How Will Collins Plaintiffs Proceed After Likely SCOTUS Win on APA Claim?

...and what is all of this about Summary Judgment anyhow...?

  • Taking the hypothetical that Collins Plaintiffs (“Ps”) only win the APA claim at SCOTUS, what are the next steps?

  • Recall originally the federal district court in Houston, Texas granted the government’s motion to dismiss the APA claim, where the court applied the legal standard that FHFA as conservator could do essentially anything that constituted the management of the GSEs, including the Net Worth Sweep (“NWS”), free of judicial review. The court found that Collins Ps could allege no set of facts that would prove the NWS was not an action taken by FHFA as conservator with respect to the GSEs’ business management, so that the government was entitled to judgment in its favor without the need for a full trial.

  • The 5th Circuit en banc majority vacated the lower court’s dismissal of the APA claim because it found the proper legal standard to be that FHFA as conservator had a statutory duty to conserve and preserve assets, and do such things as may restore the GSEs to safety and soundness, and that under this legal standard, Collins Ps had made a plausible claim (the minimum required to defeat a motion to dismiss) that the NWS violated this duty. This article assumes that SCOTUS affirms this circuit court holding.

  • After a SCOTUS APA claim win, the federal district court will receive a mandate from SCOTUS to reconsider the APA claim under the correct legal standard, and this should turn the tables on the government, and provide Collins Ps with an opportunity to show the government that what goes around comes around.

  • On this second round at federal district court, I expect a 180 degree turnaround, with Collins Ps filing a motion for summary judgment (“SJ”), arguing that, based upon the extensive discovery already conducted in the Fairholme Court of Federal Claims case and which is available to be used in the Collins case, and applying the correct legal standard that FHFA as conservator had a duty to rehabilitate the GSEs, Collins Ps will be entitled to judgment in its favor without the need for a full trial.

  • In effect, I expect the federal district court will find, on Collins Ps motion for SJ without trial, that the NWS was antithetical to the rehabilitation duty of FHFA as conservator (that the government can show no set of facts under which the NWS can be understood to further the conservator’s rehabilitative duty), and Collins Ps’ evidence set forth in the motion for SJ (most prominently, from the government’s own press releases and statements explaining the purpose and effect of the NWS) will show that the government intended the NWS to operate in a manner that would prevent the rehabilitation of the GSEs…hence the Collins Ps win.

  • If I am correct, SJ will expedite the process substantially as compared to a trial with respect to the APA claim. Upon an APA claim win on SJ, the Collins Ps full remedy should be available (apply excess of NWS distributions over original deal terms to pay down of Treasury’s senior preferred preference and any excess to provide a credit against future obligations to Treasury).


In For Fannie And Freddie Shareholders, It's "How Now, SCOTUS?", I set forth my analysis that supports the proposition that Collins Plaintiffs (Ps) will win the APA claim and should win the unconstitutional structure claim. Why do I only say, should win the unconstitutional structure claim? It is a question of what follows from an APA claim SCOTUS win, as opposed to an unconstitutional structure claim SCOTUS win.

As to the unconstitutional structure claim, if SCOTUS follows the recent Seila Law case, as I believe it should, SCOTUS would itself decide the claim on the merits in favor of the Collins Ps, enter an order voiding the Net Worth Sweep, and direct the federal district court to fashion a remedy that would flow from an invalidation of the NWS. This remedy would amount to well over a $100 billion. SCOTUS’s hands would be directly involved in ordering the lower court to craft this remedy.

If Collins Ps win on the APA before SCOTUS, there would be no final decision on the merits of the APA claim and immediate remedy order, but only the determination that the Collins Ps can proceed to argue the merits in federal district court (whether by trial or motion for summary judgment (“SJ”). SCOTUS would be one step removed, procedurally, from being in the position of granting Collins Ps a remedy that Justice Gorsuch acknowledged during oral argument to be a tough swallow.

So the unconstitutional structure claim presents SCOTUS with a tougher swallow than the APA claim.

I do not necessarily agree with this “SCOTUS as wimp” argument. Recall that in Seila Law, five Justices who are currently on the Court sided with the principle that an independent agency with a single director removable by POTUS only for cause was a violation of the separation of powers that underlies the structure of the US constitution, and the Seila P was entitled to a remedy that voids the lower court order enforcing the CFPB civil investigative demand. Add to this core five Justice majority Justice Barrett, a potential sixth majority Justice, who, in effect, cajoled her fellow Justices during oral argument about the remedy sought by the Collins Ps in connection with the unconstitutional structure claim:

  • “JUSTICE BARRETT: And -- and let me just -- I just want to be certain that I understand what you're asking for. Are you asking us to say if we agreed with you on the whole thing you want an injunction ordering Treasury to pay back the billions of dollars?

