Fannie, Freddie: Continental Western Ruling Immaterial to Fairholme/Perry Cases (updated 9/5 11am) by Todd Sullivan, ValuePlays
UPDATED TO CLARIFY DISTRICT COURT AND COURT OF CLAIMS CASES
This is classic Wall St. Without understanding or taking the time to delineate between the two cases, they simply draw a straight line from one case to another and then assume a ruling in one directly applies to the other. They don’t…. This has caused Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to sell off the last few days..
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
Fannie Mae, Freddie Mac conservator filed a Continental Ruling
FHFA filed a brief 8/26 following the Continental Ruling (filing here):
Defendants the Federal Housing Finance Agency (“FHFA” or the “Conservator”), as Conservator of the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (the “Enterprises”), FHFA Director Melvin L. Watt, Fannie Mae, and Freddie Mac here by notify the Court of a recent ruling (attached as Exhibit A)—issued in a related litigation—in further opposition to Plaintiffs’ Motion for Supplementation of the Administrative Records, for Limited Discovery, for Suspension of Briefing on Defendants’ Dispositive Motions, and for a Status Conference, Fairholme Funds, Inc. v. FHFA, No. 1:13cv01053 (Feb. 12, 2012) (Doc. # 31) (the “Motion for Supplementation”). In this recent decision, another federal district court denied essentially the same relief Plaintiffs seek here—to conduct discovery and expand the administrative record before resolving threshold legal issues.
On February 5, 2014, Continental Western Insurance Company, initiated an action in the U.S. District Court for the Southern District of Iowa against FHFA, its director, and the Department of the Treasury (“Treasury”). See Continental Western Ins. Co. v. FHFA, et al., No. 4:14cv0042 (S.D. Iowa) (the “Iowa Action”); see also Doc. # 49 (1:13cv1053) (identifying the Iowa Action as a related action). The Iowa Action is directly related to the actions pending in this Court. The plaintiff in the Iowa Action is a corporate subsidiary of one of the Plaintiffs in the Fairholme action (Berkeley Regional Insurance Company) and is represented by the same counsel as the Fairholme plaintiffs (Cooper & Kirk, PLLC). The Iowa Action presents the same controversy as the present actions—whether the FHFA as Conservator and Treasury acted unlawfully by executing the Third Amendment to the Senior Preferred Stock Purchase Agreements (“PSPAs”)—and the same claims as the present actions. Defendants filed their motions to dismiss in the present actions on January 17, 2014. Fairholme’s subsidiary commenced the Iowa Action less than three weeks later.
Fannie Mae, Freddie Mac: FHFA and Treasury filed motions to dismiss the Iowa Action
FHFA and Treasury filed motions to dismiss the Iowa Action. In response, the plaintiff filed a Motion to Compel Production of the Administrative Record and for Suspension of the Briefing Schedule (the “Iowa Motion to Compel”). In that motion, the plaintiff sought to compel Defendants to produce “complete” administrative records—that is, beyond the administrative record and document compilation already produced in the actions pending before this Court— and to suspend briefing on the motions to dismiss until such production. The plaintiff argued that this relief was mandated because Defendants’ briefs in support of the motions to dismiss allegedly raised factual issues “about the necessity and purpose of the net worth sweep [that were] inconsistent with the Complaint’s allegations on the same subjects.” Ex. A at 4.
On August 5, 2014, the court denied the Iowa Motion to Compel. See Ex. A at 6-7. The court held that no discovery was warranted because Defendants’ motions to dismiss presented only facial challenges to the court’s jurisdiction that can be resolved purely as a matter of law. Id. at 6. The court explained:
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. It is natural they would explain the sweep from their perspective in view of the allegations in the Complaint about the invalidity of the sweep, but that does not mean defendants make a factual challenge to jurisdiction. At bottom the motions to dismiss do appear to advance purely legal arguments. 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. There is no need to adjudicate the truth of the matter in order to determine the motions to dismiss.
Id. (emphases added). The court also observed that there were other, potentially dispositive issues raised by the motions concerning the plaintiff’s standing to pursue its claims that “clearly present purely legal issues which may be decided without resort to an administrative record.” Id. Finally, the court identified various practical problems with granting the relief requested:
The Court is also concerned with the practical consequences to the progression of the case if Continental Western’s motion is granted. The time necessary to put together an administrative record, the inevitable disputes about its adequacy, requests for additional discovery at which Continental Western hints, and the time required to digest and incorporate the administrative record in what promises to be extensive briefing, all portend months of delay in resolving the motions to dismiss to no obvious benefit or purpose.
Id. at 6-7 (emphasis added). Accordingly, the court denied the Motion to Compel and ordered the plaintiff to file its brief in response to the motions to dismiss by August 29, 2014. Id. at 7.
Fannie Mae, Freddie Mac: Iowa Order is directly relevant
The Iowa Order is directly relevant here because Plaintiffs in this action are pursuing substantially the same strategy as is the plaintiff in Iowa. Here, Plaintiffs accuse Defendants of “rely[ing] on disputed material facts to support their motion to dismiss.” See Memo in Supp. of Motion for Suppl. at 4 (Doc. # 32); see also id. at 29 (arguing that Defendants “responded to Plaintiffs’ well-pled factual allegations by disputing them on the merits.”). As in Iowa, Plaintiffs argue that the Defendants have made “factual contentions regarding the purposes underlying” the Third Amendment that are “in direct conflict with those allegations [in the complaint],” and thus warrant discovery. Id. at 30. Further, as in Iowa, Plaintiffs argue that the discovery issues they raise should be addressed before the Court resolves the (now fully-briefed) motions to dismiss. Id. at 34-37.
