People of the State of California, ex rel. et al v. Federal Housing Finance Agency et al

Filing 129

ORDER by Judge Claudia Wilken granting in part and denying in part 49 Motion to Dismiss (cwlc3, COURT STAFF) (Filed on 8/26/2011)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

United States District Court
For the Northern District of California

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PEOPLE OF THE STATE OF
CALIFORNIA, ex rel. KAMALA D.
HARRIS, ATTORNEY GENERAL,

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Plaintiff,

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v.

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FEDERAL HOUSING FINANCE AGENCY;
EDWARD DeMARCO, in his capacity
as Acting Director of FEDERAL
HOUSING FINANCE AGENCY; FEDERAL
HOME LOAN MORTGAGE CORPORATION;
CHARLES E. HALDEMAN, Jr., in his
capacity as Chief Executive
Officer of FEDERAL HOME LOAN
MORTGAGE CORPORATION; FEDERAL
NATIONAL MORTGAGE ASSOCIATION;
and MICHAEL J. WILLIAMS, in his
capacity as Chief Executive
Officer of FEDERAL NATIONAL
MORTGAGE ASSOCIATION,
Defendants
________________________________/

No.
No.
No.
No.

C
C
C
C

10-03084
10-03270
10-03317
10-04482

CW
CW
CW
CW

ORDER GRANTING IN
PART AND DENYING
IN PART
DEFENDANTS'
MOTIONS TO DISMISS
(Docket Nos. 49,
41, 74, 18, and
13), AND GRANTING
IN PART AND
DENYING IN PART
SONOMA COUNTY'S
MOTION FOR A
PRELIMINARY
INJUNCTION (Docket
No. 33)

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SONOMA COUNTY and PLACER COUNTY,
Plaintiff and
Plaintiff-Intervener,

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United States District Court
For the Northern District of California

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v.
FEDERAL HOUSING FINANCE AGENCY;
EDWARD DeMARCO, in his capacity
as Acting Director of FEDERAL
HOUSING FINANCE AGENCY; FEDERAL
HOME LOAN MORTGAGE CORPORATION;
CHARLES E. HALDEMAN, Jr., in his
capacity as Chief Executive
Officer of FEDERAL HOME LOAN
MORTGAGE CORPORATION; FEDERAL
NATIONAL MORTGAGE ASSOCIATION;
and MICHAEL J. WILLIAMS, in his
capacity as Chief Executive
Officer of FEDERAL NATIONAL
MORTGAGE ASSOCIATION,
Defendants.

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/

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SIERRA CLUB,
Plaintiff,

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v.

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FEDERAL HOUSING FINANCE AGENCY;
and EDWARD DeMARCO, in his
capacity as Acting Director of
FEDERAL HOUSING FINANCE AGENCY,

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Defendants.

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/

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CITY OF PALM DESERT,
Plaintiff,

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v.

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FEDERAL HOUSING FINANCE AGENCY;
FEDERAL NATIONAL MORTGAGE
ASSOCIATION; and FEDERAL HOME
LOAN MORTGAGE CORPORATION,

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Defendants.

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/
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California, Sonoma and Placer Counties, the City of Palm

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Desert and the Sierra Club have sued the Federal Housing Finance

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Agency (FHFA), the Federal National Housing Association (Fannie

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Mae), the Federal Loan Mortgage Corporation (Freddie Mac) and

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their directors.1

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The lawsuits challenge actions by the FHFA,

Fannie Mae and Freddie Mac which have allegedly blocked government

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programs financing energy conservation.2

Plaintiffs seek

declaratory and injunctive relief, alleging violations of the

United States District Court
For the Northern District of California

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Administrative Procedures Act (APA), the National Environmental

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Policy Act (NEPA), various state laws and the Constitution's Tenth

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Amendment and Spending Clause.

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Defendants have moved to dismiss all claims.3

Plaintiffs

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jointly oppose.

Sonoma County also moves for a preliminary

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injunction.

Defendants' motions to dismiss are GRANTED IN PART.

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By stipulation, the claims against Defendants Charles E.
Halderman, Jr. and Michael J. Williams, who were sued in their
official capacities as Chief Executive Officers for Fannie Mae and
Freddie Mac, have been dismissed. No. C 10-03084, Docket No. 83;
No. C 10-03270, Docket No. 93.
2 Three similar cases have been filed in federal district
courts in Florida and New York: The Town of Babylon v. Federal
Housing Finance Agency, et al., 2:10-cv-04916 (E.D.N.Y); Natural
Resource Defense Council, Inc. v. Federal Housing Finance
Authority, et al., 1:10-cv-07647-SAS (S.D.N.Y.); and Leon County
v. Federal Housing Finance Agency, et al., 4:10-cv-00436-RH
(N.D.Fla.). The Babylon and Natural Resource Defense Council
actions have been dismissed, and notices of appeal have been
filed.
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Unless noted otherwise, citations to the record refer to
the California action, C 10-03084.
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Sonoma County's motion for a preliminary injunction is GRANTED IN
PART.
BACKGROUND

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The present actions arise from disputes about certain
federally funded, state and locally administered initiatives known
as Property Assessed Clean Energy (PACE) programs.

The Department

of Energy substantially funds PACE programs, as part of the

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American Recovery and Reinvestment Act of 2008.

Through these

United States District Court
For the Northern District of California

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programs, state and local governments finance energy conservation

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improvements with debt obligations secured by the retrofitted

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properties.

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create jobs.

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As a related benefit, the programs are intended to

In the Housing and Economic Recovery Act of 2008 (HERA),
Public Law 110-289, 122 Stat. 2654, Congress established the FHFA

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to regulate and oversee Fannie Mae and Freddie Mac (collectively,
the Enterprises), as well as the Federal Home Loan Banks (Banks),

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which largely control the country's secondary market for

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residential mortgages.

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Enterprises Financial Safety and Soundness Act of 1992, 12 U.S.C.

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§ 4501 et seq. (Safety and Soundness Act).

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The HERA amended the Federal Housing

The Safety and

Soundness Act outlines the regulatory and oversight structure for
the Enterprises and the Banks, denominated the regulated entities.

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12 U.S.C. § 4502(20).

As amended by the HERA, the Safety and

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Soundness Act vests in the FHFA the authority to act as a

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conservator and receiver for the Enterprises and the Banks.
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U.S.C. §§ 4511(b); 4617(a).

Since September 6, 2008, both

Enterprises have been in FHFA conservatorship.

Id.

The parties disagree about the nature of the debt obligations

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created by PACE programs, and the extent to which the obligations

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create risks for secondary mortgage holders, such as the

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Enterprises.

Defendants contend that PACE programs, in particular

those that result in lien obligations that take priority over

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mortgage loans, make alienation of the encumbered properties more

United States District Court
For the Northern District of California

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difficult, and thus pose risk to the security interests of

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entities that purchase the mortgages for investment purposes.

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Plaintiffs allege that Defendants' actions have thwarted PACE

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programs.

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imposed procedural requirements in adopting policies about the

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They claim that (1) Defendants disregarded statutorily

PACE debt obligations, (2) Defendants' determinations were

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substantively unlawful because they were arbitrary and capricious,
and (3) Defendants mischaracterized the legal nature of the

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obligations, contrary to state law, deeming them loans rather than

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traditional public assessments.

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The actions Defendants took are as follows.

In a letter

dated June 18, 2009, addressed to banking and creditor trade
groups, as well as associations for mortgage regulators, governors
and state legislators, the FHFA asserted in general terms that the

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PACE program posed risks to homeowners and lenders.

On September

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18, 2009, Fannie Mae issued a "Lender Letter" to its mortgage

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sellers and servicers in response to questions about PACE
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programs, providing a link to the FHFA's June 18, 2009 letter.
First Amended Complaint (FAC), Ex. A.

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On May 5, 2010, Fannie Mae and Freddie Mac both issued

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letters to their mortgage sellers and servicers, again addressing

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concerns about PACE programs.

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FAC, Ex. B.

On July 6, 2010, the FHFA issued a statement that the PACE
programs “present significant safety and soundness concerns that

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must be addressed by Fannie Mae, Freddie Mac and the Federal Home

United States District Court
For the Northern District of California

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Loan Banks.”

