In re Federal Home Loan Mortg. Corp. Litigation

• Decision Date: 27 July 2009
• Docket Number: No. 1:08cv773 (LMB/TCB).,1:08cv773 (LMB/TCB).
• Citation: 643 F.Supp.2d 790
• Parties: In re FEDERAL HOME LOAN MORTGAGE CORPORATION DERIVATIVE LITIGATION. This document relates to: All Actions.
• Court: U.S. District Court — Eastern District of Virginia

643 F.Supp.2d 790

In re FEDERAL HOME LOAN MORTGAGE CORPORATION DERIVATIVE LITIGATION This document relates to: All Actions.

No. 1:08cv773 (LMB/TCB).

United States District Court, E.D. Virginia, Alexandria Division.

July 27, 2009.

Robert J. Cynkar, Cuneo Gilbert & LaDuca LLP, Washington, DC, Howard Cayne, Ian S. Hoffman, Arnold & Porter LLP, Washington, DC, for Plaintiffs.

Lucy C. Hynes, Ropes & Gray LLP, Washington, DC, Ky E. Booth-Kirby, Bingham McCutchen LLP, Preston Burton, Orrick Herrington & Sutcliffe LLP Washington, DC, Charles Paul Chalmers, Wilson Sonsini Goodrich & Rosati PC, Washington, DC, Mitka Tamara Lynn Baker, DLA Piper US LLP, Washington, DC, Joseph Francis Yenouskas, Goodwin Procter LLP, Washington, DC, Eric Jay Feigin, Robbins Russell Englert Orseck Untereiner & Sauber LLP, Washington, DC, Peter King Stackhouse, Alexandria, VA, Jeffrey A. Simes, Goodwin Procter LLP, Boston, MA, Kenneth Ian Schacter, Bingham McCutchen LLP, New York, NY, for Defendants.

MEMORANDUM OPINION

LEONIE M. BRINKEMA, District Judge.

Three groups of shareholders have filed derivative actions on behalf of the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Federal Housing Finance Agency ("FHFA"), the federal agency acting as conservator of Freddie Mac pursuant to the Housing and Economic Recovery Act of 2008, has intervened and moved to substitute itself in place of the plaintiffs in all of the actions. For the reasons discussed below, the FHFA's motions will be granted.

I. Background

A. Freddie Mac, HERA, and the FHFA.

Freddie Mac was established in 1970 to compete with the Federal National Mortgage Association ("Fannie Mae") in the secondary mortgage market. Although technically private corporations, both Fannie Mae and Freddie Mac are government sponsored enterprises established to facilitate liquidity in the home mortgage market and to promote homeownership. See Federal National Mortgage Association Charter Act, ch. 847, § 301, 48 Stat. 1246, 1252 (1934) (codified as amended at 12 U.S.C. §§ 1716 et seq.); Federal Home Loan Mortgage Corporation Act, Pub.L. No. 91-351, § 301, 84 Stat. 450, 451 (1970) (codified as amended at 12 U.S.C. §§ 1451 et seq.).¹

The Office of Federal Housing Enterprise Oversight ("OFHEO") was a federal agency established in 1992 to oversee and ensure the financial soundness of Fannie Mae and Freddie Mac. In general, OFHEO's reports about Freddie Mac were positive; as recently as July 2008, OFHEO's director described Freddie Mac and Fannie Mae as "adequately capitalized."² However, OFHEO's forecasts and analyses proved incorrect. Freddie Mac reported total losses of $3.1 billion in 2007,³ and $50.1 billion in 2008.⁴

On July 30, 2008, Congress passed the Housing and Economic Recovery Act of 2008, Pub.L. No. 110-289, 122 Stat. 2654 (2008) ("HERA"), which merged OFHEO and another agency, the Federal Housing Finance Board, to form the new Federal Housing Finance Agency ("FHFA"). See HERA, §§ 1301-1314, 122 Stat. at 2794-2799. HERA further provided that until appointment and confirmation of an FHFA director, OFHEO's former director would act as director of the FHFA. Id. § 1101, 122 Stat. at 2662. The plaintiffs have alleged, and the FHFA has not disputed, that there is significant overlap between OFHEO's staff and that of the FHFA.⁵

HERA granted the FHFA's director the authority to appoint the FHFA as conservator or receiver of Freddie Mac, Fannie Mae, and any Federal Home Loan Bank. Pursuant to this authority, on September 6, 2008, FHFA Director James Lockhart appointed the FHFA as Freddie Mac's conservator.⁶ Under the broad powers established by HERA for conservators, the FHFA has "succeed[ed] to all rights, titles, powers, and privileges of [Freddie Mac], and of any stockholder, officer, or director of [Freddie Mac] with respect to [Freddie Mac] and the assets of [Freddie Mac]," and is empowered to "take over the assets of and operate [Freddie Mac] with all the powers of the shareholders, the directors, and the officers of [Freddie Mac] and conduct all business of [Freddie Mac]." 12 U.S.C. §§ 4617(b)(2)(A)(i), (B)(i). The statute also provides that, except under limited circumstances not at issue here, "no court may take any action to restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or a receiver." 12 U.S.C § 4617(f).

