You are on page 1of 39

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF IOWA


CENTRAL DIVISION

CONTINENTAL WESTERN INSURANCE )
COMPANY, )
)
Plaintiff, )
)
v. ) Case 4:14-cv-00042-RP-RAW
FEDERAL HOUSING FINANCE AGENCY, )
et al., )
)
Defendants. )
_________________________________________ )


DEPARTMENT OF THE TREASURYS MEMORANDUM IN SUPPORT OF
ITS MOTION TO DISMISS THE COMPLAINT OR, IN THE ALTERNATIVE,
TO TRANSFER OR STAY THE ACTION

Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 1 of 39
i

TABLE OF CONTENTS

Page

Introduction ......................................................................................................................................1

Background ......................................................................................................................................4

I. Fannie Mae and Freddie Mac ..............................................................................................4

II. Treasurys Senior Preferred Stock Purchase Agreements with the GSEs ...........................6

III. The Plaintiffs Suit in This Court .......................................................................................10

Argument .......................................................................................................................................10

I. Standard of Review ............................................................................................................10

II. HERA Precludes the Plaintiff from Challenging the Third Amendment ..........................10

A. HERA Bars the Relief Requested in the Complaint ..............................................11

B. The Plaintiff Cannot Bring Claims Based on Its Status as a Shareholder
in the GSEs ............................................................................................................20

1. HERA Bars Direct and Derivative Shareholder Claims ............................20

2. The Plaintiffs Claims Alleging a Right to a Liquidation
Preference are Not Ripe for Judicial Review .............................................24

3. As a Shareholder, the Plaintiff Lacks Prudential Standing
To Sue for Injuries to the GSEs .................................................................25

III. Alternatively, This Action Should Be Transferred to the United States
District Court for the District of Columbia, or This Action Should be Stayed .................26

A. Transfer is Appropriate Under the First-Filed Rule ...............................................27

B. Transfer is Appropriate Under 28 U.S.C. 1404(a) ..............................................28

Conclusion .....................................................................................................................................31
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 2 of 39
ii

TABLE OF AUTHORITIES


Cases Page(s)

Abbott Labs. v. Gardner,
387 U.S. 136 (1967) ...........................................................................................................24

In re AFY,
734 F.3d 810 (8th Cir. 2013) .............................................................................................26

Ark. Blue Cross & Blue Shield v. Little Rock Cardiology Clinic, P.A.,
551 F.3d 812 (8th Cir. 2009) .............................................................................................10

Aventure Commcns Tech., L.L.C. v. Nextel W. Corp.,
C 07-4094-MWB, 2008 WL 73657 (N.D. Iowa Jan. 3, 2008) ..........................................28

Bankers Life & Cas. Co. v. Kirtley,
338 F.2d 1006 (8th Cir. 1964) ...........................................................................................26

Brictson v. Woodrough,
164 F.2d 107 (8th Cir. 1947) .............................................................................................25

Brown v. Medtronic, Inc.,
628 F.3d 451 (8th Cir. 2010) ...............................................................................................5

CBS Interactive Inc. v. Natl Football League Players Assn,
259 F.R.D. 398 (D. Minn. 2009)........................................................................................29

Colo. River Water Conservation Dist. v. United States,
424 U.S. 800 (1976) ...........................................................................................................31

Contl Grain Co. v. FBI,
364 U.S. 19 (1960) .............................................................................................................30

Courtney v. Halleran,
485 F.3d 942 (7th Cir. 2007) .............................................................................................19

DesignSense, Inc. v. MRIGlobal,
4:13-CV-010-DGK, 2013 WL 3205569 (W.D. Mo. June 25, 2013) .................................29

Dieterich v. Harrer,
857 A.2d 1017 (Del. Ch. 2004)..........................................................................................21

Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 3 of 39
iii

Dittmer Properties, L.P. v. FDIC,
708 F.3d 1011 (8th Cir. 2013) ...........................................................................................14

In re Fed. Home Loan Mortg. Corp. Derivative Litig.,
643 F. Supp. 2d 790 (E.D. Va. 2009), affd sub nom. La. Mun. Police Emp.
Ret. Sys. v. FHFA, 434 Fed. Appx 188 (4th Cir. 2011) ..............................................21, 23

In re Fed. Natl Mortg. Assn Sec., Derivative & ERISA Litig.,
629 F. Supp. 2d 1 (D.D.C. 2009), affd sub nom. Kellmer v. Raines,
674 F.3d 848 (D.C. Cir. 2012) ...........................................................................................23

First Hartford Corp. Pension Plan & Trust v. United States,
194 F.3d 1279 (Fed. Cir. 1999)..........................................................................................22

Franchise Tax Bd. of Cal. v. Alcan Aluminum Ltd.,
493 U.S. 331 (1990) ...........................................................................................................25

Freeman v. FDIC,
56 F.3d 1394 (D.C. Cir. 1995) .....................................................................................12, 16

Furgatch v. Resolution Trust Corp.,
No. 93-20304, 1993 WL 149084 (N.D. Cal. Apr. 30, 1993) .............................................15

Gross v. Bell Sav. Bank PaSA,
974 F.2d 403 (3d Cir. 1992).........................................................................................12, 15

Hanson v. FDIC,
113 F.3d 866 (8th Cir. 1997) .............................................................................................12

Hindes v. FDIC,
137 F.3d 148 (3d Cir. 1998)...............................................................................................15

Jama v. Immigration & Customs Enforcement,
543 U.S. 335 (2005) ...........................................................................................................18

In re Kaplan,
143 F.3d 807 (3d Cir. 1998)...............................................................................................25

Kellmer v. Raines,
674 F.3d 848 (D.C. Cir. 2012) .....................................................................................21, 22

Kuriakose v. Fed. Home Loan Mortg. Co.,
674 F. Supp. 2d 483 (S.D.N.Y. 2009) ................................................................................14

Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 4 of 39
iv

Lynn v. Purdue Pharma Co.,
No. 04cv0300, 2004 WL 1242765 (D.N.M. June 7, 2004) ...............................................31

Marshak v. Reed,
No. 96 CV 2292, 2000 WL 33152076 (E.D.N.Y. Oct. 17, 2000) .....................................27

May Dept Stores Co. v. Wilansky,
900 F. Supp. 1154 (E.D. Mo. 1995) ...................................................................................31

McCarthy v. Ozark Sch. Dist.,
359 F.3d 1029 (8th Cir. 2004) ...........................................................................................24

Merrill Lynch, Pierce, Fenner & Smith v. Haydu,
675 F.2d 1169 (11th Cir. 1982) .......................................................................................27

Monsanto Tech. LLC v. Syngenta Crop Prot., Inc.,
212 F. Supp. 2d 1101 (E.D. Mo. 2002)..............................................................................27

Natl Trust for Historic Pres. v. FDIC,
995 F.2d 238 (D.C. Cir. 1993), affd and reinstated on rehg,
21 F.3d 469 (D.C. Cir. 1994) .................................................................................12, 13, 22

Nw. Airlines, Inc. v. Am. Airlines, Inc.,
989 F.2d 1002 (8th Cir. 1993) .....................................................................................10, 27

Orthmann v. Apple River Campground, Inc.,
765 F.2d 119 (8th Cir. 1985) .............................................................................................27

Piper Aircraft Co. v. Reyno,
454 U.S. 235 (1981) ...........................................................................................................30

Potthoff v. Morin,
245 F.3d 710 (8th Cir. 2001) .............................................................................................26

Pragmatic Software Corp.v. Antrim Design Sys., Inc.,
CIV. 02-2595 (JRT/FL), 2003 WL 244804 (D. Minn. Jan. 28, 2003) ..............................27

Rhinelander Paper Co. v. FERC,
405 F.3d 1 (D.C. Cir. 2005) ...............................................................................................14

Steel Co. v. Citizens for a Better Envt,
523 U.S. 83 (1998) .............................................................................................................10


Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 5 of 39
v

Stewart Org., Inc. v. Ricoh Corp.,
487 U.S. 22 (1987) .............................................................................................................30

In re Syncor Intl Corp. Sholders Litig.,
857 A.2d 994 (Del. Ch. 2004)............................................................................................21

Telematics Intl, Inc. v. NEMLC Leasing Corp.,
967 F.2d 703 (1st Cir. 1992) ..............................................................................................15

Terra Intl, Inc. v. Mississippi Chem. Corp.,
119 F.3d 688 (8th Cir. 1997) .............................................................................................29

