• Financial Markets Rescue Package Q&A: Judicial Review (8 of 10)
  • October 26, 2008
  • Law Firm: Faegre & Benson LLP - Minneapolis Office
  • The federal government's Troubled Asset Relief Program (TARP)--created by The Emergency Economic Stabilization Act of 2008 (EESA) signed into law by President Bush on October 3, 2008--gives the U.S. Department of the Treasury authority to purchase "troubled assets" from financial institutions.

    Is the program subject to judicial review, and what other litigation may result?

    Q: What judicial review is available of any of the government's decisions?

    A: The government's decisions may only be reviewed for whether they are "arbitrary, capricious, an abuse of discretion, or not in accordance with law." (§ 119(a)(1).) Injunctive relief is only available, however, for constitutional violations. (§ 119(a)(2).) The EESA also establishes an expedited timeline for consideration of requests for injunctive relief. (Id.)

    Q: Who may seek judicial review?

    A: Institutions that sell assets in connection with any program under EESA may not bring claims against the Treasury Secretary, except for under the "arbitrary and capricious" standard or as allowed by contract. (§ 119(a)(3).) Actions by any other party are not discussed directly, but presumably would be subject to the courts' regular standing requirements.

    Q: What litigation claims are likely to arise from implementation of the bailout?

    A: With the details of the TARP so vague and the discretion vested in the Treasury Department so great, the program could spawn a wide variety of litigation.

    The EESA contains a savings clause that provides that the Treasury Secretary's actions under the TARP do not impair any claims or defenses that otherwise apply with respect to persons other than the Secretary. (§ 119(b)(2).)

    The government, as purchaser of troubled assets under the TARP, therefore, may choose to exercise legal claims and rights that go along with those assets. If it does, then another field of litigation could be opened in which, as in the S&L bailout of the 1980s and 1990s, the government pursues legal claims that formerly belonged to the old asset holders.

    Another possible area of litigation relates to the review of the TARP's activities. Until "program guidelines" are issued—no later than 45 days after the Act is enacted—there is no telling when, and to what degree, the government's actions can be successfully challenged by those who feel that the Treasury Department—or the asset managers that it deputizes to run the TARP—have exceeded or abused their authority. The Act does provide for judicial review and reversal of Treasury Department decisions that are "arbitrary, capricious, an abuse of discretion, or not in accordance with law." But the Act also sets strict limits on the type of relief available, prohibiting injunctive relief for anything other than constitutional violations.

    Yet another source of civil litigation may be related to the rights of firms that "service" mortgages that have been pooled and securitized. In mortgage-related securities, the mortgage rights themselves are generally left in the hands of a "servicer" that administers the loans. This permits one entity to service individual loans and distribute funds to trustees to pay the various investors. Servicers and trustees have contractual obligations related to the mortgages that have been pooled and securitized, but may be under government pressure to change mortgage terms and avoid foreclosure of certain mortgages. Despite language in the Act attempting to preserve a servicer's right and duties, it is possible that litigation may arise over how the TARP's purchases will affect the contractual duties of these participants in securitizations.

    The EESA provides that a mortgage servicer, except as provided by contract, owes no duty to determine whether the net present value of payments on a loan, as modified, is likely to be greater than the anticipated net recovery that would result from foreclosure, to all investors and holders of beneficial interests in the investment, and not to any individual or group of investors. (§ 119(b)(2).) A servicer also is deemed to act in the best interests of all investors or holders of beneficial interests if it agrees to or implements a modification or workout plan when the servicer takes reasonable loss mitigation actions. (Id.) Because servicer contracts typically contained detailed provisions on these issues, however, the exception in the statute likely will swallow this rule.