Treasury's MTD Brief in Continental Western

8/11/2019 Treasury's MTD Brief in Continental Western

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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


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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 Shareholderin the GSEs ............................................................................................................20

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

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

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

III. Alternatively, This Action Should Be Transferred to the United StatesDistrict 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



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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



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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



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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



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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) ...........................................................................................................................1112 U.S.C. 1455(l) ................................................................................................................5, 6, 1312 U.S.C. 1719(g) ...............................................................................................................5, 6, 1312 U.S.C. 1821(j) ..................................................................................................................12, 1412 U.S.C. 4501 ..............................................................................................................................512 U.S.C. 4617(a) ...............................................................................................................passim12 U.S.C. 4617(b) ...............................................................................................................passim12 U.S.C. 4617(e) .................................................................................................................18, 2412 U.S.C. 4617(f) ............................................................................................................11, 12, 1428 U.S.C. 1391(e) .................................................................................................................29, 3028 U.S.C. 1404 ..................................................................................................................4, 26, 29



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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



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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



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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



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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



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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. SeeCompl. 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 Agreementsat 5 (Mar. 20, 2013)



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(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). SeeFederal 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. See12 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. See12 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 thecomplaint has stated any claim over which this Court has subject-matter jurisdiction. SeeBrown v. Medtronic, Inc., 628 F.3d 451, 459-60 (8th Cir. 2010). The 2013 OIG Report isincluded as Exhibit E to the memorandum in support of the dispositive motion that FHFA and itsDirector have filed in this action (FHFA Exh. E).



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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. SeeCompl. 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-Conservatorship-of-Fannie-Mae-and-Freddie-Mac.aspx.



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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. SeeFannie 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. See12 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.

SeeFannie 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).



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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



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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).



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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



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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



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actions by the Resolution Trust Corporation (and its successor, the Federal Deposit Insurance

Corporation) as conservator or receiver of failed banking institutions4 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 alsoFreeman 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) (citingFreeman) (alteration in

original);see alsoTri-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 anyaction, except at the request of the Board of Directors by regulation or order, to restrain or affectthe exercise of powers or functions of the Corporation as a conservator or receiver.) with 12U.S.C. 4617(f) (Except as provided in this section or at the request of the Director, no courtmay take any action to restrain or affect the exercise of powers or functions of the Agency as aconservator or a receiver.).



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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. See12 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



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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 affectthe 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



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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 clearlyoutside 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



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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 receiverfor the purpose of reorganizing, rehabilitating, or

winding upthe 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 Endingat 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/ReportDocuments/20120221_StrategicPlanConservatorships_508.pdf.



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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.

SeeFannie 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. See12 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



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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. See12 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



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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, orwinding 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



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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



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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). WhileKellmerandIn re Freddie Macaddressed

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. See12 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 distinguishbetween a derivative and direct claim, [t]he proper analysis has been and should remain that acourt should look to the nature of the wrong and to whom the relief should go. The stockholdersclaimed direct injury must be independentof any alleged injury to the corporation. Thestockholder must demonstrate that the duty breached was owed to the stockholder and that he orshe can prevail without showing an injuryto the corporation. Tooley v. Donaldson, Lufkin &Jenrette, Inc., 845 A.2d 1031, 1039 (Del. 2004) (emphasis added). The particular label that theplaintiff 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 thatway, and mentioning a merger does not talismanically create a direct action. Instead, the courtmust 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, theduty of the court is to look at the nature of the wrong alleged, not merely at the form of words usedin the complaint.). The injury that the plaintiff alleges is not independent of a claimed injury tothe GSEs.



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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 alsoNatl 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. InKellmer, 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 inKellmer, onlyFirst

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 conservatorover conservatorship actions.



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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).



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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 alsoPotthoff 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).



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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 areIn re Fannie Mae/Freddie Mac Senior Preferred Stock PurchaseAgreement 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), andArrowood Indemnity Co., et al. v. Federal National MortgageAssociation, et al., No. 13-cv-01439 (RCL).



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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.(quotingMerrill 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.

CompareCompl., ECF No. 1, withCompl.,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 alsoMarshak 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. ComparePl.s Statement of Interest



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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. See28 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).



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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. SeeMay 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



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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.



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Dated: April 29, 2014 Respectfully submitted,

STUART F. DELERYAssistant Attorney General

NICHOLAS A. KLINEFELDTUnited States Attorney

DIANE KELLEHERAssistant Branch Director

/s/Joel McElvainJOEL MCELVAINTHOMAS D. ZIMPLEMANTrial AttorneysU.S. Department of JusticeCivil Division, Federal Programs BranchP.O. Box 883Washington, D.C. 20044(202) [email protected]

Counsel for Department of the Treasury