Texas v. United States,
523 U.S. 296 (1998) ...........................................................................................................24

Tooley v. Donaldson, Lufkin & Jenrette, Inc.,
845 A.2d 1031 (Del. 2004) ................................................................................................21

Town of Babylon v. FHFA,
699 F.3d 221 (2d Cir. 2012)...................................................................................11, 13, 20

Tri-State Hotels, Inc. v. FDIC,
79 F.3d 707 (8th Cir. 1996) ...............................................................................................12

United States v. Mullins,
613 F.3d 1273 (10th Cir. 2010) .........................................................................................15

Ward v. Resolution Trust Corp.,
996 F.2d 99 (5th Cir. 1993) .........................................................................................12, 15

Statutes:

5 U.S.C. 701(a) ...........................................................................................................................11
12 U.S.C. 1455(l) ................................................................................................................5, 6, 13
12 U.S.C. 1719(g) ...............................................................................................................5, 6, 13
12 U.S.C. 1821(j) ..................................................................................................................12, 14
12 U.S.C. 4501 ..............................................................................................................................5
12 U.S.C. 4617(a) ............................................................................................................... passim
12 U.S.C. 4617(b) ............................................................................................................... passim
12 U.S.C. 4617(e) .................................................................................................................18, 24
12 U.S.C. 4617(f) ............................................................................................................11, 12, 14
28 U.S.C. 1391(e) .................................................................................................................29, 30
28 U.S.C. 1404 ..................................................................................................................4, 26, 29

Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 6 of 39
vi

Federal Housing Enterprises Financial Safety and Soundness Act of 1992,
Pub. L. No. 102-550, 1301-1395, 106 Stat. 3672, 3941-4012 ........................................5

Housing and Economic Recovery Act of 2008,
Pub. L. No. 110-289, 122 Stat. 2654 (2008) ........................................................................5

Miscellaneous:

Blacks Law Dictionary (8th ed. 2004) ..........................................................................................15

Blacks Law Dictionary (9th ed. 2009) ............................................................................................7

1 Oxford English Dictionary (2d ed. 1989) ...................................................................................15

Websters Third New International Dictionary (2002) ..................................................................15

Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 7 of 39
1

Introduction
This case concerns the extraordinary, and ongoing, efforts by the Treasury Department to
save two key financial institutions the Federal National Mortgage Association (Fannie Mae)
and the Federal Home Loan Mortgage Corporation (Freddie Mac) from being forced into
immediate liquidation. For decades, Fannie Mae and Freddie Mac, two government sponsored
enterprises (GSEs), had performed an important function for the national housing market by
purchasing home loans from lenders. In 2008, however, Fannie Mae and Freddie Mac
experienced overwhelming losses as a result of a dramatic increase in default rates on residential
mortgages. By the late summer of 2008, the enterprises were at the brink of insolvency and
mandatory receivership. Failure of those enterprises would have had devastating effects on the
national economy. Accordingly, on September 6, 2008, the Federal Housing Finance Agency
(FHFA), as the regulator of the GSEs, exercised the power that Congress had granted to it in the
Housing and Economic Recovery Act of 2008 (HERA) to place Fannie Mae and Freddie Mac
into conservatorship. FHFA, as conservator, then entered into agreements with Treasury
whereby Treasury committed a massive amount of public funds to the GSEs ultimately
providing more than $187 billion in exchange for senior preferred stock in the enterprises and
significant additional economic rights, which were designed to compensate it for the value of its
commitment to the enterprises.
These senior preferred stock purchase agreements (PSPAs) were intended to provide
confidence to the market that the GSEs would not be closed down and liquidated. Under the
PSPAs, Treasury committed to provide funds to each GSE for each calendar quarter in which the
GSEs liabilities exceeded its assets, so as to restore the solvency (i.e., the positive net worth) of
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 8 of 39
2

that enterprise. The availability of these funds on an ongoing basis provided critical market
confidence and stability for trillions of dollars of existing mortgages and in the ability of the GSEs
to fund new mortgages. In return for these funds, Treasury received, among other valuable
consideration, senior preferred stock in the GSEs, and the GSEs agreed to pay a dividend to
Treasury on that stock equal to 10 percent per year of the total amount of funds that Treasury had
provided (plus $1 billion for each GSE).
By 2012, however, the amount of funds that Treasury had provided to the enterprises had
grown so large that it was unlikely that the GSEs would earn enough net income even in years
when they were otherwise profitable to pay Treasury its dividends without the need to take
further draws from Treasury. Because the amount of Treasurys commitment of funds would
become fixed at the end of 2012, these dividend payments threatened to diminish the limited fixed
draw capacity remaining and, ultimately, threaten the ability of Treasury and FHFA to continue to
maintain the operational viability of Fannie Mae and Freddie Mac. Treasury anticipated that the
financial markets would pay close attention to this growing threat to the GSEs viability. FHFA
and Treasury accordingly entered into a Third Amendment to the PSPAs to address this problem.
(The first two amendments had each increased Treasurys commitment of funds, after it had
become apparent that the funds available under the original PSPAs would likely be insufficient to
maintain the GSEs financial health, given the enterprises ongoing losses.)
Under the Third Amendment, the agreements dividend structure was replaced with a
formula under which the GSEs would draw funds from Treasury when they have negative net
worth (i.e., when the difference between assets and liabilities on their balance sheet, in accordance
with Generally Accepted Accounting Principles (GAAP), is negative). Conversely, Treasury
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 9 of 39
3

would receive dividends only when the enterprises have positive net worth, in an amount equal to
the enterprises positive net worth above a specified reserve amount. This amendment ended the
vicious circle of the GSEs drawing funds from Treasury to pay Treasury, removed the threat of
the GSEs potential insolvency as a result of the exhaustion of the draw capacity in the PSPAs, and
further improved market confidence in those GSEs.
The plaintiff in this action, however, objects to this arrangement, asserting that Treasury
has violated the Administrative Procedure Act (APA), either by violating statutory restrictions
in HERA, or by acting arbitrarily and capriciously. The plaintiff is a holder of junior preferred
stock in the GSEs (i.e., stock that is junior in priority to the senior preferred stock that Treasury
received in exchange for its provision of funds to the GSEs). The plaintiffs investments became
essentially worthless as a result of the financial crisis of 2008 and the resulting credit losses on the
GSEs portfolios. Indeed, both Fannie Mae and Freddie Mac exist today solely because Treasury
provided them with billions of dollars of public funds, so as to cover the overwhelming losses that
the GSEs experienced as a result of their investments and guarantee obligations in the years before
the financial crisis.
This Court, however, is not the right forum to address the plaintiffs challenges to the
Treasurys and FHFAs efforts to maintain the solvency of Fannie Mae and Freddie Mac. This
Court lacks jurisdiction over the plaintiffs claims. In enacting HERA, Congress included two
provisions that preclude the GSEs shareholders, like the plaintiff here, from interfering with the
conservatorship process. First, HERA prohibits relief that would restrain the powers that FHFA
exercises as the conservator of the GSEs, such as FHFAs decision to enter into the Third
Amendment. Second, HERA prohibits suits, such as those brought by the plaintiff here, based on
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 10 of 39
4

the plaintiffs status as a shareholder in the GSEs. By statute, the conservator has succeeded to all
of the rights of the shareholders in those institutions. These two independent prohibitions bar
judicial review of the conservators actions and prohibit the plaintiff from proceeding here.
Moreover, even if this case could proceed at all, it should be transferred to the United
States District Court for the District of Columbia. Several earlier-filed suits, raising substantially
the same claims that the plaintiff asserts here, are pending in that Court, including a suit brought by
the plaintiffs parent entity (which is represented by the same counsel as the plaintiff here). A
transfer therefore is appropriate under either the first-filed doctrine or the general standards for a
transfer under 28 U.S.C. 1404.
Background
I. Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are government sponsored enterprises that provide liquidity
to the mortgage market by purchasing whole loans from lenders, or by exchanging mortgage
backed securities (MBS) for whole loans, thereby freeing up lenders capital to make additional
loans. See Compl. 28. These entities, which own or guarantee trillions of dollars of residential
mortgages and MBS, have played a key role in housing finance and the U.S. economy.
Throughout the first half of 2008, the GSEs suffered multi-billion dollar losses on their
mortgage portfolios and guarantees. See Compl. 3. By the end of 2008, Fannie Mae lost $58.7
billion and Freddie Mac lost $50.1 billion. See FHFA, Office of Inspector General, Analysis of
the 2012 Amendments to the Senior Preferred Stock Purchase Agreements at 5 (Mar. 20, 2013)
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 11 of 39
5

