Robinson v. Fed. Hous. Fin. Agency, CIVIL ACTION NO. 7:15–cv–109–KKC
| Decision Date | 09 September 2016 |
| Docket Number | CIVIL ACTION NO. 7:15–cv–109–KKC |
| Citation | 223 F.Supp.3d 659 |
| Parties | Arnetia Joyce ROBINSON, Plaintiff, v. The FEDERAL HOUSING FINANCE AGENCY, et al., Defendants. |
| Court | U.S. District Court — Eastern District of Kentucky |
Robert B. Craig, Taft, Stettinius & Hollister, LLP, Covington, KY, for Plaintiff.
Asim Varma, David B. Bergman, Howard N. Cayne, Arnold & Porter, LLP, Deepthy Kishore, Thomas David Zimpleman, U.S. Department of Justice—Civil Division, Washington, DC, T. Scott White, Fogle, Keller, Purdy, PLLC, Lexington, KY, for Defendants.
This matter is before the Court on the Federal Housing Finance Agency ("FHFA") and the Department of the Treasury's ("Treasury") motions to dismiss. (DE 22; DE 23.) Plaintiff, Arnetia Robinson, is a private individual who claims her investments in Fannie Mae and Freddie Mac ("Companies") were materially damaged when FHFA and Treasury entered into a 2012 amendment ("Third Amendment") to existing Preferred Stock Purchase Agreements ("PSPAs"). The plaintiff seeks declaratory and injunctive relief that would prevent enforcement of portions of the Third Amendment.
The Companies, Fannie Mae and Freddie Mac, are government-sponsored enterprises born from statutory charters issued by Congress. The Companies insure trillions of dollars of mortgages and provide liquidity to the residential mortgage market. The Companies previously operated for profit, their debt and equity securities being privately owned and publicly traded. The shareholders in the companies include many individuals and organizations, including Plaintiff.
During the economic downturn of 2008, the Companies were seen as extreme liabilities as major players in the distressed housing market. In response to this perceived volatility, the United States Congress enacted the Housing and Economic Recovery Act ("HERA") on July 30, 2008. HERA granted FHFA the power to place the Companies in conservatorship or receivership. FHFA as conservator or receiver was empowered to "immediately succeed to—(i) all rights, titles, powers, and privileges of the [Company], and of any stockholder, officer or director of such [Company] with respect to the [Company] and the assets of the [Company]." 12 U.S.C. § 4617 (b)(2)(A)(i). Plaintiff contends that as conservator HERA charges FHFA to rehabilitate the Companies so as to put the Companies back into a solvent condition while preserving their assets. Plaintiff also alleges that only as receiver does HERA give FHFA the authority to liquidate the Companies' assets.
On September 6, 2008—despite public statements made by Treasury and FHFA assuring investors that the companies were in sound financial state—FHFA exercised their rights to conservatorship. Plaintiff claims that at that time, neither Company was experiencing a liquidity crisis, nor did they suffer from a short-term fall in operating revenue. The Companies had access to separate credit facilities at the Federal Reserve and the Treasury. The Companies also held hundreds of billions of dollars in unencumbered assets that could potentially be pledged as collateral.
HERA also granted Treasury temporary authority to invest in the Companies' stock until December of 2009. Soon after the Companies were placed in conservatorship, Treasury exercised that temporary statutory authority by entering into PSPAs with FHFA in its role as conservator of the Companies. Under these PSPAs, Treasury committed to purchase a newly created class of Senior Preferred Stock ("Government Stock"). In return for this commitment, Treasury received one billion dollars of Government Stock in each Company and warrants to acquire 79.9% of the common stock of the Companies. These stocks entitled the treasury to dividends at an annualized rate of 10% cash or 12% in-kind. The agreement gave FHFA discretion to determine whether to pay cash or in-kind dividends. In-kind were to be paid by increasing the liquidation preference of the outstanding Government Stock. Therefore, Plaintiff claims, there was never any threat that the Companies would become insolvent by virtue of paying cash dividends.
