Reid v. United States

BRUCE REID et al., Plaintiffs, v. THE UNITED STATES, Defendant.

No. 14-152C

United States Court of Federal Claims

Reissued for Publication: May 19, 2020^*

Reissued Following Motion to Certify Interlocutory Appeal: June 11, 2020^**

May 8, 2020

Motion to Dismiss; RCFC 12(b)(1); RCFC 12(b)(6); Jurisdiction; Standing; Derivative Claims; Coercion; Agent; Collateral Estoppel; Issue Preclusion; Conservator; Conflict of Interest; Freddie; FHFA; Certification of Interlocutory Appeal

Robert C. Schubert, San Francisco, CA, for plaintiffs.

Kenneth M. Dintzer, United States Department of Justice, Washington, DC, for defendant.

OPINION AND ORDER

SWEENEY, Chief Judge

Plaintiffs in this case are shareholders of the Federal Home Loan Mortgage Corporation ("Freddie") who, through a shareholder derivative suit, challenge the actions of the United States during the conservatorship of Freddie. Specifically, plaintiffs take issue with the conservator for Freddie amending a funding agreement between Freddie and the United States Department of the Treasury ("Treasury"). Based on the revisions to that agreement, plaintiffs seek the return of money illegally exacted, damages for breach of fiduciary duty, and compensation for a taking pursuant to the Fifth Amendment to the United States Constitution ("Constitution"). Defendant moves to dismiss plaintiffs' complaint, arguing that the court lacks subject-matter jurisdictionover plaintiffs' claims, plaintiffs lack standing to pursue certain claims, and plaintiffs fail to state a claim upon which relief may be granted. For the reasons stated below, the court denies defendant's motion to dismiss.

I. BACKGROUND

A. Freddie is a private company that is under the control of a conservator.

1. Freddie operated independently before the financial crisis.

Congress created Freddie in 1970 to help the housing market; Freddie purchases and guarantees mortgages originated by private banks before bundling those mortgages into securities that are sold to investors.¹ Am. Derivative Compl. ¶¶ 40-41, 44. Freddie was initially part of the federal government before Congress reorganized it as a for-profit company owned by private shareholders in 1989. Id. ¶¶ 42-43, 45. Freddie issued its own common and preferred stock, id. ¶ 45, and its conduct is subject to Virginia law, id. ¶ 26.

Freddie, up until the financial crisis in the late 2000s, was consistently profitable and had not reported a full-year loss since becoming privately owned. Id. ¶ 47. Even when the financial crisis hit the mortgage market, Freddie continued to generate sufficient cash to pay its debts and retained sufficient capital to operate. Id. ¶ 48. Otherwise stated, Freddie was not in financial distress or otherwise at risk of insolvency. Id. ¶¶ 48-52, 55.

2. Congress created the Federal Housing Finance Agency to regulate Freddie and the

Federal National Mortgage Association, and also authorized the agency to serve as a

conservator for Freddie.

In the midst of the financial crisis during the summer of 2008, Congress enacted the Housing and Economic Recovery Act of 2008 ("HERA"), Pub. L. No. 110-289, 122 Stat. 2654 (codified as amended in scattered sections of 12 U.S.C.). In that statute, Congress created the Federal Housing Finance Agency ("FHFA") and provided it with supervisory and regulatory authority over the Federal National Mortgage Association ("Fannie") and Freddie ("Enterprise," when used for either entity; collectively, "Enterprises"). See 12 U.S.C. § 4511(a)-(b) (2018)(stating that FHFA has "general regulatory authority" over Fannie and Freddie).² Congress further authorized the FHFA Director to, in limited circumstances, appoint the FHFA as the conservator ("FHFA-C") for either Enterprise to reorganize, rehabilitate, or wind up its affairs.³ Id. § 4617(a)(2). Specifically, the Director is authorized to appoint a conservator if, among other things, the Enterprise consents, is undercapitalized, or lacks sufficient assets to pay its obligations. Id. § 4617(a)(3).⁴ The conservator, once appointed, functions independently; it is not "subject to the direction or supervision of any other agency of the United States or any State in the exercise of [its] rights, powers, and privileges . . . ." Id. § 4617(a)(7).

