SCOTUS: Can Fannie Mae Make a Federal Case Out of It?

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By Nicholas Datlowe

Nov. 8 — Over 40,000 foreclosure cases involving Fannie Mae currently in state courts could end up in federal court ( Lightfoot v. Cendant Mortg. Corp., U.S., No. 14-1055 , argued 11/8/16 ).

The U.S. Supreme Court heard oral argument Nov. 8 on whether mortgage finance giant Fannie Mae can always face suit in federal courts. The result will likely turn on fine points of statutory construction, interpretation of precedent and historical events, but the result could be huge for the federal judiciary.

“There are 60,000 cases that Fannie Mae is involved in, 60,000 cases of which 70% are in state court. If all of a sudden this court says that there is federal jurisdiction, all of those foreclosure cases are moving tomorrow to federal court,” E. Joshua Rosenkranz of Orrick Herrington & Sutcliffe LLP, New York said, arguing for the plaintiff homeowners.

Fannie Mae’s charter—a federal statute—allows it to “to sue and be sued, and to complain and defend, in any court of competent jurisdiction, State or Federal.”

Rosenkranz said that the court had held five times that “court of competent jurisdiction” required a separate grant of jurisdiction but didn’t confer it automatically.

Fannie Mae General Counsel Brian P. Brooks countered that adding the phrase “State or Federal” was that separate grant.

Same Words, Different Meanings

Rosenkranz led by arguing that there was only one natural way to read the statute: The clause granted “capacity” to sue, but the “court of competent jurisdiction” clause required the court to have a separate basis for jurisdiction to hear the suit.

Fannie Mae’s reading required the phrase to have a different meaning depending on whether it was modifying “state” or “federal,” because a federal statute can’t confer jurisdiction in a state court, he argued.

“Fannie Mae has never explained how you can take the same language and map it out differently to reach different results,” he said.

This comparatively clear argument rapidly turned toward minutiae.

What do you do about former Justice David H. Souter’s language in American National Red Cross v. S.G., 505 U.S. 247 (1992), that “specifically mentioning the federal court suffices to confer federal jurisdiction,” asked Justice Ruth Bader Ginsburg.

Rosenkranz argued that based on the language in that statute it meant only that it was possible that federal courts would have jurisdiction.

‘Drive-By Jurisdictional Reference.’

Justice Stephen G. Breyer noted that the language in other similar cases was not on point and that former Chief Justice John Marshall—"who is not, say, Justice X,” Breyer said, to a laugh—said that such language was sufficient to confer federal jurisdiction.

Rosenkranz countered that the language in that case, Osborn v. Bank of the U.S., 22 U.S. 734 (1824), was different.

“But the language in D’Oench, Duhme is identical,” Breyer responded, referring to D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942), “and they come out the other way.”

“We can’t figure out what this court was saying in D’Oench because it was a drive-by jurisdictional reference,” Rosenkranz replied.

Ann O’Connell, arguing on behalf of the plaintiffs for the federal government, argued that the plain language reading of the statute was the “strongest point” of their argument.

“Even if you don’t find” our historical and precedential arguments “completely satisfying, the text of the statute should control,” she said.

‘Pretty Weak Tea.’

Brooks had some similarly intricate footwork to do.

Under long-standing precedent, the right to sue and be sued in federal court confers jurisdiction, he argued. Congress can withdraw that grant of jurisdiction, “but adding the words ‘competent jurisdiction’ is pretty weak tea as a solution for abolishing jurisdiction that otherwise existed,” he said.

“Your friend on the other side scares me when he says there are 60,000 cases that are going to be added to the federal docket,” Chief Justice John G. Roberts Jr. said. “Do you have an answer for that?”

Brooks responded that the easiest answer is that Fannie’s sister company, Freddie Mac, has “almost as many foreclosures as Fannie Mae has,” and there hasn’t been a race to the federal courthouse.

But Freddie’s charter is “crystal clear,” Ginsburg said. If Congress wanted Fannie and Freddie to be treated the same, “then why didn’t it say the same thing for Fannie Mae?”

Brooks suggested that it was because in creating Freddie in 1970, Congress was writing on a blank slate, rather than extricating and privatizing Fannie Mae, which began as a New Deal agency in 1938.

He also noted that the phrase “competent jurisdiction, state or federal,” had been interpreted by appellate courts three times in the 1940s, and all held that the phrase conferred federal jurisdiction. Congress would have “no idea” that borrowing that language wouldn’t do the same for Fannie Mae, he argued.

‘Well, Forget It.’

The contradictions between the language, the history and the precedent were clearly frustrating to the justices.

“After reading through the cases pretty quickly, I would think you’re right,” Breyer said to Rosenkranz, particularly in light of a page of legislative history which said as much.

“But when I finished reading the cases, going back to Marshall in 1816, I say, oh, you know, there is something of a rule there,” even if it doesn’t make too much sense, Breyer said.

Regarding jurisdiction, “we shouldn’t get things too messed up,” he said. “So I don’t know whether to look into it deeply in this particular case where you’re going to end up with a result that seems to be different than the other cases, or to say, well, forget it. It was all decided. Keep to the precedent.”

Good Humor Bar

The justices nevertheless remained in good humor.

Brooks noted that the statute creating Fannie Mae was passed in 1938, the same year that Senator Robert J. Bulkley (D-Ohio), whose legislative history supported Rosenkranz’s argument, lost his reelection campaign.

“For this reason,” Breyer interjected.

Later, Breyer wondered where the particular language in Fannie’s statute had come from. “There is a human being who wrote it,” he said. “But who? Where did he come from? Who did he work for? Does anybody know?”

“He was fired,” Roberts suggested.

“He was fired!” Breyer laughed in response.

“It’s possible it was a former staffer for Senator Bulkley, although I certainly hope not,” Brooks said.

And in trying to explain why the justices shouldn’t fear an onslaught of 60,000 foreclosure cases in the federal courts, Brooks noted that he had many reasons, “but the easiest answer is this—"

“Don’t tell us we’re not working hard enough,” Justice Anthony M. Kennedy interjected.

“Well, I do recall, Justice Kennedy, that once upon a time the court took 150 cases a year,” Brooks responded, earning a hearty laugh from all.

“They were easier cases,” Kennedy said gamely.

“Perhaps I should sit down,” Brooks said in mock chagrin.

To contact the reporter on this story: Nicholas Datlowe in Washington at nDatlowe@bna.com

To contact the editor responsible for this story: Jessie Kokrda Kamens at jkamens@bna.com

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