Perry Capital LLC v. Lew

UNITED STATES DISTRICT COURT
FILED
FOR THE DISTRICT OF COLUMBIA SEP 30 201\
Clerk, U.S. District & Bankruptcy
Courts for ttte Dlstrltt of Columbia
)
PERRY CAPITAL LLC, )
)
Plaintiff, )
)
v. ) Civil No. 13-1025 (RCL)
)
JACOB J. LEW, et aL, )
)
Defendants. )

)
FAIRHOLME FUNDS, INC., et aL, )
)
Plaintiffs, )
)
v. ) Civil No. 13-1053 (RCL)
)
FEDERAL HOUSING FINANCE )
AGENCY, et aL, )
)
Defendants. )

)
ARROWOOD INDEMNITY COMPANY, )
etaL, )
)
Plaintiffs, )
)
v. ) Civil No. 13-1439 (RCL)
)
FEDERAL NATIONAL MORTGAGE )
ASSOCATION, et al., )
)
Defendants. )
 )
In re Fannie Mae/Freddie Mac )
Senior Preferred Stock Purchase Agreement )
Class Action Litigations ) Miscellaneous No. 13-1288 (RCL)
______________________________________ )
)
This Memorandum Opinion relates to: ) CLASS ACTION
ALL CASES )
)

MEMORANDUM OPINION

Before the Court are motions to dismiss or, in the alternative, for summary judgment,

filed by the defendants United States Department of the Treasury (“Treasury”) and Federal

Housing Finance Agency (“FHFA”), as well as a cross-motion for summary judgment on

Administrative Procedure Act (“APA”) claims filed by the Perry, Fairholme, and Arrowood

plaintiffs (collectively, “individual plaintiffs”). Upon consideration of the defendants’

respective motions to dismiss, the individual plaintiffs’ cross-motion for summary judgment, the

various opposition and reply briefs thereto filed by the defendants, the individual plaintiffs, and

the class action plaintiffs (“class plaintiffs”), the applicable law, and the entire record herein, the

Court will GRANT the defendants’ motions to dismiss and DENY the individual plaintiffs’

cross-motion for summary judgment.

I. BACKGROUND

This matter is brought before the Court by both a class action lawsuit and a set of three

individual lawsuits. These four lawsuits contain numerous overlapping, though not identical,

claims. The purported class plaintiffs consist of private individual and institutional investors

who own either preferred or common stock in the Federal National Mortgage Association

(“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Am. Compl.

at ¶¶ 30-44, In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class

2
Action Litigs., No. 13-1288 (D.D.C. Dec. 3, 2013), ECF No. 4 (“In re Fannie Mae/Freddie Mac

Am. Compl.”); Derivative Compl. at ¶¶ 19-21, In re Fannie Mae/Freddie Mac, No. 13-1288

(D.D.C. July 30, 2014), ECF No. 39 (“In re Fannie Mae/Freddie Mac Derivative Compl.”). The

individual plaintiffs comprise a collection of private investment funds and insurance companies.

Compl. at ¶¶ 25-27, Perry Capital LLC v. Lew, No. 13-1025 (D.D.C. July 7, 2013), ECF No. 1

(“Perry Compl.”); Compl. at ¶¶ 18-28, Fairholme Funds, Inc., v. FHFA, No. 13-1053 (D.D.C.

July 10, 2013), ECF No. 1 (“Fairholme Compl.”); Compl. at ¶¶ 15-19, Arrowood Indem. Co. v.

Fannie Mae, No. 13-1439 (D.D.C. Sept. 20, 2013), ECF No. 1 (“Arrowood Compl.”).

Fannie Mae and Freddie Mac are government-sponsored enterprises (“GSEs”), 1 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). In other words, the GSEs’ shared purpose was to make it

easier (i.e., less risky) for local banks and other lenders to offer mortgages to prospective home

buyers. The GSEs sought to accomplish this objective by purchasing mortgage loans from

lenders, thus relieving lenders of default risk and “freeing up lenders’ capital to make additional

loans.” See Treasury Defs.’s Mot. to Dismiss, or, in the Alternative, for Summ. J. at 6 (D.D.C.

Jan. 17, 2014) (“Treasury Mot.”). 2 In order to finance this operation, the GSEs would, primarily,

1
While Fannie Mae and Freddie Mac are not the only GSEs, see, e.g., Federal Home Loan Banks, for convenience,
this Memorandum Opinion will employ the term “GSE” to refer to Fannie Mae and Freddie Mac exclusively.
2
Rather than list each of the numerous dockets on which the briefs in this matter have been filed, this Memorandum
Opinion will cite the name of the brief, the date on which it was filed on all relevant dockets, and the short form
citation by which the brief will be referenced thereinafter.

3
pool the many mortgage loans they purchased into various mortgage-backed securities and sell

these securities to investors. See, e.g., Individual Pls.’s Opp’n and Cross-Mot. for Summ. J. at 4

(D.D.C. Mar. 21, 2014) (“Individual Pls.’s Opp’n”).

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. Housing and Urban Development Act, Pub. L. No.

90-448, § 802, 82 Stat. 536-538 (1968); Financial Institutions Reform, Recovery and

Enforcement Act, Pub. L. No. 101-73, § 731, 103 Stat. 432-433 (1989). Yet despite this

historically market-driven ownership structure, “the GSEs have benefitted from a public

perception that the federal government had implicitly guaranteed the securities they issued; this

perception allowed the GSEs to purchase more mortgages and [mortgage-backed securities], at

cheaper rates, than would otherwise prevail in the private market.” Treasury Mot. at 6-7.

By 2008, the United States economy faced dire straits, in large part due to a massive

decline within the national housing market. See Individual Pls.’s Opp’n at 7. “As a result of the

housing crisis, the value of the [GSEs’] assets . . . deteriorated and the [GSEs] suffered . . . credit

losses in their portfolios.” FHFA Mot. to Dismiss, or, in the Alternative, for Summ. J. at 7

(D.D.C. Jan. 17, 2014) (“FHFA Mot.”).

Given the systemic danger that a Fannie Mae or Freddie Mac collapse posed to the

already fragile national economy, among other housing market-related perils, Congress enacted

the Housing and Economic Recovery Act (“HERA”) on July 30, 2008. See Individual Pls.’s

Opp’n at 6; Pub. L. No. 110-289, 122 Stat. 2654. HERA established FHFA as an independent

agency to supervise and regulate the GSEs. 12 U.S.C. § 4511. HERA further granted FHFA’s

director the authority to appoint the agency as conservator or receiver for the GSEs. 12 U.S.C.

4
§ 4617(a). Of most relevance to the present litigation, HERA empowered FHFA, as conservator

or receiver, to “immediately succeed to—(i) all rights, titles, powers, and privileges of the

[GSE], and of any stockholder, officer, or director of such [GSE] with respect to the [GSE] and

the assets of the [GSE].” 12 U.S.C. § 4617(b)(2)(A)(i). The statute also set forth a “[l]imitation

on court action,” noting that, “[e]xcept as provided in this section or at the request of the

Director, no court may take any action to restrain or affect the exercise of powers or functions of

[FHFA] as a conservator or a receiver.” 12 U.S.C. § 4617(f). Moreover, apparently recognizing

that Treasury (i.e., taxpayer) funds may soon be necessary to capitalize the struggling GSEs, 3

Congress, under HERA, amended the GSEs’ charters to temporarily authorize Treasury to

“purchase any obligations and other securities issued by the [GSEs].” 12 U.S.C. § 1455(l)(1)(A)

(Freddie Mac); 12 U.S.C. § 1719(g)(1)(A) (Fannie Mae). 4 This provision also provided that the

“Secretary of the Treasury may, at any time, exercise any rights received in connection with such

purchases.” 12 U.S.C. § 1719(g)(2)(A). Treasury’s authority to invest in the GSEs expired on

December 31, 2009. 12 U.S.C. § 1719(g)(4).

Following the GSEs’ unsuccessful effort to “raise capital in the private markets,” FHFA

Mot. at 7-8, FHFA placed the GSEs into conservatorship on September 6, 2008. See, e.g., Class

Pls.’s Opp’n at 7 (D.D.C. Mar. 21, 2014) (“Class Pls.’s Opp’n”). One day later, Treasury,

pursuant to 12 U.S.C. § 1719(g), entered into Senior Preferred Stock Purchase Agreements

(“PSPAs”) with each of the GSEs. Individual Pls.’s Opp’n at 8. Under the initial PSPAs,

3
The purpose of HERA’s provision authorizing Treasury to invest in the GSEs was, in part, to “prevent disruptions
in the availability of mortgage finance”—disruptions presumably due to the challenges confronting the GSEs in
2008. See 12 U.S.C. § 1455(l)(1)(B); 12 U.S.C. § 1719(g)(1)(B) (“Emergency determination required[.] In
connection with any use of this [purchasing] authority, the [Treasury] Secretary must determine that such actions are
necessary to—(i) provide stability to the financial markets; (ii) prevent disruptions in the availability of mortgage
finance; and (iii) protect the taxpayer.”).
4
Since 12 U.S.C. § 1455(l) and 12 U.S.C. § 1719(g) are identical provisions, this Memorandum Opinion,
hereinafter, will refer only to the Fannie Mae provision, § 1719(g).

5
Treasury committed to provide up to $100 billion in funding to each GSE “to ensure that their

assets were equal to their liabilities”—i.e., to “cure [the GSEs’] negative net worth”—at the end

of any fiscal quarter. Id.; FHFA Mot. at 11. On May 6, 2009, Treasury and the GSEs, through

FHFA, entered into the First Amendment to the PSPAs, whereby Treasury doubled its funding

cap to $200 billion for each GSE. Individual Pls.’s Opp’n at 11. On December 24, 2009, the

parties executed the Second Amendment, which permitted the GSEs to continue to “draw

unlimited sums from Treasury [as required to cure any quarterly negative net worth] until the end

of 2012,” and then, as of December 31, 2012, permanently fixed the funding cap for each GSE

(at an amount that, in the end, totaled greater than $200 billion per GSE), in accordance with an

agreed-upon formula. Id. at 11-12; FHFA Mot. at 12; see also Treasury AR at 190-91, 196-97. 5

In exchange for its funding commitment, Treasury received senior preferred stock in each

GSE, which entitled Treasury to four principal contractual rights under the PSPAs. See, e.g.,

Treasury AR at 14. First, Treasury received a senior liquidation preference 6 of $1 billion for

each GSE plus a dollar-for-dollar increase each time the GSEs drew upon Treasury’s funding

commitment. Individual Pls.’s Opp’n at 8-9 (citing Treasury AR at 100, 133). Second, the

PSPAs entitled Treasury to dividends equivalent to 10% of Treasury’s existing liquidation

preference, paid quarterly. 7 Id. at 9 (citing AR at 32-33, 67-68); Treasury Mot. at 13. Third,

5
Citations to the administrative record filed by the Treasury defendants, e.g., Administrative R., In re Fannie
Mae/Freddie Mac, No. 13-1288 (D.D.C. Dec. 17, 2013), ECF No. 6, are noted as “ Treasury AR.” Citations to the
document compilation regarding the Third Amendment filed by the FHFA defendants, e.g., In re Fannie
Mae/Freddie Mac, ECF No. 7, are noted as “FHFA Docs.”
6
“A liquidation preference is a priority right to receive distributions from the [GSEs’] assets in the event they are
dissolved.” Individual Pls.’s Opp’n at 5.
7
Given the Court’s ruling to grant the defendants’ motion to dismiss, there is no need to evaluate the merits of the
defendants’ decision to execute the Third Amendment instead of selecting other options in lieu of the cash dividend
that, under the PSPAs, was equal to 10% of Treasury’s liquidation preference. Nevertheless, the Court notes its
disagreement with the plaintiffs’ characterization of one purported alternative to the Third Amendment. The
plaintiffs claim that the GSEs “had no obligation to pay the 10 percent dividend in cash,” and instead could simply
opt to pay a 12% dividend that would be added to the outstanding liquidation preference rather than be paid in cash
each quarter. Individual Pls.’s Opp’n at 9, 66-67. However, the plaintiffs’ contention that paying 10% in cash or

6
Treasury received warrants to acquire up to 79.9% of the GSEs’ common stock at a nominal

price. Individual Pls.’s Opp’n at 9; e.g., Treasury AR at 15, 43. Fourth, beginning on March 31,

2010, Treasury would be entitled to a periodic commitment fee “to fully compensate [Treasury]

for the support provided by the ongoing [funding] [c]ommitment.” Treasury AR at 22, 56. The

amount of the periodic commitment fee was to be determined by mutual agreement, and

Treasury reserved the right to waive the fee for one year at a time “based on adverse conditions

in the United States mortgage market.” Id. Treasury waived the commitment fee in 2010 and

2011, and later, under the Third Amendment, the fee was suspended. Treasury Mot. at 14, 18.

As of August 8, 2012, Treasury had provided $187.5 billion in funding to the GSEs, 8 and,

thus, held a total $189.5 billion senior liquidation preference between both GSEs, including the

adding 12% to the liquidation preference was merely a matter of choice, Class Pls.’s Opp’n at 11, directly
contravenes the unambiguous language of the contract. The relevant provisions, which are identical, in Treasury’s
respective stock certificates with each of the GSEs, state:
“‘Dividend Rate’ means 10.0%; provided, however, that if at any time the
[GSE] shall have for any reason failed to pay dividends in cash in a timely
manner as required by this Certificate, then immediately following such failure
and for all Dividend Periods thereafter until the Dividend Period following the
date on which the Company shall have paid in cash full cumulative dividends
(including any unpaid dividends added to the Liquidation Preference pursuant to
Section 8), the ‘Dividend Rate’ shall mean 12.0%.”
Treasury AR at 33, 67-68 (Treasury Senior Preferred Stock Certificates § 2(c)) (emphasis added). The provision
makes clear that 10% cash dividends were “required by” the stock certificates, and that 12% dividends deferred to
the liquidation preference were only triggered upon a “failure” to meet the 10% cash dividend requirement. Thus,
classifying the 12% dividend feature as a “penalty,” as Treasury does, is surely more accurate than classifying it as a
“right.” Compare Treasury Defs.’s Reply at 49-50 (D.D.C. May 2, 2014) (“Treasury Reply”), with Individual Pls.’s
Opp’n at 9. The plaintiffs cannot gloss over this distinction by repetitively using the phrase “in kind” to describe the
12% dividend feature. See Individual Pls.’s Opp’n at 9, 66-67, 80-81; Class Pls.’s Opp’n at 16. Inclusion of “in
kind” within § 2(c) would have slightly improved the plaintiffs’ argument that the contract expressly permitted the
GSEs to simply choose between a 10% cash dividend or 12% dividend deferred to the liquidation preference. But,
as plaintiffs are certainly aware, “in kind” appears nowhere within the stock certificates’ dividends provision. See
Treasury AR at 33, 67-68.
With regard to the two other hypothetical alternatives presented by the individual plaintiffs—Treasury accepting
lower dividends or allowing the GSEs to use excess profits to pay down the liquidation preference and, thus, the
basis for the 10% dividend—the Court has no occasion to determine whether the plaintiffs’ arguments demonstrate
arbitrary and capricious decisionmaking or only amount to second-guessing decisionmakers charged with exercising
predictive judgments. Compare Individual Pls.’s Opp’n at 79-82, with FHFA Defs.’s Reply at 52-58 (D.D.C. May
2, 2014) (“FHFA Reply”).
8
A figure that is unchanged through 2013. See Treasury AR 4351.

