United States District Court, D. Delaware
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.
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.
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.
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.
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).
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.
Fannie Mae and Freddie Mac
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).
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).
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).
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