(2013 OIG Report) (cited in Compl. 59, 67, 68, 82).
1
These losses exceeded the GSEs
combined earnings for the previous thirty-seven years. Id.
In response to the developing financial crisis, in July 2008, Congress passed the Housing
and Economic Recovery Act of 2008 (HERA), Pub. L. No. 110-289, 122 Stat. 2654 (2008).
Compl. 3. HERA created the Federal Housing Finance Agency (FHFA), an independent
federal agency, to supervise and regulate Fannie Mae, Freddie Mac, and the Federal Home Loan
Banks. 12 U.S.C. 4501 et seq. (Previously, the GSEs had been regulated by the Office of
Federal Housing Enterprise Oversight (OFHEO). See Federal Housing Enterprises Financial
Safety and Soundness Act of 1992, Pub. L. No. 102-550, 1301-1395, 106 Stat. 3672,
3941-4012.) HERA also granted the Director of FHFA the authority to place Fannie Mae and
Freddie Mac in conservatorship or receivership. See 12 U.S.C. 4617(a). FHFA could use this
discretionary authority to be appointed conservator or receiver for the purpose of reorganizing,
rehabilitating, or winding up the affairs of a regulated entity. 12 U.S.C. 4617(a)(2).
HERA also amended the statutory charters of the GSEs to grant the Secretary of the
Treasury the authority to purchase any obligations and other securities issued by the GSEs on
such terms and conditions as the Secretary may determine and in such amounts as the Secretary
may determine, provided that Treasury and the GSEs reached a mutual agreement for such a
purchase. See 12 U.S.C. 1719(g)(1)(A) (Fannie Mae); id. 1455(l)(1)(A) (Freddie Mac).
Treasury was required to determine, prior to exercising this purchase authority, that the purchase

1
Documents incorporated within a complaint by reference are considered part of the pleadings,
and may be cited in this motion to dismiss, which raises a facial challenge to whether the
complaint has stated any claim over which this Court has subject-matter jurisdiction. See
Brown v. Medtronic, Inc., 628 F.3d 451, 459-60 (8th Cir. 2010). The 2013 OIG Report is
included as Exhibit E to the memorandum in support of the dispositive motion that FHFA and its
Director have filed in this action (FHFA Exh. E).
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 12 of 39
6

was necessary to provide stability to the financial markets, prevent disruptions in mortgage
financing, and protect the taxpayer. Id. 1719(g)(1)(B) (Fannie Mae); id. 1455(l)(1)(B)
(Freddie Mac).
In early September 2008, FHFA and Treasury determined that the GSEs had severe capital
deficiencies and were operating in an unsafe and unsound manner. Compl. 3-5. Accordingly,
on September 6, 2008, the Director of FHFA placed them into conservatorship. Press Release,
Statement of FHFA Director James B. Lockhart at 5 (Sept. 7, 2008) (cited in Compl. 35).
2
At
that time, the GSEs financial exposure on their combined guaranteed mortgage-backed securities
(MBS) and debt outstanding totaled more than $5.4 trillion, and their net worth and public stock
prices had fallen sharply. Id. at 1. Without Treasurys funding, both enterprises would have
been insolvent within weeks of the conservatorship decision, thereby triggering mandatory
receivership. See 2013 OIG Report at 5.
II. Treasurys Senior Preferred Stock Purchase Agreements with the GSEs
On September 7, 2008, one day after the GSEs entered conservatorship, Treasury used its
authority to rescue the GSEs from impending insolvency and mandatory receivership, providing
them with access to a lifeline of billions of dollars in taxpayer funds. See Compl. 6. Treasury
entered into Senior Preferred Stock Purchase Agreements (the PSPAs) with each GSE, through
FHFA. Under the PSPAs, Treasury committed to advance funds to each GSE for each calendar
quarter in which the GSEs liabilities exceeded its assets, in accordance with GAAP, so as to
maintain the solvency (i.e., positive net worth) of that enterprise. If a draw was needed, FHFA

2
Director Lockharts statement is available at http://www.fhfa.gov/Media/PublicAffairs/Pages/
Statement-of-FHFA-Director-James-B--Lockhart-at-News-Conference-Annnouncing-Conservat
orship-of-Fannie-Mae-and-Freddie-Mac.aspx.
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 13 of 39
7

submitted a request to Treasury to allow the GSE to draw on the funds committed under its PSPA.
Treasury would then provide funds sufficient to eliminate any net worth deficit. See Fannie Mae
PSPA 2.1, 2.2, Freddie Mac PSPA 2.1, 2.2 (cited in, e.g., Compl. 6) (FHFA Exh. A).
As of August 8, 2012, Fannie Mae had drawn $116.15 billion and Freddie Mac had drawn
$71.34 billion from Treasury. See Compl. 55. These draws were necessary to maintain the
positive net worth, and thus the viability, of each company. Had Treasury not supplied this
capital, both companies would have entered mandatory receivership. See 12 U.S.C.
4617(a)(4)(A) (FHFA must place the GSE in receivership if the obligations of the GSE exceed
its assets for 60 calendar days).
In exchange for the capital that it provided to the GSEs, Treasury received senior preferred
stock with a liquidation preference,
3
warrants to purchase 79.9 percent of each GSEs common
stock, and commitment fees. Compl. 8, 73; Fannie Mae PSPA 3.1-3.4; Freddie Mac PSPA
3.1-3.4. The face value of the liquidation preference on Treasurys senior preferred stock was
$1 billion from each GSE, and it increased dollar-for-dollar as either Fannie Mae or Freddie Mac
drew on their PSPA funding capacity. Fannie Mae PSPA 3.3; Freddie Mac PSPA 3.3.
Treasury received no additional shares of stock when the GSEs made draws under the PSPAs.
See Fannie Mae PSPA 3.1, Freddie Mac PSPA 3.1. Currently, Treasury has a combined
liquidation preference of $189.5 billion for the two GSEs. (This reflects approximately $187.5
billion in draws, plus the initial $2 billion in liquidation preference.) Compl. 15.

3
A liquidation preference is [a] preferred shareholders right, once the corporation is
liquidated, to receive a specified distribution before common shareholders receive anything.
Blacks Law Dictionary 1298 (9th ed. 2009).
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 14 of 39
8

Treasury also received quarterly dividends on the total amount of its senior preferred stock.
Compl. 7-8. Prior to the Third Amendment, the GSEs paid dividends at an annual rate of ten
percent of their respective liquidation preferences. Fannie Mae Senior Preferred Stock Certificate
5; Freddie Mac Senior Preferred Stock Certificate 5 (cited in Compl. 49) (FHFA Exh. B).
(The quarterly dividend payment thus amounted to 2.5% of the liquidation preference.) Treasury
would provide funds to the GSEs to cure both enterprises negative net worth, which was caused in
part by the GSEs payment of dividends to Treasury. However, each instance of Treasury
providing funds to the GSEs to pay quarterly dividend obligations back to Treasury increased the
liquidation preference even further. In turn, this increased future quarterly dividend payments.
See Compl. 55.
The original PSPAs also restricted dividend payments to all shareholders who were
subordinate to Treasury in the capital structure. Fannie Mae PSPA 5.1; Freddie Mac PSPA
5.1. Under these agreements, the GSEs cannot pay or declare a dividend to subordinate
shareholders without the prior written consent of Treasury so long as Treasurys preferred stock is
unredeemed. Id. Nor can the GSEs set aside any amount for any such purpose without the
prior written consent of Treasury. Id.
The PSPAs also required the GSEs to pay a periodic commitment fee to Treasury
beginning on March 31, 2010. Compl. 73; Fannie Mae PSPA 3.1, 3.2; Freddie Mac PSPA
3.1, 3.2. The periodic commitment fee is intended to fully compensate [Treasury] for the
support provided by the ongoing Commitment following December 31, 2009. Id. The amount
of the fee was to be determined with reference to the market value of the Commitment as then in
effect, as mutually agreed between Treasury and the GSEs, in consultation with the Chairman of
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 15 of 39
9

