Tag Archives: Epstein

Delaying Trump’s Wall

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photo by Jimmysalv

USA Today cited me in No, Cards Against Humanity Can’t Delay Trump’s Border Wall. It opens,

By now you’ve played a rousing game of Cards Against Humanity or at least heard the game makers want to buy land to block the construction of President Trump’s proposed border wall between the U.S. and Mexico.

The raunchy game, where people fill in the blank or complete sentences with terrible — but funny — things, pulls a holiday marketing stunt every year. Last year, Cards Against Humanity raised money to dig a hole. Before that, they mailed people boxes filled with actual bulls–t.

This year, they asked for $15 from customers to buy a large plot of land along the U.S./Mexico border for their “Cards Against Humanity Saves America” campaign. The promotion already sold out.

A marketing video implies they would separate acres of land into tiny pieces for each participant, in order to hold the government up in court for years. They want to make the push to build a wall time-consuming and expensive by hiring lawyers to keep the land tied up in court, according to the website.

The only problem is, that’s not how eminent domain works.

“This is a way for them to utilize their popularity with an audience most people assume are either indifferent toward political issues or at the very least unsophisticated about how things get done,” said Steve Silva, an eminent domain and land use attorney for Fennemore Craig law group in Reno. Silva has literally used eminent domain to build a wall.

“It’s got a lot of people literally buying into this issue of significant public importance,” he said.

The Fifth Amendment to the U.S. Constitution allows the Federal Government to take property from people for “just compensation.” The amendment favors the government’s ability to take while also protecting an owner’s right to make money. Meaning, property owners must be paid fair-market value for the land.

Determining value is what usually ends up taking years in court, Silva said. TheCongre actual taking of the property takes very little time.

“It’s a two-step process: First thing is that the government has to prove it has the right to take the property,” he said. “Once it establishes that, it can take it immediately.”

The federal government need only establish the land will be used for the public, such as for a large wall owned by the government. Then it can basically take that acreage and start building the wall while fighting out the value in court.

“Congress can also just pass a special bill to take land,” Silva said. “They’ve done that for national parks before. Finally, the U.S. Supreme Court has noted that the U.S. can just seize land summarily by occupying it and ousting the former owner.

“I suspect this sort of move would be really unpopular,” he added.

So, Cards Against Humanity may end up fighting the government for years after the wall is finished.

Even if Cards Against Humanity spreads the ownership of the land out to lots of people — say, thousands of them — the Federal Government can still take the land all at once. But now those individual owners will need to fight each other, Cards Against Humanity and the government for their just compensation.

Since people paid $15 for land, it’s likely they would establish land value and get that $15 back unless Cards Against Humanity somehow improves the land or plans to build a museum, monument or even a parking lot on that space.

But again, that would only increase its value, not slow down the wall’s construction.

In an interview on Mashable.com, law professors David Reiss and Richard Epstein argued the court would reject Cards Against Humanity’ claim over the land because they’re using it for political purposes. But attorneys Silva and Lynn Blais disagree. The game makers are using land as a protest, which should be respected by the court, so their protest shouldn’t matter in eminent domain proceedings.

The GSE Litigation Footnote Everyone Is Talking About

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Judge Pratt (S.D.Iowa) ruled against the plaintiffs in the GSE shareholderr litigation, Continental Western Insurance Company v. The FHFA et al. (4:14-cv-00042, Feb. 3, 2015). The Judge’s order is mostly an analysis of why this case should be dismissed because of the doctrine of issue preclusion, which bars “‘successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment . . .'” (6, quoting Supreme Court precedent). The relevant prior judgment was Judge Lamberth’s (D.D.C.) opinion in a similar case that was decided last October.

