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Wednesday, October 1, 2014

Magic Words that Repeal Fifth Amendment Discovered by Federal Judge

In an astonishing breakthrough in Constitutional jurisprudence, U.S. District Judge Royce Lamberth yesterday discovered that, if Congress uses either of two magic words "receivership" or "conservatorship", it can authorize the U.S. Treasury to take over any company in America and extract all of its profits, past, present or future. without having to compensate the owners for a "taking" under the Fifth Amendment to the Constitution. 

Dismissing a lawsuit by several investors who held stock in Fannie Mae and/or Freddie Mac that was outstanding in July, 2008 when Congress passed the statute under which the Federal Housing Finance Authority launched its conservatorship of the GSEs in September 2008, Lambeth first construed the statute to bar all judicial review of actions taken by FHFA during the conservatorship. 

Those actions included FHFA entering into an agreement, years after the terms of the U.S. Treasury's financing support had first been agreed, to transfer all of the GSE's net worth in perpetuity into the U.S. Treasury's coffers.  The Judge further held that the impact of that depletion on the liquidation preference attendant upon the preferred shares held by plaintiffs was not "ripe" for judicial intervention, diplomatically side-stepping the question as to when something occurring in perpetuity would become ripe for review.

He also ruled that the statute barred a shareholder-derivative complaint because it gave FHFA "all rights" of "any stockholder".  Likewise, it barred suit against a third party, such as the U.S. Treasury, that complained of decisions made by FHFA as conservator (supplementing that reading with a finding that none of FHFA's decisions to favor the Treasury conflicted with a fiduciary duty to stockholders because the two agencies did not have the same mission (which flies in the face of everything journalists have documented about the government's takeover of the GSEs in 2008, which Treasury dictated every step of the way), and because back in 2008 the Treasury was the only game in town to rescue the GSE's (overlooking that the net worth taking happened over two years later and leaving that decision totally unscrutinized).

The Judge then faced a choice as to what followed from those rulings:  (1) "Sorry, investors, all of your rights as a stockholder have been transferred to the federal government and there is no legal recourse under our laws for that"; (2) "Because FHFA's actions, even if pursuant to statute, deprived you of 'all rights' pertinent to being a "stockholder", the government must compensate you for the value of the rights it so took"; or (3) "This is not the right court to decide the takings question -- go see the Court of Federal Claims."

Acknowledging that the third option was supported by the weight of authority, the Judge nonetheless boldly chose to disregard it and embraced the merits of the takings claim, whereupon he announced, what to my knowledge is a brand-new "takings" doctrine: if Congress uses the words "conservatorship" or "receivership" when it empowers a government agency to take over a privately held company, a subsequent takeover, regardless of the terms, is not a "taking" of the stockholders' investment, regardless of their losses.

Here is his holding: "By statutory definition, the GSEs are subject to governmental control at the discretion of FHFA’s director. 12 U.S.C. § 4617(a)(2). Therefore, the GSE shareholders necessarily lack the right to exclude the government from their investment when FHFA places the GSEs under governmental control— e.g., into conservatorship.  This conclusion is especially true since the statute explicitly grants FHFA the power to assume “all rights . . . of the regulated entity, and of any stockholder . . . .  See 12 U.S.C. § 4617(b)(2)(i)."


The Judge seeks to buttress that reasoning by noting that the spectre of conservatorship or receivership for the GSEs has been in federal law since 1992.  True enough, but the common stock of Fannie and Freddie had been held by private parties for years before that.  He makes no effort to articulate why only the post-1992 era has judicial significance. 

In response to the shareholders' observation that such a rule "would mean that defendants could expropriate all of the shares in the most profitable and stable financial institutions in the country, without triggering the Takings Clause" the Judge scoffed; his reasoning only applied "when the government may 'legally impose a conservatorship -- i.e., when necessary to stabilize a stressed financial institution" [emphasis added; citation omitted].  Apparently, there is some extrinsic law that determines when Congress can take away rights.   I wish I could remember what that law was ....  Perhaps I should seek a refund of my law school tuition or my bar review course, because I don't ever remember being told that there was a law that limited Congress's power to take rights to situations when it is "necessary to stabilize a stressed financial institution.". Personally, I would have thought the body of law that limits Congress's power to take away rights might be a little broader than that. 

The absurdity of the Judge's reasoning is even more apparent when you read elsewhere in the opinion that "motives are irrelevant, for takings purposes, if the plaintiffs possess no cognizable property interests in the first place.  [Citations omitted] stand for the general notion that investors have no right to exclude the government from their alleged property interests when the regulated institution in which they own shares is placed into conservatorship or receivership.” [Emphasis added]. 

So his claim that there exists a limit on Congress's power to thrust companies into receivership while evading the Takings Clause is just false.  If "motives are irrelevant", then it doesn't matter whether the institution targeted was stressed or not, a financial institution or something else.  Congress could provide that a company may be placed in receivership if some agency found the company had failed to provide "equal pay for equal work", if it violated the Foreign Corrupt Practices Act, if its SEC filings were inaccurate, if it damaged the environment anywhere in the world, if it paid less than n% of its global income in taxes.  And it could obliterate judicial review of the relevant decision by the agency, and similarly immunize from recapture every payment the agency then caused the company to make to the U.S. Treasury.  And then it's just a short step toward taking over those companies owned by someone who wasn't sufficiently supportive of the parties in control of the government. See Chavez's and Maduro's Venezuela; the Kirchners' Argentina; Putin's Russia.  So companies will adjust and make sure they donate appropriately to the party in power....

Sure, one could try to reconcile the two statements by saying "the necessity to stablize a stressed financial institution is not a 'motive' -- it can be assessed objectively".  But that is disingenuous.  Courts have always deferred to judgment vouchsafed to an agency's expertise and there is no reason to predic that they would not continue to defer to an agency's determination that the institution was stressed.  The agency could just say it was acting pre-emptively, to prevent a greater harm that might arise from further deterioration.  Few judges would override such a determination, as this decision itself proves.  The rest of the Judge's opinion simply belies his claim that the power of Congress is limited.  That's just a fig leaf for unreviewable authority to take "all rights" of every "stockholder"  in every corporation without compensation under the Fifth Amendment. 

The Judge's reasoning boils down to this: once Congress passes a law that threatens a conservatorship of a company, investors have no stable property interest in that company, and thus implementation of the law effects no taking.  It's a self-executing solution to the cost that would be imposed by complying with the Fifth Amendment.  Just say the magic word "conservatorship", let the statute sit out there for a while, and poof, no taking.  Congress could write that into every regulatory statute -- if a company violates this law, the such-and-such administrator can put the company into conservatorship -- and we are well on the way to a socialist economy, comrades!

The Judge has simply missed the forest for the trees in this aspect of his opinion. If a law says the executive branch can take "all rights" associated with something, that's a taking, period.  Advance warning doesn't change that -- if anything it makes it worse:  if, on the day the first threat of conservatorship was signed into law, stockholders had sued over the prospect of a taking - because in Judge Lamberth's words, from that point on, they possessed "no cognizable property interests" -- courts would have said "not ripe - agency has taken no action yet pursuant to the statutory authority".  Yet, when the action is taken, this Judge says, "it's too late, you were warned they might do something some day!".  Heads, the government wins, tails the government wins.  There's never any moment in time when the investors' rights receive protection under the Fifth Amendment. That has to be wrong reasoning. There isn't anything left of the Fifth Amendment for investors if this ruling stands.