Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-07-07108/USCOURTS-caDC-07-07108-0/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 

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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. 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 1 of 38
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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 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 2 of 38
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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, 

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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, 

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II 

Before turning to the merits of this appeal, we address 

jurisdiction. The parties all agree there is federal subjectmatter 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. 

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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 

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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 

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 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. 

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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 

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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-andbe-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 

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 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. 

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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 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 14 of 38
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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 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 15 of 38
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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. 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 16 of 38
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 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 17 of 38
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 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 18 of 38
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. 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 19 of 38
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). 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 20 of 38
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. 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 21 of 38
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. 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 22 of 38
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 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 23 of 38
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’ severancerelated claim here does not suffice under any of the possible 

formulations. 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 24 of 38
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 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 25 of 38
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. 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 26 of 38
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 jurisdiction, 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 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.” 505 U.S. at 255 (emphasis 

added). Based on this language, the majority concludes 

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

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 27 of 38
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 unremarkable 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 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 28 of 38
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 mentioning 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

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 29 of 38
4 

In sum, under Red Cross, a sue-and-be-sued clause mentioning 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 according 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 independent source of subject-matter jurisdiction. 

In 1954 Congress amended Fannie Mae’s charter by inserting 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. 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 30 of 38
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 subjectmatter 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 adjudicate” 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 ‘competence’ 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 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 31 of 38
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 “competent 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 accurately 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). 

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7 

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

authorization “to sue and be sued ... in any court of competent 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 jurisdiction 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 

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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 components 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-besued clause does not create subject-matter jurisdiction. 

The majority also suggests the words “competent jurisdiction” “clarify that ... litigants relying on the ‘sue-and-besued’ 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 conclusion 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 subjectmatter 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. 

USCA Case #07-7108 Document #1132167 Filed: 08/08/2008 Page 34 of 38
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Red Cross relied on the canon that Congress is “presumed 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 significant, 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 

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10 

interrelated organizations as Fannie Mae and Freddie Mac. 

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

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

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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 amendment 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. 

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