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1st Cir. Holds Fannie Mae Not Liable for Unauthorized Acts of Its Agents

The U.S. Court of Appeals for the First Circuit, on an issue of first impression at the federal appellate level, recently held that the Merrill doctrine – which prevents federal government instrumentalities from being bound by the unauthorized acts of their agents – applies to Federal National Mortgage Association (“Fannie Mae”).

Accordingly, the First Circuit affirmed the trial court’s entry of summary judgment in favor of Fannie Mae.

A copy of the opinion in Faiella v. Federal National Mortgage Association is available at:  Link to Opinion.

The plaintiff borrower took out a loan secured by a mortgage on his home.  The lender subsequently assigned the loan to Fannie Mae, which arranged for it to be serviced by a loan servicer.

Over the next eight years, the borrower occasionally failed to make payments, though on each occasion he worked with the servicer to cure the default.

However, in the summer of 2015, the borrower missed a payment, and received a mortgage statement providing an arrearage of $5,428.61, and requesting that he call the servicer to bring the loan current.  After speaking with the servicer, the borrower mailed a check for $6,167.21 on Sept. 17, 2015, which was to cover his arrearage and his anticipated October 2015 loan payment.

Two days later, the borrower received a notice of foreclosure of his home.  He immediately wrote the servicer to confirm that he had sent a check sufficient to cure the default, and to request that the foreclosure be halted. The servicer returned his check and notified him that the amount tendered was not correct.

The borrower then contacted the servicer by phone, and was told that the problem was that he had submitted a personal check, not a cashier’s check.  The borrower therefore sent the servicer a cashier’s check in the same amount.

However, the foreclosure proceeded and Fannie Mae acquired the property on Oct. 16, 2015.

The servicer returned the cashier’s check with instructions for the borrower to contact his representative to confirm the amount owed. When the borrower did so, the representative did not know the amount needed to wipe out the foreclosure and reinstate the loan.

The borrower thereafter filed a complaint in state court against the servicer and Fannie Mae asserting claims for declaratory judgment regarding the invalidity of the foreclosure, wrongful foreclosure, and seeking money damages for economic loss and emotional distress.

The action was removed to federal court, where the borrower filed an amended complaint seeking only a declaratory judgment with respect to the alleged invalidity of the foreclosure.  The servicer was dropped from the complaint as it had not participated in the foreclosure proceeding.

The borrower subsequently filed another amended complaint to assert damages claims alleging violations of several state and federal debt collection and consumer protection laws and regulations, as well as common law tort claims for deceit and negligent misrepresentation.

After the court dismissed the statutory claims, the only claims left were the common-law claims alleging that Fannie Mae was vicariously liable for deceit and negligent misrepresentation committed by the servicer’s employees.

Fannie Mae thereafter filed a motion for summary judgment based on its affirmative defenses that the claims were barred under the Merrill doctrine and economic loss doctrine.

The trial court granted Fannie Mae’s summary judgment motion on the basis of the Merrill doctrine, ruling that Fannie Mae was a federal instrumentality protected from vicarious liability for the unauthorized acts of its agents.

The borrower appealed.

Initially, the borrower argued that the grant of summary judgment was improper because the record was not sufficiently developed and additional discovery should have been permitted.  However, the First Circuit determined that the borrower could not raise this argument as he had already agreed in a status conference in the trial court that “the parties are now in agreement that there’s no discovery that needs to be conducted . . . to respond to the pending motion for summary judgment.”

After disposing of the borrower’s argument regarding discovery, the First Circuit noted that “[t]he pivotal question with respect to the trial court’s summary judgment ruling is whether Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine.”

As you will recall, the Merrill doctrine comes from Fed. Crop Ins. Co. v. Merrill, 332 U.S. 380, 384 (1947), and stands for the proposition that the federal government cannot be bound by the unauthorized acts of its agents.

The “Merrill doctrine is designed, in part, to ensure appropriate protection of the public” fiscal operations, and it also “rests solidly ‘upon considerations of sovereign immunity and constitutional grounds – the potential for interference with the separation of governmental powers between the legislative and executive.’”

However, because the Merrill doctrine only operates to safeguard federal instrumentalities, “it remains for us to determine whether Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine – a task that no other federal appellate court has yet undertaken.”

On that issue, the borrower argued that because Fannie Mae is not a federal instrumentality for purposes of sovereign immunity or the Federal Tort Claims Act, it also is not for purposes of the Merrill doctrine.  The borrower further argued that as a shareholder-owned corporation, Fannie Mae is not entitled to the protections of the Merrill doctrine.

The First Circuit disagreed, noting that “the fact that an entity is deemed not to be a federal instrumentality for a particular purpose does not signify that the entity should not be deemed to be a federal instrumentality for some other purpose.”

Further, “the question of instrumentality status is not determined either by Fannie Mae’s corporate form or by whether Fannie Mae serves a ‘proprietary’ (as opposed to ‘sovereign’) function.”  Instead, the Court held, “our inquiry hinges on whether Congress created Fannie Mae to serve an important governmental objective.”

In reaching its determination that Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine, the First Circuit found instructive the Seventh Circuit’s ruling in Mendrala v. Crown Mortg. Co., 955 F.2d 1132 (7th Cir. 1992), wherein the court looked to the governing statute of Federal Home Loan Mortgage Corporation (“Freddie Mac”), and found that Freddie Mac “has a public statutory mission: to maintain the secondary market and assist in meeting low – and moderate – income housing goals.”  The Seventh Circuit determined that the mission “would be thwarted if Freddie Mac could be held ‘responsible for the unauthorized actions’ of its agent.”

The First Circuit noted that “Freddie Mac and Fannie Mae are siblings under the skin,” and that “like Freddie Mac, Fannie Mae serves an important governmental objective: ‘to maintain the secondary mortgage market and assist in meeting low – and moderate – income housing goals.”

Therefore, “[e]nabling Fannie Mae to be held liable for the unauthorized acts of its agents, particularly those who are employees of a private entity, would frustrate Congress’s intent as expressed in the prescribed nature of Fannie Mae’s authority.”

The First Circuit therefore held “that Fannie Mae is a federal instrumentality for purposes of the Merrill doctrine and, thus, cannot be held liable for the unauthorized acts of its agents.”

Because the borrower’s claims were predicated on the theory that Fannie Mae should be held liable for the acts of the servicer’s employees, and because the record did not show that those acts were actually authorized, the First Circuit affirmed the ruling of the trial court.

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Jeffrey Karek practices in Maurice Wutscher's Commercial Litigation, Consumer Credit Litigation, and Appellate groups. He has substantial experience in defending consumer finance lawsuits in both state and federal trial courts, and on appeal. Such litigation includes allegations brought under TILA, HOEPA, RESPA, FDCPA, TCPA, FCRA, and state consumer protection statutes, including in the defense of putative class actions. Jeff received his Juris Doctor from the University of Michigan Law School, and graduated magna cum laude with a Bachelor of Business Administration degree from Western Michigan University.

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