UPDATE: The court has accepted the brief and Treasury has 15 days to reply ONLY re: Perry decision
This is good stuff…
Charles Cooper has filed a motion on behalf of Continental Western to supplement their brief. In it he points out the flaws in the Perry ruling from Lamberth. The cliff notes here are that Lambreth ignored 2nd Circuit, 8th Circuit, 9th Circuit and Supreme Court precedent with his ruling when he claimed:
1- FHFA has ability to liquidate
2- Because HERA (in his opinion) says FHFA can do whatever it wants, it can
3- Because the companies have not yet been liquidated, there is no taking and the claims are not ripe
Summation below and full annotated filing below (all quotations from filing, all BOLD notations are mine):
1- Interestingly enough, despite it being touted as the main reason for the Conservatorship, “Nowhere in the Perry court’s recent decision upholding the Net Worth Sweep can one find the words “preserve and conserve the assets and property of the regulated entity” or “put the regulated entity in a sound and solvent condition.”
2- “HERA says that “no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.” 12 U.S.C. § 4617(f) (emphasis added). It follows that Section 4617(f) bars review of Plaintiff’s claims only if FHFA was legitimately acting within its authority as a “conservator” when it yielded to Treasury’s demand to impose the Net Worth Sweep. See Plaintiff’s Response to Defendants’ Motions To Dismiss at 24-29, Doc. 45 (“MTD Opp.”). The Perry court, however, never explained how FHFA’s decision to donate to its sister agency all of Fannie’s and Freddie’s massive profits in perpetuity could possibly be viewed as the legitimate act of a “conservator.” Our research discloses no act of a conservator in the annals of financial regulatory history that is even remotely comparable to Defendants’ looting of privately owned companies. Nor have Defendants been able to point to a comparable precedent.
The Perry court likewise failed to explain how FHFA’s actions could possibly be squared with HERA’s specific statutory requirements that FHFA, as conservator, “preserve and conserve [the Companies’] assets and property” and strive to place them “in a sound and solvent condition.” ”
3- “As the Eighth Circuit has explained, the conservator of a distressed financial institution is “empowered to take action necessary to restore [it] to a solvent position and to carry on the business of the institution and preserve and conserve the assets and property of the institution.” RTC v. CedarMinn Bldg. Ltd. P’ship, 956 F.2d 1446, 1453 (8th Cir. 1992) (internal quotation marks omitted). Indeed, “a conservator only has the power to take actions necessary to restore a financially troubled institution to solvency. “
4- “(“The decision to appoint a conservator is not a judgment to divest the owner of his property. Rather, it is a judgment that the owner is unable or unwilling to properly manage or control the assets and it is an attempt to put the institution back into a safe and sound condition.”).
In direct contradiction of the rehabilitative mission that defines the role of a conservator, the Perry court concluded that only “two facts” mattered to its inquiry under Section 4617(f): because Fannie and Freddie (1) “continue to operate” and (2) “have now regained profitability,” FHFA’s actions cannot be challenged as beyond the scope of its powers as conservator. Op. 24. To that court, it mattered not that by stripping all profits from Fannie and Freddie, FHFA was depleting the Companies’ capital by billions of dollars every quarter and leaving them just one bad quarter from insolvency.
On the Perry court’s understanding of Section 4617(f), then, FHFA need not offer any rehabilitative rationale for its actions or otherwise even pretend to pursue the traditional goals and actions of a conservator to avail itself of immunity from suit. So long as Fannie and Freddie continue to operate profitably, FHFA is free to give all of the Companies’ assets to anyone, for any reason. Congress surely did not intend Section 4617(f) to bring about such absurd results. “
5- “The Perry court’s extraordinary expansion of the reach of Section 4617(f) is illustrated by the fact that Section 4617(f) is materially identical to the provisions of FIRREA that govern FDIC’s conservatorships and receiverships of banks. Perry has dire implications for financial institutions that may seek to raise capital in the future: if FHFA as conservator can donate the entire value of the Companies to deficit reduction, then the same is true for the FDIC when it acts as conservator for a bank, even a highly profitable one.
