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The 9th Circuit May Have Just Decided The Delaware GSE Cases….For Plaintiffs

 

First, let’s go back and see what Delaware plaintiffs are arguing.  The short answer is plaintiffs are arguing that the GSE’s are Delaware corporations and Delaware law governs their actions.   They then saw that the Net Worth Sweep is in direct violation of Delaware law, thus illegal. Defendants (the government) argue that the GSE’s are Federal entities due to the conservatorship and that HERA allows them to do whatever they want so Delaware Law is irrelevant.

So, what did the 9th Circuit say about this subject yesterday?

The district court properly held that a claim presented to Fannie Mae or Freddie Mac is not presented to an “officer, employee or agent” of the United States. And that’s because Fannie Mae and Freddie Mac are private companies, albeit companies sponsored or chartered by the federal government.12 U.S.C. § 1716b (Fannie Mae is a “Government-sponsored private corporation”); 12 U.S.C. § 1452 (Freddie Mac is “a body corporate under the direction of a Board of Directors” elected annually by the voting common stockholders). Seealso Lebron v. Nat’l R.R. Passenger Corp., 513 U.S. 374, 392 (1995) (charter disclaimer of government entity status dispositive for matters within Congress’s control); U.S. ex rel. Totten v. Bombardier Corp., 380 F.3d 488, 492 (D.C. Cir. 2004) (False Claims Act coverage is a matter within Congress’s control), cert. denied, 544 U.S. 1032 (2005). The

United States filed a helpful and well-reasoned amicus brief agreeing with this conclusion.1

Our prior decision in Rust v. Johnson, 597 F.2d 174 (1979), where we held that Fannie Mae was a federal instrumentality for state/city tax purposes, does not change the result, because Rust does not address Fannie Mae or Freddie Mac’s status under the False Claims Act. As we have previously held, just because an entity is considered a federal instrumentality for one purpose does not mean that the same entity is a federal instrumentality for another purpose. Kuntz v. Lamar Corp., 385 F.3d 1177, 1185 (9th Cir. 2004). Fannie Mae’s federal instrumentality status for state tax purposes doesn’t answer whether Fannie Mae and Freddie Mac are also government entities for False Claims Act purposes. See Lewis v. United States, 680 F.2d 1239, 1242–43 (9th Cir.1982).

Nor does the Federal Housing Finance Agency’s conservatorship transform Fannie Mae and Freddie Mac into federal instrumentalities. We agree that the FHFA has “all the rights, titles, powers and privileges of” Fannie Mae and Freddie Mac. Cty of Sonoma v. Fed. Hous. Fin. Agency, 710 F.3d 987, 993 (9th Cir. 2013) (quoting 12 U.S.C. § 4617(b)(2)(A)(i)). However, this places FHFA in the shoes of Fannie Mae and Freddie Mac, and gives the FHFA their rights and duties, not the other way around.

Myron Steel promptly sent a letter to Judge Sleet in the Delaware case notifying him of the 9th Circuit’s ruling.

BY CM/ECF

The Honorable Gregory M. Sleet

U.S. District Court for the District of Delaware

U.S. Courthouse

844 North King Street

Wilmington, DE 19801

Re: Jacobs v. Federal Housing Finance Agency,

C.A. No. 15-708-GMS

Dear Judge Sleet:

Pursuant to D. Del. LR 7.1.2(b), Plaintiffs David Jacobs and Gary Hindes, on behalf of themselves and all others similarly situated, and derivatively on behalf of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, write to inform the Court of the recent Ninth Circuit Court of Appeals decision in United States of America ex rel. Adams v. Aurora Loan Servs., Inc., No. 14-15031 (9th Cir. Feb. 22, 2016), which is relevant to Defendants’ pending Motions to Dismiss (D.I. 17 and 19). The Ninth Circuit issued its opinion after the parties completed briefing on the pending Motions to Dismiss. In Adams, the Ninth Circuit held that Fannie Mae and Freddie Mac are private companies, not federal instrumentalities, and that the conservatorship placed the Federal Housing Financing Agency (“FHFA”) “in the shoes of Fannie Mae and Freddie Mac, and gives the FHFA their rights and duties, not the other way around.” Id. at 6 (emphasis in original).

This holding is contrary to Defendants’ arguments that federal law, not state law, governs the conservator’s power to implement the Net Worth Sweep as a term of preferred stock, and that FHFA has authority under HERA to act as it sees fit without regard to whether Fannie Mae and Freddie Mac themselves have power under state law to issue preferred stock having the terms of the Net Worth Sweep. FHFA Op. Br. (D.I. 18) at 4-5, 13-15, 26-28; Treasury Op. Br. (D.I. 20) at 3, 22-28. For the Court’s convenience, we attach the Adams opinion as Exhibit A.

Respectfully,

/s/ Myron T. Steele

Myron T. Steele (#000002)

9th Circuit ruling and Steele Letter

The government here is between a rock and a hard place. They can’t appeal the decision because they won and they won because the lower court and the appeals court bought their argument, the GSE’s are not Federal Instrumentalities and if they aren’t, they are subject to state law. In this case that is Delaware Law where they are chartered. If that is true, then the NWS, illegal under Delaware Law should be ruled as such.

Here is the line that will hurt the defendants: “Nor does the Federal Housing Finance Agency’s conservatorship transform Fannie Mae and Freddie Mac into federal instrumentalities.” The government would have undoubtedly argued that the conservatorship ship did just that, transformed them into Federal Instrumentalities for the purposes of the Delaware litigation. The 9th Circuit just squashed that……..

Everyday things look better and better for plaintiffs…