Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust v. Raines

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 23, 2008 Decided August 8, 2008

No. 07-7108

PIRELLI ARMSTRONG TIRE CORPORATION RETIREE MEDICAL
BENEFITS TRUST, DERIVATIVELY ON BEHALF OF FEDERAL
NATIONAL MORTGAGE ASSOCIATION AND WAYNE COUNTY
EMPLOYEES' RETIREMENT SYSTEM, DERIVATIVELY ON BEHALF
OF FEDERAL NATIONAL MORTGAGE ASSOCIATION,
APPELLANTS

v.

FRANKLIN D. RAINES, ET AL.,
APPELLEES

Appeal from the United States District Court
for the District of Columbia
(No. 04cv01783)

Randall J. Baron argued the cause for appellants. With
him on the briefs were Eric A. Isaacson and Benny C.
Goodman III.

Maureen E. Mahoney argued the cause for appellees.
With her on the briefs were Everett C. Johnson, Jr., J. Scott
Ballenger, Jeffrey W. Kilduff, Michael J. Walsh, Jr., Barbara
Van Gelder, James D. Wareham, James E. Anklam, John J.
 2
Clarke, Jr., Earl J. Silbert, James Hamilton, Rhonda D. Orin,
Daniel J. Healy, William K. Dodds, Stephanie A. Joyce,
Glenn B. Manishin, David E. Barry, William A. Krohley,
Christopher C. Palermo, Steven M. Salky, Eric Delinsky,
Holly A. Pal, Kevin M. Downey, and Paul Mogin. Barbara A.
Miller entered an appearance.

Before: TATEL, BROWN, and KAVANAUGH Circuit
Judges.

Opinion for the Court filed by Circuit Judge
KAVANAUGH, in which Circuit Judge TATEL joins.

Opinion concurring in the judgment filed by Circuit
Judge BROWN.

KAVANAUGH, Circuit Judge: In 2004, Fannie Mae
announced one of the largest corporate earnings restatements
in U.S. history. Numerous investigations and official reports
followed. The story of Fannie Mae told by these reports is
disturbing. It thus comes as no surprise that the Fannie Mae
accounting debacle has generated a wave of lawsuits. In this
case, certain Fannie Mae shareholders filed a derivative suit
on behalf of Fannie Mae against the Company’s directors.
The complaint targets the directors’ failure to prevent the
accounting irregularities. The complaint also challenges the
directors’ decision to approve severance arrangements for two
Fannie Mae officers, Franklin D. Raines and J. Timothy
Howard.

The parties agree that Delaware law provides the
substantive standards for evaluating plaintiffs’ complaint.
Shareholders ordinarily must make a demand on the
company’s board of directors in order to bring a derivative
suit. Although these shareholders did not make such a
demand, the law does not require demand when it would be
 3
futile. But consistent with the long-standing principle that
directors and not shareholders manage a corporation, the
Delaware precedents on demand futility make clear that the
bar is high, the standards are stringent, and the situations
where demand will be excused are rare.

Carefully applying the Delaware precedents, the District
Court found that plaintiffs’ complaint failed to meet the test
for demand futility and dismissed the case. We affirm.

I

Fannie Mae is a federally chartered corporation
authorized by Congress in 1934 and created in 1938. Initially
established as a public entity, Fannie Mae was privatized in
1968. Fannie Mae thus has shareholders, directors, and
officers like other non-governmental corporations.

Fannie Mae’s mission is to increase affordable housing
for moderate- and low-income families. It purchases
mortgages originated by other lenders and helps lenders
convert their home loans into mortgage-backed securities.
The goal is to provide stability and liquidity to the mortgage
market. This allows mortgage lenders to provide more loans,
thereby increasing the rate of homeownership in America.

During the summer of 2003, Fannie Mae’s sister
organization Freddie Mac disclosed accounting irregularities.
Shortly thereafter, the Office of Federal Housing Enterprise
Oversight, an Executive Branch agency, reviewed Fannie
Mae’s accounting. In September 2004, OFHEO released an
interim report that highlighted deficiencies in Fannie Mae’s
accounting policies, internal controls, and financial reporting.
OFHEO’s interim report led to an investigation by the
Securities and Exchange Commission. On December 15,
 4
2004, the SEC announced that it would require a $9 billion
earnings restatement by Fannie Mae.

Six days after the SEC’s announcement, two Fannie Mae
officers (CEO Franklin D. Raines and CFO J. Timothy
Howard) resigned. The Board did not fire Raines or Howard
for cause; as a result, they were able to leave the company
with approximately $31 million in severance benefits.

In late 2004, shareholders filed multiple derivative suits
on behalf of Fannie Mae against Fannie Mae’s directors. See
In re Fed. Nat’l Mortgage Ass’n Litig., 503 F. Supp. 2d 9, 13
(D.D.C. 2007). As relevant here, plaintiffs allege that Fannie
Mae’s Board of Directors failed to exercise sufficient
oversight to prevent the accounting violations. Plaintiffs also
contend that the outside directors on the Board should have (i)
terminated Raines and Howard for cause, thereby denying
them severance benefits, and (ii) sued to obtain disgorgement
of previous compensation Raines and Howard received.

Shareholders bringing a derivative suit first must make a
demand on the Board, in effect asking the Board to have the
corporation pursue the claims itself. The shareholders here
did not do so. They assert that demand is excused in this case
because a majority of the directors could not render a
disinterested and independent decision whether to pursue
those claims.1 The District Court found that demand was not
excused and dismissed the suit.2

1
The parties have agreed throughout the litigation that
Delaware law applies to the analysis in this case of the demand
requirement and the directors’ potential liability. That is because
the relevant Fannie Mae statute and regulation have been applied so
as to incorporate Delaware General Corporation Law. See 12
U.S.C. § 4513; 12 C.F.R. § 1710.10(b); Fannie Mae ByLaws,
 5
II

Before turning to the merits of this appeal, we address
jurisdiction. The parties all agree there is federal subject-
matter jurisdiction based on 12 U.S.C. § 1723a(a), which
authorizes Fannie Mae to “sue and to be sued, and to
complain and to defend, in any court of competent
jurisdiction, State or Federal.” Based on an independent
assessment, we also conclude that this provision establishes
federal subject-matter jurisdiction.

In American National Red Cross v. S.G., the Supreme
Court considered a statute providing that the Red Cross could
‘“sue and be sued in courts of law and equity, State or
Federal, within the jurisdiction of the United States.’” 505
U.S. 247, 248 (1992) (quoting 36 U.S.C. § 2 (now codified as
amended at 36 U.S.C. § 300105(a)(5))). The Court held that

Corporate Governance Practices & Procedures, Art. 1, § 1.05,
http://www.fanniemae.com/governance/pdf/bylaws.pdf.
2
Under Gaubert v. Federal Home Loan Bank Board, we
review the District Court’s decision for abuse of discretion. 863
F.2d 59, 68 n.10 (D.C. Cir. 1988). We tend to agree with plaintiffs
that an abuse-of-discretion standard may not be logical in this kind
of case, however, because the question whether demand is excused
turns on the sufficiency of the complaint’s allegations; and the legal
sufficiency of a complaint’s allegations is a question of law we
typically review de novo. But there is no need to further consider
this aspect of Gaubert at this time because we affirm the District
Court’s decision even under de novo review.
Relatedly, plaintiffs argue that that the District Court abused
its discretion by relying on extraneous public reports and similar
materials in evaluating the sufficiency of the complaint. The
District Court’s mention of those public materials did not affect its
resolution of the case. In any event, those materials are not relevant
to a de novo assessment of the complaint.
 6
this sue-and-be-sued clause conferred federal subject-matter
jurisdiction over cases in which the Red Cross was a party.
Red Cross, 505 U.S. at 257. In so ruling, the Court articulated
the general principle that “a congressional charter’s ‘sue and
be sued’ provision may be read to confer federal court
jurisdiction if, but only if, it specifically mentions the federal
courts.” Id. at 255 (emphasis added). The Red Cross Court
stated that express reference to federal courts in a federally
chartered entity’s sue-and-be-sued clause was “necessary and
sufficient to confer jurisdiction.” Id. at 252 (emphasis added).