While Judge Pratt did not reach the merits because he dismissed the case, he stated in a footnote

The Court notes that even if it were to reach the merits of Continental Western’s claims, including the allegedly new claims, it would agree with the well-reasoned opinion of the very able Judge Lamberth in Perry Capital that the case must be dismissed. Specifically the Court agrees that: (1) FHFA and Treasury did not act outside the power granted to them by HERA (see Perry Capital, 2014 WL 4829559 at *8–12); (2) HERA bars Continental Western’s claims under the APA (see id. at *7); (3) Continental Western’s claims for monetary damages based on a breach of contract and breach of the implied covenant of good faith and fair dealing against FHFA must be dismissed because they are not ripe and because Continental Western’s shares of the GSEs do not contractually guarantee them a right to dividends (see id. at *15–19); and (4) Continental Western’s claim for breach of fiduciary duty by FHFA is barred by HERA because it is a derivative claim and HERA grants all shareholder rights, including the right to bring a derivative suit, to FHFA (see id. at *13–15). The Court shares in Judge Lamberth’s observation that “[i]t is understandable for the Third Amendment, which sweeps nearly all GSE profits to Treasury, to raise eyebrows, or even engender a feeling of discomfort.” Perry Capital, 2014 WL 4829559 at *24. But it is not the role of this Court to wade into the merits or motives of FHFA and Treasury’s actions—rather the Court is limited to reviewing those actions on their face and determining if they were permissible under the authority granted by HERA. (19, n.6)

As I have noted before, this is not a surprising result. What remains surprising is how so many analysts refuse to see how these cases might be decided this way.

This is not to say that the plaintiffs’ cases are dead in the water. Appeals courts may reach a different result from those of the trial courts. But so many of those writing on this topic refuse to see any result other than a win for plaintiffs. Time for a reality check.

GSE Shareholder Litigation Issue

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The NYU Journal of Law & Business has posted a special issue devoted to the GSE shareholder litigation. Here are the links for the the individual articles:

The Government Takeover of Fannie Mae and Freddie Mac: Upending Capital Markets with Lax Business and Constitutional Standards
Richard A. Epstein
The Fannie and Freddie Bailouts Through the Corporate Lens
Adam B. Badawi & Anthony J. Casey
An Overview of the Fannie and Freddie Conservatorship Litigation
Davis Reiss
Back to the Future: Returning to Private-Sector Residential Mortgage Finance
Lawrence J. White
Reforming the National Housing Finance System: What’s at Risk for the Multifamily Rental Market if Fannie Mae and Freddie Mac Go Away?
Mark Willis & Andrew Neidhardt

I have blogged about drafts of some of the articles here (Epstein), here (Badawi and Casey) and here (my contribution) and I may very well blog about the rest of them over the next few weeks. Given the nature of legal scholarship, these articles were written well before many of this year’s developments in the GSE shareholder litigations (such as Judge Lamberth’s ruling in the District Court for the District of Columbia case).  Nonetheless, these articles have a lot to offer in terms of understanding the broader issues at stake in the ongoing litigation (the first three articles) and in terms of reform efforts going forward (the last two articles).

Reiss on Shakespearean GSE Litigation

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Fundweb quoted me in Stateside: My Kingdom for a House. It reads in part,

History repeats itself. In 1483, Richard III seized the British crown from his 13-year-old nephew on a trumped up legal sophistry.  One justification was to prevent a return to the chaos of the War of the Roses, considered likely to resume under a child king. (Many historians believe he subsequently murdered those princes in the tower to dispense with future claims.)

Five centuries later, the issue of confiscation returns in the form of US government actions taken to stabilise the financial system during the 2008 credit crisis.  The usurpation argument repeats that the end justifies the means and the rule of law may be subverted in perceived emergencies for the common good. Recent legal cases are challenging that principle, with momentous long- term consequences for the nation.

Specifically, in 2008, Congress enacted the Housing Economic and Recovery Act, which authorised loans to mortgage agencies Fannie Mae and Freddie Mac known as government-sponsored entities. The HERA law placed the GSEs in a conservatorship, giving the US government senior preferred shares in the companies, which paid the government a 10 per cent dividend.

Eventually, the GSEs became immensely profitable again, having now repaid $30bn more to the government than the original loan. In 2012, the conservator passed a third amendment, which transformed the 10 per cent preferred dividend to a sweep of all profits, forever.

Richard Bove, vice-president equity research at Rafferty Capital Markets, responds: ”If the government has the right to override any contract and can appropriate private property for itself, then contracts mean nothing in the US and the government is like Richard III.”

Politics of populism
Ultimately, the government may determine whether the GSEs survive or in what guise or how their profits are distributed.

