Yale Law School lecturer Logan Beirne examined a lawsuit recently filed by three Fannie Mae and Freddie Mac investors accusing the federal government of exceeding its authority as a conservator.

The three plaintiffs in question allege that the Federal Housing Finance Agency and the U.S. Treasury “systemically exceeded their limited authority under HERA” and “acted arbitrarily and capriciously.”

In his article, published in the National Law Review, Beirne seems to agree. He says that the case “astutely focuses on [the Federal Housing Finance Agency’s statutory breaches],” unlike the earlier suits that focused on constitutional claims.

“However, rather than work as conservator to benefit Fannie Mae and Freddie Mac’s shareholders, as is its obligation under traditional conservatorship law, the FHFA acted for the benefit of the U.S. government – and to the detriment of those private shareholders. In a surprise deal, the FHFA effectively wiped out the private shareholders and essentially turned the proceeds of Freddie and Fannie to the U.S. Treasury,” Beirne writes.

At the time of the conservatorship, most thought the move was necessary, though serious questions have arisen about that contention since.

The GSEs returned to profitability by the second quarter in 2012, and within a few months the Treasury enacted its “Third Amendment Sweep” of profits.

Beirne says that as a conservator, the FHFA had a statutory obligation to shareholders over other concerns.

He notes that concerns for taxpayers are important, yes, but breeches of contractual responsibilities are even more serious.

“As conservator under HERA, it is precisely the FHFA’s responsibility to work for the benefit of the shareholders. Under standard corporate law principles, that conservator is bound, by a strong fiduciary duty to protect the corporate assets for the benefit of both common and preferred shareholders. By working for the benefit of third party taxpayers – and to the detriment of private shareholders – the FHFA is in breach of its duties under HERA,” he writes.

Beirne concludes that while the “political winds of the moment” make the seizure of private property from shareholder seem popular, the long-term consequences of allowing this violation of the rule of law to go unchecked would have very costly consequences on the housing market.