The Red Cross majority repeatedly characterized this
principle as a “rule,” see id. at 255-57, noting that it had been
“established” in the early 19th Century by Osborn v. Bank of
United States, 22 U.S. (9 Wheat.) 738, 818 (1824), and
subsequently confirmed in Bankers Trust Co. v. Texas &
Pacific Railway Co., 241 U.S. 295, 304 (1916), and D’Oench,
Duhme & Co. v. FDIC, 315 U.S. 447, 455-56 (1942). And
the Red Cross dissenters similarly understood the rule’s
clarity, although they disagreed with the rule’s content: “The
Court today concludes that whenever a statute granting a
federally chartered corporation the ‘power to sue and be sued’
specifically mentions the federal courts (as opposed to merely
embracing them within general language), the law will be
deemed . . . to confer on federal district courts jurisdiction
over any and all controversies to which that corporation is a
party.” 505 U.S. at 265 (Scalia, J., dissenting) (emphasis
omitted).

Applying the Red Cross rule to the present case, we find
that there is federal jurisdiction because the Fannie Mae “sue
and be sued” provision expressly refers to the federal courts in
a manner similar to the Red Cross statute. To be sure, the
Fannie Mae sue-and-be-sued clause differs from the Red
Cross statute in one respect: It refers to “any court of
 7
competent jurisdiction, State or Federal,” whereas the Red
Cross statute refers to “courts of law and equity, State or
Federal.” Compare 12 U.S.C. § 1723a(a), with 36 U.S.C.
§ 300105(a)(5). We agree, however, with the majority of
district courts that have confronted the question since Red
Cross: Section 1723a(a) provides federal subject-matter
jurisdiction in Fannie Mae cases. See, e.g., Grun v.
Countrywide Home Loans, Inc., 2004 WL 1509088, at *2
(W.D. Tex. July 1, 2004); Connelly v. Fed. Nat’l Mortgage
Ass’n, 251 F. Supp. 2d 1071, 1073 (D. Conn. 2003); C.C.
Port, Ltd. v. Davis-Penn Mortgage Co., 891 F. Supp. 371, 372
(N.D. Tex. 1994), aff’d, 58 F.3d 636 (5th Cir. 1995); Peoples
Mortgage Co. v. Fed. Nat’l Mortgage Ass’n, 856 F. Supp.
910, 917 (E.D. Pa. 1994).

It is true that two district courts have reached the contrary
conclusion, reasoning that applying the Red Cross rule to
Fannie Mae is problematic because doing so, in their view,
renders superfluous the words “of competent jurisdiction” in
the Fannie Mae statute. See Knuckles v. RBMG, Inc., 481 F.
Supp. 2d 559, 563 (S.D.W.Va. 2007); Fed. Nat’l Mortgage
Ass’n v. Sealed, 457 F. Supp. 2d 41, 44-46 (D.D.C. 2006).
We disagree with the Knuckles and Sealed district court
opinions. Applying the Red Cross rule to the Fannie Mae
statute does not render the words “of competent jurisdiction”
superfluous. The words “of competent jurisdiction” help
clarify that: (i) litigants in state courts of limited jurisdiction
must satisfy the appropriate jurisdictional requirements, see
Osborn, 22 U.S. (9 Wheat.) at 817-18 (finding federal
jurisdiction because of statute empowering a federal
corporation “to sue and be sued . . . in all state courts having
competent jurisdiction, and in any circuit court of the United
States”) (internal quotation marks omitted) (emphasis added);
(ii) litigants, whether in federal or state court, must establish
that court’s personal jurisdiction over the parties, see
 8
Blackmar v. Guerre, 342 U.S. 512, 516 (1952) (noting that a
“court of ‘competent jurisdiction’” for the purpose of hearing
suits against civil service commissioners must be one that
possessed personal jurisdiction over those commissioners);
see also United States v. Morton, 467 U.S. 822, 828 (1984);
(iii) litigants relying on the “sue-and-be-sued” provision can
sue in federal district courts but not necessarily in all federal
courts, see Red Cross, 505 U.S. at 256 n.8; id. at 267 (Scalia,
J., dissenting); Brief of Petitioner-Appellant at 30-31, Am.
Nat’l Red Cross v. S.G., 505 U.S. 247 (1992) (No. 91-594)
(“it is obvious that the district courts are intended” to receive
the jurisdiction conferred in “sue-and-be-sued” clauses); and
(iv) where the Tucker Act otherwise might funnel cases to the
Court of Federal Claims, the federal district courts still
possess jurisdiction, see Ferguson v. Union Nat’l Bank, 126
F.2d 753, 756 (4th Cir. 1942) (applying “of competent
jurisdiction” language in 12 U.S.C. § 1702: “It could hardly
have been intended by Congress that suits for over $10,000
against the Administrator could be brought in any state court
of general jurisdiction, but in the federal jurisdiction only in
the Court of Claims . . . .”). Applying the Red Cross rule to
the Fannie Mae statute thus does not render the words “of
competent jurisdiction” meaningless.3

3
When the Supreme Court decided Red Cross, it was well
aware of the opinion’s significance for statutes that included the “of
competent jurisdiction” language. Consistent with a position
previously advanced by the Solicitor General, the Red Cross
identified those “of competent jurisdiction” statutes to the Court
and argued that the “of competent jurisdiction” language did not
detract from the jurisdictional force of a sue-and-be-sued clause
that referred to federal courts. See Brief of Petitioner-Appellant at
49, Am. Nat’l Red Cross v. S.G., 505 U.S. 247 (1992) (No. 91-594)
(noting that “other entities besides the Red Cross will be affected”
and explaining that “[t]he Solicitor General also has advised this
 9
The Supreme Court’s unanimous decision in Breuer v.
Jim’s Concrete of Brevard, Inc. is consistent with our
conclusion. See 538 U.S. 691 (2003). There, the Court held
that the Fair Labor Standards Act’s right-to-sue clause did not
bar removal of suits from state to federal court. Id. at 694-97;
29 U.S.C. § 216(b). In so holding, the Court stated that there
was “no question that Breuer could have begun his action in
the District Court” given the language in the FLSA statute –
similar to the Fannie Mae statute – indicating that an action
“‘may be maintained . . . in any Federal or State court of
competent jurisdiction.’” 538 U.S. at 694 (quoting 29 U.S.C.
§ 216(b)) (alteration in original) (emphasis added).
Therefore, despite the presence of an “of competent
jurisdiction” phrase, the Court found no reason to doubt that
the FLSA’s right-to-sue clause conferred federal jurisdiction.

Judge Brown’s separate opinion appears to acknowledge
that the original Fannie Mae sue-and-be-sued clause in place
from 1934 to 1954 conferred automatic federal jurisdiction in
Fannie Mae cases, but says that Congress eliminated this
jurisdictional grant in 1954 by adding the words “of

Court: ‘Plainly, Section 1702 [of the National Housing Act], by
authorizing suit ‘in any court of competent jurisdiction, State or
Federal,’ provides a basis for district court jurisdiction . . . .’”)
(citing Brief for the Respondents in Opposition at 9, Portsmouth
Redevelopment & Housing Auth. v. Pierce, 464 U.S. 960 (1983)
(No. 83-90)); see also Petition for Writ of Certiorari at 23, S.G. v.
Am. Nat’l Red Cross, 938 F.2d 1494 (1st Cir. 1991) (No. 91-594);
Brief for the United States as Amicus Curiae Supporting Petitioners
at 5-6, Am. Nat’l Red Cross v. S.G., 505 U.S. 247 (No. 91-594)
(arguing that the Supreme Court’s sue-and-be-sued decisions “have
established a clear rule that congressional charters provide for
original jurisdiction in the federal courts whenever they specifically
grant a right to sue and be sued in federal courts”).
 10
competent jurisdiction.” We disagree. After the 1954
statutory change, the jurisdictional provision of the Fannie
Mae statute continues to refer to federal courts, thus still
falling within the Red Cross rule we are bound to follow.
Moreover, we disagree with the separate opinion about the
meaning and effect of that 1954 statutory change.