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created by PACE programs were different from “routine tax

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assessments,” and posed significant risks to lenders, servicers,

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and mortgage securities investors.

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local governments to reconsider these programs" and called "for a

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FAC, Ex. C.

The FHFA stated that first liens

Id.

The FHFA "urged state and

pause in such programs so concerns can be addressed."

Id.

The

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FHFA directed Fannie Mae, Freddie Mac and the Banks to undertake
"prudential actions," including reviewing their collateral

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policies to assure no adverse impact by PACE programs.

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Although Defendants have taken the position that the FHFA issued

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the statement in its capacities as conservator and as regulator,

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the statement itself does not say so, or cite any statutory or

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Id.

regulatory provision.
On August 31, 2010, Fannie Mae and Freddie Mac, citing the

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FAFA’s July 2010 statement, announced to lenders that they would
not purchase mortgages originated on or after July 6, 2010, which

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were secured by properties encumbered by PACE obligations.
Declaration of Scott Border, Exs. 20 & 21.
At the Court's request, on February 8, 2011, the United
States submitted a Statement of Interest in these lawsuits.
On February 28, 2011, the FHFA's General Counsel sent a
letter to General Counsel for Fannie Mae and Freddie Mac,
reaffirming that debts arising from PACE programs pose significant

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risks to the Enterprises.

Defendants' Notice of New Authority,

United States District Court
For the Northern District of California

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Ex. A.

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and directed that the "Enterprises shall continue to refrain from

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purchasing mortgage loans secured by properties with outstanding

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first-lien PACE obligations."

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ordered that the "Enterprises shall continue to operate in

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The FHFA invoked its statutory authority as conservator

Id.

In addition, the letter

accordance with the Lender Letters and shall undertake other steps

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necessary to protect their safe and sound operations from these
first-lien PACE programs."

Id.
LEGAL STANDARD

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Dismissal is appropriate under Rule 12(b)(1) when the

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district court lacks subject matter jurisdiction over the claim.

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Fed. R. Civ. P. 12(b)(1).

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Federal subject matter jurisdiction

must exist at the time the action is commenced.

Morongo Band of

Mission Indians v. Cal. State Bd. of Equalization, 858 F.2d 1376,

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1380 (9th Cir. 1988).

A federal court is presumed to lack subject

matter jurisdiction until the contrary affirmatively appears.

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Stock W., Inc. v. Confederated Tribes, 873 F.2d 1221, 1225 (9th
Cir. 1989).
Dismissal under Rule 12(b)(6) for failure to state a claim is

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appropriate only when the complaint does not give the defendant

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fair notice of a legally cognizable claim and the grounds on which

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it rests.

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).

A complaint must contain a "short and plain statement of the claim

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showing that the pleader is entitled to relief."

Fed. R. Civ. P.

United States District Court
For the Northern District of California

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8(a).

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a claim, the court will take all material allegations as true and

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construe them in the light most favorable to the plaintiff.

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Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986).

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However, this principle is inapplicable to legal conclusions;

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In considering whether the complaint is sufficient to state

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"threadbare recitals of the elements of a cause of action,

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supported by mere conclusory statements," are not taken as true.
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949-50 (2009) (citing
Twombly, 550 U.S. at 555).
DISCUSSION

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I. Subject Matter Jurisdiction
A. Article III Standing
Although Defendants did not initially raise the issue, the
United States argues in its Statement of Interest that Plaintiffs

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do not have Article III standing and, therefore, the Court does

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not have subject matter jurisdiction to consider their claims.

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“If the court determines at any time that it lacks subject-matter
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jurisdiction, the court must dismiss the action.”

Fed. R. Civ. P.

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12(h)(3).

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satisfy three requirements--(1) injury in fact; (2) causation; and

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(3) redressability.

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560 (1998).

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To establish constitutional standing, a plaintiff must

Lujan v. Defenders of Wildlife, 504 U.S. 555,

The party invoking federal jurisdiction bears the

burden of establishing that it has Article III standing.

Steel

Co. v. Citizens for a Better Environment, 523 U.S. 83, 103-104

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(1998).

On a motion to dismiss, a plaintiff need only show that

United States District Court
For the Northern District of California

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the facts alleged, if proved, would confer standing.

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Delta Water Agency v. United States, 306 F.3d 938, 947 (9th Cir.

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2002).

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Central

The United States does not argue that Plaintiffs do not
allege "injury in fact," and the Court finds that they do.
Rather, the United States asserts that Plaintiffs cannot satisfy

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the causation requirement because the Enterprises took the
position that PACE debt obligations were incompatible with their

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uniform security instruments in their May 5, 2010 letters, before

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the FHFA issued its July 6, 2010 statement.

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argues that Plaintiffs have alleged no facts suggesting that the

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Enterprises would have altered their position if the FHFA had not

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The United States

issued its July statement.
With respect to redressability, the United States asserts

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that it is mere speculation that if the FHFA changed its policy on

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the PACE program, individuals would be able to obtain mortgages,

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or refinance existing mortgages, on properties encumbered by PACE9

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related debt obligations.

The United States further argues that

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it is speculative that the notice and comment process would change

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the FHFA's and the Enterprises' position with respect to PACE

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programs.

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Plaintiffs claim procedural as well as substantive injury.
"A showing of procedural injury lessens a plaintiff's burden on
the last two prongs of the Article III standing inquiry, causation

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and redressability."

Salmon Spawning & Recovery Alliance v.

United States District Court
For the Northern District of California

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Gutierrez, 545 F.3d 1220, 1226 (9th Cir. 2008).

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has explained that

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The Supreme Court

a litigant to whom Congress has accorded a procedural
right to protect his concrete interests . . . can
assert that right without meeting all the normal
standards for redressability and immediacy. When a
litigant is vested with a procedural right, that
litigant has standing if there is some possibility
that the requested relief will prompt the injurycausing party to reconsider the decision that
allegedly harmed the litigant.
Massachusetts v. EPA, 549 U.S. 497, 517-18 (2007) (internal

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quotation marks and citations omitted).

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that an agency has failed to follow procedural requirements in

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considering the environmental impact of its action, for purposes

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of redressability, "[i]t suffices that . . . the [agency's]

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Where a plaintiff asserts

decision could be influenced by the environmental considerations
that [the relevant statute] requires an agency to study."

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Citizens for Better Forestry v. USDA, 341 F.3d 961, 976 (9th Cir.

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2003) (alterations and emphasis in original, internal quotation

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marks omitted); Natural Resources Defense Council, Inc. v. EPA,
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638 F.3d 1183, 1189 n.3 (9th Cir. 2011); Salmon Spawning, 545 F.3d

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at 1226-27; Sierra Forest Legacy v. United States Forest Service,

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652 F. Supp. 2d 1065, 1078 (N.D. Cal. 2009).

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plaintiff alleging a substantive violation must demonstrate that

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its injury would likely be redressed by a favorable court

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decision."

In contrast, "a

Salmon Spawning, 545 F.3d at 1228.

With regard to causation, Plaintiffs have alleged a

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sufficient connection between Defendants' actions and the

United States District Court
For the Northern District of California

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thwarting of PACE programs and their anticipated benefits.

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hold otherwise would suggest that Congress imposed procedural

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requirements that have no meaningful effect.

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Better Forestry, 341 F.3d at 973.

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To

See Citizens for

Although the FHFA's July 2010 statement was issued after
Fannie Mae and Freddie Mac's May 2010 announcements to their

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sellers and servicers, the FHFA had publicized its concerns in the
prior, June 2009, letter.

Fannie Mae, in turn, cited that letter

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as it raised caution about PACE programs in its September 2009

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Lender Letter.

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31, 2010 announcements that they would not purchase PACE-

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encumbered mortgages originated on or after July 6, 2010, were

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In addition, Fannie Mae's and Freddie Mac's August

issued in response to the FHFA's statement.
Further, Plaintiffs' claims of procedural violations are

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redressable.

If the statutorily mandated procedures were

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followed, Plaintiffs' interests could be protected by a resulting

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change in the FHFA, Fannie Mae and Freddie Mac's policy, spurring
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lenders to renew financing of PACE-encumbered properties.

