MEMORANDUM OPINION
ROYCEC. LAMBERTH UNITED STATES DISTRICT JUDGE
Before
the Court is a motion to dismiss filed by the defendants
Federal Housing Finance Agency ("FHFA"), as
Conservator for the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac," and together with
Fannie Mae, the "GSEs, "); Melvin L. Watt, in his
official capacity as Director of FHFA; and the GSEs
(collectively, "Defendants"). The motion applies to
all three of the above-captioned cases [ECF No. 68 for Civil
No. 13-1053; ECF No. 77 for Civil No. 13-1439; ECF No. 66 for
Miscellaneous No. 13-1288]. Upon consideration,
Defendants' motion is GRANTED IN PART
and DENIED IN PART. Additionally, because
the Court considered the various plaintiffs' sur-replies
in coming to this decision, the motions for leave to file
sur-reply [ECF No. 79 for Civil No. 13-1053, ECF No.' 87
for Civil No. 13-1439, and ECF No. 78 for Miscellaneous No.
13-1288] will be GRANTED.
I.
BACKGROUND[1]
This
matter is brought before the Court by a class action law suit
and two individual lawsuits. Following this Court's prior
opinion, see generally Perry Capital LLC v. Lew, 70
F.Supp.3d 208 (D.D.C. 2014) ("'Perry F),
and the D.C. Circuit's opinion, see generally Perry
Capital LLC v. Mnuchin, 864 F.3d 591 (D.C. Cir. 2017)
("Perry IF), these lawsuits contain
substantially identical claims.[2] The class action law suit was
brought by a purported class of private individual and
institutional investors (the "Class Plaintiffs")
who own either preferred or common stock in the Fannie Mae or
Freddie Mac. Second Am. Consolidated Class Action Compl. at
¶¶ 18-33, In re Fannie Mae/Freddie Mac Senior
Preferred Stock Purchase Agreement Class Action
Litigs., Misc. No. 13-1288 (D.D.C. Feb. 1, 2018), ECF
No. 71 ("Class SAC"). The individual lawsuits were
brought by separate institutional investors owning junior
preferred stock in the GSEs. First Am. Compl. at ¶¶
5-20, Fairholme Funds, Inc. v. FHFA, Civ. No.
13-1053 (D.D.C. Feb. 1, 2018), ECF No. 75 ("Fairholme
FAC"); First Am. Compl. at ¶¶ 6-18,
Arrowood Indem. Co. v. Fannie Mae, Civ. No. 13-1439
(D.D.C. Feb. 1, 2018), ECF No. 83 ("Arrowood FAC").
A.
The GSEs
Fannie
Mae and Freddie Mac are government-sponsored enterprises,
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). The GSEs accomplish this objective by purchasing
mortgages from lenders, thereby relieving the lenders of
default risk and clearing up funds to be used to make more
loans. To finance these purchases, the GSEs pool the many
mortgage loans they purchase into various mortgage-backed
securities and sell these securities to investors.
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. In 1968, Congress made Fannie Mae a publicly
traded, stockholder-owned corporation. Housing and Urban
Development Act, Pub. L. No. 90-448, § 802, 82 Stat.
536-538 (1968). And in 1989, Freddie Mac followed suit.
Financial Institutions Reform, Recovery and Enforcement Act,
Pub. L. No. 101-73, § 731, 103 Stat. 432-433 (1989). To
provide guidance to the GSEs on corporate governance issues
not specifically addressed by federal law, the Office of
Federal Housing Enterprise Oversight directed the GSEs to
follow a chosen state's corporate laws as a gap-filling
measure. See 67 Fed. Reg. 38361 (Jun. 4, 2002). The
GSEs hence enacted bylaws in which they elected to follow a
chosen state's law-Delaware law for Fannie Mae and
Virginia law for Freddie Mac.
Since
their founding, the GSEs have been major players in the
United States' housing market. In the lead up to 2008,
the GSEs' mortgage portfolios had a combined value of $5
trillion and accounted for nearly half of the United
States' mortgage market.
B.
The 2008 Recession, the Creating of the FHFA, and the
Beginning of Conservatorship
In
2008, the United States' mortgage and housing markets
went into crisis, leading in part < to a
severe recession. Despite the GSEs' comparatively strong
financial position amidst the crisis, Congress worried that a
potential default by Fannie or Freddie would imperil the
already fragile national economy. In response to these
concerns, Congress enacted the Housing and Economic Recovery
Act ("HERA" or "the Act"). HERA
established the FHFA, granting it broad authority to ensure
the GSEs remained stable. The Act denominated the GSEs as
"regulated entit[ies]" subject to the direct
"supervision" of FHFA, 12 U.S.C. § 4511(b)(1),
and the "general regulatory authority" of
FHFA's director (the "Director"). Id.