Under the original 1934 statute, Fannie Mae was a
governmental entity that could “sue and be sued, complain
and defend, in any court of law or equity, State or Federal.”
Pub. L. No. 73-479, § 301(c)(4), 48 Stat. 1246, 1256 (1934).
The Housing Act of 1954 maintained Fannie Mae’s
governmental status, but completely revamped the 1934
legislation; the addition of the phrase “of competent
jurisdiction” to the sue-and-be-sued clause was one of
numerous changes. See Pub. L. No. 83-560, tit. II, 68 Stat.
590, 612-22 (1954). Unlike Judge Brown, we see no
plausible reason that Congress in 1954 would have continued
to refer to federal courts in the sue-and-be-sued clause –
language understood since the Osborn case in 1824 to confer
federal jurisdiction in cases involving federally chartered
entities – and then used the words “of competent jurisdiction”
in an attempt to negate automatic federal jurisdiction. If
Congress in 1954 did not want to continue to confer federal
jurisdiction in Fannie Mae cases, it logically would have
omitted the word “Federal” from the statute, not attempted a
bank shot by adding the words “of competent jurisdiction.”

This analysis finds support from the fact that in 1954 –
the same year that Congress redrafted Fannie Mae’s charter –
Congress also revised the “sue-and-be-sued” provision of the
Federal Savings and Loan Insurance Corporation statute by
deleting “Federal” from the original FSLIC law. The FSLIC
statute as amended read: “[t]o sue and be sued . . . in any
court of competent jurisdiction in the United States.” Pub. L.
 11
No. 83-560, § 501(1), 68 Stat. 590, 633 (1954) (amending
Pub. L. No. 73-479, § 402(c)(4), 48 Stat. 1246, 1256 (1934)
(“[t]o sue and be sued . . . in any court of law or equity, State
or Federal”)). In other words, in 1934 Congress established
two substantially identical “sue-and-be-sued” provisions, one
for Fannie Mae and one for the FSLIC. And in 1954,
Congress dropped the word “Federal” from the FSLIC statute
while keeping the word “Federal” in the Fannie Mae statute.
We must assume that Congress knew the jurisdictional
consequences of what it was doing in 1954. The fact that
Congress chose to keep that all-important word in the Fannie
Mae statute but to delete it from the FSLIC statute is
compelling evidence that Fannie Mae’s “sue-and-be-sued”
provision was meant to ensure continuing federal jurisdiction
in Fannie Mae cases.

The separate opinion’s analysis of the “of competent
jurisdiction” language also does not account for the
congressional expectations associated with “sue-and-be-sued”
provisions during the middle of the 20th Century when this
statutory change was made. A number of cases relevant to
this issue had been decided in the years before 1954. To
begin with, since 1824, the courts had concluded that express
reference to federal courts in a sue-and-be-sued clause of a
federally chartered entity would ensure federal jurisdiction.
See Osborn, 22 U.S. (9 Wheat.) at 818; cf. Red Cross, 505
U.S. at 252 (earlier cases placed Congress “on prospective
notice of the language necessary and sufficient to confer
jurisdiction”). In 1952, moreover, the Supreme Court’s
decision in Blackmar v. Guerre made clear that using the
phrase “of competent jurisdiction” would serve the objective
of requiring a plaintiff to establish personal jurisdiction in
cases involving corporate entities like Fannie Mae. See
Blackmar, 342 U.S. at 516. Because of Blackmar, Congress
might have thought the textual formula approved in 1942 in
 12
D’Oench, Duhme – “in any court of law or equity, State or
Federal” – did not suffice to require a showing of personal
jurisdiction. In addition, as of 1954, Congress would not have
thought that using the phrase “of competent jurisdiction”
could negate federal jurisdiction in Fannie Mae cases; several
recent circuit precedents had interpreted sue-and-be-sued
clauses that included the phrase “of competent jurisdiction”
and found federal jurisdiction. See George H. Evans & Co. v.
United States, 169 F.2d 500, 502 (3d Cir. 1948); Seven Oaks,
Inc. v. Fed. Hous. Admin., 171 F.2d 947, 948-49 (4th Cir.
1948); Ferguson v. Union Nat’l Bank, 126 F.2d 753, 756-57
(4th Cir. 1942). The Evans and Ferguson cases specifically
relied on the “of competent jurisdiction” language, moreover,
to hold that federal district courts had jurisdiction over cases
involving federal entities that otherwise might be considered
subject to the Tucker Act and shoehorned into the Court of
Claims. Therefore, we think it abundantly clear that Congress
in 1954 would not have thought or intended the words “of
competent jurisdiction” to negate automatic federal
jurisdiction for Fannie Mae cases.4

4
Interpreting Fannie Mae’s sue-and-be-sued provision as a
grant of federal jurisdiction is also consistent with the fact that
Fannie Mae’s later-created sibling, Freddie Mac, carries a “sue-and-
be-sued” provision that, like the Red Cross’s, does not include the
phrase “of competent jurisdiction.” See 12 U.S.C. § 1452(c). It is
logical to conclude that Congress used distinctive statutory
language in the 1954 Fannie Mae statute in response to the
precedents of that era. In addition, Freddie Mac – like the Red
Cross – was originally created as a private entity, whereas Fannie
Mae was a governmental entity until 1968. Therefore, Congress
likely would not have been concerned that, absent the “of
competent jurisdiction” language, Freddie Mac cases could be
funneled only to the Court of Claims rather than to federal district
courts, which was a potential concern in 1954 when Congress
 13
In sum, in interpreting the Fannie Mae statute, we see no
need to muddy the waters by departing from Red Cross’s
clear rule for interpreting the text of a federally chartered
entity’s sue-and-be-sued clause. And even if we were to go
beyond that rule in this case, the legislative background to
Congress’s 1954 statutory amendment strongly supports
automatic federal jurisdiction in Fannie Mae cases. We
therefore hold that Fannie Mae’s sue-and-be-sued clause
confers federal subject-matter jurisdiction.

The jurisdictional issue resolved, we turn to the merits of
the complaint.

III

Plaintiffs concede that they did not attempt to make a
pre-suit demand on the Board as is ordinarily required for
shareholder derivative suits. Rather, plaintiffs allege that a
demand on the Board would have been futile because a
majority of the Board was not “disinterested” and
“independent.”

When plaintiffs filed the relevant complaint, there were
13 directors on Fannie Mae’s Board. This included three
corporate officers: then-CEO Franklin D. Raines, then-CFO J.
Timothy Howard, and current-CEO Daniel H. Mudd. It also
included 10 outside directors: Stephen B. Ashley, Kenneth M.
Duberstein, Thomas P. Gerrity, Ann Korologos, Frederic V.
Malek, Donald B. Marron, Anne Mulcahy, Joe K. Pickett,
Leslie Rahl, and H. Patrick Swygert. To prove demand
futility, plaintiffs must prove that a majority of the Board at
the time of the complaint – here, at least seven directors –

revised the Fannie Mae statute for that then-governmental entity.
Cf. Ferguson, 126 F.2d at 756-57.
 14
lacked the necessary disinterestedness and independence to
evaluate the suit. For purposes of this appeal only, it is
conceded that Raines, Howard, and Mudd were not
disinterested and independent. So for demand to be excused,
the complaint must create a “reasonable doubt” about the
disinterestedness or independence of at least four of the 10
outside directors. See Aronson v. Lewis, 473 A.2d 805, 814
(Del. 1984).

Federal Rule of Civil Procedure 23.1 mandates that a
complaint in a shareholder derivative suit “state with
particularity . . . the reasons for . . . not making the effort” to
make a demand. FED. R. CIV. P. 23.1(b)(3). Plaintiffs state
three main reasons to support their argument of demand
futility.

First, plaintiffs allege that demand is excused on their
accounting-related claims. They argue that there was a
“reasonable doubt” about the directors’ “disinterestedness” to
consider a demand because, in plaintiffs’ view, there is a
“substantial likelihood” that a majority of the directors would
be liable on the accounting-related claims for failure to
exercise proper oversight. See Rales v. Blasband, 634 A.2d
927, 936 (Del. 1993) (internal quotation marks omitted).