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Plaintiffs have alleged that, prior to the July 2010 statement,

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PACE programs were operational and PACE participants were able to

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refinance their mortgages.

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FHFA's July 2010 statement and the Enterprises' announcements, the

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They further allege that, after the

programs faltered and participants became unable to refinance or
transfer their properties without paying off the PACE debt in

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full.

FAC ¶ 35.

Accepting the allegations as true, the financing

United States District Court
For the Northern District of California

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and benefits previously afforded by PACE programs could be renewed

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as a result of new information gleaned through the notice and

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comment and environmental review processes and a resulting change

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in Defendants' position and related marketplace practices.

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Although Plaintiffs' substantive claims are subject to
greater scrutiny with regard to Article III standing requirements,

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the causation and redressability requirements are adequately
plead.

The alleged reaction of the marketplace to Defendants'

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actions and the rapid demise of PACE programs establish a

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sufficient causal connection between Defendants' actions and

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Plaintiffs' purported injury.

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alleged because, if the FHFA’s policy were set aside as arbitrary

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Redressability is sufficiently

and capricious, it is likely that financing streams would be
renewed.

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This case is distinguishable from Levine v. Vilsack, 587 F.3d

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986 (9th Cir. 2009), a case upon which the United States relies to

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argue that Plaintiffs' claims are not redressable.
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In Levine, the

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plaintiffs brought suit against the Secretary of Agriculture,

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alleging that the agency's interpretive rule excluding poultry

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from the Humane Methods of Slaughter Act (HMSA) was arbitrary and

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capricious under the APA.

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inhumane slaughter of poultry under the HMSA, but the statute

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The plaintiffs sought to block the

lacked an enforcement provision.

Id. at 989.

Plaintiffs' goal

would be achieved only if the Secretary proceeded to add poultry

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to the list of protected species under the Federal Meat Inspection

United States District Court
For the Northern District of California

10

Act, a separate statute which was not at issue in the case.

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at 993-95.

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Secretary would do so and whether resulting regulations would make

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the slaughter of poultry more humane.

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Id.

The court reasoned that it was speculative whether the

Id. at 996-97.

The present actions differ because further action by a
federal agency would not be required to achieve Plaintiffs' goals.

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Plaintiffs have alleged that PACE encumbrances were treated like
tax assessments until the FHFA took the actions it did.

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Plaintiffs adequately allege that a change in the FHFA's policy

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would lead to a return previous marketplace practices.

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Accordingly, Plaintiffs' claims sufficiently allege the
injury in fact, causation and redressability necessary to
establish standing at this stage of the litigation.
B. Statutory Preclusion of Judicial Review

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Defendants argue that, pursuant to Federal Rule of Civil

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Procedure 12(b)(1), the present actions should be dismissed for

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lack of subject matter jurisdiction.
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Specifically, Defendants

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assert that three statutory provisions--12 U.S.C. §§ 4617(f),

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4635(b), and 4623(d)--preclude judicial review of Plaintiffs'

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claims for relief.

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The courts have long recognized a presumption in favor of
judicial review of administrative actions.

Love v. Thomas, 858

F.2d 1347, 1356 (9th Cir. 1988) (citing Block v. Community
Nutrition Inst., 467 U.S. 340, 349-51 (1984)).

The presumption

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may be overcome by various means, including "specific language or

United States District Court
For the Northern District of California

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specific legislative history that is a reliable indicator of

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congressional intent" or "by inference of intent drawn from the

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statutory scheme as a whole."

Block, 467 U.S. at 349.

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Although "great weight" is ordinarily given to an agency's

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interpretation of a statute it is charged with enforcing, "that

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deference does not extend to the question of judicial review, a

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matter within the peculiar expertise of the courts."

Love, 858

F.2d at 1352 n.9.
The Court considers whether any of the three provisions
preclude its authority to hear Plaintiffs' claims.
1. Section 4617(f)
Section 4617(a) authorizes the appointment of the FHFA as
conservator or receiver for a regulated entity under certain
circumstances.

12 U.S.C. § 4617(a).

As conservator, the FHFA

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immediately succeeds to "all rights, titles, powers, and

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privileges of the regulated entity, and of any stockholder,

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officer, or director of such regulated entity" with respect to the
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1

entity and its assets.

12 U.S.C. § 4617(b)(2)(A).

The FHFA may

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take over assets and operate the entity subject to its

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conservatorship, collect all obligations and money due, perform

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all functions of the regulated entity in its name consistent with

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the FHFA's appointment as conservator, and preserve and conserve

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the entity's assets and property.

12 U.S.C. § 4617(b)(2)(B)(i)-

(iv).

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Section 4617(f) limits judicial review of such actions,

United States District Court
For the Northern District of California

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stating that "no court may take any action to restrain or affect

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the exercise of powers or functions of the Agency as a conservator

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or a receiver."

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interpreting Section 4617(f).

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the language in the provision is similar to 12 U.S.C. § 1821(j),

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12 U.S.C. § 4617(f).

There is little case law

However, the parties recognize that

which limits judicial review of actions taken by the Federal

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Deposition Insurance Corporation (FDIC) in its capacity as a
conservator or receiver.

Sahni v. American Diversified Partners,

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83 F.3d 1054, 1058-59 (9th Cir. 1996).

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"no court may take any action," except at the request of the FDIC

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Board of Directors by regulation or order, "to restrain or affect

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the exercise of powers or functions of the [FDIC] as a conservator

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or a receiver."

That provision states that

12 U.S.C. § 1821(j).

The Ninth Circuit has stated, "The bar imposed by § 1821(j)

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does not extend to situations in which the FDIC as receiver

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asserts authority beyond that granted to it as a receiver."

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Sharpe v. FDIC, 126 F.3d 1147, 1155 (9th Cir. 1997) (citing
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National Trust for Historic Preservation v. FDIC, 995 F.2d 238,

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240 (D.C. Cir. 1993), judgment vacated, 5 F.3d 567 (D.C. Cir.

3

1993), reinstated in relevant part, 21 F.3d 469 (D.C. Cir. 1994)).

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In Sharpe, the Ninth Circuit held that the FDIC, in breaching a

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contract, did not act within its statutorily defined receiver

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powers to disaffirm or repudiate contracts; the court was
permitted to review the plaintiffs' breach of contract claim

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United States District Court
For the Northern District of California

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against the FDIC.
The FHFA contends that it issued its July 2010 statement and

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February 2011 letter as conservator of the Enterprises.

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Plaintiffs respond that Defendants' actions amount to substantive

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rule-making, and that rule-making is not a part of the FHFA's role

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as conservator.

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The FHFA has directed Fannie Mae and Freddie Mac

prospectively to refrain from purchasing any mortgage loan secured

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by property with an outstanding PACE obligation.

This appears to

amount to substantive rule-making.
Distinct from the FHFA's powers as a conservator or receiver,

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it has supervisory and regulatory authority over Fannie Mae,

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Freddie Mac and the Federal Home Loan Banks, the regulated

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entities.

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See 12 U.S.C. § 4511(b); § 4513b; § 4513(a)(1)(A),

(B)(i)-(v).
Therefore, the Court must next consider whether the FHFA's

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rule-making is pursuant to its authority as a conservator, or to

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its supervisory or regulatory authority.

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explained that, "in interpreting a statute, the court will not
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The Ninth Circuit has

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look merely to a particular clause in which general words may be

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used, but will take in connection with it the whole statute (or

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statutes on the same subject) and the objects and policy of the

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law."

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1209, 1219 (9th Cir. 1987) (internal quotation marks omitted).

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7

Morrison-Knudsen Co., Inc. v. CHG Int'l, Inc., 811 F.2d
In

Morrison-Knudsen, the Ninth Circuit declined to hold that the
Federal Savings and Loan Insurance Corporation's authority to

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9

adjudicate creditor claims was in keeping with the ordinary

United States District Court
For the Northern District of California

10

functions of a receiver.

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that the language in the relevant statute failed to enumerate, and

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the statutory scheme did not support, the power to adjudicate

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creditor claims.