In declaring FHFA’s purpose for entering the Net Worth Sweep irrelevant to the jurisdictional analysis, the Perry court said that it would consider only “what has happened, not why it happened.” Op. 21. Even if the Perry court were correct, in this case it is ironically not Plaintiff but Defendants who have sought to shift the focus away from what the Net Worth Sweep did to why it was done. Perhaps recognizing that “what” the Net Worth Sweep does cannot be squared with the most fundamental duties of a conservator under HERA, Defendants have attempted to defend the Net Worth Sweep by offering a patently pretextual purpose. Specifically, in contravention of the Complaint’s allegations, Defendants argue that this extraordinary action was necessary to arrest a “downward spiral” supposedly caused by the Companies’ practice of drawing on Treasury’s funding commitment to pay cash dividends back to Treasury. See, e.g., Treasury MTD Reply at 5-6, Doc. 46; FHFA MTD Reply at 14, Doc. 47. While the Perry court claimed to have deemed this explanation irrelevant to the Section 4617(f) analysis, it appears to have largely credited Defendants’ economic narrative. Op. 6 n.7 (concluding that FFHA was required to pay dividends to Treasury even if it had to draw on Treasury’s funding commitment to do so).2 But even if that narrative were accurate—it is not— Defendants’ purported good intentions would not change the fact that the Net Worth Sweep gave away the assets that FHFA was supposed to “preserve and conserve” as conservator and guaranteed that the Companies will never be able to rebuild capital and resume normal business operations. Such actions, whatever their motive, are not those of a conservator.
In all events, this Court has held that it “must take Continental Western’s factual assertions . . . as true”—including Plaintiff’s assertions “that the net worth sweep was unnecessary and improperly motivated.” Order on Motion To Compel at 6, Doc. 42 (“MTC Order”). To the extent that the Court considers why FHFA imposed the Net Worth Sweep, it cannot dismiss the Complaint on the basis of Defendants’ contested economic narrative. ”
6- Footnote 2 “The Perry court’s reasoning rests on the demonstrably mistaken premise that prior to the Net Worth Sweep the Companies were required to pay Treasury a 10% cash dividend even when they could not do so without drawing on Treasury funds. The Perry court’s reading of the Stock Certificates is inconsistent with the plain language of the contract and applicable law. First, as we have previously demonstrated, MTD Opp. 31 n.9, the plain terms of Treasury’s senior preferred stock certificates gave the Companies another option, specifying that “[t]o the extent” dividends were not paid in cash, “dividends on the Senior Preferred Stock shall accrue and shall be added to the Liquidation Preference.” Fannie Government Stock Certificate § 2(b) (Exhibit B to Doc. 23-2). The Perry court determined that declining to declare cash dividends was not an “option” available to the Companies because the Stock Certificates say that if the Companies “fail[ ] to pay dividends in cash in a timely manner as required by this Certificate, then immediately following such failure” the dividend rate increases to 12% until all accrued dividends are paid in cash. Op. 7 n.7 (quoting Fannie Government Stock Certificate § 2(c)). But another provision of the Stock Certificates makes clear that Treasury is only entitled to cash dividends “when, as and if declared by the Board of Directors, in its sole discretion.” Fannie Government Stock Certificate § 2(a). The Perry court ignored that provision, and its oversight is particularly glaring because 31 pages later it pointed to the very same language in the plaintiffs’ stock certificates as the basis for its conclusion, this time correct, that the plaintiffs had no contractual right to be paid undeclared cash dividends. Op. 37. Second, even if no such language appeared in the Treasury Stock Certificates, it would not change the fundamental principle that a corporation is never legally required to pay undeclared cash dividends and may not do so when paying them would render it insolvent. See EBS Litig., LLC v. Barclays Global Investors, 304 F.3d 302, 305-06 (3d Cir. 2002). Under Delaware corporate law, a dividend cannot be mandatory. DEL. CODE tit. 8, § 170(a) (directors “may” pay dividends out of surplus but “shall not” declare or pay dividends out of a corporation that lacks a capital surplus). ”
7- “Perhaps no passage of the Perry opinion better illustrates this error than its startling conclusion that the Companies’ private shareholders do not retain a property interest in their stock:
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 . . . were extinguished.
