                                                                           June 3, 1977


77-33       MEMORANDUM OPINION FOR THE
            SECRETARY OF THE DEPARTMENT OF
            HOUSING AND URBAN DEVELOPMENT
            Constitutionality of S. 1397—Federal National
            Mortgage Association


   The A ttorney General has asked that we respond to your request for
an opinion concerning the constitutionality of the provisions of S. 1397.
The proposed legislation would amend the Federal National Mortgage
Association Charter Act to increase the size of the Board of Directors
of the Federal National M ortgage Association (FNMA), and would
make FN M A subject to the Freedom of Information Act.
   F N M A ’s counsel has prepared a legal memorandum arguing that S.
 1397 raises Fifth Amendment questions regarding the prohibitions
against the taking of private property without “due process of law” or
“just compensation.” Your legal counsel prepared a rebuttal paper to
FN M A counsel’s arguments, and concluded that FN M A ’s arguments
were without merit. We have reviewed the proposed legislation and
relevant case law and it is our conclusion that the enactment of S. 1397
would constitute a legal exercise of congressional power and clearly
stand within the boundaries of the Constitution.
   A t present, the Board of Directors of FNMA (the Board) consists of
15 persons, 5 appointed annually by the President and 10 elected annu­
ally by the common stockholders.1 S. 1397 would amend § 308(b) of
the National Housing Act to allow the President to appoint 9 directors
while leaving the number elected by the common stockholders at 10.
This proposed amendment raises four questions of law that require
discussion in order to determine the ultimate question of the constitu­
tionality of S. 1397.
         (1) Did the charter granted to FN M A by the Government create
      contractual rights between the Government, FNM A, and the
      stockholders?

  1 See 12 U.S.C. § 1723(b) (1970). Initially, F N M A ’s preferred stock was held by the
Secretary o f the T reasury. It was retired in accordance w ith the A ct, and F N M A became
a privately ow ned corporation. See 12 U.S.C. § 1718 (1970).

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         (2) Are contractual rights derived from a legislative act protect­
      ed by the Constitution?
         (3) D o the stockholders of FNM A have vested rights to the
      continuation of FNM A’s charter in its present form?
         (4) If the proposed legislation were enacted into law, would it
      effect a “taking” of FN M A’s stockholders property without “due
      process of law” or “just compensation”?
In our opinion, the answer to the first two questions is yes and to the
latter two is no.
   The starting point, more out of tradition than legal necessity, is the
Dartmouth College Case.2 The Supreme Court held that the granting of
a charter by the State of New Hampshire to the school created a
contract between the State, the trustees, and the individuals who con­
veyed property to the corporation. When the State of New Hampshire
attempted to amend the charter to increase the number of trustees, the
Supreme Court held that the legislation amending the charter violated
Article I, § 10 of the United States Constitution, which, inter alia, states
that “ [n]o state shall . . . pass any . . . Law impairing the obligation
of Contracts.”
   While the congressional action proposed in S. 1397 is analogous to
that involved in the Dartmouth College Case, it is well settled that “[t]he
Contract Clause . . . is a limitation on state rather than federal
action.” 3 And, the question whether the Federal Government can pass
laws that modify, amend, or repeal contracts between it and private
parties has been answered in the affirm ative.4 However, “a measure of
protection against contract impairment by the federal government is
given by the Fifth Amendment.” 5 The Supreme Court, in Lynch v.
United States* held that rights under a contract with the Government
are property, which the Fifth Amendment protects from a statutory
“taking” without just compensation.7
   It seems clear that (1) the Federal Government is not restrained by
Article I, § 10 of the Constitution from impairing the obligation of
contracts; (2) the Federal Government, through legislation, can create
contractual rights with private parties; and (3) these contractual rights
are property that is protected by the Fifth Amendment. Thus, we
conclude that the Federal Government has the power to alter the
obligation of contracts and “need only adhere to the due process
requirements of the Fifth Amendment.” 8

 2 Dartmouth College v. Woodward, 17 U.S. (4 W heat) 518 (1819).
 3 John McShain, Inc. v. District o f Columbia, 205 F. 2d 882, 883 (D.C. Cir., 1953).
 4 See cases cited infra, at notes 9, 10, and 12.
 5 John McShain. Inc. v. District o f Columbia, supra, note 3, 205 F. 2d at 884.
 •292 U.S. 571 (1934).
 7 Id. at 579.
 8 United States v. One 1962 Ford Thunderbird, 232 F. Supp. 1019, 1021 (N .D . 111., 1964).

