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Economic Recovery Act Violation – Separation of Powers

By: Derek Hawkins//September 16, 2021//

Economic Recovery Act Violation – Separation of Powers

By: Derek Hawkins//September 16, 2021//

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United States Supreme Court

Case Name: Patrick J. Collins, et al., v. Janet L. Yellen, et al.,

Case No.: 19-422; 19-563

Focus: Economic Recovery Act Violation – Separation of Powers

Fannie Mae and Freddie Mac are two of the Nation’s leading sources of mortgage financing. When the housing crisis hit in 2008, the companies suffered significant losses, and many feared that their troubling financial condition would imperil the national economy. To address that concern, Congress enacted the Housing and Economic Recovery Act of 2008 (Recovery Act), 122 Stat. 2654, 12 U. S. C. §4501 et seq. Among other things, that law created the Federal Housing Finance Agency (FHFA), “an independent agency” tasked with regulating the companies and, if necessary, stepping in as their conservator or receiver. §§4511, 4617. At its head, Congress installed a single Director, whom the President could remove only “for cause.” §§4512(a), (b)(2).

Shortly after the FHFA came into existence, it placed Fannie Mae and Freddie Mac into conservatorship and negotiated agreements for the companies with the Department of Treasury. Under those agreements, Treasury committed to providing each company with up to $100 billion in capital, and in exchange received, among other things, senior preferred shares and quarterly fixed-rate dividends. Four years later, the FHFA and Treasury amended the agreements and replaced the fixed-rate dividend formula with a variable one that required the companies to make quarterly payments consisting of their entire net worth minus a small specified capital reserve. This deal, which the parties refer to as the “third amendment” or “net worth sweep,” caused the companies to transfer enormous amounts of wealth to Treasury. It also resulted in a slew of lawsuits, including the one before us today.

A group of Fannie Mae’s and Freddie Mac’s shareholders challenged the third amendment on statutory and constitutional grounds. With respect to their statutory claim, the shareholders contended that the Agency exceeded its authority as a conservator under the Recovery Act when it agreed to a variable dividend formula that would transfer nearly all of the companies’ net worth to the Federal Government. And with respect to their constitutional claim, the shareholders argued that the FHFA’s structure violates the separation of powers because the Agency is led by a single Director who may be removed by the President only “for cause.” §4512(b)(2). They sought declaratory and injunctive relief, including an order requiring Treasury either to return the variable dividend payments or to re-characterize those payments as a pay down on Treasury’s investment. We hold that the shareholders’ statutory claim is barred by the Recovery Act, which prohibits courts from taking “any action to restrain or affect the exercise of [the] powers or functions of the Agency as a conservator.” §4617(f ). But we conclude that the FHFA’s structure violates the separation of powers, and we remand for further proceedings to determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim.

Affirmed in part. Vacated in part. Reversed and remanded in part.

Dissenting: SOTOMAYOR, J., filed an opinion concurring in part and dissenting in part, in which BREYER, J., joined.

Concurring: . THOMAS, J., filed a concurring opinion. KAGAN, J., filed an opinion concurring in part and concurring in the judgment, in which BREYER and SOTOMAYOR, JJ., joined as to Part II. GORSUCH, J., filed an opinion concurring in part. SOTOMAYOR, J., filed an opinion concurring in part and dissenting in part, in which BREYER, J., joined.

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Derek A Hawkins is Corporate Counsel, at Salesforce.

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