Pagliara v. Fed. Nat'l Mortg. Ass'n

RE: Timothy Pagliara v. Federal National Mortgage Association

Civil Action No. 12105-VCMR

COURT OF CHANCERY OF THE STATE OF DELAWARE

Date Submitted: May 2, 2017

May 31, 2017

TAMIKA R. MONTGOMERY-REEVES VICE CHANCELLOR

C. Barr Flinn, Esquire

Emily V. Burton, Esquire

Lakshmi A. Muthu, Esquire

Gregory J. Brodzik, Esquire

Young Conaway Stargatt & Taylor, LLP

1000 North King Street

Wilmington, DE 19801

S. Mark Hurd, Esquire

Zi-Xiang Shen, Esquire

Morris, Nichols, Arsht & Tunnell LLP

1201 North Market Street

Wilmington, DE 19899

Robert J. Stern, Jr., Esquire

Blake Rohrbacher, Esquire

Richards, Layton & Finger, P.A.

920 North King Street

Wilmington, DE 19801

Dear Counsel:

Pending before the Court is a motion to dismiss or to substitute the plaintiff in this 8 Del. C. § 220 proceeding. For the reasons stated herein, the motion to dismiss is granted.

I. BACKGROUND

The facts in this letter opinion derive from Plaintiff's Verified Complaint (the "Complaint") and the documents attached to it. Plaintiff Timothy J. Pagliara is a preferred stockholder of Federal National Mortgage Association, a federally chartered corporation governed by the "corporate governance practices and procedures of" the Delaware General Corporation Law ("Fannie Mae"). Fannie Mae was designed by the federal government to create liquidity in the mortgage market and facilitate the extension of credit to American homebuyers. Between 1968 and 1970, Fannie Mae became largely privately owned and publicly traded on the New York Stock Exchange.¹ But Fannie Mae remained subject to extensive federal regulation. In 2002, Fannie Mae's then-regulator, the Office of Federal Housing Enterprise Oversight, directed Fannie Mae to follow the "corporate governance practices and procedures of" the law of the jurisdiction containing Fannie Mae's principal office, the Delaware General Corporation Law, or the Revised Model Business Corporation Act.² Fannie Mae chose the Delaware General Corporation Law, and a certificate of incorporation was filed in Delaware for Federal National Mortgage Association, Inc.³

During the U.S. housing crisis, Congress passed the Housing and Economic Recovery Act of 2008 ("HERA") to stabilize the mortgage market. Under HERA, Fannie Mae's regulator was replaced by the newly created Federal Housing FinanceAgency (the "FHFA"). HERA authorized the FHFA to put Fannie Mae into conservatorship or receivership,⁴ and the FHFA placed Fannie Mae into conservatorship on September 7, 2008.⁵

On the same day, the U.S. Department of the Treasury (the "Treasury Department") entered a Preferred Stock Purchase Agreement with Fannie Mae under which Fannie Mae agreed to issue one million shares of Senior Preferred Stock to the Treasury Department. The Senior Preferred Stock had an initial liquidation preference of $1,000 per share and was senior to all other classes of Fannie Mae stock.⁶ The Treasury Department also received a warrant to purchase 79.9% of Fannie Mae's common stock. The Senior Preferred Stock was entitled to a 10% cumulative cash dividend or a 12% stock dividend. The Preferred Stock Purchase Agreement was restated and then amended twice to make minor changes and to increase the Treasury Department's funding commitment to Fannie Mae.⁷

On August 17, 2012, after Fannie Mae allegedly had become profitable again, the Treasury Department and Fannie Mae entered the Third Amendment to theRestated Preferred Stock Purchase Agreement (the "Third Amendment"). The Third Amendment changed the Treasury Department's 10% dividend to a "net worth sweep" such that Fannie Mae would distribute the bulk of its quarterly net worth to the Treasury Department every quarter for an indefinite period of time.⁸ As of the date of Pagliara's Complaint, the Treasury Department's Fannie Mae dividends allegedly had increased by $78.2 billion as a result of the Third Amendment.⁹

On January 19, 2016, counsel for Pagliara served a Section 220 demand on Fannie Mae, which sought documents to investigate whether the decisions to approve the Third Amendment, Fannie Mae's subsequent payment of dividends under the Third Amendment, and certain other Fannie Mae investments constituted misconduct. Pagliara also sought to communicate with other stockholders regarding the misconduct and to value his shares. Fannie Mae, through the FHFA, rejected Pagliara's demand on January 27, 2016.

On March 14, 2016, Pagliara filed the Complaint in this action, and on March 25, 2016, Fannie Mae removed the case to federal court. The U.S. District Court for the District of Delaware remanded the case on March 8, 2017, and Fannie Mae fileda motion to dismiss or, in the alternative, to substitute the FHFA as the plaintiff on March 31, 2017. The Court heard oral argument on the motion on May 2, 2017.

