Federal Housing Finance Agency v. Raines

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

In re Federal National Mortgage
Association Securities, Derivative, and MDL No. 1668
"ERISA" Litigation

Federal Housing Finance Agency as Civil Case No. 07-1173 (RJL)
Conservator for the Federal National
Mortgage Association v. Raines, et al.
Kellmer III

~~
MEMORANDUM OPINION
(July 2a, 2010)

Before the Court are four motions arising from two nearly identical derivative

lawsuits brought originally by plaintiff shareholder James Kellmer. The two lawsuits

were originally captioned as Kellmer v. Marron, Civ. No. 05-0037 (D.D.C., filed Jan. 10,

2005) ("Kellmer 11'), and Kellmer v. Raines, Civ. No. 07-1173 (D.D.C., filed June 29,

2007) ("'Kellmer 111'). I dismissed Kellmer II as part of a consolidated action in which

Kellmer's derivative suit was joined with other shareholder derivative suits. See In re

Fannie Mae Derivative Litig., 503 F. Supp. 2d 9 (D.D.C. 2007). My decision to dismiss

the consolidated action has been affirmed by our Circuit Court. See Pirelli Armstrong

Tire Corp. Retiree Med. Benefits Trust v. Raines, 534 F.3d 779 (D.C. Cir. 2008). Instead

of appealing my consolidation order and subsequent dismissal of his case, Kellmer filed

the complaint in Kellmer III, which is substantially the same as the complaint in Kellmer
II. Kellmer also moved for clarification of the order dismissing the consolidated case or,

alternatively, for relief from the judgment pursuant to Federal Rule of Civil Procedure

60(b). The nominal defendant Federal National Mortgage Association ("Fannie Mae")

opposed Kellmer's motion and moved to dismiss the Kellmer III complaint for lack of

subject matter jurisdiction or, in the alternative, for claim preclusion. Three of the

defendants in Kellmer III-Franklin D. Raines, J. Timothy Howard, and Leanne G.

Spencer (collectively, "the individual defendants")-joined Fannie Mae's Motion to

Dismiss. Since these motions were filed, the Court has replaced Kellmer as the derivative

shareholder plaintiff with the Federal Housing Finance Agency ("FHF A"), the statutory

conservator of Fannie Mae. FHFA initially adopted Kellmer's response to the Motion to

Dismiss but has since moved for voluntary dismissal of Kellmer III without prejudice.

Not surprisingly, the individual defendants opposed FHFA's Motion for Approval of

Voluntary Dismissal and have moved to dismiss Kellmer III with prejudice for failure to

prosecute.

Having considered the parties' arguments, the Court finds that the individual

defendants would suffer prejudice if the Court were to grant FHFA's motion now that the

individual defendants have justifiably relied on Fannie Mae's fully briefed Motion to

Dismiss, which, if granted, would dispose of the case against them. Accordingly,

FHFA's Motion for Approval of Voluntary Dismissal is DENIED. At the same time, the

individual defendants' Motion to Dismiss with Prejudice for Failure to Prosecute is also

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DENIED because they have failed to show that FHFA's conduct is egregiously dilatory.

Finally, regarding the merits of Fannie Mae's pending Motion to Dismiss, the Court

concludes that Ke llmer II was properly dismissed in light of the Court's earlier

consolidation order and that Kellmer III is barred by the doctrine of claim preclusion.

Thus, Kellmer's Motion for Clarification or, in the Alternative, for Relief from Judgment

is DENIED, and Fannie Mae's Motion to Dismiss, which was joined by the individual

defendants, is GRANTED.

BACKGROUND

Both Kellmer II and Kellmer III arise from allegations that Fannie Mae engaged in

improper accounting practices. These allegations are exhaustively explained in my

previous opinions. See, e.g., In re Fannie Mae Derivative Litig., 503 F. Supp. 2d at 11-

14. Beginning in September 2004, ten plaintiffs, including Kellmer, commenced

shareholder derivative actions against former and then-current officers and directors of

Fannie Mae. Id. at 13 & n.3. l Various parties promptly moved to consolidate these

actions. Although Kellmer did not oppose consolidation, he did oppose filing a

consolidated complaint, and he sought to have his counsel appointed as one of the co-lead

counsel. (PI. Kellmer's Formal Position [Civ. No. 05-37, Dkt. # 7] at 10, 5,4). He

argued that it was necessary to distinguish his derivative suit, the only one in which a

1Kellmer also brought a books and records action against Fannie Mae under
Delaware law. See Kellmer v. Fed. Nat 'I Mortgage Ass 'n, Civ. No. 04-2084 (D.D.C.,
filed Dec. 1,2004) ("Kellmer F').

