Collins Cheat Sheet

Two things to look for in the SCOTUS opinion

After oral arguments before SCOTUS on December 9, 2020, I had thought a Collins opinion would have issued by now, by analogy to the 17 weeks between argument and opinion in Seila Law, a recent and comparable case to Collins.

Now, I am confident in predicting that the SCOTUS Collins opinion will issue in the next eight weeks, as the current SCOTUS term is scheduled to close at the end of June 2021.

What should you look for in the SCOTUS Collins majority opinion? I offer two important questions that GSE investors should be particularly interested to see how SCOTUS answers.

1. Is the Net Worth Sweep inimical to the Conservator’s duties?

   SCOTUS and the federal Circuit Courts are reviewing courts…they review the decision below, and decide whether to vacate, modify or affirm the decision below. The decision below in Collins, by the 5th Circuit Court of Appeals en banc, itself reversed the federal District Court judgment that granted the United States motion to dismiss the plaintiffs’ APA claim that the NWS was ultra vires, or not within the power of the FHFA as conservator to adopt.

   So, whereas the federal District Court held that the Collins plaintiffs could show no facts which would prove that the NWS was outside the Conservator’s powers, the 5th Circuit held that the Collins plaintiffs had made a “plausible showing” (the minimum necessary to defeat the United States’ motion to dismiss) that the NWS was outside the Conservator’s powers, and therefore void. So the District Court was wrong to dismiss the action, and should schedule the case for trial on remand.

   What was the difference between the federal District Court’s and 5th Circuit’s analyses? The District Court bought the United States argument that the Conservator could do anything so long as what the Conservator did could be construed as managing the affairs of the GSEs. The 5th Circuit rejected this analysis and concluded that the Conservator had a duty to conserve and preserve the assets of the GSEs, and do such things as may rehabilitate the GSEs back to safety and soundness.

   Therefore, the 5th Circuit held that the Collins plaintiffs should have the opportunity to go back to the District court to argue that, based upon its evidence and applying the proper legal standard as set forth by the 5th Circuit, the NWS was ultra vires and therefore void.

   I expect SCOTUS, at a minimum, will affirm the 5th Circuit decision, setting forth what it considers to be the correct legal standard relating to the Conservator’s duty for the District Court to adopt upon remand. Presumably if SCOTUS affirms the 5th Circuit, then SCOTUS’s analytical framework should resemble that of the 5th Circuit. The net result will be a remand to the District Court for a trial. The Collins plaintiffs may be able to short circuit the need for a full trial by moving for summary judgment at the District Court, as I discuss in a prior post, which the District Court could grant more quickly than a judgment after trial.

   But will SCOTUS go further than the 5th Circuit, to the benefit of the Collins plaintiffs? Consider these questions:

   Is there any set of facts under which the NWS could be fairly construed to further the Conservator’s rehabilitative mission? The stated purpose of the NWS is to drain off all of the GSEs’ capital for the benefit of the Treasury, leaving the GSEs with no capital to insulate them from losses arising from their trillions of dollars of guaranty obligations. The foremost indicium of safety and soundness for financial institutions such as the GSEs is a robust capital position. How does reducing the GSEs’ capital to zero promote safety and soundness, which the 5th Circuit found to be the Conservator’s duty?

   Will the SCOTUS decision’s analytical framework make clear that there is no objective basis to conclude that the NWS furthers the rehabilitative mission of the Conservator…that, indeed, the NWS is inimical to the conservator’s duty to take such actions as may make the GSEs safe and sound?

   This, of course, would go one step beyond the 5th Circuit’s analysis and holding, but it would be an important step for the Collins plaintiffs. This is the kind of step that SCOTUS, as a reviewing court of last resort, might be more willing to take than any one of eleven Circuit Courts. In connection with this analytical framework, should SCOTUS adopt it, SCOTUS would be in the position to remand the case to the District Court not for trial on the merits, but rather for determination of the Collins plaintiffs’ remedy.

   Will SCOTUS not just affirm the 5th Circuit en banc APA holding, but provide the Collins plaintiffs an even more favorable holding?

2. Will SCOTUS find an off-ramp on the unconstitutional structure claim, so as not to grant the Collins plaintiffs backward relief?

   I expect SCOTUS will find that the FHFA Director must be removable by POTUS at will, such that the FHFA was unconstitutionally structured by providing that its director was removable by POTUS only for cause. This follows directly from the Seila Law case, which held that a single agency director removable by POTUS only for cause violates the US constitution’s separation of powers.

   There is substantial SCOTUS precedent that an unconstitutionally structured agency’s actions are voidable by any party aggrieved by such an agency’s action. So if SCOTUS does not proceed to grant the Collins plaintiffs requested backward relief by voiding the NWS, SCOTUS must find an analytical “off ramp”.

   SCOTUS considered two such possible off ramps during oral argument: i) the NWS was not adopted by an unconstitutionally structured agency insofar as it was adopted by the acting FHFA Director who, as argued by the United States, was removable at will by POTUS; and ii) even if the acting Director was not removable at will by POTUS such that the NWS was adopted by an unconstitutionally structured agency, backward relief should be denied under the harmless error doctrine…in this case, it was harmless error that the FHFA was unconstitutionally structured since the NWS counterparty to FHFA was Treasury, whose Secretary was subject to POTUS at will removal, so that POTUS really could direct whether or not the NWS was to be adopted. So POTUS not having removal power to control the FHFA Director was harmless error, since at least one signatory to the NWS was subject to POTUS removal power control.

   I believe these two off ramps are analytically suspect, as I discuss in a prior post. A close reading of the Collins SCOTUS oral argument transcript reveals both a willingness by some Justices to see how viable these off ramps are (so as to avoid granting a remedy that Justice Gorsuch admitted was a “tough swallow”), and an appreciation by other Justices that these off ramps were either weak analytically, or presented their own sub issues that did not lead to simple solutions.

   Will SCOTUS refrain from exiting onto these off ramps and provide the Collins plaintiffs with backward relief on the unconstitutionally structured claim? Will SCOTUS be further emboldened to do so if it finds that the NWS is inimical to the Conservator’s duty with respect to the APA claim (a holding that would result in the same relief of voiding the NWS as would backward relief for the unconstitutional structure claim)?