Congress also delineated the scope of the FHFA-C's powers in HERA. See generally id. § 4617. As soon as it is appointed, the FHFA-C "immediately succeed[s] to . . . all rights, titles, powers, and privileges of the [Enterprise], and of any stockholder, officer, or director of such [Enterprise] with respect to the [Enterprise] and the assets of the [Enterprise] . . . ." Id. § 4617(b)(2)(A). Congress also conferred on the conservator the power to "[o]perate the [Enterprise]." Id. § 4617(b)(2)(B). Pursuant to that power, the conservator "may," among other things, "perform all functions of the [Enterprise]," "preserve and conserve the assets and property of the [Enterprise]," and "provide by contract for assistance in fulfilling any function . . . of the [conservator]." Id. The conservator "may" also "take such action as may be . . . necessary to put the [Enterprise] in a sound and solvent condition; . . . and appropriate to carry on the business of the [Enterprise] and preserve and conserve the assets and property of the [Enterprise]." Id. § 4617(b)(2)(D). Rounding out the panoply of powers, Congress also provided that the conservator "may . . . exercise . . . such incidental powers as shall be necessary to carry out [its enumerated powers]" and "take any action authorized by [12 U.S.C. § 4617(b)], which [it] determines is in the best interest of the [Enterprise] or the [FHFA]." Id. § 4617(b)(2)(J). By describing the FHFA-C's role primarily in terms of what powers it "may" exercise, see generally id. § 4617, Congress provided the FHFA-C with significant discretion on when or how it uses its powers, see United States v. Rodgers, 461 U.S. 677, 706 (1983) ("The word 'may,' when used in a statute, usually implies some degree of discretion."). Simply stated, the FHFA has "extraordinarily broad flexibility to carry out its role as conservator." Perry Capital LLC v. Mnuchin, 864 F.3d 591, 606 (D.C. Cir. 2017) ("Perry II"), cert. denied, 138 S. Ct. 978 (2018).

3. Congress authorized Treasury to purchase securities issued by Freddie.

At the same time that it established the FHFA, Congress authorized the Treasury Secretary to buy securities issued by Freddie in limited circumstances. 12 U.S.C. § 1455(l).Congress included a sunset clause on this power; the Secretary could not purchase securities after December 31, 2009. Id. § 1455(l)(4). Until that date, the Secretary was permitted to purchase the securities if he determined that doing so was necessary to provide stability to the financial markets, prevent disruptions in the availability of mortgage finance, and protect taxpayers. Id. § 1455(l)(1)(B). As part of his obligation to protect taxpayers, the Secretary could only purchase securities after considering:

(i) The need for preferences or priorities regarding payments to the Government.

(ii) Limits on maturity or disposition of obligations or securities to be purchased.

(iii) [Freddie's] plan for the orderly resumption of private market funding or capital market access.

(iv) The probability of [Freddie] fulfilling the terms of any such obligation or other security, including repayment.

(v) The need to maintain [Freddie's] status as a private shareholder-owned company.

(vi) Restrictions on the use of [Freddie's] resources, including limitations on the payment of dividends and executive compensation and any such other terms and conditions as appropriate for those purposes.

Id. § 1455(l)(1)(C).

4. The FHFA became the conservator for Freddie.

After Congress enacted HERA, Treasury "urg[ed]" the FHFA to place each Enterprise into conservatorship. Am. Derivative Compl. ¶ 56. The FHFA and Treasury subsequently sought to persuade Freddie's board of directors to consent to conservatorship. Id. ¶ 214. The board accepted that offer and consented to a conservatorship on September 6, 2008. Id. The conservatorship became effective on September 6, 2008. Id. ¶¶ 54, 58, 214; see also 12 U.S.C. § 4617(a)(3)(I) (permitting the FHFA Director to appoint a conservator when "[t]he [Enterprise], by resolution of its board of directors or its shareholders or members, consents to the appointment").

5. The FHFA-C contracted with Treasury to obtain funding for Freddie.

On September 7, 2008, the FHFA-C entered into a Preferred Stock Purchase Agreement ("PSPA") with Treasury for Freddie. Am. Derivative Compl. ¶ 67. Treasury entered into the agreement pursuant to its authority under HERA to buy Freddie's securities. Id. ¶¶ 54, 67. Under the PSPA, Treasury committed to provide up to $100 billion to Freddie to ensure that Freddie maintained a positive net worth. Id. ¶ 67. If Freddie's liabilities exceeded its assets,then Freddie could draw on Treasury's funding commitment in an amount equal to the difference between Freddie's liabilities and assets. Id.

In return for Treasury's funding commitment, Freddie surrendered stock, dividends, and commitment fees. First, with respect to the stock, Treasury acquired one million shares of preferred stock in Freddie and warrants to purchase 79.9% of Freddie's common stock at a nominal price. Id. Treasury's preferred stock had an initial liquidation preference of $1 billion, but the amount increased dollar-for-dollar when Freddie drew on Treasury's funding commitment. Id. ¶ 68. In the event of a liquidation, Treasury was entitled to recover the full liquidation value of its shares before any other shareholder would receive compensation. Id. Second, Treasury bargained for the right to a quarterly cash dividend equal to 10% of its liquidation preference. Id. ¶ 69. If Freddie decided against paying a cash dividend in a specific quarter it could make an in-kind payment: the value of the dividend would be added to the liquidation preference, and the dividend rate...