II. ANALYSIS

Fannie Mae moves to dismiss under Court of Chancery Rule 12(b)(2) for lack of personal jurisdiction and under Rule 12(b)(6) for failure to state a claim. I first consider the Rule 12(b)(2) motion because "[a] court without personal jurisdiction has no power to dismiss a complaint for failure to state a claim."¹⁰

A. Pagliara's Complaint Survives a Motion to Dismiss for Lack of Personal Jurisdiction

On a Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction, "the plaintiff bears the burden of showing a prima facie basis for the Court's exercise of personal jurisdiction over a nonresident defendant . . . ."¹¹ "[W]hen no evidentiary hearing has been held, the plaintiffs' burden is a relatively light one."¹² "'[T]he record is construed in the light most favorable to the plaintiff,' and the plaintiff need not rely solely on the allegations in the complaint but may employ extra-pleadingmaterial as a supplement to establish jurisdiction."¹³ The Delaware Supreme Court recognized in General Parts Company v. Cepec that a corporation is subject to general jurisdiction in its state of incorporation.¹⁴

The Complaint in this case sufficiently alleges a prima facie basis for personal jurisdiction over Fannie Mae in Delaware. The Complaint alleges that Fannie Mae filed a certificate of incorporation in Delaware on August 21, 2002, sixteen days after the Office of Federal Housing Enterprise Oversight's corporate governance regulation requiring that Fannie Mae choose a corporation law became effective.¹⁵ The Complaint also points to Fannie Mae's bylaws, which reference a certificate of incorporation. The bylaws state that the inclusion of certain provisions in them "shall constitute inclusion in the corporation's 'certificate of incorporation' for allpurposes of the Delaware General Corporation Law."¹⁶ Thus, Plaintiff argues that the Complaint establishes a prima facie basis for personal jurisdiction.

Defendant responds that the certificate does not refer to Fannie Mae because it incorporates "Federal National Mortgage Association, Inc." instead of "Federal National Mortgage Association." Further, Defendant argues that the certificate of incorporation was voided in 2004 for failure to pay annual taxes.¹⁷ As to the legal point, Delaware and federal courts have exercised personal jurisdiction over defendant Delaware corporations that have not filed a certificate of dissolution but whose certificates of incorporation were voided for failure to pay franchise taxes.¹⁸As to the factual argument regarding Fannie Mae's name, the alleged facts and Defendant's arguments would be sufficient to entitle Pagliara to jurisdictional discovery to prove whether Fannie Mae is subject to personal jurisdiction in Delaware. But Plaintiff has requested that "the Court not delay this matter further for jurisdictional discovery,"¹⁹ and Defendant has also argued against jurisdictional discovery.²⁰ In accordance with the parties' requests and because, for the reasons explained below, jurisdictional discovery would be futile, I address the Rule 12(b)(6) motion to dismiss.

B. Pagliara's Complaint Is Dismissed on Issue Preclusion Grounds

Fannie Mae moves to dismiss under Court of Chancery Rule 12(b)(6) and argues that the dispositive issue in this case—whether Pagliara has a right to inspect Fannie Mae's books and records—has been decided against Pagliara in Pagliara v. Federal Home Loan Mortgage Corporation,²¹ a case from the Eastern District of Virginia. As such, Defendant argues that this case should be dismissed on issue preclusion grounds. "This Court will grant a motion to dismiss under . . . Rule 12(b)(6) only if the 'plaintiff could not recover under any reasonably conceivableset of circumstances susceptible of proof.'"²² On a Rule 12(b)(6) motion to dismiss, the Court "must accept as true all of the well-pleaded allegations of fact and draw reasonable inferences in the plaintiff's favor."²³ The Court, however, is "not . . . required to accept as true conclusory allegations 'without specific supporting factual allegations.'"²⁴

Federal law determines the effect of a federal judgment for issue preclusion purposes.²⁵ Under federal common law, when state law is the substantive law at issue, the law of the state where a federal court sits determines the effects of that court's judgments.²⁶ When federal law is the substantive law at issue, federal preclusion law determines the effect of federal court judgments.²⁷ The evaluation ofFannie Mae's defense under HERA Section 4617(b)(2)(A)(i) is a question of federal law, and federal preclusion law, thus, applies. Applying federal law, the U.S. Supreme Court "regularly turns to the Restatement (Second) of Judgments for a statement of the ordinary elements of issue preclusion."²⁸ Pagliara also relied on the Restatement (Second) of Judgments at oral argument and in his brief.²⁹ Under the Restatement, a party to a prior proceeding is precluded from relitigating an issue when (1) the "issue of fact or law is actually litigated" in the prior proceeding, (2) the issue is "determined by a valid and final judgment," and (3) "the determination is essential to the judgment."³⁰ Section 28 of the Restatement includes an...