Fairholme Funds, Inc. v. United States
| Decision Date | 22 February 2022 |
| Docket Number | 2020-2020,2020-1938,2020-2037,2020-1955,2020-1934,2020-1912,2020-1954,2020-1914 |
| Court | U.S. Court of Appeals — Federal Circuit |
| Parties | FAIRHOLME FUNDS, INC., ACADIA INSURANCE COMPANY, ADMIRAL INDEMNITY COMPANY, ADMIRAL INSURANCE COMPANY, BERKLEY INSURANCE COMPANY, BERKLEY REGIONAL INSURANCE COMPANY, CAROLINA CASUALTY INSURANCE COMPANY, CONTINENTAL WESTERN INSURANCE COMPANY, MIDWEST EMPLOYERS CASUALTY INSURANCE COMPANY, NAUTILUS INSURANCE COMPANY, PREFERRED EMPLOYERS INSURANCE COMPANY, FAIRHOLME FUND, ANDREW T. BARRETT, Plaintiffs-Appellants v. UNITED STATES, Defendant-Cross-Appellant OWL CREEK ASIA I, L.P., OWL CREEK ASIA II, P., OWL CREEK I, L.P., OWL CREEK II, L.P., OWL CREEK ASIA MASTER FUND, LTD., OWL CREEK CREDIT OPPORTUNITIES MASTER FUND, L.P., OWL CREEK OVERSEAS MASTER FUND, LTD., OWL CREEK SRI MASTER FUND, LTD., Plaintiffs-Appellants v. UNITED STATES, Defendant-Appellee MASON CAPITAL L.P., MASON CAPITAL MASTER FUND L.P., Plaintiffs-Appellants v. UNITED STATES, Defendant-Appellee AKANTHOS OPPORTUNITY FUND, L.P., Plaintiff-Appellant v. UNITED STATES, Defendant-Appellee APPALOOSA INVESTMENT LIMITED PARTNERSHIP I, PALOMINO MASTER LTD., AZTECA PARTNERS LLC, PALOMINO FUND LTD., Plaintiffs-Appellants v. UNITED STATES, Defendant-Appellee CSS, LLC, Plaintiff-Appellant v. UNITED STATES, Defendant-Appellee ARROWOOD INDEMNITY COMPANY, ARROWOOD SURPLUS LINES INSURANCE COMPANY, FINANCIAL STRUCTURES LIMITED, Plaintiffs-Appellants v. UNITED STATES, Defendant-Appellee JOSEPH CACCIAPALLE, Plaintiff-Appellant MELVIN BAREISS, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, BRYNDON FISHER, BRUCE REID, ERICK SHIPMON, AMERICAN EUROPEAN INSURANCE COMPANY, FRANCIS J. DENNIS, Plaintiffs v. UNITED STATES, Defendant-Appellee |
Appeal from the United States Court of Federal Claims in Nos 1:13-cv-00465-MMS, 1:18-cv-00281-MMS, 1:18-cv-00529-MMS 1:18-cv-00369-MMS, 1:18-cv-00370-MMS, 1:18-cv-00371-MMS 1:13-cv-00698-MMS, 1:13-cv-00466-MMS, Senior Judge Margaret M. Sweeney.
Brian W. Barnes, Cooper & Kirk, PLLC, Washington, DC, argued for plaintiff-appellants Fairholme Funds, Inc., Acadia Insurance Company, Admiral Indemnity Company, Admiral Insurance Company, Berkley Insurance Company, Berkley Regional Insurance Company, Carolina Casualty Insurance Company, Continental Western Insurance Company, Midwest Employers Casualty Insurance Company, Nautilus Insurance Company, Preferred Employers Insurance Company, Fairholme Fund, Andrew T. Barrett. Also represented by Vincent J Colatriano, Charles J. Cooper, Peter A. Patterson, David Thompson.
Bruce Bennett, Jones Day, Los Angeles, CA, argued for plaintiffs-appellants Owl Creek Asia I, L.P., Owl Creek Asia II, L.P., Owl Creek I, L.P., Owl Creek II, L.P., Owl Creek Asia Master Fund, Ltd., Owl Creek Credit Opportunities Master Fund, L.P., Owl Creek Overseas Master Fund, Ltd., Owl Creek SRI Master Fund, Ltd., Mason Capital L.P., Mason Capital Master Fund LP, Akanthos Opportunity Fund, L.P., Appaloosa Investment Limited Partnership I, Palomino Master Ltd., Azteca Partners LLC, Palomino Fund Ltd., CSS, LLC. Also argued by Lawrence D. Rosenberg, Washington, DC. Also represented by C. Kevin Marshall.
Drew William Marrocco, Dentons U.S. LLP, Washington, DC, argued for plaintiffs-appellants Arrowood Indemnity Company, Arrowood Surplus Lines Insurance Company, Financial Structures Limited. Also represented by Richard M. Zuckerman, New York, NY.
Hamish Hume, Boies Schiller & Flexner LLP, Washington, DC, argued for plaintiff-appellant Joseph Cacciapalle.
Mark B. Stern, Appellate Staff, Civil Division, United States Department of Justice, Washington, DC, argued for United States. Also represented by Brian M. Boynton, Kyle T. Edwards, Gerard Sinzdak, Abby Christine Wright.
Noah Schubert, Schubert Jonckheer & Kolbe LLP, San Francisco, CA, for amici curiae Bryndon Fisher, Bruce Reid, Erick Shipmon. Also represented by Robert Schubert; Patrick Vallely, Shapiro Haber & Urmy LLP, Boston, MA.