7
initial $1 billion liquidation preferences from each GSE. Therefore, “the GSEs’ dividend

obligations to Treasury were nearly $19 billion per year.” Treasury Mot. at 16.

On August 17, 2012, Treasury and the GSEs, through FHFA, agreed to the Third

Amendment to the PSPA, which is the focus of this litigation. The Third Amendment “replaced

the previous dividend formula with a requirement that the GSEs pay, as a dividend, the amount

by which their net worth for the quarter exceeds a capital buffer of $3 billion. The capital buffer

gradually declines over time by $600 million per year, and is entirely eliminated in 2018.”

Treasury Mot. at 18. In simpler terms, the amendment “requires Fannie Mae and Freddie Mac to

pay a quarterly dividend to Treasury equal to the entire net worth of each Enterprise, minus a

small reserve that shrinks to zero over time.” Class Pls.’s Opp’n at 3. These dividend payments

do not reduce Treasury’s outstanding liquidation preferences. See Individual Pls.’s Opp’n at 16.

The plaintiffs cite multiple justifications offered publicly by the defendants for this “net

worth sweep.” See Individual Pls.’s Opp’n at 16-17. First, Treasury asserted that the

amendment will end “the circular practice of the Treasury advancing funds to the [GSEs] simply

to pay dividends back to Treasury.” Id. at 16 (citing Press Release, Treasury Dep’t Announces

Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac (Aug. 17, 2012),

available at http://www.treasury.gov/press-center/press-releases/Pages/tg1684.aspx); see also

Treasury Mot. at 2, 5, 50; FHFA Mot. at 3, 15-16. However, the plaintiffs counter that in 2012,

the GSEs were once again profitable and, pertinently, able to pay the 10% dividend without

drawing additional funds from Treasury. Id. at 14-15; but see Fairholme Compl. at ¶ 26 (stating

that “approximately $26 billion” of Treasury’s current liquidation preference “were required

simply to pay the 10% dividend payments owed to Treasury”). Second, quoting from the same

Treasury press release, the plaintiffs note Treasury’s statement that the net worth sweep is

8
consistent with the Obama Administration’s “commitment . . . that the GSEs will be wound

down and will not be allowed to retain profits, rebuild capital, and return to the market in their

prior form.” Id. at 16-17. Third, according to the press release, the net worth sweep would

“make sure that every dollar of earnings that Fannie Mae and Freddie Mac generate will be used

to benefit taxpayers for their investment in those firms.” Id. at 17.

Under the Third Amendment net worth sweep, the GSEs paid Treasury nearly $130

billion in 2013. 9 Treasury AR at 4352. As mentioned above, under the former dividend

arrangement requiring payment equivalent to 10% of Treasury’s existing liquidation preference,

the GSEs would have owed nearly $19 billion. Through 2013, the cumulative draws of Treasury

funding taken by the GSEs remained $187.5 billion, id. at 4351, and the cumulative dividends

paid to Treasury by the GSEs totaled $185.2 billion, id. at 4352.

Notwithstanding the plaintiffs’ attempt to downplay the need for a GSE bailout in the

first place, see, e.g., Individual Pls.’s Opp’n at 6, 10-11, the plaintiffs do not contest the initial

PSPA or subsequent two amendments to the PSPA, see, e.g., Class Pls.’s Opp’n at 11, but rather

only challenge the Third Amendment to the PSPA. The class plaintiffs have brought claims of

breach of contract, regarding allegedly promised dividends and liquidation preferences, breach of

the implied covenant of good faith and fair dealing, and an unconstitutional taking, as well as

derivative claims of breach of fiduciary duty. The Perry plaintiff has brought claims under the

Administrative Procedure Act (“APA”). The Arrowood plaintiffs have also brought APA claims,

as well as claims of breach of contract, regarding allegedly promised dividends and liquidation

preferences, and breach of the implied covenant of good faith and fair dealing. The Fairholme

plaintiffs have brought the same claims as the Perry and Arrowood plaintiffs with an additional

9
Though this figure includes the outlier $59.3 billion dividend paid by Fannie Mae in the second quarter and $30.4
billion dividend paid by Freddie Mac in the fourth quarter. Treasury AR 4352.

9
claim of breach of fiduciary duty against FHFA. The parties dispute whether the Fairholme

plaintiffs’ fiduciary duty claim is direct or derivative. See infra n.24.

On January 17, 2014, the defendants moved to dismiss the complaints against the Third

Amendment for lack of jurisdiction under Federal Rule of Civil Procedure 12(b)(1) and for

failure to state a claim under Rule 12(b)(6). In the alternative, the defendants moved for

summary judgment pursuant to Rule 56. In their opposition, filed March 21, 2014, the individual

plaintiffs presented a cross-motion for summary judgment.

II. LEGAL STANDARD

“Federal courts are of limited jurisdiction.” Kokkonen v. Guardian Life Ins. Co. of Am.,

511 U.S. 375, 377 (1994). Under Rule 12(b)(1), the plaintiffs bear the burden of demonstrating

that subject matter jurisdiction exists. Khadr v. United States, 529 F.3d 1112, 1115 (D.C. Cir.

2008). The Court must “assume the truth of all material factual allegations in the complaint and

construe the complaint liberally, granting [the] plaintiff[s] the benefit of all inferences that can be

derived from the facts alleged.” Am. Nat. Ins. Co. v. F.D.I.C., 642 F.3d 1137, 1139 (D.C. Cir.

2011) (internal quotation marks and citation omitted). But “[b]ecause subject-matter jurisdiction

focuses on the [C]ourt’s power to hear the claim . . . , the [C]ourt must give the plaintiff[s’]

factual allegations closer scrutiny when resolving a Rule 12(b)(1) motion than would be required

for a Rule 12(b)(6) motion for failure to state a claim.” Youming Jin v. Ministry of State Sec.,

475 F. Supp. 2d 54, 60 (D.D.C. 2007). Furthermore, when evaluating a Rule 12(b)(1) motion to

dismiss, “it has been long accepted that the [Court] may make appropriate inquiry beyond the

pleadings to satisfy itself on authority to entertain the case.” Haase v. Sessions, 835 F.2d 902,

906 (D.C. Cir. 1987) (internal quotation marks and citation omitted).

10
 A motion to dismiss is also 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). Once again, “the 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. Nor must the [C]ourt accept legal conclusions cast in the form of factual allegations.

Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994) (internal quotation marks

and citation omitted). “If, on a motion under Rule 12(b)(6) . . . , matters outside the pleadings

are presented to and not excluded by the [C]ourt, the motion must be treated as one for summary

judgment under Rule 56.” Fed. R. Civ. P. 12.

III. ANALYSIS

A. HERA Bars the Plaintiffs’ Prayers for Declaratory, Injunctive, and Other
Equitable Relief against FHFA and Treasury

By this Court’s calculation, twenty-four of the thirty-one substantive prayers for relief10

requested by the plaintiffs across their five complaints seek declaratory, injunctive, or other

equitable relief against FHFA or Treasury. See also FHFA Mot. at 22 n.13. Such relief runs up

against HERA’s anti-injunction provision, which declares that “no court may take any action to

restrain or affect the exercise of powers or functions of [FHFA] as a conservator or a receiver.”

12 U.S.C. § 4617(f).

10
This thirty-one prayers for relief figure does not include the two prayers for “reasonable costs, including
attorneys’ fees, incurred in bringing this action” and “such other and further relief as this Court deems just and
proper” that appear in each of the five complaints at issue here. See, e.g., Fairholme Compl. at ¶ 146(i) and (j).

11
 While case law adjudicating HERA-related disputes is generally sparse, “[c]ourts

interpreting the scope of [§] 4617(f) have relied on decisions addressing the nearly identical

jurisdictional bar applicable to the Federal Deposit Insurance Corporation (‘FDIC’)

conservatorships contained in 12 U.S.C. § 1821(j).” 11 Natural Res. Def. Council, Inc. v. FHFA,

815 F. Supp. 2d 630, 641 (S.D.N.Y. 2011), aff’d sub nom. Town of Babylon v. FHFA, 699 F.3d

221 (2d Cir. 2012). Congress passed the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (“FIRREA”), Pub. L. No. 101-73, 103 Stat. 183, during the savings

and loan crisis to enable the FDIC (and, formerly, the Resolution Trust Corporation (“RTC”)) to

serve as a conservator or receiver for troubled financial institutions. It was with this backdrop

that the Court of Appeals for the District of Columbia Circuit, in Freeman v. FDIC, explained

that the language of § 1821(j) “does indeed effect a sweeping ouster of courts’ power to grant

equitable remedies.” 56 F.3d 1394, 1399 (D.C. Cir. 1995). 12 The Circuit held that the FIRREA

provision precludes courts from granting “non-monetary remedies, including injunctive relief []

[and] declaratory relief” that would “effectively ‘restrain’ the [agency] from” exercising its

statutorily authorized responsibilities. Id. (quoting 12 U.S.C. § 1821(j)). As the parties both

agree, an equivalent bar on jurisdiction derives from HERA’s substantially identical anti-

injunction provision. E.g., Individual Pls.’s Opp’n at 31-32.

Like a number of its sister circuits, however, this Circuit has established that, if the

agency “has acted or proposes to act beyond, or contrary to, its statutorily prescribed,

11
Section 1821(j) reads: “. . . no court may take any action . . . to restrain or affect the exercise of powers or
functions of the [FDIC] as a conservator or a receiver.” 12 U.S.C. § 1821(j).
12
“Although this limitation on courts’ power to grant equitable relief may appear drastic, it fully accords with the
intent of Congress at the time it enacted FIRREA in the midst of the savings and loan insolvency crisis to enable the
FDIC and the [RTC] to expeditiously wind up the affairs of literally hundreds of failed financial institutions
throughout the country.” Id. at 1398. Whether or not FHFA is “winding up the affairs of” the GSEs, the Circuit’s
interpretation of congressional intent to grant the FDIC enormous discretion to act as a conservator or receiver
during the savings and loan crisis of 1989 applies with equal force to the mortgage finance crisis of 2008.

12
constitutionally permitted, powers or functions,” then 12 U.S.C. § 4617(f) shall not apply. Nat’l

Trust for Historic Pres. v. FDIC, 21 F.3d 469, 472 (D.C. Cir. 1994) (Wald, J., concurring)

(internal quotation marks and citation omitted) (referring to 12 U.S.C. § 1821(j)); see also Leon

Cnty., Fla. v. FHFA, 700 F.3d 1273, 1278 (11th Cir. 2012) (“‘[I]f the FHFA were to act beyond

statutory or constitutional bounds in a manner that adversely impacted the rights of others,

§ 4617(f) would not bar judicial oversight or review of its actions.’”) (quoting In re Freddie Mac

Derivative Litig., 643 F. Supp. 2d 790, 799 (E.D. Va. 2009)); Cnty. of Sonoma v. FHFA, 710

F.3d 987, 992 (9th Cir. 2013) (“[T]he anti-judicial review provision is inapplicable when FHFA

acts beyond the scope of its conservator power.”). Thus, the question for this Court is whether

the plaintiffs sufficiently plead that FHFA acted beyond the scope of its statutory “powers or

functions . . . as a conservator” when the agency executed the Third Amendment to the PSPAs

with Treasury. 12 U.S.C. § 4617(f). If not, the Court must dismiss all of the defendants’ claims

for declaratory, injunctive, or other equitable relief. 13

1. Section 4617(f) Bars Claims of Arbitrary and Capricious Conduct,
under APA § 706(2)(A), Which Seek Declaratory, Injunctive, or Other
Equitable Relief

While there is a “strong presumption that Congress intends judicial review of

administrative action,” Bowen v. Mich. Acad. of Family Physicians, 476 U.S. 667, 670 (1986),

that presumption is “defeated if the substantive statute precludes review.” Heckler v. Chaney,

470 U.S. 821, 843 (1985) (citing 5 U.S.C. § 701(a)(1)). The plaintiffs do not discuss the

applicability of 5 U.S.C. § 701(a)(1) of the APA to the present case in any of their oppositions,

except to cite Reno v. Catholic Soc. Servs., 509 U.S. 43, 63-64 (1993), in the individual

plaintiffs’ opposition and reply briefs for the proposition that the Court can preclude APA review

13
As the Court will explain below, this is true regardless of whether the defendants have levied some of their non-
monetary claims against Treasury instead of FHFA.

