Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust v. Raines

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 23, 2008 Decided August 8, 2008

No. 07-7108

PIRELLI ARMSTRONG TIRE CORPORATION RETIREE MEDICAL

BENEFITS TRUST, DERIVATIVELY ON BEHALF OF FEDERAL

NATIONAL MORTGAGE ASSOCIATION AND WAYNE COUNTY

EMPLOYEES' RETIREMENT SYSTEM, DERIVATIVELY ON BEHALF

OF FEDERAL NATIONAL MORTGAGE ASSOCIATION,

APPELLANTS

v.

FRANKLIN D. RAINES, ET AL.,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 04cv01783)

Randall J. Baron argued the cause for appellants. With

him on the briefs were Eric A. Isaacson and Benny C.

Goodman III.

Maureen E. Mahoney argued the cause for appellees.

With her on the briefs were Everett C. Johnson, Jr., J. Scott

Ballenger, Jeffrey W. Kilduff, Michael J. Walsh, Jr., Barbara

Van Gelder, James D. Wareham, James E. Anklam, John J.

2

Clarke, Jr., Earl J. Silbert, James Hamilton, Rhonda D. Orin,

Daniel J. Healy, William K. Dodds, Stephanie A. Joyce,

Glenn B. Manishin, David E. Barry, William A. Krohley,

Christopher C. Palermo, Steven M. Salky, Eric Delinsky,

Holly A. Pal, Kevin M. Downey, and Paul Mogin. Barbara A.

Miller entered an appearance.

Before: TATEL, BROWN, and KAVANAUGH Circuit

Judges.

Opinion for the Court filed by Circuit Judge

KAVANAUGH, in which Circuit Judge TATEL joins.

Opinion concurring in the judgment filed by Circuit

Judge BROWN.

KAVANAUGH, Circuit Judge: In 2004, Fannie Mae

announced one of the largest corporate earnings restatements

in U.S. history. Numerous investigations and official reports

followed. The story of Fannie Mae told by these reports is

disturbing. It thus comes as no surprise that the Fannie Mae

accounting debacle has generated a wave of lawsuits. In this

case, certain Fannie Mae shareholders filed a derivative suit

on behalf of Fannie Mae against the Company’s directors.

The complaint targets the directors’ failure to prevent the

accounting irregularities. The complaint also challenges the

directors’ decision to approve severance arrangements for two

Fannie Mae officers, Franklin D. Raines and J. Timothy

Howard.

The parties agree that Delaware law provides the

substantive standards for evaluating plaintiffs’ complaint.

Shareholders ordinarily must make a demand on the

company’s board of directors in order to bring a derivative

suit. Although these shareholders did not make such a

demand, the law does not require demand when it would be

3

futile. But consistent with the long-standing principle that

directors and not shareholders manage a corporation, the

Delaware precedents on demand futility make clear that the

bar is high, the standards are stringent, and the situations

where demand will be excused are rare.

Carefully applying the Delaware precedents, the District

Court found that plaintiffs’ complaint failed to meet the test

for demand futility and dismissed the case. We affirm.

I

Fannie Mae is a federally chartered corporation

authorized by Congress in 1934 and created in 1938. Initially

established as a public entity, Fannie Mae was privatized in

1968. Fannie Mae thus has shareholders, directors, and

officers like other non-governmental corporations.

Fannie Mae’s mission is to increase affordable housing

for moderate- and low-income families. It purchases

mortgages originated by other lenders and helps lenders

convert their home loans into mortgage-backed securities.

The goal is to provide stability and liquidity to the mortgage

market. This allows mortgage lenders to provide more loans,

thereby increasing the rate of homeownership in America.

During the summer of 2003, Fannie Mae’s sister

organization Freddie Mac disclosed accounting irregularities.

Shortly thereafter, the Office of Federal Housing Enterprise

Oversight, an Executive Branch agency, reviewed Fannie

Mae’s accounting. In September 2004, OFHEO released an

interim report that highlighted deficiencies in Fannie Mae’s

accounting policies, internal controls, and financial reporting.

OFHEO’s interim report led to an investigation by the

Securities and Exchange Commission. On December 15,

4

2004, the SEC announced that it would require a $9 billion

earnings restatement by Fannie Mae.

Six days after the SEC’s announcement, two Fannie Mae

officers (CEO Franklin D. Raines and CFO J. Timothy

Howard) resigned. The Board did not fire Raines or Howard

for cause; as a result, they were able to leave the company

with approximately $31 million in severance benefits.

In late 2004, shareholders filed multiple derivative suits

on behalf of Fannie Mae against Fannie Mae’s directors. See

In re Fed. Nat’l Mortgage Ass’n Litig., 503 F. Supp. 2d 9, 13

(D.D.C. 2007). As relevant here, plaintiffs allege that Fannie

Mae’s Board of Directors failed to exercise sufficient

oversight to prevent the accounting violations. Plaintiffs also

contend that the outside directors on the Board should have (i)

terminated Raines and Howard for cause, thereby denying

them severance benefits, and (ii) sued to obtain disgorgement

of previous compensation Raines and Howard received.

Shareholders bringing a derivative suit first must make a

demand on the Board, in effect asking the Board to have the

corporation pursue the claims itself. The shareholders here

did not do so. They assert that demand is excused in this case

because a majority of the directors could not render a

disinterested and independent decision whether to pursue

those claims.1 The District Court found that demand was not

excused and dismissed the suit.2

1

The parties have agreed throughout the litigation that

Delaware law applies to the analysis in this case of the demand

requirement and the directors’ potential liability. That is because

the relevant Fannie Mae statute and regulation have been applied so

as to incorporate Delaware General Corporation Law. See 12

U.S.C. § 4513; 12 C.F.R. § 1710.10(b); Fannie Mae ByLaws,

5

II

Before turning to the merits of this appeal, we address

jurisdiction. The parties all agree there is federal subject-

matter jurisdiction based on 12 U.S.C. § 1723a(a), which

authorizes Fannie Mae to “sue and to be sued, and to

complain and to defend, in any court of competent

jurisdiction, State or Federal.” Based on an independent

assessment, we also conclude that this provision establishes

federal subject-matter jurisdiction.

In American National Red Cross v. S.G., the Supreme

Court considered a statute providing that the Red Cross could

‘“sue and be sued in courts of law and equity, State or

Federal, within the jurisdiction of the United States.’” 505

U.S. 247, 248 (1992) (quoting 36 U.S.C. § 2 (now codified as

amended at 36 U.S.C. § 300105(a)(5))). The Court held that

Corporate Governance Practices & Procedures, Art. 1, § 1.05,

http://www.fanniemae.com/governance/pdf/bylaws.pdf.

2

Under Gaubert v. Federal Home Loan Bank Board, we

review the District Court’s decision for abuse of discretion. 863

F.2d 59, 68 n.10 (D.C. Cir. 1988). We tend to agree with plaintiffs

that an abuse-of-discretion standard may not be logical in this kind

of case, however, because the question whether demand is excused

turns on the sufficiency of the complaint’s allegations; and the legal

sufficiency of a complaint’s allegations is a question of law we

typically review de novo. But there is no need to further consider

this aspect of Gaubert at this time because we affirm the District

Court’s decision even under de novo review.

Relatedly, plaintiffs argue that that the District Court abused

its discretion by relying on extraneous public reports and similar

materials in evaluating the sufficiency of the complaint. The

District Court’s mention of those public materials did not affect its

resolution of the case. In any event, those materials are not relevant

to a de novo assessment of the complaint.

6

this sue-and-be-sued clause conferred federal subject-matter

jurisdiction over cases in which the Red Cross was a party.

Red Cross, 505 U.S. at 257. In so ruling, the Court articulated

the general principle 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. at 255 (emphasis added). The Red Cross Court

stated that express reference to federal courts in a federally

chartered entity’s sue-and-be-sued clause was “necessary and

sufficient to confer jurisdiction.” Id. at 252 (emphasis added).