  • MR. THOMPSON [Collins Ps counsel]: No -- no -- no, Your Honor. So this is very important. We're seeking two things. Number one, we're seeking prospective relief so that in your hypothetical the Senate-confirmed director would be enjoined from making any future sweep dividend, approving any future sweep dividend payment; and, number two, we're asking to go back and have the overpayments, over and above the 18.9 billion dollars, to be treated as a pay-down of principal. And that would essentially deem the government paid back.

  • JUSTICE BARRETT: Thank you.”

So no offending check cutting by Treasury necessary! One wonders if Justice Barrett might have stiffened the spine of the five (male) Justice Seila Law majority with her question.

But let’s accept for the moment the SCOTUS as wimp theory, and consider what would be the next steps for Collins Ps if they secure a SCOTUS win only on the APA claim.


We have to dig into the weeds a bit to see what one may expect the Collins Ps will do after an APA win, but hang on and consider this question at the outset.

If it is a tough swallow for SCOTUS to grant an over $100 billion remedy in connection with the unconstitutional structure claim, shouldn’t it also be a tough swallow to allow the government to siphon off over $100 billion from private corporations through executive branch action and not subject that action, contested in the form of the APA claim, to judicial review?

Put another way, if there is an expectation that SCOTUS will analytically strain to avoid granting a remedy in connection with the unconstitutional structure claim, distinguishing Seila law in some intellectually suspect way (for example, conjuring the FHFA Acting Director to be under the direction of POTUS at the time of the NWS while the statutory language resists this interpretation), does this not argue for an equal or even greater expectation that SCOTUS will hold in favor of judicial review (not applying HERA’s anti-injunction clause) in connection with the APA claim?

So after an expected SCOTUS win on the APA claim, the Court will remand the claim back to the federal district court in Houston, Texas where the claim began. It is important to understand what will necessarily change between the court’s consideration of the claim after a SCOTUS win, as opposed to its original consideration of the claim.

Taking a step back, every court case involves a complaint by a plaintiff that the defendant violated the law (as plaintiff understands the law), and under the plaintiff’s version of the facts in the case, this legal violation has caused plaintiff damages for which the court should order the defendant to provide a remedy. The case is decided on whether i) the plaintiffs are entitled to assert this claim (plaintiffs have standing), ii) plaintiffs correctly state the legal provisions or principles that underlie plaintiff’s claim for relief (plaintiffs understand the law correctly), and iii) the facts of the case, determined by the court by a preponderance (>50%) of the evidence, are as alleged by plaintiff and support plaintiff’s claim (in which case relief is available). Of course, if instead the defendant is found to have the correct understanding of applicable law and under that standard the preponderance of the facts are found to support that legal standard, then relief to the plaintiff is not available.

The first time at federal district court, government successfully argued that the Collins case should be dismissed, without any trial to ascertain the facts. The court held that the anti-injunction clause of HERA insulated all actions taken by FHFA as conservator insofar as those actions constituted the management of the GSEs’ businesses. The court understood the applicable law to be a sort of “business judgment rule.” If the NWS was an act of business management by the conservator, as it certainly was, then the government wins. There was no need to do any further fact finding, given the court’s understanding of the applicable legal principle.

Upon appeal at the 5th Circuit en banc, the circuit court found that the lower court’s identification of the applicable legal principle was wrong, as a matter of statutory interpretation. Under HERA, the roles and duties of a conservator and receiver are distinct, and the NWS arguably violated the conservator’s duty to conserve and preserve assets, and its mandate to try to place the GSEs in a safe and sound financial position. As the 5th Circuit en banc majority opinion states:

“In adopting the net worth sweep, the Agencies abandoned rehabilitation in favor of “winding down” the GSEs. Treasury announced that the Third Amendment would “expedite the wind down of Fannie Mae and Freddie Mac” and ensure that the GSEs “will be wound down and will not be allowed to retain profits, rebuild capital, and return to the market in their prior form.” The FHFA acting Director also said that the Third Amendment “reinforce[d] the notion that the [GSEs] will not be building capital as a potential step to regaining their former corporate status.” In a report to Congress, FHFA explained that it was “prioritizing [its] actions to move the housing industry to a new state, one without Fannie Mae and Freddie Mac.” For reasons we are about to explain, this “wind down” exceeded the conservator’s powers and is the type of transaction reserved for a receiver.” (emphasis added)

See what Judge Willett has done in the above paragraph? This is the key to understanding the viability of a Collins Ps motion for SJ.

With the sentences that I have italicized, Judge Willett has identified for Collins Ps the evidence, incontrovertible since it is from the government’s own mouth and contemporaneous with the NWS, that Collins Ps can set forth prominently in a motion for SJ that will prove the NWS is incompatible, and was intended by the government to be incompatible, with a conservator rehabilitation mandate.

It is always best when the other party’s statements make your case for you.

So the circuit court’s identification of the correct applicable principle, that the conservator has a duty to do such actions as may put the GSEs back into a safe and sound position, is far more stringent that the “business judgment rule” legal principle identified by the lower court. Assuming that SCOTUS simply affirms the 5th Circuit’s majority opinion regarding the APA claim, the lower court will be mandated to use the more stringent conservator duty to restore safety and soundness.