Second, plaintiffs allege that demand is excused on their
severance-related claims. They allege that there was a
“reasonable doubt” about the Board’s “disinterestedness” to
consider a demand because, in plaintiffs’ view, the directors
did not exercise valid “business judgment” in approving the
severance arrangements for Raines and Howard. See
Aronson, 473 A.2d at 815.

Third, plaintiffs allege that demand is excused on both
sets of claims because there was a “reasonable doubt” about a
majority of the Board’s “independence” to consider a demand
 15
in light of the various professional, charitable, and personal
entanglements among Board members. See Beam v. Stewart,
845 A.2d 1040, 1049 (Del. 2004).

A

With respect to the accounting-related claims, plaintiffs
contend that demand is excused because there was a
reasonable doubt about the disinterestedness of a majority of
the directors: They claim that a majority of the directors face
a “substantial likelihood” of personal liability as a result of
their failure to exercise sufficient oversight. See Rales, 634
A.2d at 934, 936.

Liability predicated on a Board’s failure to exercise
oversight “is possibly the most difficult theory in corporation
law upon which a plaintiff might hope to win a judgment.” In
re Caremark Int’l, Inc. Derivative Litig., 698 A.2d 959, 967
(Del. Ch. 1996); see also Stone v. Ritter, 911 A.2d 362, 372
(Del. 2006). The standard “requires conduct that is
qualitatively different from, and more culpable than, the
conduct giving rise to a violation of the fiduciary duty of care
(i.e., gross negligence).” Stone, 911 A.2d at 369. As relevant
here, plaintiffs must allege particularized facts demonstrating
that the directors “knew that they were not discharging their
fiduciary obligations” and failed to act “in the face of a
known duty to act, thereby demonstrating a conscious
disregard for their responsibilities.” Id. at 370.

According to plaintiffs, the complaint alleges that the
directors crossed that line by failing to adequately respond to
several “red flags”: (1) a $200 million audit difference
originating in 1998; (2) a whistleblower’s complaints that
Fannie Mae was improperly manipulating earnings; (3) signs
that Fannie Mae management was using improper hedge
accounting practices; and (4) sister company Freddie Mac’s
 16
disclosure in 2003 that it had understated profits. Plaintiffs’
Br. at 44-55. We disagree that these allegations create a
“substantial likelihood” of personal liability for the directors.
On each claim, the Board or its relevant committee looked
into the matter and relied on internal or external accounting
experts and officials responsible for those matters. As the
District Court correctly stated, “plaintiffs’ own allegations
demonstrate that the directors actually responded to each of
the ‘red flags’ cited by plaintiffs.” In re Fed. Nat’l Mortgage
Ass’n Litig., 503 F. Supp. 2d 9, 19 (D.D.C. 2007) (emphasis
omitted). Under Delaware law, a Board of Directors is not a
Board of Accountants. Although the allegations (if true) may
show negligence by the Board, they do not meet the very high
standards set by Delaware law for director oversight liability.

First, plaintiffs claim that the directors ignored a $200
million audit difference originating in 1998. Second Am.
Comp. at ¶¶ 28-30. That year, Fannie Mae incurred $440
million of expenses on its mortgage holdings. Id. at ¶ 28.
Instead of adjusting its income by $440 million, Fannie Mae
adjusted its income by $240 million and deferred the
remaining expenses to subsequent years. Id. at ¶ 29.
Deferring the expenses and engaging in other manipulative
accounting practices enabled Fannie Mae to meet its
performance target and thus increased the company
executives’ incentive-based compensation. Id. at ¶¶ 31-32.

Plaintiffs claim that the directors ignored the audit
difference. But plaintiffs’ own allegations demonstrate that
the directors did in fact address the issue. Second Am. Comp.
at ¶ 30. The complaint states that the Audit Committee – a
standing committee of the Board of Directors – met with
KPMG, Fannie Mae’s outside auditor, to discuss the audit
difference. And KPMG agreed with Fannie Mae’s treatment
of the expenses. Id.
 17
Under Delaware law, directors are insulated from liability
when they rely in good faith on the opinions of outside
experts who are acting within their expertise. See DEL. CODE
ANN. tit. 8 § 141(e); Brehm v. Eisner, 746 A.2d 244, 261-62
(Del. 2000). The complaint shows that the Audit Committee
relied on KPMG’s opinions with respect to the audit
difference, which turned this allegedly red flag into a green
flag.

Second, according to plaintiffs, the directors ignored
whistleblower Roger Barnes’s complaints that Fannie Mae
was improperly manipulating earnings. Second Am. Comp.
at ¶ 98. Barnes was a mid-level accountant; in 2003, he wrote
a detailed memorandum to internal auditors regarding what he
considered to be improper accounting practices at Fannie
Mae. Id. at ¶¶ 98, 362. The complaint alleges that the Audit
Committee of the Board learned about the memorandum but
deliberately dismissed Barnes’s revelations, letting them lie
without further investigation and permitting the accounting
violations to continue.

But again, the complaint shows that the Audit Committee
responded. Id. at ¶ 365. Shortly after learning of the memo,
the Audit Committee, company executives, and KPMG
convened to review and discuss Barnes’s allegations. Id;
OFHEO Final Report, Joint Appendix (“J.A.”) 714. At this
meeting, the Audit Committee “expressed satisfaction with
the results of the review” and commended company officers
for working quickly to address the concerns. Second Am.
Comp. at ¶ 366 (internal quotation marks omitted).

As explained above, directors are insulated from liability
when they rely in good faith on the opinions of outside
experts who are acting within their expertise. Directors also
are “fully protected in relying in good faith” upon the
 18
“opinions, reports or statements presented to the corporation
by any of the corporation’s officers or employees,” so long as
the Board “reasonably believes” that such matters are “within
such other person’s professional or expert competence.” DEL.
CODE ANN. tit. 8 § 141(e). With respect to the Barnes
Memorandum, plaintiffs have not put forth particularized
facts undermining the Audit Committee’s reliance on officials
who were responsible for these issues and who assured the
Committee that the situation had been resolved. It is not as if
the Audit Committee took the Barnes Memo from the in-box
and put it in the out-box without taking any action.

Third, plaintiffs allege that the Assets and Liabilities
Policy Committee – another standing committee of the Board
of Directors – should have known that management was using
improper “hedge accounting” practices. According to
plaintiffs, Fannie Mae’s executives improperly applied
“hedge accounting” principles to derivatives, thereby
spreading the company’s losses on derivatives over a number
of years rather than booking them immediately. But the
complaint alleges only that the directors should have known
about the accounting violations even though KPMG assessed
the implementation of this accounting policy. Second Am.
Comp. at ¶¶ 256-57, 399. Again, therefore, this allegation
does not create a substantial likelihood of personal liability
under the standards of Delaware law for director oversight
claims.

Fourth, plaintiffs assert that the directors failed to
sufficiently react after Fannie Mae’s sister organization
Freddie Mac disclosed in 2003 that it had “understated
profits” in an effort to “smooth earnings and maintain its
image on Wall Street as a steady performer.” Second Am.
Comp. at ¶ 343. Plaintiffs allege that the “similarities
between Fannie Mae and Freddie Mac and the common issues
 19
that were the focus of the Freddie Mac violations should have
. . . serve[d] as ‘red flags’” alerting the directors to Fannie
Mae’s financial manipulations. Id. at ¶ 346. The problem for
plaintiffs is that the Board of Directors responded to the news
about Freddie Mac. The directors met multiple times to
discuss the Freddie Mac situation. Second Am. Comp. at
¶¶ 344, 345, 347, 348, 349, 351, 353. At those meetings, the
company’s financial officers contrasted Freddie Mac’s
practices with Fannie Mae’s and assured the Board that
Fannie Mae’s accounting was sound. See OFHEO Final
Report, J.A. 766-67. Again, because the outside directors
relied on representations of internal financial experts, they are
protected against personal liability.