The Red Cross majority repeatedly characterized this

principle as a “rule,” see id. at 255-57, noting that it had been

“established” in the early 19th Century by Osborn v. Bank of

United States, 22 U.S. (9 Wheat.) 738, 818 (1824), and

subsequently confirmed in Bankers Trust Co. v. Texas &

Pacific Railway Co., 241 U.S. 295, 304 (1916), and D’Oench,

Duhme & Co. v. FDIC, 315 U.S. 447, 455-56 (1942). And

the Red Cross dissenters similarly understood the rule’s

clarity, although they disagreed with the rule’s content: “The

Court today concludes that whenever a statute granting a

federally chartered corporation the ‘power to sue and be sued’

specifically mentions the federal courts (as opposed to merely

embracing them within general language), the law will be

deemed . . . to confer on federal district courts jurisdiction

over any and all controversies to which that corporation is a

party.” 505 U.S. at 265 (Scalia, J., dissenting) (emphasis

omitted).

Applying the Red Cross rule to the present case, we find

that there is federal jurisdiction because the Fannie Mae “sue

and be sued” provision expressly refers to the federal courts in

a manner similar to the Red Cross statute. To be sure, the

Fannie Mae sue-and-be-sued clause differs from the Red

Cross statute in one respect: It refers to “any court of

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competent jurisdiction, State or Federal,” whereas the Red

Cross statute refers to “courts of law and equity, State or

Federal.” Compare 12 U.S.C. § 1723a(a), with 36 U.S.C.

§ 300105(a)(5). We agree, however, with the majority of

district courts that have confronted the question since Red

Cross: Section 1723a(a) provides federal subject-matter

jurisdiction in Fannie Mae cases. See, e.g., Grun v.

Countrywide Home Loans, Inc., 2004 WL 1509088, at *2

(W.D. Tex. July 1, 2004); Connelly v. Fed. Nat’l Mortgage

Ass’n, 251 F. Supp. 2d 1071, 1073 (D. Conn. 2003); C.C.

Port, Ltd. v. Davis-Penn Mortgage Co., 891 F. Supp. 371, 372

(N.D. Tex. 1994), aff’d, 58 F.3d 636 (5th Cir. 1995); Peoples

Mortgage Co. v. Fed. Nat’l Mortgage Ass’n, 856 F. Supp.

910, 917 (E.D. Pa. 1994).

It is true that two district courts have reached the contrary

conclusion, reasoning that applying the Red Cross rule to

Fannie Mae is problematic because doing so, in their view,

renders superfluous the words “of competent jurisdiction” in

the Fannie Mae statute. See Knuckles v. RBMG, Inc., 481 F.

Supp. 2d 559, 563 (S.D.W.Va. 2007); Fed. Nat’l Mortgage

Ass’n v. Sealed, 457 F. Supp. 2d 41, 44-46 (D.D.C. 2006).

We disagree with the Knuckles and Sealed district court

opinions. Applying the Red Cross rule to the Fannie Mae

statute does not render the words “of competent jurisdiction”

superfluous. The words “of competent jurisdiction” help

clarify that: (i) litigants in state courts of limited jurisdiction

must satisfy the appropriate jurisdictional requirements, see

Osborn, 22 U.S. (9 Wheat.) at 817-18 (finding federal

jurisdiction because of statute empowering a federal

corporation “to sue and be sued . . . in all state courts having

competent jurisdiction, and in any circuit court of the United

States”) (internal quotation marks omitted) (emphasis added);

(ii) litigants, whether in federal or state court, must establish

that court’s personal jurisdiction over the parties, see

8

Blackmar v. Guerre, 342 U.S. 512, 516 (1952) (noting that a

“court of ‘competent jurisdiction’” for the purpose of hearing

suits against civil service commissioners must be one that

possessed personal jurisdiction over those commissioners);

see also United States v. Morton, 467 U.S. 822, 828 (1984);

(iii) litigants relying on the “sue-and-be-sued” provision can

sue in federal district courts but not necessarily in all federal

courts, see Red Cross, 505 U.S. at 256 n.8; id. at 267 (Scalia,

J., dissenting); Brief of Petitioner-Appellant at 30-31, Am.

Nat’l Red Cross v. S.G., 505 U.S. 247 (1992) (No. 91-594)

(“it is obvious that the district courts are intended” to receive

the jurisdiction conferred in “sue-and-be-sued” clauses); and

(iv) where the Tucker Act otherwise might funnel cases to the

Court of Federal Claims, the federal district courts still

possess jurisdiction, see Ferguson v. Union Nat’l Bank, 126

F.2d 753, 756 (4th Cir. 1942) (applying “of competent

jurisdiction” language in 12 U.S.C. § 1702: “It could hardly

have been intended by Congress that suits for over $10,000

against the Administrator could be brought in any state court

of general jurisdiction, but in the federal jurisdiction only in

the Court of Claims . . . .”). Applying the Red Cross rule to

the Fannie Mae statute thus does not render the words “of

competent jurisdiction” meaningless.3

3

When the Supreme Court decided Red Cross, it was well

aware of the opinion’s significance for statutes that included the “of

competent jurisdiction” language. Consistent with a position

previously advanced by the Solicitor General, the Red Cross

identified those “of competent jurisdiction” statutes to the Court

and argued that the “of competent jurisdiction” language did not

detract from the jurisdictional force of a sue-and-be-sued clause

that referred to federal courts. See Brief of Petitioner-Appellant at

49, Am. Nat’l Red Cross v. S.G., 505 U.S. 247 (1992) (No. 91-594)

(noting that “other entities besides the Red Cross will be affected”

and explaining that “[t]he Solicitor General also has advised this

9

The Supreme Court’s unanimous decision in Breuer v.

Jim’s Concrete of Brevard, Inc. is consistent with our

conclusion. See 538 U.S. 691 (2003). There, the Court held

that the Fair Labor Standards Act’s right-to-sue clause did not

bar removal of suits from state to federal court. Id. at 694-97;

29 U.S.C. § 216(b). In so holding, the Court stated that there

was “no question that Breuer could have begun his action in

the District Court” given the language in the FLSA statute –

similar to the Fannie Mae statute – indicating that an action

“‘may be maintained . . . in any Federal or State court of

competent jurisdiction.’” 538 U.S. at 694 (quoting 29 U.S.C.

§ 216(b)) (alteration in original) (emphasis added).

Therefore, despite the presence of an “of competent

jurisdiction” phrase, the Court found no reason to doubt that

the FLSA’s right-to-sue clause conferred federal jurisdiction.

Judge Brown’s separate opinion appears to acknowledge

that the original Fannie Mae sue-and-be-sued clause in place

from 1934 to 1954 conferred automatic federal jurisdiction in

Fannie Mae cases, but says that Congress eliminated this

jurisdictional grant in 1954 by adding the words “of

Court: ‘Plainly, Section 1702 [of the National Housing Act], by

authorizing suit ‘in any court of competent jurisdiction, State or

Federal,’ provides a basis for district court jurisdiction . . . .’”)

(citing Brief for the Respondents in Opposition at 9, Portsmouth

Redevelopment & Housing Auth. v. Pierce, 464 U.S. 960 (1983)

(No. 83-90)); see also Petition for Writ of Certiorari at 23, S.G. v.

Am. Nat’l Red Cross, 938 F.2d 1494 (1st Cir. 1991) (No. 91-594);

Brief for the United States as Amicus Curiae Supporting Petitioners

at 5-6, Am. Nat’l Red Cross v. S.G., 505 U.S. 247 (No. 91-594)

(arguing that the Supreme Court’s sue-and-be-sued decisions “have

established a clear rule that congressional charters provide for

original jurisdiction in the federal courts whenever they specifically

grant a right to sue and be sued in federal courts”).

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competent jurisdiction.” We disagree. After the 1954

statutory change, the jurisdictional provision of the Fannie

Mae statute continues to refer to federal courts, thus still

falling within the Red Cross rule we are bound to follow.

Moreover, we disagree with the separate opinion about the

meaning and effect of that 1954 statutory change.

Under the original 1934 statute, Fannie Mae was a

governmental entity that could “sue and be sued, complain

and defend, in any court of law or equity, State or Federal.”

