The Supreme Court of the United States recently held that the “sue-and-be-sued” clause in the Federal National Mortgage Association’s (“Fannie Mae”) charter does not confer subject matter jurisdiction on federal district courts over all cases involving Fannie Mae, and that an independent basis for subject matter jurisdiction must exist such as federal question or diversity.

A copy of the opinion in Lightfoot v. Cendant Mortgage Corp. is available at: Link to Opinion.

Justice Sotomayor’s opinion began by reciting the history of Fannie Mae, which began with the federal government’s attempts to stabilize and strengthen the residential mortgage market during the Great Depression.

The National Housing Act of 1934 gave the Administrator of the recently-created Federal Housing Administration (FHA) authorization to form “national mortgage associations” to purchase and sell certain types of first mortgages and other first liens and to “borrow money for such purposes.” The National Housing Act also conferred on Fannie Mae the power to “sue and be sued, complain and defend, in any court of law or equity.”

In 1954, the National Housing Act was amended to restructure Fannie Mae’s charter in order that it was no longer wholly owned by the federal government. Instead, “[p]rivate shareholders held its common stock and the Department of the Treasury held its preferred stock.” Also, the language of the “sue-and-be-sued” clause was changed to “sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal.”

“In 1968, Fannie Mae became fully privately owned and relinquished part of its portfolio to its new spinoff, the Government National Mortgage Association (known as Ginnie Mae).” Fannie Mae “’continue[d] to operate the secondary market operations’ but became ‘a Government-sponsored private corporation.’”

Fannie Mae currently participates in the secondary mortgage market by “purchas[ing] mortgages that meet its eligibility criteria, packages them into mortgage-backed securities, and sells those securities to investors, and it invests in mortgage-backed securities itself. One of those mortgage purchases led to Fannie Mae’s entanglement in this case.”

Turning to the facts of the case at bar, the borrower refinanced her mortgage in 1999. Fannie Mae purchased the mortgage, which the prior holder continued to service. The borrower defaulted and the servicer/former mortgagee repurchased the mortgage from Fannie Mae and sued to foreclose.

The borrower transferred title of the property to her daughter and filed bankruptcy in an unsuccessful bid to avoid foreclosure, the property eventually being sold at a trustee’s sale in 2001. The mother and daughter borrowers then filed suit in state court, alleging that “deficiencies in the refinancing, foreclosure, and sale of their home entitled them to relief against Fannie Mae.”

Fannie Mae removed the case to federal court based on the “sue-and-be-sued” clause in its charter which it asserted conferred federal question jurisdiction under 28 U.S.C § 1441(a).

The district court denied a motion to remand the case to state court and then dismissed the case “on claim preclusion grounds.” After further litigation, the district court entered a final judgment in Fannie Mae’s favor. The borrowers then moved to set aside the judgment under Federal Rule of Civil Procedure 60(b) based on “fraud upon the court,” which the district court denied.

The borrowers appealed, and the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal and the denial of the Rule 60(b) motion. The borrowers moved for rehearing and the Ninth Circuit withdrew its opinion and “ordered briefing on the question whether the District Court had jurisdiction over the case under Fannie Mae’s sue-and-be-sued clause.”

The Ninth Circuit affirmed the district court’s judgment, relying on the Supreme Court’s 1992 decision in American Nat. Red Cross v. S.G, interpreting it as establishing the rule that “[w]hen a sue-and-be sued clause in a federal charter expressly authorizes suit in federal courts, it confers jurisdiction on the federal courts.”

On certiorari review, the Supreme Court reversed the Ninth Circuit, framing the question as “whether Fannie Mae’s sue-and-be-sued clause goes further and grants federal courts jurisdiction over all cases involving Fannie Mae.”

The Supreme Court noted that the dissent in the Ninth Circuit’s opinion instead interpreted the Red Cross decision “as setting out only a ‘default rule’ that provides a ‘starting point for [the] analysis … It read the ‘any court of competent jurisdiction [language] in Fannie Mae’s sue-and-be sued clause to overcome that default rule by requiring an independent source of jurisdiction in cases involving Fannie Mae.”

The Supreme Court pointed out the First and District of Columbia Circuits “have concluded that the language in Fannie Mae’s sue-and-be-sued clause grants jurisdiction to federal courts,” while four other Circuits — the Seventh, Second, Fifth and Third – “have disagreed, finding that similar language did not grant jurisdiction.”

The Court explained that it did “not face a clean slate” because it had “addressed the jurisdictional reach of sue-and-be sued clauses in five federal charters. Three clauses were held to grant jurisdiction, while two were found wanting.” These opinions “support the rule 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.”

Turning to the clause at issue, the Supreme Court explained that while “Fannie Mae’s sue-and-be-sued clause resembles the clauses this Court has held confer jurisdiction in one important respect … it ‘specifically mentions the federal courts[,]’ [it] differs in a material respect from the three clauses the Court has held sufficient to grant federal jurisdiction.” Specifically, the clause at issue contains the qualifying words “any court of competent jurisdiction.”

The Court reasoned that “[a] court of competent jurisdiction is a court with the power to adjudicate the case before it … [a]nd a court’s subject-matter jurisdiction defines its power to hear cases.” Thus, “[i]t follows that a court of competent jurisdiction is a court with a grant of subject-matter jurisdiction covering the case before it.” Based on such basic principles, the “Court has understood the phrase ‘court of competent jurisdiction’ as a reference to a court with an existing source of subject-matter jurisdiction.”