In sum, the complaint fails to establish a substantial
likelihood of personal liability for the outside directors on the
accounting-related claims. Therefore, under Delaware law,
the accounting-related allegations do not create a reasonable
doubt about the disinterestedness of the Board to consider a
demand with respect to those claims.5

B

On the severance-related claims, plaintiffs allege that the
directors’ decisions to allow Raines and Howard “to resign or

5
To support their claims, plaintiffs rely on the Sixth Circuit’s
decision applying Delaware law in McCall v. Scott, 239 F.3d 808
(6th Cir. 2001), amended on denial of reh’g, 250 F.3d 997 (6th Cir.
2001). In that case, the court excused demand in a case where the
shareholders’ claims arose out of “allegedly wide-spread and
systematic health care fraud.” Id. at 813. Even assuming arguendo
that the result in McCall is consistent with the high standards set by
Delaware law, McCall contained far more substantial allegations
with respect to lack of proper directorial oversight than are
contained in the complaint in this case.
 20
retire with more than $31 million in severance benefits” and
to absolve the executives of their “legal obligation to disgorge
compensation that they had procured via accounting
manipulations and insider trading” create a “reasonable
doubt” that they were the product of a valid business
judgment by the directors. Plaintiffs’ Br. at 29; Aronson, 473
A.2d at 814.6

The business judgment rule establishes a “presumption
that in making a business decision the directors of a
corporation acted on an informed basis, in good faith and in
the honest belief that the action taken was in the best interests
of the company.” Aronson, 473 A.2d at 812. As plaintiffs
acknowledge, the business judgment rule protects decisions
unless “no reasonable business person” would have made the
decision. Plaintiffs’ Br. at 41 (internal quotation marks
omitted). Under this principle, courts rarely second-guess
directors’ compensation and severance decisions because the
“size and structure of executive compensation are inherently
matters of judgment.” Brehm, 746 A.2d at 263. Plaintiffs
thus must allege “particularized facts sufficient to raise (1) a
reason to doubt that the action was taken honestly and in good
faith or (2) a reason to doubt that the board was adequately
informed in making the decision.” See In re Walt Disney Co.
Derivative Litig., 825 A.2d 275, 286 (Del. Ch. 2003) (Disney
II).

To support their claim that the directors’ severance
decision was not a valid business judgment, plaintiffs rely on

6
It appears from the complaint that a 14th director, Wulff, was
involved in the severance-related decisions, but that does not affect
the analysis in this section because the complaint alleges that the
severance decision was a collective decision by the outside
directors (in other words, on this claim, either all were disinterested
or none were disinterested).
 21
the Disney II case. There, the Delaware Chancery Court
found that the board’s decision not to seek a termination
based on fault or to inquire into the terms and conditions of
the termination agreement was not entitled to the protection of
the business judgment rule. See Disney II, 825 A.2d at 286-
87. As the Disney II court described it, the complaint
demonstrated that the “defendant directors consciously and
intentionally disregarded their responsibilities, adopting a ‘we
don’t care about the risks’ attitude concerning a material
corporate decision.” Id. at 289 (emphasis omitted). The court
accordingly concluded that plaintiffs sufficiently alleged that
the directors breached their “obligation to act honestly and in
good faith in the corporation’s best interests” and thus their
decision “fell outside the protection of the business judgment
rule.” Id.

But plaintiffs here fail to allege particularized facts that
demonstrate that the process was similarly flawed or that the
directors acted without adequate information or deliberation.
The complaint itself acknowledges that the termination
decision was made in a series of board meetings held over
several days. Second Am. Comp. at ¶ 414 (termination
decision “discussed in Board meetings on December 19, 20
and 21, 2004”).

The complaint alleges that the “issue was not discussed
by the Compensation Committee, which had no meetings
during this timeframe.” Id. But that is a red herring because
the Compensation Committee is a standing committee of the
Board of Directors. The individuals who sat on the
Compensation Committee also sat on the Board of Directors,
and the full Board met at length to discuss the severance
issue.
 22
Plaintiffs also point to the fact that the directors made the
decision without the assistance of any compensation
consultants. But that is irrelevant: The question in this case
is not about an initial compensation package but instead a
judgment about for-cause termination and what kind of
severance was best for the short- and long-term interests of
the company.

Plaintiffs allege that even if procedurally sound, the
severance decision was substantively flawed because Raines’s
and Howard’s fraudulent acts constituted grounds to terminate
them for cause. But in the analogous case of Brehm v. Eisner,
the Supreme Court of Delaware dismissed a similar claim
because the complaint failed to allege that the directors did
not act within their discretion in awarding an underperforming
executive a severance package. 746 A.2d 244 (Del. 2000).
The court found two business reasons that could support the
directors’ decision: First, the company would likely have to
litigate any dispute over the reasons for termination and
“persuade a trier of fact and law” that the decision was
warranted under the contract. Id. at 265. Second, “that
process of persuasion could involve expensive litigation,
distraction of executive time and company resources, lost
opportunity costs, more bad publicity and an outcome that
was uncertain at best and, at worst, could have resulted in
damages against the Company.” Id.

So too here. Even if the directors had grounds to invoke
the “for cause” termination provisions, the directors
reasonably could have decided not to invoke those provisions
because Fannie Mae likely would have had to spend
enormous time and resources over many years litigating the
decision. The Board reasonably may have decided that going
forward, it was more important to cut ties and dedicate the
company’s resources to righting the ship.
 23
Plaintiffs also contest the directors’ decision not to sue
Raines and Howard for disgorgement under § 304 of the
Sarbanes-Oxley Act of 2002. 15 U.S.C. § 7243(a). That
statutory provision establishes that the SEC may sue the CEO
and CFO of a company when the company has been required
to restate its earnings due to noncompliance with securities
laws. Id.

The problem is that § 304 does not create a private right
of action. And contrary to the suggestion in plaintiffs’ brief,
which relies on 1970s-era cases, courts today rarely create
implied private rights of action; courts generally deem it
Congress’s prerogative to make that decision. See Stoneridge
Inv. Partners v. Scientific-Atlanta, 128 S. Ct. 761, 772-73
(2008); Kogan v. Robinson, 432 F. Supp. 2d 1075, 1076 (S.D.
Cal. 2006) (holding that § 304 does not create private
remedy); In re Whitehall Jewellers, Inc. S’holder Derivative
Litig., 2006 WL 468012, at *7 (N.D. Ill. 2006) (same); In re
BISYS Group Inc. Derivative Action, 396 F. Supp. 2d 463,
464 (S.D.N.Y. 2005) (same); Neer v. Pelino, 389 F. Supp. 2d
648, 655 (E.D. Pa. 2005) (same). As a result, the directors’
decision not to devote corporate assets to pursue such an
uncertain cause of action was certainly a reasonable one.

In sum on the severance-related claims, the complaint
fails to create a reasonable doubt about the Board’s
disinterestedness to consider a demand because it fails to
create a reasonable doubt whether the Board exercised a valid
business judgment.7

7
Delaware law is not clear about whether, for this kind of
Aronson business-judgment claim, plaintiffs’ demand must show
(i) a reasonable doubt about the Board’s disinterestedness by
showing a reasonable doubt whether the directors exercised a valid
business judgment; (ii) a reasonable doubt about the Board’s
 24
C

Finally, plaintiffs argue that nearly all of the 10 outside
directors lacked the necessary “independence” to evaluate the
demand because (1) the Raines-controlled Fannie Mae
Foundation made charitable donations to non-profit
organizations affiliated with individual Board members,
(2) the directors had other conflicting business and personal
relationships with each other, and (3) Raines otherwise
controlled and dominated the directors. See Rales, 634 A.2d
at 934; Aronson, 473 A.2d at 814. “Independence means that
a director’s decision is based on the corporate merits of the
subject before the board rather than extraneous considerations
or influences.” Aronson, 473 A.2d at 816.

The brief for the directors dismisses those allegations as
plainly insufficient under Delaware law. Yet in their 30-page
reply brief, plaintiffs make no mention of this “independence”
argument. Although not a waiver, the reply brief’s silence on
the subject is a telling indication of this argument’s lack of
weight under Delaware law.