Op. 46 (emphasis added). Even FHFA, in announcing its decision to place the Companies in conservatorship, acknowledged that under a conservatorship the shareholders “are still in place; both the preferred and common shareholders have an economic interest in the companies.” Compl. ¶ 39 (quoting Oversight Hearing To Examine Recent Treasury and FHFA Actions Regarding the Housing GSEs: Hearing Before H. Comm. on Fin. Servs., 110th Cong. (Sept. 25, 2008) (Statement of James B. Lockhart, III, Dir., FHFA)); id. (during the conservatorship, the Companies’ stockholders “will continue to retain all rights in the stock’s financial worth” (quoting FHFA FACT SHEET, QUESTIONS AND ANSWERS ON CONSERVATORSHIP 3 (Sept. 7, 2008)); see MTD Opp. 11-12. FHFA’s donative transfer to Treasury was the act of an owner, not a conservator pursuing its self-avowed “statutory mission to restore soundness and solvency to [Fannie and Freddie] and to preserve and conserve their assets and property.” 76 Fed. Reg. at 35,726. ”
7- “The Perry court correctly acknowledged that it could set aside the Net Worth Sweep if FHFA acceded to that change in violation of HERA’s proscription “not [to] be subject to the direction or supervision of any other agency of the United States.” 12 U.S.C. § 4617(a)(7); see Op. 23. That court erred, however, in dismissing the plaintiffs’ claim on the ground that “there is nothing in the pleadings or the administrative record provided by Treasury that hints at coercion actionable” under Section 4617(a)(7). Op. 23.
Regardless of whether there was any merit to the Perry court’s conclusion that “nothing in the pleadings . . . hints at coercion actionable under § 4617(a)(7),” Op. 23, this Court has already recognized that the Complaint in this case alleges that the Net Worth Sweep “was the product of a Treasury directive aimed simply at giving Treasury all of the Companies’ profits.”
MTC Order 4 (emphasis added); see Compl. ¶ 78 (“FHFA agreed to the Net Worth Sweep only at the insistence and under the direction and supervision of Treasury.”); MTD Opp. 32-33. Indeed, the Court has previously ruled that it must accept that allegation, like all of the facts alleged in the Complaint, as true in resolving the Defendants’ pending motions to dismiss. MTC Order 6.
It was, of course, quite improper for the Perry court to dismiss a claim on the basis of the incomplete “administrative record provided by Treasury,” id.,4 while at the same declaring that it “need not view the full administrative record” to dismiss the suit. ”
8- “The Perry court’s analysis rests on the false premise that only an act that completes the Companies’ liquidation could be at odds with FHFA’s mission as conservator “to carry on [their] business . . . and preserve and conserve” their assets. 12 U.S.C. § 4617(b)(2)(D). Here, FHFA as “conservator” for Fannie and Freddie has publicly declared that the Companies “will not be building capital as a potential step to regaining their former corporate status,”6 and it is taking steps to wind down their operations. These are the acts of a de facto receiver, and the Perry court erred in holding otherwise. Regardless of whether Fannie and Freddie continue to operate and generate profits, the Net Worth Sweep is an unlawful step towards the impermissible end of winding down and liquidating the Companies.
The Perry court sought to buttress its conclusion by reasoning that a conservator may undertake “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.” Op. 25 n.20. But this interpretation of HERA contradicts the long-settled difference between conservatorship and receivership. As discussed above, the Eighth Circuit has explained in the closely related context of FIRREA that “[t]he conservator’s mission is to conduct an institution as an ongoing business” and that this mission “stands apart from the strategy of a receiver, whose interest, by definition, is shutting the business down.” CedarMinn Bldg., 956 F.2d at 1454. To be sure, an unsuccessful conservatorship may ultimately end in receivership and liquidation, but that does not give the pessimistic conservator license to begin winding down the institution before the appointment of a receiver. The Perry court’s contrary reading of HERA would lead to the absurd, and lawless, result that FHFA could evade HERA’s strict procedural requirements and order of priorities during receivership by winding down the Companies as their conservator. But HERA specifically instructs FHFA as to how it must go about liquidating the Companies during receivership, and Congress could not have intended for those instructions to be so easily circumvented. See MTD Opp. 46-47. ”