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shareholder made a demand on Fannie Mae's board of directors under Federal Rule of

Civil Procedure 23.1, from the other derivative suits, in which the shareholders declined

to make such a demand on the theory that doing so would have been futile. (Id. at 4).

In February 2005, I granted the motions to consolidate and appointed Pirelli

Armstrong Tire Corporation Retiree Medical Benefits Trust and Wayne County

Employees' Retirement System as co-lead plaintiffs. (Feb. 14,2005 Mem. Op. and Order

[Civ. No. 05-37, Dkt. #25] at 3-4). I explicitly addressed Kellmer's argument that

"demand made" and "demand futile" cases should not be consolidated into one action but

decided nevertheless "that this distinction is insufficient to necessitate separate actions at

this point in the litigation." (Id. at 4-5). As a result, I issued Pretrial Order No.1, which

consolidated Kellmer II and the other shareholder derivative actions "for all purposes

through final judgment." (Pretrial Order No. 1 [Civ. No. 05-37, Dkt. #26] at 4). I also

ordered that the dockets for the individual cases be closed, (id.), and that the co-lead

plaintiffs file a consolidated complaint that would "supersede all existing complaints filed

in this action," (id. at 7).

Pursuant to that Order, the co-lead plaintiffs filed an initial consolidated complaint

in September 2005, which they later amended in September 2006. The Amended

Complaint asserts two types of claims: (1) "breach of fiduciary duties and gross

mismanagement arising out of the company's misapplication ofFAS 91 and 133

(,accounting-related claims')," (Am. Compi. [Civ. No. 04-1783, Dkt. #127] Counts I-IV);

4
and (2) "claims for corporate waste and unjust enrichment relating to the Board's

approval of certain executives' compensation (,compensation-related claims')," (Am.

CompI. [Civ. No. 04-1783, Dkt. #127] Counts V-VIII). In re Fannie Mae Derivative

Litig., 503 F. Supp. 2d at 13-14. The co-lead plaintiffs proceeded on a theory that it

would have been futile to make a successful pre-suit demand on Fannie Mae's board as

required by Rule 23.1. The defendants moved to dismiss the consolidated complaint

claiming, among other things, that the co-lead plaintiffs failed to allege sufficient facts to

establish futility.

In February 2007, before I ruled on the defendants' Motion to Dismiss, Kellmer

sought to intervene in the case. (Kellmer's Mot. to Intervene [Civ. No. 04-1783, Dkt.

# 175] at 3). He argued that "a dismissal of the present action may bind Mr. Kellmer and

thus preclude him from asserting his claims though he, unlike the named representative

plaintiffs, properly made a pre-suit demand upon Fannie Mae's Directors pursuant to Rule

23.1 FRCP." (Id. at 6). Both the co-lead plaintiffs and the defendants opposed this

request. In his reply, Kellmer advocated that the Court defer ruling on his Motion to

Intervene and only consider it if the Court intended to grant the Motion to Dismiss on the

ground that pre-suit demand was not futile. (Kellmer's Reply in Support of Mot. to

Intervene [Civ. No. 04-1783, Dkt # 183] at 1).

Ultimately, on May 31, 2007, the Court dismissed the consolidated derivative

complaint because the plaintiffs failed "to make the requisite Rule 23.1 demand upon the

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Board of Directors of Fannie Mae prior to filing this derivative suit." In re Fannie Mae

Derivative Litig., 503 F. Supp. 2d at 14. My Memorandum Opinion specifical1y lists

Kellmer 11 as among the cases that had been consolidated, (id. at 13 & n.3), and as

indicated in the accompanying Order, the consolidated case was dismissed as to all

defendants, (id. at 24).2

Before the deadline for filing an appeal expired, the co-lead plaintiffs filed a

Notice of Appeal as to "ALL ACTIONS." (Notice of Appeal [Civ. No. 04-1783, Dkt.

#201 D. Kellmer neither filed his own appeal nor requested that the Court consider his

pending Motion to Intervene. Instead, a day after the co-lead plaintiffs docketed their

appeal, Kellmer filed a new lawsuit ("Kellmer 11F'). (See CompI. [Civ. No. 07-1173, Dkt.

