Saxton v. Fed. Hous. Fin. Agency

• Decision Date: 27 March 2017
• Docket Number: No. 15–CV–47–LRR,15–CV–47–LRR
• Citation: 245 F.Supp.3d 1063
• Parties: Thomas SAXTON et al., Plaintiffs, v. The FEDERAL HOUSING FINANCE AGENCY et al., Defendants.
• Court: U.S. District Court — Northern District of Iowa

245 F.Supp.3d 1063

Thomas SAXTON et al., Plaintiffs,

v.The FEDERAL HOUSING FINANCE AGENCY et al., Defendants.

No. 15–CV–47–LRR

United States District Court, N.D. Iowa, Cedar Rapids Division.

Signed March 27, 2017

Alexander Michael Johnson, Sean Patrick Moore, Des Moines, IA, for Plaintiffs.

Howard N. Cayne, Asim Varma, David B. Bergman, Ian S. Hoffman, Arnold & Porter LLP, Deepthy Kishore, Thomas David Zimpleman, US Department of Justice, Brian Wesley Barnes, Charles Justin Cooper, David Henry Thompson, Peter Andrew Patterson, Cooper & Kirk, PLLC, Michael H. Krimminger, Cleary, Gottlieb, Steen & Hamilton, LLP, Washington, DC, Matthew C. McDermott, Stephen H. Locher, Belin McCormick, PC, Kendra Lou Mills Arnold, Matthew G. Whitaker, Whitaker, Hagenow, Gustoff, LLP, Ryan Gene Koopmans, Nyemaster, Goode, West, Hansell & O'Brien, Des Moines, IA, Matt M. Dummermuth, Whitaker, Hagenow & Gustoff, Cedar Rapids, IA, for Defendants.

ORDER

LINDA R. READE, JUDGE

TABLE OF CONTENTS

I. INTRODUCTION ...1066

II. RELEVANT PROCEDURAL HISTORY ...1066

III. FACTUAL BACKGROUND ...1067

A. Parties ...1067

B. Placement Into Conservatorship ...1068

C. Preferred Stock Purchase Agreements ...1068

D. Post–Conservatorship Financial Performance ...1069

E. Third Amendment to PSPAs ...1069

F. Motivation for Third Amendment ...1070

IV. LEGAL STANDARD ...1070

V. ANALYSIS ...1071

A. Nature of Plaintiffs' Claims ...1071

B. Issue Preclusion ...1073

C. § 4617 (f ) Bar to Suit ...1075

1. Conservator's power to adopt Third Amendment...1075

2. Adoption of Third Amendment at Treasury's direction...1076

3. Application of § 4617 (f ) to Treasury...1078

D. § 4617(b)(2)(A) Bar to Suit ...1078

VI. CONCLUSION ...1080

I. INTRODUCTION

The matters before the court are Defendants Federal Housing Finance Agency ("FHFA") and Melvin L. Watt's "Motion to Dismiss" ("FHFA Motion") (docket no. 76) and Defendant United States Department of the Treasury's ("Treasury") "Motion to Dismiss the Amended Complaint" ("Treasury Motion") (docket no. 77) (collectively, "Motions").

II. RELEVANT PROCEDURAL HISTORY

On February 9, 2016, Plaintiffs Thomas Saxton, Ida Saxton and Bradley Paynter (collectively, "Plaintiffs") filed an Amended Complaint (docket no. 61). In the Amended Complaint, Plaintiffs seek declaratory and injunctive relief and damages based on five claims against FHFA and Treasury: (1) actions taken by FHFA exceeded its statutory authority; (2) actions taken by Treasury exceeded its statutory authority; (3) actions taken by Treasury were arbitrary and capricious; (4) breach of contract by FHFA; and (5) breach of the implied covenant of good faith and fair dealing by FHFA. See Amended Complaint ¶¶ 134–81. Counts I–III are raised under the Administrative Procedures Act ("APA"), 5 U.S.C. § 706, and Counts IV–V are raised under state common law. Plaintiffs' claims arise from FHFA's exercise of its role as conservator of the Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") and Treasury's exercise of its authority to purchase Fannie Mae and Freddie Mac securities.

On March 18, 2016, FHFA and Watts filed the FHFA Motion and Treasury filed the Treasury Motion. On April 4, 2016, the proceedings in the instant case were stayed pending decision by the Judicial Panel on Multidistrict Litigation as to whether the case would be transferred with several similar cases for consolidation and coordination in another district. See April 4, 2016 Order (docket no. 79). On June 2, 2016, the Judicial Panel on Multidistrict Litigation denied transfer. See docket no. 80. On June 16, 2016, FHFA and Watts filed a "Supplemental Brief in Further Support of Their Motion to Dismiss" ("FHFA Supplemental Brief") (docket no. 83). On June 30, 2016, Plaintiffs filed a Response (docket no. 86) to the FHFA and Treasury Motions. On August 1, 2016, FHFA and Watt filed a Reply (docket no. 87) to the Response. That same date, Treasury also filed a Reply (docket no. 88) to the Response. On March 23, 2017, the court heard oral argument from the parties regarding the issues raised in the Motions and the Response. See Mar. 23, 2017 Minute Entry (docket no. 104). The matters are fully submitted and ready for decision.

III. FACTUAL BACKGROUND

Accepting all factual allegations in the Amended Complaint as true and drawing all reasonable inferences in favor of Plaintiffs, the facts are as follows.

