Consumer Finance Insights
November 21, 2016

SCOTUS Holding Could Exacerbate Already-Backlogged Federal Dockets

On November 8, 2016, the U.S. Supreme Court heard oral arguments in Lightfoot v. Cendant Mortg. Corp., a case that will decide an important jurisdictional issue for Federal National Mortgage Association (FNMA).  See 769 F.3d 681 (9th Cir. 2014), cert. granted, 136 S. Ct. 2536 (2016).  The question before the Court is whether Fannie Mae’s federal charter—which grants Fannie Mae the power “to sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal”— itself confers federal question jurisdiction over claims brought by or against Fannie Mae.  See 12 U.S.C. § 1723a(a).

The case is on appeal from the Ninth Circuit, where a divided court held that the sue-and-be-sued clause in Fannie Mae’s charter affirmatively conferred federal question jurisdiction over claims brought by or against Fannie Mae.  See Lightfoot, 769 F.3d at 683.  The majority issued its ruling based on the 1992 precedent established by the U.S. Supreme Court in Nat’l Red Cross v. S.G., 505 U.S. 247.  See id.  According to the Lightfoot majority, the Red Cross Court gave “a clear rule for construing sue-and-be-sued clauses for federally chartered corporations” when it held that “a congressional charter’s ‘sue and be sued’ provision may be read to confer federal court jurisdiction if, but only if, it specifically mentions the federal courts.”  Id. (quoting Red Cross, 505 U.S. at 255).

On appeal, petitioners argue in part that the Red Cross holding does not apply because the charter language at issue in Red Cross was materially different from Fannie Mae’s charter.  See Brief for Petitioners at 48, Lightfoot v. Cendant Mortg. Corp., 14-1055 (U.S. Aug. 16, 2016).  Specifically, the charter in Red Cross granted the power “to sue and be sued in courts of law and equity, State or Federal, within the jurisdiction of the United States.”  Id. (quoting Red Cross, 505 U.S. at 248).  The Fannie Mae charter, by contrast, is qualified by the additional language that a court must be of “competent jurisdiction.”  See id.  According to petitioners, the plain language of Fannie Mae’s charter dictates that, although Fannie Mae potentially could be sued in state and federal courts, these courts must have an independent jurisdictional basis.  See id. at 19-20.  Respondents, on the other hand, re-assert that Fannie Mae’s charter language is materially similar to the Red Cross charter language and that the principle of stare decisis dictates that Fannie Mae’s charter grants federal question jurisdiction.  See Brief for Respondent Fannie Mae at 16-17, Lightfoot v. Cendant Mortg. Corp., No. 14-1055 (U.S. Sept. 19, 2016).  In addition, respondents argue that the “court of competent jurisdiction” language does not eliminate this jurisdiction.  See id. at 17-19.  During oral argument, the Justices seemed to recognize the validity of both parties’ arguments, but seemed hesitant to diverge from precedent.  For example, Justice Stephen Breyer tellingly remarked to petitioners that “I would think you’re right, if I were doing this afresh,” but observed that precedent seemed to establish “something of a rule here.”

If the Supreme Court rules in favor of the Lightfoot respondents, the ruling potentially would allow removal of a significant number of mortgage cases to federal courts, which may materially increase the number of cases on federal dockets.  As petitioners pointed out during oral argument, “Fannie Mae is currently involved in 60,000 cases, and roughly 70 percent of those are in state court.” Importantly, this appeared to be a compelling issue for the Justices during oral argument, although it is unclear how that concern will impact the court’s decision.