# 1D. By Kellmer's own admission, the claims in that lawsuit "relate back in all respects

to the original filing" in Kellmer 11. (Jd. ~ 9). He commenced the new lawsuit in part

because the Clerk's Office had marked the docket in Kellmer 11 as "CLOSED." (Jd.). In

the Complaint, Kellmer contends that the Court's Order dismissing the consolidated

action did not, and could not, dismiss his case because, unlike the other cases, he had

properly made a demand on Fannie Mae's board. (Jd. ~ 8). Reiterating the same

argument, Kellmer moved on September 20, 2007, for clarification or for relief from the

judgment in Kellmer 11 pursuant to Federal Rule of Civil Procedure 60(b). (See PI.

2Although the Memorandum Opinion and Order were not filed on the docket in
Kellmer 11, Kellmer's attorneys were added to the docket for the consolidated case, and as
a result, they received notice of the dismissal.

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Kellmer's Mot. for Clarification, or, in the Alternative, for Relief from 1. [Civ. No. 05-37,

Dkt. #27]). Fannie Mae, joined by the individual defendants, opposed the motion and at

the same time moved to dismiss the complaint in Kellmer III. (Fannie Mae's Omnibus

Mot. to Dismiss and Opp'n to Mot. for Relief from J. [Civ. No. 07-1173, Dkt. #24]; Ind.

Defs.' Mot. to Dismiss and Opp'n to Mot. for Relief from J. [Civ. No. 07-1173, Dkt.

#28]). They argued that the Court lacked subject matter jurisdiction while its decision in

Kellmer II was on appeal in our Circuit Court. Even though the filing of a notice of

appeal "confers jurisdiction on the court of appeals and divests the district court of

control over those aspects of the case involved in the appeal," the district court regains

jurisdiction after the court of appeals issues its mandate. United States v. Defries, 129

F.3d 1293, 1302 (D.C. Cir. 1997). Now that the Circuit Court has upheld dismissal of the

consolidated action and has issued its mandate, this Court has regained jurisdiction thus

rendering the defendants' jurisdictional argument moot. Still standing, however, is the

defendants' alternative argument that Kellmer III should be dismissed on the ground of

claim preclusion.

Subsequent developments in the case arising from FHFA's appointment as Fannie

Mae's conservator have raised questions about whether this Court should still decide the

defendants' pending Motion to Dismiss. On September 6, 2008, months after the Circuit

Court upheld my decision to dismiss the consolidated derivative action, Fannie Mae, with

authorization from FHF A, moved to stay all cases related to the Fannie Mae multi-district

7
litigation. (Mot. for Stay of All Proceedings [Civ. No. 07-1173, Dkt. #61 D. The Court

approved the stay for 45 days. (Order Granting Stay of All Proceedings [Civ. No. 07-

1173, Dkt. #65]). On January 22,2009, the Court granted FHFA's Motion to Intervene as

Conservator for Fannie Mae. (Minute Order entered in Civ. No. 07-1173 on Jan. 22,

2009). Several months later, on June 25, the Court granted FHFA's motion to substitute

itself for Kellmer and ordered FHFA to notify the Court of its position on the defendants'

pending Motion to Dismiss in Kellmer III. (Mem. Order [Civ. No. 07-1173, Dkt. #82] at

6-7). FHF A did so on July 27, 2009, announcing "for the present" that it would "adopt[]"

the pleadings filed by Kellmer. (Status Report on the Mots. to Dismiss in Middleton and

Kellmer's Shareholder Derivative Compls. [Civ. No. 07-1173, Dkt. #88] at 2). FHFA

soon altered course. Claiming that it needed more time to decide whether prosecuting

Kellmer III would advance the statutory purpose of the conservatorship to preserve and

protect Fannie Mae's assets, FHFA moved on September 25 to dismiss the case without

prejudice under Federal Rules 23 .1 (c) and 41 (a). 3 Alternatively, FHF A requested a 180-

day stay. In response, the individual defendants filed a Motion to Dismiss with prejudice

under Rule 41(b) on the ground that FHFA has failed to prosecute the lawsuit diligently.

3Kellmer III is one of four shareholder derivative actions still pending before this
Court as part of the Fannie Mae multi-district litigation. The other cases were originally
captioned as Middleton v. Raines (Civ. No. 07-1221), Arthur v. Mudd (Civ. No. 07-2130),
and Agnes v. Raines (Civ. No. 08-1093). FHFA seeks to dismiss each of these cases
without prejudice.

