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Gail C. Sweeney Estate Marital Trust v. United States Treasury Dep't

United States District Court, D. Columbia.

September 19, 2014

GAIL C. SWEENEY ESTATE MARITAL TRUST, derivatively on behalf of FEDERAL NATIONAL MORTGAGE ASSOCIATION, Plaintiff,
v.
UNITED STATES TREASURY DEPARTMENT, et al., Defendants

For GAIL C. SWEENEY ESTATE MARITAL TRUST, derivatively on behalf of FEDERAL NATIONAL MORTGAGE ASSOCIATION, Plaintiff: Steven N. Berk, LEAD ATTORNEY, BERK LAW PLLC, Washington, DC; Arvin Ratanavongse, Jordan Laurence Lurie , PRO HAC VICE, CAPSTONE LAW APC, Los Angeles, CA.

For UNITED STATES TREASURY DEPARTMENT, JACOB J. LEW, in his capacity as Treasury Secretary, Defendants: David Michael Glass, LEAD ATTORNEY, U.S. DEPARTMENT OF JUSTICE, Civil Division, Washington, DC.

For FEDERAL NATIONAL MORTGAGE ASSOCIATION, Defendant: Michael J. Walsh, Jr., LEAD ATTORNEY, O'MELVENY & MYERS LLP, Washington, DC.

For FEDERAL HOUSING FINANCE AGENCY, EDWARD J. DEMARCO, in his capacity as Acting Director of FEDERAL HOUSING FINANCE AGENCY, Defendants: Asim Varma, David Block Bergman, Howard Neil Cayne, LEAD ATTORNEYS, ARNOLD & PORTER LLP, Washington, DC.

Page 117

MEMORANDUM OPINION

AMY BERMAN JACKSON, United States District Judge.

Plaintiff Gail C. Sweeney Estate Marital Trust has brought a shareholder derivative lawsuit on behalf of the Federal National Mortgage Association (" Fannie Mae" ) against defendants Fannie Mae, the United States Department of the Treasury (" Treasury" ), Secretary of the Treasury Jacob J. Lew, the Federal Housing Finance Agency (" FHFA" ), and FHFA Director Melvin L. Watt.[1] Am. Compl. [Dkt. # 32]. Plaintiff asserts four counts in the amended complaint: breach of fiduciary duty, abuse of control, mismanagement, and waste of corporate assets. Id. ¶ ¶ 146-63. Plaintiff seeks declaratory and injunctive relief, and attorneys' fees and costs. Am. Compl., Prayer for Relief, ¶ ¶ A--B.

The FHFA is the Conservator of Fannie Mae, id. ¶ 26, and it has moved to substitute itself as plaintiff in this case, arguing that only the Conservator has standing to pursue claims on behalf of Fannie Mae. Renewed Mot. of FHFA as Conservator of Fannie Mae to Substitute for Shareholder Derivative Pl. & Mem. of P. & A. in Supp. [Dkt. # 37] at 2 (" FHFA Mot." ). Plaintiff does not disagree that, as a general matter, only the Conservator has standing to sue on behalf of Fannie Mae. But plaintiff contends that in this case, the Conservator suffers from a " manifest, disabling and irreconcilable" conflict of interest that prevents it from pursuing Fannie Mae's interests, and that plaintiff should therefore be permitted to bring this action. Am. Compl. ¶ 93; Pl.'s Opp. to FHFA Mot. & to Resp. of Defs. U.S. Dep't of Treasury & Sec'y of Treasury [Dkt. # 41] at 1 (" Pl.'s Opp." ). The Court finds that there is not a " manifest, disabling and irreconcilable" conflict of interest in this case and that plaintiff lacks standing to sue on behalf of Fannie Mae, so it will grant the FHFA's motion to substitute.

BACKGROUND

I. Factual Background[2]

A. The Housing and Economic Recovery Act of 2008

Congress enacted the Housing and Economic Recovery Act of 2008 (" HERA" ) in response to the recent national housing market crisis. HERA established the FHFA, an agency charged with regulating Fannie Mae, the Federal Home Loan Mortgage Corporation (" Freddie Mac" ), and the Federal Home Loan Banks. 12 U.S.C. § 4511 (2012). The statute also empowered the Director of the FHFA to appoint the FHFA as the conservator or receiver for the entities it regulates " for the purpose of reorganizing, rehabilitating, or winding up [their] affairs." 12 U.S.C. § 4617(a)(2) (2012). HERA further provides that " no court may take any action to restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or receiver." Id. § 4617(f).