Before Lourie, Prost, and O'Malley, Circuit Judges.
Certain shareholders of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) appeal a judgment of the United States Court of Federal Claims (Claims Court) granting-in-part the government's motion to dismiss their directly pled constitutional and non-constitutional claims for either lack of standing or lack of subject matter jurisdiction. See Fairholme Funds, Inc. v. United States, 147 Fed.Cl. 1 (2019); Owl Creek Asia I, L.P. v. United States, 148 Fed.Cl. 614 (2020); Mason Cap. L.P. v. United States, 148 Fed.Cl. 712 (2020); Akanthos Opportunity Master Fund, L.P. v. United States, 148 Fed.Cl. 647 (2020); Appaloosa Inv. Ltd. P'ship I v. United States, 148 Fed.Cl. 679 (2020); CSS, LLC v. United States, 149 Fed.Cl. 363 (2020); Arrowood Indem. Co. v. United States, 148 Fed.Cl. 299 (2020); Cacciapalle v. United States, 148 Fed.Cl. 745 (2020). The government cross-appeals the portions of the Claims Court's judgment denying its motion to dismiss shareholders' derivative claims. Because we conclude that the Claims Court correctly dismissed shareholders' directly pled claims but erred in not dismissing shareholders' derivatively pled allegations, we affirm-in-part and reverse-in-part.
Shareholders[1] own stock in Fannie Mae and Freddie Mac (collectively, the Enterprises). The Enterprises suffered devastating financial losses in 2008 when the national housing market collapsed. In response, Congress enacted the Housing and Economic Recovery Act of 2008 (HERA). HERA created the Federal Housing Finance Agency (FHFA), an independent agency tasked with regulating the Enterprises and (if necessary) stepping in as conservator or receiver. 12 U.S.C. §§ 4511, 4617. HERA also contains a Succession Clause, which states that the FHFA "shall, as conservator or receiver . . . immediately succeed to [] all rights, titles, powers, and privileges of the [Enterprises], and of any stockholder . . . with respect to the [Enterprises] and the assets of the [Enterprises]." Id. § 4617(b)(2)(A)(i).
With the consent of the Enterprises' boards of directors, the FHFA's Director placed the Enterprises into conservatorship in September 2008. J.A. 497-98; J.A. 530. The FHFA Director then negotiated preferred stock purchase agreements (PSPAs) with the Department of Treasury (Treasury) in which Treasury agreed to allow the Enterprises to draw up to $100 billion in capital in exchange for: (1) senior preferred non-voting stock having quarterly fixed-rate dividends and an initial liquidation preference of $1 billion and (2) warrants to purchase up to 79.9% of the common stock of each Enterprise at a nominal price. J.A. 415-18; J.A. 498-99.
FHFA and Treasury amended the terms of the original PSPAs in the years that followed. Relevant to this appeal, a "net worth sweep" under the PSPAs replaced the fixed-rate dividend formula with a variable one that required the Enterprises to make quarterly payments equal to their entire net worth, minus a small capital reserve amount. J.A. 437; J.A. 506-07. The net worth sweep caused the Enterprises to transfer most, if not all, of their equity to Treasury, leaving no residual value that could be distributed to shareholders. J.A. 437; J.A. 506-07.
Shareholders launched a series of challenges to the net worth sweep that have worked their way through several fora, including the D.C. Circuit and the Supreme Court. See, e.g., Perry Cap. LLC v. Lew, 70 F.Supp.3d 208 (D.D.C. 2014) ("Perry I"); Perry Cap. LLC v. Mnuchin, 864 F.3d 591 (D.C. Cir. 2017) ("Perry II"); Collins v. Yellen, 141 S.Ct. 1761 (2021) ("Collins"). Parallel to these unsuccessful attempts to undo the net worth sweep, shareholders filed complaints with the Claims Court, alleging the following direct claims: (1) the net worth sweep violated the Fifth Amendment for taking (or, alternatively, illegally exacting) the shareholders' equity in the Enterprises without just compensation; (2) the FHFA breached its fiduciary duties by entering into the net worth sweep; and (3) the FHFA and the Enterprises breached an implied-in-fact contract (with shareholders as the intended third-party beneficiaries) by agreeing to the net worth sweep. See, e.g., Fair-holme, 147 Fed.Cl. at 22. Barrett, an individual shareholder of the Enterprises, separately asserted derivative claims on behalf of the Enterprises, alleging similar takings, illegal exaction, breach of fiduciary duty, and breach of contract claims. See id.
The government moved to dismiss the claims in every case before the Claims Court in a single, omnibus motion. See id. at 22 & n.11. The Claims Court first granted-in-part and denied-in-part the government's motion in one case, Fairholme Funds, Inc. v. United States. See id. at 15. Specifically, the Claims Court dismissed the shareholders' direct Fifth Amendment takings and illegal exaction claims for lack of standing because it found them to be substantively derivative in nature. See, e.g., id. at 45. The Claims Court also dismissed for lack of subject matter jurisdiction the shareholders' direct claims for breach of fiduciary duty, see, e.g., id. at 37, and breach of implied-in-fact contract, see, e.g., id. at 40. The Claims Court, however, found that Barrett had standing to bring his derivative claims, notwithstanding HERA's Succession Clause, under the conflict-of-interest exception espoused in First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279 (Fed. Cir. 1999). See Fairholme, 147 Fed.Cl. at 49.
Having dismissed the direct takings claims in Fairholme the Claims Court solicited supplemental briefing from the parties in the other cases on the applicability of its ...
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