the Federal Reserve. Id. While the fee was initially to be set by December 31, 2009, the PSPAs
(as amended) permitted Treasury, in its sole discretion, to waive the fee for up to one year at a time
based on conditions in the mortgage market. Compl. 48; Second Amendment to Amended and
Restated Fannie Mae PSPA, 8 (Dec. 24, 2009); Second Amendment to Amended and Restated
Freddie Mac PSPA, 8 (Dec. 24, 2009) (cited in Compl. 53) (FHFA Exh. A).
Treasurys rights under the PSPAs its receipt of senior preferred stock with
accompanying dividend rights, warrants to purchase common stock, and the right to set
commitment fees reflected the extraordinary nature of the commitment it had made to the GSEs.
Simply put, the GSEs would have been liquidated, with dramatically negative results for the
United States economy, if Treasury had not committed hundreds of billions of dollars to attempt to
stave off the GSEs mandatory receivership and liquidation.
In August 2012, FHFA, acting as conservator for the Enterprises, entered into the Third
Amendment to the PSPAs. Compl. 68. The Third Amendment eliminated the PSPAs
provisions requiring the payment of a fixed, 10-percent dividend. Compl. 70. Instead, an
Enterprise now pays a quarterly variable dividend known as a net worth sweep only if the
Enterprise has a positive net worth after accounting for prescribed capital reserves. Compl. 70.
If either Enterprises net worth is negative in a quarter, no dividend is due from that Enterprise.
Id. The Third Amendment also suspended the periodic commitment fee that each Enterprise
would otherwise owe to Treasury. Third Amendment to Amended and Restated Fannie Mae
PSPA, 4 (Aug. 17, 2012); Third Amendment to Amended and Restated Freddie Mac PSPA, 4
(Aug. 17, 2012) (cited in Compl. 68) (FHFA Exh. A).

Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 16 of 39
10

III. The Plaintiffs Suit in This Court
The plaintiff, an owner of preferred shares in Fannie Mae and Freddie Mac, alleges that the
Third Amendment expropriated the value of its preferred stock. See, e.g., Compl. 12-13, 18,
68-70. The plaintiff has brought suit against FHFA and its Director, and also against Treasury.
With respect to Treasury, the plaintiff contends that Treasury lacked the legal authority to enter
into the Third Amendment and that Treasurys decision-making with respect to the Third
Amendment was arbitrary and capricious. Compl. 114-36.
Argument
I. Standard of Review
Before proceeding to the merits of a case, a court must ensure that it is vested with subject
matter jurisdiction over the action. Ark. Blue Cross & Blue Shield v. Little Rock Cardiology
Clinic, P.A., 551 F.3d 812, 816 (8th Cir. 2009). Treasury moves to dismiss the complaint for lack
of jurisdiction or, alternatively, moves to transfer this action to the United States District Court for
the District of Columbia. Under Federal Rule of Civil Procedure 12(b)(1), the plaintiff bears the
burden to show that the court has jurisdiction over its claims. See Steel Co. v. Citizens for a Better
Envt, 523 U.S. 83, 104 (1998). The decision whether to transfer a case to another district court is
committed to this Courts discretion. See Nw. Airlines, Inc. v. Am. Airlines, Inc., 989 F.2d 1002,
1006 (8th Cir. 1993).
II. HERA Precludes the Plaintiff from Challenging the Third Amendment
The plaintiff challenges Treasury and FHFAs decision to enter into the Third Amendment
to the PSPAs, under a variety of theories. This Court lacks jurisdiction over the complaint,
however, because it violates two separate, and independent, barriers to judicial review over such
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 17 of 39
11

claims that Congress erected when it enacted HERA. First, HERA prohibits relief that would
restrain the powers that FHFA exercises as conservator of the GSEs, such as the decision to enter
into the Third Amendment. Second, HERA prohibits suits, such as those brought by the plaintiff
here, based on the plaintiffs status as a shareholder in the GSEs; under HERA, the conservator
(FHFA) has succeeded to all of the rights of the shareholders in those institutions.
A. HERA Bars the Relief Requested in the Complaint

At the outset, the complaint must be dismissed because it is barred by the anti-injunction
provision of HERA. In its complaint, the plaintiff seeks a declaratory judgment that the Third
Amendment is unlawful, as well as injunctions preventing FHFA and Treasury from
implementing, applying, or taking any action whatsoever pursuant to the Third Amendment.
Compl, Prayer for Relief m.
This requested relief, however, conflicts with the statutory bar against injunctive or other
equitable relief affecting or restraining FHFAs powers as conservator of the GSEs. Specifically,
12 U.S.C. 4617(f) states that: Except 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 the Agency
as a conservator or a receiver. By its terms, this provision excludes judicial review of the
exercise of powers or functions given to the FHFA as a conservator. Town of Babylon v. FHFA,
699 F.3d 221, 228 (2d Cir. 2012). Where, as here, acts taken by FHFA in its capacity as
conservator are challenged, [a] conclusion that the challenged acts were directed to an institution
in conservatorship and with the powers given to the conservator ends the inquiry. Id.
Section 4617(f) does not permit judicial review of FHFAs actions as conservator or
receiver. Indeed, courts interpreting a nearly identical provision barring judicial review of
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 18 of 39
12

actions by the Resolution Trust Corporation (and its successor, the Federal Deposit Insurance
Corporation) as conservator or receiver of failed banking institutions
4
have held that the
provision permitted review only where the [agency] is acting clearly outside its statutory
powers. Gross v. Bell Sav. Bank PaSA, 974 F.2d 403, 407 (3d Cir. 1992). By contrast, where
the [agency] performs functions assigned it under the statute, injunctive relief will be denied even
where the [agency] acts in violation of other statutory schemes. Id.; see also Freeman v. FDIC,
56 F.3d 1394, 1399 (D.C. Cir. 1995) (Section 1821(j) does indeed effect a sweeping ouster of the
courts power to grant equitable remedies); Natl Trust for Historic Pres. v. FDIC, 995 F.2d 238,
240 (D.C. Cir. 1993), affd and reinstated on rehg, 21 F.3d 469 (D.C. Cir. 1994); accord Ward v.
Resolution Trust Corp., 996 F.2d 99, 103 (5th Cir. 1993) (because disposing of assets of the failed
thrift when acting as its conservator or receiver is a quintessential statutory power of the RTC,
injunctive relief is unavailable even if the RTC is improperly or even unlawfully exercising that
power). Moreover, the prohibition against relief that would restrain or affect the actions of a
conservator or receiver applies to all nonmonetary remedies, including injunctive relief,
declaratory relief, and rescission. Freeman, 56 F.3d at 1399. The Eighth Circuit has likewise
held that [s]ection 1821(j) . . . effect[s] a sweeping ouster of courts power to grant equitable
remedies. Hanson v. FDIC, 113 F.3d 866, 871 (8th Cir. 1997) (citing Freeman) (alteration in
original); see also Tri-State Hotels, Inc. v. FDIC, 79 F.3d 707, 715 (8th Cir. 1996) (holding that

4
Compare 12 U.S.C. 1821(j) (Except as provided in this section, no court may take any
action, except at the request of the Board of Directors by regulation or order, to restrain or affect
the exercise of powers or functions of the Corporation as a conservator or receiver.) with 12
U.S.C. 4617(f) (Except 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 the Agency as a
conservator or a receiver.).
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 19 of 39
13

because of 1821(j), [t]his Court therefore lacks jurisdiction to grant the requested equitable
relief.).
Congress obviously envisioned that Treasury would purchase preferred shares or other
obligations of the GSEs. See 12 U.S.C. 1719(g)(1) (empowering the Treasury Department to
purchase shares of Fannie Mae); id. 1455(l)(1) (same power with respect to shares of Freddie
Mac). Congress also envisioned that Treasury would exercise its rights pursuant to those
purchases, including its right to amend the agreement to change the payment of dividends. Id.
1719(g)(2)(A), 1455(l)(2)(A). Furthermore, HERA grants FHFA, as conservator, the power
to carry on the business of the GSEs, and put the [GSEs] in a sound and solvent condition. 12
U.S.C. 4617(b)(2)(D). The conservator is empowered to transfer or sell any asset of the
[GSEs] in default, and may do so without any approval, assignment, or consent with respect to
such transfer or sale. 12 U.S.C. 4617(b)(2)(G). The PSPAs with Treasury provided both
companies the capital that they needed to continue operations after the third quarter of 2008, and
funding from Treasury eliminated net worth deficiencies that would have triggered mandatory
receivership. FHFA and Treasury determined that the Third Amendment would end the need for
the GSEs to draw funds from Treasury to pay dividends to Treasury, and would materially reduce
the risk that the GSEs would be insolvent in the future. It was thus squarely within FHFAs
powers as conservator. See Town of Babylon, 699 F.3d at 227-28 (the exclusion of judicial
review over the exercise of [FHFAs power as conservator] would be relatively meaningless if it
did not cover an FHFA directive to an institution in conservatorship to mitigate or avoid a
perceived financial risk.); Natl Trust for Historic Pres., 995 F.2d at 239 (An injunction against
the planned sale would surely restrain or affect the FDICs exercise of those powers or
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 20 of 39
14