13
“only if presented with clear and convincing evidence” of congressional intent to preclude such

review. E.g., Individual Pls.’s Reply to Defs.’s Mot. for Summ. J. at 15-16 (D.D.C. June 2,

2014) (“Individual Pls.’s Reply”). The individual plaintiffs are correct in that the “presumption

of judicial review [under the APA] is, after all, a presumption, and like all presumptions used in

interpreting statutes, may be overcome by, inter alia, specific language . . . that is a reliable

indicator of congressional intent . . . to preclude judicial review.” Bowen, 476 U.S. at 673

(internal quotation marks and citation omitted). HERA’s express anti-injunction provision,

which, as explained below, necessarily covers litigation arising out of contracts executed by

FHFA in accordance with its duties as a conservator, qualifies as a reliable indicator of

congressional intent to preclude review of non-monetary APA claims brought against both

FHFA and Treasury. Importantly, when applying FIRREA’s anti-injunction provision, 12 U.S.C

§ 1821(j), this Circuit has only considered whether the FDIC acted beyond “its statutorily

prescribed, constitutionally permitted, powers or functions” under FIRREA, specifically, and not

whether it acted beyond any of its more general APA obligations under 5 U.S.C. § 702(2). See

Nat’l Trust, 21 F.3d at 472 (Wald, J., concurring and further noting that, “given the breadth of

the statutory language [of § 1821(j)], untempered by any persuasive legislative history pointing

in a different direction, the statute would appear to bar a court from acting in virtually all

circumstances”); Freeman, 56 F.3d at 1398-99; MBIA Ins. Corp. v. FDIC, 816 F. Supp. 2d 81,

103 (D.D.C. 2011), aff'd, 708 F.3d 234 (D.C. Cir. 2013); see also Leon Cnty., 700 F.3d at 1278-

79. In other words, this Circuit, like the APA itself, implicitly draws a distinction between acting

beyond the scope of the constitution or a statute, see § 702(2)(B) and (C), and acting within the

scope of a statute, but doing so arbitrarily and capriciously, see § 702(2)(A). This distinction

arises directly from the text of § 4617(f), which prohibits the Court from restraining “the exercise

14
of powers or functions of [FHFA]”—i.e., restraining how FHFA employs its powers or

functions—but does not prohibit review based upon the statutory or constitutional origin of the

powers or functions themselves. 12 U.S.C. § 4617(f) (emphasis added). Consequently, it does

appear that § 4617(f) bars all declaratory, injunctive, or other equitable relief stemming from

claims of arbitrary and capricious decisionmaking, under APA § 706(2)(A). Thus, the two

counts in each of the Perry, Fairholme, and Arrowood Complaints, and related prayers for relief,

that claim APA violations for arbitrary and capricious conduct by both Treasury and FHFA are

hereby dismissed pursuant to Rule 12(b)(1). 14

2. Section 4617(f) Applies to Treasury’s Authority under HERA

As a threshold matter, the plaintiffs contend that § 4617(f) does not bar claims against

Treasury because the provision only governs claims against FHFA. However, the defendants’

argument that granting relief against the counterparty to a contract with FHFA would directly

restrain FHFA’s ability as a conservator vis-à-vis that contract is based on sound reasoning. See,

e.g., Treasury Reply at 12-13 (collecting cases outside of this Circuit). Conduct by a

counterparty that is required under a contract with FHFA does not merely constitute “a

peripheral connection to FHFA’s activities as the [GSEs’] conservator.” See Individual Pls.’s

Opp’n at 29. To the contrary, such interdependent, contractual conduct is directly connected to

FHFA’s activities as a conservator. A plaintiff is not entitled to use the technical wording of her

14
The class, Arrowood, and Fairholme plaintiffs each present a claim of breach of the implied covenant of good
faith and fair dealing that closely parallels the individual plaintiffs’ APA claims for arbitrary and capricious conduct.
See, e.g., In re Fannie Mae/Freddie Mac Am. Compl. at ¶ 161 (“. . . Fannie Mae, acting through FHFA, acted
arbitrarily and unreasonably and not in good faith or with fair dealing toward the members of the Fannie Preferred
Class.”). Given the breadth of HERA and this Circuit’s wariness toward evaluating how FHFA carries out its
conservatorship responsibilities, any claim—APA- or contract-based—dependent upon allegations of arbitrary and
capricious behavior coupled with a request for equitable relief probably should be summarily dismissed under
§ 4617(f). Yet regardless of whether the Circuit sees fit to establish a categorical rule, the plaintiffs’ claims of
breach of the implied covenant which seek equitable relief are still generally dismissed on § 4617(f) grounds
because the Court finds that FHFA acted within its statutory authority under HERA. See infra Section III(A)(4).
And because some plaintiffs include within their breach of the implied covenant allegations a request for monetary
relief, dismissal is also proper on ripeness and failure to state a claim grounds. See infra Section III(C).

15
complaint—i.e., bringing a claim against a counterparty when the contract in question is

intertwined with FHFA’s responsibilities as a conservator—as an end-run around HERA.

Therefore, § 4617(f) applies generally to litigation concerning a contract signed by FHFA

pursuant to its powers as a conservator.

Additionally, when the counterparty to FHFA’s contract—Treasury—is also a

government entity operating based on authority derived from HERA, e.g. 12 U.S.C. § 1719(g)

(temporarily authorizing Treasury to purchase GSE securities), HERA’s anti-injunction

provision may be logically extended to that government counterparty. Likewise, if FHFA, as a

conservator or receiver, signs a contract with another government entity that is acting beyond the

scope of its HERA powers, then FHFA is functionally complicit in its counterparty’s

misconduct, and such unlawful actions may be imputed to FHFA. Here, as noted above, there

can be little doubt that enjoining Treasury from partaking in the Third Amendment would

restrain FHFA’s uncontested authority to determine how to conserve the viability of the GSEs.

Accordingly, the Court must decide whether Treasury acted in contradiction of its temporary

power, under HERA, to invest in the GSEs.

The individual plaintiffs argue that Treasury acted beyond the scope of HERA because

the Third Amendment constitutes the purchase of new GSE securities after HERA’s December

31, 2009 sunset provision and because Treasury violated the APA by acting arbitrarily and

capriciously when entering into the net worth sweep. Here, given § 4617(f)’s bar on non-

monetary claims of arbitrary and capricious decisionmaking under the APA, the Court must only

consider whether Treasury purchased new securities through the Third Amendment.

16
 3. Treasury’s Execution of the Third Amendment Does Not Constitute the
Purchase of New Securities in Contravention of HERA

The individual plaintiffs argue that Treasury violated the sunset provision associated with

its authority to purchase GSE securities under 12 U.S.C. § 1719(g) because the Third

Amendment was not an “exercise of rights” under the statute and because the Third Amendment

was effectively a purchase of new securities after December 31, 2009. Individual Pls.’s Opp’n at

37. Both claims are unpersuasive.

Asserting that the Third Amendment was not the exercise of a right, as allegedly required

for any “market participa[tion]” after 2009, the individual plaintiffs state that, “[a]s of 2010,

Treasury’s authority as a market participant was limited to ‘hold[ing], exercis[ing] any rights

received in connection with, or sell[ing] any obligations or securities purchased’” from the

GSEs. Individual Pls.’s Opp’n at 36-37 (quoting 12 U.S.C. § 1719(g)(2)(D)). But this

contention overreads the provision governing the application of the statutory expiration date to

purchased securities. While § 1719(g)(2)(D) notes that holding securities, exercising any rights

under the securities contract, or selling securities are specifically exempt from the sunset

provision, the existence of that provision does not therefore preclude other non-security-

purchasing activities otherwise permitted under an already agreed-upon, pre-2010 investment

contract with the GSEs. 15 To then say that the purchase authority sunset provision also

categorically prohibits any provision within Treasury’s contracts with the GSEs that requires

“mutual assent” is to reach too far. Cf. Individual Pls.’s Opp’n at 38. Thus, whether or not

amending the PSPA is a “right,” as understood under § 1719(g), is irrelevant, as long as the

Third Amendment did not constitute a purchase of new securities.
15
While legislative history on this issue is unrevealing, the Court can easily imagine that Congress, with its
exclusion from the sunset provision of Treasury’s ability to “exercise any rights received in connection with . . .
securities purchased,” was contemplating an investment agreement whereby Treasury maintained future rights to
purchase more GSE securities.

17
 Here, Treasury purchased one million senior preferred shares in each GSE in exchange

for a number of contractual entitlements. E.g., Treasury AR at 21-22 (Fannie Mae PSPA). This

“purchase” of GSE securities required Treasury to provide the GSEs with a funding

commitment. While in all three amendments that followed this purchase Treasury never

received additional GSE shares, under the first two amendments, Treasury provided the GSEs

with an expanded funding commitment. The individual plaintiffs cite the “Action Memorandum

for [Treasury] Secretary Geithner,” which invokes Treasury’s statutory purchasing authority

under § 1719(g) as a justification for the funding expansion, as evidence that the Third

Amendment was also a purchase of securities. Individual Pls.’s Reply at 21 (Treasury AR at

181-88). The Court, however, does not accept that a reference to Treasury’s general purchasing

authority in a memorandum to Secretary Geithner regarding the Second Amendment means that

the Second Amendment (and First Amendment, for that matter) was, in fact, a purchase of new

obligations or securities according to § 1719(g)(1)(a). While Treasury’s funding commitment is

the currency by which Treasury purchased shares, which came with additional rights for

Treasury, in the original PSPAs, no new shares or obligations were purchased during the first

two amendments. Treasury’s receipt of “valuable consideration”—i.e., the potential for

increased liquidation preferences as the GSEs drew more funding—for these amendments does

not, on its own, constitute the purchase of new GSE securities under § 1719(g)(1)(a). 16 Cf.

Individual Pls.’s Reply at 21.

Yet regardless of whether the first two amendments to the PSPAs should be considered a

purchase of new securities, the Court finds that Treasury did not purchase new securities under

16
Similarly, the fact that Treasury, prior to executing the First and Second Amendments, made § 1719(g)(1)(B)
“emergency determinations” generally required before purchasing new securities does not, alone, signify the
purchase of new securities. See Treasury Reply at 37-38 (determinations made “because [Treasury] was pledging
additional taxpayer funds to the GSEs”).

18
the Third Amendment. Under the Third Amendment—unlike the first two amendments—

Treasury neither granted the GSEs additional funding commitments nor received an increased

liquidation preference. Instead, Treasury agreed to a net worth sweep in exchange for

eliminating the cash dividend equivalent to 10% of the GSEs’ liquidation preference. This net

worth sweep represented a new formula of dividend compensation for a $200 billion-plus

investment Treasury had already made. As FHFA further claims, the agency executed the Third

Amendment to ameliorate the existential challenge of paying the dividends it already owed

pursuant to the GSE securities Treasury purchased through the PSPA; it did not do so in order to

sell more GSE securities. FHFA Mot. at 3 (“The [GSEs] were unable to meet their 10%

dividend obligations without drawing more from Treasury, causing a downward spiral of

repaying preexisting obligations to Treasury through additional draws from Treasury.”)

(emphasis added). Notwithstanding plaintiffs’ contentions regarding the “fundamental change

doctrine,” Treasury’s own tax regulations, or otherwise, the present fact pattern strikes the Court

as straightforward, at least in the context of the applicability of § 1719(g)’s sunset provision.

Without providing an additional funding commitment or receiving new securities from the GSEs

as consideration for its Third Amendment to the already existing PSPAs, Treasury cannot be said

to have purchased new securities under § 1719(g)(1)(a). Treasury may have amended the

compensation structure of its investment in a way that plaintiffs find troubling, but doing so did

not violate the purchase authority sunset provision. § 1719(g)(4).

19
 4. FHFA Acted within Its Statutory Authority

The individual plaintiffs put forth a number of claims that FHFA violated HERA by

entering into the Third Amendment. 17 These arguments concern both FHFA’s conduct and the

purported reasons for FHFA’s conduct—the what and the why, so to speak. 18

At bottom, the Third Amendment sweeps nearly all GSE profit dollars to Treasury. The

result for non-Treasury shareholders is virtually no likelihood of dividend payments (given the

lack of profits along with Treasury’s discretion to pay dividends, see, e.g. Treasury AR at 58

(Freddie Mac PSPA § 5.1)) and a decrease in the potential liquidation preference they would

receive if the company liquidated during a period of profitability. Both parties essentially admit

this same depiction in their briefs, biased adjectives aside. Looking past the financial

engineering involved in the PSPAs and subsequent amendments, the question for this Court,

simply, is whether the net worth sweep amendment represents conduct that exceeds FHFA’s

authority under HERA—a statute of exceptional scope that gave immense discretion to FHFA as

a conservator. It is surely true that “FHFA cannot evade judicial scrutiny by merely labeling its

actions with a conservator stamp.” Leon Cnty. v. FHFA, 700 F.3d 1273, 1278 (11th Cir. 2012).

Yet construing the allegations in a light most favorable to the plaintiffs, the Court finds that the

plaintiffs fail to demonstrate by a preponderance of the evidence—if at all—that FHFA’s

execution of the Third Amendment violated HERA. See, e.g., Pitney Bowes, Inc. v. U.S. Postal

Serv., 27 F. Supp. 2d 15, 19 (D.D.C. 1998) (“The plaintiff bears the burden of persuasion to

establish subject matter jurisdiction by a preponderance of the evidence.”). As such, the

plaintiffs cannot overcome § 4617(f)’s jurisdictional bar on equitable relief.

17
The class plaintiffs appear to adopt the individual plaintiffs’ briefing on this issue. See Class Pls.’s Opp’n at 25.
18
The Court has already dismissed, supra, claims of arbitrary and capricious decisionmaking brought pursuant to 5
U.S.C. 706(2)(A). This subsection, then, will address all other claims for equitable relief against FHFA.

20
 a. FHFA’s Justifications for Executing the Third Amendment and,
Consequently, the Accompanying Administrative Record, Are Irrelevant
for § 4617(f) Analysis

The extraordinary breadth of HERA’s statutory grant to FHFA as a conservator or

receiver for the GSEs, likely due to the bill’s enactment during an unprecedented crisis in the

housing market, Cf. Freeman, 56 F.3d at 1398, coupled with the anti-injunction provision,

narrows the Court’s jurisdictional analysis to what the Third Amendment entails, rather than why

FHFA executed the Third Amendment. See also id. (the anti-injunction provision applies

“unless [the conservator] has acted . . . beyond, or contrary to, its statutorily prescribed,

constitutionally permitted, powers or functions.”). Nevertheless, the individual plaintiffs focus a

sizable portion of their opposition and reply briefs on disputing FHFA’s justifications for the

Third Amendment. See Individual Pls.’s Opp’n at 58-73; Individual Pls.’s Reply at 31-39.

Similarly, the individual plaintiffs argue that FHFA violated HERA by not producing the full

administrative record. Individual Pls.’s Opp’n at 46-51; Individual Pls.’s Reply at 26-29. Both

sets of claims ask the Court, directly or indirectly, to evaluate FHFA’s rationale for entering into

the Third Amendment—a request that contravenes § 4617(f).

Claims that FHFA’s varying explanations for entering into the Third Amendment reveal

that the agency’s conduct went beyond its statutory authority under HERA—which are merely

extensions of the individual plaintiffs’ arbitrary and capricious arguments under a different

subheading—share the same fate as the plaintiff’s APA arbitrary and capricious claims. Once

again, to determine whether it has jurisdiction to adjudicate claims for equitable relief against

FHFA as a conservator, the Court must look at what has happened, not why it happened. For

instance, the Court will examine whether the Third Amendment actually resulted in a de facto

receivership, infra; not what FHFA has publicly stated regarding any power it may or may not

21
have, as conservator, to prepare the GSEs for liquidation, see Individual Pls.’s Opp’n at 58-66.

FHFA’s underlying motives or opinions—i.e., whether the net worth sweep would arrest a

downward spiral of dividend payments (see also supra n.7), increase payments to Treasury, or

keep the GSEs in a holding pattern, Individual Pls.’s Opp’n at 66-73—do not matter for the

purposes of § 4617(f). Cf. Leon Cnty., Fla. v. FHFA, 816 F. Supp. 2d 1205, 1208 (N.D. Fla.

