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Fairholme Funds, Inc. v. Federal Housing Finance Agency

United States District Court, District of Columbia

November 8, 2019

FAIRHOLME FUNDS, INC., et al., Plaintiffs,


          Royce C. Lamberth United States District Court Judge.

         In April of 2019, plaintiffs Fairholme Funds, Inc., et al. ("Fairholme") subpoenaed thirty- seven requests for production of documents ("RFPs") from the U.S. Department of the Treasury ("Treasury"). Treasury has refused to comply with the subpoena, so Fairholme has filed a Motion to Compel Compliance with Subpoena to the U.S. Treasury for certain RFPs. ECF No. 103. For the reasons set forth below, the Court will grant plaintiffs Motion to Compel and require Treasury to produce RFPs 1-8, 10-14, 15(a)-(d), 16-26, and 29-30.


         I. Underlying Dispute

         After the economic crash in 2008, Congress enacted the Housing and Economic Recovery Act of 2008. Pub. L. No. 110-289, 122 Stat. 2654. This statute created the Federal Housing Finance Agency ("FHFA") and empowered it to act as conservator or receiver of the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The statute also authorized Treasury to purchase securities issued by Fannie Mae and Freddie Mac (collectively "the GSEs"). FHFA exercised its statutory authority to place the GSEs into conservatorship around the same time that Treasury entered into Senior Preferred Stock Purchase Agreements ("PSPAs") pursuant to which Treasury invested billions of dollars in the GSEs to keep them from defaulting and to maintain their net worth at a positive level ("Net Worth Sweep"). See Perry Capital LLC ex rel. Inv. Funds v. Mnuchin, 864 F.3d 591, 599 (D.C. Cir. 2017). In exchange for this investment, Treasury received senior preferred stock with a liquidation preference, warrants to purchase 79.9% of each enterprise's common stock, commitment fees, and quarterly dividends as a percentage of the liquidation preference of its senior preferred stock. In 2012, Treasury and FHFA entered into the Third Amendment to the PSPAs, thereby replacing the GSEs' obligation to pay Treasury quarterly dividends at a fixed rate with a variable dividend equal to the amount, if any, by which the enterprises' net worth exceeds a 'capital buffer. The Third Amendment also suspended the periodic commitment fee that each GSE would otherwise owe to the taxpayers for the remaining funding available to the GSEs for as long as the variable dividend remains in effect. Plaintiffs filed their original complaint challenging the Third Amendment in 2013. ECF No. 1. This case is now on remand following a decision from the United States Court of Appeals for the District of Columbia, so only claims against FHFA and the GSEs remain; Treasury is no longer a party to this action. The ultimate issue in this case is whether defendants are liable for breach of the implied covenant of good faith and fair dealing.

         II. Dispute Regarding Subpoena

         Plaintiffs served a third-party subpoena on Treasury on" April 9, 2019. Pursuant to an agreement between the parties, Treasury responded via letter on May 10, 2019. The subpoena included thirty-seven RFPs seeking information from July 1, 2008 to January 31, 2014. Treasury determined that due to Toughy regulations, Treasury and its employees could not produce any documents without prior agency authorization. See United States ex rel. Toughy v. Ragen, 340 U.S. 462 (1951). Treasury therefore denied the requests to produce documents in response to thirty-six of the thirty-seven RFPs as unduly burdensome, disproportionate to the needs of the case, and/or seeking documents available from other sources. In July of 2019, plaintiffs filed their Motion to Compel but dropped RFPs 9, 15(e), 27-28, and 31-37. Their motion seeks full compliance with the remainder of their Rule 45 subpoena.


         The Federal Rules of Civil Procedure ("Fed. R. Civ. P.") govern discovery disputes, including disputes regarding subpoenas. When a party files a motion to compel, the first consideration is whether the discovery sought is relevant to any party's claim or defense. See Fed. R. Civ. P. 26(b)(1). Courts generally construe the concept of relevance broadly, as disclosure is favored over nondisclosure. See In re Denture Cream Prod. Liab. Litig., 292 F.R.D. 120, 123 (D.D.C. 2013) ("For purposes of discovery, relevance is liberally construed."); Zelaya v. UNICCO Serv. Co., 682 F.Supp.2d 28, 32 (D.D.C. 2010). Although the low bar for relevance remains the same for both parties and nonparties alike, courts do attempt to be "generally sensitive to the costs imposed on third parties." Watts v. SEC, 482 F.3d 501, 509 (D.C. Cir. 2007).

         If the materials sought are relevant, the Court must then determine whether the subpoena would place "an undue burden" on the person or entity from whom discovery is sought. Watts, 482 F.3d at 508. In assessing whether a discovery request imposes an undue burden, the Court must analyze whether the request is "unreasonably cumulative or duplicative," whether it "can be obtained from some other source that is more convenient, less burdensome, or less expensive," and "whether it is proportional to the needs of the case." Fed.R.Civ.P. 26(b)(1); Fed.R.Civ.P. 26(b)(2)(C). The person or entity "resisting discovery" has the "burden ... to show that the documents requested are ... unduly burdensome[.]" In re Micron Tech., Inc. Sec. Litig., 264 F.R.D. 7, 9 (D.D.C. 2010); see also Buzzfeed, Inc. v. U.S. Dep't of Justice, 318 F.Supp.3d 347, 356 (D.D.C. 2018). Vague and conclusory assertions are not sufficient; rather, a showing of undue burden "must be specific" and concrete. See, e.g., Flatow v. Islamic Republic of Iran, 196 F.R.D. 203, 207 (D.D.C. 2000). Assertions of an undue burden without "specific estimates of staff hours needed to comply" should be "categorically rejected." Association of Am. Physicians & Surgeons v. Clinton, 837 F.Supp. 454, 458 n.2 (D.D.C. 1993).

         Even if the entity objecting to the subpoena proves that there is some burden, that burden must be balanced against other factors before it can truly be considered undue. Fed.R.Civ.P. 26(b)(1) states that the proportionality inquiry considers "the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit." Therefore, the undue burden test essentially considers the totality of the circumstances rather than focusing on any one particular factor.


         As explained in this Section of the Memorandum Opinion, the Court finds that the materials sought do meet the low threshold for relevance. The Court also finds that Treasury has not demonstrated with the requisite specificity how granting Fairholme's Motion to Compel would constitute an undue burden. The Court will therefore grant the Motion to Compel.

         I. Plaintiffs' Requested Materials are ...

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