functions.); see also Kuriakose v. Fed. Home Loan Mortg. Co., 674 F. Supp. 2d 483, 494
(S.D.N.Y. 2009) (The FHFA is well within its statutory authority to enforce the contracts of
Freddie Mac and take any other action it determines to be in the best interest of Freddie Mac.
HERA clearly provides that this Court does not have the jurisdiction to interfere with such
authority.).
The plaintiff cannot evade HERAs bar against judicial review by suing both FHFA and
Treasury, the counter-party to the Third Amendment. Section 4617(f) precludes any court from
taking 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). Injunctive relief that, in the
words of the complaint, prevents a counter-party from from implementing, applying, or taking
any action whatsoever pursuant to an agreement with a conservator would obviously affect
FHFAs powers as conservator. See Compl, Prayer for Relief m. As the Eighth Circuit has put
it, an action can affect the exercise of powers by an agency without being aimed directly at [the
agency]. [T]he statute, [in that case, 12 U.S.C. 1821(j),] by its terms, can preclude relief
even against a third party where the result is such that the relief restrains or affects the exercise
of powers or functions of the [agency] as conservator or receiver. Dittmer Properties, L.P. v.
FDIC, 708 F.3d 1011, 1017 (8th Cir. 2013) (internal quotation and alterations omitted).
The relief that the plaintiff seeks here, whether asserted against Treasury or FHFA, would
completely set aside the agreements that have allowed both companies to continue operating after
2008, and thus is barred by HERAs anti-injunction provision. See Rhinelander Paper Co. v.
FERC, 405 F.3d 1, 6 (D.C. Cir. 2005) (The verb affect means, very broadly, to produce an
effect on; to influence in some way.) (citing Blacks Law Dictionary 92 (8th ed. 2004)); see also
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 21 of 39
15

United States v. Mullins, 613 F.3d 1273, 1278 (10th Cir. 2010) (affect means to make a
material impression on; to act upon, influence, move, touch, or have an effect on, 1 Oxford
English Dictionary 211 (2d ed. 1989), or, perhaps more appositely to this case, to have a
detrimental influence on, Websters Third New International Dictionary 35 (2002)); Hindes v.
FDIC, 137 F.3d 148, 160 (3d Cir. 1998) ([A]n action can affect the exercise of powers by an
agency without being aimed directly at [the agency].); Telematics Intl, Inc. v. NEMLC Leasing
Corp., 967 F.2d 703, 707 (1st Cir. 1992) (Permitting Telematics to attach the certificate of
deposit, if that attachment were effective against the FDIC, would have the same effect, from the
FDIC's perspective, as directly enjoining the FDIC from attaching the asset. In either event, the
district court would restrain or affect the FDIC in the exercise of its powers as receiver. Section
1821(j) prohibits such a result.); Furgatch v. Resolution Trust Corp., No. 93-20304, 1993 WL
149084, at *2 (N.D. Cal. Apr. 30, 1993) (Plaintiff contends that section 1821(j) is inapplicable in
this case because he is attempting to enjoin HomeFed and the trustee who is conducting the sale,
not RTC. However, enjoining these parties indirectly enjoins RTC, which a district court has no
power to do.).
The plaintiff attempts to dodge HERAs anti-injunction provision by alleging that, when it
agreed to the Third Amendment, FHFA acted outside of its conservatorship authority. This
argument is misconceived, because the relevant question under section 4617(f) is not whether the
plaintiff puts forth an argument that FHFA improperly or unlawfully exercised its statutory
authority. Instead, the relevant question is only whether the agency is acting clearly outside its
statutory powers. Gross, 974 F.2d at 407 (emphasis added). See also Ward, 996 F.2d at 102-03
(as long as the [agency] is exercising judgment under one of its enumerated powers the courts
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 22 of 39
16

may not enjoin the activities of the RTC merely because someone alleges that it is not running the
troubled institutions affairs in a legal manner) (internal quotation omitted); Freeman, 56 F.3d at
1399 (The exercise of these powers may not be restrained by any court, regardless of the
claimants likelihood of success on the merits of his underlying claims.).
In any event, the plaintiffs challenge to FHFAs statutory authority takes two forms.
First, the plaintiff contends that the Third Amendment was not a conservatorship action because it
begins a supposedly unlawful wind-up of the GSEs. See, e.g., Compl. 71. In the plaintiffs
view, FHFAs conservatorship powers under HERA authorize the agency to do no more than
rehabilitate the GSEs at taxpayer expense and return them to the market in their prior form.
Compl. 38. This argument depends on two premises, both of them wrong. The first premise
that FHFA does not have the power to wind up the companies as conservator is contradicted by
the plain text of the statute. HERA provides that [t]he Agency 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. 12 U.S.C. 4617(a)(2) (emphasis added).
Indeed, in the exercise of this statutory authority, FHFA has consistently maintained that
the conservatorship aims to shrink the size of the GSEs operations and to contract their portfolios.
As it reported to Congress in early 2012, one of the goals of conservatorship is to [g]radually
contract the Enterprises dominant presence in the marketplace while simplifying and shrinking
their operations. FHFA, A Strategic Plan for Enterprise Conservatorships: The Next Chapter in
a Story that Needs an Ending at 2 (Feb. 21, 2012) (cited in Compl. 79).
5
Thus, the plaintiffs
allegation that the Third Amendment mandated the winding up of the Companies, Compl. 71,

5
FHFAs Strategic Plan is available at http://www.fhfa.gov/AboutUs/Reports/Report
Documents/20120221_StrategicPlanConservatorships_508.pdf.
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 23 of 39
17

misses the mark. The contraction of the GSEs investment portfolios the source of sizable
losses both before and after the enterprises entered into conservatorship has been a goal of the
conservatorship ever since the FHFA and Treasury first agreed to the PSPAs in September 2008.
See Fannie Mae PSPA 5.7; Freddie Mac PSPA 5.7. As noted, HERA provided FHFA with
statutory authority, as conservator, to wind up the GSEs operations, and FHFA exercised that
authority in 2008 to require the GSEs to reduce their investment portfolios. See 12 U.S.C.
4617(a)(2). The Third Amendment, in turn, restructured the fixed dividend payments to
Treasury to account for the effect that these reductions would have on the GSEs long-run
profitability.
The agreement was plainly consistent with FHFAs powers as conservator, and eliminated
the risk that the GSEs would need to draw on their funding from Treasury in order to pay dividends
on the senior preferred stock, thus diminishing Treasurys PSPA support a risk that the GSEs had
repeatedly acknowledged. See, e.g., Fannie Mae Second Quarter Report, Form 10-Q at 12 (Aug.
8, 2012) (cited in Compl. 59) (FHFA Exh. C) (Although we may experience period-to-period
volatility in earnings and comprehensive income, we do not expect to generate net income or
comprehensive income in excess of our annual dividend obligation to Treasury over the long term.
However, we expect that in some future quarters we will be able to generate comprehensive
income sufficient to cover at least a portion of our quarterly dividend payment to Treasury. We
also expect that, over time, our dividend obligation to Treasury will increasingly drive our future
draws under the senior preferred stock purchase agreement.).
The second premise of the plaintiffs theory that FHFA exceeded its conservatorship
powers that HERA sets forth certain actions that the conservator would be required to undertake
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 24 of 39
18