14
15

Id. at 1217.

The Ninth Circuit found

Id. at 1218-20.

Here, it is clear from the statutory scheme overall and other
provisions of section 4617 that Congress distinguished between the

16
17
18
19

FHFA's powers as a conservator and its authority as a regulator,
and did not intend that the former would subsume the latter.
Specific provisions of section 4617 include the phrase, "The

20

agency may, as conservator . . .," in reference to the FHFA's

21

authority in that role, while other provisions addressing the

22

FHFA's regulatory powers do not contain analogous language.

23

Compare 12 U.S.C. § 4617(b)(1) and (2)(C) with § 4617(b)(2)(A),

24
25
26
27
28
17

1

(B), (G), (H), (I)(i)(I) and (J)4 and § 4617(b)(4).

Section

2

4617(b) indicates that Congress intended to enumerate the FHFA's

3

powers and duties as a conservator, while delegating other duties

4

to the FHFA's regulatory authority.

5

substantive rulemaking as a conservatorship power.

6

The statute does not identify

The cases upon which Defendants rely to assert that the

7
8
9

FHFA's powers as a conservator are "sweeping" and "broad," such
that its July 2010 statement and February 2011 letter escape

United States District Court
For the Northern District of California

10

judicial review, are inapposite.

11

typical of the ordinary day-to-day functions of an agency acting

12

as conservator or receiver.

13

1394 (D.C. Cir. 1995) (holding that, pursuant to 12 U.S.C.

14

The cases address FHFA actions

See e.g., Freeman v. FDIC, 56 F.3d

§ 1821(j), the court was precluded from taking any action that

15
might restrain the FDIC from conducting a nonjudicial foreclosure
16
17

sale of assets acquired from a failed bank); National Trust, 995

18

F.2d at 239-41 (holding that a lawsuit to enjoin the FDIC's sale

19

to liquidate assets was precluded by § 1821(j)); Hindes v. FDIC,

20

137 F.3d 148, 160 (3rd Cir. 1998) (precluding an order voiding

21

FDIC action in its corporate capacity, which triggered a state

22

agency to close a bank and appoint the FDIC as receiver);

23

Telematics International, Inc. v. NEMLC Leasing Corp., 967 F.2d

24
25
26
27
28

Although section 4617(b)(2)(J) is worded as a broad,
catchall provision, given the overall scheme of section 4617, it
would be incorrect to find that section 4617(b)(2)(J) authorizes
the FHFA to do anything and everything, including engaging in
rule-making, as a conservator.
4

18

1

703, 707 (1st Cir. 1992) (precluding plaintiff from attaching a

2

certificate of deposit held by a bank because the attachment would

3

impede the FDIC from attaching the asset); Save Our Wetlands, Inc.

4

v. State of La., Landmark Lands Co., 1996 WL 194924, *2-3 (E.D.

5

La.) (stating that disposition of a failed institution's assets is

6
7

a power of a receiver, and a challenge to title of a property
directly affects the receiver's function); Pyramid Const. Co.,

8
9

Inc. v. Wind River Petroleum, Inc., 866 F. Supp. 513, 518-19 (D.

United States District Court
For the Northern District of California

10

Utah 1994) (precluding an order to rescind the Resolution Trust

11

Corporation's sale of a parcel and force transfer of that parcel

12

from one private party to another); Furgatch v. Resolution Trust

13

Corp., 1993 WL 149084, *2 (N.D. Cal.) (precluding injunction

14

against a bank and trustee to prevent a foreclosure sale because

15

it would indirectly enjoin a foreclosure by the RTC in its role as

16
17
18

conservator).
Substantive rule-making is not appropriately deemed action

19

pursuant to the FHFA's conservatorship authority.

20

policy-making with respect to PACE programs does not involve

21

succeeding to the rights or powers of the Enterprises, taking over

22

their assets, collecting money due or operating their business.

23
24

Given the presumption in favor of judicial review, section 4617(f)
does not preclude review of the July 2010 statement and February

25
26

The FHFA's

2011 letter.

27
28
19

2.

1
2

Section 4623(d)

The FHFA argues that its July 2010 statement was exempt from

3

judicial review pursuant to 12 U.S.C. § 4623(d), which restricts

4

judicial review of any action taken under section 4616(b)(4).

5

Section 4616(b)(1) through (4) describes supervisory actions that

6

5

the FHFA Director may take with respect to "significantly

7
8
9

undercapitalized" regulated entities.

Section 4616(b)(4)

authorizes the Director to require a "significantly

United States District Court
For the Northern District of California

10

undercapitalized" regulated entity "to terminate, reduce, or

11

modify any activity that the Director determines creates excessive

12

risk to the regulated entity."

13

establishes a tiered system of classification of the

14

The Safety and Soundness Act

capitalization of the regulated entities; "significantly

15
undercapitalized" is the second lowest of the four tiers.

See 12

16
17
18

U.S.C. § 4614(a) and (b)(1)(C).
It is not clear that the FHFA acted pursuant to section

19

4616(b)(4) because it could have done so only if it found that

20

Defendants assert that Title 12 U.S.C. sections 4623(d) and
section 4635(b) preclude judicial review of the July 2010
statement, as alternative arguments to their contention that
section 4617(f) bars review. The FHFA issued its February 2011
letter after the parties completed briefing on Defendants' motions
to dismiss, and the Court permitted supplemental briefing to
address the February 2011 letter. Defendants did not argue that
12 U.S.C. §§ 4635(b) and 4623(d) also apply to the February 2011
letter. They took the position that section 4617(f) precluded
review of the February 2011 letter because it was issued expressly
in the FHFA's capacity as conservator of Fannie Mae and Freddie
Mac. Docket No. 105 and 107. Accordingly, the Court does not
address 12 U.S.C. §§ 4635(b) or 4623(d) with respect to the
February 2011 letter.

21
22
23
24
25
26
27
28

5

20

1

Fannie Mae, Freddie Mac and the Federal Home Loan Banks were

2

significantly undercapitalized.

3

the FHFA imposed such a classification.

4

entity may be placed into FHFA conservatorship on grounds apart

5

from its capital classification, it is not possible to infer from

6
7

Defendants have not shown that
Because a regulated

Fannie Mae or Freddie Mac's conservatorship that they were
classified as significantly undercapitalized.

Nothing in the July

8
9

2010 statement refers to section 4616(b)(4), or makes reference to

United States District Court
For the Northern District of California

10

undercapitalization.

Thus, section 4623(d) does not limit the

11

Court's jurisdiction to hear Plaintiffs' claims.

12

3. Section 4635(b)

13

The FHFA contends that it issued its July 2010 statement

14

pursuant to its enforcement authority6 and, thus, under 12 U.S.C.

15
§ 4635(b), the action is beyond the Court's purview.

Section

16
17

4635(b) bars judicial review of the "issuance or enforcement of

18

any notice or order" under 12 U.S.C. § 4624(b) and (c).

19

4624(b) and (c) authorize the FHFA to issue orders to "make

20

temporary adjustments to the established standards for an

21

enterprise or both enterprises" and to "require an enterprise,

22

under such terms and conditions as the Director determines to be

23
appropriate, to dispose of or acquire any asset . . ."

Sections

12 U.S.C.

24
25

§ 4624(b)-(c).

26
27
28

Again, Defendants do not appear to argue that the February
2011 letter was issued under this authority.
6

21

1

Neither sections 4624(b) nor (c) applies to the July 2010

2

statement.

3

not solely the Enterprises.

4

section 4624(b) or any established standard that the FHFA sought

5

to adjust.

6
7

The statement was directed to the regulated entities,
The statement does not refer to

Defendants now assert that the relevant standard that

the FHFA sought to modify is set forth in 12 C.F.R. § 1252.1, a
regulation mandating the Enterprises to comply with the portfolio

8
9

holdings criteria established in their respective Senior Preferred

United States District Court
For the Northern District of California

10

Stock Purchase Agreements with the Department of Treasury.

11

However, the July 2010 statement did not adjust the Stock Purchase

12

Agreements; those agreements simply addressed the amount of

13

mortgage assets that the Enterprises must hold in their

14

portfolios.

