Collins v. Mnuchin

SHAREHOLDERS’ RIGHT TO BRING THE CHALLENGE

Collins asserts that the claim is a direct suit rather than a derivative action, therefore the challenge is not barred by the succession clause. Brief for Petitioner, Patrick J. Collins, et al. at 15. Collins contends that the challenge is based upon the shareholders’ personal interest and is a direct claim under the APA because the shareholders are personally “aggrieved . . . within the meaning of a relevant statute,” 5 U.S.C. § 702. Id. at 16. Collins argues that the case law established a “zone-of-interests” test to determine whether a plaintiff seeking judicial review under the APA maintains interests that are covered by the statute and may therefore make a direct claim. Id. at 16–17. Collins asserts both precedent and the APA’s legislative history support applying the “zone-of-interests" test and that Collins’s claim is squarely within the zone of interests because the Recovery Act provides that the conservator should seek to preserve the enterprises’ assets. Id. at 17–18. Collins contends that Mnuchin’s reliance on the stipulation in 5 U.S.C. § 702 regarding no other limitations on judicial review is misguided because a broad abrogation of sovereign immunity marks the statute’s context. Id. at 21–22. Collins further maintains that even if the Court uses the principles of corporation law, the challenge would still be direct because the effects of the dividend restructuring with Treasury negatively affected the individual shareholders’ interests, not those of Fannie Mae and Freddie Mac. Id. at 24–27. Collins finally suggests that even if the challenge is a derivative suit, it is not barred because the succession clause does not bar shareholder derivative suits where the conservator has a conflict of interest. Id. at 30–32. Collins asserts that interpreting the clause to bar such derivative suits would require the Court to find it unconstitutional for due process reasons. Id. at 37.

Furthermore, Collins argues that the anti-injunction clause does not bar the challenge because FHFA acted contrary to its statutory role as conservator when agreeing to the Third Amendment’s dividend restructuring. Brief for Petitioner at 38–39. Collins posits that the Recovery Act granted FHFA powers to undertake rehabilitative actions that would improve the solvency of Fannie Mae and Freddie Mac and would conserve the enterprises’ assets. Id. at 40. Collins claims that the statute does not give the conservator broad powers but, consistent with the more general constitutional system, defines specific ways in which the conservator could act. Id. at 43. Collins argues that FHFA did not further its narrow statutory function and instead violated its obligations by pursuing actions that diminished the enterprises’ capital to the Treasury’s benefit. Id. at 44, 47. Collins further maintains that Mnuchin’s argument that the Third Amendment helped the enterprises avoid a vicious debt cycle does not withstand scrutiny because the financial mechanisms that characterized the relationship with the Treasury would have allowed the enterprises to avoid the conjectured danger. Id. at 52–53.

Mnuchin counters that the Recovery Act’s succession clause bars Collins’s challenge to the Third Amendment because it is a derivative claim. Brief for Respondent, Steven T. Mnuchin, Secretary of the Treasury, et al. at 18, 22–23. Mnuchin contends that the succession clause transfers the right to litigate Fannie Mae’s and Freddie Mac’s claims to FHFA as the conservator and that this right includes the shareholders’ power to bring derivative suits. Id. at 19–20. Mnuchin claims that Collins’s challenge is a derivative claim under a widely accepted two-part test because Collins’s claim alleges that Fannie Mae and Freddie Mac—instead of the shareholders—suffered the harm; and accordingly, the GSEs receive the benefit of recovery. Id. at 20–21. Mnuchin also asserts that the cause of action created by the Administrative Procedure Act (“APA”) does not displace the two-part test, nor does it convert Collins’s derivative challenge into a direct one. Id. at 25–26. Mnuchin argues that the APA grants a right of review but does not impose additional limitations on judicial review, thereby leaving intact the foundational principle of corporation law that shareholders do not have the right to sue over the harm done to the corporation. Id. at 26–28. Mnuchin further maintains that the succession clause unambiguously transfers all rights to FHFA, as conservator, and that the statutory context demonstrates that Congress would have explicitly created a conflict-of-interest exception had it intended to allow shareholders to sue over corporate injuries. Id. at 29–30.