“Politicians are carrying out what people want them to do.  The public and the media maintain that if the bankers are harming society and the economy, there is no limitation on what the government can do,” says Bove. But beware. Investor confidence further erodes each time the government steps in to act unilaterally in the name of crisis control. The determinant is whether or not the country needs the GSEs to continue to underwrite mortgages and the answer is probably yes. Without them, there will be no one to under-write 30-year mortgages, “the monthly cost of owning a home will go up, prices will go down and it will kill housing in the US,” Bove insists.

Mel Watts, who was appointed this year as a new conservator, may represent a new direction for reshaping the GSEs. His recent speeches suggest he may be planning to merge the two agencies and liberate them from conservatorship status.

David Reiss, professor at Brooklyn Law School, points out another drawback to leaving the GSEs in limbo for six years. Executives, employees and others are now running for the exits, with turnover at the top. The agencies back 60 per cent of residential US mortgages but no longer know who they are. “It’s not healthy for homeowners or taxpayers,” says Reiss.

Investment War of the Roses
A number of hedge fund investors have rebelled, challenging the conservator’s behaviour. Marquee names include Perry Capital, Fairholme Funds and Pershing Square Capital Management. Their claims generally derive from assertions that the conservator illegally expropriated shareholder profits. The plaintiff hedge funds represent a motley crew, some of whom bought the stock after 2009, knowing they were picking up lottery tickets, and others well predating the conservatorship. From the sidelines, smaller investors watched keenly and joined the big boys’ ranks.

“People bought the stock only knowing that Icahn, Berkowitz and Ackmann had positions, so they followed like lemmings,” says Bove. To compound the confusion, most conventional wisdom from commentators lined up on one side. Many were openly remunerated by the shareholders, like New York University’s Richard Epstein.

Reiss adds that, “with no public speakers of equivalent prestige on the other side, it seemed inconceivable the investors might lose, which was a perfect set up for falling hard”.

Indeed they fell, with the recent ruling by Judge Royce Lamberth in the Perry hedge fund case.  The court dismissed the suit with complex arguments but one theme undergirded the judge’s ruling: the government had acted forcefully in a financial emergency, authorised by Congress, which he hesitated to unwind.

Carney, Epstein, Macey & Reiss on GSE Litigation

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I was on an interesting panel today on the state of the Fannie/Freddie shareholder litigation. Judge Lamberth’s ruling in Perry Capital LLC v. Lew et al. was bad news for the plaintiffs in all of the shareholder suits. The panel was hosted by Michael Kim, CRT Capital Managing Director & Senior Research Analyst, and featured

  • John Carney – Wall Street Journal
  • Richard Epstein – NYU Law School
  • Jonathan Macey – Yale Law School
  • David Reiss – Brooklyn Law School

The agenda for the panel included

  • an overview of the litigation timeline for the cases in Iowa District Court, the Court of Federal Claims and the U.S. Court of Appeals for the District of Columbia
  • a detailed analysis of Judge Lamberth’s Ruling and
  • a review of legal strategies and the outlook going forward

The more of these panels I am on, the more I am struck by the passionate intensity of those representing the shareholders. They are convinced that they are not only right, but also that the judiciary will see it their way. I lack this conviction.

It is not that I am so sure that the shareholders will ultimately lose (although that is a good possibility). Rather, it is that the facts and the law are extraordinarily complex in these cases. Because of this complexity, I find it hard to predict how the judges assigned to hear these cases will choose to frame them.

Judge Lamberth and other judges deciding cases arising from government action during the financial crisis often frame their decisions with a narrative of extraordinary government intervention during a period of great uncertainty. As a result, those judges have granted the government as much deference as they can.

Many of the shareholder advocates analogize from precedents drawn from more pedestrian situations and believe that courts will hew closely to them. I am quite skeptical of that approach. Judges lived through the crisis too and are all too aware of the precipice we were on. I think they will think twice before second guessing those who had to call the shots with such severely limited information, and did so while under unrelenting pressure to get it right when the stakes were so high.