§ 4511(b)(1), (2). The Director was charged by HERA with
"over see[ing] the prudential operations" of the
GSEs and "ensur[ing] that" they "operate[] in
a safe and sound manner," "consistent with the
public interest." Id. § 4513(a)(1)(A),
(B)(i), (B)(v).
Additionally,
HERA authorized the Director to appoint FHFA as either
conservator or receiver for the GSEs "for the purpose of
reorganizing, rehabilitating, or winding up the[ir]
affairs." 12 U.S.C. § 4617(a)(2). If appointed as
conservator, the Act granted the FHFA broad powers and
authority over the GSEs. The Act provided that the FHFA
"shall, as conservator or receiver, . . . immediately
succeed to . . . all rights, titles, powers, and privileges
of the regulated entity and of any stockholder, officer, or
director of such regulated entity with respect to the
regulated entity and the assets of the regulated
entity." Id. § 4617(bX2)(B)(i), (iv). It
also gave the FHFA general powers to take actions
"necessary to put the [GSEs] in a sound and solvent
condition" and "appropriate to carry on the
business of the [GSEs] and preserve and conserve the assets
and property of the [GSEs]." Id. §
4617(b)(2)(D)(i), (ii). And the Act further provides that the
FHFA, as conservator, may take any action authorized under
the act "which [it] determines is in the best interests
of the [GSEs] or the [FHFA]." Id. §
4617(b)(2)(J)(ii).
On
September 6, 2008, FHFA placed the GSEs into conservatorship,
assuming the powers granted to the conservator by the Act.
According to statements by the Director, conservatorship was
"designed to stabilize a troubled institution with the
objective of returning the entities to normal business
operations." Class SAC at ¶ 40 (relying on Press
Release, Federal Housing Finance Agency, Statement of FHFA
Director James B. Lockhart at News Conference Announcing
Conservatorship of Fannie Mae and Freddie Mac (Sept. 7,
2008)). And that the "FHFA [would] act as the
conservator to operate the GSEs until they [were]
stabilized." Id. Once the FHFA determined that
the GSEs were in a safe and solvent condition, the Director
would issue an order terminating conservatorship.
Despite
the conservatorship, the common and preferred stock remained
outstanding. In its Form 8-K filing just days after the
beginning of conservatorship, Freddie Mac stated, "The
holders of Freddie Mac's existing common and preferred
stock... will retain all their rights in the financial worth
of those instruments, as such worth is determined by the
market." Class SAC at ¶ 42 (relying on Federal Home
Loan Mortgage Corporation, Current Report (Form 8-K) (Sept.
11, 2008)).
C.
The GSEs Enter into a Senior Preferred Stock Purchase
Agreement ("PSPA") with Treasury
A day
after its appointment as conservator, the FHFA struck a deal
with the Treasury Department ("Treasury"), entering
into the PSPAs. The state of the market limited access to
private capital markets for Freddie and Fannie. To shore up
the GSEs' financial positions, Treasury agreed to invest
billions of dollars in the GSEs in exchange for one million
senior preferred shares ("Government Preferred
Stock") in each company. These shares had a principal
value equal to the amount invested by Treasury in each
company, plus $1 billion to reflect a commitment fee with
respect to each GSE. The shares also entitled Treasury to:
• a senior preferred dividend each quarter in an amount
equal to 10% of the outstanding principal value of the
Government Preferred Stock if the dividend was paid in cash;
• a stock dividend, if the senior preferred dividend was
not paid in cash, in the form of additional Government
Preferred Stock with a face value equal to 12% of the
outstanding principal value of the Government Preferred
Stock;
• a priority right above all other stockholders, whether
preferred or otherwise, to receive distributions from assets
if the GSEs were dissolved;
• warrants allowing Treasury to purchase up to 79.9% of
the GSEs' common stock; and .
• the possibility of periodic commitment fees over and
above dividends.
Additionally,
the PSPAs included a variety of covenants. Most relevantly,
the GSEs would have to receive Treasury's approval before
declaring or paying any dividend or distribution. However,
this covenant only applied during conservatorship.
Initially,
Treasury's commitment to invest capital was capped at
$100 billion per company. But it was determined that this
would not be enough to meet the GSEs' funding needs. The
PSPAs were amended twice. First, in May 2009, Treasury agreed
to expand the funding commitment to $200 billion for each
company. Seven months, later the PSPAs were amended again,
raising the cap to an adjustable figure determined by an
agreed-upon formula. As of June 30, 2012, the GSEs together
had drawn $187.5 billion from Treasury's funding
commitment.