2011) aff'd, 700 F.3d 1273 (11th Cir. 2012) (“Congress surely knew, when it enacted § 4617(f),

that challenges to agency action sometimes assert an improper motive. But Congress barred

judicial review of the conservator's actions without making an exception for actions said to be

taken from an improper motive.”). Moreover, contrary to the individual plaintiffs’ assertion, id.

at 46-51, and consistent with the Court’s ruling regarding the bar on arbitrary and capricious

review under § 4617(f), supra, the Court need not view the full administrative record to

determine whether the Third Amendment, in practice, exceeds the bounds of HERA.

Generally, “[i]t is not [the Court’s] place to substitute [its] judgment for FHFA’s,” Cnty.

of Sonoma, 710 F.3d at 993, let alone in the face of HERA’s “sweeping ouster of courts’ power

to grant equitable remedies,” Freeman, 56 F.3d at 1398. See also MBIA Ins. Corp., 816 F. Supp.

2d at 103 (“In seeking injunctive or declaratory relief, it is not enough for [the plaintiffs] to

allege that [conservator] came to the wrong conclusion . . . .”). Requiring the Court to evaluate

the merits of FHFA’s decisionmaking each time it considers HERA’s jurisdictional bar would

render the anti-injunction provision hollow, disregarding Congress’ express intention to divest

the Court of jurisdiction to restrain FHFA’s “exercise of [its] powers or functions” under

HERA—i.e., how FHFA employs its powers or functions. See 12 U.S.C. § 4617(f). Therefore,

the Court will only consider FHFA’s actual conduct.

22
 b. FHFA Has Not Violated 12 U.S.C. § 4617(a)(7)

The individual plaintiffs briefly argue that FHFA violated HERA’s prescription “not [to]

be subject to the direction or supervision of any other agency of the United States . . . in the

exercise of the rights, powers, and privileges of the Agency.” 12 U.S.C. § 4617(a)(7); see

Individual Pls.’s Opp’n at 51; Fairholme and Arrowood Plaintiffs’ Supplemental Opp’n at 7-10

(D.D.C. Mar. 21, 2014) (“Sup. Opp’n”); Individual Pls.’s Reply at 13, 40. However, “records”

showing that Treasury “invented the net-worth sweep concept with no input from FHFA” do not

come close to a reasonable inference that “FHFA considered itself bound to do whatever

Treasury ordered.” See Individual Pls.’s Opp’n at 51. The plaintiffs cannot transform

subjective, conclusory allegations into objective facts. See Sup. Opp’n at 9-10 (claiming that

“[o]nly a conservator that has given up the will to exercise its independent judgment could agree

to forfeit so much”). Notwithstanding the plaintiffs’ perspective that the Third Amendment was

a “one-sided deal” favoring Treasury, the amendment was executed by two sophisticated parties,

and there is nothing in the pleadings or the administrative record provided by Treasury that hints

at coercion actionable under § 4617(a)(7). See Individual Pls.’s Opp’n at 51 (citing Treasury AR

at 3775-802, 3833-62, 3883-94, 3895-903). Undoubtedly, many negotiations arise from one

party conjuring up an idea, and then bringing their proposal to the other party. This claim does

not pass muster under either Rule 12(b)(1) or Rule 12(b)(6).

c. FHFA Has Not Placed the GSEs in De Facto Liquidation

The individual plaintiffs further contend that the Third Amendment amounts to a de facto

liquidation, which exceeds FHFA’s statutory authority as a conservator. By entering into an

agreement that sweeps away nearly all GSE profits, they argue, FHFA has forsaken its statutory

responsibility to “rehabilitate” the GSEs and, instead, has effectively placed the GSEs in

23
receivership. Individual Pls.’s Opp’n at 55-58; see 12 U.S.C. § 4617(a)(2). But FHFA counters

that full-scale rehabilitation is not the only possible statutory duty of a conservator—that the

statute also permits a conservator to “reorganize” or “wind up” the affairs of a GSE. FHFA Mot.

at 30 (citing 12 U.S.C. § 4617(a)(2)). The Court has no occasion to decide whether the

conservator is empowered to wind down the GSEs. It is unnecessary to engage in a lengthy

debate over statutory interpretation because the facts, as stated in the plaintiffs’ pleadings, belie

the individual plaintiffs’ claims of de facto liquidation under receivership authority.

Here, the Court need not look further than the current state of the GSEs to find that FHFA

has acted within its broad statutory authority as a conservator. Four years ago, on the brink of

collapse, the GSEs went into conservatorship under the authority of FHFA. E.g., Fairholme

Compl. at ¶ 3. Today, both GSEs continue to operate, and have now regained profitability. E.g.,

Fairholme Compl at ¶¶ 8, 60, 63 (“Fannie and Freddie are now immensely profitable.”); cf. id. at

¶ 14 (noting that prior to the Third Amendment, “[t]he conservatorship of Fannie and Freddie

achieved the purpose of restoring the Companies to financial health”). Unquestionably, the

plaintiffs take great issue with FHFA’s conduct between and since these two bookend facts.

However, when the Court is asked to determine whether FHFA acted beyond, or contrary to, its

responsibilities as conservator under a statute that grants the agency expansive discretion to act

as it sees fit, it is the current state of affairs that must weigh heaviest on this analysis. If the

Third Amendment were really part of a scheme to liquidate the GSEs, then the GSEs would,

presumably, be in liquidation rather than still be “immensely profitable.” See Fairholme Compl.

at ¶ 60. There is no dispute that the Third Amendment substantially changed the flow of profits,

24
directing billions of dollars into Treasury’s coffers. 19 But that alteration, alone, is in no way

sufficient to reclassify a conservatorship into a receivership. 20

The individual plaintiffs cite no precedent stating that a net worth sweep, or some

equivalent, is functionally akin to liquidation. The case law cited in their opposition actually

supports the position that FHFA is acting as a conservator. Individual Pls.’s Opp’n at 52-54

(collecting cases). In sum, these cases stand for the proposition that a conservator should “carry

on the business of the institution,” MBIA Ins. Corp. v. FDIC, 708 F.3d 234, 236 (D.C. Cir. 2013),

and “take actions necessary to restore a financially troubled institution to solvency,” McAllister

v. RTC, 201 F.3d 570, 579 (5th Cir. 2000). Here, the GSEs maintain an operational mortgage

finance business and are, once again, profitable—two facts indicative of a successful

19
It is worth noting that Treasury’s insistence on receiving cash dividends, as required under the PSPAs, rather than
accepting a 12% dividend deferred to the liquidation preference, suggests that Treasury believed there was no
intention to imminently liquidate the GSEs. See Treasury Reply at 49-50; see also supra n.7. A belief that there
was no planned liquidation—and thus no forthcoming receipt of liquidation payments—would mean that adding
owed dividends to Treasury’s ever-growing liquidation preference would produce increased risk for the taxpayer.
20
The individual plaintiffs specifically argue that the net worth sweep exceeds FHFA’s authority as a conservator
because it (1) depletes available capital; (2) “eliminates the possibility of normal business operations”; and (3)
carries an ultimate intent to wind down the GSEs. Individual Pls.’s Opp’n at 56-58. First, the original dividend
distribution scheme under the PSPAs also depleted the GSEs’ capital. Dividends distributed to security holders, by
nature, constitute a depletion of available capital. Second, there is no HERA provision that requires a conservator to
abide by every public statement it has made. To the contrary, HERA permits a conservator wide latitude to flexibly
operate the GSEs over time. See 12 U.S.C. § 4617(b)(2) Third, even if FHFA has explicitly stated an intent to
eventually wind down the GSEs, such an intent is not automatically inconsistent with acting as a conservator. There
surely can be a fluid progression from conservatorship to receivership without violating HERA, and that progression
could very well involve a conservator that acknowledges an ultimate goal of liquidation. FHFA can lawfully take
steps to maintain operational soundness and solvency, conserving the assets of the GSEs, until it decides that the
time is right for liquidation. See 12 U.S.C. § 4617(b)(2)(D) (“[p]owers as conservator”).
Moreover, since the Third Amendment remains consistent with FHFA’s wide-ranging authority as a conservator,
there is no need for the Court to further resolve whether the amendment falls within FHFA’s authority to “transfer or
sell any asset” under § 4617(b)(2)(G). Compare FHFA Mot. at 27-29 and FHFA Reply at 5-7, with Individual Pls.’s
Opp’n at 63-66 and Individual Pls.’s Reply at 31-33. The plaintiffs essentially argue that the Third Amendment
runs counter to FHFA’s power to transfer assets because FHFA is not seeking to “rehabilitate” the GSEs when
making this transfer. Individual Pls.’s Opp’n at 64-66. Yet, as explained, the Court finds the plaintiffs’ premise—
that FHFA’s conduct is inconsistent with a conservatorship—to be lacking. Therefore, whether or not FHFA
classifies the Third Amendment as a transfer of assets is of no moment. The breadth of Congress’ grant of authority
to FHFA under HERA means that the Court’s analysis must center much more on the ends than the means.

25
conservatorship. 21 Thus, the plaintiffs plead no facts demonstrating that FHFA has exceeded its

statutory authority as a conservator.

Given that § 4617(f) bars subject matter jurisdiction 22 over all declaratory, injunctive, and

other equitable relief requested against the defendants that would restrain the conservator’s

ability to “exercise [its statutory] powers or functions,” all claims related to these prayers for

relief must be dismissed pursuant to Rule 12(b)(1). Included are the individual plaintiffs’ APA

claims against both FHFA and Treasury, 23 the Fairholme plaintiffs’ claim of breach of fiduciary

duty against FHFA, and any part of the plaintiffs’ claims of breach of the implied covenant of

good faith and fair dealing which request declaratory relief.

B. HERA Bars the Plaintiffs’ Derivative Claims against FHFA and Treasury

The class plaintiffs bring derivative claims against both FHFA and Treasury on behalf of

Fannie Mae and Freddie Mac. In re Fannie Mae/Freddie Mac Am. Compl. at ¶¶ 72-79 (Fannie

Mae); In re Fannie Mae/Freddie Mac Derivative Compl. at ¶¶ 175-82 (Freddie Mac). 24 Under

21
Indeed, the GSE’s current profitability is the fundamental justification for the plaintiffs’ prayers for equitable and
monetary relief. In other words, this litigation only exists because the GSEs have, under FHFA’s authority,
progressed from insolvency to profitability.
22
The Court acknowledges that there appears to be some confusion over whether Rule 12(b)(1) or Rule 12(b)(6)
applies to § 4617(f). This Circuit has framed FIRREA’s substantially identical anti-injunction provision, 12 U.S.C.
§ 1821(j), as a bar on relief. See Freeman, 56 F.3d at 1396, 1398, 1406; see also MBIA Ins. Corp., 816 F. Supp. 2d
at 104, 106 (explicitly dismissing claims on § 1821(j) grounds pursuant to Rule 12(b)(6)). However, recent rulings
by courts in the Second, Ninth, and Eleventh Circuits framing § 4617(f) as a jurisdictional bar, see Town of Babylon,
699 F.3d at 227-28; Cnty. of Sonoma, 710 F.3d at 990, 994-95; Leon Cnty., 700 F.3d at 1275 n.1, 1276, coupled with
the parties in this case doing the same, see, e.g., Individual Pls.’s Opp’n at 31-32 (“HERA’s jurisdictional bar”);
FHFA Mot. at 28 (“[t]he jurisdictional bar of Section 4617(f)”), leads the Court to believe that the breadth of
§ 4617(f) better represents a jurisdictional bar, with related claims subject to dismissal under Rule 12(b)(1), than a
bar on relief. But regardless of the proper basis for dismissal, the Court would dismiss the plaintiffs’ claims for
equitable relief under 12(b)(1) or 12(b)(6).
23
Accordingly, the Perry Complaint is dismissed in its entirety.
24
The Court need not determine whether the individual plaintiffs’ APA claims should be considered derivative,
since all such claims are dismissed pursuant to § 4617(f). Compare Treasury Mot. at 30-33, with Individual Pls.’s
Reply at 9-11.
Similarly, the Fairholme plaintiffs’ fiduciary duty claim against FHFA, which seeks only equitable relief, is also
dismissed pursuant to § 4617(f). See Sup. Opp’n at 13 (“The Fairholme Plaintiffs, moreover, have expressly limited
their fiduciary duty claim to seek only ‘equitable and declaratory relief’ aimed at unwinding the Sweep Amendment

26
HERA, FHFA “shall, as conservator or receiver, and by operation of law, immediately succeed

to (i) all rights, titles, powers, and privileges of the [GSE], and of any stockholder . . . .” 12

U.S.C. § 4617(b)(2)(A)(i). 25 The Circuit has held that “[t]his language plainly transfers

shareholders’ ability to bring derivative suits—a ‘right[ ], title[ ], power[ ], [or] privilege[ ]’—to

FHFA.” Kellmer v. Raines, 674 F.3d 848, 850 (D.C. Cir. 2012).

1. An Exception to HERA’s Bar on Shareholder Derivative Claims Would
Contravene the Plain Language of the Statute

The plaintiffs argue that, despite the general bar against derivative suits, they have

standing to sue derivatively because FHFA, due to a conflict of interest, would be unwilling to

sue itself or Treasury. 26 Class Pls.’s Opp’n at 32-35; Sup. Opp’n at 14-16. In passing, Kellmer

notes the existence, among other circuits, of an exception to the equivalent bar on shareholder

and eliminating its harmful effect on Plaintiffs’ interests in Fannie and Freddie.”) (internal quotations and citation to
Complaint omitted). As such, there is no requirement for the Court to decide whether such claims are derivative or
direct. However, if such a determination were necessary, the Court notes that it would find that the Fairholme
plaintiffs’ fiduciary duty claim is derivative in nature and, therefore, barred under § 4617(b)(2)(A)(i) as well.
Without resolving whether Delaware and/or Virginia law applies to the Fairholme plaintiffs’ fiduciary duty claim,
the Court—like both parties—will briefly utilize the analysis established by the Supreme Court of Delaware in
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). To determine whether a shareholder’s
claim is derivative or direct, the Court asks: “(1) who suffered the alleged harm (the corporation or the suing
stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation
or the stockholders, individually)?” Id. at 1033. Regardless of whether the Fairholme plaintiffs plead injuries to
both the GSEs and the individual plaintiff shareholders, see FHFA Reply at 23; but see Sup. Opp’n at 12-13, the
claim qualifies as derivative, not direct, under Tooley’s second prong. Here, recovery or relief will not flow
“directly to the stockholders.” Tooley, 845 A.2d at 1036. Instead, the equitable relief Fairholme seeks—“namely,
vacating the Third Amendment and returning its resulting dividends from Treasury to the Enterprises (Fairholme
Compl. ¶ 146(d)-(e))—would flow first and foremost to the [GSEs].” FHFA Reply at 24. That relief will not flow
directly to the Fairholme plaintiffs is especially true since, after signing the PSPAs, Treasury effectively maintained
discretion over GSE dividend payments, see, e.g., Treasury AR at 24 (Fannie Mae PSPA § 5.1), and the GSEs, still
in conservatorship, are not liquidating assets pursuant to any liquidation preferences.
Finally, Treasury’s argument that the plaintiffs lack prudential standing, Treasury Mot. at 34-36, does not require
consideration here. Cf. Louisiana Envtl. Action Network v. Browner, 87 F.3d 1379, 1384 (D.C. Cir. 1996) (“[The
Court has] no difficulty dismissing a case based on one jurisdictional bar rather than another. . . . Because issues of
standing, ripeness, and other such ‘elements’ of justiciability are each predicate to any review on the merits, a court
need not identify all such elements that a complainant may have failed to show in a particular case.”).
25
The statute also provides that FHFA may, as conservator, “. . . operate the [GSE] with all the powers of the
shareholders.” 12 U.S.C. § 4617(b)(2)(B)(i).
26
“The party invoking federal jurisdiction bears the burden of establishing [standing].” Lujan v. Defenders of
Wildlife, 504 U.S. 555, 561 (1992).