Pub. L. No. 73-479, § 301(c)(4), 48 Stat. 1246, 1256 (1934).

The Housing Act of 1954 maintained Fannie Mae’s

governmental status, but completely revamped the 1934

legislation; the addition of the phrase “of competent

jurisdiction” to the sue-and-be-sued clause was one of

numerous changes. See Pub. L. No. 83-560, tit. II, 68 Stat.

590, 612-22 (1954). Unlike Judge Brown, we see no

plausible reason that Congress in 1954 would have continued

to refer to federal courts in the sue-and-be-sued clause –

language understood since the Osborn case in 1824 to confer

federal jurisdiction in cases involving federally chartered

entities – and then used the words “of competent jurisdiction”

in an attempt to negate automatic federal jurisdiction. If

Congress in 1954 did not want to continue to confer federal

jurisdiction in Fannie Mae cases, it logically would have

omitted the word “Federal” from the statute, not attempted a

bank shot by adding the words “of competent jurisdiction.”

This analysis finds support from the fact that in 1954 –

the same year that Congress redrafted Fannie Mae’s charter –

Congress also revised the “sue-and-be-sued” provision of the

Federal Savings and Loan Insurance Corporation statute by

deleting “Federal” from the original FSLIC law. The FSLIC

statute as amended read: “[t]o sue and be sued . . . in any

court of competent jurisdiction in the United States.” Pub. L.

11

No. 83-560, § 501(1), 68 Stat. 590, 633 (1954) (amending

Pub. L. No. 73-479, § 402(c)(4), 48 Stat. 1246, 1256 (1934)

(“[t]o sue and be sued . . . in any court of law or equity, State

or Federal”)). In other words, in 1934 Congress established

two substantially identical “sue-and-be-sued” provisions, one

for Fannie Mae and one for the FSLIC. And in 1954,

Congress dropped the word “Federal” from the FSLIC statute

while keeping the word “Federal” in the Fannie Mae statute.

We must assume that Congress knew the jurisdictional

consequences of what it was doing in 1954. The fact that

Congress chose to keep that all-important word in the Fannie

Mae statute but to delete it from the FSLIC statute is

compelling evidence that Fannie Mae’s “sue-and-be-sued”

provision was meant to ensure continuing federal jurisdiction

in Fannie Mae cases.

The separate opinion’s analysis of the “of competent

jurisdiction” language also does not account for the

congressional expectations associated with “sue-and-be-sued”

provisions during the middle of the 20th Century when this

statutory change was made. A number of cases relevant to

this issue had been decided in the years before 1954. To

begin with, since 1824, the courts had concluded that express

reference to federal courts in a sue-and-be-sued clause of a

federally chartered entity would ensure federal jurisdiction.

See Osborn, 22 U.S. (9 Wheat.) at 818; cf. Red Cross, 505

U.S. at 252 (earlier cases placed Congress “on prospective

notice of the language necessary and sufficient to confer

jurisdiction”). In 1952, moreover, the Supreme Court’s

decision in Blackmar v. Guerre made clear that using the

phrase “of competent jurisdiction” would serve the objective

of requiring a plaintiff to establish personal jurisdiction in

cases involving corporate entities like Fannie Mae. See

Blackmar, 342 U.S. at 516. Because of Blackmar, Congress

might have thought the textual formula approved in 1942 in

12

D’Oench, Duhme – “in any court of law or equity, State or

Federal” – did not suffice to require a showing of personal

jurisdiction. In addition, as of 1954, Congress would not have

thought that using the phrase “of competent jurisdiction”

could negate federal jurisdiction in Fannie Mae cases; several

recent circuit precedents had interpreted sue-and-be-sued

clauses that included the phrase “of competent jurisdiction”

and found federal jurisdiction. See George H. Evans & Co. v.

United States, 169 F.2d 500, 502 (3d Cir. 1948); Seven Oaks,

Inc. v. Fed. Hous. Admin., 171 F.2d 947, 948-49 (4th Cir.

1948); Ferguson v. Union Nat’l Bank, 126 F.2d 753, 756-57

(4th Cir. 1942). The Evans and Ferguson cases specifically

relied on the “of competent jurisdiction” language, moreover,

to hold that federal district courts had jurisdiction over cases

involving federal entities that otherwise might be considered

subject to the Tucker Act and shoehorned into the Court of

Claims. Therefore, we think it abundantly clear that Congress

in 1954 would not have thought or intended the words “of

competent jurisdiction” to negate automatic federal

jurisdiction for Fannie Mae cases.4

4

Interpreting Fannie Mae’s sue-and-be-sued provision as a

grant of federal jurisdiction is also consistent with the fact that

Fannie Mae’s later-created sibling, Freddie Mac, carries a “sue-and-

be-sued” provision that, like the Red Cross’s, does not include the

phrase “of competent jurisdiction.” See 12 U.S.C. § 1452(c). It is

logical to conclude that Congress used distinctive statutory

language in the 1954 Fannie Mae statute in response to the

precedents of that era. In addition, Freddie Mac – like the Red

Cross – was originally created as a private entity, whereas Fannie

Mae was a governmental entity until 1968. Therefore, Congress

likely would not have been concerned that, absent the “of

competent jurisdiction” language, Freddie Mac cases could be

funneled only to the Court of Claims rather than to federal district

courts, which was a potential concern in 1954 when Congress

13

In sum, in interpreting the Fannie Mae statute, we see no

need to muddy the waters by departing from Red Cross’s

clear rule for interpreting the text of a federally chartered

entity’s sue-and-be-sued clause. And even if we were to go

beyond that rule in this case, the legislative background to

Congress’s 1954 statutory amendment strongly supports

automatic federal jurisdiction in Fannie Mae cases. We

therefore hold that Fannie Mae’s sue-and-be-sued clause

confers federal subject-matter jurisdiction.

The jurisdictional issue resolved, we turn to the merits of

the complaint.

III

Plaintiffs concede that they did not attempt to make a

pre-suit demand on the Board as is ordinarily required for

shareholder derivative suits. Rather, plaintiffs allege that a

demand on the Board would have been futile because a

majority of the Board was not “disinterested” and

“independent.”

When plaintiffs filed the relevant complaint, there were

13 directors on Fannie Mae’s Board. This included three

corporate officers: then-CEO Franklin D. Raines, then-CFO J.

Timothy Howard, and current-CEO Daniel H. Mudd. It also

included 10 outside directors: Stephen B. Ashley, Kenneth M.

Duberstein, Thomas P. Gerrity, Ann Korologos, Frederic V.

Malek, Donald B. Marron, Anne Mulcahy, Joe K. Pickett,

Leslie Rahl, and H. Patrick Swygert. To prove demand

futility, plaintiffs must prove that a majority of the Board at

the time of the complaint – here, at least seven directors –

revised the Fannie Mae statute for that then-governmental entity.

Cf. Ferguson, 126 F.2d at 756-57.

14

lacked the necessary disinterestedness and independence to

evaluate the suit. For purposes of this appeal only, it is

conceded that Raines, Howard, and Mudd were not

disinterested and independent. So for demand to be excused,

the complaint must create a “reasonable doubt” about the

disinterestedness or independence of at least four of the 10

outside directors. See Aronson v. Lewis, 473 A.2d 805, 814

(Del. 1984).

Federal Rule of Civil Procedure 23.1 mandates that a

complaint in a shareholder derivative suit “state with

particularity . . . the reasons for . . . not making the effort” to

make a demand. FED. R. CIV. P. 23.1(b)(3). Plaintiffs state

three main reasons to support their argument of demand

futility.

First, plaintiffs allege that demand is excused on their

accounting-related claims. They argue that there was a

“reasonable doubt” about the directors’ “disinterestedness” to

consider a demand because, in plaintiffs’ view, there is a

“substantial likelihood” that a majority of the directors would

be liable on the accounting-related claims for failure to

exercise proper oversight. See Rales v. Blasband, 634 A.2d

927, 936 (Del. 1993) (internal quotation marks omitted).