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 DISCUSSION

I. Individual Defendants' Motion For Involuntary Dismissal With Prejudice

Last to be filed, but first to be addressed, is the individual defendants' Motion to

Dismiss with Prejudice for Failure to Prosecute. Rule 41(b) provides for involuntary

dismissal if the plaintiff "fails to prosecute" its case. Fed. R. Civ. P. 41(b). Typically,

dismissal is without prejudice. Under Local Civil Rule 83.23, "[a]n order dismissing a

claim for failure to prosecute shall specify that the dismissal is without prejudice, unless

the Court determines that the delay in prosecution of the claim has resulted in prejudice to

an opposing party." LcvR 83.23 (emphasis added). Thus, whether the Court should

dismiss the case with prejudice depends on whether the defendants can show that FHF A

"has not manifested reasonable diligence in pursuing the cause," Bomate v. Ford Motor

Co., 761 F.2d 713,714 (D.C. Cir. 1985), and that the resulting delay has caused them

prejudice.

The individual defendants have not shown to the Court's satisfaction that FHFA

has failed to exercise reasonable diligence under the circumstances in prosecuting

Kellmer's derivative claims. FHFA did not formally replace the original derivative

plaintiff until as late as June 2009, and since then, its conduct has not been so "dilatory or

contumacious" as to justify the stiff penalty of dismissal with prejudice. See Bristol

Petroleum Corp. v. Harris, 901 F .2d 165, 167 (D.C. Cir. 1990). FHF A has responded to

all of the Court's orders in a timely and reasonable fashion. It certainly has not disobeyed

9
any Court order. Furthermore, FHFA's Motion for Approval of Voluntary Dismissal

comes less than a mere three months after FHF A officially replaced the original plaintiff

and well before the eve of trial.

The real issue, therefore, is not whether FHFA's conduct until now has been

egregiously dilatory (it has not) but whether FHFA's decision to dismiss its claims with

the option of bringing them again in the future is itself so dilatory as to warrant dismissal

with prejudice. The individual defendants contend that in moving for voluntary dismissal

FHF A has stubbornly refused to announce whether or not it intends to proceed with

Kellmer's derivative action and that this intentional delay justifies involuntary dismissal

with prejudice. It goes without saying that a decision to move for voluntary dismissal

cannot-by itself-be a basis for granting involuntary dismissal. Were that so, then

voluntary dismissal under Rule 41(a)(2) would be a nullity. The question then is whether

FHFA's motion to dismiss without prejudice is an unwarranted deferral of a decision that

this Court has required FHFA to make. If so, then the Court may properly deem FHFA's

motion as an obstinate refusal to prosecute and thereby dismiss the case with prejudice.

Although I directed FHF A to submit a status report stating its position on the

defendants' pending Motion to Dismiss, I never gave FHF A the choice to proceed with

Kellmer's derivative claims or face the prospect of involuntary dismissal with prejudice.

It would "upset[] notions of fundamental fairness" for this Court, "in response to

[FHFA's] request for dismissal without prejudice," to dismiss the case with prejudice,

10
"while failing to give [FHFA] notice of its inclination to impose this extreme remedy."

Andes v. Versant Corp., 788 F.2d 1033, 1037 (4th Cir. 1986). Having never warned

FHFA that a refusal to pursue Kellmer's claims in this litigation could result in dismissal

on the merits, I will not grant the individual defendants' Motion for Dismissal with

Prejudice under Rule 41 (b).

II. FHFA's Motion For Voluntary Dismissal Without Prejudice

Whether the Court should grant the individual defendants' motion for involuntary

dismissal is, however, a separate question from whether the Court should grant FHFA's

motion for voluntary dismissal. Denying the former does not mean that the Court should

grant the latter. Under the Federal Rules, a derivative action may be "voluntarily

dismissed ... only with the court's approval." Fed. R. Civ. P. 23.1(c). Voluntary

dismissal by court order is without prejudice unless the court states otherwise. Fed. R.