27
derivative actions brought against the FDIC under the substantially similar FIRREA provision,

12 U.S.C. § 1821(d)(2)(A), for instances of “manifest conflict of interest.” Kellmer, 674 F.3d at

850. The defendants are right, however, that this Circuit has not adopted such an exception.

E.g., Treasury Mot. at 31. While Kellmer concerned a suit against officers and directors rather

than one against FHFA and Treasury, see Class Pls.’s Opp’n at 31, the Circuit’s holding puts no

limitations on HERA’s rule against shareholder derivative suits. Based on the Circuit’s

discussion of the text of 12 U.S.C. § 4617(b)(2)(A)(i), it stands to reason that if the Kellmer

Court had occasion to consider the purported conflict of interest exception, it would not have

found that such an exception exists.

The idea of an exception to HERA’s rule against derivative suits comes from two cases,

both considering FIRREA § 1821(d)(2)(A). First, the Federal Circuit held that, notwithstanding

the “general proposition” that the FDIC assumed “the right to control the prosecution of legal

claims on behalf of the insured depository institution now in its receivership,” a plaintiff has

standing to bring a derivative suit when the FDIC has a “manifest conflict of interest”—i.e.,

when the plaintiffs ask the receiver to bring a suit based on a breach allegedly caused by the

receiver. First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279, 1295-96

(Fed. Cir. 1999). Then, the Ninth Circuit “adopt[ed] the First Hartford exception” in Delta

Savings Bank v. United States, 265 F.3d 1017 (9th Cir. 2001), for instances of conflict of interest

between sufficiently “interdependent entities.” Id. at 1021-23. 27

It strikes this Court as odd that a statute like HERA, through which Congress grants

immense discretionary power to the conservator, § 4617(b)(2)(A), and prohibits courts from

interfering with the exercise of such power, § 4617(f), would still house an implicit end-run

27
The Court can reasonably presume the Ninth Circuit’s exception would also apply to instances where a plaintiff
demands that the FDIC sue itself.

28
around FHFA’s conservatorship authority by means of the shareholder derivative suits that the

statute explicitly bars. “To resolve this [oddity, however,] we need only heed Professor

Frankfurter's timeless advice: ‘(1) Read the statute; (2) read the statute; (3) read the statute!’”

Kellmer, 674 F.3d at 850 (second internal quotation marks omitted) (citing Henry J. Friendly,

Mr. Justice Frankfurter and the Reading of Statutes, in Benchmarks 196, 202 (1967)). The

Circuit tells the Court that HERA, by its unambiguous text, removes the power to bring

derivative suits from shareholders and gives it to FHFA. Id. (citing § 4617(b)(2)(A)). 28 As the

basis for its exception to the rule against shareholder derivative suits, the Federal Circuit

explained that “the very object of the derivative suit mechanism is to permit shareholders to file

suit on behalf of a corporation when the managers or directors of the corporation, perhaps due to

a conflict of interest, are unable or unwilling to do so, despite it being in the best interests of the

corporation.” First Hartford, 194 F.3d at 1295; see also Class Pls.’s Opp’n at 32 (quoting the

same). Yet the existence of a rule against shareholder derivative suits, § 4617(b)(2)(A)(i),

indicates that courts cannot use the rationale for why derivative suits are available to

shareholders as a legal tool—including the conflict of interest rationale—to carve out an

exception to that prohibition. Derivative suits largely exist so that shareholders can protect a

corporation from those who run it—and HERA takes the right to such suits away from

shareholders. 29 How, then, can a court base the exception to a rule barring shareholder

28
See also La. Mun. Police Emps. Ret. Sys. v. FHFA, 434 F. App’x 188, 191 (4th Cir. 2011) (affirming and quoting
In re Freddie Mac Derivative Litig., 643 F. Supp. 2d 790, 795 (E.D. Va. 2009) (“[T]he plain meaning of the statute
is that all rights previously held by Freddie Mac’s stockholders, including the right to sue derivatively, now belong
exclusively to the [Agency].”)).
29
“Indeed, as the Supreme Court has explained, ‘the purpose of the derivative action was to place in the hands of the
individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of
faithless directors and managers.’” First Hartford, 194 F.3d at 1295 (quoting Kamen v. Kemper Fin. Servs., Inc.,
500 U.S. 90, 95 (1991)).

29
derivative suits on the purpose of the “derivative suit mechanism” that rule seeks to bar? See

First Hartford, 194 F.3d at 1295. Such an exception would swallow the rule. 30

By looking outside HERA’s statutory language to find an exception to the rule against

derivative suits that is based on the reason the judicial system permits derivative suits in the first

place, a court would effectively be asserting its disagreement with the breadth of HERA’s text.

HERA provides no qualification for its bar on shareholder derivative suits, and neither will this

Court. § 4617(b)(2)(A) (the conservator “shall . . . immediately succeed to . . . all rights, titles,

powers, and privileges . . . of any stockholder) (emphasis added). 31 It is a slippery slope for the

Court to poke holes in, or limit, the plain language of a statute, especially when, as here, the

plaintiffs have not asked the Court to weigh in on the statute’s constitutionality. Therefore, the

Court finds that HERA’s plain language bars shareholder derivative suits, without exception.

2. Even If the Exception Applies, There Is No Conflict of Interest between
FHFA and Treasury

Even assuming arguendo that the First Hartford and Delta Savings exceptions to

HERA’s prohibition on shareholder derivative suits applied to HERA § 4617(b)(2)(A)(i), there is

no conflict of interest between FHFA and Treasury, and the class plaintiffs’ fiduciary duty

claims against Treasury would be dismissed. The First Hartford decision would not apply to the

30
The Court further notes that the First Hartford and Delta Savings decisions both involved the FDIC in
receivership. Applying an exception to the statutory rule against derivative suits makes still less sense in the
conservatorship context, where FHFA enjoys even greater power free from judicial intervention. Consistent with
congressional intent to decrease restrictions governing the emergency scenario during which FHFA would need to
conserve the viability of the GSEs, under HERA, court involvement on issues brought by outside stakeholders, and
not by the GSEs themselves, cf. § 4617(a)(5), is most available throughout the receivership claims process. E.g.,
§ 4617(b)(5), (6).
31
The Court respectfully disagrees with the Ninth Circuit’s argument that “strict adherence to an absolute rule
would be at least impracticable, and arguably absurd.” Delta Sav. Bank v. United States, 265 F.3d 1017, 1023-24
(9th Cir. 2001). This Court believes that an unequivocal, “absolute rule” against shareholder derivative suits enacted
by Congress during a time of economic crises requires “strict adherence.” HERA’s anti-injunction provision,
§ 4617(f), is illustrative of Congress’ intention to transfer “all” shareholder rights to the conservator so that it could
work, unimpeded, to save the GSEs from impending collapse, without a concern for preserving any such shareholder
rights to derivative suits.

30
Treasury fiduciary duty claims because the plaintiffs are not demanding that FHFA sue itself or

sue another government entity on account of FHFA’s own breach, 194 F.3d at 1295—the

plaintiffs’ claims against Treasury are due to Treasury’s alleged breach. E.g., In re Fannie

Mae/Freddie Mac Am. Compl. at ¶¶ 177-79. In Delta Savings, the Ninth Circuit’s finding of a

“manifest conflict of interest” was not just based on the presence of two government entities, but

rather two sufficiently interrelated government agencies. 265 F.3d at 1023 (“We do not suggest

that the FDIC-as-receiver is faced with a disqualifying conflict every time a bank-in-receivership

is asked to sue another federal agency; it is the nature of the [Office of Thrift Supervision

(‘OTS’)]–FDIC relationship that raises the conflict here.”). As the Delta Savings Court

explained, the FDIC and the OTS were “interrelated agencies with overlapping personnel,

structures, and responsibilities.” Id. at 1021-22. The relationship between FHFA and Treasury

fails the Ninth Circuit’s interrelatedness test. The class plaintiffs point to no “operational or

managerial overlap,” and the agencies do not “share a common genesis.” Id. at 1022-23.

Unlike OTS, which supervised thrift institutions and retained the ability to “choose the FDIC to

be the conservator,” id. at 1023, Treasury plays no role in choosing FHFA to act as a conservator

for the GSEs. While Treasury and FHFA, inter alia, have jointly proposed regulations, e.g.,

Credit Risk Retention, 78 Fed. Reg. 183 (proposed Sept. 20, 2013), the fact that both entities

exist within the financial regulation space cannot, on its own, satisfy Delta Savings’ narrowly

applied interrelatedness test. See 265 F.3d at 1022-1023.

Furthermore, the Court understands that Treasury represented the only feasible entity—

public or private—capable of injecting sufficient liquidity into and serving as a backstop for the

GSEs within the short timeframe necessary to preserve their existence in September 2008. There

was no other investment partner at FHFA’s disposal. See FHFA Mot. at 7-8. In fact, Congress

31
expressly foresaw the need for a Treasury-FHFA relationship, specifically authorizing Treasury

to invest in the GSEs. 12 U.S.C. § 1719(g); see also 12 U.S.C. § 4617(b)(5)(D)(iii)(I) (Congress

highlighted Treasury’s potential role as creditor to the GSEs by explicitly creating an exception

to FHFA’s authority, as receiver, to disallow creditor claims made by Treasury). 32 A

relationship-based conflict of interest analysis, see Delta Sav. Bank, 265 F.3d at 1023, does not

require the Court to ignore the harsh economic realities facing the GSEs—and the national

financial system if the GSEs collapsed—when FHFA and Treasury executed the PSPAs in 2008.

Courts, generally, should be wary of labeling a transaction with an investor of last resort as a

conflict of interest. 33

Thus, the class plaintiffs’ derivative claims, on behalf of the GSEs, for breach of

fiduciary duty by FHFA and Treasury, are dismissed pursuant to Rule 12(b)(1) for lack of

standing. 34

C. The Plaintiffs’ Breach of Contract and Breach of the Implied Covenant of
Good Faith and Fair Dealing Claims for Monetary Damages Must Also Be
Dismissed

The plaintiffs further request monetary damages for claims of breach of contract and

breach of the implied covenant of good faith and fair dealing, specifically regarding the

dividends and liquidation preference provisions within their respective GSE stock certificates.

See In re Fannie Mae/Freddie Mac Am. Compl. at 64 (¶ 7); Arrowood Compl. at 52 (¶ E); 35

32
Notably, Congress omitted Treasury from its list of potential credit providers exempt from FDIC’s authority to
disallow claims under FIRREA. See 12 U.S.C. § 1821(d)(5)(D)(iii)(I).
33
A recent ruling by Judge Jackson provides additional persuasive reasoning that, even if the conflict of interest
exception existed in this Circuit, the FHFA-Treasury relationship does not constitute such a conflict. Gail C.
Sweeney Estate Marital Trust v. U.S. Treasury Dep’t, No. 13-0206, 2014 WL 4661983 (D.D.C. Sept. 19, 2014).
34
“[T]he defect of standing is a defect in subject matter jurisdiction.” Haase v. Sessions, 835 F.2d 902, 906 (D.C.
Cir. 1987).
35
It is unclear to the Court whether the Arrowood plaintiffs incorporate their claim of breach of the implied
covenant into their request for monetary relief, Arrowood Compl. at 52 (¶ E). Yet, regardless of the Arrowood
plaintiff’s intention, the claim is dismissed. If the claim of breach of the implied covenant is included within ¶ E,

32
Fairholme Compl. at ¶ 146(h). As the class plaintiffs correctly assert, HERA’s anti-injunction

provision, § 4617(f), does not bar requests for monetary relief. See Class Pls.’s Opp’n at 21-22

(citing, among other cases, Hindes v. FDIC., 137 F.3d 148, 161 (3d Cir. 1998); Willow Grove,

Ltd. v. Fed. Nat’l Mortg. Ass’n, No. 13-0723, 2013 WL 6865127, at *2 (D. Colo. Dec. 31,

2013)); see also Freeman, 56 F.3d at 1399 (concluding that FIRREA § 1821(j) precluded

nonmonetary remedies, but noting that “aggrieved parties will [still] have opportunities to seek

money damages”). Nevertheless, the plaintiffs’ contract-based claims seeking monetary

damages must also be dismissed under the threshold analyses required by Rule 12(b)(1) and Rule

12(b)(6).

1. The Plaintiffs’ Liquidation Preference Claims Are Not Ripe

FHFA’s entrance into the Third Amendment, allegedly in contravention of the GSEs’

existing contract—i.e., stock certificates—with the plaintiffs, constitutes a decision by an

administrative agency. See 12 U.S.C. § 4511(a) (“There is established the Federal Housing

Finance Agency, which shall be an independent agency of the Federal Government.”). While the

class and Arrowood plaintiffs also include the GSEs as targets of their claims of breach of

contract and breach of the implied covenant, the action in question was undeniably one taken by

FHFA. As such, the ripeness doctrine, which is most often applied to pre-enforcement review of

agency determinations, may also govern the Court’s assessment of subject matter jurisdiction

here. 36 “Ripeness entails a functional, not a formal, inquiry.” Pfizer Inc. v. Shalala, 182 F.3d

975, 980 (D.C. Cir. 1999). “Determining whether administrative action is ripe for judicial

then the claim is dismissed pursuant to Rule 12(b)(1) and Rule 12(b)(6). See infra. If the Arrowood plaintiffs only
intended to seek declaratory relief for the alleged breach of the implied covenant, then Count VI of the Arrowood
Complaint is dismissed, under HERA § 4617(f), pursuant to Rule 12(b)(1). See supra Section III(A).
36
“The question of ripeness goes to [the Court’s] subject matter jurisdiction . . . .” Duke City Lumber Co. v. Butz,
539 F.2d 220, 221 n.2 (D.C. Cir. 1976).