Second, plaintiffs allege that demand is excused on their

severance-related claims. They allege that there was a

“reasonable doubt” about the Board’s “disinterestedness” to

consider a demand because, in plaintiffs’ view, the directors

did not exercise valid “business judgment” in approving the

severance arrangements for Raines and Howard. See

Aronson, 473 A.2d at 815.

Third, plaintiffs allege that demand is excused on both

sets of claims because there was a “reasonable doubt” about a

majority of the Board’s “independence” to consider a demand

15

in light of the various professional, charitable, and personal

entanglements among Board members. See Beam v. Stewart,

845 A.2d 1040, 1049 (Del. 2004).

A

With respect to the accounting-related claims, plaintiffs

contend that demand is excused because there was a

reasonable doubt about the disinterestedness of a majority of

the directors: They claim that a majority of the directors face

a “substantial likelihood” of personal liability as a result of

their failure to exercise sufficient oversight. See Rales, 634

A.2d at 934, 936.

Liability predicated on a Board’s failure to exercise

oversight “is possibly the most difficult theory in corporation

law upon which a plaintiff might hope to win a judgment.” In

re Caremark Int’l, Inc. Derivative Litig., 698 A.2d 959, 967

(Del. Ch. 1996); see also Stone v. Ritter, 911 A.2d 362, 372

(Del. 2006). The standard “requires conduct that is

qualitatively different from, and more culpable than, the

conduct giving rise to a violation of the fiduciary duty of care

(i.e., gross negligence).” Stone, 911 A.2d at 369. As relevant

here, plaintiffs must allege particularized facts demonstrating

that the directors “knew that they were not discharging their

fiduciary obligations” and failed to act “in the face of a

known duty to act, thereby demonstrating a conscious

disregard for their responsibilities.” Id. at 370.

According to plaintiffs, the complaint alleges that the

directors crossed that line by failing to adequately respond to

several “red flags”: (1) a $200 million audit difference

originating in 1998; (2) a whistleblower’s complaints that

Fannie Mae was improperly manipulating earnings; (3) signs

that Fannie Mae management was using improper hedge

accounting practices; and (4) sister company Freddie Mac’s

16

disclosure in 2003 that it had understated profits. Plaintiffs’

Br. at 44-55. We disagree that these allegations create a

“substantial likelihood” of personal liability for the directors.

On each claim, the Board or its relevant committee looked

into the matter and relied on internal or external accounting

experts and officials responsible for those matters. As the

District Court correctly stated, “plaintiffs’ own allegations

demonstrate that the directors actually responded to each of

the ‘red flags’ cited by plaintiffs.” In re Fed. Nat’l Mortgage

Ass’n Litig., 503 F. Supp. 2d 9, 19 (D.D.C. 2007) (emphasis

omitted). Under Delaware law, a Board of Directors is not a

Board of Accountants. Although the allegations (if true) may

show negligence by the Board, they do not meet the very high

standards set by Delaware law for director oversight liability.

First, plaintiffs claim that the directors ignored a $200

million audit difference originating in 1998. Second Am.

Comp. at ¶¶ 28-30. That year, Fannie Mae incurred $440

million of expenses on its mortgage holdings. Id. at ¶ 28.

Instead of adjusting its income by $440 million, Fannie Mae

adjusted its income by $240 million and deferred the

remaining expenses to subsequent years. Id. at ¶ 29.

Deferring the expenses and engaging in other manipulative

accounting practices enabled Fannie Mae to meet its

performance target and thus increased the company

executives’ incentive-based compensation. Id. at ¶¶ 31-32.

Plaintiffs claim that the directors ignored the audit

difference. But plaintiffs’ own allegations demonstrate that

the directors did in fact address the issue. Second Am. Comp.

at ¶ 30. The complaint states that the Audit Committee – a

standing committee of the Board of Directors – met with

KPMG, Fannie Mae’s outside auditor, to discuss the audit

difference. And KPMG agreed with Fannie Mae’s treatment

of the expenses. Id.

17

Under Delaware law, directors are insulated from liability

when they rely in good faith on the opinions of outside

experts who are acting within their expertise. See DEL. CODE

ANN. tit. 8 § 141(e); Brehm v. Eisner, 746 A.2d 244, 261-62

(Del. 2000). The complaint shows that the Audit Committee

relied on KPMG’s opinions with respect to the audit

difference, which turned this allegedly red flag into a green

flag.

Second, according to plaintiffs, the directors ignored

whistleblower Roger Barnes’s complaints that Fannie Mae

was improperly manipulating earnings. Second Am. Comp.

at ¶ 98. Barnes was a mid-level accountant; in 2003, he wrote

a detailed memorandum to internal auditors regarding what he

considered to be improper accounting practices at Fannie

Mae. Id. at ¶¶ 98, 362. The complaint alleges that the Audit

Committee of the Board learned about the memorandum but

deliberately dismissed Barnes’s revelations, letting them lie

without further investigation and permitting the accounting

violations to continue.

But again, the complaint shows that the Audit Committee

responded. Id. at ¶ 365. Shortly after learning of the memo,

the Audit Committee, company executives, and KPMG

convened to review and discuss Barnes’s allegations. Id;

OFHEO Final Report, Joint Appendix (“J.A.”) 714. At this

meeting, the Audit Committee “expressed satisfaction with

the results of the review” and commended company officers

for working quickly to address the concerns. Second Am.

Comp. at ¶ 366 (internal quotation marks omitted).

As explained above, directors are insulated from liability

when they rely in good faith on the opinions of outside

experts who are acting within their expertise. Directors also

are “fully protected in relying in good faith” upon the

18

“opinions, reports or statements presented to the corporation

by any of the corporation’s officers or employees,” so long as

the Board “reasonably believes” that such matters are “within

such other person’s professional or expert competence.” DEL.

CODE ANN. tit. 8 § 141(e). With respect to the Barnes

Memorandum, plaintiffs have not put forth particularized

facts undermining the Audit Committee’s reliance on officials

who were responsible for these issues and who assured the

Committee that the situation had been resolved. It is not as if

the Audit Committee took the Barnes Memo from the in-box

and put it in the out-box without taking any action.

Third, plaintiffs allege that the Assets and Liabilities

Policy Committee – another standing committee of the Board

of Directors – should have known that management was using

improper “hedge accounting” practices. According to

plaintiffs, Fannie Mae’s executives improperly applied

“hedge accounting” principles to derivatives, thereby

spreading the company’s losses on derivatives over a number

of years rather than booking them immediately. But the

complaint alleges only that the directors should have known

about the accounting violations even though KPMG assessed

the implementation of this accounting policy. Second Am.

Comp. at ¶¶ 256-57, 399. Again, therefore, this allegation

does not create a substantial likelihood of personal liability

under the standards of Delaware law for director oversight

claims.

Fourth, plaintiffs assert that the directors failed to

sufficiently react after Fannie Mae’s sister organization

Freddie Mac disclosed in 2003 that it had “understated

profits” in an effort to “smooth earnings and maintain its

image on Wall Street as a steady performer.” Second Am.

Comp. at ¶ 343. Plaintiffs allege that the “similarities

between Fannie Mae and Freddie Mac and the common issues

19

that were the focus of the Freddie Mac violations should have

. . . serve[d] as ‘red flags’” alerting the directors to Fannie

Mae’s financial manipulations. Id. at ¶ 346. The problem for

plaintiffs is that the Board of Directors responded to the news

about Freddie Mac. The directors met multiple times to

discuss the Freddie Mac situation. Second Am. Comp. at

¶¶ 344, 345, 347, 348, 349, 351, 353. At those meetings, the

company’s financial officers contrasted Freddie Mac’s

practices with Fannie Mae’s and assured the Board that

Fannie Mae’s accounting was sound. See OFHEO Final

Report, J.A. 766-67. Again, because the outside directors

relied on representations of internal financial experts, they are

protected against personal liability.