A. Parties

Fannie Mae and Freddie Mac (collectively, "GSEs") are government-sponsored enterprises that purchase and guarantee mortgages issued by private banks and bundle the mortgages into securities that are then sold to investors. Amended Complaint ¶ 34. The GSEs issue common stock and various series of preferred stock, such that owners of preferred stock receive dividend and liquidation preferences over owners of common stock. Id. ¶ 36.

Plaintiffs Thomas and Ida Saxton are individuals residing in Cedar Rapids, Iowa. Id. ¶ 29. Thomas Saxton owns shares of Freddie Mac preferred stock, and Thomas and Ida Saxton own shares of Freddie Mac common stock both jointly and individually. Id. ¶ 37. The Saxtons acquired their Freddie Mac common stock in 2008. Id. Plaintiff Bradley Paynter is an individual residing in the State of Washington. Id. ¶ 30. Paynter owns shares of Fannie Mae common stock, which he acquired in 1996. Id. ¶ 38.

FHFA is an independent agency created by the Housing and Economic Recovery Act of 2008 ("HERA") and is empowered by HERA to regulate the GSEs. Id. ¶¶ 31, 42; see also 12 U.S.C. § 4511. Treasury is an executive agency temporarily authorized by HERA to purchase stock issued by the GSEs, with such purchase authority expiring on December 31, 2009. Amended Complaint ¶¶ 53, 55; see also 12 U.S.C. § 1719(g).

B. Placement Into Conservatorship

In 2008, in the midst of the financial crisis, Congress passed HERA. Amended Complaint ¶ 42. In addition to creating FHFA, HERA also authorizes FHFA to place the GSEs under conservatorship or receivership. Id. ; see also 12 U.S.C. § 4617(a). At the time of HERA's passing, the GSEs had "recorded losses in 2007 and the first two quarters of 2008," consistent with the dramatic downward trend of the housing market. Amended Complaint ¶ 40. Despite the losses, the GSEs remained capable of paying their debts and retained significant capital to pay future loses. Id.

On September 6, 2008, FHFA placed the GSEs under conservatorship after receiving "significant pressure from Treasury" to do so. Id. ¶ 48. Upon announcing the conservatorship, FHFA made public statements to the effect that the conservatorship was temporary in nature and meant only to restore the GSEs to solvency, that GSE common stock would "continue to trade" and that shareholders would retain their rights to the financial value of their stock. Id. ¶¶ 49–50.

C. Preferred Stock Purchase Agreements

On September 7, 2008, FHFA (as conservator of the GSEs) and Treasury entered into the Preferred Stock Purchase Agreements ("PSPAs"). Id. ¶ 52. The PSPAs represented the vehicle through which Treasury exercised its authority under HERA to purchase securities issued by the GSEs. Id. ¶ 53. The PSPAs saw Treasury commit up to $100 billion to each of the GSEs, allowing the GSEs to draw upon the funding commitment to cover any difference between their assets and their liabilities in a given financial quarter and retain a positive net worth. Id. ¶ 56. In exchange for the funding commitment, Treasury received one million shares of "Government Stock" in each of the GSEs, warrants to purchase 79.9% of each GSE's common stock and a quarterly "commitment fee" meant to compensate Treasury for its ongoing financial support. Id. ¶ 57, 63.¹ Treasury's Government Stock included a $1 billion liquidation preference, which would increase dollar-for-dollar for every draw that the GSEs made on Treasury's funding commitment. Id. ¶ 58.

Under the PSPAs, Treasury was also entitled to dividends calculated at a percentage of Treasury's liquidation preference. Id. ¶ 59. If the GSEs were unable to issue such dividends in cash, the PSPAs contemplated an alternative "in-kind" system wherein the calculated dividend value would be added to Treasury's liquidation preference. See id. This alternative dividend system ensured that the GSEs would not have to draw on Treasury's funding commitment merely to pay cash dividends—a scenario that would increase future dividend payments to Treasury (by further drawing on the funding commitment and increasing the liquidation preference) just to satisfy existing dividend payments to Treasury. See id. ¶ 62. The PSPAs required the GSEs to satisfy their dividend obligations to Treasury before paying dividends to the holders of any junior stock. Id. ¶ 65.

The PSPAs provided that, once the GSEs "pay down" Treasury's liquidation preference in its entirety, the Government Stock acquired by Treasury under the PSPAs would be redeemed. Id. ¶ 64.

In 2009, FHFA and Treasury amended the PSPAs on two separate occasions. Id.¶¶ 67–68. On May 6, 2009, in the first amendment, Treasury increased its funding commitment to each of the GSEs from $100 billion to $200 billion. Id. ¶ 67. On December 24, 2009, in the second amendment, Treasury increased its funding commitment via a formula that would determine the precise amount of the commitment on a yearly basis in 2010, 2011, 2012 and in light of any surplus existing at the end of 2012. Id. ¶ 68. Regardless of the precise dollar amount calculated under the formula, the second amendment provided that the funding commitment would not fall below $200 billion. Id.

D. Post–Conservatorship Financial Performance

Upon assuming its role as conservator of the GSEs in 2008, FHFA took a pessimistic view of the GSEs' financial prospects. Id. ¶ 70. Due to FHFA anticipating significant losses for the GSEs, the GSEs reported large "non-cash losses" triggered by write-downs of tax assets and the creation of loan loss reserves. Id. During the first year and a half of conservatorship, these...