Perry Capital LLC v. Lew

• Citation: 70 F.Supp.3d 208
• Decision Date: 30 September 2014
• Docket Number: Civil No. 13–1439 RCL, Civil No. 13–1053 RCL,Miscellaneous No. 13–1288 RCL,Civil No. 13–1025 RCL
• Parties: Perry Capital LLC, Plaintiff, v. Jacob J. Lew, et al., Defendants. Fairholme Funds, Inc., et al., Plaintiffs, v. Federal Housing Finance Agency, et al., Defendants. Arrowood Indemnity Company, et al., Plaintiffs, v. Federal National Mortgage Association, et al., Defendants. In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations This Memorandum Opinion relates to: All Cases
• Court: U.S. District Court — District of Columbia

70 F.Supp.3d 208

Perry Capital LLC, Plaintiff

v.Jacob J. Lew, et al., Defendants.

Fairholme Funds, Inc., et al., Plaintiffs

v.Federal Housing Finance Agency, et al., Defendants.

Arrowood Indemnity Company, et al., Plaintiffs

v.Federal National Mortgage Association, et al., Defendants.

In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations

This Memorandum Opinion relates to: All Cases

Civil No. 13–1025 RCL

Civil No. 13–1053 RCL

Civil No. 13–1439 RCL

Miscellaneous No. 13–1288 RCL

United States District Court, District of Columbia.

Signed September 30, 2014

Theodore B. Olson, Derek S. Lyons, Matthew D. McGill, Nikesh Jindal, Douglas R. Cox, Gibson, Dunn & Crutcher, L.L.P., Peter A. Patterson, David Henry Thompson, Howard C. Nielson, Jr., Vincent J. Colatriano, Charles J. Cooper, Cooper & Kirk, PLLC, Drew William Marrocco, Dentons U.S. LLP, Hamish P.M. Hume, Boies, Schiller & Flexner LLP, Craig L. Briskin, Mehri & Skalet, PLLC, Michael G. McLellan, Finkelstein Thompson LLP, Reuben A. Guttman, Grant & Eisenhofer P.A., Hamish P.M. Hume, Boies, Schiller & Flexner LLP, Craig L. Briskin, Mehri & Skalet, PLLC, Washington, DC, Michael H. Barr, Richard M. Zuckerman, Sandra D. Hauser, Dentons U.S. LLP, Jeremy A. Lieberman, Lesley F. Portnoy, Pomerantz Grossman Hufford Dahlstrom LLP, David L. Wales, John Rizio–Hamilton, Bernstein Litowitz Berger & Grossmann LLP, New York, NY, Ex Kano S. Sams, II, Glancy Binkow & Goldberg LLP, Los Angeles, CA, Eric L. Zagar, Lee D. Rudy, Kessler, Meltzer & Check LLP, Radnor, PA, Patrick V. Dahlstrom, Pomerantz Grossman Hufford Dahlstrom LLP, Chicago, IL, Blair A. Nicholas, David R. Kaplan, Bernstein Litowitz Berger & Grossmann LLP, San Diego, CA, Geoffrey C. Jarvis, Grant & Eisenhofer P.A., Wilmington, DE, Barbara J. Hart, Thomas A. Skelton, Lowey Dannenberg Cohen& Hart, White Plains, NY, for Plaintiffs.

Joel L. McElvain, Thomas David Zimpleman, U.S. Department of Justice, Asim Varma, David Block Bergman, Howard Neil Cayne, Arnold & Porter LLP, Paul Clement, Bancroft PLLC, Graciela Maria Rodriguez, Michael Joseph Ciatti, King & Spalding, LLP, Washington, DC, Stephen V. Potenza, Bancroft PLLC, New York, NY, for Defendants.

