September 7, 2018
Appeal from the United States District Court for the District
of Delaware (D.C. No. 1:015-cv-00708) District Judge:
Honorable Gregory M. Sleet
Christopher N. Kelly, Esq. Michael A. Pittenger, Esq.
[ARGUED] Alan R. Silverstein, Esq. Potter Anderson &
Corroon Myron T. Steele, Esq. Counsel for Appellants
B. Bergman, Esq. Howard N. Cayne, Esq. [ARGUED] Ian S.
Hoffman, Esq. Dirk Phillips, Esq. Asim Varma, Esq. Arnold
& Porter Kaye Scholer Robert C. Maddox, Esq. Robert J.
Stearn, Jr., Esq. Richards Layton & Finger Counsel for
Appellee Federal Housing Finance Agency
J. Sinzdak, Esq. [ARGUED] Abby C. Wright, Esq. United States
Department of Justice Civil Division Counsel for Appellee
United States Department of Treasury
C. Maddox, Esq. Robert J. Stearn, Jr., Esq. Richards Layton
& Finger Meaghan M. Vergow, Esq. O'Melveny &
Myers Counsel for Appellee Federal National Mortgage
Michael J. Ciatti, Esq. King & Spalding Robert C. Maddox,
Esq. Robert J. Stearn, Jr., Esq. Richards Layton & Finger
Counsel for Appellee Federal Home Loan Mortgage Corporation
Before: HARDIMAN, KRAUSE, and BIBAS, Circuit Judges
2008, the U.S. government strove to rescue the collapsing
economy. Its extreme measures helped many, but others
suffered as a result. One of the rescue measures, the Housing
and Economic Recovery Act, authorized the government to act
as conservator for Fannie Mae and Freddie Mac, two
government-sponsored enterprises with critical roles in the
home-mortgage market. Under that conservatorship, Fannie and
Freddie made a deal with the Department of Treasury. The deal
guaranteed Fannie and Freddie access to hundreds of billions
of dollars. But in return, they had to give their net profits
to the Treasury-in perpetuity. Fannie's and Freddie's
junior shareholders had expected to share in those future
profits, but the deal wiped out that expectation. So some of
those junior shareholders now challenge that deal.
reject the shareholders' challenge on all fronts. First,
the Recovery Act gave the government broad, discretionary
power to enter into the deal. Second, the deal complies with
the requirements of the Recovery Act, as well as Delaware and
Virginia corporate law. And third, the relief sought would
"restrain or affect the exercise of [the
government's] powers" as conservator, which the
Recovery Act forbids. 12 U.S.C. § 4617(f). That relief,
even the monetary relief, would unwind the whole deal. So we
will affirm the District Court's dismissal.
Fannie Mae and Freddie Mac.
wake of the Great Depression, Congress created Fannie, and
later Freddie, to support the home-mortgage market. Pub. L.
No. 91-351, 84 Stat. 450, § 301(b), as amended
by Pub. L. No. 101-73, 103 Stat. 183, § 731(a)
(codified at 12 U.S.C. § 1451 note) (Freddie Mac); 12
U.S.C. §§ 1716-17 (Fannie Mae). Fannie and Freddie
do so by borrowing money, buying home mortgages, packaging
them into guaranteed mortgage-backed securities, and selling
those securities to investors. 12 U.S.C. §§
buying mortgages and then guaranteeing the resulting
securities, Fannie and Freddie make the mortgage market both
more liquid and more stable. Perry Capital LLC v.
Mnuchin, 864 F.3d 591, 599 (D.C. Cir. 2017) (Perry
Capital), cert. denied, 138 S.Ct. 978 (2018).
They relieve mortgage lenders of the risk of default and free
up their capital to make more loans. As a result, lenders can
keep lending to home buyers who meet Fannie's and
Freddie's underwriting standards, secure in the knowledge
that Fannie and Freddie will buy those mortgages. By 2008,
Fannie and Freddie owned or guaranteed five trillion
dollars' worth of mortgages and mortgage-backed
securities- nearly half of the market. Id. In short,
they are the backbone of the U.S. residential-mortgage
and Freddie are government-sponsored enterprises; they were
created by congressional charter but are owned by private
shareholders. 2 U.S.C. § 622(8). Although Fannie and
Freddie are privately owned and publicly traded companies,
the public has long viewed their securities as implicitly
backed by the federal government's credit. That perceived
government guarantee has helped them to borrow money and to
buy mortgages more cheaply than they otherwise could have.