misconstrues the authority that Congress granted to FHFA. The statute empowers FHFA to
take a number of steps as conservator or receiver, but those powers are expressed in permissive,
not mandatory, terms. See 12 U.S.C. 4617(b)(2)(B) (The Agency may, as conservator or
receiver exercise the authority specified in 4617(b)(2)(B)(i)-(v)) (emphasis added); id.
4617(b)(2)(D) (The Agency may, as conservator, take such action as may be (i) necessary to
put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the
business of the regulated entity and preserve and conserve the assets and property of the regulated
entity.) (emphasis added). Indeed, the statute contemplates that a conservator may take any, all
or a portion of any of the actions set forth, at its discretion. The word may customarily
connotes discretion. Jama v. Immigration & Customs Enforcement, 543 U.S. 335, 346 (2005).
As has already been discussed, Treasury and FHFA determined that the Third Amendment
eliminated the need to draw funds from Treasury to pay dividends to Treasury, thereby preserving
the remaining PSPA funding to cover future net worth deficits; the amendment was thus consistent
with FHFAs obligations as conservator, even under the plaintiffs theory.
Second, the plaintiff argues that FHFA acted outside of its powers as conservator because
the Third Amendment supposedly contravenes the statutory receivership liquidation priorities.
Compl. 13. However, FHFAs maximum liability to shareholders in the event of receivership
was fixed by 12 U.S.C. 4617(e), which limits that liability to the amount that shareholders would
have received had the GSEs assets and liabilities been liquidated at the time of statutory default in
September 2008. And, in any event, the statutes provisions concerning the distribution priority
in receivership do not restrain FHFAs authority to transfer assets in conservatorship. As a court
of appeals noted in reviewing a similar challenge to FDICs authority as receiver, the agencys
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 25 of 39
19

power to transfer funds provided specific statutory authorization for its actions, and a challenge
to that transfer was barred, notwithstanding the claim that FDIC had contravened a similar
statutory distribution priority scheme. Courtney v. Halleran, 485 F.3d 942, 949 (7th Cir. 2007).
None of the allegations in the complaint demonstrates that FHFA overstepped its
conservatorship authority through the Third Amendment, let alone that FHFA acted clearly
beyond its statutory powers. As conservator, the FHFA has broad powers to, among other things,
take over the assets of and operate the regulated entity with all the powers of the shareholders, the
directors, and the officers of the regulated entity and conduct all business of the regulated entity,
12 U.S.C 4617(b)(2)(B)(i), perform all functions of the regulated entity in the name of the
regulated entity which are consistent with the appointment as conservator or receiver, id.
4617(b)(2)(B)(iii), and take actions appropriate to carry on the business of the regulated entity
and preserve and conserve the assets and property of the regulated entity. Id.
4617(b)(2)(D)(ii). FHFA is not required to take these actions with the unyielding goal of
rehabilitating the GSEs and returning them to the market in their prior form. Rather, as
conservator, FHFA can act with the goal of reorganizing, rehabilitating, or winding up the
affairs of the GSEs. Id. 4617(a)(2) (emphasis added).
The PSPA funding represents, by far, the GSEs single largest source of capital support,
and the Third Amendment guaranteed that neither GSE would have to draw on that support (which
otherwise risked being depleted) in order to pay quarterly dividends. There is no question that
FHFA acted within its explicit enumerated conservatorship powers by seeking to preserve the
critical source of funding that FHFA, as conservator, had previously used to prevent both GSEs
from entering mandatory receivership. That fact ends the inquiry. Town of Babylon, 699 F.3d
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 26 of 39
20

at 228. The plaintiff may disagree with FHFAs use of its conservatorship powers, but HERAs
bar on judicial review exists to prevent such second-guessing of the conservators decisions.
B. The Plaintiff Cannot Bring Claims Based on Its Status as a Shareholder in the
GSEs

Further, the complaint must be dismissed because, in addition to barring challenges to the
actions of FHFA as conservator, HERA bars suits by shareholders. The plaintiff explicitly
premises its standing to bring this action on its ownership of preferred stock in both GSEs, Compl.
31, and alleges that the Third Amendment expropriate[d] for the Government the value of the
Preferred Stock and common stock held by private investors in violation of the rules of priority,
the Companies contractual obligations, and the need to maintain the Companies status as private
shareholder-owned Companies. Compl. 13. Both HERA and standing rules prevent them
from bringing these claims in this Court.
1. HERA Bars Direct and Derivative Shareholder Claims

First, HERA bars lawsuits brought by shareholders during conservatorship. Upon its
appointment as conservator of the GSEs, FHFA succeeded to all of the rights, titles, powers, and
privileges of the GSEs and of any stockholder, officer, or director of the GSEs. 12 U.S.C.
4617(b)(2)(A)(i). HERA further empowered FHFA to take over the assets of and operate [the
GSEs] with all the powers of [the GSEs] shareholders, directors, and officers, and to
conduct all business of [the GSEs]. Id. 4617(b)(2)(B)(i). The D.C. Circuit has held that
4617(b) 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)
(alterations in original). The Fourth Circuit has likewise affirmed a district courts post-HERA
determination that the plain meaning of the statute is that all rights previously held by Freddie
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 27 of 39
21

Macs stockholders, including the right to sue derivatively, now belong exclusively to the FHFA.
In re Fed. Home Loan Mortg. Corp. Derivative Litig. (In re Freddie Mac), 643 F. Supp. 2d 790,
795 (E.D. Va. 2009) (emphasis in original), affd sub nom. La. Mun. Police Emp. Ret. Sys. v.
FHFA, 434 Fed. Appx 188 (4th Cir. 2011). While Kellmer and In re Freddie Mac addressed
derivative claims, the interpretation of HERA adopted by those Courts of Appeals deprive the
plaintiff of standing whether its claims are characterized as derivative or direct. The ability
to bring a cause of action as a shareholder of the GSEs is obviously a right[], title[], power[], [or]
privilege[] of being a shareholder, and thus that ability was transferred to FHFA by operation of
law upon its appointment as conservator. See 12 U.S.C. 4617(b)(2)(A)(i).
6

Congress has already created a forum for the plaintiff to present its claim that the Third
Amendment violates the rules of priority for the payment of a liquidation preference on its
preferred and common stock. This claim regarding a right to payment, resolution, or other
satisfaction of their claims can be presented only in receivership, and only then if the claim has
been properly exhausted under the claims administration process. See 12 U.S.C.

6
In any event, the claims that the plaintiff seeks to assert here are derivative. To distinguish
between a derivative and direct claim, [t]he proper analysis has been and should remain that a
court should look to the nature of the wrong and to whom the relief should go. The stockholders
claimed direct injury must be independent of any alleged injury to the corporation. The
stockholder must demonstrate that the duty breached was owed to the stockholder and that he or
she can prevail without showing an injury to the corporation. Tooley v. Donaldson, Lufkin &
Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004) (emphasis added). The particular label that the
plaintiff chooses to attach to its claim is irrelevant. See, e.g., Dieterich v. Harrer, 857 A.2d 1017,
1027 (Del. Ch. 2004) (Even after Tooley, a claim is not direct simply because it is pleaded that
way, and mentioning a merger does not talismanically create a direct action. Instead, the court
must look to all the facts of the complaint and determine for itself whether a direct claim exists.);
In re Syncor Intl Corp. Sholders Litig., 857 A.2d 994, 997 (Del. Ch. 2004) ([U]nder Tooley, the
duty of the court is to look at the nature of the wrong alleged, not merely at the form of words used
in the complaint.). The injury that the plaintiff alleges is not independent of a claimed injury to
the GSEs.
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 28 of 39
22

4617(b)(2)(K)(i). Congress has also expressly provided that such a claim shall be subject to the
priority of claims and maximum liability provisions of HERA. See id. (right to payment,
resolution, or other satisfaction of their claims, as permitted under subsections (b)(9), (c), and
(e).); see also Natl Trust for Historic Pres., 21 F.3d at 472 (a private person genuinely
aggrieved by [] unlawful FDIC action could generally bring a suit for damages, or seek
administrative redress through the 1821(d) monetary claims procedure which ultimately includes
judicial review.). By bringing what it purports to be a direct action concerning its liquidation
preference now, when all rights, titles, powers, and privileges of shareholders are vested in
FHFA, the plaintiff is simply trying to ignore the process that Congress established to determine its
claim in the event of liquidation.
Moreover, there is no exception to this explicit bar on lawsuits brought by shareholders that
would allow the plaintiff to bring this suit. In Kellmer, the D.C. Circuit referred in passing to
authority in other circuits discussing a manifest conflict of interest exception to FIRREAs bar to
shareholder suits. See Kellmer, 674 F.3d at 850 (All of these courts have found that, absent a
manifest conflict of interest by the conservator not at issue here, the statutory language bars
shareholder derivative actions.). Of the three cases that the court cited in Kellmer, only First
Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279, 1295 (Fed. Cir. 1999),
recognized such an exception to FIRREAs prohibition against shareholder suits, and that conflict
of interest exception involved a pre-receivership claim against a predecessor agency to the FDIC.
No circuit, in the context of either FIRREA or HERA, has held that a conflict of interest exception
allows a shareholder to sue the conservator over conservatorship actions.
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 29 of 39
23

