SUMMARY OF THE ARGUMENT
This case concerns amendments to the constitutive documents of two publicly traded,
stockholder-owned corporations—Fannie Mae and Freddie Mac—to grant to their controlling
stockholder all of their profits forever in return for no consideration.
The controlling
stockholder—the federal government—called these 2012 amendments the “Net Worth Sweep.”
The Companies were on the verge of earning hundreds of billions of dollars in 2012 when
FHFA—their conservator since 2008—and Treasury—owner of their senior preferred stock and
warrants for 80% of their common stock—implemented the Net Worth Sweep, pursuant to which
Treasury took any and all profits the Companies earn each quarter from that point forward in
perpetuity. At the time of the Net Worth Sweep, the Companies were profitable, the federal
government was acting in a commercial capacity, and it controlled the affairs of the Companies.
This action challenges the validity and enforceability of the Net Worth Sweep.
1 Capitalized terms not defined above are defined in the Statement of Facts or Argument.
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2There is no federal corporate law relevant to this case.
In fact, the applicable federal law
incorporates Delaware and Virginia law to govern the constitutive documents and internal affairs
of Fannie Mae and Freddie Mac, respectively.
Under Delaware and Virginia law, the Net Worth Sweep is an absurdity.
Preferred stock of a corporation cannot be given a cumulative dividend right equal to all the net worth of the corporation in perpetuity, to the necessary exclusion of any dividends ever being paid on junior
stock.
Because the Net Worth Sweep purports to do this, it is void and unenforceable.
The Net Worth Sweep, in return for which the Companies received no consideration,
expropriates to the federal government all of the economic interests held by the Companies’
private stockholders and makes it impossible for the Companies to rebuild their capital reserves,
exit conservatorship, and return to normal business operations.
As Defendants anticipated when
they imposed the Net Worth Sweep, their scheme has been tremendously profitable for Treasury.
Altogether, Fannie Mae and Freddie Mac have paid Treasury over $241 billion—approximately
$54 billion more than Treasury disbursed to the Companies to obtain their senior preferred stock.
But due to the terms of the Net Worth Sweep, these payments have not reduced the Companies’
outstanding obligation to Treasury under the senior preferred stock by even one dollar, and both
Companies must continue to pay all of their net worth each quarter to Treasury in perpetuity.
As explained herein, the Net Worth Sweep is an invalid term for any preferred stock
instrument, whether or not held by the government. Pursuant to their enabling legislation,
Fannie Mae and Freddie Mac have chosen for their internal affairs to be governed by Delaware
and Virginia law, respectively. HERA—the federal law pursuant to which FHFA and Treasury
purported to act when placing them in conservatorship and implementing the Net Worth
Sweep—did not change that. Neither Delaware nor Virginia law permits a corporation to
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contract away all of its net worth and profits for all time to a single preferred stockholder by way
of an infinite, perpetual dividend. Because the Net Worth Sweep violates these states’ corporate
laws, it is void and unenforceable, and Plaintiffs are entitled to the relief they have requested in
the Complaint.
The Net Worth Sweep also violates the contractual rights and fiduciary duties
owed to the Companies’ minority stockholders—rights and duties that are preserved by the
applicable federal statutes and that govern the corporate activities of the Companies, whether
before, during, or after conservatorship, thus warranting the relief sought by Plaintiffs.
The Court should reject FHFA’s and Treasury’s arguments and deny their motions to
dismiss.
First, contrary to the government’s contentions, Plaintiffs have stated claims under
Delaware and Virginia law that the Net Worth Sweep is void and unenforceable.2
Second, neither HERA nor the Certificates of Designation governing Treasury’s Senior
Preferred Stock preempt Delaware and Virginia law.
HERA does not conflict with Delaware or
Virginia law. Indeed, the application of those states’ corporate laws is fully consistent with
HERA and the Companies’ enabling legislation. Further, the Certificates of Designation cannot
preempt state law because they are creatures of, and must comply with, state law. Relatedly,
Treasury is incorrect in disputing that it owes fiduciary duties to the Companies and their other
stockholders. To be sure, Treasury is the Companies’ controlling stockholder based on its
ownership of the Senior Preferred Stock and warrants to acquire nearly 80% of the Companies’
common stock, as well as its extensive rights under the PSPAs that confer it with actual control
over FHFA and the Companies’ business and affairs.
2 Because of the significant questions of Delaware and Virginia law involved in this case,
including matters of first impression that could result in early resolution of this litigation,
contemporaneously with the filing of this brief, Plaintiffs are filing an application requesting that
this Court certify questions of law to the Delaware and Virginia Supreme Courts.
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Third, Plaintiffs’ claims against Treasury are not barred by sovereign immunity because
they fall squarely within the waiver of immunity under the APA for actions seeking relief other
than money damages (such as the equitable, injunctive, and declaratory relief sought against
Treasury here) and alleging unlawful conduct by a federal agency, officer, or employee.
Contrary to Treasury’s contentions, this waiver of immunity applies to the state law claims here.
Fourth, FHFA’s and Treasury’s arguments that Plaintiffs’ claims are barred by HERA are
wrong. While FHFA and Treasury repeatedly emphasize that HERA bars equitable relief that
would “restrain or affect the exercise of powers or functions of [FHFA] as a conservator,” this
restriction does not apply here because FHFA blatantly exceeded its conservatorship authority in
implementing the Net Worth Sweep through the creation of stock that is void under applicable
state law.
Because HERA did not give FHFA the authority to transgress the state law governing
Fannie Mae’s and Freddie Mac’s operations, this suit challenging the Net Worth Sweep is not
barred by HERA.
FHFA’s and Treasury’s reliance on another provision of HERA, which provides that when FHFA took over as conservator it “immediately succeed[ed] to . . . all rights,
titles, powers, and privileges of . . . any stockholder . . . of [Fannie and Freddie] with respect to
the [Companies] and the assets of the [Companies] . . . ,” similarly is misplaced. This provision
does not affect direct claims, and many of Plaintiffs’ claims are direct. It also does not grant to
FHFA the right to control derivative claims against itself and a sister federal agency.
Defendants also are incorrect in asserting that Plaintiffs’ contract claims are not ripe. As
explained below and in the Complaint, FHFA has violated the contractual rights of the
Companies’ private stockholders.
The Net Worth Sweep effectively nullified Plaintiffs’ contracts
and transferred their entire value to Treasury, breaching both the express terms of the contracts
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and the implied covenant of good faith and fair dealing that inheres in those contracts.
The Net
Worth Sweep thus has caused Plaintiffs to suffer present injury, making this case ripe for review.
Finally, Defendants’ motions rely on Perry Capital LLC v. Lew, 70 F. Supp. 3d 208
(D.D.C. 2014), but Plaintiffs raise claims that are distinct from those raised in Perry Capital. At
any rate, the Perry Capital court’s reasoning is utterly bankrupt, and this Court should repudiate
it. Further, and contrary to Defendants’ contentions, Plaintiffs’ claims here are not precluded by
rulings against different stockholders in different cases challenging the Net Worth Sweep.