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    The case law supports the foregoing conclusion.9 As the Supreme
 Court stated in Federal Housing Administration v. The Darlington, Inc.,10
 “ ‘[s]o long as the Constitution authorizes the subsequently enacted
 legislation, the fact that its provisions limit or interfere with previously
 acquired rights does not condemn it. Immunity from federal regulation
 is not gained through forehanded contracts.’ ” 11
    M oreover, at least one case suggests that the Federal Government
 can modify or rescind a contract by later legislation without regard to
the prohibitions of the Fifth Amendment, except where rights are
 vested.12 This raises the question whether the stockholders of FNM A
have a vested right to the continuance of FN M A ’s charter in its present
form.
    The case of Fahey v. O'Melveny & Myers 13 teaches that, to determine
whether the stockholders o f FNMA have a vested right in its present
form, one must look first at the nature of the contract. Although not
the same case, O'Melveny & Myers points to the right legal direction in
the present matter. Like FNM A, the privately owned corporation in
O'Melveny & Myers was a creature of Federal legislation. The predeces­
sor of the Federal Home Loan Bank Board had abolished the Federal
Home Loan Bank of Los Angeles and Portland (Oregon) and merged
them into a new Federal Hom e Loan Bank of San Francisco. The court
reviewed the Home Loan Bank Act and the contractual obligations it
established, and concluded that
        “ . . . a Federal Home Loan Bank is a federal instrumentality . . .
      neither the bank nor its association members, although they are
      nominally stockholders, acquire under the provisions of the Bank
      Act, any vested interest in the continued existence o f said bank or
      any legally protected private rights which would enable them to
      invoke the due process clause.”14
The court noted that “[t]his legislatively created system of Home Loan
Banks exemplifies the principle that whatever rights and privileges
Congress may constitutionally confer, it may withhold. . . .” 15
   Similarly, the Federal National M ortgage Association Charter Act
provides the only authority for the creation o f FNMA, and expressly
   9 See, Norman v. B. & O. R. Co.. 294 U.S. 240, 309-310 (1935), holding that “ [t]here is
no constitutional ground for denying to the C ongress the p o w er expressly to prohibit and
invalidate c o n tracts although previously made, and valid w hen made, w hen they interfere
w ith the carry in g out o f the policy it is free to adopt;” Hart v. Aluminum Co. o f America,
73 F. Supp. 727, 728 (W .D. Pa., 1947), stating th at “[b]y a subsequent statute C ongress
may w ith d raw rights granted by a statute w ithout violating any provision o f the C onstitu­
tion” ; and Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 437 (1934), w here
the C o u rt stated th at “ [t]he econom ic interests o f the State m ay justify the exercise o f its
continuing and dom inant protective pow er notw ithstanding interference w ith contracts.”
   10 358 U.S. 84 (1958).
   '■ Id. at 91.
   '‘‘ Southwestern Petroleum Corporation v. Udall, 361 F. 2d 650, 654 (10th Cir., 1966).
   ” 200 F. 2d 420 (9th Cir., 1952).
   14 Id. at 446.
   11 Ibid.

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authorizes its business existence. While, under the statute, after a transi­
tion period, it was to become a privately owned corporation, it is a
corporation of the United States. Unlike O'Melveny & Myers, the
charter did not invest FNMA “with all the attributes and characteris­
tics of a purely private corporation and immediately clothed it and all
of the properties in its control and possession with all of the protections
provided by general law as in a case where a purely private corporate
enterprise was involved.” 18
   The legislative history demonstrates that FNM A was to be a “G ov­
ernment-sponsored private corporation” with “a status analogous to
that of the Federal land banks and the Federal home loan banks.” 17
Moreover, 12 U.S.C. § 1723a(h) provides that “[t]he Secretary of Hous­
ing and Urban Development shall have general regulatory power over
the Federal National Mortgage Association and shall make such rules
and regulations as shall be necessary and proper to insure that the
purposes of this subchapter are accomplished.” 17
   FNMA was organized to carry out a public policy.18 Its organization
and incorporation are pursuant to a law of Congress which authorized
its undertaking. Thus, all obligations on the part of the Government
and any rights of the shareholders derived from those obligations “must
be understood as having been made in reference to the possible exercise
of the rightful authority of the Government, and that no obligation o f a
contract ‘can extend to the defeat’ of that authority.” 19
   As previously noted, it is true that Congress intended that the stock
of FNMA be privately owned, but it also intended that the hand of the
Federal Government would continue to rest upon its shoulder; it re­
mains subject to the regulatory oversight of both the Department of
Housing and Urban Development and the Department of the
Treasury.20 It has been stated that “ [t]hose who do business in the
regulated field cannot object if the legislative scheme is buttressed by
subsequent amendments to achieve the legislative end.” 21
   It is our opinion that FNM A’s stockholders have no vested rig h t22 to
the continued existence of FNM A in its present form and no protected
private right that would enable them to invoke the prohibitions of the
Fifth Amendment.23 To vest them with such a right would be to tie the

