Taking Back the Takings Clause: Investment-Backed Expectations Could Be The Key

I feel privileged to be able to include an opinion piece on the current constitutionally challenged conundrum that is composed of the Fannie Mae/Freddie Mac shareholder lawsuits against the Government. As a sixth-year attorney, my memories of constitutional law at Cardozo Law School in New York City are still very fresh. Specifically, what stands out most vividly is the moment, at the end of the course, when our professor (a former Federal Prosecutor) slammed her hand on her desk and said, “Look, it all comes down to this. We still don’t know who makes the law- Congress or the Supreme Court. There is a constant tension there, and some will call it a “balance of powers,” but really, that is the question.”


The significance of this concession has been highlighted in every discrimination, harassment, and other constitutionally derived lawsuits I have litigated since beginning to practice, but never has this issue been more significant than when I read the decisions (most recently, Judge Lamberth) and the statute involved in these cases (HERA).


What attorneys learn through law school academics is that the law is plastic. This plasticity is revered as the emblem of a democratic society, but really, the plasticity means that law is often never absolute. Attorneys and lawmakers, and most importantly, the Supreme Court, evolve precedent through silence. They analyze whether Congress was “silent” as to a specific issue, leaving it exposed to interpretation” and possibly, being overturned. The Supreme Court can, in most cases, declare a law or statute passed by Congress to be unconstitutional, and that analysis, which lends the Supreme Court the power to analyze and describe the dimensions of a particular statute, has many tiers of factual analysis, often described as “scrutiny,” that the Supreme Court will use when determining whether a law is unconstitutional, typically dependent upon the right or class of persons affected. Some fundamental rights recognized by the Supreme Court are: the right to marry, the right to contraception, and the right to privacy – to name a few.


Here, we have a class of persons (the shareholders) who have been disenfranchised. There is no doubt that the shareholders of Fannie Mae and Freddie Mac live under the threat of being completely stripped of their assets due to the legislation allowing the FHFA broad discretion, which has resulted in a sweep of all profits to the Government.


One of the arguments set forth by counsel for the Plaintiffs is that shares of Fannie Mae/Freddie Mac constitute “property” under the takings clause of the 5th Amendment of the U.S. Constitution, which holds that the government must provide “just compensation” when property of private citizens is acquired. Courts have found difficulty in interpreting the takings clause where some government regulation, such as HERA, is enacted to secure some sort of public benefit, in turn causing loss of value to some property owners.


Currently, the Supreme Court uses a test to determine whether a particular situation falls within the parameters of the takings clause, which essentially examines a case on its own particular set of facts. The Supreme Court has identified several factors to consider when analyzing a takings clause case, such as: the economic impact of the regulation; the degree to which the regulation interferes with investor-backed expectations; and the character of the government action. This means that there is a lot of “wiggle room” for argument as to how, and when, these various factors should be weighed. In this position, the “investment-backed expectations” factor is one that the Plaintiffs might focus on in the multiple class action litigation.


But will this argument work in a scenario where the “property” in question are securities? On September 28, 2014, trial began in the case of Starr International v. United States. Starr, the largest shareholder of A.I.G. stock in 2008, is alleging that the Government’s 2008 bailout of A.I.G. amounted to an unconstitutional takings. The Government seized 80% of A.I.G.’s common stock amid the bailout (a proportion that eventually rose to 92 percent). At the heart of the Starr case is that the Government took an ownership interest in A.I.G., as opposed to merely lending them money, as it did with numerous other institutions. One could argue that this scenario relates to the current GSE’s net-sweep agreement. Our eyes should be following this trial, as the takings argument will be before the jury, and has not thus far been dismissed in motion practice. Which means, in laymen terms: the takings argument has been found plausible by at least one Federal Court, when applied to a securities situation in the 2008 bailout by the Government.


For those disheartened by the decision by Judge Lamberth in the Perry lawsuit, take heart. The issues on appeal are interesting. For example, an argument that could be made on appeal is that the FHFA’s actions in the net-worth sweep did not occur within its role as a conservator or a receiver. HERA’s language states that “no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.” 12 U.S.C. section 4617(f). While Judge Lamberth seemed to assert that HERA grants broad authority to the FHFA to act within its discretion as it sees fit, the decision does not explain how the net-sweep agreement, which donates massive profits of Fannie Mae and Freddie Mac to the Government, in perpetuity, can be seen as a legitimate act of a “conservator.”


We are in a holding pattern, but we have before us unchartered waters and novel approaches to Constitutional Law. It goes without saying that the result of this litigation will impact the meaning of the 5th Amendment as we know it.

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