Civ. P. 41(a)(2). Before granting a motion for voluntary dismissal, the Court must satisfy

itself: (1) that the motion is sought in good faith, and (2) that the defendants will not

suffer "legal prejudice" if the case is dismissed. In re Vitamins Antitrust Litig., 198

F.R.D. 296, 304 (D.D.C. 2000). "Legal prejudice" is determined by considering four

factors: (1) the defendants' effort and expense in preparation for trial; (2) excessive delay

or lack of diligence on the plaintiffs' part in prosecuting the action; (3) the adequacy of

the plaintiffs' explanation for voluntary dismissal; and (4) the stage of the litigation at the

time the motion to dismiss is made. Id. Voluntary dismissal is generally "granted in the

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federal courts unless the defendant would suffer prejudice other than the prospect of a

second lawsuit or some tactical disadvantage." Conafay v. Wyeth Labs., 793 F.2d 350,

353 (D.C. Cir. 1986).

Notwithstanding that courts typically grant voluntary dismissal, this Court is not

convinced that FHFA's motion is justified at this juncture. Even though the Court has no

reason to believe that FHF A is acting in bad faith, it has plenty of reason to believe that

the individual defendants will suffer legal prejudice if the Court grants FHFA's Motion

for Approval of Voluntary Dismissal without first resolving the defendants' dispositive

Motion to Dismiss, which had been pending for nearly two years before FHF A filed its

motion. To be sure, the individual defendants' efforts preparing for trial do not support a

finding of legal prejudice because the preparations made in this case can be used in other

cases that are part of the Fannie Mae multi-district litigation. Furthermore, the Court has

already determined that FHF A has been sufficiently diligent under the circumstances in

prosecuting Kellmer's claims. Notwithstanding that the first two of the four factors for

determining legal prejudice weigh in favor of FHF A's motion, the Court finds that

FHFA's explanation for requesting voluntary dismissal, coupled with the fact that the

defendants had already filed dispositive motions in this case, is enough to tip the balance

against FHF A's motion.

Before addressing FHF A's rationale for seeking voluntary dismissal, the Court

must first address FHFA's claim that it is entitled to prevail on its motion because the

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Housing and Economic Recovery Act of2008 ("HERA"), 12 U.S.C. §§ 4501 et seq.,

precludes judicial review of FHF A's chosen course of action. FHFA contends that, as the

conservator of Fannie Mae, it is vested with the sole authority under HERA to protect and

preserve the assets of Fannie Mae and that its decision to seek voluntary dismissal is the

best means for accomplishing that end. Furthermore, according to FHF A, that decision is

not judicially reviewable by virtue of a provision in HERA that specifically provides:

"[N]o court may take any action to restrain or affect the exercise of powers or functions

of the Agency as a conservator." 12 U.S.C. § 4617(f).

FHFA construes this provision much too broadly. A careful reading reveals that

the Court is barred only from interfering with the powers or functions of FHF A "as a

conservator." All that means is that I cannot affect FHF A's power and authority to

manage Fannie Mae or to act on its behalf. It does not mean, however, that I am barred

from treating FHF A the same as any other litigant when FHF A invokes the authority of

this Court. Nothing in the language of Section 4617(f) purports to suspend the operation

of the Federal Rules as applied to FHFA. Nor does any language in that provision entitle

FHF A to different treatment as a litigant than Fannie Mae or its shareholders would have

received had FHFA not been appointed Fannie Mae's conservator. There being no

convincing basis for casting aside the usual standards governing motions for voluntary

dismissal under Rule 41(a)(2), this Court will not simply rubber stamp FHFA's motion.

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 Because FHFA is subject to the same rules as any other plaintiff seeking voluntary

dismissal, the Court will scrutinize the merits of FHF A's request as it would any other.

FHF A claims that dismissal without prejudice "is necessary to allow for the Conservator

to thoroughly and effectively evaluate whether continued prosecution of the claims would

further the statutory purpose of the conservatorship to preserve and protect these assets."

(FHF A's Mem. in Support of Mot. for Approval of Voluntary Dismissal without

Prejudice [Civ. No. 07-1173, Dkt. #95] at 2). In light of Congress's decision to extend

the statute of limitations as long as three years for tort claims and six years for contract

claims from the date of the conservator's appointment, see 12 U.S.C. § 4617(b)(12),

FHF A's explanation for withdrawing Kellmer's derivative claims is not wholly

unreasonable. By extending the limitations period, Congress seems to have contemplated

that FHF A might need more time to decide whether and how to pursue any claims it

inherited as Fannie Mae's newly-appointed conservator.

