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Jacobs v. Federal Housing Finance Agency

United States District Court, D. Delaware

November 27, 2017

DAVID JACOBS and GARY HINDES, on behalf of themselves and all others similarly situated, and derivatively on behalf of the Federal National Mortgage Assoc, and Federal Home Loan Mortgage Corp., Plaintiffs,
THE FEDERAL HOUSING FINANCE AGENCY, in its capacity as Conservator of the Federal National Mortgage Assoc, and the Federal Home Loan Mortgage Corp., and THE UNITED STATES DEPARTMENT OF THE TREASURY, Defendants, and THE FEDERAL NATIONAL MORTGAGE ASSOC. and THE FEDERAL HOME LOAN MORTGAGE CORP., Nominal Defendants.

          Myron T. Steele, Esq., Michael A. Pittenger, Esq., Christopher N. Kelly, Esq., and Alan R. Silverstein, Esq. of Potter Anderson & Corroon LLP, Wilmington, DE. Counsel for Plaintiffs.

          Robert J. Steam, Jr., Esq. and Robert C. Maddox, Esq. of Richards, Layton & Finger, P.A., Wilmington, DE. Counsel for Defendants Federal Housing Finance Agency, Federal National Mortgage Assoc, and Federal Home Loan Mortgage Corp. Of Counsel: Howard N. Cayne, Esq., Asim Varma, Esq., and David B. Bergman, Esq. of Arnold & Porter Kaye Scholer LLP, Washington, DC; Jeffrey W. Kilduff, Esq. and Michael Walsh, Esq. of O'Melveny & Meyers LLP, Washington, DC; and Michael Joseph Ciatti, Esq. and Graciela Maria Rodriquez, Esq. of King & Spalding LLP, Washington DC.

          David C. Weiss, Esq. and Jennifer L. Hall, Esq. of U.S. Attorney's Office, Wilmington, DE. Counsel for Defendant U.S. Dept. of Treasury. Of Counsel: Chad A. Readier, Esq., Diane Kelleher, Esq., Thomas D. Zimpleman, Esq., Deepthy Kishore, Esq., and Robert C. Merritt, Esq. of U.S. Dept. of Justice Civil Division, Washington DC.




         This action is one of several lawsuits filed by the stockholders of the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Association ("Freddie Mac") challenging what the parties call a "Net Worth Sweep, " which is a provision in the Third Amendment to the Amended and Restated Senior Preferred Stock Purchase Agreements (the "Third Amendment") governing the payment of dividends. The Third Amendment was entered into by the United States Department of the Treasury ("Treasury") and the Federal Housing Finance Agency (the "Agency, " and collectively with Fannie Mae, Freddie Mac, and Treasury, the "Defendants"). At the time, the Agency was acting in its capacity as conservator of Fannie Mae and Freddie Mac (each a "Company, " and collectively, the "Companies"). Plaintiffs David Jacobs and Gary Hines (collectively, "Plaintiffs") seek equitable relief based on their assertion that the Net Worth Sweep violates state statutory schemes governing corporations and unjustly enriches Defendants. (D.I. 62 ¶¶ 79-108).

         The court has subject matter jurisdiction over this action pursuant to 28 U.S.C. §§ 1331, 1332, and 1367. Currently pending before the court are Defendants' motions to dismiss the complaint. (D.I. 65, D.I. 67). Defendants have raised a multitude of arguments as to why the complaint should be dismissed, including the anti-injunction clause in the Housing and Economic Recovery Act of 2008 ("HERA"), 12 U.S.C. § 4617(f), the succession clause in HERA, 12 U.S.C. § 4617(b)(2)(A)(i), the requirement to state a claim under Fed.R.Civ.P. 12(b)(6), issue preclusion and, with respect to Treasury alone, sovereign immunity. (D.I. 66, D.I. 68). For the reasons discussed below, the court finds that the anti-injunction clause in Section § 4617(f) deprives it of subject matter jurisdiction. Because Plaintiffs do not clear this threshold hurdle, the court is dismissing the complaint without reaching Defendants' other arguments.