15

Finally, section 4624(c) does not avail Defendants

because the July 2010 statement did not order the acquisition or

16
17
18

disposal of assets.

Thus, if anything, the statement appears to

fall under the authority of section 4624(a), which provides that

19

the FHFA Director "shall, by regulation, establish criteria

20

governing the portfolio holdings of the enterprises . . ."

21

would seem to support Plaintiffs' argument that the FHFA's action

22

amounted to substantive rule-making.

23
24

This

Accordingly, 12 U.S.C. § 4635(b) does not restrict this
Court's jurisdiction over Plaintiffs' claims.

25
26
27

In sum, none of the three statutory provisions upon which
Defendants rely--12 U.S.C. § 4617(f), 12 U.S.C. § 4623(d) or 12

28
22

1

U.S.C. § 4635(b)--applies to the FHFA's policy on PACE financing.

2

Plaintiffs' actions are not precluded on these grounds.

3

II. Motion to Dismiss for Failure to State a Claim

4

A. Administrative Procedures Act

5

Plaintiffs allege that the FHFA's policy statements7 on PACE

6

obligations failed to comply with the notice and comment

7
8
9

requirements of, and was arbitrary and capricious in violation of,
the APA, 5 U.S.C. §§ 553, 706(2)(D).
1. Judicial review under the APA

United States District Court
For the Northern District of California

10
11

To invoke judicial review of agency action under the APA,

12

Plaintiffs must demonstrate prudential standing.

13

requirement is distinct from Article III standing, in that it is a

14

This standing

"purely statutory inquiry" to determine "whether a particular

15
plaintiff has been granted a right to sue by the statute under
16
17

which he or she brings suit."

City of Sausalito v. O'Neil, 386

18

F.3d 1186, 1199 (9th Cir. 2004).

19

prudential standing under the APA, 'the interest sought to be

20

protected by the complainant [must be] arguably within the zone of

21

interests to be protected or regulated by the statute . . . in

22

question.'"

23

"For a plaintiff to have

Nat'l Credit Union Admin. v. First National Bank &

Trust Co., 522 U.S. 479, 488 (1998) (alteration in original).

The

24
25
26
27
28

Plaintiffs assert that the February 2011 letter, as well as
the July 2010 statement, are unlawful under the APA; Defendants'
supplemental briefing did not address the APA issues as they
relate to the February 2011 letter. The Court assumes that the
APA analysis of the July 2010 statement applies equally to the
February 2011 letter.
7

23

1

test requires that "we first discern the interest 'arguably . . .

2

to be protected' by the statutory provision at issue; we then

3

inquire whether the plaintiff's interests affected by the agency

4

action in question are among them."

5

zone of interest test, "there does not have to be an 'indication

6
7

Id. at 492.

To satisfy the

of congressional purpose to benefit the would-be plaintiff.'"

Id.

A plaintiff is outside a provision's zone of interest where "the

8
9

plaintiff's interests are so marginally related to or inconsistent

United States District Court
For the Northern District of California

10

with the purposes implicit in the statute that it cannot

11

reasonably be assumed that Congress intended to permit the suit."

12

Clarke v. Securities Industry Ass’n, 479 U.S. 388, 399 (1987).

13

The test is not "especially demanding."

14
15

Id. at 399.

With regard to the first factor in the zone of interest test,
the parties agree that the paramount goal of the Safety and

16
17
18
19

Soundness Act is to protect the stability and ongoing operation of
the residential mortgage market.
California and the municipalities are arguably within the

20

Safety and Soundness Act’s zone of interests because the housing

21

mortgage market operates alongside a system of laws and

22

assessments that California and the municipalities have erected.

23
24

Although Congress has not expressed a specific purpose to benefit
state and local governments through the Safety and Soundness Act,

25
26

California and the municipalities' interests are affected by the

27

Act and are consistent with its purposes.

28

Plaintiffs share an interest in a safe and sustainable secondary
24

The governmental

1

mortgage market and suffer as a result of a faltering mortgage

2

market.

3

reversed the longstanding treatment of local assessments in

4

mortgage lending, thwarted California and the municipalities' PACE

5

programs, and curtailed access to mortgages for residents who

6
7

Defendants' actions, pursuant to the Act, have allegedly

participate in the programs.

Although there is a potential for

disruption inherent in allowing every party adversely affected by

8
9

Defendants' actions to seek judicial review, California and the

United States District Court
For the Northern District of California

10

municipalities are well-positioned to represent the public

11

interest reliably without undermining the Act's objectives.

12

Clarke, 479 U.S. at 397 n.12 (stating that the ability of a

13

plaintiff to serve as a "reliable private attorney general" is

14

relevant to the zone of interest test.)

15

See

The Sierra Club, however, bears a significantly less direct

16
17
18

relationship to the mortgage market.

The environmental interests

the Sierra Club asserts, even taking account of the Act's public

19

interest provision, are too attenuated from the Act's central

20

purpose to find prudential standing under the APA for the

21

organization on that basis.

22
23
24

Defendants also argue that Plaintiffs have failed to allege a
final agency action.

Under the APA, judicial review is only

permissible for final agency action.

5 U.S.C. § 704.

"For an

25
26

agency action to be final, the action must (1) 'mark the

27

consummation of the agency's decisionmaking process' and (2) 'be

28

one by which rights or obligations have been determined, or from
25

1

which legal consequences will flow.'"

Oregon Natural Desert Ass'n

2

v. United States Forest Service, 465 F.3d 977 (9th Cir. 2006).

3

determine whether the consummation prong of the test has been

4

satisfied, the court must make a pragmatic consideration of the

5

effect of the action, not its label.

6
7

Id. at 982, 985.

To

The

finality requirement is satisfied when an agency action imposes an
obligation, denies a right, or fixes some legal relationship as a

8
9

consummation of the administrative process.

Id. at 986-87.

"An

United States District Court
For the Northern District of California

10

agency action may be final if it has a 'direct and immediate . . .

11

effect on the day-to-day business' of the subject party."

12

987 (alteration in original).

13
14
15

Id. at

The FHFA presented its July 2010 statement as the
consummation of a decision-making process that involved “careful
review” and “over a year of working with federal and state

16
17
18

government agencies.”

FAC, Ex. A, at 10.

The statement was

designed to "pause" PACE programs nation-wide.

See id.

The day

19

the statement was issued, the FHFA's counsel sent it to the

20

California Attorney General.

21

because it immediately imposed on the regulated entities

22

obligations to take certain prudential actions.

23
24

The statement had a legal effect

Fannie Mae and

Freddie Mac promptly responded on August 31, 2010, publishing
announcements to industry lenders that they would no longer

25
26

purchase mortgage loans originated on or after July 6, 2010,

27

secured by properties with an outstanding PACE obligation.

28

Act authorizes the FHFA Director to take enforcement action
26

The

1

against regulated entities to police their lawful operation.

See

2

e.g., 12 U.S.C. § 4631(a)(1).

3

distinguishable from Fairbanks North Star Borough v. Army Corps of

4

Engineers, 543 F.3d 586, 593-97 (2008), and Hindes, 137 F.3d at

5

162-63.

6
7

Thus, the present case is

The July 2010 statement indicated the FHFA's final stance

on PACE obligations, and the February 2011 letter reiterated that
policy, thus demonstrating a final agency action by the FHFA

8
9

subject to review under the APA.
2. Notice and comment requirement

United States District Court
For the Northern District of California

10
11

Title 12 U.S.C. § 4526(b) provides that any regulations

12

issued by the FHFA Director pursuant to the agency's general

13

regulatory authority shall comply with the APA's requirements for

14

notice and comment.

15

"Interpretative rules," however, are exempt

from the APA's notice and comment requirements.

5 U.S.C.

16
17
18

§ 553(b)(3)(A).

This exemption is narrowly construed.

Flagstaff

Medical Center, Inc. v. Sullivan, 962 F.2d 879, 885 (9th Cir.

19

1992).

20

imposed on orders that result from an agency adjudication.

21

Terrace Community Council v. Cisneros, 37 F.3d 442, 448 (9th Cir.

22

1994).