B. These Civil Actions.

These three consolidated cases—Bassman, Adams Family Trust, and Louisiana Municipal⁷—are derivative actions filed by shareholders on Freddie Mac's behalf. All of the plaintiffs assert claims against Freddie Mac's former board members. Plaintiff Bassman has also sued other corporations, including PricewaterhouseCoopers LLP, First American Corporation, First American Eapppraiseit, Washington Mutual, Inc., and several entities of Countrywide Financial Corporation,⁸ as well as officers of those corporations, for allegedly contributing to Freddie Mac's demise.

After the plaintiffs made demands on Freddie Mac to pursue the claims, Freddie Mac appointed a special litigation committee ("SLC") of three purportedly independent board members to investigate the claims, and retained counsel to assist in the investigation. On September 4, 2008, the SLC met with the Adams Family and Louisiana Municipal plaintiffs to discuss possible resolution of the litigation, invited the plaintiffs to submit a list of suggested corporate reforms, and conveyed its willingness to continue discussing the issues raised by the plaintiffs. When the FHFA became Freddie Mac's conservator, the board members, including the members of the SLC, were dismissed.⁹

After being granted permission by the Court to intervene, the FHFA moved to substitute itself for the plaintiffs in all of the consolidated actions, asserting that under the above-quoted provisions of HERA, it is the only party with standing to sue on behalf of Freddie Mac, and that allowing the plaintiffs to continue pursuing this litigation would interfere with its powers in contravention of HERA's mandate. After hearing argument on FHFA's motions, the Court held the motions in abeyance, stayed the matter, and ordered the parties to appear on May 1, 2009 for a status hearing.

At the status hearing, the plaintiffs contended that their opposition to the FHFA's substitution as plaintiff was buttressed by the FHFA's alleged failure to file a claim on Freddie Mac's behalf in a recent bankruptcy of Washington Mutual Bank. The Court ordered the FHFA to file a response. The FHFA's response provided evidence that Freddie Mac, acting under the FHFA's authority, had, in fact, filed proofs of claims related to two separate Washington Mutual entities—one regarding Washington Mutual, Inc. in bankruptcy, and one regarding Washington Mutual Bank in FDIC receivership—and had also recently entered into a confidential settlement with JP Morgan Chase, the purchaser of the assets of Washington Mutual Bank.¹⁰ Given the FHFA's timely response to the Court's order concerning the Washington Mutual proceedings, and in light of two recent decisions in similar cases, the Court finds that the motions to substitute are ripe for adjudication.

II. Discussion

At issue in the FHFA's Motion to Substitute is whether HERA bars the plaintiffs from maintaining their derivative actions. The FHFA, relying on the plain language of HERA as well as case law, argues that it alone has standing to sue on behalf of Freddie Mac, and that allowing plaintiffs to sue would affect FHFA's ability to fulfill its mandate as conservator. The plaintiffs argue that HERA does not bar them from suing derivatively, at least on these facts. Alternatively, the plaintiffs have proposed that the Court continue the stay of the motions to substitute until the FHFA has indicated whether or not it intends to actually litigate the claims raised in their complaints.

The FHFA's argument has merit. The FHFA's position is consistent with the language of HERA, with the recent decisions reached by two other federal district courts, as well as with the persuasive case law interpreting an analogous statute. Finally, particularly given the FHFA's involvement in the Washington Mutual bankruptcy, the Court does not find that the plaintiffs' concerns of conflicts of interest or bad faith warrant granting them derivative standing.

A. Shareholder Derivative Suits.

Normally, a corporation's board of directors has complete discretion to prosecute the corporation's causes of action. See United Copper Sec. Co. v. Amalgamated Copper Co., 244 U.S. 261, 263, 37 S.Ct. 509, 61 L.Ed. 1119 (1917). Shareholders wishing to initiate an action on a corporation's behalf must first make a reasonable demand on the board of directors to initiate the action; if the board elects to pursue the claims, it alone has standing to do so. See Meltzer v. Atlantic Research Corp., 330 F.2d 946, 949 (4th Cir.1964). If the shareholders' demand is refused or ignored, or if they demonstrate that a demand would be futile, they may pursue a derivative action. See id.

A shareholder derivative complaint in federal court must "state with particularity any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and the reasons for not obtaining the action or not making the effort." Fed.R.Civ.P. 23.1(b)(3). In this case, it is undisputed that the plaintiffs have made proper demands, and that to date, neither Freddie Mac's board nor the FHFA has affirmatively pursued the claims.

B. HERA's Impact on the Plaintiffs' Standing.

1. Plain Language.

Under HERA, the FHFA, as Freddie Mac's conservator, possesses "all rights, titles, powers, and privileges of . . . any stockholder . . . of [Freddie Mac] with respect to [Freddie Mac] and the assets of [Freddie Mac]," and was granted the power to "take over the assets of and operate [Freddie Mac] with all the powers of the shareholders . . . of [Freddie Mac]...