The basic hurdle for plaintiffs stems from the fact that the
kinds of relationships alleged in the complaint exist at many
companies. Directors tend to be experienced and
accomplished business persons; those individuals also tend to
be comparatively wealthy and have a wide range of
professional and charitable affiliations and relationships. It is
usually considered in the interests of corporations and their

disinterestedness by showing a “substantial likelihood” that the
directors will be personally liable for not exercising a valid business
judgment; or (iii) both. It also is not clear whether there is a real
difference in these formulations. Regardless, plaintiffs’ severance-
related claim here does not suffice under any of the possible
formulations.
 25
shareholders to attract experienced and accomplished business
leaders as directors. So as not to preclude service by such
persons, Delaware law creates a very high bar for using the
kinds of relationships alleged here as a basis for finding a lack
of independence and thereby excusing demand in a derivative
suit.

First, the complaint alleges that outside directors
Duberstein, Gerrity, Malek, Marron, Swygert, and Korologos
are beholden to Raines because he was Chairman of the Board
of the Fannie Mae Foundation, which made charitable grants
to non-profit organizations with which the directors were
affiliated. Second Am. Comp. at ¶ 116. For those donations
to be relevant, plaintiffs must allege that Raines “has the
unilateral power . . . to decide whether the challenged director
continues to receive a benefit . . . .” Orman v. Cullman, 794
A.2d 5, 25 n.50 (Del. Ch. 2002). But the complaint does not
allege any particularized facts showing that Raines controlled
who received donations or determined the size of grants. We
thus conclude that the contributions to non-profit charities and
organizations provide no basis for us to question the
independence of the directors for purposes of Delaware law.

Second, plaintiffs allege that outside directors Duberstein,
Pickett, Korologos, Malek, Marron, Ashley, and Swygert
have “business and/or personal relationships with each other,
or with immediate families of other defendants, that would
conflict with their ability to objectively determine whether it
would be appropriate to bring suit against other Fannie Mae
current and former officers and/or directors.” Second Am.
Comp. at ¶ 132. But allegations of “mere personal friendship
or a mere outside business relationship, standing alone, are
insufficient to raise a reasonable doubt about a director’s
independence.” Stewart, 845 A.2d at 1050. Only
professional or personal friendships that “border on or even
 26
exceed familial loyalty and closeness[] may raise a reasonable
doubt whether a director can appropriately consider demand.”
Id. (internal quotation marks omitted). The Delaware
Supreme Court has instructed that “[n]ot all friendships, or
even most of them, rise to this level and the Court cannot
make a reasonable inference that a particular friendship does
so without specific factual allegations to support such a
conclusion.” Id. (internal quotation marks and emphasis
omitted). We need not dally long on this allegation: The
commonplace business, professional, and personal
relationships alleged in this case are not remotely sufficient
under Delaware law to disqualify the challenged directors
from evaluating demand in an independent manner.

Third, plaintiffs allege that the directors lacked
independence because Raines “controlled” a majority of the
Board. But the complaint cites no particularized facts to
support this charge other than that the Board often approved
Raines’s proposed decisions. This does not suffice under
Delaware law to demonstrate that Raines so controlled the
directors’ decisionmaking as to mean they lacked
independence to consider a demand. As the Delaware courts
have stated, the “shorthand shibboleth of dominated and
controlled directors” is insufficient. Aronson, 473 A.2d at
816 (internal quotation marks omitted).

In sum, under the standards set forth by Delaware law,
the complaint’s allegations do not create a reasonable doubt
about the Board’s independence to consider a demand.

***

We affirm the District Court’s judgment dismissing the
complaint.

So ordered.
 BROWN, Circuit Judge, concurring in the judgment: After
182 pages of briefing by 39 attorneys who have strained to
squeeze this case into their preferred courtroom, I still—even
after reading the majority opinion—haven’t heard a decent
argument for federal subject-matter jurisdiction. All parties
in this litigation teamed up to manufacture jurisdiction, but,
needless to say, parties cannot create subject-matter jurisdic-
tion, see Kline v. Burke Constr. Co., 260 U.S. 226, 233–34
(1922). Neither can judges, for doing so misappropriates
Congress’s jurisdiction-conferring role, id., and invalidly
scoops cases out of state court. And these principles are
especially important in a case where Congress amended the
supposedly jurisdictional statute to make clear Fannie Mae
may only sue or be sued in courts that have “competent
jurisdiction”—that is, subject-matter jurisdiction. The
majority’s misreading of Supreme Court precedent and
disregard for statutory text lead it to erroneously conclude we
have jurisdiction.

I

Fannie Mae’s sue-and-be-sued clause does not, as the
majority contends, create “automatic” federal subject-matter
jurisdiction, see maj. op. at 10, 12–13. Most of the majority’s
mistakes flow from its misinterpretation of American
National Red Cross v. S.G., 505 U.S. 247 (1992).

A

In Red Cross, the Court declared “a congressional char-
ter’s ‘sue and be sued’ provision may be read to confer
federal court jurisdiction if, but only if, it specifically
mentions the federal courts.” 505 U.S. at 255 (emphasis
added). Based on this language, the majority concludes
Fannie Mae’s sue-and-be-sued clause creates jurisdiction
 2

simply because it mentions the federal courts. I would apply
this silly test if Red Cross actually created it. But Red Cross
did no such thing. Rather, Red Cross stands for the unre-
markable rule that mentioning federal courts is necessary, but
not always sufficient, to confer jurisdiction. Three key
rationales support this commonsense interpretation.

First, the majority’s reading of Red Cross is implausible.
Consider this hypothetical statutory provision: “Fannie Mae
may sue and be sued in federal court only if another statute
independently confers subject-matter jurisdiction.” Under the
majority’s test, this hypothetical provision would create
“automatic federal jurisdiction” simply because it mentions
federal courts—even though the text evinces a contrary
meaning. But that cannot be; a mere mention of federal
courts cannot justify disregarding statutory barriers to federal
jurisdiction. In short, the phrase “federal courts” isn’t a
talisman.

Second, the majority’s (mis)interpretation of Red Cross
is belied by Red Cross itself. After all, if a mere textual
mention of federal courts was sufficient, then the Red Cross
Court wasted many pages articulating other rationales and
examining the jurisprudential backdrop against which
Congress enacted the Red Cross charter. Certainly a brief
discussion would have sufficed to create the talismanic “I see
the phrase ‘federal courts’ so it must be jurisdictional” test.
Instead, Red Cross substantially relied on the timing of an
amendment to Red Cross’s charter by applying the canon that
Congress is “presumed to intend [the] judicially settled
meaning of terms.” Red Cross, 505 U.S. at 252, 257; see K.V.
Mart Co. v. United Food & Commercial Workers Int’l Union,
Local 324, 173 F.3d 1221, 1224–25 (9th Cir. 1999) (per
curiam) (Red Cross is “premised” on this canon). Red Cross
also discussed numerous sources of legislative history. 505
 3

U.S. at 261–62. But the majority’s interpretation would
render these portions of Red Cross “entirely meaningless,”1
and “I am reluctant to reach that conclusion about Supreme
Court decisions.” Agri Processor Co., Inc. v. NLRB, 514 F.3d
1, 12–13 (D.C. Cir. 2008) (Kavanaugh, J., dissenting).