23
24

Likewise, the notice and comment requirements are not
Yesler

An interpretive rule is one "'issued by an agency to advise
the public of the agency's construction of the statutes and rules

25
26

which it administers.'"

Erringer v. Thompson, 371 F.3d 625, 630

27

(9th Cir. 2004) (citing Shalala v. Guernsey Mem'l Hosp., 514 U.S.

28

87, 88 (1995)).

"Because they generally clarify the application
27

1

of a law in a specific situation, they are used more for

2

discretionary fine-tuning than for general law making."

3

Flagstaff, 962 F.2d at 886.

4

sometimes referred to as legislative rules, "create rights, impose

5

obligations, or effect a change in existing law pursuant to

6
7

On the other hand, substantive rules,

authority delegated by Congress."

Erringer, 371 F.3d at 630.

"There is no bright-line distinction between interpretative and

8
9

substantive rules."

Flagstaff, 962 F.2d at 886.

A court need not

United States District Court
For the Northern District of California

10

accept an agency's characterization of its rule at face value.

11

Hemp Industries Ass'n v. DEA, 333 F.3d 1082, 1087 (9th Cir. 2003).

12

That the FHFA's policy amounted to substantive rulemaking is

13

supported by the FHFA's handling of another issue: Guidance it

14

recently proposed to issue with respect to private transfer fee

15

covenants.

On August 16, 2010, the FHFA published a notice and

16
17
18

request for comments in the Federal Register concerning the
proposed Guidance that the regulated entities "should not deal in

19

mortgages on properties encumbered by private transfer fee

20

covenants" because "[s]uch covenants appear adverse to liquidity,

21

affordability and stability in the housing finance market and to

22

financially safe and sound investments."

23
24

16, 2010).

In this analogous instance, the FHFA apparently deemed

it appropriate to comply with the APA notice and comment

25
26

75 Fed. Reg. 49932 (Aug.

requirements.

27
28
28

1

The Court finds that the FHFA's policy on PACE obligations

2

amounts to substantive-rulemaking, not interpretive rule-making

3

that would be exempt from the notice and comment requirement.

4

Defendants also argue that the APA's notice and comment

5

requirements do not apply because the July 2010 statement was an

6
7

order resulting from an adjudication.

Yesler explains that

"adjudications resolve disputes among specific individuals in

8
9

specific cases [and] . . . have an immediate effect on specific

United States District Court
For the Northern District of California

10

individuals (those involved in the dispute)."

11

(parenthetical in original).

12

prospective, and has a definitive effect on individuals only after

13

the rule subsequently is applied."

14

not refer to a specific homeowner seeking a mortgage, or to a

15

group of PACE participants.

37 F.3d at 448

"Rulemaking, in contrast, is

Id.

The FHFA's policy does

It is a prospective, generally

16
17
18
19
20

applicable directive.

Accordingly, it would be inappropriate to

apply the adjudication exemption from the APA's notice and comment
requirements to the actions of which Plaintiffs complain.
3. Arbitrary and capricious action--discretionary act
exemption

21
22

In addition to their procedural claim under the APA,

23

Plaintiffs allege a substantive claim that the FHFA's policy is

24

arbitrary and capricious.

25

and capricious action is exempt from judicial review when the

26

challenged action is "committed to agency discretion by law."

27

U.S.C. § 701(a)(2).

Under the APA, a claim for arbitrary

In the Ninth Circuit there are two

28
29

5

1
2

circumstances in which judicial review is foreclosed by
§ 701(a)(2).

8

The first of these of circumstances is that in which a
court would have no meaningful standard against which
to judge the agency's exercise of discretion and there
thus is no law to apply. The second such circumstance
is that in which the agency's action requires a
complicated balancing of a number of factors which are
peculiarly within [the agency's] expertise, including
the prioritization of agency resources, likelihood of
success in fulfilling the agency's statutory mandate,
and compatibility with the agency's overall policies.

9

Newman v. Apfel, 223 F.3d 937, 943 (9th Cir. 2000)(internal

3
4
5
6
7

United States District Court
For the Northern District of California

10

quotation marks and citations omitted, alteration in original).

11

In section 4526(b), the Safety and Soundness Act expressly

12
13

adopts the requirements of the APA with respect to its regulatory

14

actions, giving rise to a presumption of judicial oversight.

15

U.S.C. § 4526(b).

16

embodies a 'basic presumption of judicial review.'").

17

FHFA has "wide discretion" does not establish that it may justify

18

its choices on "specious grounds."

19

12

See Newman, 223 F.3d at 943 ("[T]he APA

Id.

That the

The Ninth Circuit has

"emphasized that § 701(a)(2) stakes out 'a very narrow

20
exception.'"

Id. (citing Citizens to Preserve Overton Park v.

21
22

Volpe, 401 U.S. 402, 410 (1971)).
In Newman, the Ninth Circuit approved judicial review of

23
24

Social Security regulations defining the statutory terms,

25

"reliable" and "currently available" information.

26

943.

27

available, pursuant to the regulation, a different method of

223 F.3d at

When certain information was deemed reliable and currently

28
30

1

calculating Supplemental Security Income benefits would apply.

2

Id. at 939.

3

definitions of the terms "reliable" and "currently available" were

4

arbitrary and capricious.

5

that the claim was subject to judicial review.

6
7

The plaintiff claimed that the regulation's

The Ninth Circuit agreed, after holding
The court reasoned

that the definition and application of the two statutory terms,
and of the terms "arbitrary" and "capricious," did not defy

8
9

"meaningful review" or involve a complicated balancing of a number

United States District Court
For the Northern District of California

10

of factors "peculiarly within the agency's expertise."

11

943.

12

The same reasoning applies to the present case.

Id. at

Plaintiffs'

13

claims would require the Court to determine whether the FHFA's

14

decision to treat debt obligations arising from PACE programs as

15

assessments, rather than loans, was arbitrary and capricious.

16
17
18
19
20

Under this limited review, the claims do not oblige the Court to
evaluate whether the FHFA arrived at the correct conclusion, as a
matter of policy.
The FHFA action challenged here is unlike the agency actions

21

disputed in cases in which courts have found review precluded.

22

See e.g., Lincoln v. Vigil, 508 U.S. 182 (1993) (agency's

23
24

allocation of a lump-sum appropriation); Heckler v. Chaney, 470
U.S. 821, 831 (agency's decision not to institute enforcement

25
26

proceedings); Center for Policy Analysis on Trade and Health v.

27

Office of the United States Trade Representative, 540 F.3d 940,

28

947 (9th Cir. 2008) (political question regarding committee
31

1

membership).

The FHFA's obligation to consider the impact of the

2

PACE programs in a manner that is not arbitrary or capricious does

3

not involve a complicated political calculus or the balancing of

4

multiple factors so peculiarly within the agency's expertise that

5

judicial review is unwarranted.

6
7

In sum, the FHFA's July 2010 statement and February 2011
letter are not insulated from judicial review for arbitrariness by

8
9

the discretionary act exemption.

United States District Court
For the Northern District of California

10

B. NEPA Claims

11

California, Sonoma County, Palm Desert and the Sierra Club

12

assert claims for violation of the NEPA based on the FHFA's

13

failure to consider the environmental impact of its actions.8

14

Defendants move to dismiss the NEPA causes of action for failure

15
to state a claim.
16
17

The NEPA requires federal agencies to prepare a detailed

18

Environmental Impact Statement (EIS) for all "major Federal

19

actions significantly affecting the quality of the human

20

environment."

21

Inc. v. Water Supply, 295 F.3d 955, 959 (9th Cir. 2002).

22

alternative, an agency may prepare a more limited environmental

23

42 U.S.C. § 4332(2)(C); Ka Makani 'O Kohala Ohana,
In the

assessment (EA) concluding in a "Finding of No Significant

24
25
26
27
28

The parties' supplemental briefing did not address the NEPA
issues with regard to the February 2011 letter, which reaffirmed
the FHFA's July 2010 statement. The Court's NEPA analysis of the
July 2010 statement applies equally to the February 2011 letter.
8

32

1
2

Impact."

San Luis Obispo Mothers for Peace v. Nuclear Regulatory

Com'n., 449 F.3d 1016, 1020 (9th Cir. 2006).

