable at will.
Chief Justice John Roberts asks that since the shareholders are claiming their stock was completely wiped out in a unique way, isn’t their claim direct and therefore not barred? Mooppan notes that in this case the harm in the first instance is to the corporation and therefore the claim is derivative. Since it’s about the dissipation of assets, the corporation itself does have an injury. Much like the cases they cited in their reply brief, Moopan notes, when there is a side transaction to one shareholder to the disadvantage of all other shareholders, there is no difference for the purposes of derivative claims. It does not matter whether that harm to a particular shareholder comes because of a side transaction or, like here, to an amendment to a dividend obligation.
Justice Clarence Thomas follows up, asking for an example of what would be a direct rather than derivative claim. He proposes a hypothetical where an agreement explicitly transfers all dividends from existing shareholders to the Treasury Department. Mooppan responds that the relevant point is not so much that it is an explicit agreement but, rather, if the agreement harms the corporation. In the hypothetical, that agreement is acting directly on the shareholders’ contractual right to dividends and is therefore a direct claim. In Collins v. Mnuchin, the claim is about the dissipation of corporate assets. In other words, Moopan argues, Thomas’s hypothetical is about the “share of the pie,” which is a direct claim, while the current suit is about the “size of the pie,” which affects the corporation and is therefore a derivative claim.
Justice Stephen Breyer continues on the same line of questioning, wondering if the agreement could be characterized as nationalizing the companies, thus making their shares worthless. While Mooppan recognizes the unique nature of the Third Amendment, he says the amendment was a result of the unique condition of the enterprise—it owed $20 billion a year to the federal government. The agreement was a renegotiation of financial obligations, which is a “heartland exercise” of conservatorship power. The anti-injunction clause in HERA, he notes, means you cannot second-guess the conservator’s actions.
Justice Samuel Alito turns to the removability arguments, asking if the court even has to address the constitutionality question if they take the government’s position that an acting director is removable at will. Mooppan responds that the court should confirm the Fifth Circuit’s holding that, prospectively, the FHFA removal restriction be set aside. Alito then asks if the court must consider the status of confirmed directors, as the shareholders argue, because they took actions pursuant to the Third Amendment. He also wonders what relief the court should grant. Mooppan questions if the shareholders are actually challenging any action enforcing the Third Amendment by confirmed directors. Additionally, he goes on to distinguish this case from other Appointments Clause cases by remarking that there was a removable official, the treasury secretary, who was party to the challenged action. Unlike the other cases where the president could not remove officials at will, the president did have sufficient control over the agreement because he could remove the treasury secretary at will.
Justice Sonia Sotomayor returns to reviewability of the Third Amendment. Echoing Breyer’s nationalization question, Sotomayor asks if there’s really no court review of a decision by the FHFA as conservator that could give shareholders a right to challenge. Mooppan replies that the government is not arguing that the anti-injunction clause means there is absolutely no review of what the conservator does. However, when the conservator takes appropriate and necessary actions to preserve and conserve assets, there is no second-guessing the conservator’s business judgment. In response to a follow up, Mooppan reiterates that the shareholders’ claim is that the FHFA acted improperly in giving away the assets of the corporation and, therefore, it’s a derivative, not direct claim.
Sotomayor ends by questioning the FHFA’s similarity to the CFPB. Conservatorships are not thought of as an executive power; rather, they are an adjunct to the judicial power. Additionally, conservatorships are not wide ranging, affecting many entities. Why shouldn’t the court see the FHFA as an exception to Humphrey’s Executor or Morrison v. Olson? Mooppan responds that the question turns on the significance of the executive power. He notes that a decision that affects the entire mortgage market and, therefore, the home equity of every homeowner in the country is “unquestionably a significant executive power.”
Justice Elena Kagan continues Alito’s line of questioning. If the Third Amendment is the only final action that the shareholders are challenging, what basis does the court have to do anything more than issue a declaratory judgment on the validity of the amendment? Mooppan challenges that characterization of the shareholder suit. Like Free Enterprise Fund, the shareholders can bring a prospective suit, absent a concrete final agency action, that raises a challenge that a regulator with authorities over them—in this case, whether they continue or not in conservatorship or be placed in receivership—be constitutionally structured.