Hold on, notice now that the shoe is on the other foot. How can the government establish facts regarding the NWS that would lead the federal district court at trial to conclude that the NWS was consistent with this conservator duty to restore safety and soundness?

Collins Ps discuss this in their reply brief at pps 52-54. Government argued at SCOTUS, and will argue at federal district court in order to defeat Collins Ps motion for SJ, that the GSEs were in a “vicious cycle” in which they drew on Treasury’s limited funding commitment to pay dividends on Treasury’s senior preferred stock. The fear was that the GSEs would exhaust the available amount of Treasury’s committed credit line, and that Treasury took a “risk” in adopting the terms of the NWS that shouldn’t be second-guessed (while on some distribution dates Treasury might be paid more than the original deal terms would provide, on other distribution dates Treasury might be paid less). This new “risk,” the government argument goes, supports Treasury’s and FHFA’s intent to rehabilitate the GSEs by making sure that Treasury’s line of credit would not be exhausted by draws on the credit line used to make fixed distribution payments.

Collins Ps will argue in its motion for SJ that the government’s allegation, that the NWS furthered the conservator’s rehabilitative mission, is demonstrably wrong in at least four ways:

  • First, among a treasure trove of evidence adverse to the Government that Collins P have dug up in prior discovery, Collins Ps have the testimony of Fannie’s CFO at the time of the NWS adoption. She testified that she told the government that the GSEs were about to enter their “golden period of profitability”. This of course rebuts the government’s “death spiral” narrative. The Joint Appendix reveals that the government has introduced no contrary evidence to rebut this testimony.

  • Second, under the terms of the NWS, there could never be a vicious cycle of commitment line draws to pay senior preferred stock dividends. The original deal had a built-in “pay in kind” provision under which Treasury could select to have no cash distributions, the senior preference would increase by the amount of the distribution not made in cash to protect Treasury, and Treasury’s total commitment line amount would not be reduced.

  • Third, there could never be an instance under the NWS in which Treasury would be paid less on a net basis, and there was every likelihood, given that the GSEs were entering their golden period of profitability, that Treasury would be paid substantially more. From p. 53 of the Collins Ps rely brief: “To see this, consider Defendants’ example of 2015, a year in which the Companies’ dividend payments under the Net Worth Sweep totaled $15.8 billion—less than the amount of the 10% dividend. Under the prior arrangement, if the Companies had a net worth of $15.8 billion over the course of a year, their total net dividend payments to Treasury would have been at most $15.8 billion, with any additional “dividends” being financed through circular draws on Treasury’s funding commitment. Thus, under the Net Worth Sweep, Treasury gets more when the Companies’ net worth exceeds the prior 10% dividend and no less on a net basis when the Companies earn less than the prior 10% dividend. From Treasury’s standpoint, the Net Worth Sweep carried no risk and had only upside.”

  • Fourth, consider the FHFA and Treasury statements explaining the NWS that Judge Willett alluded to in his majority opinion, set forth above. Out of the mouths of FHFA and Treasury, we learn that the purpose of the NWS was to wind down the GSEs and prevent the GSEs from retaining and building capital. From p. 59 of Collins Ps reply brief: “FHFA may be appointed “conservator or receiver for the purpose of reorganizing, rehabilitating, or winding up” the Companies, 12 U.S.C. § 4617(a)(2) (emphasis added), and nothing in the statute prevents the Court from considering the purpose of the Net Worth Sweep when deciding whether this action was consistent with FHFA’s conservatorship mission.” As FHFA and Treasury themselves tell us, the NWS contravened the statute’s rehabilitative purpose for the conservator.

    Motions for SJ are governed by Federal Rule of Civil Procedure 56 , which provides in pertinent part: “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”

    There will be no genuine dispute as to a material fact relating to the purpose and effect of the NWS. It was adopted to prevent the GSEs from becoming safe and sound again, which is precisely the conservator’s statutory mission, and to provide Treasury a windfall, in which Treasury was likely to siphon off substantially more money than under the original terms, and was never in a position of obtaining less money on a net basis.

    Government’s claims that it was preserving the commitment line are a pretextual litigation argument which ignores the actual dividend cash deferral terms of the original deal, and the Government will not be able to introduce any evidence, because it has no such evidence after full discovery, that would support its death spiral narrative.

    The important facts relating to the conservator’s dereliction of its rehabilitative mandate are all in Collins Ps’ favor, and the Government will not be able to dismiss these facts under the incorrect conservator business judgment standard. Under a SJ motion applying the correct legal standard, these facts are deadly for the Government.

    Collins Ps’ motion for SJ can be prepared and filed with the federal district court soon after SCOTUS issues its mandate (which usually comes shortly after the opinion is issued), as there is no further discovery that Collins Ps need to do. The federal district court should be able to hold oral argument and decide the SJ motion in a matter of a few months (as opposed to holding the case for trial, which would surely take more than a year).