In sum, the complaint fails to establish a substantial

likelihood of personal liability for the outside directors on the

accounting-related claims. Therefore, under Delaware law,

the accounting-related allegations do not create a reasonable

doubt about the disinterestedness of the Board to consider a

demand with respect to those claims.5

B

On the severance-related claims, plaintiffs allege that the

directors’ decisions to allow Raines and Howard “to resign or

5

To support their claims, plaintiffs rely on the Sixth Circuit’s

decision applying Delaware law in McCall v. Scott, 239 F.3d 808

(6th Cir. 2001), amended on denial of reh’g, 250 F.3d 997 (6th Cir.

2001). In that case, the court excused demand in a case where the

shareholders’ claims arose out of “allegedly wide-spread and

systematic health care fraud.” Id. at 813. Even assuming arguendo

that the result in McCall is consistent with the high standards set by

Delaware law, McCall contained far more substantial allegations

with respect to lack of proper directorial oversight than are

contained in the complaint in this case.

20

retire with more than $31 million in severance benefits” and

to absolve the executives of their “legal obligation to disgorge

compensation that they had procured via accounting

manipulations and insider trading” create a “reasonable

doubt” that they were the product of a valid business

judgment by the directors. Plaintiffs’ Br. at 29; Aronson, 473

A.2d at 814.6

The business judgment rule establishes a “presumption

that in making a business decision the directors of a

corporation acted on an informed basis, in good faith and in

the honest belief that the action taken was in the best interests

of the company.” Aronson, 473 A.2d at 812. As plaintiffs

acknowledge, the business judgment rule protects decisions

unless “no reasonable business person” would have made the

decision. Plaintiffs’ Br. at 41 (internal quotation marks

omitted). Under this principle, courts rarely second-guess

directors’ compensation and severance decisions because the

“size and structure of executive compensation are inherently

matters of judgment.” Brehm, 746 A.2d at 263. Plaintiffs

thus must allege “particularized facts sufficient to raise (1) a

reason to doubt that the action was taken honestly and in good

faith or (2) a reason to doubt that the board was adequately

informed in making the decision.” See In re Walt Disney Co.

Derivative Litig., 825 A.2d 275, 286 (Del. Ch. 2003) (Disney

II).

To support their claim that the directors’ severance

decision was not a valid business judgment, plaintiffs rely on

6

It appears from the complaint that a 14th director, Wulff, was

involved in the severance-related decisions, but that does not affect

the analysis in this section because the complaint alleges that the

severance decision was a collective decision by the outside

directors (in other words, on this claim, either all were disinterested

or none were disinterested).

21

the Disney II case. There, the Delaware Chancery Court

found that the board’s decision not to seek a termination

based on fault or to inquire into the terms and conditions of

the termination agreement was not entitled to the protection of

the business judgment rule. See Disney II, 825 A.2d at 286-

87. As the Disney II court described it, the complaint

demonstrated that the “defendant directors consciously and

intentionally disregarded their responsibilities, adopting a ‘we

don’t care about the risks’ attitude concerning a material

corporate decision.” Id. at 289 (emphasis omitted). The court

accordingly concluded that plaintiffs sufficiently alleged that

the directors breached their “obligation to act honestly and in

good faith in the corporation’s best interests” and thus their

decision “fell outside the protection of the business judgment

rule.” Id.

But plaintiffs here fail to allege particularized facts that

demonstrate that the process was similarly flawed or that the

directors acted without adequate information or deliberation.

The complaint itself acknowledges that the termination

decision was made in a series of board meetings held over

several days. Second Am. Comp. at ¶ 414 (termination

decision “discussed in Board meetings on December 19, 20

and 21, 2004”).

The complaint alleges that the “issue was not discussed

by the Compensation Committee, which had no meetings

during this timeframe.” Id. But that is a red herring because

the Compensation Committee is a standing committee of the

Board of Directors. The individuals who sat on the

Compensation Committee also sat on the Board of Directors,

and the full Board met at length to discuss the severance

issue.

22

Plaintiffs also point to the fact that the directors made the

decision without the assistance of any compensation

consultants. But that is irrelevant: The question in this case

is not about an initial compensation package but instead a

judgment about for-cause termination and what kind of

severance was best for the short- and long-term interests of

the company.

Plaintiffs allege that even if procedurally sound, the

severance decision was substantively flawed because Raines’s

and Howard’s fraudulent acts constituted grounds to terminate

them for cause. But in the analogous case of Brehm v. Eisner,

the Supreme Court of Delaware dismissed a similar claim

because the complaint failed to allege that the directors did

not act within their discretion in awarding an underperforming

executive a severance package. 746 A.2d 244 (Del. 2000).

The court found two business reasons that could support the

directors’ decision: First, the company would likely have to

litigate any dispute over the reasons for termination and

“persuade a trier of fact and law” that the decision was

warranted under the contract. Id. at 265. Second, “that

process of persuasion could involve expensive litigation,

distraction of executive time and company resources, lost

opportunity costs, more bad publicity and an outcome that

was uncertain at best and, at worst, could have resulted in

damages against the Company.” Id.

So too here. Even if the directors had grounds to invoke

the “for cause” termination provisions, the directors

reasonably could have decided not to invoke those provisions

because Fannie Mae likely would have had to spend

enormous time and resources over many years litigating the

decision. The Board reasonably may have decided that going

forward, it was more important to cut ties and dedicate the

company’s resources to righting the ship.

23

Plaintiffs also contest the directors’ decision not to sue

Raines and Howard for disgorgement under § 304 of the

Sarbanes-Oxley Act of 2002. 15 U.S.C. § 7243(a). That

statutory provision establishes that the SEC may sue the CEO

and CFO of a company when the company has been required

to restate its earnings due to noncompliance with securities

laws. Id.

The problem is that § 304 does not create a private right

of action. And contrary to the suggestion in plaintiffs’ brief,

which relies on 1970s-era cases, courts today rarely create

implied private rights of action; courts generally deem it

Congress’s prerogative to make that decision. See Stoneridge

Inv. Partners v. Scientific-Atlanta, 128 S. Ct. 761, 772-73

(2008); Kogan v. Robinson, 432 F. Supp. 2d 1075, 1076 (S.D.

Cal. 2006) (holding that § 304 does not create private

remedy); In re Whitehall Jewellers, Inc. S’holder Derivative

Litig., 2006 WL 468012, at *7 (N.D. Ill. 2006) (same); In re

BISYS Group Inc. Derivative Action, 396 F. Supp. 2d 463,

464 (S.D.N.Y. 2005) (same); Neer v. Pelino, 389 F. Supp. 2d

648, 655 (E.D. Pa. 2005) (same). As a result, the directors’

decision not to devote corporate assets to pursue such an

uncertain cause of action was certainly a reasonable one.

In sum on the severance-related claims, the complaint

fails to create a reasonable doubt about the Board’s

disinterestedness to consider a demand because it fails to

create a reasonable doubt whether the Board exercised a valid

business judgment.7

7

Delaware law is not clear about whether, for this kind of

Aronson business-judgment claim, plaintiffs’ demand must show

(i) a reasonable doubt about the Board’s disinterestedness by

showing a reasonable doubt whether the directors exercised a valid

business judgment; (ii) a reasonable doubt about the Board’s

24

C

Finally, plaintiffs argue that nearly all of the 10 outside

directors lacked the necessary “independence” to evaluate the

demand because (1) the Raines-controlled Fannie Mae

Foundation made charitable donations to non-profit

organizations affiliated with individual Board members,

(2) the directors had other conflicting business and personal

relationships with each other, and (3) Raines otherwise

controlled and dominated the directors. See Rales, 634 A.2d

at 934; Aronson, 473 A.2d at 814. “Independence means that

a director’s decision is based on the corporate merits of the

subject before the board rather than extraneous considerations

or influences.” Aronson, 473 A.2d at 816.

The brief for the directors dismisses those allegations as

plainly insufficient under Delaware law. Yet in their 30-page

reply brief, plaintiffs make no mention of this “independence”

argument. Although not a waiver, the reply brief’s silence on

the subject is a telling indication of this argument’s lack of

weight under Delaware law.

