Fannie Mae: Continental Western Points Out Lamberth Ignored Supreme Court Precedent by Todd Sullivan, ValuePlays
UPDATE: The court has accepted the brief and Treasury has 15 days to reply ONLY re: Perry decision
This is good stuff…
Charles Cooper has filed a motion on behalf of Continental Western to supplement their brief. In it he points out the flaws in the Perry ruling from Lamberth. The cliff notes here are that Lamberth ignored 2nd Circuit, 8th Circuit, 9th Circuit and Supreme Court precedent with his ruling when he claimed:
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1- FHFA has ability to liquidate
2- Because HERA (in his opinion) says FHFA can do whatever it wants, it can
3- Because the companies have not yet been liquidated, there is no taking and the claims are not ripe
Summation below and full annotated filing below (all quotations from filing, all BOLD notations are mine):
1- Interestingly enough, despite it being touted as the main reason for the Conservatorship, “Nowhere in the Perry court’s recent decision upholding the Net Worth Sweep can one find the words “preserve and conserve the assets and property of the regulated entity” or “put the regulated entity in a sound and solvent condition.”
2- “HERA says that “no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.” 12 U.S.C. § 4617(f) (emphasis added). It follows that Section 4617(f) bars review of Plaintiff’s claims only if FHFA was legitimately acting within its authority as a “conservator” when it yielded to Treasury’s demand to impose the Net Worth Sweep. See Plaintiff’s Response to Defendants’ Motions To Dismiss at 24-29, Doc. 45 (“MTD Opp.”). The Perry court, however, never explained how FHFA’s decision to donate to its sister agency all of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s massive profits in perpetuity could possibly be viewed as the legitimate act of a “conservator.” Our research discloses no act of a conservator in the annals of financial regulatory history that is even remotely comparable to Defendants’ looting of privately owned companies. Nor have Defendants been able to point to a comparable precedent.
The Perry court likewise failed to explain how FHFA’s actions could possibly be squared with HERA’s specific statutory requirements that FHFA, as conservator, “preserve and conserve [the Companies’] assets and property” and strive to place them “in a sound and solvent condition.” ”
3- “As the Eighth Circuit has explained, the conservator of a distressed financial institution is “empowered to take action necessary to restore [it] to a solvent position and to carry on the business of the institution and preserve and conserve the assets and property of the institution.” RTC v. CedarMinn Bldg. Ltd. P’ship, 956 F.2d 1446, 1453 (8th Cir. 1992) (internal quotation marks omitted). Indeed, “a conservator only has the power to take actions necessary to restore a financially troubled institution to solvency. “
4- “(“The decision to appoint a conservator is not a judgment to divest the owner of his property. Rather, it is a judgment that the owner is unable or unwilling to properly manage or control the assets and it is an attempt to put the institution back into a safe and sound condition.”).
In direct contradiction of the rehabilitative mission that defines the role of a conservator, the Perry court concluded that only “two facts” mattered to its inquiry under Section 4617(f): because Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (1) “continue to operate” and (2) “have now regained profitability,” FHFA’s actions cannot be challenged as beyond the scope of its powers as conservator. Op. 24. To that court, it mattered not that by stripping all profits from Fannie Mae and Freddie Mac, FHFA was depleting the Companies’ capital by billions of dollars every quarter and leaving them just one bad quarter from insolvency.
On the Perry court’s understanding of Section 4617(f), then, FHFA need not offer any rehabilitative rationale for its actions or otherwise even pretend to pursue the traditional goals and actions of a conservator to avail itself of immunity from suit. So long as Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) continue to operate profitably, FHFA is free to give all of the Companies’ assets to anyone, for any reason. Congress surely did not intend Section 4617(f) to bring about such absurd results. “
5- “The Perry court’s extraordinary expansion of the reach of Section 4617(f) is illustrated by the fact that Section 4617(f) is materially identical to the provisions of FIRREA that govern FDIC’s conservatorships and receiverships of banks. Perry has dire implications for financial institutions that may seek to raise capital in the future: if FHFA as conservator can donate the entire value of the Companies to deficit reduction, then the same is true for the FDIC when it acts as conservator for a bank, even a highly profitable one.
In declaring FHFA’s purpose for entering the Net Worth Sweep irrelevant to the jurisdictional analysis, the Perry court said that it would consider only “what has happened, not why it happened.” Op. 21. Even if the Perry court were correct, in this case it is ironically not Plaintiff but Defendants who have sought to shift the focus away from what the Net Worth Sweep did to why it was done. Perhaps recognizing that “what” the Net Worth Sweep does cannot be squared with the most fundamental duties of a conservator under HERA, Defendants have attempted to defend the Net Worth Sweep by offering a patently pretextual purpose. Specifically, in contravention of the Complaint’s allegations, Defendants argue that this extraordinary action was necessary to arrest a “downward spiral” supposedly caused by the Companies’ practice of drawing on Treasury’s funding commitment to pay cash dividends back to Treasury. See, e.g., Treasury MTD Reply at 5-6, Doc. 46; FHFA MTD Reply at 14, Doc. 47. While the Perry court claimed to have deemed this explanation irrelevant to the Section 4617(f) analysis, it appears to have largely credited Defendants’ economic narrative. Op. 6 n.7 (concluding that FFHA was required to pay dividends to Treasury even if it had to draw on Treasury’s funding commitment to do so).2 But even if that narrative were accurate—it is not— Defendants’ purported good intentions would not change the fact that the Net Worth Sweep gave away the assets that FHFA was supposed to “preserve and conserve” as conservator and guaranteed that the Companies will never be able to rebuild capital and resume normal business operations. Such actions, whatever their motive, are not those of a conservator.