Third, Red Cross’s use of the word “may” is significant.
Red Cross announced that a sue-and-be-sued clause mention-
ing federal courts “may be read to confer federal court
jurisdiction.” Id. at 255 (emphasis added). Importantly, the
word “may” is generally “employed to imply permissive,
optional or discretional, and not mandatory action.” BLACK’S
LAW DICTIONARY 979 (deluxe 6th ed. 1990); see, e.g., United
States v. Lexington Mill & Elevator Co., 232 U.S. 399, 411
(1914). Thus, when a sue-and-be-sued clause mentions
federal courts, a court is permitted to interpret the clause as
conferring jurisdiction, and it should do so only when the
statutory text and amendment history support such a reading.
Red Cross did not command federal courts to shirk their
responsibility to examine “the ordinary sense of the language
used [and] basic canons of statutory construction,” 505 U.S.
at 263, in reaching an ultimate conclusion about the clause’s
meaning.2

1
In the critical section of its opinion, the Court relied on the
amendment to the Red Cross charter and the “judicially settled
meaning” canon. See 505 U.S. at 252, 257. And although the
Court discussed legislative history in the context of rejecting a
party’s arguments, it extensively analyzed the legislative materials
rather than declaring such materials irrelevant in light of some
newly announced magic-words test. See id. at 261–62.
2
Although the Red Cross Court used the phrase “necessary
and sufficient,” it did so when explaining that previous cases had
notified Congress about language sufficient to create jurisdiction.
See 505 U.S. at 252. Just because those cases are examples of
sufficient jurisdictional language, however, does not mean any
 4

In sum, under Red Cross, a sue-and-be-sued clause men-
tioning federal courts may (or may not) be jurisdictional—
because mentioning federal courts is necessary (but not
always sufficient) to confer jurisdiction. And even if Red
Cross flirted with a magic-words test by emphasizing “federal
courts” and ignoring other aspects of the Red Cross charter’s
text, the Court could not have intended to apply this test
where Congress specifically amended the charter to add a
jurisdictional limitation, as Congress did here.

B

Interpreting Fannie Mae’s sue-and-be-sued clause ac-
cording to “the ordinary sense of the language used [and]
basic canons of statutory construction,” Red Cross, 505 U.S.
at 263, demonstrates the clause does not create subject-matter
jurisdiction. According to the majority, a charter provision
authorizing Fannie Mae to sue and be sued “in any court of
competent jurisdiction” is a declaration that all federal district
courts have competent jurisdiction. See 12 U.S.C. § 1723a
(emphasis added); Maj. Op. at 5–13. Because “competent
jurisdiction”—a phrase not present in the Red Cross’s
charter—refers to subject-matter jurisdiction, Fannie Mae
may only sue or be sued “in any court” that has an independ-
ent source of subject-matter jurisdiction.

In 1954 Congress amended Fannie Mae’s charter by in-
serting the words “[in any court of] competent jurisdiction.”
Compare Pub. L. No. 73-479, § 301(c)(3), 48 Stat. 1246,
1253 (1934) (authorizing Fannie Mae “[t]o sue and be sued,
complain and defend, in any court of law or equity, State or

reference to federal courts always suffices even if statutory text
indicates otherwise. Moreover, the majority’s contention that
mentioning federal courts always suffices runs counter to Red
Cross’s holding that such a reference “may” suffice, see id. at 255.
 5

Federal” (emphasis added)), with Pub. L. No. 83-560, § 201,
68 Stat. 590, 620 (1954) (authorizing Fannie Mae “to sue and
to be sued, and to complain and to defend, in any court of
competent jurisdiction, State or Federal” (emphasis added)).
Red Cross explained that such “a change in language [should]
be read, if possible, to have some effect.” 505 U.S. at 263;
see also Fund for Animals, Inc. v. Kempthorne, 472 F.3d 872,
877 (D.C. Cir. 2006) (“[C]ourts presume that Congress has
used its scarce legislative time to enact statutes that have
some legal consequence.”).

Our task is to determine what Congress accomplished by
adding the phrase “[court of] competent jurisdiction.” As the
Supreme Court has repeatedly emphasized, the phrase
“competent jurisdiction” almost always refers to subject-
matter jurisdiction. See, e.g., Wachovia Bank, Nat’l Ass’n v.
Schmidt, 546 U.S. 303, 316 (2006); United States v. Morton,
467 U.S. 822, 828 (1984); Califano v. Sanders, 430 U.S. 99,
106 n.6 (1977) (suggesting a statute required “an independent
jurisdictional foundation” largely because it limited judicial
review to “‘a court of competent jurisdiction,’” which
“seem[ed] to look to outside sources of jurisdictional
authority”); cf. Kontrick v. Ryan, 540 U.S. 443, 454 (2004).
Just two years ago, the Court unambiguously declared:
“Subject-matter jurisdiction … concerns a court’s competence
to adjudicate a particular category of cases.” Wachovia Bank,
546 U.S. at 316 (emphasis added); see Kontrick, 540 U.S. at
454 (treating “what cases … courts are competent to adjudi-
cate” as an issue of subject-matter jurisdiction). “Competent
jurisdiction” rarely refers to personal jurisdiction. Indeed,
“[a]s far back as Pennoyer v. Neff, 95 U.S. 714 (1878),
[courts] drew a clear distinction between a court’s ‘compe-
tence’ and its jurisdiction over the parties.” Morton, 467 U.S.
at 828 n.6. Leading commentators likewise treat a court’s
“competence” to hear a case as an issue of subject-matter
 6

jurisdiction. See 13 CHARLES ALAN WRIGHT, ARTHUR R.
MILLER & EDWARD H. COOPER, FEDERAL PRACTICE AND
PROCEDURE: JURISDICTION § 3522 (2d ed. 1984). So does
Black’s Law Dictionary. BLACK’S LAW DICTIONARY 355,
426 (rev. 4th ed. 1968) (defining “court of competent
jurisdiction” as one “having power and authority of law … to
do the particular act,” and explaining the term “competent
authority,” “[a]s applied to courts,” means “legal authority to
deal with the particular matter in question”); id. 379, 459 (3d
ed. 1933) (same).

The majority contends the Supreme Court overruled this
well-settled meaning of “competent jurisdiction” in one vague
half-sentence in Breuer v. Jim’s Concrete of Brevard, Inc.,
538 U.S. 691 (2003). See Maj. Op. at 9. But “[c]ourts do not
normally overturn a long line of earlier cases without
mentioning the matter,” John R. Sand & Gravel Co. v. United
States, 128 S. Ct. 750, 756 (2008), and they especially do not
do so in equivocal half-sentences. Perhaps this is why the
parties—who have not exactly been shy about making
jurisdictional arguments that stretch the bounds of credulity—
refused to place much reliance on Breuer, even when
specifically prompted to do so at oral argument.3

Flailing to find some meaning for the statute’s “compe-
tent jurisdiction” limitation, the majority claims Congress
inserted this phrase to “clarify that … litigants in state courts
of limited jurisdiction must satisfy the appropriate jurisdic-

3
The majority’s selective quotations from Breuer do not accu-
rately reflect the vagueness of the relevant passage, in which the
Court first concluded the plaintiff could bring his claim in district
court, then quoted a statute containing “competent jurisdiction”
language, and then remarked that “the district courts would in any
event have original jurisdiction over FLSA claims under 28 U.S.C.
§ 1331 … and § 1337(a).” 538 U.S. at 694 (emphasis added).
 7

tional requirements.” See Maj. Op. at 7. I disagree. For if
authorization “to sue and be sued … in any court of compe-
tent jurisdiction, State or Federal,” clarifies that there must be
a separate source of state jurisdiction, why does it not also
clarify that there must be an independent source of federal
jurisdiction? See 12 U.S.C. § 1723a(a). Surely “competent
jurisdiction” modifies both “State” and “Federal” in Fannie
Mae’s charter. See id. In addition, the majority’s citation of
the statute construed in Osborn v. Bank of the United States is
ironic, because the “competent jurisdiction” phrase in that
statute only referred to state courts (but not federal courts).
See 22 U.S. (9 Wheat.) 738, 817 (1824) (authorizing suit “in
all state courts having competent jurisdiction, and in any
circuit court of the United States”). If, as the majority asserts,
Congress added “competent jurisdiction” to Fannie Mae’s
charter to clarify that an independent jurisdictional grant is
required in state (but not federal) courts, one would expect the
verbal formulation to look something like the statute in
Osborn. It does not.