The basic hurdle for plaintiffs stems from the fact that the

kinds of relationships alleged in the complaint exist at many

companies. Directors tend to be experienced and

accomplished business persons; those individuals also tend to

be comparatively wealthy and have a wide range of

professional and charitable affiliations and relationships. It is

usually considered in the interests of corporations and their

disinterestedness by showing a “substantial likelihood” that the

directors will be personally liable for not exercising a valid business

judgment; or (iii) both. It also is not clear whether there is a real

difference in these formulations. Regardless, plaintiffs’ severance-

related claim here does not suffice under any of the possible

formulations.

25

shareholders to attract experienced and accomplished business

leaders as directors. So as not to preclude service by such

persons, Delaware law creates a very high bar for using the

kinds of relationships alleged here as a basis for finding a lack

of independence and thereby excusing demand in a derivative

suit.

First, the complaint alleges that outside directors

Duberstein, Gerrity, Malek, Marron, Swygert, and Korologos

are beholden to Raines because he was Chairman of the Board

of the Fannie Mae Foundation, which made charitable grants

to non-profit organizations with which the directors were

affiliated. Second Am. Comp. at ¶ 116. For those donations

to be relevant, plaintiffs must allege that Raines “has the

unilateral power . . . to decide whether the challenged director

continues to receive a benefit . . . .” Orman v. Cullman, 794

A.2d 5, 25 n.50 (Del. Ch. 2002). But the complaint does not

allege any particularized facts showing that Raines controlled

who received donations or determined the size of grants. We

thus conclude that the contributions to non-profit charities and

organizations provide no basis for us to question the

independence of the directors for purposes of Delaware law.

Second, plaintiffs allege that outside directors Duberstein,

Pickett, Korologos, Malek, Marron, Ashley, and Swygert

have “business and/or personal relationships with each other,

or with immediate families of other defendants, that would

conflict with their ability to objectively determine whether it

would be appropriate to bring suit against other Fannie Mae

current and former officers and/or directors.” Second Am.

Comp. at ¶ 132. But allegations of “mere personal friendship

or a mere outside business relationship, standing alone, are

insufficient to raise a reasonable doubt about a director’s

independence.” Stewart, 845 A.2d at 1050. Only

professional or personal friendships that “border on or even

26

exceed familial loyalty and closeness[] may raise a reasonable

doubt whether a director can appropriately consider demand.”

Id. (internal quotation marks omitted). The Delaware

Supreme Court has instructed that “[n]ot all friendships, or

even most of them, rise to this level and the Court cannot

make a reasonable inference that a particular friendship does

so without specific factual allegations to support such a

conclusion.” Id. (internal quotation marks and emphasis

omitted). We need not dally long on this allegation: The

commonplace business, professional, and personal

relationships alleged in this case are not remotely sufficient

under Delaware law to disqualify the challenged directors

from evaluating demand in an independent manner.

Third, plaintiffs allege that the directors lacked

independence because Raines “controlled” a majority of the

Board. But the complaint cites no particularized facts to

support this charge other than that the Board often approved

Raines’s proposed decisions. This does not suffice under

Delaware law to demonstrate that Raines so controlled the

directors’ decisionmaking as to mean they lacked

independence to consider a demand. As the Delaware courts

have stated, the “shorthand shibboleth of dominated and

controlled directors” is insufficient. Aronson, 473 A.2d at

816 (internal quotation marks omitted).

In sum, under the standards set forth by Delaware law,

the complaint’s allegations do not create a reasonable doubt

about the Board’s independence to consider a demand.

***

We affirm the District Court’s judgment dismissing the

complaint.

So ordered.

BROWN, Circuit Judge, concurring in the judgment: After

182 pages of briefing by 39 attorneys who have strained to

squeeze this case into their preferred courtroom, I still—even

after reading the majority opinion—haven’t heard a decent

argument for federal subject-matter jurisdiction. All parties

in this litigation teamed up to manufacture jurisdiction, but,

needless to say, parties cannot create subject-matter jurisdic-

tion, see Kline v. Burke Constr. Co., 260 U.S. 226, 233–34

(1922). Neither can judges, for doing so misappropriates

Congress’s jurisdiction-conferring role, id., and invalidly

scoops cases out of state court. And these principles are

especially important in a case where Congress amended the

supposedly jurisdictional statute to make clear Fannie Mae

may only sue or be sued in courts that have “competent

jurisdiction”—that is, subject-matter jurisdiction. The

majority’s misreading of Supreme Court precedent and

disregard for statutory text lead it to erroneously conclude we

have jurisdiction.

I

Fannie Mae’s sue-and-be-sued clause does not, as the

majority contends, create “automatic” federal subject-matter

jurisdiction, see maj. op. at 10, 12–13. Most of the majority’s

mistakes flow from its misinterpretation of American

National Red Cross v. S.G., 505 U.S. 247 (1992).

A

In Red Cross, the Court declared “a congressional char-

ter’s ‘sue and be sued’ provision may be read to confer

federal court jurisdiction if, but only if, it specifically

mentions the federal courts.” 505 U.S. at 255 (emphasis

added). Based on this language, the majority concludes

Fannie Mae’s sue-and-be-sued clause creates jurisdiction

2

simply because it mentions the federal courts. I would apply

this silly test if Red Cross actually created it. But Red Cross

did no such thing. Rather, Red Cross stands for the unre-

markable rule that mentioning federal courts is necessary, but

not always sufficient, to confer jurisdiction. Three key

rationales support this commonsense interpretation.

First, the majority’s reading of Red Cross is implausible.

Consider this hypothetical statutory provision: “Fannie Mae

may sue and be sued in federal court only if another statute

independently confers subject-matter jurisdiction.” Under the

majority’s test, this hypothetical provision would create

“automatic federal jurisdiction” simply because it mentions

federal courts—even though the text evinces a contrary

meaning. But that cannot be; a mere mention of federal

courts cannot justify disregarding statutory barriers to federal

jurisdiction. In short, the phrase “federal courts” isn’t a

talisman.

Second, the majority’s (mis)interpretation of Red Cross

is belied by Red Cross itself. After all, if a mere textual

mention of federal courts was sufficient, then the Red Cross

Court wasted many pages articulating other rationales and

examining the jurisprudential backdrop against which

Congress enacted the Red Cross charter. Certainly a brief

discussion would have sufficed to create the talismanic “I see

the phrase ‘federal courts’ so it must be jurisdictional” test.

Instead, Red Cross substantially relied on the timing of an

amendment to Red Cross’s charter by applying the canon that

Congress is “presumed to intend [the] judicially settled

meaning of terms.” Red Cross, 505 U.S. at 252, 257; see K.V.

Mart Co. v. United Food & Commercial Workers Int’l Union,

Local 324, 173 F.3d 1221, 1224–25 (9th Cir. 1999) (per

curiam) (Red Cross is “premised” on this canon). Red Cross

also discussed numerous sources of legislative history. 505

3

U.S. at 261–62. But the majority’s interpretation would

render these portions of Red Cross “entirely meaningless,”1

and “I am reluctant to reach that conclusion about Supreme

Court decisions.” Agri Processor Co., Inc. v. NLRB, 514 F.3d

1, 12–13 (D.C. Cir. 2008) (Kavanaugh, J., dissenting).

Third, Red Cross’s use of the word “may” is significant.

Red Cross announced that a sue-and-be-sued clause mention-

ing federal courts “may be read to confer federal court

jurisdiction.” Id. at 255 (emphasis added). Importantly, the

word “may” is generally “employed to imply permissive,

optional or discretional, and not mandatory action.” BLACK’S

LAW DICTIONARY 979 (deluxe 6th ed. 1990); see, e.g., United

States v. Lexington Mill & Elevator Co., 232 U.S. 399, 411

(1914). Thus, when a sue-and-be-sued clause mentions

federal courts, a court is permitted to interpret the clause as

conferring jurisdiction, and it should do so only when the

statutory text and amendment history support such a reading.

