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Roberts v. Federal Housing Finance Agency

United States Court of Appeals, Seventh Circuit

May 3, 2018

Christopher Roberts, et al., Plaintiffs-Appellants,
v.
Federal Housing Finance Agency, et al., Defendants-Appellees.

          Argued October 30, 2017

          Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 16 C 2107 - Edmond E. Chang, Judge.

          Before Wood, Chief Judge, and Bauer and Easterbrook, Circuit Judges.

          Wood, Chief Judge.

         At the height of the 2008 financial crisis, Congress created the Federal Housing Finance Agency (the Agency) and authorized it to place into conservatorship two critical government-sponsored enterprises-the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, commonly known as Fannie Mae and Freddie Mac. 12 U.S.C. § 4617(a). To stabilize Fannie and Freddie, along with the broader financial markets, Congress em- powered the U.S. Treasury to purchase their "obligations and other securities" through the end of 2009. 12 U.S.C. §§ 1455(1)(1)(A), 1719(g)(1)(A). The Agency and Treasury acted quickly. In exchange for a cash infusion and fixed funding commitment for each enterprise, Treasury received senior preferred shares. Its shares gave it extraordinary governance and economic rights, including the right to receive dividends tied to the amount of Treasury 's payments. But the stabilization effort proved to be more difficult than was initially expected. As Fannie and Freddie's capital needs mounted, Treasury agreed three times to modify the original stock purchase agreements. The First and Second Amendments primarily increased Treasury's funding commitment. The third modification-which, unlike the first two, was made after Treasury's purchasing authority had expired-introduced a variable dividend under which Treasury's dividend rights were set equal to the companies' outstanding net worth.

         That net-worth dividend, sometimes called the Net Worth Sweep, is at the heart of this litigation. The plaintiffs are private shareholders of Fannie and Freddie. They sued Treasury and the Agency, claiming that the Agency violated its duties in two ways: by agreeing to the net-worth dividend and by unlawfully succumbing to the direction of Treasury. They fault Treasury both for exceeding its statutory authority and failing to follow proper procedures. The district court dis- missed the complaint for failure to state a claim. See 12 U.S.C. § 4617(f). We affirm.

          I

         Fannie Mae and Freddie Mac are mammoth institutions. Although they were chartered by Congress to increase home- loan lending by injecting liquidity into mortgage markets, they have long operated as publicly traded corporations. By 2008, they had come to play an integral role in the United States economy, backing mortgages valued at trillions of dollars and representing a substantial portion of all home loans. As the 2008 financial crisis intensified and the national housing market hovered on the verge of collapse, fears mounted about their vitality. Congress responded by passing the Housing and Economic Recovery Act of 2008 (HERA).

         HERA authorizes the director of the Agency to appoint the Agency as conservator or receiver for Fannie or Freddie for a variety of reasons. 12 U.S.C. § 4617(a)(1)-(3). In either of those capacities, the Agency "may" then:

(i) take over the assets of and operate the regulated entity with all the powers of the shareholders, the directors, and the officers of the regulated entity and con- duct all business of the regulated entity;
(ii) collect all obligations and money due the regulated entity;
(iii) perform all functions of the regulated entity in the name of the regulated entity which are consistent with the appointment as conservator or receiver;
(iv) preserve and conserve the assets and property of the regulated entity; and
(v) provide by contract for assistance in fulfilling any function, activity, action, or duty of the Agency as conservator or receiver.

Id. § 4617(b)(B). Additional provisions of HERA apply separately to each of the Agency's two possible roles. The Agency "may, as a conservator, take such action as may be (i) necessary to put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity." Id. § 4617(b)(D). In contrast, "when acting as receiver, " the Agency "shall place the regulated entity in liquidation." Id. § 4617(b)(E). Finally, the Agency may exercise "such incidental powers as shall be necessary to carry out" powers granted to it in either role, and it may "take any action authorized … which the Agency deter- mines is in the best interests of the regulated entity or the Agency." Id. § 4617(b)(J). In exercising any of these powers, the Agency "shall not be subject to the direction or supervision of any other agency of the United States." Id. § 4617(a)(7).

         At the same time as HERA broadly empowers the Agency, it disempowers courts and existing stockholders, directors, and officers. Unless otherwise permitted by the statute or re- quested by the Agency's director, "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." Id. § 4617(f). The law also provides that the Agency "shall, as conservator or receiver, and by operation of law, immediately succeed to all rights, titles, powers, and privileges of the regulated entity, and of any stockholder, officer, or director of such regulated entity with respect to the regulated entity and [its] assets … ." Id. § 4617(b)(2)(A); see also id. § 4617(b)(2)(K)(i).

          Finally, HERA authorized Treasury to purchase securities in Fannie and Freddie "on such terms and conditions … and amounts as the Secretary [of the Treasury] may determine." Id. §§ 1455(1)(1)(A), 1719(g)(1)(A). Treasury's purchasing authority continued through December 31, 2009, 12 U.S.C. § 1719(g)(4), after which Treasury could only "hold, exercise any rights received in connection with, or sell, any" of the securities it had purchased, 12 U.S.C. § 1719(g)(2)(D).

         After Congress passed HERA, the Agency promptly placed Fannie and Freddie into conservatorship and entered into agreements with Treasury for the sale of senior preferred shares. Treasury initially invested $1 billion in each company and extended $100 billion funding commitments to each. Pursuant to Preferred Stock Purchase Agreements, Treasury received a) an initial liquidation preference in each company of $1 billion, to be increased dollar-for-dollar as each company drew on its $100 billion funding commitment, b) a quarterly cumulative dividend, c) an annual commitment fee waivable at Treasury's discretion, and d) warrants to purchase approximately 80 percent of each company's common stock. The companies could elect to pay the dividend in cash at an annualized rate equal to ten percent of Treasury's outstanding liquidation preference or by ...


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