In all events, this Court has held that it “must take Continental Western’s factual assertions . . . as true”—including Plaintiff’s assertions “that the net worth sweep was unnecessary and improperly motivated.” Order on Motion To Compel at 6, Doc. 42 (“MTC Order”). To the extent that the Court considers why FHFA imposed the Net Worth Sweep, it cannot dismiss the Complaint on the basis of Defendants’ contested economic narrative. ”
6- Footnote 2 “The Perry court’s reasoning rests on the demonstrably mistaken premise that prior to the Net Worth Sweep the Companies were required to pay Treasury a 10% cash dividend even when they could not do so without drawing on Treasury funds. The Perry court’s reading of the Stock Certificates is inconsistent with the plain language of the contract and applicable law. First, as we have previously demonstrated, MTD Opp. 31 n.9, the plain terms of Treasury’s senior preferred stock certificates gave the Companies another option, specifying that “[t]o the extent” dividends were not paid in cash, “dividends on the Senior Preferred Stock shall accrue and shall be added to the Liquidation Preference.” Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) Government Stock Certificate § 2(b) (Exhibit B to Doc. 23-2). The Perry court determined that declining to declare cash dividends was not an “option” available to the Companies because the Stock Certificates say that if the Companies “fail[ ] to pay dividends in cash in a timely manner as required by this Certificate, then immediately following such failure” the dividend rate increases to 12% until all accrued dividends are paid in cash. Op. 7 n.7 (quoting Fannie Mae Government Stock Certificate § 2(c)). But another provision of the Stock Certificates makes clear that Treasury is only entitled to cash dividends “when, as and if declared by the Board of Directors, in its sole discretion.” Fannie Mae Government Stock Certificate § 2(a). The Perry court ignored that provision, and its oversight is particularly glaring because 31 pages later it pointed to the very same language in the plaintiffs’ stock certificates as the basis for its conclusion, this time correct, that the plaintiffs had no contractual right to be paid undeclared cash dividends. Op. 37. Second, even if no such language appeared in the Treasury Stock Certificates, it would not change the fundamental principle that a corporation is never legally required to pay undeclared cash dividends and may not do so when paying them would render it insolvent. See EBS Litig., LLC v. Barclays Global Investors, 304 F.3d 302, 305-06 (3d Cir. 2002). Under Delaware corporate law, a dividend cannot be mandatory. DEL. CODE tit. 8, § 170(a) (directors “may” pay dividends out of surplus but “shall not” declare or pay dividends out of a corporation that lacks a capital surplus). ”
7- “Perhaps no passage of the Perry opinion better illustrates this error than its startling conclusion that the Companies’ private shareholders do not retain a property interest in their stock:
Whether the defendants executed the Third Amendment to generate profits for taxpayers or to escape a “downward spiral” of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) seeking funding in order to pay owed dividends back to Treasury, it does not change the fact that it was executed during a period of conservatorship and, thus, after the plaintiffs’ property interests . . . were extinguished.
Op. 46 (emphasis added). Even FHFA, in announcing its decision to place the Companies in conservatorship, acknowledged that under a conservatorship the shareholders “are still in place; both the preferred and common shareholders have an economic interest in the companies.” Compl. ¶ 39 (quoting Oversight Hearing To Examine Recent Treasury and FHFA Actions Regarding the Housing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC): Hearing Before H. Comm. on Fin. Servs., 110th Cong. (Sept. 25, 2008) (Statement of James B. Lockhart, III, Dir., FHFA)); id. (during the conservatorship, the Companies’ stockholders “will continue to retain all rights in the stock’s financial worth” (quoting FHFA FACT SHEET, QUESTIONS AND ANSWERS ON CONSERVATORSHIP 3 (Sept. 7, 2008)); see MTD Opp. 11-12. FHFA’s donative transfer to Treasury was the act of an owner, not a conservator pursuing its self-avowed “statutory mission to restore soundness and solvency to [Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)] and to preserve and conserve their assets and property.” 76 Fed. Reg. at 35,726. ”
7- “The Perry court correctly acknowledged that it could set aside the Net Worth Sweep if FHFA acceded to that change in violation of HERA’s proscription “not [to] be subject to the direction or supervision of any other agency of the United States.” 12 U.S.C. § 4617(a)(7); see Op. 23. That court erred, however, in dismissing the plaintiffs’ claim on the ground that “there is nothing in the pleadings or the administrative record provided by Treasury that hints at coercion actionable” under Section 4617(a)(7). Op. 23.
Regardless of whether there was any merit to the Perry court’s conclusion that “nothing in the pleadings . . . hints at coercion actionable under § 4617(a)(7),” Op. 23, this Court has already recognized that the Complaint in this case alleges that the Net Worth Sweep “was the product of a Treasury directive aimed simply at giving Treasury all of the Companies’ profits.”
MTC Order 4 (emphasis added); see Compl. ¶ 78 (“FHFA agreed to the Net Worth Sweep only at the insistence and under the direction and supervision of Treasury.”); MTD Opp. 32-33. Indeed, the Court has previously ruled that it must accept that allegation, like all of the facts alleged in the Complaint, as true in resolving the Defendants’ pending motions to dismiss. MTC Order 6.
It was, of course, quite improper for the Perry court to dismiss a claim on the basis of the incomplete “administrative record provided by Treasury,” id.,4 while at the same declaring that it “need not view the full administrative record” to dismiss the suit. ”
8- “The Perry court’s analysis rests on the false premise that only an act that completes the Companies’ liquidation could be at odds with FHFA’s mission as conservator “to carry on [their] business . . . and preserve and conserve” their assets. 12 U.S.C. § 4617(b)(2)(D). Here,
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