Why the 9th Circuit Fannie Mae "Federal Instrumentality" R...

Now for a break from Puerto Rico. 

Some housing finance commentators (here and here, e.g.) have been very excited by a 9th Circuit ruling that Fannie Mae is not a governmental entity for purposes of the federal False Claim Act (FCA) because they believe that basically decides the issue of whether Delaware law applies to the controversial Net Worth Sweep undertaken by Treasury as part of its support of Fannie and Freddie. Unfortunately, this excitement reflects a misunderstanding of some legal concepts and issues. The 9th Circuit opinion is a big nothing for the Delaware Net Worth Sweep litigation. It does matter for those who try to bring FCA claims against sellers to Fannie and Freddie, but that's a different kettle of fish. 

First, a conceptual point:  chartering and incorporation are the same thing. Therefore, a company cannot be federally chartered and incorporated under a state's laws. It's one or the other. Fannie Mae and Freddie Mac are federally chartered entities--they are federal corporations. The only reason Delaware law comes up is that by federal regulation, Fannie and Freddie are required to pick between DC corporate law, Delaware corporate law, or the Revised Model Business Corporation Act (a model law that some jurisdictions have adopted). The election is done in Fannie and Freddie's corporate bylaws.  Fannie has elected Delaware law, but only "to the extent not inconsistent with the Charter Act and other Federal law, rules, and regulations". That's a big potential carve-out. 

Second, what on earth does the 9th Circuit decision have to do with the Delaware litigation? Almost nothing.

The 9th Circuit was ruling on a narrow issue under the federal False Claims Act. For the relators to be able to bring a successful FCA claim against a mortgage servicer for defrauding Fannie Mae, they have to show that Fannie Mae is a "governmental entity" for the purposes of the False Claims Act. The 9th Circuit said it is not because the US government has not retained permanent authority over Fannie as it has for Amtrak, where it appoints a majority of the board of directors.(What on earth is the never-ending conservatorship? Is it any less permanent than the Amtrak arrangement, which Congress could change?) While I might quibble with the 9th Circuit's ridiculously formalist logic that's beside the point here.

Even if the 9th Circuit got it exactly right, it doesn't tell us anything about whether Fannie Mae is subject to Delaware law regarding the Net Worth Sweep. While Fannie might not be a governmental entity for FCA purposes, the analysis regarding the applicability of Delaware corporate law is totally different. A federal corporation is not the same as a federal instrumentality, and even if an entity is not a federal instrumentality, the applicability of a federal regulatory scheme might trump any state law that the entity has opted into (with express limitations, as noted above). The question of whether Delaware law applies is a matter of interpretation of Fannie's by-laws and nothing more. It's basically a contract interpretation question to which the FCA is uninformative. There's no collateral estoppel (issue preclusion) argument here. 

Put another way, the 9th Circuit ruling is a non-event in the Net Worth Sweep litigation.