Red Cross did not command federal courts to shirk their

responsibility to examine “the ordinary sense of the language

used [and] basic canons of statutory construction,” 505 U.S.

at 263, in reaching an ultimate conclusion about the clause’s

meaning.2

1

In the critical section of its opinion, the Court relied on the

amendment to the Red Cross charter and the “judicially settled

meaning” canon. See 505 U.S. at 252, 257. And although the

Court discussed legislative history in the context of rejecting a

party’s arguments, it extensively analyzed the legislative materials

rather than declaring such materials irrelevant in light of some

newly announced magic-words test. See id. at 261–62.

2

Although the Red Cross Court used the phrase “necessary

and sufficient,” it did so when explaining that previous cases had

notified Congress about language sufficient to create jurisdiction.

See 505 U.S. at 252. Just because those cases are examples of

sufficient jurisdictional language, however, does not mean any

4

In sum, under Red Cross, a sue-and-be-sued clause men-

tioning federal courts may (or may not) be jurisdictional—

because mentioning federal courts is necessary (but not

always sufficient) to confer jurisdiction. And even if Red

Cross flirted with a magic-words test by emphasizing “federal

courts” and ignoring other aspects of the Red Cross charter’s

text, the Court could not have intended to apply this test

where Congress specifically amended the charter to add a

jurisdictional limitation, as Congress did here.

B

Interpreting Fannie Mae’s sue-and-be-sued clause ac-

cording to “the ordinary sense of the language used [and]

basic canons of statutory construction,” Red Cross, 505 U.S.

at 263, demonstrates the clause does not create subject-matter

jurisdiction. According to the majority, a charter provision

authorizing Fannie Mae to sue and be sued “in any court of

competent jurisdiction” is a declaration that all federal district

courts have competent jurisdiction. See 12 U.S.C. § 1723a

(emphasis added); Maj. Op. at 5–13. Because “competent

jurisdiction”—a phrase not present in the Red Cross’s

charter—refers to subject-matter jurisdiction, Fannie Mae

may only sue or be sued “in any court” that has an independ-

ent source of subject-matter jurisdiction.

In 1954 Congress amended Fannie Mae’s charter by in-

serting the words “[in any court of] competent jurisdiction.”

Compare Pub. L. No. 73-479, § 301(c)(3), 48 Stat. 1246,

1253 (1934) (authorizing Fannie Mae “[t]o sue and be sued,

complain and defend, in any court of law or equity, State or

reference to federal courts always suffices even if statutory text

indicates otherwise. Moreover, the majority’s contention that

mentioning federal courts always suffices runs counter to Red

Cross’s holding that such a reference “may” suffice, see id. at 255.

5

Federal” (emphasis added)), with Pub. L. No. 83-560, § 201,

68 Stat. 590, 620 (1954) (authorizing Fannie Mae “to sue and

to be sued, and to complain and to defend, in any court of

competent jurisdiction, State or Federal” (emphasis added)).

Red Cross explained that such “a change in language [should]

be read, if possible, to have some effect.” 505 U.S. at 263;

see also Fund for Animals, Inc. v. Kempthorne, 472 F.3d 872,

877 (D.C. Cir. 2006) (“[C]ourts presume that Congress has

used its scarce legislative time to enact statutes that have

some legal consequence.”).

Our task is to determine what Congress accomplished by

adding the phrase “[court of] competent jurisdiction.” As the

Supreme Court has repeatedly emphasized, the phrase

“competent jurisdiction” almost always refers to subject-

matter jurisdiction. See, e.g., Wachovia Bank, Nat’l Ass’n v.

Schmidt, 546 U.S. 303, 316 (2006); United States v. Morton,

467 U.S. 822, 828 (1984); Califano v. Sanders, 430 U.S. 99,

106 n.6 (1977) (suggesting a statute required “an independent

jurisdictional foundation” largely because it limited judicial

review to “‘a court of competent jurisdiction,’” which

“seem[ed] to look to outside sources of jurisdictional

authority”); cf. Kontrick v. Ryan, 540 U.S. 443, 454 (2004).

Just two years ago, the Court unambiguously declared:

“Subject-matter jurisdiction … concerns a court’s competence

to adjudicate a particular category of cases.” Wachovia Bank,

546 U.S. at 316 (emphasis added); see Kontrick, 540 U.S. at

454 (treating “what cases … courts are competent to adjudi-

cate” as an issue of subject-matter jurisdiction). “Competent

jurisdiction” rarely refers to personal jurisdiction. Indeed,

“[a]s far back as Pennoyer v. Neff, 95 U.S. 714 (1878),

[courts] drew a clear distinction between a court’s ‘compe-

tence’ and its jurisdiction over the parties.” Morton, 467 U.S.

at 828 n.6. Leading commentators likewise treat a court’s

“competence” to hear a case as an issue of subject-matter

6

jurisdiction. See 13 CHARLES ALAN WRIGHT, ARTHUR R.

MILLER & EDWARD H. COOPER, FEDERAL PRACTICE AND

PROCEDURE: JURISDICTION § 3522 (2d ed. 1984). So does

Black’s Law Dictionary. BLACK’S LAW DICTIONARY 355,

426 (rev. 4th ed. 1968) (defining “court of competent

jurisdiction” as one “having power and authority of law … to

do the particular act,” and explaining the term “competent

authority,” “[a]s applied to courts,” means “legal authority to

deal with the particular matter in question”); id. 379, 459 (3d

ed. 1933) (same).

The majority contends the Supreme Court overruled this

well-settled meaning of “competent jurisdiction” in one vague

half-sentence in Breuer v. Jim’s Concrete of Brevard, Inc.,

538 U.S. 691 (2003). See Maj. Op. at 9. But “[c]ourts do not

normally overturn a long line of earlier cases without

mentioning the matter,” John R. Sand & Gravel Co. v. United

States, 128 S. Ct. 750, 756 (2008), and they especially do not

do so in equivocal half-sentences. Perhaps this is why the

parties—who have not exactly been shy about making

jurisdictional arguments that stretch the bounds of credulity—

refused to place much reliance on Breuer, even when

specifically prompted to do so at oral argument.3

Flailing to find some meaning for the statute’s “compe-

tent jurisdiction” limitation, the majority claims Congress

inserted this phrase to “clarify that … litigants in state courts

of limited jurisdiction must satisfy the appropriate jurisdic-

3

The majority’s selective quotations from Breuer do not accu-

rately reflect the vagueness of the relevant passage, in which the

Court first concluded the plaintiff could bring his claim in district

court, then quoted a statute containing “competent jurisdiction”

language, and then remarked that “the district courts would in any

event have original jurisdiction over FLSA claims under 28 U.S.C.

§ 1331 … and § 1337(a).” 538 U.S. at 694 (emphasis added).

7

tional requirements.” See Maj. Op. at 7. I disagree. For if

authorization “to sue and be sued … in any court of compe-

tent jurisdiction, State or Federal,” clarifies that there must be

a separate source of state jurisdiction, why does it not also

clarify that there must be an independent source of federal

jurisdiction? See 12 U.S.C. § 1723a(a). Surely “competent

jurisdiction” modifies both “State” and “Federal” in Fannie

Mae’s charter. See id. In addition, the majority’s citation of

the statute construed in Osborn v. Bank of the United States is

ironic, because the “competent jurisdiction” phrase in that

statute only referred to state courts (but not federal courts).

See 22 U.S. (9 Wheat.) 738, 817 (1824) (authorizing suit “in

all state courts having competent jurisdiction, and in any

circuit court of the United States”). If, as the majority asserts,

Congress added “competent jurisdiction” to Fannie Mae’s

charter to clarify that an independent jurisdictional grant is

required in state (but not federal) courts, one would expect the

verbal formulation to look something like the statute in

Osborn. It does not.

In another effort to give “competent jurisdiction” some

meaning, appellees imply the phrase might refer to personal

jurisdiction. Although this interpretation is contrary to the

phrase’s ordinary meaning, Morton, 467 U.S. at 828 n.6, the

majority embraces this interpretation, see maj. op. at 7–8.