9- “The Perry court was also wrong to conclude that it lacked jurisdiction under Section 4617(f) to set aside as arbitrary and capricious FHFA’s decision to enter into the Net Worth Sweep. Op. 13-15. That court’s reasoning turned on “a distinction between acting beyond the scope of the constitution or a statute, and acting within the scope of a statute, but doing so arbitrarily and capriciously.” Op. 14 (citation omitted). But the Supreme Court recognized two Terms ago that no coherent distinction can be drawn between an agency acting unlawfully and an agency acting beyond the scope of its powers. City of Arlington v. FCC, 133 S. Ct. 1863, 1869-70 (2013). Furthermore, neither HERA nor any other statute authorizes FHFA to act arbitrarily so long as it does so as a conservator, and if such a statute existed it would raise serious constitutional concerns where, as here, an arbitrary conservatorship decision results in a deprivation of property. See Nordlinger v. Hahn, 505 U.S. 1, 11 (1992). Courts are bound to read statutes to avoid such constitutional problems where the statutory text readily admits of another interpretation. ”
10- “Further compounding the troubling implications of the Perry court’s ruling that virtually all of FHFA’s acts, no matter how inconsistent with its express statutory mission, are immune from suits for equitable relief when FHFA purports to act as conservator for an institution operating profitably, the Perry court also held that FHFA effectively can extend that immunity to the lawless acts of any federal agency—or anyone else—merely by signing a contract. Op. 15- 16. Plaintiff has found no other case that has adopted such a broad understanding of what it means for judicial relief to “restrain or affect” FHFA’s exercise of its conservatorship powers, and the Perry court did not cite any. To be sure, courts have rebuffed efforts “to use the technical wording of [a] complaint . . . as an end-run around” the jurisdictional bars found in HERA and FIRREA. Op. 15-16; see, e.g., Dittmer Props., LP v. FDIC, 708 F.3d 1011, 1017-18 (8th Cir. 2013); Telematics Int’l, Inc. v. NEMLC Leasing Corp., 967 F.2d 703, 707 (1st Cir. 1992); Hindes v. FDIC, 137 F.3d 148, 160 (3d Cir. 1998). ‘
11- The Perry court’s contrary reading of HERA would confer on FHFA as conservator the power to suspend by contract the application of virtually any law to any person. Congress could not have possibly intended to immunize patently unlawful contractual arrangements, yet the Perry opinion would bless them on the basis of little more than a penumbra surrounding the word “affect.” ”
12- Regarding the “new security”
“In the Perry court’s view, so long as Treasury continued to own 1,000 shares of preferred stock in each Company, it was free to agree to fundamentally alter the economic substance of those shares and to invest tens of billions of additional dollars in the Companies after its authority to purchase new securities had expired. Op. 18-19. Some changes to a stock are so fundamental as to convert it into a new security for purposes of the securities and tax laws. See, e.g., Gelles v. TDA Indus., Inc., 44 F.3d 102, 104 (2d Cir. 1994) (new security is created where amendment is “such significant change in the nature of the investment or in the investment risks as to amount to a new investment”); Rev. Rul. 56-654, 1956 WL 10781, at *1 (IRS 1956) (concluding that amendment to preferred stock was “in substance, an exchange of the preferred stock” for new stock where amendment entitled preferred shareholders to dividend payment equal to corporation’s entire net worth in the event of redemption); see also 26 C.F.R. § 1.1001-3(b) (treating any “significant modification” to a debt security as a sale of the old security). If HERA’s sunset provision is to have any meaning at all, the same must be true here. “
13- “The Perry court candidly acknowledged that its reading of HERA conflicts with decisions of the Ninth and Federal Circuits that interpret a materially identical provision of FIRREA—12 U.S.C. § 1821(d)(2)(A)—to allow shareholders to assert derivative claims when the federal receiver has a “manifest conflict of interest.”
14- “Regardless of whether one believes that First Hartford and similar cases interpreting 12 U.S.C. § 1821(d)(2)(A) were rightly decided in the first instance, it is beyond cavil that they represented the federal courts’ settled and uniform view when Congress used materially identical language in HERA in 2008. The Perry opinion overlooked that fact, but it is enormously significant because Congress is presumed to adopt the accepted judicial interpretation of a statute when it enacts the same language a second time. Lorillard v. Pons, 434 U.S. 575, 581 (1978); Redd v. Federal Land Bank of St. Louis, 851 F.2d 219, 222 (8th Cir. 1988). That presumption deserves extra weight here because Congress so extensively borrowed from FIRREA when it enacted HERA, reenacting not only Section 1821(d)(2)(A) but most of FIRREA’s statutory scheme. Congress thus made clear that it expected the two statutes to be interpreted in pari materia, and in doing so it embraced the existing FIRREA caselaw.