Justice Neil Gorsuch next questions why the court would not void the Third Amendment by virtue of the Appointments Clause problem, much like it did in Lucia. Mooppan reiterates the government’s two prevailing arguments in the matter: A removable official, the treasury secretary, was party to the deal (which Gorsuch characterizes as the “harmless error” argument) and the FHFA director at the time was in an acting capacity and therefore always removable at will by the president.
Mooppan explains that HERA does not expressly provide the same clause protections to an acting director as it does to a confirmed director. Much like the court has done in the past, the statute should be read to avoid constitutional problems. That reading of the statute would entail that an acting director is removable at will by the president. Justice Brett Kavanaugh asks whether, if that was true for all acting officials, the principle means that acting officials are presumptively removable at will by the president unless a statute says otherwise. Mooppan responds that it’s more that the court should not “leapfrog from any clause restriction for a confirmed official and assume that that extends to an acting official.” Kavanaugh follows up, noting the tension between congressional designation of an agency as independent and the removability of an acting director. Would not the latter make the agency no longer independent? Mooppan responds with two points. First, Congress has designated some agencies as independent when they are not subject to any clause restrictions, one example in which courts okayed that arrangement is in Swan v. Clinton. Second, he recognizes that the clause restrictions do not necessarily mean that an agency is independent when it has an acting director. In HERA, before the FHFA had its first confirmed director, there was a transitional period when its head was a Housing and Urban Development (HUD) officer who was not subject to any clause restriction.
Justice Amy Coney Barrett asks whether, if one assumes the Third Amendment was valid because the acting director was removable at will and there is a problem with subsequent confirmed directors because of “for cause” removal, there is not a structural problem with the administration of the Third Amendment. Mooppan replies that maybe the only discretionary decision within the Third Amendment would be whether dividends owed be paid in cash or paid as a liquidation preference, neither of which benefits the shareholders who sued. Barrett asks whether it would not be an injury when a past confirmed director, possibly with unconstitutional removal protections, could have taken actions to end the arrangements under the Third Amendment. Mooppan reiterates that that is essentially a challenge to agency inaction, a challenge that the shareholders are not bringing in this suit. He later responds to another follow-up challenge about the propriety of importing the corporate law distinction of direct and derivative suits into the Administrative Procedure Act; Moopan argues that the latter does not displace the former.
Oral Argument for the Court-Appointed Amicus Curiae
After concluding remarks by Mooppan, Aaron Nielson, the court-appointed amicus curiae to argue for the constitutionality of the FHFA’s structure, began his oral argument. Nielson agrees with the government’s position that unless Congress says so in a statute, an acting director does not have tenure protections. However, he disagrees with the government and believes this part of the case should be over and the court should not address the larger constitutionality question. An acting director is removable at will and the shareholders are not challenging ongoing action by the FHFA. However, Nielson argues that if the court chooses to tackle the issue, it should still reverse the Fifth Circuit’s holding on the unconstitutionality of the FHFA structure. First, the FHFA is not comparable to the CFPB because it does not wield significant executive power by regulating purely private actors. Second, “for cause” is the weakest protection in removal law and can be read to include policy disagreements with the president. Under the parties’ logic, similarly situated agencies like the Social Security Administration and the Federal Reserve would be subject to constitutional attack. A decision by the court to hold weak “for cause” protections in these types of agencies unconstitutional would have far-reaching consequences.
Chief Justice Roberts first asks what the consequences are for the payments that took place under the jurisdiction of an unconstitutionally appointed director, even if the Third Amendment was entered into by an acting director who was removable. Nielson agrees with Mooppan that the Third Amendment is not an ongoing agency action but, rather, a discrete agreement that is being currently challenged. Justice Thomas follows up on the same line of questioning, asking about the future administration of the Third Amendment, noting that it is unlike other agency actions. Nielson reiterates that the concerns are hypothetical since the shareholders’ complaint does not incorporate an ongoing taint theory. Such a theory would hold that the ongoing payments are wrong because they are being conducted under an unconstitutionally structured agency. However, the challenge is to the Third Amendment. The “for cause” provision does not have anything to do with the Third Amendment.
Remarking on his past dissents in structural cases, Justice Breyer asks Nielson what he should do in the present case. Should he “throw in the towel,” stick to past dissents, or say this is something different? Nielson responds that this is something different. Even the Justice Department concedes that the FHFA here is not exercising executive power. While this is still a government function, it does not mean it is “executive power.” If a private person can do something, so can the government; that takes it out of the realm of purely “executive power.” The fact that the government performs an action does not make it an executive power, much like the court ordering books does not make the ordering a judicial power.