The Government Stocks diluted, but did not wholly eliminate, the economic interests of the private shareholders. Shortly after the imposition of the conservatorship, the Director of the FHFA James Lockhart accordingly assured Congress that the Companies' shareholders are still in place ... common shareholders have an economic interest in the companies." During the conservatorship, due to allegedly pessimistic assumptions about potential future losses, the Companies significantly wrote down the value of their assets. This forced the Companies to incur non-cash accounting losses in the form of loan loss provisions. In June 2012, these losses forced the Companies to issue $161 billion in Government Stock to make up for the balance-sheet deficits. The Companies also issued an additional $26 billion of Government Stock so that the Companies could pay cash dividends to the Treasury (although the Companies were not required to pay cash, as stated above). Because of these transactions, the dividends owed on the Government Stock were artificially and permanently inflated.
As a result of these transactions, the Treasury amassed a total of $189 billion in Government Stock. Based on the Companies' performances in the second quarter of 2012, there still seemed to be value in private shares. The Companies were paying 10% annualized cash dividends on the Government Stock without drawing additional capital from Treasury. Based on the improving housing market and higher quality of the newer loans backed by the Companies, Plaintiff contends that the Companies had returned to stable profitability.
Plaintiff also alleges that Treasury and FHFA knew of this apparent return to profitability. The Companies would soon be reversing many of the non-cash accounting losses that were incurred previously and both Treasury and FHFA had specific knowledge of this forthcoming balance sheet improvement.
After the Companies had announced their successful second quarter earnings, the Treasury and FHFA agreed to the PSPA's Third Amendment on August 17, 2012. The Third Amendment replaced the previous dividend formula with a requirement that the Companies pay as dividends the amount by which their net worth for the quarter exceeds a capital buffer of $3 billion. This buffer will gradually decrease over time by $600 million per year, being entirely eliminated in 2018. Put simply, the Third Amendment requires the Companies to pay a quarterly dividend equal to the entire net worth of each Company, minus a small reserve that will eventually shrink to zero (the "Net Worth Sweep").
Finally, Plaintiff alleges that the Companies via FHFA agreed to the Third Amendment at the insistence and under the direction and supervision of the Treasury. Plaintiff believes that the Third Amendment was a Treasury initiative that and reflected the culmination of a long-term plan to seize and nationalize the Companies.
Based on the foregoing facts, Plaintiff makes three claims for relief. First, that FHFA exceeded its conservatorship authority under HERA in violation of the APA. (DE 17 at 62–64.) Second, that Treasury exceeded its temporary statutory authority to purchase the Companies' securities in violation of the APA. (DE 17 at 64–66.) And finally, that Treasury further violated the APA through arbitrary and capricious conduct. (DE 17 at 66–68.)
Consequently, Plaintiff requests (1) a declaration that the Net Worth Sweep violates HERA and that Treasury acted arbitrarily and capriciously; (2) an injunction requiring Treasury to return all payments received through the Net Worth Sweep or recharacterizing these payments as a pay down and redemption of Treasury's liquidation preference and Government Stock; (3) vacatur of the Net Worth Sweep portions of the Third Amendment; (4) an injunction preventing FHFA or Treasury from further enforcing the Net Worth Sweep; and (5) an injunction barring FHFA from acting under the direction of Treasury in its role as conservator of the Companies. Both FHFA and Treasury have independently moved for dismissal of Plaintiff's claims. (DE 22; DE 23.)
A court may dismiss a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) if the plaintiff fails to provide "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The court must construe the complaint in the light most favorable to the plaintiff and accept all factual allegations as true, but the factual allegations must "raise a right to relief above the speculative level." Id. at 555, 127 S.Ct. 1955. The complaint must "contain either direct or inferential allegations respecting all material elements necessary for recovery under a viable legal theory." D'Ambrosio v. Marino , 747 F.3d 378, 383 (6th Cir. 2014) (internal quotation marks omitted). Failure to include plausible factual allegations for all material elements necessary for recovery warrants dismissal. Id.
Through HERA, Congress explicitly limited court authority to grant equitable relief upon challenges to FHFA action, 12 U.S.C. § 4617(f) provides that: "no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver." "Courts interpreting the scope of [§] 4617(f) have relied on decisions addressing the nearly identical jurisdictional bar applicable to the Federal Deposit Insurance Corporation (‘FDIC’) conservatorships contained in 12 U.S.C. § 1821(j)." Natural Res. Def. Council, Inc. v. FHFA , 815 F.Supp.2d 630, 641 (S.D.N.Y. 2011), aff'd sub nom. Town of Babylon v. FHFA , 699 F.3d 221 (2d Cir. 2012). These provisions have been construed to "effect a sweeping ouster of courts'...
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