3

"Because NEPA does not contain a separate provision for

4

judicial review, we review an agency's compliance with NEPA under

5

the Administrative Procedure Act . . ."

6
7

959.

Ka Makani, 295 F.3d at

This Court earlier held that Plaintiffs, other than the

Sierra Club, satisfied the zone of interest test under the APA

8
9

with respect to the Safety and Soundness Act.

The Court must now

United States District Court
For the Northern District of California

10

consider whether Plaintiffs are within the zone of interest sought

11

to be protected by the NEPA.

12

Norton, 420 F.3d 934, 939 (9th Cir. 2005).

13
14
15

See Ashley Creek Phosphate Co. v.

"NEPA's purpose is to protect the environment."
Better Forestry, 341 F.3d at 976.

Citizens for

The statute's "twin aims" are

to place upon a federal agency "the obligation to consider every

16
17
18

significant aspect of the environmental impact of a proposed
action" and "ensure that the agency will inform the public that it

19

has indeed considered environmental concerns in its decisionmaking

20

process."

21

Council, Inc., 462 U.S. 87, 97 (1983).

22

present actions asserting NEPA claims, including the Sierra Club,

23
24

Baltimore Gas and Elec. Co. v. Natural Resource Defense
All Plaintiffs in the

plainly seek to protect the environment and, as a result, the zone
of interest requirement is satisfied.

25
26

Defendants next contend that the adoption of the FHFA's PACE

27

policy was not a major federal action significantly altering the

28

quality of the human environment because Plaintiffs' alleged
33

1

environmental injury is not "fairly traceable" to the policy.

2

However, in making this argument Defendants incorrectly rely on

3

Lujan's discussion of Article III standing, 504 U.S. at 561,

4

rather than authority addressing prudential standing under the

5

APA.

6
7

Plaintiffs have adequately alleged that the FHFA's policy

has decimated PACE programs and significantly impacted the
environment by depriving California and its citizens of

8
9

United States District Court
For the Northern District of California

10

opportunities to improve water and energy conservation.
Nor does Northcoast Environmental Center v. Glickman, 136

11

F.3d 660 (9th Cir. 1998), demonstrate that Plaintiffs have failed

12

to satisfy the "major federal action" requirement.

13

presented a challenge to an inter-agency program that involved

14

activities that did not have an "actual or immediately threatened

15

Northcoast

effect," because they implicated setting guidelines and goals for

16
17
18

research, management strategies and information sharing, rather
than specific activities with a direct impact.

Id. at 669-70.

19

Here, however, Plaintiffs do not challenge such a broad program

20

involving activities preliminary to discrete agency action.

21

Relying on National Wildlife Federation v. Espy, 45 F.3d

22

1337, 1343 (9th Cir. 1995), Defendants also argue that the FHFA's

23
24

adoption of its PACE policy was not a major federal action because
it did not alter an environmental status quo, as required to

25
26

trigger obligations under the NEPA.

Defendants' reliance on

27

National Wildlife Federation is unavailing.

28

court found that the contested agency action did not alter the
34

In that case, the

1

environmental status quo because the grazing of a certain wetland

2

parcel was occurring before the agency transferred the parcel and

3

the transfer would simply allow a continuation of the grazing.

4

Id. at 1343-44.

5

changed the status quo by thwarting financing for PACE-encumbered

6
7

Here Plaintiffs allege that the FHFA's policy

properties, thus curtailing energy conservation efforts that were
ongoing beforehand.

The policy, by the terms of the July 2010

8
9

statement, aimed to place PACE programs on "pause," and changed

United States District Court
For the Northern District of California

10

the status quo by blocking these emerging environmental

11

conservation efforts, through the direction of marketplace

12

practices.

13

For purposes of this motion, Plaintiffs sufficiently allege

14

that the FHFA's policy entailed a major federal action under the

15

NEPA.

16
17
18

Finally, Defendants contend that environmental review would
serve no purpose because the FHFA is statutorily precluded from

19

altering its safety and soundness determinations based on

20

environmental concerns.

21

statute creates an "irreconcilable and fundamental conflict."

22

Flint Ridge Development Co. v. Scenic Rivers Ass'n of Okalhoma,

23
24

The NEPA gives way when a competing

426 U.S. 776, 788 (1976).
The FHFA's dual obligations to ensure that the regulated

25
26

entities operate safely and soundly and in the public interest do

27

not indicate that the agency's consideration of the environmental

28

impact resulting from its actions with regard to the PACE programs
35

1

is precluded.

Notably, the NEPA does not mandate results, but

2

simply requires a process by which the agency considers

3

environmental impact and informs the public of its decision-making

4

process.

5
6
7

Defendants argue that the FHFA was required to act without
regard to environmental concerns due to the national housing
crisis.

The FHFA, however, admittedly engaged in a year-long

8
9

review, consulting with various stakeholders.

Thus, Defendants

United States District Court
For the Northern District of California

10

cannot be heard to argue that the urgency of the crisis and the

11

FHFA's statutory duties created an insurmountable conflict with

12

NEPA's requirements.

13

an irreconcilable conflict because the relevant statute required a

14

time frame that did not permit NEPA compliance).

15

Cf., Flint Ridge, 426 U.S. at 791 (finding

Department of Transportation v. Public Citizen is not on

16
17
18

point.

There the Supreme Court found that an agency's EIS was not

required to include the environmental impact of Mexican motor

19

carriers entering the United States because the agency had no

20

authority to prevent the carriers from cross-border operations.

21

541 U.S. 752, 767 (2004).

22

bar to the FHFA's authority to consider environmental impacts.

23
24

Here, however, there is no categorical

Grand Council of the Crees v. Federal Energy Regulatory
Commission, 198 F.3d 950 (D.C. Cir. 2000), is inapposite because

25
26
27
28

it did not address the Safety and Soundness Act.
Because Plaintiffs have satisfied the zone of interest test
and alleged a major federal action that has altered the
36

1

environmental status quo, and because environmental considerations

2

are not precluded by the Safety and Soundness Act, Plaintiffs have

3

stated cognizable claims for violation of the NEPA.

4

C. Tenth Amendment Commerce Clause

5

Placer County claims that the FHFA violated the

6
7

Constitution's Tenth Amendment Commerce Clause by interfering with
the county's taxation and assessment powers.

Even if the FHFA

8
9

interfered with Placer County's authority, the FHFA's actions are

United States District Court
For the Northern District of California

10

not barred by the federal Commerce Clause.

11

that Congress may impede a State's power to tax, where the

12

enactment is a proper exercise of its constitutional authority.

13

McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 436 (1819).

14

recent case affirming a dismissal of a Tenth Amendment challenge

15

It is well established

In a

to a federal banking regulation, the Supreme Court stated,

16
17
18

"Regulation of national banking operations is a prerogative of
Congress under the Commerce and Necessary and Proper Clauses."

19

Watters v. Wachovia Bank, N.A., 550 U.S. 1, 22 (2007).

20

County's response that state and local laws authorizing PACE

21

programs do not attempt to regulate banks is unavailing because

22

its Tenth Amendment claim challenges the FHFA's action pursuant to

23
24

Placer

the Safety and Soundness Act.
Furthermore, Placer County concedes that its claim does not

25
26

arise from a theory that a federal program commandeered the

27

legislative process of the States by directly compelling them to

28

enact and enforce a federal regulatory program.
37

Yet it cites no

1

authority for the proposition that a federal agency's action that

2

indirectly interferes with a state or local sovereign's assessment

3

powers may form the basis for a Tenth Amendment claim.

4

Accordingly, Placer County's Tenth Amendment claim is dismissed.

5

Leave to amend is not warranted because Placer County's theory is

6
7

not cognizable.
D. Spending Clause

8
9

Where Congress grants money pursuant to its powers under the

United States District Court
For the Northern District of California

10

Constitution's Spending Clause, any conditions imposed on receipt

11

of the funds must be unambiguously authorized by Congress.

12

Pennhurst State School and Hosp. v. Halderman, 451 U.S. 1, 17

13

(1981).

