Montilla v. Fed. Nat'l Mortg. Ass'n

• Decision Date: 08 June 2021
• Docket Number: No. 20-1673,20-1673
• Citation: 999 F.3d 751
• Parties: Neris MONTILLA, on behalf of herself and all others so similarly situated; Michael Kyriakakis, on behalf of himself and all others so similarly situated, Plaintiffs, Appellants, Roselia Montufar, on behalf of herself and all others so similarly situated; Ruben Velasquez, on behalf of himself and all others so similarly situated, Plaintiffs, v. FEDERAL NATIONAL MORTGAGE ASSOCIATION; Federal Housing Finance Agency, Defendants, Appellees, Mr. Cooper, f/k/a Nationstar Mortgage, LLC; Seterus, Inc.; C.I.T. Bank, N.A., Defendants.
• Court: U.S. Court of Appeals — First Circuit

999 F.3d 751

Neris MONTILLA, on behalf of herself and all others so similarly situated; Michael Kyriakakis, on behalf of himself and all others so similarly situated, Plaintiffs, Appellants,

Roselia Montufar, on behalf of herself and all others so similarly situated; Ruben Velasquez, on behalf of himself and all others so similarly situated, Plaintiffs,

v.FEDERAL NATIONAL MORTGAGE ASSOCIATION; Federal Housing Finance Agency, Defendants, Appellees,Mr. Cooper, f/k/a Nationstar Mortgage, LLC; Seterus, Inc.; C.I.T. Bank, N.A., Defendants.

No. 20-1673

United States Court of Appeals, First Circuit.

June 8, 2021

Todd S. Dion, Pawtucket, RI, for appellants.

Michael A.F. Johnson, with whom Dirk C. Phillips, Washington, DC, and Arnold & Porter Kaye Scholer LLP were on brief, for appellee Federal Housing Finance Authority.

Noah A. Levine, New York, NY, with whom Wilmer Cutler Pickering Hale & Dorr LLP, Samuel C. Bodurtha, Boston, MA, and Hinshaw & Culbertson LLP were on brief, for appellees Federal Housing Finance Authority and Federal National Mortgage Association.

Steven Fischbach for amici curiae Direct Action for Rights and Equality, National Center for Law and Economic Justice, National Housing Law Project, and Virginia Poverty Law Center.

Before Lynch and Kayatta, Circuit Judges, and Woodcock,^* District Judge.

LYNCH, Circuit Judge.

Plaintiffs-appellants obtained loans secured by mortgages on their real property in Rhode Island. These agreements gave their lenders the right to nonjudicially foreclose on the mortgages. The loans and mortgages were later sold to the Federal National Mortgage Association ("Fannie Mae") while the Federal Housing Finance Agency ("FHFA"), a federal agency, was acting as Fannie Mae's conservator. Appellants defaulted on their loans, and Fannie Mae, consistent with Rhode Island law, conducted nonjudicial foreclosure sales of the mortgaged properties.

Appellants brought suit in federal court alleging that Fannie Mae and FHFA are government actors and that the nonjudicial foreclosure sales violated their Fifth Amendment procedural due process rights. They appeal from the district court's holding that Fannie Mae and FHFA are not subject to their Fifth Amendment claims and its order dismissing those claims. See Montilla v. Fed. Hous. Fin. Agency, No. 18-cv-00632, slip op. at 9-11, 2020 WL 9934769 (D.R.I. May 26, 2020), ECF No. 40. We affirm.

I. Facts

A. Fannie Mae, Freddie Mac, and FHFA

Fannie Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively, the "government-sponsored enterprises" or "GSEs") are "private, publicly traded corporations ... created by federal charter to support the development of the secondary mortgage market." Town of Johnston v. Fed. Hous. Fin. Agency, 765 F.3d 80, 82 (1st Cir. 2014) ; see 12 U.S.C. § 1716b ; id. § 1452. Among other activities, the GSEs buy and sell residential mortgages. See 12 U.S.C. § 1719 ; id. § 1454.¹

In July 2008, as the housing market crashed and the value of the GSEs' loan portfolios declined, Congress established FHFA through the Housing and Economic Recovery Act of 2008 ("HERA"). See 12 U.S.C. § 4511. HERA gave the director of FHFA the discretionary authority to appoint FHFA as conservator or receiver for Fannie Mae or Freddie Mac "for the purpose of reorganizing, rehabilitating, or winding up the[ir] affairs." Id. § 4617(a)(2).

In September 2008, FHFA's director exercised this authority and placed both entities into conservatorship. As conservator, FHFA "immediately succeed[ed] to" the "rights, titles, powers, and privileges" of Fannie Mae, Freddie Mac, and the entities' shareholders and boards of directors. Id. § 4617(b)(2)(A).

HERA also amended the GSEs' charters to allow the Secretary of the Treasury to "purchase any obligations and other securities issued by the corporation[s]." Pub. L. No. 110–289, 122 Stat. 2654, 2683 (codified at 12 U.S.C. § 1719(g)(1)(A) ); id. at 2684-85 (codified at 12 U.S.C. § 1455(l)(1)(A) ). Under this authority, Treasury entered into agreements to infuse capital into Fannie Mae and Freddie Mac. In exchange, it received $1 billion in senior preferred stock in both entities and warrants for the purchase of common stock that, if exercised, would give Treasury 79.9% of the entities' common stock. Treasury has never exercised these warrants and owns no common stock in either Fannie Mae or Freddie Mac.