CLASS ACTION

MEMORANDUM OPINION

ROYCE C. LAMBERTH, United States District Judge

Before the Court are motions to dismiss or, in the alternative, for summary judgment, filed by the defendants United States Department of the Treasury (“Treasury”) and Federal Housing Finance Agency (“FHFA”), as well as a cross-motion for summary judgment on Administrative Procedure Act (“APA”) claims filed by the Perry, Fairholme, and Arrowood plaintiffs (collectively, “individual plaintiffs”). Upon consideration of the defendants' respective motions to dismiss, the individual plaintiffs' cross-motion for summary judgment, the various opposition and reply briefs thereto filed by the defendants, the individual plaintiffs, and the class action plaintiffs (“class plaintiffs”), the applicable law, and the entire record herein, the Court will GRANT the defendants' motions to dismiss and DENY the individual plaintiffs' cross-motion for summary judgment.

I. BACKGROUND

This matter is brought before the Court by both a class action lawsuit and a set of three individual lawsuits. These four lawsuits contain numerous overlapping, though not identical, claims. The purported class plaintiffs consist of private individual and institutional investors who own either preferred or common stock in the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Am. Compl. at ¶¶ 30–44, In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigs., No. 13–1288 (D.D.C. Dec. 3, 2013), ECF No. 4 (“In re Fannie Mae/Freddie Mac Am. Compl. ”); Derivative Compl. at ¶¶ 19–21, In re Fannie Mae/Freddie Mac, No. 13–1288 (D.D.C. July 30, 2014), ECF No. 39 (“In re Fannie Mae/Freddie Mac Derivative Compl.”). The individual plaintiffs comprise a collection of private investment funds and insurance companies. Compl. at ¶¶ 25–27, Perry Capital LLC v. Lew, No. 13–1025 (D.D.C. July 7, 2013), ECF No. 1 (“Perry Compl.”); Compl. at ¶¶ 18–28, Fairholme Funds, Inc., v. FHFA, No. 13–1053 (D.D.C. July 10, 2013), ECF No. 1 (“Fairholme Compl.”); Compl. at ¶¶ 15–19, Arrowood Indem. Co. v. Fannie Mae, No. 13–1439 (D.D.C. Sept. 20, 2013), ECF No. 1 (“Arrowood Compl.”).

Fannie Mae and Freddie Mac are government-sponsored enterprises (“GSEs”),¹ born from statutory charters issued by Congress. See Federal National Mortgage Association Charter Act, 12 U.S.C. §§ 1716 –1723 ; Federal Home Loan Mortgage Corporation Act, 12 U.S.C. §§ 1451 –1459. Congress created the GSEs in order to, among other goals, “promote access to mortgage credit throughout the Nation ... by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.” 12 U.S.C. § 1716(3). In other words, the GSEs' shared purpose was to make it easier (i.e., less risky) for local banks and other lenders to offer mortgages to prospective home buyers. The GSEs sought to accomplish this objective by purchasing mortgage loans from lenders, thus relieving lenders of default risk and “freeing up lenders' capital to make additional loans.” See Treasury Defs.'s Mot. to Dismiss, or, in the Alternative, for Summ. J. at 6 (D.D.C. Jan. 17, 2014) (“Treasury Mot.”).² In order to finance this operation, the GSEs would, primarily, pool the many mortgage loans they purchased into various mortgage-backed securities and sell these securities to investors. See, e.g., Individual Pls.'s Opp'n and Cross–Mot. for Summ. J. at 4 (D.D.C. Mar. 21, 2014) (“Individual Pls.'s Opp'n”).

Fannie Mae and Freddie Mac are considered government-sponsored, rather than government-owned, because both congressionally chartered entities were eventually converted, by statute, into publicly traded corporations. Housing and Urban Development Act, Pub.L. No. 90–448, § 802, 82 Stat. 536–538 (1968); Financial Institutions Reform, Recovery and Enforcement Act, Pub.L. No. 101–73, § 731, 103 Stat. 432–433 (1989). Yet despite this historically market-driven ownership structure, “the GSEs have benefitted from a public perception that the federal government had implicitly guaranteed the securities they issued; this perception allowed the GSEs to purchase more mortgages and [mortgage-backed securities], at cheaper rates, than would otherwise prevail in the private market.” Treasury Mot. at 6–7.