While FHFA's reason for seeking voluntary dismissal is not unreasonable, it is not

particularly compelling. As the regulatory body that oversees Fannie Mae, FHFA and its

predecessor the Office of Federal Housing Enterprise Oversight are already quite familiar

with the facts underlying Kellmer's derivative claims. Moreover, even though FHFA did

not substitute itself for Kellmer until three months before it moved for voluntary

dismissal, it intervened as Fannie Mae's conservator a full five months earlier. Thus,

FHF A was a party in the case for eight months before it filed its motion to dismiss

14
without prejudice. Given that FHF A had at least eight months to contemplate how this

case should proceed, the Court is not particularly persuaded by FHFA's request for more

time.

In addition to FHF A's less-than-compelling explanation for seeking non-suit, its

decision to move for voluntary dismissal nearly two years after the defendants had filed

their dispositive Motion to Dismiss weighs heavily against granting dismissal without

prejudice. One factor that courts have recognized as a basis for denying a motion for

voluntary dismissal under Rule 41(a)(2) is the existence of an already-pending motion for

summary judgment. See, e.g., Pace v. S. Express Co., 409 F .2d 331, 334 (7th Cir. 1969);

Conafay, 793 F.2d at 352. The Court sees little reason not to extend that rule to a

defendant's fully briefed motion to dismiss, so long as that motion is already pending and

would actually dispose of the case on the merits. Defendants have a reasonable

expectation that when they file a motion that could resolve the case against

them-whether that motion is for dismissal or for summary judgment-the courts will

address it. Allowing plaintiffs to move successfully for voluntary dismissal after the

motion is ripe would deprive defendants of their reasonable expectation in a resolution of

their pending motion. Thus, it is fair to conclude that granting a motion for voluntary

dismissal that was filed after the defendants had already filed their dispositive motion

would indeed prejudice the defendants. As such, were the Court to grant FHFA's Motion

for Approval of Voluntary Dismissal, which FHF A had filed nearly two years after the

15
defendants' pending Motion to Dismiss, the individual defendants would suffer prejudice.

Voluntary dismissal in favor of FHF A is, therefore, not appropriate at this time.

III. Kellmer's Motion For Clarification Or For Relief From Judgment

Having declined to dismiss Kellmer 111 under Rule 41, I will consider the merits of

the pending Motion to Dismiss filed by Fannie Mae and joined by the individual

defendants. First, however, I will address Kellmer's Motion for Clarification or for

Relief from Judgment in Kellmer 11.4

Kellmer contends that this Court erred to the extent that it dismissed his claims as

part of the consolidated derivative action. I dismissed the consolidated action because the

plaintiff shareholders failed to make the requisite pre-suit demand on Fannie Mae's board

of directors pursuant to Rule 23.1. According to Kellmer, that rationale does not apply to

his claims because he, unlike the other shareholder derivative plaintiffs, had made the

required pre-suit demand. Consequently, he asks this Court for an order clarifying that it

did not actually dismiss his claims but that it dismissed only those claims where the

shareholder failed to make a demand on Fannie Mae's board.

4Even though FHFA, as Fannie Mae's conservator, has taken Kellmer's place as
the shareholder derivative plaintiff, the Court will treat Kellmer's pleadings as adopted by
FHFA. Now that the Court has rejected FHFA's Motion for Approval of Voluntary
Dismissal, the Court relies on FHFA's earlier representation that it would adopt
Kellmer's pleadings. (See Status Report on the Mots. to Dismiss in Middleton and
Kellmer's Shareholder Derivative Compls. [Civ. No. 07-1173, Dkt. #88] at 2).

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 There is no need for clarification because it is quite clear that this Court did indeed

dismiss Kellmer's case as part of the consolidated action. In granting consolidation, I

specifically determined that the distinction between "demand made" and "demand futile"

cases is insufficient to necessitate separate actions. (Feb. 14,2005 Mem. Op. and Order

[Civ. No. 05-37, Dkt. #25] at 4-5). As a result, I entered an order consolidating Kellmer

11 with other shareholder derivative actions "for all purposes through final judgment."

(Pretrial Order No.1 [Civ. No. 05-37, Dkt. #26] at 3-4). I also directed that the dockets

for the individual cases be closed, (id. at 4), and that the plaintiffs file a consolidated

complaint that would "supersede all existing complaints filed in this action," (id. at 7).