D.
The Return to Profitability
When
appointed as conservator, the FHFA did not expect the GSEs to
be profitable. Expecting large losses in the coming years,
FHFA directed the GSEs to book substantial loss
reserves-recording anticipated mortgage loan losses before
they were actually incurred-and required the GSEs to
eliminate from their balance sheets the value of deferred tax
assets that would only be of use if the GSEs became
profitable. This accounting decision caused a strain on the
GSEs' balance sheets, necessitating (in part) an
increased draw from the Treasury's commitment. It even
led to the payment of some circular dividend payments, where
the GSEs drew on Treasury's funding commitment to pay
Treasury its senior preferred dividend.
By
2012, though, it became clear that FHFA had overestimated the
Companies' likely losses and underestimated the
possibility of a return to profitability. More than $234
billion had been set aside by the GSEs to absorb loan losses,
whereas losses of just over $125 billion were actually
realized.
Additionally,
the housing market had rebounded and the companies were
well-positioned to begin generating profits for the
foreseeable future. The GSEs, FHFA, and Treasury learned the
GSEs were expected to be sufficiently profitable in the
coming years to pay the 10% dividend on the Government
Preferred Stock without the necessity of drawing from
Treasury. It was believed that the period between 2012 and
2020 would be the "golden years of GSE earnings."
See Class SAC ¶ 54; Arrowood ¶ 53;
Fairholme FAC ¶ 56. In fact, the GSEs were forecasted to
be so consistently profitable that they could repay Treasury
its initial investment within the following eight years.
E.
The Enactment of the Third Amendment
Despite
this positive outlook, FHFA and Treasury agreed to amend the
PSPAs for a third time (the "Third Amendment"). The
Third Amendment changed the government's senior preferred
dividend from 10% of the outstanding principal value of the
Government Preferred Stock to a quarterly dividend equal to
100% of each company's net worth that exceeded a capital
buffer of $3 billion, with that buffer decreasing annually
down to zero by 2018 (the "Net Worth Sweep"). And,
since the PSPAs provided that in the event of a liquidation
of the GSEs, the government would receive a liquidation
preference that included the amount of any prior unpaid
dividend, the Third Amendment guaranteed that even if the
GSEs were liquidated, Treasury would receive the full amount
of the GSEs' net worth in that liquidation.
The
GSEs received no new investment in exchange for the change in
dividend structure. The reason given publicly for the Third
Amendment was to end the practice of circular dividends paid
to Treasury from funds drawn from Treasury's commitment
to the GSEs. As of February 2018, Treasury has received over
$276 billion in dividends from the companies-$88 billion more
than Treasury's total investment in both companies.
II.
PROCEDURAL HISTORY
In
2013, Plaintiffs filed suit challenging the Third Amendment.
They alleged that, in adopting the Third Amendment, FHFA and
the GSEs breached the terms governing dividends, liquidation
preferences, and voting rights in the stock certificates for
Freddie's Common Stock and for both Fannie's and
Freddie's Preferred Stock. Additionally, they alleged
that those defendants breached the implied covenant of good
faith and fair dealing in those certificates. The Plaintiffs
also alleged that FHFA and Treasury breached state-law
fiduciary duties owed by a corporation's management and
controlling shareholder, respectively. The Plaintiffs asked
the Court to declare their lawsuit a "proper derivative
action" and to award damages as well as injunctive and
declaratory relief.
The
Court dismissed Plaintiffs' claims entirely for failure
to state a claim, along with different claims by
institutional investors under HERA and the Administrative
Procedure Act ("APA)" seeking only equitable
relief. See generally Perry I, 70 F.Supp.3d 208. On
appeal, the D.C. Circuit affirmed in part and reversed in
part, remanding some of Plaintiffs' claims. See
generally Perry II, 864 F.3d 591.' Having amended
their respective complaints, all plaintiffs bring claims for
breach of contract, breach of the implied covenant of good
faith and fair dealing, breach of fiduciary duty, and
violations of Delaware and Virginia statutory law governing
dividends.[3] See Class SAC; Fairholme FAC;
Arrowood FAC. Additionally, the Class Plaintiffs bring
derivative claims against FHFA for breach of fiduciary
duties. And the individual plaintiffs bring APA claims.
Again, Defendants move to dismiss Plaintiffs' claims. And
once again, this Court must decide whether Plaintiffs have
stated a claim upon which relief may be granted.
III.
