A former Fannie Mae employee who filed a whistleblower case against the government-sponsored enterprise is highlighting some of the difficulties plaintiffs face when dealing with agencies under conservatorship.

The case also shows the Federal Housing Finance Agency utilizing its statutory powers to avoid penalties and large pay-outs that could adversely effect U.S. taxpayers.

The former employee, Caroline Herron, lost her most recent push for the inclusion of punitive damage claims in a pending lawsuit against Fannie.

While the case is not precedent in most jurisdictions, it does illustrate some of the legal battles ahead for counties and other parties that sue GSEs in the future. These lawsuits may prove difficult given the fact that it's difficult to ascertain when the GSEs will be classified as government entities with certain immunities or as private corporations.

In the original suit, former Fannie employee Caroline Herron sued the GSE, saying she was wrongfully terminated after bringing attention to allegations that Fannie "acted inappropriately" when assisting the Treasury with home loan modifications. She also accused the GSE of wasting public funds and violating terms of a Treasury contract, according to court records.

In her initial complaint, Herron, a former Fannie Mae vice president and a consultant to the GSE after it entered conservatorship, argued if Fannie is a public entity then she should be able to bring a Constitutional First Amendment violation claim against the mortgage giant in its government capacity.

However, the United States District Court for the District of Columbia threw out the First Amendment claim against Fannie earlier this year, saying the GSE functions as a private entity and even though the Federal Housing Finance Agency took over as conservator, it essentially stepped into the GSE's role as a private institution.

This legal analysis, which gave Fannie Mae private status, barred the Constitutional claims.

However, Herron still has several claims of wrongful discharge, civil conspiracy and tortious interference pending against Fannie Mae in the same case.

The Federal Housing Finance Agency as conservator filed its own motion with the court, asking them to dismiss Herron's claims for punitive damages to be included in the remaining suit. It's here where the classification of the GSEs turns, creating much confusion on how courts and attorneys view the agencies.

In this scenario, a "public classification" would bar Fannie from punitive damages. However, if the firm is a private entity then punitive damages could possibly stick.

In this particular situation, the FHFA cited a federal statute (12 U.S.C. ยง 4617(j)) which says a conservator "shall not be liable for any amounts in the nature of penalties and fines." The court agreed with this observation and threw out Herron's claim for punitive damages to be attached to the remaining counts.

The two decisions seem discombobulated because in the first, a Constitutional claim is thrown out on the grounds that even under conservatorship, Fannie Mae is considered a private entity, protecting it from such a claim. Then, in the second decision on damages, the FHFA's conservatorship status maintains a type of public persona for the GSE, allowing it to obtain certain statutory protections through the conservatorship arrangement.

While the decisions, which came down from the U.S. District Court for the District of Columbia, do not apply to every case or jurisdiction, they do exemplify the ongoing confusion that occurs in legal circles across the U.S. when it comes to Fannie Mae and Freddie Mac's role as firms that are simultaneously public and private.

"I think the key here is to distinguish between Fannie and the conservator," said Michael Froomkin, a professor of law at the University of Miami School of Law. "The court seems to be saying Fannie remains private; the conservator is public; but having the conservator direct Fannie doesn't make its acts public."

He added, "The last step is consistent with conservatorship law, and is in a previously grey area regarding government corporation law."

When asked about the court's recent dismissals in the case, FHFA general counsel Alfred Pollard, said, "This is a significant ruling upholding the statutory prohibition against imposing punitive damages against FHFA or Fannie Mae and Freddie Mac while they are in conservatorship or receivership, thus avoiding costs that otherwise would be borne by U.S. taxpayers."

kpanchuk@housingwire.com