Plaintiffs’ common-law claims in this case. But in their motions to dismiss, they have contradicted the core factual allegations of Plaintiffs’ complaint: that the Net Worth Sweep was wholly unnecessary and that its purpose and effect was to nationalize Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and to expropriate the value of private investors’ shares for the federal government. See, e.g., Complaint ¶¶ 10-11, Doc. 1. FHFA denies these factual allegations, insisting instead that the Net Worth Sweep “ended the circular practice of the Enterprises drawing funds from Treasury merely to make dividend payments to Treasury” and the concomitant “threat[ ] to erode the amount of the Treasury commitment available to the Enterprises.” FHFA Motion To Dismiss at 56, Doc. 28 (emphasis in original).
Despite the fact that FHFA and Treasury appear to have consciously omitted in the Iowa Action a number of fact-laden arguments that they raise before this Court, the agencies nevertheless made similar factual allegations regarding the purpose and effect of the Net Worth Sweep, and for that reason Continental Western sought to compel production of the administrative record. As the Iowa Court explained, Continental Western’s motion was prompted by the fact that in their briefs on the motions to dismiss defendants make factual assertions about the necessity and purpose of the net worth sweep inconsistent with the Complaint’s allegations on the same subjects. In particular, Continental Western targets statements in defendants’ briefs which justify the net worth sweep as necessary to save the Companies from insolvency.
Fannie Mae, Freddie Mac: Iowa Order
Below is some pretty stunning stuff. What makes discovery necessary in the Fairholme case is that Treasury/FHFA disputed many of the “facts” put forth by Fairholme in the Motion for Summary Judgement (not filed in Continental case) and offered some of their own. Because of that contradiction, discovery is then needed to flush out the truth. BUT, in the Continental’s case, they simply accepted all the facts in Continental’s complaint to be true, thus eliminating the need for additional discovery (I’m pretty sure that is not the last we’ve heard of that). Read below:
Iowa Order at 4.
At the hearing on Continental Western’s motion to compel production of the administrative record, however, FHFA and Treasury expressly and repeatedly disavowed their factual allegations contradicting the allegations of Continental Western’s Complaint. See, e.g., Tr. at 17-18 (“[F]or purposes of Defendants’ motions to dismiss, we accept . . . the correctness of every factual allegation.”) (FHFA); id. at 18 (“This is . . . a plain vanilla motion to dismiss . . . taking as true for purposes of our motion every single fact alleged.”) (FHFA); id. at 22-23 (“Our position remains [that] we’re entitled to dismissal because . . . we’ve accepted the allegations.”) (FHFA); id. at 29 (“THE COURT: . . . [A]s I understand [Continental Western’s] argument, the guts of it is that the anti-injunction statute does not apply because the FHFA was acting outside of its proper function as a conservator when it approved the net worth sweep and, as described by the Plaintiff, ended up essentially nationalizing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). . . . [I]f that is their argument, can that still be decided on the face of the pleadings? MR. CAYNE: Yes, Your Honor. I also understand that to be their argument, and in accepting, for purposes of our motion, those factual allegations, we believe that those factual allegations do not change the legal conclusions here.”) (FHFA); id. at 34 (“There is no factual dispute. You can take the allegations of the complaint as true . . . .”) (Treasury).
And it was on the basis of that disclaimer that the Court in the Iowa Action denied Continental Western’s motion to compel:
As noted, defendants contend that they make only a facial challenge to the Complaint. It is true that in their briefing they describe the net worth sweep in positive terms as a means to save the Companies from the insolvency they were facing under the dividend structure in effect prior to the Third Amendment. . . . Defendants having disclaimed a factual challenge, the Court must take Continental Western’s factual assertions bearing on its jurisdictional theory—that the net worth sweep was unnecessary and improperly motivated—as true.
Iowa Order at 6 (footnote omitted).
Profit sweep was necessary to save Fannie Mae and Freddie Mac
Here, FHFA purports to raise a purely facial challenge to the complaint in its motion to dismiss, but it never has disclaimed its insistence that the Net Worth Sweep was necessary to save Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) from the circular dividend practice that FHFA foisted upon them. Indeed, in opposing Plaintiffs’ Motion for Supplementation FHFA insists that “[t]he Court can— and should—consider” its assertions regarding the purpose and effect of the Net Worth Sweep “in resolving the Motion to Dismiss the breach of fiduciary duty claims.” FHFA Opposition to Plaintiffs’ Motion for Supplementation at 15, Doc. 34. But as the Iowa Court correctly concluded, those assertions contradict Plaintiffs’ factual allegations. Thus, the Court should either (a) grant Plaintiffs’ pending motion to allow Plaintiffs to take limited discovery, or (b) ignore FHFA’s attempts to justify the Net Worth Sweep and accept as true, as the Iowa Court has, Plaintiffs’ allegations “that the net worth sweep was unnecessary and improperly motivated” simply to expropriate the value of Plaintiffs’ preferred stock in Fannie and Freddie. See Iowa Order at 6.
Plaintiffs submit that the former option is preferable in light of the circumstances of this case, see Plaintiffs’ Reply in Support of Their Motion for Supplementation at 23-24, Doc. 36, but what is plainly not permissible is to allow FHFA to attempt to seek dismissal of Plaintiffs’ claims on the basis of factual assertions that contradict the central allegations of the complaint.1
Dated: September 3, 2014
Sweeney, (Fairholme case Judge) has repeatedly said Fairholme (plaintiff) “will have their day in court”. I see no reason why she will reverse her previous orders for discovery due to a ruling based on facts and circumstances not even present in the case before her. Further, the ruling in Continental was issued in a District Court while Sweeney sits in the DC Court of Claims. The two courts has different procedures and jurisdictional issues that preclude a ruling in one from being automatically applicable to the other.
If anything, I see this attempt from the government pissing her off (as they already have a several occasions).
Let’s remember, the Continental case was not dismissed, additional discovery was denied because the FHFA/Treasury did not file a motion for summary judgement (like they did in Fairholme), did not file an administrative record (as they partially did in the Fairholme case) and took “as fact” the claims Continental made (again, unlike the Fairholemcase).
We will of course have to wait for her order but I’d be very, very shocked if anything changed in this case.