LEGAL STANDARD
A
motion to dismiss is appropriate when the complaint fails
"to state a claim upon which relief can be
granted." Fed.R.Civ.P. 12(b)(6). The Court does not
"require heightened fact pleading of specifics, but only
enough facts to state a claim to relief that is plausible on
its face." Bell Atl. Corp. v. Twombly, 550 U.S.
544, 570 (2007). "[T]he complaint is construed liberally
in the plaintiffs' favor, and [the Court] grant[s]
plaintiffs the benefit of all inferences that can be derived
from the facts alleged. However, the [C]ourt need not accept
inferences drawn by plaintiffs if such inferences are
unsupported by the facts set out in the complaint."
Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1276
(D.C. Cir. 1994) (internal quotation marks and citation
omitted).
IV.
ANALYSIS
A.
Plaintiffs' Breach of Contract Claims Fail on the
Merits
In each
case, the respective plaintiffs assert the Third Amendment
breached Plaintiffs' contractual rights to receive a
liquidation preference. See Class SAC Counts I-III;
Fairholme FAC Count II; Arrowwood FAC Count III. While this
Court previously dismissed these claims as unripe, see
Perry I, 70 F.Supp.3d at 234-26, the D.C. Circuit
reversed that decision, holding that the "claims for
breach of contract with respect to liquidation preferences
are better understood as claims for anticipatory
breach[.]" Perry II, 864 F.3d at 633. Under
this doctrine, "a voluntary affirmative act which
renders the obligor unable ... to perform" is a
repudiation, Restatement (Second) of Contracts § 250(b),
that "ripens into a breach prior to the time for
performance'. . . if the promisee elects to treat it as
such" by, for instance, suing for damages. Franconia
Assocs. v. United States, 536 U.S. 129, 143, 122 S.Ct.
1993, 153 L.Ed.2d 132 (2002) (internal quotation marks
omitted); Restatement (Second) of Contracts §§
253(1), 256 cmt. c; accord Lenders Fin. Corp. v.
Talton, 249 Va. 182, 189, 455 S.E.2d 232, 236 (Va.
1995); W. Willow-Bay Court, LLC v. Robino-Bay Court
Plaza, LLC, C.A. No. 2742-VCN, 2009 WL 458779, at *5
& n.37 (Del. Ch. Feb. 23, 2009). As the Circuit
explained, "anticipatory breach is 'a doctrine of
accelerated ripeness' because it 'gives the plaintiff
the option to have the law treat the promise to breach [or
the act rendering performance impossible] as a breach
itself" Perry II, 864 F.3d at 633-34 (quoting
Homeland Training Ctr, LLC v. Summit Point Auto. Research
Ctr., 594 F.3d 285, 294 (4th Cir. 2010)). The Circuit,
therefore, reversed this Court's decision, holding the
Plaintiffs' breach of contract claims ripe for decision.
Id. at 634.
In
making this determination, the D.C. Circuit made clear that
it was not addressing the merits of the breach of contract
claim. Id. ("Our holding that the claims are
ripe sheds no light on the merits of those claims").
Instead, that court held that "[w]hether the class
plaintiffs stated claims for breach of contract... is best
addressed by the district court in the first instance."
Id. After evaluating the merits of the claim, and
for the reasons set forth below, the Court finds that
Plaintiffs fail to state a claim for anticipatory breach of
their contractual rights to receive a liquidation preference.
As such, Defendants' motion will be granted as to these
counts in the respective cases.
As
Defendants point out in their briefs, the doctrine of
anticipatory breach is not limitless. See Defs.'
Mot. To Dismiss at 15-17. As this Court recently explained,
see Glenn v. Fay,281 F.Supp.3d 130, 139 (D.D.C.
2017), the doctrine traditionally does not apply to
unilateral contracts, especially when the only remaining
performance is the payment of money. Smyth v. United
States,302 U.S. 329, 356, 58 S.Ct. 248, 82 L.Ed. 294
(1937) ("[T]he rule of law is settled that the doctrine
of anticipatory breach has in general no application to
unilateral contracts, and particularly to such contracts for
the payment of money only."). And, importantly for the
purposes of this opinion, the limitation also applies to
"bilateral contracts that have become unilateral by full
performance on one side." 23 Williston on Contracts
§ 63:60 (quoting Phelps v. Herro,215 Md. 223,
137 A.2d 159 (1957)); see also 23 Williston on
Contracts § 63:61 ("[W]hen a bilateral contract has
become a unilateral obligation by full performance on one
side, anticipatory repudiation of that obligation does not
permit the immediate filing of an action.")-m
other words, "if the payee has completely performed his
side of the contract and is just ...