By 2008, the United States economy faced dire straits, in large part due to a massive decline within the national housing market.See Individual Pls.'s Opp'n at 7. “As a result of the housing crisis, the value of the [GSEs'] assets ... deteriorated and the [GSEs] suffered ... credit losses in their portfolios.” FHFA Mot. to Dismiss, or, in the Alternative, for Summ. J. at 7 (D.D.C. Jan. 17, 2014) (“FHFA Mot.”).

Given the systemic danger that a Fannie Mae or Freddie Mac collapse posed to the already fragile national economy, among other housing market-related perils, Congress enacted the Housing and Economic Recovery Act (“HERA”) on July 30, 2008. See Individual Pls.'s Opp'n at 6; Pub.L. No. 110–289, 122 Stat. 2654. HERA established FHFA as an independent agency to supervise and regulate the GSEs. 12 U.S.C. § 4511. HERA further granted FHFA's director the authority to appoint the agency as conservator or receiver for the GSEs. 12 U.S.C. § 4617(a). Of most relevance to the present litigation, HERA empowered FHFA, as conservator or receiver, to “immediately succeed to—(i) all rights, titles, powers, and privileges of the [GSE], and of any stockholder, officer, or director of such [GSE] with respect to the [GSE] and the assets of the [GSE].” 12 U.S.C. § 4617(b)(2)(A)(i). The statute also set forth a “[l]imitation on court action,” noting that, “[e]xcept as provided in this section or at the request of the Director, no court may take any action to restrain or affect the exercise of powers or functions of [FHFA] as a conservator or a receiver.” 12 U.S.C. § 4617(f). Moreover, apparently recognizing that Treasury (i.e., taxpayer) funds may soon be necessary to capitalize the struggling GSEs,³ Congress, under HERA, amended the GSEs' charters to temporarily authorize Treasury to “purchase any obligations and other securities issued by the [GSEs].” 12 U.S.C. § 1455(l ) (1)(A) (Freddie Mac); 12 U.S.C. § 1719(g)(1)(A) (Fannie Mae).⁴ This provision also provided that the “Secretary of the Treasury may, at any time, exercise any rights received in connection with such purchases.” 12 U.S.C. § 1719(g)(2)(A). Treasury's authority to invest in the GSEs expired on December 31, 2009. 12 U.S.C. § 1719(g)(4).

Following the GSEs' unsuccessful effort to “raise capital in the private markets,” FHFA Mot. at 7–8, FHFA placed the GSEs into conservatorship on September 6, 2008. See, e.g., Class Pls.'s Opp'n at 7 (D.D.C. Mar. 21, 2014) (“Class Pls.'s Opp'n”). One day later, Treasury, pursuant to 12 U.S.C. § 1719(g), entered into Senior Preferred Stock Purchase Agreements (“PSPAs”) with each of the GSEs. Individual Pls.'s Opp'n at 8. Under the initial PSPAs, Treasury committed to provide up to $100 billion in funding to each GSE “to ensure that their assets were equal to their liabilities”—i.e., to “cure [the GSEs'] negative net worth”—at the end of any fiscal quarter. Id. ; FHFA Mot. at 11. On May 6, 2009, Treasury and the GSEs, through FHFA, entered into the First Amendment to the PSPAs, whereby Treasury doubled its funding cap to $200 billion for each GSE. Individual Pls.'s Opp'n at 11. On December 24, 2009, the parties executed the Second Amendment, which permitted the GSEs to continue to “draw unlimited sums from Treasury [as required to cure any quarterly negative net worth] until the end of 2012,” and then, as of December 31, 2012, permanently fixed the funding cap for each GSE (at an amount...