However, appellees’ half-hearted argument is quite telling,

because the furthest they will go is to argue personal jurisdic-

tion occasionally represents one “component of a court’s

‘competent jurisdiction.’” Rule 28(j) Letter, Apr. 21, 2008

(emphasis added); cf. Blackmar v. Guerre, 342 U.S. 512,

513–16 (1952) (interpreting “competent jurisdiction” to

require personal jurisdiction, but giving no indication that an

independent source of subject-matter jurisdiction was not also

required). There are two types of jurisdiction: personal

jurisdiction and subject-matter jurisdiction. Cf. Kontrick, 540

8

U.S. at 455; 1 ROBERT C. CASAD & WILLIAM M. RICHMAN,

JURISDICTION IN CIVIL ACTIONS § 1-1 (3d ed. 2004). If, as

appellees argue, personal jurisdiction is one of the compo-

nents of a court’s “competent jurisdiction,” then the other

component must be subject-matter jurisdiction. Thus,

appellees’ best argument is that the sue-and-be-sued clause

requires personal jurisdiction and an independent source of

subject-matter jurisdiction. If that is the case, the sue-and-be-

sued clause does not create subject-matter jurisdiction.

The majority also suggests the words “competent juris-

diction” “clarify that … litigants relying on the ‘sue-and-be-

sued’ provision can sue in federal district courts but not

necessarily in all federal courts.” Maj. Op. at 7–8. But the

authority cited by the majority directly undercuts this

proposition. The majority cites the Supreme Court’s conclu-

sion that Red Cross’s authorization to sue and be sued in

federal court only includes district courts—not all federal

courts. See Maj. Op. at 8 (citing Red Cross, 505 U.S. at 256

n.8; id. at 267 (Scalia, J., dissenting)). But if that is the case,

Congress would have no need to clarify this point by adding

the “competent jurisdiction” language.

At bottom, the majority provides no convincing reason to

give the statute’s words anything other than their ordinary

meaning. Because “competent jurisdiction” refers to subject-

matter jurisdiction, Fannie Mae’s sue-and-be-sued clause is

functionally equivalent to the hypothetical statute described at

the beginning of this opinion: Fannie Mae may sue and be

sued “in any court of competent jurisdiction,” meaning it may

only sue in a court with an independent basis of jurisdiction.

Yet the majority presses its counter-textual conclusion that

this clause creates jurisdiction. I disagree, and the additional

interpretive principles to which I now turn support my textual

analysis.

9

Red Cross relied on the canon that Congress is “pre-

sumed to intend [the] judicially settled meaning of terms,”

505 U.S. at 252, but that canon undercuts the majority’s

position here. In 1942, the Court held the FDIC’s charter was

jurisdictional. See id. at 254. Just five years later, in 1947,

Congress amended the Red Cross’s charter, making its

language “in all relevant respects identical” to the FDIC’s

charter. Id. at 257. The Red Cross Court found this signifi-

cant, explaining “Congress may well have relied on [the

Court’s 1942 holding] to infer” that amending the Red

Cross’s charter in this way would make it jurisdictional. Id.

at 260; see id. at 263; K.V. Mart, 173 F.3d at 1224–25 (Red

Cross is “premised” on this principle). But Red Cross’s

rationale cuts exactly the opposite way here. Fannie Mae’s

charter had contained text virtually identical to that already

deemed jurisdictional by the Court, but then Congress

decided to add a phrase that functions as a jurisdictional

restriction. Thus, unlike Red Cross, where the amendment

“tug[ged] hard toward a jurisdictional reading,” id. at 263,

here Congress inserted a phrase that militates against such a

reading.

In addition, Congress placed the “competent jurisdiction”

limitation in Fannie Mae’s sue-and-be-sued clause—but not

Freddie Mac’s clause, which is almost the same in every other

respect. Compare 12 U.S.C. § 1723a(a) (authorizing Fannie

Mae “to sue and to be sued, and to complain and to defend, in

any court of competent jurisdiction, State or Federal”

(emphasis added)), with 12 U.S.C. § 1452(c) (authorizing

Freddie Mac “to sue and be sued, complain and defend, in

any State, Federal, or other court”). We should be reluctant to

disregard this important difference in language—especially

when the two provisions containing the disparate language

appear in the same title of the U.S. Code and involve such

10

interrelated organizations as Fannie Mae and Freddie Mac.

See, e.g., Branch v. Smith, 538 U.S. 254, 281 (2003) (plural-

ity) (noting “it is, of course, the most rudimentary rule of

statutory construction … that courts do not interpret statutes

in isolation, but in the context of the corpus juris of which

they are a part”).

In sum, each interpretive tool utilized by the Red Cross

Court—statutory text, the amendment timeline of the charter

juxtaposed against relevant Supreme Court decisions,

interpretive canons, and other statutory provisions—

demonstrates Fannie Mae’s sue-and-be-sued clause does not

create jurisdiction.

C

At first blush, it might seem reasonable for subject-matter

jurisdiction to exist in all cases where a federally chartered

entity such as Fannie Mae is a party. However, a federal

court cannot declare it has power (jurisdiction) over a case

simply by declaring it would be good policy for it to have that

power. See Pub. Citizen v. Nat’l Highway Traffic Safety

Admin., 489 F.3d 1279, 1287–88 (D.C. Cir. 2007) (“[T]his

court simply is not at liberty to displace, or to improve upon,

the jurisdictional choices of Congress,” and “[d]iscretionary

considerations of ‘fairness or efficiency’ do not authorize us

… to disregard plain statutory terms assigning a different

court initial subject-matter jurisdiction over a suit.”). I cannot

employ such a self-aggrandizing approach, because it is not

courts’ job to make policy—much less when that policy

inflates the judicial role at the expense of Congress and the

states. See Kline, 260 U.S. at 234 (holding the lower federal

courts “derive[] [their] jurisdiction wholly from the authority

of Congress”); WRIGHT, MILLER, & COOPER, supra, § 3522

(“[I]f the federal courts … entertain cases not within their

11

jurisdiction,” an “unconstitutional invasion of the powers

reserved to the states” occurs.) Yet today the majority gives

Fannie Mae an “automatic” ticket out of state court anytime it

is sued—something only Congress can do.

Moreover, if policy choices are relevant to this inquiry,

they at least need to comport with those of Congress. Two

points are relevant here. First, Congress statutorily rejected

the notion that federal courts should always have subject-

matter jurisdiction in cases where a federally chartered entity

is a party. While “involvement of a federally chartered

corporation” used to be sufficient to create federal subject-

matter jurisdiction, Red Cross, 505 U.S. at 251, Congress in

1925 “diminish[ed] the flood of federal litigation” resulting

from this policy, Gov’t Nat’l Mortgage Ass’n v. Terry, 608

F.2d 614, 621 n.10 (5th Cir. 1979), by limiting “the [policy’s]

reach … to federally chartered corporations in which the

United States owned more than one-half of the capital stock,”

Red Cross, 505 U.S. at 251. This statutory limitation remains

today. See 28 U.S.C. § 1349. Second, we do not know why

Congress placed the “competent jurisdiction” limitation in

Fannie Mae’s charter, but not in Freddie Mac’s. Congress

treated these similar entities differently in this respect. But,

needless to say, it is not our role to upset that judgment.

Moreover, if the disparate statutory language resulted from a

legislative oversight, it is “beyond our province to rescue

Congress from its drafting errors, and to provide for what we

might think … is the preferred result.” Lamie v. U.S. Trustee,

540 U.S. 526, 542 (2004).

II

For the majority to be correct about the meaning of the

sue-and-be-sued clause, one of the following three proposi-

tions must be true. First: The Supreme Court held that merely

12

mentioning the phrase “federal courts” always creates

jurisdiction, even where the rest of the clause plainly indicates

it does not create jurisdiction. Second: Congress’s amend-

ment of Fannie Mae’s charter to specifically insert the phrase

“[in any court of] competent jurisdiction” is meaningless. Or

third: The phrase “in any court of competent jurisdiction” has

a meaning completely at odds with Supreme Court precedent

(even though there is no convincing evidence to support such

an interpretation). Because none of these is even plausible, I

would hold we lack subject-matter jurisdiction.