September 26, 2019 / 7:58 PM / 24 days ago

Surprise twist in CFPB Supreme Court drama: FHFA plaintiffs want starring role

(Reuters) - Late Wednesday, Fannie Mae and Freddie Mac shareholders who won a ruling (2019 WL 4233612) earlier this month from the en banc 5th U.S. Circuit Court of Appeals that the Federal Housing Finance Agency is unconstitutionally structured filed a surprise petition for U.S. Supreme Court review.

The shareholders, who are ultimately trying to undo a 2012 deal between FHFA and the Treasury Department that directed all of Fannie and Freddie profits to the government, are asking the Supreme Court to take up the issue of the FHFA’s constitutionality – even though they won on that point at the 5th Circuit. Their explanation for the “admittedly unusual request”: They didn’t really win the case at the 5th Circuit because the appeals court refused to invalidate the FHFA “net worth sweep,” as the deal is known, despite holding that the FHFA’s director was improperly appointed. So, according to the shareholders’ lawyers at Cooper & Kirk, even though the Supreme Court generally does not hear cases at the request of the prevailing side, the shareholders “are … not ‘prevailing parties’ in any meaningful sense.”

But there’s another reason Cooper & Kirk is urging the Supreme Court to take its case. As you surely know, the constitutionality of the Consumer Financial Protection Bureau is also before the Supreme Court, in a petition by Seila Law, a California debt resolution firm protecting a CFPB civil investigatory demand. The CFPB and the FHFA have quite similar structures. Both are headed by a lone director who, by statutory design, can only be fired for good cause. Both have faced challenges asserting that their directors were appointed in violation of separation of powers doctrine because they can’t be removed by the president. The D.C. Circuit, in a case known as PHH v. CFPB (881 F.3d 75), and the 9th Circuit in the Seila Law case (923 F.3d 680), concluded the CFPB’s structure is constitutional. The 5th Circuit looked at basically the same facts and Supreme Court precedent to hold FHFA’s structure to violate the Constitution.

Cooper & Kirk contends in Wednesday’s petition that its case is a better vehicle than Seila’s for the Supreme Court to resolve what is, for all intents and purposes, a circuit split on the constitutionality of an agency headed by an omnipotent director insulated from presidential accountability. One of the key factors favoring the FHFA case, the petition said, is the CFPB’s concession of its own unconstitutionality.

You may remember that earlier this month, after years of defending its structure in courts across the country, CFPB reversed course and joined the Justice Department in a brief to the Supreme Court in response to the Seila Law petition. DOJ and the CFPB urged the justices to grant review and hold the agency’s director to have been appointed under an unconstitutional provision. Since the government would no longer argue that CFPB’s structure is constitutionally viable, DOJ and the agency said, the Supreme Court could appoint an amicus to present that position.

The FHFA, by contrast, seems to be sticking by its position that its director was constitutionally appointed, according to a Sept. 23 letter to the 5th Circuit from FHFA’s counsel at Arnold & Porter Kaye Scholer in another case challenging the net worth sweep deal. Cooper & Kirk told the Supreme Court that FHFA will probably file its own petition challenging the 5th Circuit’s ruling on its structure. (Neither the agency nor the Justice Department responded to my query for comment.) But even if it doesn’t, the petition said, the justices will be better off if they grant review in the FHFA case and hear a government agency defend itself instead of relying on an amicus in the CFPB case.

“While the Solicitor General says (in the CFPB case) that the court can assure an adversary presentation by appointing an amicus to defend the statute in Seila Law, there is a simpler solution for guaranteeing an adversary presentation of the issues: grant certiorari in this case and let FHFA defend the constitutionality of its organic statute,” the brief said.

The new petition also argues, not very convincingly, that the order enforcing the civil investigative demand at the heart of the Seila Law case is not appealable, even though the district court entered a final order enforcing the demand and none of the parties has contested its appealability throughout the appellate litigation that followed – including the CFPB, which presumably has a strong interest in blocking any appeal of an order to enforce its demand for information.

The petition’s more interesting argument, in my view, is that the FHFA case offers the justices the opportunity not just to opine on the constitutionality of the structure of agencies with a lone director removable only for good cause, but also on the constitutionally-required remedy for actions taken by an agency headed by an unconstitutionally appointed director. That question alone, Cooper & Kirk said, deserves the attention of the Supreme Court – and it’s sharply presented in the FHFA case, in which Fannie and Freddie shareholders contend that invalidation of the entire Treasury “net worth sweep” is the requisite fix for FHFA’s unconstitutionality.

If nothing else, the Cooper & Kirk petition will surely add to the urgency of Supreme Court review of the peculiar structure of the CFPB and the FHFA. As I’ve reported, and as the new petition highlights, these agencies can’t function robustly under a specter of uncertainty about their constitutionality and the appropriate remedy for it.

The Seila Law petition is scheduled for consideration at the Supreme Court’s first conference of the term on Oct. 1. We’ll find out sometime after that if Cooper & Kirk has managed to throw a wrench into the proceedings.

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