Pagliara v. Fed. Home Loan Mortg. Corp., Case No. 1:16-cv-337 (JCC/JFA)

• Decision Date: 23 August 2016
• Docket Number: Case No. 1:16-cv-337 (JCC/JFA)
• Citation: 203 F.Supp.3d 678
• Parties: Timothy J. PAGLIARA, Plaintiff, v. FEDERAL HOME LOAN MORTGAGE CORPORATION, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

203 F.Supp.3d 678

Timothy J. PAGLIARA, Plaintiff,

v.FEDERAL HOME LOAN MORTGAGE CORPORATION, Defendant.

Case No. 1:16-cv-337 (JCC/JFA)

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

Signed August 23, 2016

Christopher T. Pickens, Nathaniel Thomas Connally, III, Hogan Lovells US LLP, McLean, VA, for Plaintiff.

Taylor Thomas Lankford, Michael Joseph Ciatti, King & Spalding, Ian S. Hoffman, Arnold & Porter LLP, Washington, DC, for Defendant.

MEMORANDUM OPINION

James C. Cacheris, UNITED STATES DISTRICT COURT JUDGE

The matter before the Court questions whether a preferred stockholder retains the right to inspect Freddie Mac's corporate records despite a conservator succeeding to "all rights, titles, powers, and privileges...of any stockholder...with respect to [Freddie Mac] and the assets of [Freddie Mac]." The Court concludes that the statutory transfer of power to the conservator destroyed the stockholder's right to inspect corporate records. Accordingly, the Court will dismiss Plaintiff's Complaint.

I. Background

The Federal Home Loan Mortgage Corporation, or "Freddie Mac," is a federally chartered corporation created by Congress, but owned by stockholders.

Plaintiff Timothy J. Pagliara ("Pagliara" or "Plaintiff") is the beneficial owner of approximately 346,000 shares of Freddie Mac's junior preferred stock, which he purchased in 2009. Pagliara is also the founder of "a coalition of private investors from all walks of life, committed to the preservation of shareholder rights for those invested in Freddie Mac and Fannie Mae." (Compl. [Dkt. 1-1] ¶ 22.) Pagliara brings this lawsuit seeking to inspect corporate records in his individual capacity as a beneficial owner of Freddie Mac preferred stock.

To understand the present dispute, it is necessary to discuss Freddie Mac's origins and recent history. Congress created Freddie Mac in 1970 to bring competition to the market for secondary mortgages.

Both Freddie Mac and its sister corporation, "Fannie Mae," purchase mortgages originated by banks and bundle them into mortgage-backed securities to be sold on the open market. From 2000 through 2006, Freddie Mac was profitable and declared dividends on preferred and common stock. As a result of the national financial crisis, however, Freddie Mac recorded losses in the third and fourth quarters of 2007 and the first two quarters of 2008.

As a response to the financial crisis, Congress passed the Housing and Economic Recovery Act of 2008 ("HERA").¹ HERA created the Federal Housing Finance Authority ("FHFA") to regulate Freddie Mac and Fannie Mae and granted the FHFA authority to place either entity in conservatorship. FHFA did just that in September 2008.² As conservator, FHFA acquired broad authority from HERA to operate Freddie Mac, including the power to "take such action as may be (i) necessary to put [Freddie Mac] in a sound and solvent condition; and (ii) appropriate to carry on the business of [Freddie Mac] and preserve and conserve the assets and property of [Freddie Mac]." 12 U.S.C. § 4617(b)(2)(D). FHFA also received the authority to "operate [Freddie Mac] with all the powers of the shareholders, the directors, and the officers of the regulated entity and conduct all business of [Freddie Mac]." Id. § 4617(b)(2)(B)(i). To execute that power, HERA mandates that FHFA shall "immediately succeed to (i) 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]." Id. § 4617(b)(2)(A)(i). HERA even purports to insulate FHFA's operation of Freddie Mac from judicial intervention by stating that, except in limited circumstances, "no court may take any action to restrain or affect the exercise of powers or functions of [FHFA] as a conservator." Id. § 4617(f).

The day after FHFA became conservator in 2008, FHFA caused Freddie Mac to enter into a senior preferred stock purchase agreement with the U.S. Department of the Treasury. Under the agreement, Treasury purchased one million shares of newly created senior preferred Freddie Mac stock with a liquidation preference of $1 billion. In exchange, Freddie Mac received the right to withdraw up to $100 billion from Treasury. Between 2008 and 2012, Freddie Mac withdrew $71.3 billion, raising Treasury's liquidation preference in Freddie Mac to $72.3 billion. By 2012, Freddie Mac showed signs of financial growth. According to Pagliara, Freddie Mac's recovery threatened Treasury's ability to control and extract dividends from Freddie Mac. At the same time, the national debt ceiling was constraining Treasury's reserves. Those concerns allegedly caused Treasury to decide "to take money from Freddie Mac and Fannie Mae stockholders" by entering into a "Third Amendment" to the senior preferred stock purchase agreement. (Compl. ¶¶ 91-92.)

