Who Knew? Sue-and-be-sued Clauses: State or Federal Jurisdiction

–by Michael Corelli

Source: Lightfoot v. Cendant Mortgage Corp., 580 U. S. ____ (2017); Bank of United States v. Deveaux, 9 U.S. 61 (1809); Osborn v. Bank of United States, 9 Wheat. 738 (1824); American Nat. Red Cross v. S. G., 505 U.S. 247 (1992).

Abstract: Petitioners sued a federal charter, Fannie Mae, under a sue-and-be-sued clause. Fannie Mae removed the case to federal court. The issue revolved around determining how to construe this particular sue-and-be-sued clause in light of precedent.

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Facts & Procedure

Petitioners Beverly Ann Hollis-Arrington and Crystal Lightfoot sued in state court alleging that Fannie Mae was deficient in the refinancing, foreclosure and sale of their home. Fannie Mae removed the case to federal court based on a sue-and-be-sued clause. Petitioners moved to remand the case back to state court, but the District Court denied the motion. The Ninth Circuit affirmed the decision. The Supreme Court granted certiorari to resolve the issue of whether Fannie Mae’s sue-and-be-sued clause grants federal courts jurisdiction over all cases involving Fannie Mae.

Supreme Court Decision

The Supreme Court reversed the Ninth Circuit’s decision. The court resolved the issue by first evaluating whether or not there was established precedent regarding sue-and-be-sued clauses. Justice Sotomayor analyzed several cases to determine the status of the sue-and-be-sued clause.

First, the court analyzed two cases that originally dealt with this clause. In Bank of United States v. Deveaux, the Supreme Court held that the bank had no right to sue in federal court based on a sue-and-be-sued clause that did not expressly mention the federal courts as having subject-matter jurisdiction. Following this rationale, the Supreme Court then decided Osborn v. Bank of United States, where it held that the sue-and-be-sued clause did confer subject-matter jurisdiction to federal courts because it mentioned the federal courts in the clause. Thus, the difference between the two cases was the explicit mention of the federal courts, which was enough to grant subject-matter jurisdiction.

The court then went on to analyze contemporary case law. The most recent case on the sue-and-be-sued clause was American Nat. Red Cross v. S. G., where the prior rationale established by the Supreme Court was reaffirmed. Congressional intent of granting federal courts jurisdiction based on the sue-and-be-sued clause is determined by looking at the language of the clause itself. The court assumes that federal courts lack subject-matter jurisdiction when there is no explicit mention of the federal courts in the sue-and-be-sued clause itself. Congressional intent is recognized when there is evidence of the intent in the form of explicit language.

With this understanding, the court observed that unlike Deveaux, the clause at issue here does mention the federal courts. However, unlike Osborn and Red Cross, the clause at issue here does not refer to federal courts having subject-matter jurisdiction without qualification. Rather, the clause in its language construction created a condition. The clause stated that Fannie Mae had the right “to sue and to be sued, and to complain and to defend, in any court of competent jurisdiction, State or Federal.” Thus, to determine whether the case was properly removed to federal court the court went on to analyze the meaning of competent jurisdiction.

Referring to Black’s Law Dictionary, Justice Sotomayor stated that “a court of competent jurisdiction is a court with the power to adjudicate the case before it.” This definition signifies that a court with competent jurisdiction is a court that has a grant of subject-matter jurisdiction conferred to it. From there, the court stated that a court of competent jurisdiction should be understood as a reference to a court that already has existing subject-matter jurisdiction, not to directly confer jurisdiction to federal courts. Thus, the sue-and-be-sued clause at issue here did not directly grant federal courts subject-matter jurisdiction, rather it gave federal courts the capacity to adjudicate the issue.

The court then looked back to Red Cross and stated that it was often misread and interpreted as meaning any mention of federal courts in a sue-and-be-sued clause automatically conferred federal courts the subject-matter jurisdiction to adjudicate cases. The court refuted this notion and held that when a sue-and-be-sued clause explicitly mentions the federal courts in its language it does not automatically confer those courts with subject-matter jurisdiction. The question remains as to whether subject-matter jurisdiction exists. Therefore, the court rejected Fannie Mae’s arguments that jurisdiction was proper, since its arguments were premised on the misread Red Cross rationale.

Federal courts do not automatically have subject-matter jurisdiction when explicitly mentioned in the sue-and-be-sued clause. It is possible that states still retain subject-matter jurisdiction over these cases depending on the Congressional intent manifested through the language of the clause itself.

Posted in Civil Practice, Legal Pulse