   16 Fahey v. O ’Melveny & Myers, supra, note 13, 200 F. 2d at 442.
   17 See S. Rep. N o. 1123, 90th Cong., 2d Sess. 79 (1968).
   18 12 U.S.C. § 1723a(h) states that “ [t]he Secretary may require that a reasonable
portion o f the co rporation’s m ortgage purchases be related to the national goal o f
providing adequate housing for low and m oderate incom e families. . . .”
 . ' • Norman v. B. & O. R„ supra, note 9, 294 U.S. at 305. “N ot only are existing law s
read into co n tracts in o rd e r to fix obligations as betw een the parties, but the reservation
of essential attributes o f sovereign pow er is also read into contracts as postulate o f th e
legal ord er . . . .” Home Building & Loan Association v. Blaisdell, supra, note 9, 290 U.S. at
435.
   “ See 12 U .S.C. §§ 1717(a)-(b), 1718, 1719, and 1723a(h) (1970).
   21 FHA v. The Darlington. Inc., supra, note 10, 358 U.S. at 91.
   22 See text, supra at pages 5-7 and note 35, infra-
   21 See text, supra at notes 14 and 15, and note 35, infra.

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hands of Congress in its attempt, through legislation, to provide ade­
quate housing for its citizens.24 Only recently, the Supreme Court stated
that “[a]s is customary in reviewing economic and social regulation,
however, courts properly defer to legislative judgment as to the neces­
sity and reasonableness of a particular measure.”25
   The final question on this matter is whether S. 1397 would result in
“taking” of FN M A ’s stockholders’ property without “due process of
law ” or “just compensation”? For the reasons set forth above, we
respond in the'negative. W e concluded above that FNM A stockholders
have no vested rights in the continuation of the FNM A charter in its
present form. However, even if FN M A ’s stockholders have an “incho­
ate” or a “vested” right that is protected by the Fifth Amendment, we
do not think the action contemplated by the proposed legislation would
enable them to invoke the prohibitions of the Fifth Amendment. As
was pointed out in El Paso v. Simmons,26 “ . . . it is not every modifica­
tion of a contractual promise that impairs the obligation of contract
under federal law . . . .” 27 particularly, where a revision of law makes
no real substantive change.
   Furtherm ore, Congress expressly reserved the right to dissolve
F N M A ’s charter.28 Because Congress has the right under the enabling
law to abolish FNMA, it arguably has the right to amend or otherwise
alter the charter as it sees fit.29 But, if FN M A’s stockholders had an
“inchoate” or “vested” right to its continuing in its present form, then a
stockholder’s right could be materially affected differently if the corpo­
ration continued under a different managerial scheme than if it were
dissolved and liquidated.30 These considerations, however, carry little
import in the present matter.
   As noted above, the proposed legislation would increase the number
of persons appointed to the Board by the President from five to nine,
leaving the number elected by the common stockholders standing at 10.
Therefore, S. 1397 would have the effect of reducing the number of
directors elected by FN M A’s stockholders from two-thirds to one more
than one-half. But, what effect would this contemplated action have on
   24 “ T h e presum ption is that such a law is not intended to create private contractual or
vested rights but m erely declares a policy to be pursued until the legislature shall ordain
o therw ise.” Dodge v. Board o f Education, 302 U.S. 74, 79 (1937).
   25 United States Trust Company v. New Jersey, 431 U.S. 1, at 23-24 (1977).
   “ 379 U.S. 497(1965).
   27Id. a t 506-507.
   28See 12 U.S.C. § 1717(a)(2)(B) (1970).
   “ C ongress has the constitutional pow er to abolish a legislatively created corporation,
even if it does not expressly reserve such pow er. W hatever rights and privileges Congress
is authorized to give, it is also authorized to take aw ay. See text, supra at note 15. It seems
unnecessary to say th at an existing legislature could not pass a law that a subsequent
legislature could not amend or repeal.
   “ U pon liquidation the stockholders w ould be entitled to a pro rata share o f the
c o rp o ra tio n ’s assets after paym ent o f all indebtedness. U nder a new m anagerial scheme,
assum ing they decided to end their association w ith the corporation, they w ould be
forced to sell th eir stock at th e m arket price, w hich m ight be m ore o r less than they
w ould receive if th e corportion w as dissolved.