This Court also should reject each of these arguments, deny the Motion for Supplementation, and resolve the motions to dismiss on the basis of the briefing already completed.
Now, one its face it looks like a legitimate request. But there are several slights of hand here that obfuscate reality. First, while the Continental complaint is indeed similar to Fairholme and Perry’s it is not identical. That matters…….a lot. Second, and most importantly, the FHFA/Treasury response to the two complaints and the way they have been argued in court are wholly different than they were in Continental and that matters even more.
Fannie Mae, Freddie Mac: FHFA countered Iowa Action
Yesterday Fairholme lawyers countered (filing here):
FHFA brings to the Court’s attention an order entered in what it calls the “Iowa Action,” Continental Western Insurance Co. v. FHFA, No. 4:14-cv-00042-RP-RAW (S.D. Iowa). The “Iowa Order,” FHFA claims, “is directly relevant” to this Court’s disposition of Plaintiffs’ Motion for Supplementation of the Administrative Records, for Limited Discovery, for Suspension of Briefing on Defendants’ Dispositive Motions, and for a Status Conference, Doc. 31 (“the Motion for Supplementation”). FHFA Defendants’ Notice of Supplemental Authority at 3, Doc. 53. To the extent the Iowa Order is relevant at all, however, it demonstrates that in deciding FHFA’s motion to dismiss this Court should either grant Plaintiffs the discovery they have requested or ignore Defendants’ factual claims that the Net Worth Sweep was something other than a naked attempt to nationalize Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and expropriate the value of Plaintiffs’ stock for the benefit of the federal government.
Continental Western, the plaintiff in the Iowa Action, is a subsidiary of Berkley Regional Insurance Company (“Berkley”), one of the plaintiffs in the Fairholme action. True, as FHFA notes, Continental Western challenges the Net Worth Sweep on many of the same grounds advanced by Berkley and the other plaintiffs in this action. But Continental Western’s claims are not, as FHFA asserts, identical to Berkley’s in this case. To the contrary, Continental Western challenges not only the Net Worth Sweep but also, among other things, the very circular dividend practice that FHFA and Treasury assert as the justification for the Net Worth Sweep. See, e.g., Iowa Complaint ¶¶ 103, 112, 159-64, Continental Western (Feb. 5, 2014), ECF No. 1.
Fannie Mae, Freddie Mac: FHFA and Treasury pursued a diiferent strategy responding to Continental Western’s claims
FHFA and Treasury have pursued a starkly different strategy in responding to Continental Western’s claims than they have to the claims brought in this Court. Here, the agencies combined their motions to dismiss with alternative motions for summary judgment with respect to Plaintiffs’ APA claims. In the Iowa Action, by contrast, they have carefully omitted any request for summary judgment, moving exclusively to dismiss the complaint on jurisdictional grounds. As FHFA’s counsel insisted in the Iowa Action, this is a “significant difference between the status of” the cases, July 10 Hearing Transcript at 18 (“Tr.”), Continental Western (attached as Exhibit A), and as a result neither FHFA nor Treasury has produced an administrative record (or a “document compilation,” in FHFA’s preferred formulation) in the Iowa Action. The Iowa Order thus has no bearing on Plaintiffs’ requests for supplementation of the administrative record or for discovery regarding its completeness because no record has even been produced in that case. Indeed, FHFA itself insisted that the materials in the administrative record “produced in D.D.C.” were “utterly irrelevant” to the issues before the court in the Iowa Action. Tr. at 19.
Of course, FHFA and Treasury purport to move exclusively to dismiss 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 Mae: Treasury/FHFA disputed many of the “facts”
Below is some pretty stunning stuff. What makes discovery necessary in the Fairholme/Perry cases is that Treasury/FHFA disputed many of the “facts” put forth by Fairholme/Perry in their Motion for Summary Judgement (not filed in Continental case) and offered some of their own (in both Lambert’s and Sweeney’s court’s). 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).
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
Fannie Mae, Freddie Mac: Fairholme will have their day in court
Sweeney, (Fairholme case Judge) has repeatedly said Fairholme (plaintiff) “will have their day in court”. I see no reason (should the gov’t file a similar motion in her court) 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).
In Lambert’s court (Perry/Fairholme case), the same is true. The gov’t disputed the facts there and filed for summary judgement (link here) in which they proffered their own set of facts. These facts are in dispute and thus discovery is necessary (the two motions for summary judgement were essentially the same). Because of this, none of the reasoning offered above by the government in the Continental case apply to Lambert’s court either. Hence, there is no reason for him to deny discovery based on the Continental decision.
Let’s also 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, Perry ), 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 Fairholme, Perry cases).
As far as Ackman’s cases go, the gov’t has not even filed a response to them yet so there is no reason for any ruling on them
We will of course have to wait for the orders but I’d be very, very shocked if anything changed in these case.