Fannie Mae Is Not a Government Actor for Constitutional Purposes, Despite Federal Takeover

So holds yesterday’s Herron v. Fannie Mae (D.D.C. Apr. 30, 2012), citing (among other cases) United States v. Beszborn (5th Cir. 1994):

When FHFA [the Federal Housing Finance Agency] steps in as conservator or receiver it immediately succeeds to all rights and powers of the stockholders, officers, and directors of the regulated entity placed into such conservatorship or receivership. In like manner, on September 6, 2008, FHFA placed Fannie Mae into conservatorship. As conservator, FHFA took over the assets and operations of Fannie Mae with all the powers of the shareholders, officers, and directors to conduct all of Fannie Mae’s business, in order to preserve and conserve the assets and property of Fannie Mae….

In such circumstances, the federal agency in its guise as a conservator or receiver of a private corporation is not a government actor. For example, in United States v. Beszborn, 21 F.3d 62, 67–68 (5th Cir.1994), the Fifth Circuit held that the Resolution Trust Corporation (“RTC”) as receiver of a failed bank was not a government actor. The RTC had sued the former officers and directors of the failed bank in a civil case and obtained a judgment including punitive damages. The government subsequently brought criminal charges against the officers and directors based on the same conduct. The officers and directors asserted Double Jeopardy as a defense. The Fifth Circuit found that the RTC as receiver stood in the shoes of the insolvent bank, i.e., that the RTC was a private entity and not the government for purposes of the Double Jeopardy clause. Similarly, Fannie Mae was not converted into a government entity when it was placed into conservatorship; instead, FHFA stepped into the shoes of Fannie Mae. FHFA as conservator for Fannie Mae is not a government actor.

[Footnote: Ms. Herron unsuccessfully attempts to distinguish Beszborn, asserting that the RTC in that case operated to benefit the creditors and stockholders and asserting that FHFA operates Fannie Mae to benefit the federal government. This reflects an incorrect understanding of the facts. Treasury’s interest in Fannie Mae is as a shareholder of Senior Preferred Stock. FHFA operates Fannie Mae to benefit of creditors and shareholders, in the same way that RTC operated the failed financial institution in Beszborn.]

Ms. Herron avers that Fannie Mae is a federal actor for the purpose of her First Amendment claim because: (1) the conservatorship is of indefinite duration; (2) FHFA presently controls Fannie Mae; and (3) Treasury provides financial support to Fannie Mae in exchange for non-voting Senior Preferred Stock. Ms. Herron draws the wrong conclusion from these three uncontested facts. Fannie Mae would be a federal actor if the FHFA conservatorship retained for the government permanent authority to appoint a majority of the corporation’s directors. Lebron, 513 U.S. at 400. To the contrary, the appointment of FHFA as conservator did not establish permanent government authority to control Fannie Mae….

First, Ms. Herron insistes that there is no date certain when the conservatorship of Fannie Mae will end,FN11 and, therefore, she erroneously concludes that FHFA control over Fannie Mae must be permanent. In order to be a government actor under the Lebron framework, permanent government control is required. Lebron itself distinguishes permanent from temporary control. The Supreme Court contrasted Amtrak, which was a federal actor in the permanent control of the government, from “a private corporation whose stock comes into federal ownership,” which is in the temporary control of the government. Lebron, 513 U.S. at 398. Although the duration of the conservatorship is indefinite, FHFA’s control over Fannie Mae is temporary. Fannie Mae was not a federal actor at the relevant time.

Second, Ms. Herron asserts that FHFA’s complete control over Fannie Mae makes Fannie Mae a federal actor. Congress empowered FHFA to act as conservator of Fannie Mae for the purpose of reorganizing, rehabilitating, or winding up its affairs. Thus, the enabling statute expressly allows FHFA temporary but complete control over Fannie Mae, not permanent control. The complete control exercised by FHFA is authorized by statute; it is how conservatorship is accomplished. Because conservatorship is by nature temporary, the government has not acceded to permanent control over the entity and Fannie Mae remains a private corporation.

Finally, Ms. Herron also argues that Fannie Mae was transformed into a federal entity via (1) Treasury’s appointment of Fannie Mae as administrator of the Home Affordable Modification Program through the Financial Agency Agreement and (2) Treasury’s entry into the Stock Agreement with Fannie Mae. With regard to the Financial Agency Agreement, it states that Fannie Mae is distinct from the government and must maintain a fiduciary duty of loyalty to the federal government. The Financial Agency Agreement also expressly provides that contractors to Fannie Mae (such as Ms. Herron) do not become subcontractors of the government. These provisions make it clear that the Financial Agency Agreement did not transform Fannie Mae into a government entity.

As a result, Herron’s allegation that Fannie Mae violated the First Amendment by terminating Herron’s contract based on Herron’s speech cannot go forward: Because Fannie Mae, even while it’s run by the federal government, is treated as a private actor, it is not bound by the First Amendment.

I’m not sure this is right. The government is in some measure bound by the First Amendment (and other Bill of Rights provisions) even when it’s running entities that could be run privately, such as housing projects, universities, utilities, railroads, and so on; nor do I see a difference between temporary control by the government and permanent control. But that’s what the court held, and the Fifth Circuit case that it cited (Beszborn) did the same. (The Supreme Court in Lebron v. National Railroad Passenger Corp. (1995) left open the possibility that the temporary vs. permanent control distinction was constitutionally relevant, but it didn’t decide the question.)

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