B. Foreclosures on Appellants' Properties

In 2011, acting as the GSEs' conservator, FHFA established the Servicing Alignment Initiative ("SAI") to improve loan servicer performance and to limit the GSEs' financial losses. Plaintiffs allege that the SAI "directed [the GSEs' loan] servicers to use non-judicial foreclosure procedures when foreclosing on residential properties in Rhode Island."

Rhode Island permits nonjudicial foreclosures through a statutory power of sale when that power is specified in the mortgage contract. See Bucci v. Lehman Bros. Bank, FSB, 68 A.3d 1069, 1084-85 (R.I. 2013) ; 34 R.I. Gen. Laws § 34-11-22 ; id. § 34-27-4. The GSEs' standard mortgage agreement, which was used by the plaintiffs in this case, explicitly gives the lender a statutory power of sale.

Appellant Neris Montilla executed a mortgage in July 2008 on a property in Providence. This mortgage was assigned to Fannie Mae in April 2015 and serviced by C.I.T. Bank, N.A. ("CIT"). On September 10, 2016, CIT began nonjudicial foreclosure proceedings under Rhode Island law against Montilla's property. The mortgage was foreclosed on October 14, 2016. Similarly, appellant Michael Kyriakakis's mortgage on his property was assigned to Fannie Mae in May 2016. The loan servicer conducted a nonjudicial foreclosure sale in December 2017 and recorded a foreclosure deed in March 2018.

II. Procedural History

Montilla filed a putative class action against Fannie Mae, FHFA, and CIT on November 19, 2018 in federal district court in Rhode Island.² The complaint was amended in December 2018 to include Kyriakakis's claims. It alleged that FHFA and Fannie Mae deprived Montilla, Kyriakakis, and others similarly situated of property without "adequate notice and opportunity for meaningful hearings" in violation of the Fifth Amendment. The plaintiffs sought "declaratory relief, injunctive relief, actual, monetary, punitive and exemplary damages, restitution, an accounting, attorney's fees and costs, and all other relief as provided by law."

FHFA and Fannie Mae moved to dismiss the case in February 2019. FHFA argued that it and Fannie Mae are not government actors for the purposes of the plaintiffs' Fifth Amendment claims. Fannie Mae joined FHFA's arguments and alternatively argued that, even if it and FHFA were subject to the Fifth Amendment, the plaintiffs' claims failed because there was no due process violation.

In May 2020, the district court granted FHFA and Fannie Mae's motions to dismiss. See Montilla, slip op. at 1, 2020 WL 9934769. It held that because FHFA stepped into Fannie Mae's shoes as its conservator and its ability to foreclose was a "contractual right inherited from Fannie Mae by virtue of its conservatorship," FHFA was not acting as the government when it foreclosed on the plaintiffs' mortgages and was not subject to the plaintiffs' Fifth Amendment claims. Montilla, slip op. at 9-10, 2020 WL 9934769. In so holding, the court disagreed with an earlier Rhode Island district court's contrary holding in Sisti v. Fed. Hous. Fin. Agency, 324 F. Supp. 3d 273, 284 (D.R.I. 2018).

The court, applying Lebron v. Nat'l R.R. Passenger Corp., 513 U.S. 374, 115 S.Ct. 961, 130 L.Ed.2d 902 (1995), also held that FHFA's conservatorship over Fannie Mae did not make Fannie Mae a government actor for the purposes of the plaintiffs' constitutional claims because the government does not exercise sufficient control over Fannie Mae. See Montilla, slip op. at 6-9, 2020 WL 9934769 ; see also Lebron, 513 U.S. at 398-99, 115 S.Ct. 961 (holding that a corporation is subject to constitutional claims if, among other things, the government "retains for itself permanent authority to appoint a majority of the directors of [the] corporation"). The court again disagreed with Sisti, which had held that because the "decision to end [FHFA's] conservatorship is left entirely to the discretion of the government," its control over the GSEs is "effectively permanent." Sisti, 324 F. Supp. 3d at 280-81.

Montilla and Kyriakakis timely appealed. FHFA, Fannie Mae, and Freddie Mac timely appealed the decision in Sisti which had reached the contrary result.³ We heard oral argument in these appeals on May 4, 2021.

III. Analysis

We review an order granting a motion to dismiss de novo. See Sterling Suffolk Racecourse, LLC v. Wynn Resorts, Ltd., 990 F.3d 31, 35 (1st Cir. 2021). To avoid dismissal, a plaintiff's complaint must include factual allegations sufficient to state a plausible claim to relief. See Abdisamad v. City of Lewiston, 960 F.3d 56, 59 (1st Cir. 2020).

A. FHFA, as the GSEs' Conservator, Is Not a Government Actor Subject to Appellants' Due Process Claims

Adopting the district court's reasoning in Sisti, 324 F. Supp. 3d at 281-84, appellants argue that because FHFA is a government agency, any action it takes as conservator, like directing the GSEs to nonjudicially foreclose on appellants' mortgages, is government action subjecting it to appellants' constitutional claims. That analysis is simply wrong and contrary to law. We hold that, in its role as the GSE's conservator, FHFA is not a government actor because it has "stepped into the shoes" of the private GSEs.

First, it is undisputed that FHFA is a federal agency that sometimes acts as the government. 12 U.S.C. § 4511(a). But this fact is not dispositive. That a federal agency exercising a portion of its statutory powers in one role is a government actor does not as a matter of law mean that it is a government actor for all purposes or in all exercises of its statutory powers. See Faiella v. Fed. Nat'l Mortg. Ass'n, 928 F.3d...