In another section of HERA that is relevant to the pending motion, Congress

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amended the charter of Fannie Mae to grant the Department of the Treasury " [t]emporary authority" to purchase " obligations and securities" of Fannie Mae by agreement between the two entities, as long as Treasury also considers the need to " protect the taxpayers." 12 U.S.C. § 1719(g) (2012).

B. The Appointment of FHFA as Conservator of Fannie Mae and the Treasury Agreements

On September 6, 2008, the Director of the FHFA exercised his statutory authority to appoint the FHFA as Fannie Mae's Conservator. Am. Compl. ¶ 26; see also 12 U.S.C. § 4617(a). As Conservator, the FHFA succeeded to " all rights, titles, powers, and privileges of the regulated entity, and of any stockholder, officer, or director of [Fannie Mae]." 12 U.S.C. § 4617(b)(2)(A)(i). The Conservator has the power to " [o]perate" Fannie Mae, to assume the " [f]unctions of officers, directors, and shareholders" of Fannie Mae, and to " take such action as may be -- (i) necessary to put [Fannie Mae] in a sound and solvent condition; and (ii) appropriate to carry on the business of [Fannie Mae] and preserve and conserve [its] assets and property." Id. § 4617(b)(2)(B)-(D).

Starting on September 7, 2008, Fannie Mae, through its Conservator, entered into a series of Senior Preferred Stock Purchase Agreements with Treasury (" Treasury Agreements" ).[3] Am. Compl. ¶ 43; see also 12 U.S.C. § 1719(g) (granting Treasury temporary authority to purchase " obligations and securities" of Fannie Mae). Pursuant to the Treasury Agreements, Treasury received one million shares of senior preferred Fannie Mae stock, which carries a preference with respect to dividends and a liquidation preference of at least $1 billion, but no voting rights. Am. Compl. ¶ 43; FHFA Mot. at 5-6. In addition, Treasury acquired a warrant to purchase up to 79.9% of Fannie Mae's common stock. Am. Compl. ¶ 43; FHFA Mot. at 7.

In exchange, Treasury agreed to make billions of dollars available to Fannie Mae to keep it solvent. To date, Fannie Mae has received at least $116 billion from Treasury, and Treasury is obligated to make up to an additional $125 billion available. Pl.'s Opp. at 13; FHFA Mot. at 6. The parties also agreed that the Conservator would not " sell, transfer, lease or otherwise dispose of" any assets outside the ordinary course of business without Treasury's written consent, subject to exceptions not relevant here. FHFA Mot. at 5; see also Am. Compl. ¶ 44.

C. The Low-Income Housing Tax Credits

In 2009, Fannie Mae owned low-income housing tax credits (" LIHTCs" )[4] worth approximately $5.2 billion. Am. Compl. ¶ 57; FHFA Mot. at 7. But because Fannie Mae was not profitable at the time, it had no profits against which to offset the LIHTCs, and could not realize their value. Am. Compl. ¶ 57; FHFA Mot. at 7. Fannie Mae therefore sought to sell the LIHTCs, and it identified third-party investors interested in acquiring approximately $2.6 billion worth of the credits. Am. Compl. ¶ 61; FHFA Mot. at 8.

Pursuant to the Treasury Agreements, though, Fannie Mae and the Conservator

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could not dispose of the LIHTCs without Treasury's written permission. See FHFA Mot. at 5. According to the complaint, Treasury declined to approve the sale twice -- in November 2009 and February 2010 -- finding that the sale would not ultimately protect or benefit the taxpayers. Am. Compl. ¶ ¶ 66, 73.[5] Plaintiff alleges that Treasury's failure to consent to the sale constitutes a breach of its fiduciary duties as the purported " controlling shareholder" of Fannie Mae. Am. Compl. ΒΆ 76. Through ...


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