The Perry court expressly rejected the uniform body of precedent because it thought the cases inconsistent with the statutory text, which says that as conservator or receiver FHFA “succeed[s] to . . . all rights, titles, powers, and privileges of the [Companies], and of any stockholder.” 12 U.S.C. § 4617(b)(2)(A)(i); see Op. 28-29. As a textual matter, however, it is not possible for a conservator to “succeed” to a “right”—here, a cause of action—that did not exist before the conservatorship was created and exists now only because of the conservator’s post-appointment wrongdoing. Rather, in this case the shareholders’ authority to sue on behalf of the corporation because the conservator has a manifest conflict of interest originates with the conservatorship itself, springing into existence after the conservator succeeds to the shareholder’s former rights. “
15- “The Perry court was also wrong to conclude, as a factual matter, that there is no conflict of interest here. On the one hand, FHFA has a plain and indisputable conflict of interest with respect to Plaintiff’s allegations that FHFA itself violated HERA, as well as its contractual and fiduciary duties, in acquiescing to the Net Worth Sweep. And even with respect to Plaintiff’s allegations that Treasury acted unlawfully, FHFA has a manifest conflict of interest—not only because its entering into the Net Worth Sweep “was the product of a Treasury directive,” MTC Order 4, but also because Treasury’s unlawful conduct took the form of an illegal agreement with FHFA. Indeed, FHFA could not bring Plaintiff’s claims against Treasury without at least tacitly acknowledging its own unlawful actions and attempting to undo a contract it entered into and has vigorously defended. And regardless of whether “the harsh economic realities facing the GSEs
. . . when FHFA and Treasury executed the PSPAs in 2008” could somehow justify suspending the usual application of the First Hartford rule, Op. 32, this case concerns events that took place in 2012—more than four years after the financial crisis, at a time when the Companies were about to report the largest profits in their history. ”
16- On, “ripeness”
“The Perry court erred yet again in holding that contract claims based on the Net Worth Sweep’s breach of contract claims flowing from FHFA’s nullification of the plaintiffs’ liquidation preference will not be ripe for judicial review until the Companies are actually liquidated. Op. 33-37. Under both Supreme Court and Eighth Circuit precedent, a court deciding whether a claim is ripe must consider two factors: (1) “the ‘fitness of the issues for judicial decision’ ”; and (2) “ ‘the hardship to the parties of withholding court consideration.’ ” Parrish v. Dayton, 761 F.3d 873, 875 (8th Cir. 2014) (quoting Abbott Labs v. Gardner, 387 U.S. 136, 149 (1967)). The Perry opinion misapplies both prongs of that test.
As to the first prong, the Perry court thought the dispute over the plaintiffs’ liquidation preference was currently unfit for judicial resolution because Defendants might someday decide to give back the contractual rights that the Net Worth Sweep took away. Op. 35 (“[J]ust as there was a Third Amendment, the Court cannot definitively say there will be no Fourth or Fifth Amendment . . . .”). But government bodies and officials can always change their minds, and speculation that federal officials might reverse themselves after taking final agency action has never been thought sufficient to render a dispute unripe for judicial review—if it were, pre- enforcement suits would never be ripe. “
17-“The Perry court also erred in its application of the second Abbott Labs factor: whether the party seeking judicial review would suffer any hardship from delay. In considering that factor, the court simply assumed away the injury the plaintiffs suffered in the present from the lost opportunity to receive a liquidation preference in the future. Op. 34-35. But binding Eighth Circuit precedent squarely holds that exactly that sort of injury—the loss of a contingent future use of property that precipitates “a reduction in [its] value” in the present—can render a case ripe for review. Bob’s Home Serv., Inc. v. Warren Cnty., 755 F.2d 625, 627-28 (8th Cir. 1985). In Vogel v. Foth & Van Dyke Associates, 266 F.3d 838 (8th Cir. 2001), for example, the plaintiffs sued a landfill operator for announcing that it was considering locating a new landfill next to property the plaintiffs planned to develop. The Eighth Circuit held that the plaintiffs’ claims were ripe despite the defendant’s argument that any injury was contingent on a final decision about where to locate the landfill. The court of appeals explained that the defendant’s ripeness argument “misconstrue[d] the nature of the [plaintiffs’] alleged harm,” and that a reduction in the present value of the property is a concrete injury for purposes of the ripeness analysis:
The [plaintiffs] do not assert a contingent harm, but rather a current injury. That is, they do not allege that the landfill, if sited next to their property, might produce harm; they claim the announcement of the neighboring land as a potential site has directly and immediately harmed them by making their property less valuable for development and by driving away potential purchasers. . . . [W]hile the selection of the neighboring property as the final landfill site might increase the [plaintiffs’] alleged damages, it could not further ripen their claim.
Id. at 840. So too here. The Net Worth Sweep diminished the value of Plaintiff’s investment by nullifying its right to a liquidation preference, and Plaintiff should not be required to wait until the Companies are actually liquidated to vindicate its contractual rights.7