         A. Fannie Mae and Freddie Mac

         Fannie Mae and Freddie Mac are government-sponsored enterprises (a "GSE") created to increase liquidity in the mortgage market. (D.I. 68 at 5; D.I. 62 ¶¶ 30-31). A GSE is a corporation established by congressional charter but privately owned, meaning its stock is owned by private entities and individuals. 2 U.S.C. 622(8). For purposes of corporate governance, the Companies had to designate the law of the state in which its principal office is located or Delaware General Corporation Law. (D.I. 62 at ¶ 32 (citing 12 C.F.R. § 1710.10)). Fannie Mae selected Delaware law, and Freddie Mac selected Virginia law. (Id. at ¶ 32).

         In 2008, a global financial crisis and nationwide decline in the housing market caused the Companies to suffer loses. (Id. at ¶ 33). To address the crisis, Congress passed HERA, which authorized the Agency to place the Companies into conservatorship or receivership. (Id. ¶ 34; see also 12 U.S.C. § 4617(2)). On September 6, 2008, the Agency exercised its power under HERA and placed the Companies into conservatorship. (D.I. 62 ¶ 35). Shortly thereafter, each Company, acting through the Agency as a conservator, entered into a Preferred Stock Purchase Agreement (a "Stock Purchase Agreement") with Treasury. (Id. at ¶ 36). Under the Stock Purchase Agreements, Treasury committed to advance funds to the Companies for each quarter in which the Companies' liabilities exceeded its assets, so as to maintain the Companies' positive net worth. (D.I. 68 at 7). The funding commitment was capped at $100 billion for each Company. (D.I. 62 ¶¶ 8, 36). In return, Treasury received from each Company shares of a newly created class of senior preferred stock worth $1 billion and warrants to purchase 79.9% of the common stock. (Id. ¶ 8). The Stock Purchase Agreements gave Treasury the right to: (1) an aggregate liquidation preference equal to $1 billion plus the sum of all additional amounts drawn on Treasury's funding commitment; and (2) a quarterly dividend equal to a percentage of the outstanding liquidation preference: 10%, if paid in cash, or 12%, if paid "in-kind." (Id. at ¶¶ 8-9). If the quarterly dividend was in-kind, the amount would be added to the liquidation preference. (Id. at ¶ 8).

         The Stock Purchase Agreements were amended twice in 2009-first, on May 6, 2009, to raise the funding commitment for each Company from $100 billion to $200 billion and, again, on December 24, 2009, to raise the funding commitment according to a formula that would be capped at the end of 2012. (D.I. 68 at 8). On August 17, 2012, Treasury and the Agency, acting as conservator for the Companies, entered into the Third Amendment. (D.I. 62 ¶ 1). Among other things, the Third Amendment changed the formula for calculating the quarterly dividend. (D.I. 68 at 9). Now, the Companies would owe a quarterly dividend in the amount (if any) of the Company's positive net worth, minus a capital reserve. (D.I. 66 at 9). Plaintiffs refer to this dividend formula as a "Net Worth Sweep, " and allege that Defendants agreed to the Net Worth Sweep as way to improperly expropriate for the federal government the value the Companies were generating after they returned to profitability in 2012. (D.I. 62 ¶¶ 39, 42, 46).

         B. Plaintiffs

         Plaintiff Jacobs has continuously held stock in Fannie Mae and Freddie Mac since November 2009. (D.I. 62 ¶ 24). According to the complaint, Plaintiff Hindes "has been an investor in Fannie Mae and Freddi Mac since 2011." (Id. at ¶ 25). The complaint does not allege, however, that Hindes currently holds any Fannie Mae stock. In addition, Hindes currently holds Freddie Mac stock purchased in February 2015, i.e., purchased after Defendants executed the Third Amendment that serves as the basis for his claims.[1] (Id.).

         III. ...

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