Nielson continues on this line in response to Justice Alito’s argument that this agency as conservator has a profound effect on ordinary people through the housing market. Nielson frames this as a question the court needs to answer: What type of power is conservatorship? The Bank of the United States, which was much more consequential, was not thought of to be exercising executive power. Here, too, Neilson argues, conservatorship is just outside Article II even though it has significant effects on the economy.
Justice Sotomayor asks whether, if the FHFA is an executive agency, the court does not have to look at the constitutionality of its structure. Also, is it not difficult to separate the question of its structure and the task of looking at whether individual acts are executive or not? Nielson asserts that the FHFA’s powers as a regulator are not significant executive power. Congress essentially gave the FHFA a “recipe book” on what they are supposed to do. The “for cause” provision is permissible here since the FHFA does not have the same sort of discretion the CFPB did. He goes on to reiterate that it is hard to see how the court even gets to the threshold question of harmless error when there was no constitutional violation in the discrete act of entering into the Third Amendment.
Justice Kagan challenges Nielson’s characterization of the FHFA and points to both the majority and dissent in Seila Law, which noted that the FHFA makes rules, conducts enforcement actions and has subpoena power. Nielson reiterates the differences between the FHFA and the CFPB, the latter of which had vast discretion. Kagan presses on the parsing of “for cause” with the “inefficiency, neglect, or malfeasance” removal protections originally for the CFPB director. Nielson responds that Congress used different language in the Dodd-Frank Act (which created the CFPB) and in HERA and, therefore, the court should assume they mean different things.
Justice Gorsuch questions whether the acting director is answerable to the president when the president picks from a pool of three deputies who were chosen by the outgoing director. Also, why can’t the court provide relief voiding the director’s actions once there was a Senate-confirmed director? Nielson remarks that the shareholders’ argument is premised on the Vacancies Act not applying, which is inconsistent in similar circumstances. Additionally, even assuming the president could only pick from the three, there is nothing preventing the president from removing them. To the second point, Nielson points again to the shareholders’ complaint, which challenges the Third Amendment, not future action. The idea of challenging agency inaction or “merely defending something that was constitutional when done [but that later] becomes unconstitutional really has no limiting principle.”
Justice Kavanaugh then asks how this case relates to multi-member agencies when the principle discussed in the case seems to relate just to single directorships. Nielson notes the other parties could take issue with certain positions like the chair of the Federal Reserve, who is separately nominated and confirmed and has certain statutory responsibilities. Additionally, since the court in Selia Law did not carve out an exception for inferior officers with policymaking powers, there is a problem that plaintiffs can just add another count to the complaint challenging a member of the civil service who was involved in the matter. In other words, plaintiffs could challenge any agency action that involved a civil service employee who enjoys removability protections.
Justice Barrett asks Nielson to talk more about what appears to be a type of exception to Seila Law that he is advancing. The question at hand being: Is the executive official using a lot of executive power or does it look more like private power? Turning to Seila Law, Nielson points out that the case discussed two things: whether private citizens are being regulated and whether the agency has substantial policy discretion. Seila Law noted that the FHFA does not regulate purely private actors. Congress also “tightly reticulated” what the agency could do, and the president has ample ability to control it.
Oral Argument for the Challengers
After Nielson’s concluding remarks, David Thompson, representing the challengers, began his oral argument. He claims that the FHFA abandoned its conservatorship mission when it imposed the Net Worth Sweep in the Third Amendment. This was an injury not only to Fannie and Freddie but also to the private shareholders who were removed from their capital structures.
Chief Justice Roberts first asks how the private shareholders can claim their shares have no value and that the government has nationalized the companies when just that morning Fannie and Freddie were trading at $2.69 and $2.56, respectively? Thompson claims there is no scenario under the Third Amendment that the shareholders can recover any economic value. Those prices are attributable to the current lawsuit and the potential for the government to abandon the Net Worth Sweep. Responding to another question, Thompson says that petitioners are challenging the validity of payments going forward. Under 12 C.F.R. 1237.12, money cannot be transferred to the Treasury Department unless the director approves. Therefore, they are also challenging the “regulatory action of the Senate-confirmed directors in approving these dividends.”