When the plaintiffs, acting through co-lead counsel, filed their consolidated complaint,

they proceeded on a "demand futile" theory, not on a "demand made" theory. In re

Fannie Mae Derivative Lilig., 503 F. Supp. 2d at 14. Not convinced by the theory

advocated by the plaintiffs in their consolidated complaint, I dismissed their case for

failure to make a pre-suit demand as required by Rule 23.1. Id. My Memorandum

Opinion specifically lists Kellmer 11 as among the cases that had been consolidated, id. at

13 & n.3, and the accompanying Order indicates that the consolidated case was dismissed

as to all defendants, id. at 24. Because it is clear from the my rulings and the procedural

history of this case that I dismissed Kellmer 11 as part of the consolidated action,

Kellmer's request for clarification is wholly unnecessary.

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 Undaunted, Kellmer raises an alternative argument, claiming that he is entitled to

relief from the judgment under Rule 60(b). The Rule provides in relevant part that "the

court may relieve a party or its legal representative from a final judgment, order, or

proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable

neglect; ... (4) the judgment is void; ... or (6) any other reason that justifies relief."

Fed. R. Civ. P. 60(b). In deciding a motion brought under this Rule, a district court has

substantial discretion. See Richardson v. Nat'/ R.R. Passenger Corp., 49 F.3d 760, 765

(D.C. Cir. 1995). A court "must balance the interest in justice with the interest in

protecting the finality of judgments." Summers v. Howard Univ., 374 F.3d 1188,1193

(D.C. Cir. 2004).

None of Kellmer's arguments convince me that the interest injustice outweighs

the interest in protecting the finality of the judgment in this case, especially now that our

Circuit Court has affirmed the judgment. At bottom, Kellmer's motion boils down to one

simple argument: The judgment violates due process and is manifestly unjust as applied

to him because it dismissed his case on grounds that were wholly inapplicable to the

demand-made theory he was advocating. By Kellmer's own admission, he does not

challenge the Court's decision to consolidate the derivative cases; rather, he challenges

the Court's decision to render judgment against him based on a consolidated complaint

filed by counsel for the co-lead plaintiffs that failed to advance his distinctive, demand-

made theory. (Kellmer's Reply [Civ. No. 07-1173, Dkt. #36] at 3). Kellmer contends

18
that he cannot be divested of his right to advance that theory by merging his case with

demand-futile cases. See Cablevision Sys. Dev. Co. v. Motion Picture Ass 'n ofAm., Inc.,

808 F.2d 133, 135 (D.C. Cir. 1987) ("'[C]onsolidation is permitted as a matter of

convenience and economy in administration, but does not merge the suits into a single

cause, or change the rights of the parties, or make those who are parties in one suit parties

in another. ", (quoting Johnson v. Manhattan Railway Co., 289 U.S. 479, 496-97 (1933)).

Kellmer's argument would have much greater force if the right he asserts were

truly his own. In a shareholder derivative action, the "plaintiff shareholder sues on behalf

of the corporation," not on his own behalf. Henik ex reI. LaBranche & Co., Inc. v.

LaBranche, 433 F. Supp. 2d 372, 380 (S.D.N.Y. 2006); see also Daily Income Fund, Inc.

v. Fox, 464 U.S. 523, 528 (1984) (stating that "a derivative action allows a stockholder to

step into the corporation's shoes and to seek in its right the restitution he could not

demand in his own" (internal quotation marks omitted)). Because the collection of

derivative suits brought on behalf of Fannie Mae arose from the same operative facts and

involved the same legal claims, this Court consolidated them and appointed co-lead

plaintiffs that it believed would fairly and adequately represent the interests of all

shareholders, including Kellmer, in enforcing Fannie Mae's rights pursuant to Rule 23.1.

In prosecuting the consolidated action, the co-lead plaintiffs opted to forego Kellmer's

demand-made theory and instead relied on a demand-futility theory to establish their

standing to bring the derivative claims.

19
 That Kellmer disagrees with that decision does not entitle him to relief from the

judgment. All the shareholders must live with the strategic choices of the representative

shareholders ultimately charged with prosecuting the derivative action on behalf of the

corporation and its shareholders. A derivative action, whether brought by one or more, or

by all, of the shareholders '''is really the action of all the stockholders, as it is necessarily

commenced in their behalf and for their benefit, '" and '" it inevitably follows that there

can be but one adjudication on the rights of the corporation.'" Henik, 433 F. Supp. 2d at

380 (quoting Dana v. Morgan, 232 F. 85, 89 (2d Cir. 1916)). As a practical matter,

because all shareholder derivative plaintiffs act on behalf of the corporation and because

the corporation cannot be at odds with itself, there is a particular need for the

consolidation of derivative suits based on the same claims and for the appointment of a

representative shareholder plaintiff to prosecute those claims. And where there is a

disagreement between the representative shareholder and other shareholders, one side

must necessarily give way. It is not, therefore, unfair or prejudicial to Kellmer to subject

him to the same fate as all the other shareholders who must also subordinate their wishes

to those of the representative shareholders. Nevertheless, even if Kellmer did suffer

prejudice, the Court finds that the interest in remedying the harm does not overcome the

interest in preserving the finality of a judgment that Kellmer did not appeal and that has

since been affirmed by the Circuit Court.