33
review requires us to evaluate (1) the fitness of the issues for judicial decision and (2) the

hardship to the parties of withholding court consideration.” Nat'l Park Hospitality Ass'n v. Dep't

of Interior, 538 U.S. 803, 808 (2003) (citing Abbott Labs. v. Gardner, 387 U.S. 136, 149 (1967)).

“A claim is not ripe for adjudication if it rests upon ‘contingent future events that may not occur

as anticipated, or indeed may not occur at all.’” Texas v. United States, 523 U.S. 296, 300

(1998) (quoting Thomas v. Union Carbide Agric. Products Co., 473 U.S. 568, 580-81).

An analysis of the plaintiffs’ contentions regarding the liquidation preference written into

their preferred stock certificates is uncomplicated. The certificates grant the plaintiffs “a priority

right to receive distributions from the Companies’ assets in the event they are dissolved.”

Individual Pls.’s Opp’n at 5. 37 Therefore, by definition, the GSEs owe a liquidation preference

payment to a preferred shareholder only during liquidation. It follows that there can be no loss

of a liquidation preference prior to the time that such a preference can, contractually, be paid.

Here, the GSEs remain in conservatorship, not receivership, and there is no evidence of de facto

liquidation. 38 See supra Section III(A)(4)(c).

The question for the Court cannot be whether the Third Amendment diminishes an

opportunity for liquidation preferences at some point in the future, but rather whether the

plaintiffs have suffered an injury to their right to a liquidation preference in fact and at present.

Yet the individual plaintiffs assert that the Third Amendment “has clearly injured Plaintiffs in a

direct and personal way” because “[t]heir right to an opportunity to benefit from the liquidation

37
The common stockholders among the class plaintiffs similarly claim deprivation “of any possibility of receiving
dividends or a liquidation preference.” E.g., In re Fannie Mae/Freddie Mac Am. Compl. at ¶ 155.
38
The Arrowood and Fairholme plaintiffs’ citation to Quadrangle Offshore (Cayman), LLC v. Kenetech Corp., No.
16362, 1998 WL 778359 (Del. Ch. Oct. 21, 1998) is, thus, inapposite, since that case concerns what the plaintiffs
would aptly classify as de facto liquidation. See Sup. Opp’n at 41-42, 45 (“In Quadrangle, the defendant company
had pursued no business and sold most of its assets to pay creditors, but because the company did not formally
declare that it was in liquidation, it did not pay the preferred shareholders their contractually-specified liquidation
preference.”).

34
preferences in their preferred stock—once valuable—is now worthless . . . .” Individual Pls.’s

Opp’n at 36. But, just as there was a Third Amendment, the Court cannot definitively say there

will be no Fourth or Fifth Amendment that will transform the current “opportunity to benefit

from the liquidation preferences in [the plaintiffs’] preferred stock.” A ripeness requirement

prevents the Court from deciding a case “contingent [on] future events that may not occur as

anticipated, or indeed may not occur at all.” Texas v. United States, 523 U.S. at 300. Indeed, the

purpose of the ripeness doctrine is to ensure the Court hears only an “actual case or controversy.”

Cf. Pfizer, 182 F.3d at 980. Thus, the plaintiffs’ liquidation preference claims are not fit for a

judicial decision until liquidation occurs. 39

Given that the plaintiffs maintain no current right to a liquidation preference while the

GSEs are in conservatorship, the plaintiffs are no worse off today than they were before the

Third Amendment. Therefore, there is no hardship imposed on the plaintiffs by withholding

court consideration until this contingent right matures at the moment of liquidation. Once again,

any present injury is, at most, a decrease in share value, which can only be claimed as part of a

derivative action that would be barred by HERA. See supra n.39. “Moreover, no irremediable

adverse consequences flow from requiring a later challenge to” the Third Amendment with

regard to liquidation preferences since, as the defendants acknowledge, FHFA Mot. at 34-35, the

right to a liquidation preference can be adjudicated during the statutorily prescribed receivership

claims process. Toilet Goods Ass'n, Inc. v. Gardner, 387 U.S. 158, 164 (1967); see also 12

39
Even if the plaintiffs could presently claim damages as a result of a prospective contractual breach regarding the
plaintiff shareholders’ liquidation preference, this claim would, at best, be one of damage to the price of their GSE
shares, as valued by the market “based in part on the existence of their attendant . . . liquidation rights.” Class Pls.’s
Opp’n at 37-38. Such claims are considered derivative under Delaware law, and would be barred under HERA
§ 4617(b)(2)(A)(i), supra Section III(B). E.g., Labovitz v. Wash. Times Corp., 172 F.3d 897, 904-05 (D.C. Cir.
1999) (“the loss [plaintiffs] suffered in share value is a derivative harm”) (citing Kramer v. W. Pac. Indus., Inc., 546
A.2d 348, 353 (Del. 1988), for the proposition that “Delaware courts have long recognized that actions charging
mismanagement which depress[ ] the value of stock [allege] a wrong to the corporation; i.e., the stockholders
collectively, to be enforced by a derivative action”) (internal quotation marks and citation omitted).

35
U.S.C. § 4617(b)(2)(K)(i), (b)(3)-(10). Until then, the plaintiffs have no direct claims to

liquidation preference-related damages that are ripe for judicial review, and their existing claims

must be dismissed under Rule 12(b)(1). 40

In addition, for largely the same reasons that lead the Court to conclude that the

plaintiffs’ liquidation preference claims lack ripeness, the plaintiffs’ breach of contract and

breach of implied covenant claims regarding liquidation preferences fail to state a claim upon

which relief can be granted. Fed. R. Civ. P. 12(b)(6). The right to this elevated preference for

asset distribution, given to preferred shareholders under GSE stock certificates, is only triggered

during liquidation. Consequently, the plaintiffs’ direct breach of contract claims for injuries

related to their liquidation preference rights can provide them no “plausible” relief against

FHFA—or against the GSEs, for that matter—until the agency places the GSEs into receivership

and commences the dissolution process. See Twombly, 550 U.S. at 570; see also supra n.39 (the

plaintiffs’ attempt to amorphously straddle the line between direct injury to their contingent right

to a liquidation preference and derivative injury to the present “value” of their GSE holdings

further demonstrates the uncertainty of their claims). The Court’s reasoning requiring dismissal

40
FHFA and Treasury further argue that, under 12 U.S.C. § 4617(e)(2), which limits the maximum liability of
FHFA during receivership, the plaintiffs liquidation preference claims are limited “to the amount that shareholders
would have received had the GSEs’ assets and liabilities been liquidated at the time the conservator was appointed
in September 2008.” Treasury Mot. at 28, 34. The Court is unable to identify any case law discussing this HERA
provision, though a number of courts, including a handful within this Circuit, have examined FIRREA’s similar
provision capping liability, 12 U.S.C. § 1821(i)(2). E.g., Bank of Am., N.A. v. F.D.I.C., 962 F. Supp. 2d 165, 173
(D.D.C. 2013) (“12 U.S.C. § 1821(i)(2) unequivocally limits the maximum liability of the FDIC to the amount a
claimant would have received in liquidation under the distribution scheme set forth in FIRREA.”). The Tenth
Circuit has noted that § 1821(i)(2) limits creditor claims against the agency to the “pro rata share of the assets which
would have been available on the day the institution was placed in receivership.” Castleglen, Inc. v. RTC, 984 F.2d
1571, 1583 (10th Cir. 1993) (emphasis added). Identifying the point at which to measure FHFA’s maximum
liability as “the day the institution was placed in receivership”—as opposed to the day the GSEs were placed in
conservatorship, like the defendants suggest here—is consistent with the fact that this maximum liability is set only
in reference to “a claim against the receiver or the regulated entity for which such receiver is appointed.” 12 U.S.C.
§ 1821(i)(2) (emphasis added). As such, § 4617(e)(2) “has no relevance outside of receivership,” and provides the
court with no guidance regarding potential damages—or lack thereof—from claims made against FHFA as a
conservator or against the GSEs while in conservatorship. See Individual Pls.’s Opp’n at 23; see also Class Pls.’s
Opp’n at 39.

36
of such breach of contract claims also requires dismissal of the plaintiffs’ claims of breach of the

implied covenant of good faith and fair dealing, insofar as such claims request monetary relief.

“Although an implied covenant of good faith and honest conduct exists in every contract, . . .

such subjective standards cannot override the literal terms of an agreement.” Gilbert v. El Paso

Co., 575 A.2d 1131, 1143 (Del. 1990). As mentioned, the stock certificates, on their face, only

require liquidation preference payments when the GSEs enter liquidation. Since no liquidation

has occurred, the plaintiffs’ implied covenant claims relating to liquidation preference rights

cannot stand at this time.

2. The Plaintiffs’ Dividend Claims Fail to State a Claim upon Which Relief
Can Be Granted

The stock certificates upon which the plaintiffs base their claims of breach of contract

and breach of the implied covenant state that “holders of outstanding shares of . . . Preferred

Stock . . . shall be entitled to receive, ratably, when, as and if declared by the Board of Directors,

in its sole discretion, out of funds legally available therefor, non-cumulative cash

dividends . . . .” E.g., Individual Pls.’s Opp’n Ex. A at A-1 (Fannie Mae Preferred Stock Series

S); Ex. B at A-1 (Freddie Mac Preferred Stock) (emphasis added). The “right” to dividends to

which the plaintiffs refer throughout their briefs, then, is, in actuality, wholly dependent upon the

discretion of the GSEs’ board of directors. As the individual plaintiffs stress, “[a] contractual

‘right’ is an entitlement to certain performance from the counter-party, and it is ‘exercised’

through unilateral action that does not require negotiation or mutual assent.” Individual Pls.’s

Opp’n at 38. Here, the payment of a dividend expressly requires “mutual assent,” since, under

the contract, plaintiffs cannot receive such payment without board approval.

This Court—like many courts over the past two centuries—agrees with the defendants

that shareholders do not have a present or absolute right to dividends which are subject to the

37
discretion of the board. FHFA Mot. at 41-42. As Justice Holmes fittingly explained eighty-four

years ago, an investment in stock “presupposes that the business is to go on, and therefore even if

there are net earnings, the holder of stock, preferred as well as common, is entitled to have a

dividend declared only out of such part of them as can be applied to dividends consistently with

a wise administration of a going concern.” Wabash Ry. Co. v. Barclay, 280 U.S. 197, 203-04

(1930) (further noting that dividend payments are “in the first instance at least a matter for the

directors to determine”). 41

The history of case law finding no contractual right to discretionary dividends is only

bolstered by the specific facts of this case. Under HERA, FHFA succeeded to all rights and

powers of the board of directors. See 12 U.S.C. § 4617(b)(2)(A)(i) (“[FHFA] shall, as

conservator or receiver, and by operation of law, immediately succeed to—(i) all rights, titles,

powers, and privileges of the [GSEs], and of any . . . director of such regulated entity with

respect to the regulated entity and the assets of the [GSEs].”) FHFA’s power over the assets of

the GSEs surely includes the power to declare discretionary dividends from the surplus assets of

the GSEs. Consistent with FHFA’s assumption of the board’s power, FHFA’s director, James

Lockhart, stated that “the common stock and preferred stock dividends will be eliminated.” In re

Fannie Mae/Freddie Mac Am. Compl. at ¶ 53 (quoting Statement of FHFA Director James B.

Lockhart at News Conference Announcing Conservatorship of Fannie Mae and Freddie Mac

41
See also New York, L.E. & W.R. Co. v. Nickals, 119 U.S. 296, 305-07 (1886) (By qualifying dividend payments
with “as declared by the board” language, the preferred stock contract did “not intend[] to confer upon the former an
absolute right to a dividend in any particular year. . . . We are of opinion that . . . preferred stockholders . . . are not
entitled, of right, to dividends, payable out of the net profits accruing in any particular year, unless the directors of
the company formally declare, or ought to declare, a dividend payable out of such profits.”); In re Terex Corp., No.
91-3864, 1993 WL 7519, at *1 (6th Cir. Jan. 12, 1993) (“The decision to pay (or not to pay) a dividend was within
the sole discretion of Metropolitan’s board of directors; accordingly, Terex had no contractual right to receive a
dividend for any given year.”); Crawford Drug Stores v. United States, 220 F.2d 292, 296 (10th Cir. 1955) (“[I]n
ordinary circumstances the holder of preferred stock has no such absolute right to the payment of dividends.”);
Comm’r of Internal Revenue v. Meridient & Thirteenth Realty Co., 132 F.2d 182, 187 (7th Cir. 1942) (unlike a
creditor’s absolute right to interest, “[s]tockholders have no absolute right to dividends until they are declared”).

38
(Sept. 7, 2008), available at http://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-

FHFA-Director-James-B--Lockhart-at-News-Conference-Annnouncing-Conservatorship-of-

Fannie-Mae-and-Freddie-Mac.aspx). Once the agency executed the PSPAs, however, FHFA

effectively transferred discretionary power over dividend issuance to Treasury. See Treasury AR

at 24, 58 (Fannie Mae and Freddie Mac PSPAs § 5.1, requiring Treasury’s written consent for

declaration of any dividends, “preferred or otherwise”). Thus, not only do the plaintiffs lack a

right to dividend payments under their original stock certificates, but FHFA—the primary target

of the plaintiffs’ breach of contract and breach of the implied covenant claims concerning

dividends—no longer has exclusive discretion to issue such dividends.

Without a contractual right to dividends, the plaintiffs cannot state a claim for breach of

contract specifically based on their alleged dividend entitlements. See In re Fannie Mae/Freddie

Mac Am. Compl. at ¶¶ 155, 161, 167; Fairholme Compl. at ¶ 122. 42 And when the contract is

unambiguous regarding a lack of contractual right, there cannot be a coinciding claim of breach

of the implied covenant of good faith and fair dealing. Dave Greytak Enters, Inc. v. Mazda

Motors of Am., Inc., 622 A.2d 14, 23 (Del. Ch. 1992), aff'd sub nom. David Greytak Enters., Inc.

v. Mazda Motors of Am., Inc., No. 64, 1992 WL 135147 (Del. 1992) (“[W]here the subject at

issue is expressly covered by the contract, or where the contract is intentionally silent as to that

subject, the implied duty to perform in good faith does not come into play.”); see also Dunlap v.

State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005) (“Existing contract terms control,

however, such that implied good faith cannot be used to circumvent the parties’ bargain, or to

create a free-floating duty . . . unattached to the underlying legal document.”) (internal quotation

42
While the Arrowood Complaint does not specify dividends and liquidation preferences as the “rights” affected by
the Third Amendment, see Arrowood Compl. ¶¶ 135-38, other sections of the Complaint clarify that dividends and
liquidation preferences are the rights for which the Arrowood plaintiffs seek monetary damages. See, e.g., id. at ¶ 7.