14

Clause by placing conditions on PACE programs without clear

15

Placer County alleges that the FHFA violated the Spending

authorization from Congress to do so.

Defendants, however,

16
17
18

correctly point out that the FHFA's policy does not impose any
terms, let alone ambiguous requirements, for States and counties

19

to receive federal funds to support their PACE programs.

20

the policy directed the regulated entities to undertake

21

"prudential actions" with respect to the programs.

22

that makes a program more costly or difficult to operate, without

23
24

Rather,

A requirement

imposing a substantive condition not clearly required by Congress,
does not give rise to a Spending Clause violation.

See Winkelman

25
26

ex rel. Winkelman v. Parma City School Dist., 550 U.S. 516, 533-34

27

(2007).

Therefore, Placer County's Spending Clause claim is

28

dismissed without leave to amend.
38

E. Claim for Declaratory Relief

1
2

Plaintiffs seek declaratory relief in the form of an order

3

stating that, under California law, debt obligations created by

4

their PACE programs are assessments, not loans.

5

resolve the asserted substantive claims, but a claim for

6
7

The Court will

declaratory relief is not a means for a party independently to
seek court interpretations of legal terms.

Plaintiffs' claim for

8
9

United States District Court
For the Northern District of California

10

declaratory relief is dismissed without leave to amend.
III. State Law Claims
Plaintiffs’ state law claims are subject to dismissal due to

11
12

various deficiencies in their allegations that Defendants point

13

out.

14

law, the Court dismisses them without leave to amend for that

15

However, because the claims are clearly preempted by federal

reason.

Federal preemption arises under the Supremacy Clause of

16
17
18
19
20
21
22
23
24

the United States Constitution and applies in the following three
circumstances:
First, Congress may state its intent through an
express preemption statutory provision. Second, in
the absence of explicit statutory language, state law
is preempted where it regulates conduct in a field
that Congress intended the Federal Government to
occupy exclusively . . . Finally, state law that
actually conflicts with federal law is preempted.
Kroske v. U.S. Bank Corp., 432 F.3d 976, 981 (9th Cir. 2005)
(citing English v. General Elec. Co., 496 U.S. 72, 78-79 (1990)).

25
26

In general, there is a presumption against federal

27

preemption.

See id.

Here, the presumption against federal

28

preemption does not apply because there is a history of a
39

1

significant federal presence in the area of regulating the safety

2

and soundness of the Enterprises.

3

Corp., 514 F.3d 1001, 1005 (9th Cir. 2008).

4

based on an actual conflict arises "where it is impossible for a

5

private party to comply with both state and federal requirements,

6
7

See Silvas v. E*Trade Mortgage
Federal preemption

or where state law stands as an obstacle to the accomplishments
and execution of the full purposes and objectives of Congress."

8
9

English, 496 U.S. at 79 (internal citations removed).

Congress

United States District Court
For the Northern District of California

10

has established the FHFA to serve as the primary regulatory

11

authority supervising the Enterprises and the Federal Home Loan

12

Banks.

13

ability to establish uniform and consistent standards for the

14

regulated entities, and thwart its mandate to assure their safe

15

Exposure to state law claims would undermine the FHFA's

and sound operation.

If Plaintiffs’ state claims were not

16
17
18
19
20

preempted, liability based on these claims would create obstacles
to the accomplishment of the policy goals set forth in the Safety
and Soundness Act.
Plaintiffs argue, in the alternative, that a ruling on the

21

federal preemption defense is premature.

22

FHFA must make a factual showing that PACE-encumbered mortgages

23
24

They suggest that the

pose an actual obstacle to the purpose and goals of the Safety and
Soundness Act.

Plaintiffs do not cite any authority for requiring

25
26

such a showing, and it would defeat the purpose of conflict

27

preemption, which is to preserve the supremacy of federal law in

28

an area that Congress intended to occupy.
40

See Fidelity Federal

1

Savings and Loans Ass'n. v. de la Cuesta, 458 U.S. 141, 169-70

2

(1982).

3

showing.

4
5
6
7

Accordingly, preemption does not depend on such a

Plaintiffs’ state law claims are preempted by federal law and
are dismissed without leave to amend.
IV. Preliminary Injunction
Sonoma County has moved for a preliminary injunction, which

8
9

California has supported as amicus curiae.

Sonoma County requests

United States District Court
For the Northern District of California

10

that the status quo be restored by setting aside Defendants'

11

policies regarding PACE debt obligations.

12

the parties filed supplemental briefing on the balance of

13

hardships that might result from a narrower injunction directing

14

the FHFA merely to initiate the notice and comment process,

15

At the Court's request,

without changing its current policies.

16
17
18

“A plaintiff seeking a preliminary injunction must establish
that he is likely to succeed on the merits, that he is likely to

19

suffer irreparable harm in the absence of preliminary relief, that

20

the balance of equities tips in his favor, and that an injunction

21

is in the public interest.”

22

Inc., 555 U.S. 7, 19 (2008).

23
24

Winter v. Natural Res. Def. Council,
Alternatively, “a preliminary

injunction could issue where the likelihood of success is such
that serious questions going to the merits were raised and the

25
26

balance of hardships tips sharply in plaintiff's favor,” so long

27

as the plaintiff demonstrates irreparable harm and shows that the

28

injunction is in the public interest.
41

Alliance for the Wild

1

Rockies v. Cottrell, 632 F.3d 1127, 1131 (9th Cir. 2011) (citation

2

and internal quotation and editing marks omitted).

3

employ a sliding scale when considering a plaintiff's likelihood

4

of success on the merits and the likelihood of irreparable harm.

5

Id.

6
7

The court may

“Under this approach, the elements of the preliminary

injunction test are balanced, so that a stronger showing of one
element may offset a weaker showing of another."

Id.

8
9

Sonoma County has not demonstrated a likelihood that it will

United States District Court
For the Northern District of California

10

prevail on the merits to obtain the sweeping relief it initially

11

requested.

12

favor with regard to that relief.

13

established a likelihood that it will succeed in its efforts to

14

require the FHFA to comply with the APA's notice and comment

15

Nor does the balance of hardships tip sharply in its

requirements.

However, Sonoma County has

The balance of hardships tips sharply towards

16
17
18

Sonoma County in that the FHFA has failed to mention any prejudice
that would result if it were to proceed with the notice and

19

comment process, as long as it was not required to change its

20

policy in the meantime.

21

motion for a preliminary injunction requiring the FHFA, without

22

changing its current policy, to proceed with the notice and

23

Thus, the Court GRANTS Sonoma County's

comment process relating to its policy on PACE-related debts.

24

CONCLUSION

25
26

Plaintiffs have Article III standing, and the provisions of

27

the Safety and Soundness Act do not preclude judicial review of

28

Plaintiffs' claims.

Plaintiffs, except for the Sierra Club, may
42

1

pursue their claims for violations of the APA.

The Sierra Club's

2

APA claims are dismissed without leave to amend.

3

satisfied the requirements necessary to pursue claims for

4

violation of the NEPA.

5

Amendment and the Spending Clause and Plaintiffs' claims for

6
7

Plaintiffs have

Placer County's claims under the Tenth

declaratory relief are dismissed without leave to amend.
Plaintiffs' state law claims are preempted by federal law and are

8
9

dismissed without leave to amend.

Thus, Defendants' motions to

United States District Court
For the Northern District of California

10

dismiss are GRANTED IN PART AND DENIED IN PART.

11

Docket No. 49; C 10-03270, Docket Nos. 41 and 74; C 10-03317,

12

Docket No. 18; C 10-04482, Docket No. 13.

13
14
15

C 10-03084,

Sonoma County's motion for a preliminary injunction is
GRANTED IN PART.

C 10-03270, Docket No. 33.

The Court will, by a

separate order, require the FHFA, without withdrawing its July

16
17
18

2010 statement or its February 2011 letter, to proceed with the
notice and comment process with regard to those directives.

The

19

County shall submit a proposed form of order after submitting it

20

to Defendants for approval as to form.

21

IT IS SO ORDERED.

22
23
24

Dated: August 26, 2011

CLAUDIA WILKEN
United States District Judge

25
26
27
28
43