Mnuchin also posits that even if the succession clause does not bar Collins’s challenge, the Recovery Act’s anti-injunction clause does because FHFA, as conservator, acted within its statutory rights when renegotiating the dividend structure in the Third Amendment. Brief for Respondent at 33. Mnuchin asserts that the GSEs’ congressional charters demonstrate that Congress provided the conservator with significant discretionary power. Id. at 34–37, 40. Mnuchin argues that the Third Amendment was an appropriate exercise of that power because the amendment avoided the potential for a vicious cycle of ballooning dividend payments to the Treasury. Id. at 38–41. Mnuchin further maintains that the Fifth Circuit incorrectly found that the Third Amendment fell outside FHFA’s conservatorship powers because the amendment involved potentially placing the GSEs in liquidation, a power the Fifth Circuit held was reserved for receiverships. Id. at 42–43. Mnuchin contends that the Third Amendment was not a liquidation action but a proper exercise of the statutory power to preserve and conserve the GSEs’ assets. Id. at 44. Mnuchin asserts that even if the Third Amendment enabled a future liquidation, the Court should interpret the anti-injunction clause to allow a conservatorship to undertake such action. Id. at 44–45.

SEVERABILITY OF THE REMOVAL CLAUSE

Collins concurs that the removal clause violates Article II of the Constitution and asserts that the violation is particularly severe because many of FHFA’s actions are not subject to presidential oversight or to judicial review. Brief for Petitioner at 61. Collins contends that the Court’s precedent supports invalidating the Third Amendment because the President does not oversee the FHFA’s actions. Id. at 62–64. Collins explains that the Court set aside similar past actions both due to those actions being void under the Constitution and the need to ensure that plaintiffs are furnished with incentives to litigate matters relating to constitutional structural limitations. Id. at 65–66. Collins argues that the harmless error rule is not suited for the separation of powers’ as the structural nature of the separation of powers creates difficulties in determining exact harms. Id. at 66–67. Collins reasons that the Court should enact retroactive remedies even where the violation likely did not impact the government action in question because of the prophylactic nature of the separation of powers. Id. at 67. Collins asserts that if the Court does decide to use a harmless error rule in this case, the Court should follow the rule as defined by the Court of Appeals for the District of Columbia Circuit: an error is not judged to be harmless if there is any uncertainty as to its effect. Id. at 70–71. Collins argues that FHFA cannot meet this high burden and that a meaningful remedy is to invalidate the Third Amendment. Id. at 74–75. Collins further maintains that the Court should invalidate the conservatorship clause because the Recovery Act lacks a severability clause, and Mnuchin stipulates that the conservatorship clause provides broad discretion to FHFA. Id. at 77–78.

Mnuchin concedes that the removal clause granting the Director of the FHFA for-cause removal protection violates the separation of powers because
Article II of the U.S. Constitution provides the President with the power to remove executive officers, subject to several exceptions not applicable to FHFA’s director. Reply and Response Brief, Steven T. Mnuchin, Secretary of the Treasury, et al. at 23–24. However, Mnuchin notes that the Court has opted in similar situations to sever the removal clause and leave the rest of the statute intact. Id. at 27. Mnuchin contends that a textual or structural analysis of the statute demonstrates the lack of a specific connection between the removal clause and the conservatorship clause that necessitates severing the latter clause along with the removal clause. Id. Mnuchin argues that the succession clause bars Collins’s constitutional claim against the Third Amendment because neither the Constitution itself nor the APA provides a cause of action by which Collins’s derivative claim could proceed. Id. at 29–30. Mnuchin claims that the Third Amendment did not violate the Article II principle because the amendment was adopted by an acting director who could be removed at will by the President. Id. at 31–32. Mnuchin also asserts that because FHFA acted in its capacity as the conservator in adopting the amendment and doing so as a private corporation, approving the Third Amendment did not involve Article II executive powers. Id. at 37–40. Mnuchin further maintains that a harmless-error analysis, a component of the standard law of remedies, should be applied to Collins’s constitutional claim in light of precedent and the difficulty in determining unfairness. Id. at 40–45.