GSE Nationalization and Necessity

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Nestor Davidson has posted Nationalization and Necessity: Takings and a Doctrine of Economic Emergency to SSRN. This essay will be of interest to those following the Fannie/Freddie shareholder litigation. The abstract reads,

Serious economic crises have recurred with regularity throughout our history. So too have government takeovers of failing private companies in response, and the downturn of the last decade was no exception. At the height of the crisis, the federal government nationalized several of the country’s largest private enterprises. Recently, shareholders in these firms have sued the federal government, arguing that the takeovers constituted a taking of their property without just compensation in violation of the Fifth Amendment. This Essay argues that for the owners of companies whose failure would raise acute economic spillovers, nationalization without the obligation to pay just compensation should be recognized as a natural extension of the doctrine of emergency in takings. Public officials must be able to respond quickly to serious economic threats, no less than when facing the kinds of imminent physical or public health crises — such as wildfires and contagion — that have been a staple of traditional takings jurisprudence. Far from an affront to the rule of law, this reflection of necessity through an extension of emergency doctrine would reaffirm the flexibility inherent in property law in times of crisis.

Davidson looks at the various companies that were nationalized during the financial crisis, including Fannie and Freddie, and concludes,

It does no violence to norms of ownership—or the rule of law—to acknowledge that overriding necessity in times of crisis can be as relevant to economic emergency as it has always been to more prosaic threats. The doctrine of economic emergency that this Essay has proposed accords with the deepest traditions of our system of property, and rightly should be so recognized. (215)

 

Davidson reaches a very different conclusion than does Richard Epstein, who argues that just compensation is warranted for shareholders in the two companies. I have no doubt that the judges deciding these cases will have to struggle with very same issues that Davidson sets forth in this article, so it is worth a read for those who are closely following these cases.

The Government Takeover of Fannie and Freddie

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Richard Epstein has posted a draft of The Government Takeover of Fannie Mae and Freddie Mac: Upending Capital Markets with Lax Business and Constitutional Standards. The paper addresses “the various claims of the private shareholders, both preferred and common, of Fannie and Freddie.” (2) He notes that those claims have

now given rise to seventeen separate lawsuits against the Government, most of which deal with the Government’s actions in August, 2012. One suit also calls into question the earlier Government actions to stabilize the home mortgage market between July and September 2008, challenging the constitutionality of the decision to cast Fannie and Freddie into conservatorship in September 2008, which committed the Government to operating the companies until they became stabilized. What these suits have in common is that they probe, in overlapping ways, the extent to which the United States shed any alleged obligations owed to the junior preferred and common shareholders of both Fannie and Freddie. At present, the United States has submitted a motion to dismiss in the Washington Federal case that gives some clear indication as to the tack that it will take in seeking to derail all of these lawsuits regardless of the particular legal theory on which they arise. Indeed, the brief goes so far to say that not a single one of the plaintiffs is entitled to recover anything in these cases, be it on their individual or derivative claims, in light of the extensive powers that HERA vests in FHFA in its capacity as conservator to the funds. (2-3, citations omitted)

Epstein acknowledges that his “work on this project has been supported by several hedge funds that have hired me as a legal consultant, analyst, and commentator on issues pertaining to litigation and legislation over Fannie and Freddie discussed in this article.”(1, author footnote) Nonetheless, as a leading scholar, particularly of Takings jurisprudence, his views must be taken very seriously.

Epstein states that “major question of both corporate and constitutional law is whether the actions taken unilaterally by these key government officials could be attacked on the grounds that they confiscated the wealth of the Fannie and Freddie shareholders and thus required compensation from the Government under the Takings Clause. In addition, there are various complaints both at common law and under the Administrative Procedure Act.” (4)

Like Jonathan Macey, Epstein forcefully argues that the federal government has greatly overreached in its treatment of Fannie and Freddie. I tend in the other direction. But I do agree with Epstein that it “is little exaggeration to say that the entire range of private, administrative, and constitutional principles will be called into question in this litigation.” (4) Because of that, I am far from certain how the courts should and will decide the immensely complicated claims at issue in these cases.

In any event, Epstein’s article should be read as a road map to the narrative that the plaintiffs will attempt to convey to the judges hearing these cases as they slowly wend their way through the federal court system.