39
marks and citation omitted); QVT Fund LP v. Eurohypo Capital Funding LLC I, No. 5881, 2011

WL 2672092, at *14 (Del. Ch. July 8, 2011) (“If the contract clearly delineates the parties’

rights, there is no room for the implied covenant because it cannot override the express terms of

a contract.”) (internal quotation marks and citation omitted). 43 As such, the plaintiffs’ claims for

breach of contract 44 and breach of the implied covenant regarding the dividend provisions of the

plaintiffs’ stock certificates must be dismissed pursuant to Rule 12(b)(6).

Even if the implied covenant was applicable to this case—and it is not—the plaintiffs

would have failed to plead such a cause of action. The Court has ruled that the plaintiffs fail to

demonstrate through their pleadings that FHFA violated its statutory authority under HERA by

entering into the Third Amendment with Treasury. See supra Section III(A)(4). Yet the

plaintiffs attempt to brand agency actions that fall within FHFA’s statutorily established powers

to succeed to all the rights of shareholders and stabilize the GSEs as performed in “bad faith.”

E.g., In re Fannie Mae/Freddie Mac Am. Compl. at ¶¶ 90-91, 161. But the plaintiffs cannot

overcome FHFA’s sweeping congressional mandate with conclusory statements regarding the

Third Amendment’s effect on the plaintiffs’ prospective—and not present—rights to dividends

and liquidation preferences. E.g., Arrowood Compl. at ¶¶ 96, 141. 45 Furthermore, the class and

43
The individual plaintiffs’ citation to QVT Fund, Sup. Opp’n at 40-41, 44-45, is distinguishable from this case. In
QVT Fund, the plaintiffs claim that the alleged breach of an “implied obligation”—which the Court of Chancery
deemed sufficiently pleaded—is the reason why mandatory dividend payments were not triggered. See 2011 WL
2672092, at *14-15. Here, no contractual obligation—implicit or explicit—exists that could transform
unmistakably discretionary dividends into mandatory dividends.
44
The Court rejects the individual plaintiffs’ additional contention that the Third Amendment “effectively converted
[Treasury’s stock] into common stock,” which would “represent a distribution to the common shareholder ahead of
and in violation of the contractual rights of Plaintiffs and other preferred shareholders.” Sup. Opp’n at 30. Here, the
characteristics of preferred stock “that distinguish that stock from common stock”—e.g., senior-most dividend and
liquidation rights—remain “expressly and clearly stated” under the Third Amendment. See Elliot Assocs., L.P. v.
Avatex Corp., 715 A.2d 843, 852 (Del. 1998); see also FHFA Reply at 35-37.
45
Since the plaintiffs have not demonstrated, through their pleadings, that FHFA acted in bad faith, Delaware case
law under which discretionary dividends will only be compelled in the rare instance of a judicial finding of “fraud or
gross abuse of discretion” by the board of directors is inapposite. See, e.g., Gabelli & Co. v. Liggett Grp. Inc., 479
A.2d 276, 280 (Del. 1984); Moskowitz v. Bantrell, 190 A.2d 749, 750 (Del. 1963).

40
Arrowood plaintiffs fail to plead claims of breach of the implied covenant against the GSEs,

since the plaintiffs attribute all alleged “arbitrar[y] and unreasonabl[e]” conduct only to FHFA,

as a conservator that assumed all rights of the GSEs, and not to the GSEs themselves. 46 E.g., In

re Fannie Mae/Freddie Mac Am. Compl. at ¶¶ 161, 167, 173; see also FHFA Reply at 32-33. 47

D. The Class Plaintiffs Fail to Plead That the Third Amendment Is an
Unconstitutional Taking

Finally, the class plaintiffs claim that the Third Amendment effected an unconstitutional

taking of their alleged dividend entitlements and liquidation rights without just compensation.

U.S. Const. amend. V (“nor shall private property be taken for public use, without just

compensation”); see In re Fannie Mae/Freddie Mac Am. Compl. at ¶¶ 110-16, 183-92. Takings

claims are reviewed as either physical or regulatory takings. A “paradigmatic” physical taking

“is a direct government appropriation or physical invasion of private property.” Lingle v.

Chevron U.S.A. Inc., 544 U.S. 528, 537 (2005). Since the class plaintiffs do not allege a physical

taking, the Court must decide whether they adequately plead a taking as a result of government

regulation. Class Pls.’s Opp’n at 67-70. Before determining which takings rubric to utilize for

its analysis, a court must first evaluate whether a plaintiff has a cognizable property interest

protected by the Fifth Amendment. See, e.g., Conti v. United States, 291 F.3d 1334, 1339 (Fed.

Additionally, even if the plaintiffs presented allegations of “gross abuse of discretion” resulting in present damage to
the “value” of the plaintiffs’ investment, such claims would be considered derivative and barred under HERA
§ 4617(b)(2)(A)(i). See supra n.39; cf. U.S. v. Byrum, 408 U.S. 125, 141 (1972) (“Although vested with broad
discretion in determining whether, when, and what amount of dividends shall be paid, that discretion is subject to
legal restraints. If, in obedience to the will of the majority stockholder, corporate directors disregard the interests of
shareholders by accumulating earnings to an unreasonable extent, they are vulnerable to a derivative suit.”)
46
The Fairholme plaintiffs bring their claims only against FHFA. See Fairholme Compl. Count VI.
47
The reasoning of this section would also apply to dividend and liquidation preference claims for non-monetary
relief even if § 4617(f) did not bar such claims. “In assessing whether a declaratory judgment action is ripe, courts
must determine ‘whether the facts alleged, under all the circumstances, show that there is a substantial controversy,
between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a
declaratory judgment.’” RDP Technologies, Inc. v. Cambi AS, 800 F. Supp. 2d 127, 136 (D.D.C. 2011) (quoting
MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007)).

41
Cir. 2002); Nat'l Leased Hous. Ass'n v. U.S. Dep't of Hous. & Urban Dev., No. 03-1509, 2007

WL 148829, at *11 (D.D.C. Jan. 16, 2007). Here, the class plaintiffs do not allege a cognizable

property interest and, as such, fail to state a claim against FHFA and Treasury for a violation of

the Fifth Amendment’s Takings Clause.

1. The Jurisdictional Defect in the Class Plaintiffs’ Pleadings Is Not
Dispositive of Their Takings Claims

As an initial matter, the defendants argue that the class plaintiffs’ takings claims belong

in the Court of Federal Claims rather than in this Court. Pursuant to the so-called “Big” Tucker

Act, 28 U.S.C. § 1491(a)(1), the Court of Claims maintains exclusive jurisdiction over claims

against the United States that exceed $10,000. Under the “Little” Tucker Act, 28 U.S.C.

§ 1346(a)(2), the Court of Claims shares concurrent jurisdiction with federal district courts over

claims against the United States not exceeding $10,000. In this Circuit, for complaints that

include potential claims over $10,000, Little Tucker Act jurisdiction is only satisfied by a

“clearly and adequately expressed” waiver of such claims. See Waters v. Rumsfeld, 320 F.3d

265, 271-272 (D.C. Cir. 2003) (“[F]or a district court to maintain jurisdiction over a claim that

might otherwise exceed $10,000, a plaintiff's waiver of amounts over that threshold must be

clearly and adequately expressed.”) (internal quotation marks and citation omitted). Here, the

class plaintiffs argue that “expressly limit[ing] the prospective takings class to individuals who

suffered losses less than $10,000” is an adequate alternative to waiver, and that waiver is

“premature” until the class certification phase. Class Pls.’s Opp’n at 53. Yet the plaintiffs’

refusal to clearly and adequately waive claims exceeding $10,000 in either their pleadings or

subsequent opposition brief contravenes Circuit precedent. See Goble v. Marsh, 684 F.2d 12,

15-16 (D.C. Cir. 1982); Stone v. United States, 683 F.2d 449, 454 n.8 (D.C. Cir. 1982)

(“Generally a plaintiffs’ waiver should be set forth in the initial pleadings.”). Nevertheless, the

42
Circuit has also made clear its preference that the District Court should not transfer a case that is

defective on Little Tucker Act grounds to the Court of Claims “without first giving [the

plaintiffs] an opportunity to amend their complaints to effect an adequate waiver.” Goble, 684

F.2d at 17.

Thus, while the class plaintiffs’ takings pleading is inadequate for jurisdiction in this

Court under the “Little” Tucker Act, in keeping with the tenor of Circuit case law, the Court

would generally provide the class plaintiffs “an opportunity to amend their complaints to effect

an adequate waiver.” Id. However, doing so here is unnecessary, since the Court finds that the

class plaintiffs’ takings claims are dismissed on alternative grounds.

2. The Class Plaintiffs Fail to Plead a Cognizable Property Interest

Any property rights that the class plaintiffs claim can only arise from their GSE stock

certificates. Yet “existing rules,” “understandings,” or “background principles” derived from

legislation enacted prior to the share purchase inhere in the plaintiffs’ title to the stock

certificates and “define the range of interests that qualify for protection as ‘property’ under the

Fifth” Amendment. Lucas v. S. Carolina Coastal Council, 505 U.S. 1003, 1028-30 (1992); see

also Am. Pelagic Fishing Co., L.P. v. United States, 379 F.3d 1363, 1379 (Fed. Cir. 2004).48

Since 1992, when Congress established FHFA’s predecessor, the Office of Federal Housing

Enterprise Oversight (“OFHEO”), the GSEs have been subject to regulatory oversight, including

the specter of conservatorship or receivership under which the regulatory agency succeeds to “all

rights” of the GSEs and shareholders. See Federal Housing Enterprises Financial Safety and

Soundness Act of 1992, Pub. L. No. 102-550, §§ 1301-1395, 106 Stat. 3672, 3941-4012

(establishing OFHEO); 12 U.S.C. § 4617(b)(2)(i). This enduring regulatory scheme governing

48
Given the extensive history of Takings Clause jurisprudence within the Court of Appeals for the Federal Circuit,
the Court will look to such cases for guidance.

43
the GSEs at the time the class plaintiffs purchased their shares represents the “background

principle” that inheres in the stock certificates.

The defendants argue that the plaintiffs fail to plead a cognizable property interest, for

takings purposes, because the GSEs—and, therefore, the plaintiff shareholders—lack the right to

exclude the government from their property. Treasury Mot. at 59-60; FHFA Mot. at 60-62; but

see Class Pls.’s Opp’n at 61-65. The Court agrees. “[T]he ‘right to exclude’ is doubtless . . .

‘one of the most essential sticks in the bundle of rights that are commonly characterized as

property.” Yee v. City of Escondido, 503 U.S. 519, 528 (1992) (quoting Kaiser Aetna v. United

States, 444 U.S. 164, 176 (1979)). The defendants analogize the “federal oversight and

regulation” to which the GSEs have been subject to that of regulated financial institutions. See

Treasury Mot. at 59. Utilizing this analogy, the defendants cite Federal Circuit case law for the

proposition that the plaintiff shareholders have no present cognizable property interest in the

dividends or liquidation preferences referenced in their stock certificates.

In two cases involving statutorily regulated financial institutions, placed under the

authority of either the FDIC or RTC, the Federal Circuit found that the shareholders of these

institutions lacked the requisite property interests to support a takings claim. Golden Pac.

Bancorp v. United States, 15 F.3d 1066 (Fed. Cir. 1994); Cal. Hous. Sec., Inc. v. United States,

959 F.2d 955 (Fed. Cir. 1992). 49 On account of the existing regulatory structure permitting the

appointment of a conservator or receiver, the financial institutions “lacked the fundamental right

to exclude the government from its property at those times when the government could legally

impose a conservatorship or receivership on [the institutions].” Golden Pac., 15 F.3d at 1073

49
The fact that the California Housing Court only considered the “permanent physical occupation” rubric of
regulatory takings analysis from Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982), which
would not apply to the present facts, has no effect on its holding regarding the threshold determination of a
cognizable property interest.

44
(quoting Cal. Hous., 959 F.2d at 958) (internal quotation marks omitted). And the result of this

“regulated environment” is imputed to the shareholders of the financial institution, who thus hold

“less than the full bundle of property rights.” Id. (internal quotation marks omitted).

The Court finds this reasoning to be persuasive. By statutory definition, the GSEs are

subject to governmental control at the discretion of FHFA’s director. 12 U.S.C. § 4617(a)(2).

Therefore, the GSE shareholders necessarily lack the right to exclude the government from their

investment when FHFA places the GSEs under governmental control—e.g., into

conservatorship. 50 This conclusion is especially true since the statute explicitly grants FHFA the

power to assume “all rights . . . of the regulated entity, and of any stockholder . . . .” See 12

U.S.C. § 4617(b)(2)(i). 51

Without disputing the broader analogy that the defendants draw between regulated

financial institutions and the GSEs, 52 the class plaintiffs seek to distinguish the Federal Circuit

decisions based on why FHFA and Treasury entered into the Third Amendment. Id. at 63. But

motives are irrelevant, for takings purposes, if the plaintiffs possess no cognizable property

interests in the first place. Golden Pacific and California Housing stand for the general notion

that investors have no right to exclude the government from their alleged property interests when

the regulated institution in which they own shares is placed into conservatorship or receivership.
50
The Court notes that FHFA overreads the Federal Circuit holdings. Unlike FHFA’s contention that “shareholders
had no cognizable property interest within the meaning of the Takings Clause before conservatorship,” FHFA Mot.
at 61, the shareholders only lose their cognizable property interests “when [the GSEs are] in conservatorship,”
Treasury Mot. at 58.
51
The class plaintiffs’ alarmist assertion that a holding like the one at present “would mean that the defendants could
expropriate all of the shares in the most profitable and stable financial institutions in the country without triggering
the Takings Clause” is unwarranted. Class Pls.’s Opp’n at 63-64. There is no right to exclude, and therefore no
cognizable property interest upon which to state a takings claim, only when the government may “legally impose a
conservatorship”—i.e., when necessary to stabilize a stressed financial institution. See Cal. Hous., 959 F.2d at 958;
12 U.S.C. § 4617(a)(2).
52
See Class Pls.’s Opp’n at 61-62 (“Those cases hold that shareholders in regulated financial institutions are on
notice that government regulators may place the institution into conservatorship or receivership if they conclude that
the institution is insolvent or being operated in an unsafe and unsound manner, and therefore those shareholders lack
the ‘right to exclude’ the government in such circumstances.”)