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any “inchoate” or “ vested” rights of FN M A’s stockholders? On its face
it would appear to impair their ability to exercise control over the
policies and business judgments of the corporation.31
   First, as the Supreme Court stated in Norman, “[c]ontracts, however
express, cannot fetter the constitutional authority of the Congress. Con­
tracts may create rights of property, but when contracts deal with a
subject matter which lies within the control of the Congress, they have
a congenital infirmity.” 32
   Thus, as was pointed out in O'Melveny & Myers, “. . . men do not go
blindly into these Home Loan Bank ventures—they assume all of the
obligations with all of the legislative and administrative ‘strings’ at­
tached when a charter is granted to them by the Board.” 33 In the
present matter, the stockholders entered the arrangement with “all of
the legislative and administrative ‘strings’ attached.” One of those
“strings” was the chance that a subsequent legislature would exercise its
constitutional authority and amend FN M A’s charter.
   Second, §4.09 and § 4 .12(b) of the bylaws make clear that policies
and business judgments can be made by a simple majority.34 Thus,
stockholders would still elect a majority of the Board’s members.
   Moreover, the extent to which the Board of Directors sets policies
and makes business judgments must be considered in light of the fact
that 12 U.S.C. § 1723a(b) provides that “ [n]o stock, obligation, security,
or other instrument shall be issued by the corporation without the prior
approval of the Secretary.” 35 This requirement stands whether the
majority vote on a particular matter is 51 percent or 100 percent.36
Thus, the proposed legislation would leave the stockholders close to
where it found them; the harm, if any, is relatively small when all of
the appropriate factors are considered.37
   As we stated at the beginning, S. 1397 also would make FNMA
subject to the provisions of the Freedom o f Information Act. Little
   51 It should be noted that the proposed legislation in no way tam pers w ith F N M A ’s
com m on stock, and thus does not diminish its value to the stockholders o r its voting
strength.
   MNorman v. B. & O. R. Co., supra note 9, 294 U.S. at 307-308.
   ” Fahey v. O'Melveny & Myers, supra note 13, 200 F.2d at 444.
   S4A tw o-thirds affirm ative vote o f the Board o f D irectors is required to alter, amend,
o r repeal the bylaws. See A rticle 7 o f the ByLaw s o f the Federal National M ortgage
Association, as amended.
   »“      vested right * • * [is] one w hich is absolute, com plete, and unconditional to the
exercise o f w hich no obstacle exists, and w hich is imm ediate and perfect in itself and not
dependent upon a contingency.’ ” Hutton v. Autoridad Sobre Hogares De La Capital, 78 F.
Supp. 988, 994 (Puerto Rico, 1948). U nder 12 U.S.C. § 1723a(h), the Board o f D irectors
d o not have this absolute, com plete, and unconditional right, the stockholders’ right can
be no greater. See also note 18, supra.
   3®It could be argued that the Secretary is m ore likely to approve a decision o f the
Board if its vote is 10 to 5 as opposed to 10 to 9. But the m atter in question calls for an
interpretation o f the law , not a forecast o f the Secretary’s probable actions.
   57 “ Law s w hich restrict a party to those gains reasonably to be expected from the
contract are not subject to attack under the C ontract Clause, notw ithstanding that they
technically alter an obligation o f a contract.” E l Paso v. Simmons, supra, note 26, 379 U.S.
at 515.

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need be said on this issue except that Congress, as a matter of public
policy, has the constitutional power to subject the FNM A to the
Freedom of Information Act. It is w orth noting that Amtrak, a private­
ly owned corporation,38 is already subject to the Act.39
   For the foregoing reasons we are of the opinion that S. 1397 is
constitutional.
                                                        John M . H     arm on
                                            Acting Assistant Attorney General
                                                           Office o f Legal Counsel




  38 L ike F N M A , A m trak is a privately ow ned corporation that was created by an A ct o f
Congress.
  38See 45 U .S.C. § 546(g) (Supplement V, 1975).

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