The Third Amendment to the stock purchase agreement contains a "Net Worth Sweep" provision, which entitles Treasury to receive a quarterly dividend from Freddie Mac in the amount of Freddie Mac's entire net worth, except for only a small capital reserve. Freddie Mac has paid Treasury dividends of approximately $74.4 billion since 2013 under this Net Worth Sweep arrangement. During that same time, Freddie Mac has not paid any dividends to junior preferred stockholders, like Pagliara.

In January 2016, Pagliara sent a "Demand" letter to Freddie Mac's board of directors seeking to enforce his stockholder right to inspect Freddie Mac's corporate books and records. (See Demand [Dkt. 1-1] at 40-52.)³ Freddie Mac's bylaws grant stockholders a right to inspect certain corporate records when specific conditions are met.⁴ The bylaws also obligate Freddie Mac to "follow the corporate governance practices and procedures of the law of the Commonwealth of Virginia, including without limitation the Virginia Stock Corporation Act," to the extent doing so is not inconsistent with Freddie Mac's "enabling legislation and other Federal law, rules, and regulations." (See Bylaws § 11.3(a).) Pagliara's preferred stock certificates contain a similar reference to Virginia law.⁵ The Virginia Stock Corporation Act grants stockholders a right to inspect corporate records that is substantively identical to the right granted in Freddie Mac's bylaws.⁶ See Va. Code §§ 13.1-770, –771.

Pagliara sought to inspect Freddie Mac's records "primarily for the purpose of investigating potential claims arising from the ‘Net Worth Sweep.’ " (Compl. ¶ 4; see also id. ¶ 43 ("Stockholder is investigating potential claims with respect to the Net Worth Sweep and other conduct of Freddie Mac, the Board, FHFA, and Treasury, as further described below.").) The Demand explained Pagliara's belief that the Net Worth Sweep potentially gives rise to several claims against FHFA, Freddie Mac's directors, and Treasury. Principal among those claims are lawsuits against Freddie Mac's directors for breaches of fiduciary duties of care and loyalty, statutory duties governing when dividends may issue, and corporate waste, among others. The Demand also strongly suggested that Freddie Mac's directors may be personally liable for those violations.⁷ Pagliara reiterated those claims in a "Dividend Letter" sent on the same day and urging the directors to "[e]xercise your authority under Virginia law to cause [Freddie Mac] to immediately stop declaring and paying dividends to Treasury." (Dividend Letter [Dkt. 1-1] at 78-84.)

Freddie Mac's board did not respond to Pagliara's Demand. Instead, on January 28, 2016, FHFA sent Pagliara a letter explaining that Freddie Mac's directors serve on behalf of FHFA and do not owe any fiduciary duties to stockholders. (See Response Letter [Dkt. 1-1] at 69.) Thus, according to FHFA, the state law duties Pagliara discussed in his Demand and Dividend Letter "are simply not applicable." (Id. )

About six weeks after receiving FHFA's response, Pagliara filed suit in a Virginia circuit court seeking an order under Virginia Code § 13.1-773⁸ to permit him to inspect Freddie Mac's corporate books and records. At the same time, Pagliara filed a substantively identical lawsuit in Delaware seeking to inspect Fannie Mae's records. See Pagliara v. Fed. Nat'l Mortg. Assoc. , No. 1:16-cv-193 (D. Del. filed Mar. 25, 2016).

Freddie Mac removed the case to this Court pursuant to 12 U.S.C. § 1452(f),⁹ which grants Freddie Mac the right to remove "any civil or other action, case or controversy in a court of a State, or in any court other than a district court of the United States, to which [Freddie Mac] is a party," provided Freddie Mac removes the action "before the trial." Id. § 1452(f)(3). The Court then granted a brief stay to determine whether the Judicial Panel on Multidistrict Litigation would consolidate this matter with other pending cases.¹⁰ When the case was returned to active status, Freddie Mac moved to dismiss Pagliara's complaint for lack of standing and failure to state a claim upon which relief may be granted. In the alternative, FHFA moved to be substituted as plaintiff in this case. These motions have been fully briefed and argued and are now ripe for disposition.

II. Standard of Review

Defendant challenges Plaintiff's standing to bring this suit pursuant to Federal Rule of Civil Procedure 12(b)(1). Defendant raises a facial challenge to Pagliara's standing, arguing that the Complaint fails to allege facts upon which Pagliara has standing, thereby precluding the Court's subject matter jurisdiction. When reviewing a facial challenge to subject matter jurisdiction, courts must take the facts alleged within the complaint as true. Kerns v. United States , 585 F.3d 187, 192 (4th Cir.2009).

Defendant also raises a 12(b)(6) challenge to whether Pagliara has sufficiently alleged his right to inspect corporate records under the Virginia Stock Corporation Act. This motion is reviewed under the same standard described above. See id. Accordingly, the court "must accept as true all of...