45
See Cal. Hous., 959 F.2d at 958 (no right to exclude when a conservatorship or receivership is

legally imposed). Whether the defendants executed the Third Amendment to generate profits for

taxpayers or to escape a “downward spiral” of the GSEs seeking funding in order to pay owed

dividends back to Treasury, it does not change the fact that it was executed during a period of

conservatorship and, thus, after the plaintiffs’ property interests—whatever they may have been

prior to the Third Amendment—were extinguished. Unless the plaintiffs can demonstrate that

FHFA could not legally impose a conservatorship upon the GSEs at the time of the Third

Amendment, allegations of mischievous intentions during a conservatorship do not revive

already eliminated cognizable property interests. See id. And here, the class plaintiffs only

plead that the Third Amendment was inconsistent with FHFA’s responsibilities as conservator—

not that FHFA lacked any legal right to be a conservator on August 17, 2012. E.g., In re Fannie

Mae/Freddie Mac Am. Compl. at ¶¶ 92-101 (alleging that “the Third Amendment was

inconsistent and in conflict with FHFA’s statutory responsibilities as a conservator”); see also 12

U.S.C. § 4617(a)(2) (“[FHFA] may, at the discretion of the Director, be appointed conservator

or receiver for the purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated

entity.”) (emphasis added). Given that the class plaintiffs cannot repair the overarching

threshold defect of having no cognizable property interest at stake, their takings claim must be

dismissed under Rule 12(b)(6). Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009) (“[O]nly a complaint

that states a plausible claim for relief survives a motion to dismiss.”). 53

53
In consideration of the class plaintiffs’ takings claims concerning dividends, specifically, the Court further
acknowledges the multitude of federal cases, in different contexts, finding a lack of a cognizable property interest
when another party maintains discretion to grant a plaintiff’s alleged property interest. E.g., Toxco, Inc. v. Chu, 801
F. Supp. 2d 1, 10 (D.D.C. 2011) (“[I]f the government is vested with complete discretion as to whether or not it must
undertake any of its contractual obligations, the plaintiff does not have a constitutional property interest in that
contract.”) (citing Enplanar, Inc. v. Marsh, 11 F.3d 1284, 1295-96 (5th Cir. 1994); Christ Gatzonis Elec.
Contractor, Inc. v. N.Y. City Sch. Constr. Auth., 23 F.3d 636, 640 (2d Cir. 1994)); Barrington Cove Ltd. P’ship v.
R.I. Hous. & Mortg. Fin. Corp., 246 F.3d 1, 5-6 (1st Cir. 2001) (finding that a plaintiff has no cognizable property
interest in “‘promised’ federal income tax credits” because a state agency maintained “absolute discretion to

46
 3. The Class Plaintiffs Further Fail to Plead a Regulatory Taking

Even if the class plaintiffs could claim a cognizable property interest—and they cannot—

their claims would still fail on a motion to dismiss under existing Supreme Court regulatory

takings precedent. “The general rule at least is that while property may be regulated to a certain

extent, if regulation goes too far it will be recognized as a taking.” Pennsylvania Coal Co. v.

Mahon, 260 U.S. 393, 415 (1922). The Supreme Court has developed a series of analytical

rubrics under which courts are to determine “whether a regulation ‘reaches a certain magnitude’

in depriving an owner of the use of property.” See Dist. Intown Props. Ltd. P'ship v. D.C., 198

F.3d 874, 878 (D.C. Cir. 1999) (quoting Mahon, 260 U.S. at 413). There are two principal

“narrow categories” of per se takings. See Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 538

(2005). First, “a permanent physical occupation authorized by government is a taking without

regard to the public interests that it may serve.” Loretto, 458 U.S. at 426. Here, the government

has not physically occupied the plaintiffs’ property. 54 Second, a government regulation that

deprives an owner of “all economically beneficial uses” of his property is also a taking. Lucas v.

South Carolina Coastal Council, 505 U.S. 1003, 1019 (1992). Regardless of whether Lucas only

applies to real property, compare Treasury Mot. at 61, with Class Pls.’s Opp’n at 67-68, the

determine whether” such tax credits are awarded); Nello L. Teer Co. v. Orange Cnty., No. 92-2240, 1993 WL
177872, at *2 (4th Cir. 1993) (“Under our precedents, if a local zoning authority possesses any significant discretion
in granting a permit, there is no cognizable property interest in the issuance of that permit.”) (internal quotation
marks, alteration, and citation omitted). The logic of these decisions would appear to extend to dividends that are
issued at the “sole discretion” of a GSE board—or, in this case, the regulatory entity that has succeeded to all the
rights of the board. Much like how plaintiffs cannot claim that discretionary dividends amount to a contractual
right, the class plaintiffs cannot contend that such dividend provisions constitute a cognizable property interest.
54
The Supreme Court has also held that “when the government commands the relinquishment of funds linked to a
specific, identifiable property interest such as a bank account or parcel of real property, ‘a per se [takings] approach’
is the proper mode of analysis.” Koontz v. St. Johns River Water Mgmt. Dist., 133 S. Ct. 2586, 2600 (2013) (citing
Brown v. Legal Found. of Wash., 538 U.S. 216, 235 (2003)). Despite citing this language in their opposition brief,
Class Pls.’s Opp’n at 67, the class plaintiffs have not alleged that the government has commanded them to relinquish
any funds—or property, for that matter—already owned or possessed. See Treasury Reply at 56 (“The plaintiffs’
claim, instead, is that the value of their expectation of dividends or a liquidation preference has been
diminished . . . .”).

47
plaintiffs cannot find relief under a “total wipeout” theory. See Class Pls.’s Opp’n at 67-68. The

plaintiffs maintain “economically beneficial use” of their shares, since the stock very much

remains a tradable equity. Indeed, GSE shares are traded daily on public over-the-counter (OTC)

exchanges. 55 And given the Court’s rejection of the plaintiffs’ alleged present rights to

dividends and liquidation payments, it is clear that the government has not “seized [the

plaintiffs’] private property and kept that property for itself.” Class Pls.’s Opp’n at 67.

A regulatory taking, on the other hand, is evaluated under the “ad hoc” inquiry set forth

in Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978). Id. at 124. Penn Central

identified three “factors that have particular significance” in evaluating regulatory takings

claims: (1) “[t]he economic impact of the regulation on the claimant”; (2) “the extent to which

the regulation has interfered with distinct investment-backed expectations”; and (3) “the

character of the governmental action.” Id. A plaintiff is not required to demonstrate favorable

results under all three Penn Central factors in order for the Court to find a taking—it is a

balancing test. See Dist. Intown Props., 198 F.3d at 878-79 (Penn Central submits “three

primary factors [to be] weigh[ed] in the balance”). While regulatory takings require a “more fact

specific inquiry”, Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Planning Agency, 535 U.S.

302, 332 (2002), no supplementation of the factual record could alter dismissal here.

At present, the Third Amendment has had no economic impact on the plaintiffs’ alleged

dividend or liquidation preference rights. In view of the unambiguous language of the stock

certificate’s dividend provision coupled with Treasury’s discretion to pay dividends under the

PSPAs, the plaintiffs cannot show that the Third Amendment rendered their prospects of

55
That the plaintiffs retained value in their market traded shares is consistent with the statement from Freddie Mac’s
Form 8-K filing on September 8, 2011, which the class plaintiffs quote in the Amended Complaint. See In re
Fannie Mae/Freddie Mac Am. Compl. at ¶ 53 (“The holders of Freddie Mac’s existing common stock and preferred
stock . . . will retain all their rights in the financial worth of those instruments, as such worth is determined by the
market.”) (emphasis added) (quoting Freddie Mac 2011 8-K (Sept. 11, 2008)).

48
receiving dividends any less discretionary than they were prior to the amendment. Additionally,

since liquidation preference rights only ripen during liquidation, any impact on such rights is, at

best, theoretical while the GSEs remain in conservatorship.

“A ‘reasonable investment-backed expectation’ must be more than a ‘unilateral

expectation or an abstract need.’” Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1005 (1984)

(quoting Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 161 (1980)). “In

determining whether a reasonable investment-backed expectation exists, one relevant

consideration is the extent of government regulation within an industry.” Ascom Hasler Mailing

Sys., Inc. v. U.S. Postal Serv., 885 F. Supp. 2d 156, 195 (D.D.C. 2012) (collecting cases). For

decades—and at the time each of the class plaintiffs purchased their GSE stock—the GSEs have

been under the watchful eye of regulatory agencies and subject to conservatorship or

receivership largely at the government’s discretion. See supra Section III(D)(2). 56 As the

Federal Circuit’s holdings in California Housing and Golden Pacific elucidate, by lacking the

right to exclusive possession of their stock certificates—and therefore lacking a cognizable

property interest—at the time of the Third Amendment, the plaintiff shareholders could not have

“developed a historically rooted expectation of compensation” for any possible seizures that

occurred during FHFA’s conservatorship. See Cal. Hous., 959 F.2d at 958. The plaintiffs

“voluntarily entered into [investment contracts with] the highly regulated” GSEs. See Golden

Pac., 15 F.3d at 1073. 57 In fact, a number of the class plaintiffs purchased their shares mere

56
Furthermore, as FHFA cogently explains, “[b]ecause the [GSEs] benefited from preferential tax treatment, far
lower capital requirements, and a widely perceived government guarantee, [the] [p]laintiffs should have anticipated
that the [GSEs] would be subject to . . . regulation.” FHFA Mot. at 61 n.37 (citation omitted). The tradeoff when
investing in government-sponsored entities that receive meaningfully different benefits than private corporations is
increased regulation and the prospect of a government takeover.
57
Both Fannie Mae and Freddie Mac preferred stock certificates provide notice that “[t]he ability of the Board of
Directors to declare dividends may be restricted by [FHFA’s predecessor] OFHEO.” See Individual Pls.’s Opp’n
Ex. A at 20 (Fannie Mae Preferred Stock Series S); Ex. B at 27 (Freddie Mac Preferred Stock).

49
months before or shortly after FHFA exercised its statutory authority to place the GSEs into

conservatorship. E.g., In re Fannie Mae/Freddie Mac Am. Compl. at ¶¶ 30-35; In re Fannie

Mae/Freddie Mac Derivative Compl. at ¶¶ 20-21. There can be no doubt that the plaintiff

shareholders understood the risks intrinsic to investments in entities as closely regulated as the

GSEs, and, as such, have not now been deprived of any reasonable investment-backed

expectations.

Looking to the character of the governmental action in dispute, the Penn Central Court

explained that “[a] ‘taking’ may more readily be found when the interference with property can

be characterized as a physical invasion by government than when interference arises from some

public program adjusting the benefits and burdens of economic life to promote the common

good.” 438 U.S. at 124. Here, the plaintiffs do not plead a physical invasion of their property.

Whether the regulatory action taken by FHFA and Treasury when executing the Third

Amendment “promote[s] the common good” or advances a public purpose, however, is in

dispute. The Supreme Court in Kelo v. City of New London, a public use case, reaffirmed that

courts should take a deferential stance regarding what constitutes a legitimate public purpose.

545 U.S. 469, 487-88 (2005) (“When the legislature's purpose is legitimate and its means are not

irrational, our cases make clear that empirical debates over the wisdom of takings . . . are not to

be carried out in the federal courts.”); see also Hilton Washington Corp. v. D.C., 777 F.2d 47,

49-50 (D.C. Cir. 1985) (looking only for a “valid public purpose” when examining Penn

Central’s “character of the governmental action” factor). The plaintiffs would be hard pressed to

argue that actions taken to “benefit taxpayers” do not qualify as a legitimate public purpose.

E.g., Class Pls.’s Opp’n at 15. To reach this conclusion with certainty, however, the Court

would likely need to permit additional fact-finding. Nevertheless, more discovery is unnecessary

50
because Penn Central’s first two factors weigh strongly enough against the plaintiffs’ takings

claims that dismissal would be proper in this case. See Monsanto, 467 U.S. at 1005 (“[T]he

force of [the reasonable investment-backed expectations] factor [here] is so overwhelming . . .

that it disposes of the taking question . . . .”).

4. Claims of an Unconstitutional Taking of Liquidation Rights Are Not
Ripe

Moreover, the Court would also dismiss the class plaintiffs’ takings claims, at least in

relation to liquidation preference rights, on ripeness grounds. As mentioned above, “[a] claim is

not ripe for adjudication if it rests upon contingent future events that may not occur as

anticipated, or indeed may not occur at all.” Texas v. United States, 523 U.S. at 300 (internal

quotation marks and citation omitted). Liquidation preferences only entitle a preferred

stockholder to payment in the event of liquidation. Consistent with the Court’s reasoning

discussed supra, Section III(C)(1), the government cannot take a property right that has not yet

matured. This Court’s findings concerning cognizable property interests aside, a claim of an

unconstitutional taking of liquidation preference rights may only be brought once a liquidation

process has commenced. 58

58
Regarding another possible basis for dismissal, the Court appreciates the logical appeal of FHFA’s comparison of
the Omnia Court’s finding that consequential—rather than direct—injuries to a third party do not entitle that third
party to a takings remedy and the alleged injury caused to the plaintiffs here by the Third Amendment agreement
between FHFA and Treasury. FHFA Mot. at 62-63; FHFA Reply at 40-45 (citing Omnia Commercial Co. v. United
States, 261 U.S. 502 (1923)); but see Class Pls.’s Opp’n at 70-72. However, the Court is wary of applying to the
present facts a decision that came just five months after the concept of a regulatory taking was born, see
Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922), and many decades before the Supreme Court began actively
developing its regulatory takings jurisprudence. See Lingle, 544 U.S. at 536-40 (outlining the evolution of
regulatory takings case law since the Supreme Court’s Penn Central decision in 1978).
The Court need not address whether the class plaintiffs’ takings claims are further barred because FHFA is not the
United States for takings purposes, FHFA Mot. at 59-60, or because Treasury entered into the Third Amendment as
a “market participant,” Treasury Mot. at 64-65. Such additional arguments are unnecessary to consider in order to
resolve the takings issue at the motion to dismiss stage.

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IV. CONCLUSION

It is understandable for the Third Amendment, which sweeps nearly all GSE profits to

Treasury, to raise eyebrows, or even engender a feeling of discomfort. But any sense of unease

over the defendants' conduct is not enough to overcome the plain meaning of HERA's text.

Here, the plaintiffs' true gripe is with the language of a statute that enabled FHFA and,

consequently, Treasury, to take unprecedented steps to salvage the largest players in the

mortgage finance industry before their looming collapse triggered a systemic panic. Indeed, the

plaintiffs' grievance is really with Congress itself. It was Congress, after all, that parted the legal·

seas so that FHFA and Treasury could effectively do whatever they thought was needed to

stabilize and, if necessary, liquidate, the GSEs. Recognizing its role in the constitutional system,

this Court does not seek to evaluate the merits of whether the Third Amendment is sound

financial--or even moral-policy. The Court does, however, find that HERA's unambiguous

statutory provisions, coupled with the unequivocal language of the plaintiffs' original GSE stock

certificates, compels the dismissal of all of the plaintiffs' claims.

Thus, for the foregoing reasons, the Court GRANTS the defendants' motions to dismiss

and DENIES the individual plaintiffs' cross-motion for summary judgment.

A separate Order consistent with this Memorandum Opinion shall issue this date.

~c·L~
RO E C. LAMBERTH
United States District Judge

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