Perry Capital LLC v. Lew, 70 F.Supp.3d 208, 215
(D.D.C. 2014), aff'd in part, 864 F.3d 591. All
that borrowing, lending, and buying propelled the housing
market to record highs by the mid-2000's.
The Housing and Economic Recovery Act of 2008.
the housing bubble burst. House prices plunged, slashing the
value of Fannie's and Freddie's mortgage portfolios.
Fannie's and Freddie's guarantees put them on the
hook not only for the mortgages they owned, but also for many
mortgage-backed securities based on loans gone bad. Congress
feared that they might default, threatening not only the
housing market but the precarious national economy as a
whole. Perry Capital, 864 F.3d at 599.
off that threat, Congress passed the Recovery Act. The
Recovery Act created the Federal Housing Financing Agency and
empowered it to supervise and regulate Fannie and Freddie. 12
U.S.C. § 4511. The Recovery Act gives the Agency many
enumerated, mostly discretionary powers. For instance, it
authorizes the Agency's Director to "appoint the
Agency as conservator . . . for the purpose of reorganizing
[or] rehabilitating . . . the affairs of" Fannie or
Freddie. Id. § 4617(a)(1)-(2). As conservator,
the Agency inherits all the "rights, titles, powers, and
privileges" of Fannie, Freddie, and their officers,
directors, and shareholders. Id. §
4617(b)(2)(A)(i). The Recovery Act also authorizes the Agency
as conservator to exercise any "incidental powers as
shall be necessary to carry out [its enumerated]
powers." Id. § 4617(b)(2)(J)(i).
Section 4617(f) of the Recovery Act.
given the Agency sweeping authority and discretion, the
Recovery Act strictly limits judicial review: "[N]o
court may take any action to restrain or affect the exercise
of powers or functions of the Agency as a conservator or
receiver." Id. § 4617(f). This case turns
in part on how to interpret and apply that subsection.
2008, the collapse of the housing market cost Fannie and
Freddie billions of dollars, threatening the U.S. mortgage
market. The Treasury quickly took steps to prop up Fannie and
Freddie. But the mortgage and financial markets remained
perilous, and the financial crisis grew worse. So the Agency
put both Fannie and Freddie into conservatorship.
the Agency's direction, they entered into funding
agreements with the Treasury. The Treasury gave each
enterprise a funding commitment. When Fannie's or
Freddie's liabilities exceed their assets, they can draw
on that funding commitment to keep their net worth in the
return, the Treasury received one million shares of senior
preferred stock in each of Fannie and Freddie. These shares
gave the Treasury a liquidation preference in each enterprise
equal to $1 billion plus all the money drawn from the
Treasury's funding commitment. The shares also gave the
Treasury an annual dividend equal to 10% of the liquidation
preference, if paid in cash.
Treasury initially capped its funding commitment at $100
billion per enterprise. That was not enough, at least for
Fannie. Two amendments to the funding agreement more than
doubled that cap, and Fannie and Freddie wound up drawing
$116.1 billion and $71.3 billion from the Treasury. But as
Fannie and Freddie drew more and more money from the
Treasury, they owed it larger and larger dividends. In a
vicious cycle, they sometimes had to draw money from the
Treasury just to pay the Treasury's dividends.
2012, the Treasury and the Agency renegotiated the funding
agreements and agreed to the Third Amendment. The Third
Amendment replaced the 10% annual dividend with a quarterly
variable dividend. It set that variable dividend equal to
Fannie's and Freddie's positive net worth above a
capital buffer, which was set to decrease with each dividend
payment. The capital buffer is now down to zero. So each
quarter, the dividend consumes each enterprise's entire
positive net worth. The challengers call this arrangement the
Net Worth Sweep.
other words, under the Third Amendment, if Fannie or Freddie
has a positive net worth, it pays all that worth out as a
dividend to the Treasury. If its net worth is zero or
negative, it pays nothing. Fannie and Freddie pay only what
they can. That way, they need never again draw from the
Treasury to pay the Treasury's dividends. But they also
have no money left over to pay dividends to junior
shareholders or to redeem the Treasury's shares, exit
conservatorship, and return to private control.