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IV. Defendants' Motion To Dismiss

All that now remains to be decided is the Motion to Dismiss Kellmer III filed by

Fannie Mae and joined by the individual defendants. The complaint in that case is

substantially the same as the complaint in Kellmer ll. Indeed, Kellmer even admits that

the claims in the new lawsuit "relate back in all respects to the original filing." (See

Compi. [Civ. No. 07-1173, Dkt. #1] ~ 9). The individual defendants argue, as a result,

that Kellmer III is barred by the doctrine of claim preclusion. Kellmer argues, however,

that his derivative claims, which are predicated on a demand-futility theory, are not

precluded because the Court never actually adjudicated them. In a replay of his argument

for relief from the judgment in Kellmer 11, Kellmer contends that the Court resolved only

the demand-futile claims, not his demand-made claim. This argument is not any more

persuasive the second time around.

Kellmer's obvious attempt to relitigate the very claims that the Court dismissed in

Kellmer II is foreclosed by the doctrine of claim preclusion. Under that doctrine, a "final

judgment on the merits of an action precludes the parties or their privies from relitigating

issues that were or could have been raised in that action." Federated Dep 't Stores v.

Moitie, 452 U.S. 394, 398 (1981). The elements for establishing claim preclusion are

well known: "[A] subsequent lawsuit will be barred if there has been prior litigation (1)

involving the same claims or cause of action, (2) between the same parties or their

privies, and (3) there has been a final, valid judgment on the merits, (4) by a court of

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competent jurisdiction." Capitol Hill Group v. Pillsbury, Winthrop, Shaw, Pittman, LLC,

569 F.3d 485,490 (D.C. Cir. 2009). There seems to be no dispute regarding these

elements except that Kellmer contends that there is not a final judgment on the merits of

his demand-made claims. This argument, however, does not withstand even passing

scrutiny. For reasons that have already been explored, it is clear from the record that the

Court dismissed Kellmer's derivative claims on the merits in Kellmer II. That the Court

did not entertain litigation on his demand-made theory, however, does not make the

relitigation of his claims in Kellmer III proper. "[C]laim preclusion precludes the

relitigation of claims, not just arguments." Natural Res. De! Council v. EPA, 513 F .3d

257,261 (D.C. Cir. 2008) (emphasis in original). Its purpose is to prevent the relitigation,

not only of matters or arguments that were in fact litigated, but of matters or arguments

that could have been litigated but were not. Id. Because Kellmer's demand-made theory

could have been litigated as part of the consolidated action that disposed of Kellmer II,

the fact that it was not actually litigated cannot revive Kellmer's derivative claims.

Accordingly, those claims are precluded. 5

5Kellmer also argues that Kellmer III is viable as an "independent action" for
obtaining relief from "a judgment, order, or proceeding" pursuant to Rule 60( d)( 1). As
Kellmer points out, this rule is designed "to prevent a grave miscarriage of justice."
United States v. Beggerly, 524 U.S. 38,47 (1998). For reasons already given, the Court's
dismissal of Kellmer' s derivative claims in Kellmer II is hardly a miscarriage of justice,
much less a grave miscarriage of justice. Thus, just as the Court rejected Kellmer's Rule
60(b) motion for relief from judgment, the Court also rejects this maneuver to obtain the
same relief.

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 CONCLUSION

For the foregoing reasons, the individual defendants' Motion to Dismiss with

Prejudice for Failure to Prosecute and FHFA's Motion for Approval of Voluntary

Dismissal are both DENIED. In addition, Kellmer's Motion for Clarification or, in the

Alternative, for Relief from Judgment is also DENIED. Finally, the long-pending Motion

to Dismiss filed by Fannie Mae and joined by the individual defendants is GRANTED.

An appropriate Order consistent with this ruling is attached herewith.

I-

~~
RICHARD~
United States District Judge

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