In another effort to give “competent jurisdiction” some
meaning, appellees imply the phrase might refer to personal
jurisdiction. Although this interpretation is contrary to the
phrase’s ordinary meaning, Morton, 467 U.S. at 828 n.6, the
majority embraces this interpretation, see maj. op. at 7–8.
However, appellees’ half-hearted argument is quite telling,
because the furthest they will go is to argue personal jurisdic-
tion occasionally represents one “component of a court’s
‘competent jurisdiction.’” Rule 28(j) Letter, Apr. 21, 2008
(emphasis added); cf. Blackmar v. Guerre, 342 U.S. 512,
513–16 (1952) (interpreting “competent jurisdiction” to
require personal jurisdiction, but giving no indication that an
independent source of subject-matter jurisdiction was not also
required). There are two types of jurisdiction: personal
jurisdiction and subject-matter jurisdiction. Cf. Kontrick, 540
 8

U.S. at 455; 1 ROBERT C. CASAD & WILLIAM M. RICHMAN,
JURISDICTION IN CIVIL ACTIONS § 1-1 (3d ed. 2004). If, as
appellees argue, personal jurisdiction is one of the compo-
nents of a court’s “competent jurisdiction,” then the other
component must be subject-matter jurisdiction. Thus,
appellees’ best argument is that the sue-and-be-sued clause
requires personal jurisdiction and an independent source of
subject-matter jurisdiction. If that is the case, the sue-and-be-
sued clause does not create subject-matter jurisdiction.

The majority also suggests the words “competent juris-
diction” “clarify that … litigants relying on the ‘sue-and-be-
sued’ provision can sue in federal district courts but not
necessarily in all federal courts.” Maj. Op. at 7–8. But the
authority cited by the majority directly undercuts this
proposition. The majority cites the Supreme Court’s conclu-
sion that Red Cross’s authorization to sue and be sued in
federal court only includes district courts—not all federal
courts. See Maj. Op. at 8 (citing Red Cross, 505 U.S. at 256
n.8; id. at 267 (Scalia, J., dissenting)). But if that is the case,
Congress would have no need to clarify this point by adding
the “competent jurisdiction” language.

At bottom, the majority provides no convincing reason to
give the statute’s words anything other than their ordinary
meaning. Because “competent jurisdiction” refers to subject-
matter jurisdiction, Fannie Mae’s sue-and-be-sued clause is
functionally equivalent to the hypothetical statute described at
the beginning of this opinion: Fannie Mae may sue and be
sued “in any court of competent jurisdiction,” meaning it may
only sue in a court with an independent basis of jurisdiction.
Yet the majority presses its counter-textual conclusion that
this clause creates jurisdiction. I disagree, and the additional
interpretive principles to which I now turn support my textual
analysis.
 9

Red Cross relied on the canon that Congress is “pre-
sumed to intend [the] judicially settled meaning of terms,”
505 U.S. at 252, but that canon undercuts the majority’s
position here. In 1942, the Court held the FDIC’s charter was
jurisdictional. See id. at 254. Just five years later, in 1947,
Congress amended the Red Cross’s charter, making its
language “in all relevant respects identical” to the FDIC’s
charter. Id. at 257. The Red Cross Court found this signifi-
cant, explaining “Congress may well have relied on [the
Court’s 1942 holding] to infer” that amending the Red
Cross’s charter in this way would make it jurisdictional. Id.
at 260; see id. at 263; K.V. Mart, 173 F.3d at 1224–25 (Red
Cross is “premised” on this principle). But Red Cross’s
rationale cuts exactly the opposite way here. Fannie Mae’s
charter had contained text virtually identical to that already
deemed jurisdictional by the Court, but then Congress
decided to add a phrase that functions as a jurisdictional
restriction. Thus, unlike Red Cross, where the amendment
“tug[ged] hard toward a jurisdictional reading,” id. at 263,
here Congress inserted a phrase that militates against such a
reading.

In addition, Congress placed the “competent jurisdiction”
limitation in Fannie Mae’s sue-and-be-sued clause—but not
Freddie Mac’s clause, which is almost the same in every other
respect. Compare 12 U.S.C. § 1723a(a) (authorizing Fannie
Mae “to sue and to be sued, and to complain and to defend, in
any court of competent jurisdiction, State or Federal”
(emphasis added)), with 12 U.S.C. § 1452(c) (authorizing
Freddie Mac “to sue and be sued, complain and defend, in
any State, Federal, or other court”). We should be reluctant to
disregard this important difference in language—especially
when the two provisions containing the disparate language
appear in the same title of the U.S. Code and involve such
 10

interrelated organizations as Fannie Mae and Freddie Mac.
See, e.g., Branch v. Smith, 538 U.S. 254, 281 (2003) (plural-
ity) (noting “it is, of course, the most rudimentary rule of
statutory construction … that courts do not interpret statutes
in isolation, but in the context of the corpus juris of which
they are a part”).

In sum, each interpretive tool utilized by the Red Cross
Court—statutory text, the amendment timeline of the charter
juxtaposed against relevant Supreme Court decisions,
interpretive canons, and other statutory provisions—
demonstrates Fannie Mae’s sue-and-be-sued clause does not
create jurisdiction.

C

At first blush, it might seem reasonable for subject-matter
jurisdiction to exist in all cases where a federally chartered
entity such as Fannie Mae is a party. However, a federal
court cannot declare it has power (jurisdiction) over a case
simply by declaring it would be good policy for it to have that
power. See Pub. Citizen v. Nat’l Highway Traffic Safety
Admin., 489 F.3d 1279, 1287–88 (D.C. Cir. 2007) (“[T]his
court simply is not at liberty to displace, or to improve upon,
the jurisdictional choices of Congress,” and “[d]iscretionary
considerations of ‘fairness or efficiency’ do not authorize us
… to disregard plain statutory terms assigning a different
court initial subject-matter jurisdiction over a suit.”). I cannot
employ such a self-aggrandizing approach, because it is not
courts’ job to make policy—much less when that policy
inflates the judicial role at the expense of Congress and the
states. See Kline, 260 U.S. at 234 (holding the lower federal
courts “derive[] [their] jurisdiction wholly from the authority
of Congress”); WRIGHT, MILLER, & COOPER, supra, § 3522
(“[I]f the federal courts … entertain cases not within their
 11

jurisdiction,” an “unconstitutional invasion of the powers
reserved to the states” occurs.) Yet today the majority gives
Fannie Mae an “automatic” ticket out of state court anytime it
is sued—something only Congress can do.

Moreover, if policy choices are relevant to this inquiry,
they at least need to comport with those of Congress. Two
points are relevant here. First, Congress statutorily rejected
the notion that federal courts should always have subject-
matter jurisdiction in cases where a federally chartered entity
is a party. While “involvement of a federally chartered
corporation” used to be sufficient to create federal subject-
matter jurisdiction, Red Cross, 505 U.S. at 251, Congress in
1925 “diminish[ed] the flood of federal litigation” resulting
from this policy, Gov’t Nat’l Mortgage Ass’n v. Terry, 608
F.2d 614, 621 n.10 (5th Cir. 1979), by limiting “the [policy’s]
reach … to federally chartered corporations in which the
United States owned more than one-half of the capital stock,”
Red Cross, 505 U.S. at 251. This statutory limitation remains
today. See 28 U.S.C. § 1349. Second, we do not know why
Congress placed the “competent jurisdiction” limitation in
Fannie Mae’s charter, but not in Freddie Mac’s. Congress
treated these similar entities differently in this respect. But,
needless to say, it is not our role to upset that judgment.
Moreover, if the disparate statutory language resulted from a
legislative oversight, it is “beyond our province to rescue
Congress from its drafting errors, and to provide for what we
might think … is the preferred result.” Lamie v. U.S. Trustee,
540 U.S. 526, 542 (2004).

II

For the majority to be correct about the meaning of the
sue-and-be-sued clause, one of the following three proposi-
tions must be true. First: The Supreme Court held that merely
 12

mentioning the phrase “federal courts” always creates
jurisdiction, even where the rest of the clause plainly indicates
it does not create jurisdiction. Second: Congress’s amend-
ment of Fannie Mae’s charter to specifically insert the phrase
“[in any court of] competent jurisdiction” is meaningless. Or
third: The phrase “in any court of competent jurisdiction” has
a meaning completely at odds with Supreme Court precedent
(even though there is no convincing evidence to support such
an interpretation). Because none of these is even plausible, I
would hold we lack subject-matter jurisdiction.