Justice Thomas then asks how the separation of powers argument would change if the president, treasury secretary and a subsequent FHFA director all endorsed the Third Amendment in writing. Thompson responds that this after-the-fact action would still be unconstitutional. It would reflect not what the president wanted but what those officials were able to negotiate. If they want to look at a but-for world, they need to go back to the beginning of the agency. The Obama administration had ongoing fights with then-Director DeMarco, but they believed they could not remove him.
Justice Breyer questions why petitioners in this case did not bring a takings claim instead. In other words, why not sue the government for a regulatory taking without compensation? Thompson responds with two points. First, the constitutional avoidance principle counsels not reading Congress as authorizing nationalization. Second, even if the court applies traditional measures of derivative/direct suits, shareholders still win because of Alleghany Corporation v. Breswick & Company. As Thompson noted in the shareholders’ brief, in that case, the court held that the “conduct of the controlling shareholders imposed distinct harms on the ‘minority common stockholders’ ... who could therefore maintain a direct action.”
Justice Alito then asks whether the identification of an unconstitutional restriction on removal powers necessarily means that everything done by that officer is void from the start. Thompson notes that there is an interest in accountability. Additionally, it would be hard to measure the protection’s effect in a but-for world.
Justice Sotomayor continues the line of questioning about the relief in this case. The president could have removed the treasury secretary and presumably the acting director at the time the Third Amendment was enacted, and no president has ever tried to remove a director. Why ought petitioners get more than a declaratory judgment invalidating the for-cause provision? Thompson disputes that we know what the president wanted. He points again to the disputes the Obama administration had with the FHFA director and the calls during the Obama administration for the director’s removal. Thompson also disputes the characterization that the acting director can be fired. If so, the FHFA “would toggle back from being a radically independent agency to a radically dependent agency.” He also disputes the other side’s description of Swan. That case was about an agency with three members. Just because one of them became dependent, it does not follow that the whole agency transformed radically.
Justice Kagan draws on the Social Security Administration as an example. Since 1994, that agency has had a single commissioner and has rendered around 17 million decisions. Would the current challenge mean the court would have to void all those decisions? Thompson points to the statute of limitations as well as to Article III limitations that would cut against voiding all of them. However, he notes that petitioners still agree with the solicitor general on the unconstitutionality of its structure. Kagan asks if he thinks those decisions would change with at-will removal. Invoking Free Enterprise and Seila Law, Thompson argues that plaintiffs are not required to re-create a but-for world.
Justice Gorsuch asks if a constitutionally appointed director could later ratify the past arrangement. Thompson charges that the government cannot just time travel back when the underlying rationale has been exposed as invalid eight years later. Responding to a question on the removability of an acting director, he contends that the Vacancies Act did not apply here because Net Worth Sweep was enacted more than 210 days after the Senate rejected President Obama’s nominee.
Justice Kavanaugh says that the solicitor general stated the court has subjected structural constitutional claims to the general law of remedies, and courts may deny relief based on a variety of principles. What that shows is that vacating the challenged action is permissible but not necessarily mandatory. Thompson states that these principles do not apply here because petitioners brought this case under the APA: “when the APA says ‘shall set aside’ with due account for the rule of prejudicial error, that sweeps aside these equitable doctrines and tells this Court that it shall set aside.” Responding to follow-up questions, Thompson also states that petitioners do not believe Seila Law created a “sliding scale” based on the significance of the executive power, nor would this case require a redo of the framework in Seila Law as it applies to multi-member agencies.
Justice Barrett asks, if there was no structural issue with the acting director, how much participation by the unconstitutional officer would matter for this case. Thompson replies that the actions taken by the unconstitutional director would have to be invalidated and the court would have to look back on what the unconstitutional officer did during his or her tenure. Responding to a clarification of remedies, Thompson states that petitioners are looking for enjoinment of future sweep dividends and that the overpayments that were already paid be treated as a pay-down of principal.
After concluding remarks by Thompson, Mooppan provides a rebuttal in which he reiterates many of the lines of his previous argument. He notes that Thompson has not shown any presidential insulation on either side of the Third Amendment. The treasury secretary was removable, and there is little reason why the court cannot construe the removability of the acting director to avoid a constitutional problem. Even though there were limited options to replace the acting director, that fact is not a claim about presidential removal. As for the Third Amendment itself, he argues that there is no subsequent executive or discretionary decision being made because the money is owed under a valid agreement.