The Supreme Court concluded that “Fannie Mae’s sue-and-be-sued clause is most naturally read not to grant federal courts subject-matter jurisdiction over all cases involving Fannie Mae. In authorizing Fannie Mae to sue and be sued ‘in any court of competent jurisdiction, State or Federal,’ it permits suit in any state or federal court already endowed with subject-matter jurisdiction over the suit.”

The Court clarified that its ruling in “Red Cross does not require a different result.” Although some courts have interpreted that decision “to set out a rule that an express reference to the federal courts suffices to make a sue-and-be-sued clause a grant of federal jurisdiction … Red Cross contains no such rule.” Instead, the Court explained that that decision reiterates ‘the basic rule’ from earlier decisions “that a sue-and-be-sued clause conferring only a general right to sue does not grant jurisdiction to the federal courts.”

The Supreme Court rejected as unpersuasive Fannie Mae’s argument “against reading its sue-and-be-sued clause as merely capacity conferring.” First, Fannie Mae argued that the phrase “court of competent jurisdiction” “might refer to a court with personal jurisdiction over the parties before it, a court of proper venue, or a court of general, rather than specialized jurisdiction.”

However, the Court ruled, just because the clause mentions federal courts “does not resolve the jurisdictional question.” Accordingly “arguments as to why the phrase … could still have meaning if it does not carry its ordinary meaning are beside the point.”

The Court went on the explain that “even if the phrase carries additional meaning, that would not further Fannie Mae’s argument.” Taking Fannie Mae’s argument that the phrase “court of competent jurisdiction” could mean personal jurisdiction, the Court reasoned that “nothing in Fannie Mae’s sue-and-be-sued clause suggests that the reference to ‘court of competent jurisdiction’ refers only to a court with personal jurisdiction over the parties before it.” Reading the phrase to include both subject matter and personal jurisdiction “does not help Fannie Mae. So long as the sue-and-be-sued clause refers to an outside source of subject-matter jurisdiction, it does not confer subject-matter jurisdiction.”

The Court next rejected Fannie Mae’s argument that when its sue-and-be-sued clause was adopted in 1954, courts had interpreted the phrase “court of competent jurisdiction” to confer jurisdiction on federal courts and Congress relied on such decisions, known as the “prior construction canon of statutory interpretation.”

Fannie Mae pointed to “three types of statutory provisions” that supported its argument that “the phrase ‘court of competent jurisdiction’ had acquired a settled meaning by 1954.” The first two dealt with the Federal Housing Administration’s sue-and-be-sued clause and two Circuit Court of Appeals decisions from the 1940’s holding that the FHA’s sue-and-be-sued clause “overrode the general rule … that monetary claims against the United States exceeding $10,000 must be brought in the Court of Federal Claims, rather than the federal district courts.”

The Court distinguished the two cases as inapposite because “[t]hese courts did not state that their jurisdiction was founded on the sue-and-be-sued clause, as opposed to statutes governing the original jurisdiction of the federal district courts. … Thus, even assuming that two appellate court cases can ‘settle’ an issue … these two cases did not because they did not speak to the question here.”

The Court rejected Fannie Mae’s argument based on a “second set of cases [addressing] provisions authorizing suit for a violation of a statute” as well as a third set of cases that “interpreted provisions making federal jurisdiction over certain causes of action exclusive” because none of the cases “suggest that Congress in 1954 would have surveyed the jurisprudential landscape and necessarily concluded that the courts had already settled the question of whether a sue-and-be-sued clause containing the phrase ‘court of competent jurisdiction’ confers jurisdiction on the federal courts.”

The Court also rejected Fannie Mae’s argument that there was no indication that Congress intended to change the original grant of jurisdiction to federal courts enacted in 1934 when it amended the sue-and-be-sued clause in 1954 because “[t]he addition in 1954 of ‘court of competent jurisdiction,’ a phrase that, as discussed, carries a clear meaning, means that the current sue-and-be-sued clause does not confer jurisdiction.”

Finally, the Supreme Court recognized that “[s]uits involving Freddie Mac may be brought in federal court.”

However, the Court rejected Fannie Mae’s argument that because its “sibling rival, the Federal Home Loan Corporation, known as Freddie Mac,” has the power under its applicable statutes “to sue and be sued, complain and defend, in any State, Federal, or other court” and that Freddie Mac is a federal agency and civil actions against it may be removed to federal district court before trial, “there is no good reason to think that Congress gave Freddie Mac fuller access to the federal courts than it has.”

The Court explained that “[l]eaving aside the clear textual indications suggesting that Congress did just that, a plausible reason does exist.” Namely, in 1970, “when Freddie Mac’s sue-and-be-sued clause and related jurisdictional provisions were enacted, Freddie Mac was a Government-owned corporation. … Fannie Mae, on the other hand, had already transitioned into a privately owned corporation.”

In addition, the Court reasoned that Fannie Mae’s argument “contains a deeper flaw. The doors to federal court remain open to Fannie Mae through diversity and federal question jurisdiction.”

Accordingly, the Court reversed the Ninth Circuit’s ruling.