Nor is such an exception consistent with the explicit text of the statute. HERA
categorically prohibits shareholder suits, and contains no language creating an exception to this
categorical prohibition for supposed conflicts of interest, or for any other reason. This Court is
not free to judicially create such an exception, where Congress did not see fit to do so. The
district courts presented with this issue thus have reasoned, correctly, that HERA does not include
any exception to its bar on shareholder suits, let alone an exception for a supposed conflict of
interest. In re Fed. Natl Mortg. Assn Sec., Derivative & ERISA Litig. (In re Fannie Mae),
629 F. Supp. 2d 1, 4 (D.D.C. 2009) (HERAs plain language provides, in a broad stroke, that the
FHFA succeeds to all rights, titles, powers, and privileges of the stockholders of Fannie Mae .
This directive implies no exception, and plaintiffs[] fail to identify any accompanying statutory
text to persuade this Court that, when read as a whole, HERA carved out or otherwise permits the
exception they propound.), affd sub nom. Kellmer v. Raines, 674 F.3d 848 (D.C. Cir. 2012); In re
Freddie Mac, 643 F. Supp. 2d at 797 (the broad, sweeping language of HERA clearly
demonstrates Congressional intent to transfer as much control of Freddie Mac as possible to the
FHFA, including any right to sue on behalf of the corporation.).
These decisions are consistent with both the plain meaning of HERA, which contains no
exceptions to the bar on shareholder lawsuits for either direct or derivative lawsuits, as well as the
broader purposes of the conservatorship statute. Derivative actions arise only in circumstances
where the shareholder alleges that the corporate directors have violated a duty of care to the
corporation. An interpretation that bars shareholders from suing derivatively, but that also
provides for an exception whenever the conservator declines to sue itself or its counter-party,
would eviscerate the text of 4617(b)(2)(A)(i).
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 30 of 39
24

2. The Plaintiffs Claims Alleging a Right to a Liquidation Preference are
Not Ripe for Judicial Review

The plaintiff asserts that setting aside the Third Amendment would improve its potential
recovery in the event of the GSEs liquidation. Such a claim, however, is not ripe for judicial
review. Neither GSE is in liquidation, nor headed for immediate liquidation (a result of
Treasurys unprecedented commitment and provision of funds to the GSEs), and this not an
alleged injury that is ripe for review at this point. Texas v. United States, 523 U.S. 296, 300
(1998) (A claim is not ripe for adjudication if it rests upon contingent future events that may not
occur.) (internal quotation omitted); see also McCarthy v. Ozark Sch. Dist., 359 F.3d 1029, 1037
(8th Cir. 2004) (The purpose of the ripeness doctrine is to prevent the courts, through avoidance
of premature adjudication, from entangling themselves in abstract disagreements over
administrative policies, and also to protect the agencies from judicial interference until an
administrative decision has been formalized and its effects felt in a concrete way by the
challenging parties.) (quoting Abbott Labs. v. Gardner, 387 U.S. 136, 148-49 (1967)).
Further, the plaintiff overlooks the limit on its recovery put in place by HERA in the event
of receivership. The statute contains a limitation on recovery by shareholders that fixes the
receivers maximum liability to them at the amount that the shareholders would have received had
the GSEs gone into immediate liquidation at the time of statutory default in September 2008. See
12 U.S.C. 4617(e)(2). In any eventual receivership, shareholders will be entitled to receive no
more than they could have received in a hypothetical liquidation in September 2008, when both
GSEs went into statutory default. This provision exists to prevent the plaintiff from doing
precisely what it is attempting to do through this lawsuit: recover a windfall because of the
conservatorship actions of FHFA, executed with taxpayer funds from Treasury. The plaintiffs
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 31 of 39
25

claim of an injury to the liquidation preference that it might receive under this statutory scheme,
then, is not one that is ripe for review at this stage.
3. As a Shareholder, the Plaintiff Lacks Prudential Standing To Sue for
Injuries to the GSEs

Moreover, because the plaintiffs purported injury is an injury to the value of its
shareholdings, Compl. 7, the plaintiff lacks prudential standing under the shareholder standing
rule. As a prudential limit on standing, the shareholder standing rule, also known as the
derivative injury rule, prevents shareholders from suing over injuries to the corporation.
Franchise Tax Bd. of Cal. v. Alcan Aluminum Ltd., 493 U.S. 331, 336 (1990) (Related to this
principle we think is the so-called shareholder standing rule . [T]he rule is a longstanding
equitable restriction that generally prohibits shareholders from initiating actions to enforce the
rights of the corporation unless the corporations management has refused to pursue the same
action for reasons other than good-faith business judgment.). The derivative injury rule holds
that a shareholder (even a shareholder in a closely-held corporation) may not sue for personal
injuries that result directly from injuries to the corporation. In re Kaplan, 143 F.3d 807, 811-12
(3d Cir. 1998) (Alito, J.). The Eighth Circuit has applied the shareholder standing rule for
decades. Brictson v. Woodrough, 164 F.2d 107, 109 (8th Cir. 1947) ([a]ctions to enforce
corporate rights or redress injuries to the corporation cannot be maintained by a stockholder in his
own name even though the injury to the corporation may incidentally result in the depreciation
or destruction of the value of the stock.); see also Potthoff v. Morin, 245 F.3d 710, 716 (8th Cir.
2001) (Generally, if a harm has been directed toward the corporation, then only the corporation
has standing to assert a claim.); In re AFY, 734 F.3d 810, 820 (8th Cir. 2013); Bankers Life & Cas.
Co. v. Kirtley, 338 F.2d 1006, 1013 (8th Cir. 1964).
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 32 of 39
26

The plaintiff cannot premise standing for this case on its status as a shareholder in the
GSEs. Nor can it sue derivatively on behalf of the GSEs. With no basis for standing, its
complaint should be dismissed.
III. Alternatively, This Action Should Be Transferred to the United States District Court
for the District of Columbia, or This Action Should Be Stayed

If the Court denies the motion to dismiss for lack of jurisdiction, then the Court should
transfer this action to the United States District Court for the District of Columbia (D.D.C.).
Transfer is appropriate for two reasons. First, because the plaintiffs corporate parent is a plaintiff
to an earlier-filed action in D.D.C. involving the same allegations, transfer is appropriate under the
first-filed rule. Second, that district court is currently hearing multiple suits brought by
shareholders in the GSEs raising the same allegations as the plaintiff in this case.
7
Transfer is thus
appropriate under 28 U.S.C. 1404(a) in order to avoid duplicative litigation, the possibility of
inconsistent rulings, and the preservation of judicial resources. In the alternative, this Court may
choose to exercise its discretion under the first-filed rule to stay proceedings in this case pending a
final resolution of the proceedings in the D.D.C. actions.
A. Transfer is Appropriate Under the First-Filed Rule
Under the first-filed rule, a district court has the discretion to transfer a case if an
earlier-filed, related case involving the same parties and issues was filed in a different district.
Monsanto Tech. LLC v. Syngenta Crop Prot., Inc., 212 F. Supp. 2d 1101, 1102 (E.D. Mo. 2002).
To conserve judicial resources and avoid conflicting rulings, the first-filed rule gives priority, for

