A decision by the 9th Circuit Court of Appeals yesterday could have big implications for a Delaware case where plaintiffs are arguing that Fannie Mae and Freddie Mac are Delaware corporations and therefore are subject to state, not federal law.
Because Delaware law doesn't allow for the net worth sweep of Fannie and Freddie profits, if the GSEs are ruled to be private companies, that profit sweep would be illegal. The 9th Circuit seems to be saying just that in a decision that upheld a district court finding.
"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," the ruling from the 9th Circuit stated.
Key to the Delaware proceedings is this phrase from the 9th Circuit:
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…Nor does the Federal Housing Finance Agency’s conservatorship transform Fannie Mae and Freddie Mac into federal instrumentalities.
In the Delaware case, Jacobs v. Federal Housing Finance Agency, the defendants had filed a motion to dismiss. The plaintiff's attorney, Myron Steele, notified the judge in the Delaware case about the Ninth Circuit's finding, stating that:
"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."
As Todd Sullivan states in his article on the topic:
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.
The ruling is the latest twist in the legal battle over the status of the two government-sponsored entities, now dubbed FannieGate by those challenging the legality of the net worth sweep of the companies' profits to the Treasury Department.
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