7
The D.D.C. actions are In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase
Agreement Class Action Litigations, 1:13-mc-1288 (RCL); Perry Capital LLC v. Lew, et al., No.
13-cv-01025 (RCL), Fairholme Funds, Inc., et al. v. Federal Housing Finance Agency, et al.,
No. 13-cv-01053 (RCL), and Arrowood Indemnity Co., et al. v. Federal National Mortgage
Association, et al., No. 13-cv-01439 (RCL).
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 33 of 39
27

purposes of choosing among possible venues when parallel litigation has been instituted in
separate courts, to the party who first establishes jurisdiction. Nw. Airlines, 989 F.2d at 1006.
In order for the earlier-filed case to be a related case for purposes of this rule, [t]he two cases do
not have to be identical but must have issues that substantially overlap. Monsanto Tech. LLC,
212 F. Supp. 2d at 1103. While the rule is not rigid, mechanical, or inflexible, it should be
applied in a manner serving sound judicial administration. Orthmann v. Apple River
Campground, Inc., 765 F.2d 119, 121 (8th Cir. 1985). Thus, in the absence of compelling
circumstances, the first-filed rule should apply. Id. (quoting Merrill Lynch, Pierce, Fenner &
Smith v. Haydu, 675 F.2d 1169, 1174 (11th Cir. 1982)).
This case overlaps substantially with the pending cases in D.D.C., both in terms of the
identities of the parties and the issues presented. The defendants in those cases are the same.
Compare Compl., ECF No. 1, with Compl., Fairholme Funds, Inc., et al. v. Federal Housing
Finance Agency, et al., No. 13-cv-01053 (RCL) (D.D.C. filed July 10, 2013) (Fairholme
Compl.). The plaintiffs in those cases, like the plaintiff in this case, are shareholders of the
GSEs. See Pragmatic Software Corp.v. Antrim Design Sys., Inc., CIV. 02-2595 (JRT/FL), 2003
WL 244804, at *3 (D. Minn. Jan. 28, 2003) (substantial similarity of parties can satisfy the same
party requirement); see also Marshak v. Reed, No. 96 CV 2292, 2000 WL 33152076, at *3
(E.D.N.Y. Oct. 17, 2000) (invoking the first-to-file rule when the second action involved
additional parties since [p]arties whose interests are clearly aligned may be treated as if they were
the same parties) (internal quotation omitted). Further, one of the plaintiffs corporate parent
entities, Berkley Regional Insurance Company, is a plaintiff in one of the coordinated cases
pending in D.D.C., and is represented by the same counsel. Compare Pl.s Statement of Interest
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 34 of 39
28

at 1-2, ECF No. 14 (identifying Berkley Regional Insurance Company as one of the Plaintiffs
parent entities having at least an indirect pecuniary interest in the outcome of Plaintiffs case
against the Defendants by virtue of the cases financial impact on Plaintiffs parent entities) with
Fairholme Compl. 24 (identifying Berkley Regional Insurance Company as a plaintiff).
Moreover, the claims presented against the defendants and in particular the Department
of the Treasury are identical. Three of the four pending D.D.C. actions present APA claims
concerning the Third Amendment, just as this one does. The plaintiffs in each of those cases
allege, as the plaintiff does here, that Treasury acted beyond its statutory authority because the
Third Amendment was effectively a purchase of securities, executed after Treasurys purchase
authority expired, and that Treasurys decision making was arbitrary and capricious. The district
court hearing those cases is thus already in a position to provide complete relief on the claims
presented in this complaint, using the same legal standards all factors counseling in favor of
transferring the case under the first-filed rule. Aventure Commcns Tech., L.L.C. v. Nextel W.
Corp., C 07-4094-MWB, 2008 WL 73657, at *5 (N.D. Iowa Jan. 3, 2008).
B. Transfer is Appropriate Under 28 U.S.C. 1404(a)
For the convenience of parties and witnesses and in the interest of justice, a district
Court may transfer any civil action to any other district or division where it might have been
brought. 28 U.S.C. 1404(a). In considering whether a transfer of venue is proper in a given
case, this Court first considers whether venue is proper in the transferor district. If it is, the Court
considers a variety of private and public factors, including (1) the convenience of the parties, (2)
the convenience of the witnessesincluding the willingness of witnesses to appear, the ability to
subpoena witnesses, and the adequacy of deposition testimony, (3) the accessibility to records and
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 35 of 39
29

documents, (4) the location where the conduct complained of occurred, and (5) the applicability of
each forum states substantive law. Terra Intl, Inc. v. Miss. Chem. Corp., 119 F.3d 688, 696
(8th Cir. 1997). The Court also considers the parties respective choices of forum, and while
plaintiffs are traditionally given some deference, when the underlying events giving rise to the
litigation did not occur in the forum, courts afford a plaintiff's choice of forum significantly less
deference. CBS Interactive Inc. v. Nat'l Football League Players Assn, 259 F.R.D. 398, 408 (D.
Minn. 2009) (internal quotation omitted).
The party moving for transfer bears the burden of proof and must make a clear showing of
the right to transfer. DesignSense, Inc. v. MRIGlobal, 4:13-CV-010-DGK, 2013 WL 3205569,
at *1 (W.D. Mo. June 25, 2013). Defendant does not dispute that venue is proper in this district
pursuant to 28 U.S.C. 1391(e). See Compl. 24 (alleging that plaintiff is an Iowa corporation
with its headquarters and principal place of business in Urbandale, Iowa). However, venue is also
proper in D.D.C. Indeed, there are currently four coordinated cases pending before that court
raising challenges to the Third Amendment, including the suit brought by the plaintiffs parent
entity. Defendant Department of the Treasury has its principal place of business in Washington,
D.C., as does defendant FHFA. See 28 U.S.C. 1391(e)(1) (a civil action in which a defendant is
an officer or employee of the United States or any agency thereof may be brought in a judicial
district where any defendant resides). Treasury and FHFA exercised their authority under HERA
to amend the terms of the Preferred Stock Purchase Agreements from their principal places of
business in Washington, D.C. Thus, venue is proper in D.D.C. pursuant to 28 U.S.C.
1391(e)(1) and (e)(2). Transfer to that court therefore is proper pursuant to section 1404(a).
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 36 of 39
30

Further, such a transfer would serve the interests of justice. Section 1404 was designed
as a federal housekeeping measure, allowing easy change of venue within a unified federal
system. Piper Aircraft Co. v. Reyno, 454 U.S. 235, 254 (1981) (internal quotation omitted). As
discussed above, motions to transfer within the federal system are governed by a flexible and
multifaceted analysis that requires an individualized, case-by-case consideration of convenience
and fairness. Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 29, 31 (1988) (internal quotation
omitted). For these reasons, section 1404(a) grants the Court broad discretion in making its
transfer decision.
Permitting this lawsuit and the D.D.C. actions to proceed simultaneously in different fora
will virtually double the energy and resources required of the parties and the judicial system to
resolve the same dispute. In short, [t]o permit a situation in which two cases involving precisely
the same issues are simultaneously pending in different District Courts leads to the wastefulness of
time, energy, and money that 1404(a) was designed to prevent. Contl Grain Co. v. FBI, 364
U.S. 19, 26 (1960).
Moreover, permitting identical lawsuits to be separately litigated could lead to inconsistent
judgments: one or more holding that Treasurys action exceeds the scope of its authority under
HERA, and one or more holding that it does not. Moreover, one court could issue injunctive
relief (which the plaintiff here, and the plaintiffs in the D.D.C. actions, have sought) that the other
court could deny. As a practical matter, this outcome would lead to inconsistent implementation
of Treasurys and FHFAs amendment to the PSPAs. This scenario is one that section 1404(a)
seeks to guard against. See May Dept Stores Co. v. Wilansky, 900 F. Supp. 1154, 1166 (E.D. Mo.
1995) (granting motion to transfer and noting that there is a very real possibility of inconsistent
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 37 of 39
31

results if plaintiffs claims are before two courts.); Lynn v. Purdue Pharma Co., No. 04cv0300,
2004 WL 1242765, at *3 (D.N.M. June 7, 2004) (As found by courts that have transferred related
cases as of this date, the interests of justice and convenience of the parties and witnesses,
particularly considering such factors as the pendency of related litigation in New York . . .[and]
the concomitant avoidance of inconsistent results . . . strongly support transfer.) (emphasis
added); accord Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976)
(dictum) (when two cases pending in two different federal district courts raise the same issues, the
general principle is to avoid duplicative litigation).
Conclusion
For the foregoing reasons, the Court should dismiss the complaint for lack of subject matter
jurisdiction. Alternatively, the Court should transfer the case to the District Court for the District
of Columbia, or stay the case pending the resolution of the related proceedings before that court.

Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 38 of 39
32

Dated: April 29, 2014 Respectfully submitted,
STUART F. DELERY
Assistant Attorney General

NICHOLAS A. KLINEFELDT
United States Attorney

DIANE KELLEHER
Assistant Branch Director

/s/Joel McElvain
JOEL MCELVAIN
THOMAS D. ZIMPLEMAN
Trial Attorneys
U.S. Department of Justice
Civil Division, Federal Programs Branch
P.O. Box 883
Washington, D.C. 20044
(202) 514-2298
Joel.McElvain@usdoj.gov

Counsel for Department of the Treasury
Case 4:14-cv-00042-RP-RAW Document 24-1 Filed 04/29/14 Page 39 of 39

You might also like