Fairholme started a lawsuit against the FHFA on July-13-2013, later that year on Nov-6-2013 in status report, it was agreed seven parties would be consolidated (Liao, Cacciapelle, American European Insurance Co., Cane, Dennis, Marneu Holdings Co., and Borodkin ) into one, as now know the 13-1288 “Miscellaneous” or “IN RE: FANNIE MAE/FREDDIE MAC SPSPA” (class action) lawsuit, and the three other cases that were not styled as class actions remained, the Perry Capital 13-1025, Fairholme 13-1053 , and Arrowood 13-698C, as they did not believe it was necessary or appropriate to consolidate the cases. Simultaneously Fairholme filed another lawsuit in the court of federal claims “13-465C Fairholme v. USA”, both cases to date are still active and below is the Summary of events in the 13-1053 lawsuit
a. Declaring that the Net Worth Sweep, and its adoption, are not in accordance with and violate HERA within the meaning of 5 U.S.C. § 706(2)(C), and that FHFA and Treasury acted arbitrarily and capriciously within the meaning of 5 U.S.C. §706(2)(A) by executing the Net Worth Sweep
In a) they hold FHFA under 5 U.S.C. § 706(2)(C) (https://www.law.cornell.edu/uscode/text/5/706) FHFA does not have the authority to siphon of all profits in perpetuity “(2)hold unlawful and set aside agency action, findings, and conclusions found to be— (C)in excess of statutory jurisdiction, authority, or limitations, or short of statutory right” in the second part of a) they hold FHFA as well as treasury are 5 U.S.C. § 706(2)(A) “(2) hold unlawful and set aside agency action, findings, and conclusions found to be—(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law”
In short they say FHFA and Treasury stepped outside their regulatory framework and the 3th amendment is unconstitutional in “Absence of a rational connection between the facts found and the choice made” https://www.lectlaw.com/def/a064.htm
b. Declaring that, by entering the Net Worth Sweep, FHFA breached Fannie’s and Freddie’s contracts with Plaintiffs and the covenant of good faith and fair dealing implicit in those contracts;
in B) they hold that FHFA overstepped when the 3th amendment was implemented “Implied Covenant of Good Faith and Fair Dealing An implied obligation that assumes that the parties to a contract will act in good faith and deal fairly with one another without breaking their word, using shifty means to avoid obligations, or denying what the other party obviously understood. https://www.law.cornell.edu/wex/implied_covenant_of_good_faith_and_fair_dealing”
So in short the 3th amendment breached the rights preferred had on dividends, when b) is granted this can only be solved by paying backward relief on dividends, in other words all dividends missed, plus interest need to be paid back
c. Declaring that, by entering the Net Worth Sweep, FHFA violated its fiduciary duty to Plaintiffs.
In c) they hold that they are entitled to damages “Fiduciary Duty” When someone has a fiduciary duty to someone else, the person with the duty must act in a way that will benefit someone else, usually financially.
The person who has a fiduciary duty is called the fiduciary, and the person to whom the duty is owed is called the principal or the beneficiary. If the fiduciary breaches the fiduciary duties, he or she would need to account for the ill-gotten profit. The beneficiaries are typically entitled to damages. https://www.law.cornell.edu/wex/fiduciary_duty”
So in short if a) and b) are granted, c) will also be legitimate
PRAYER FOR RELIEF WHEREFORE, Plaintiffs pray for an order and judgment:
a.Declaring that the Net Worth Sweep, and its adoption, are not in accordance with and violate HERA within the meaning of 5 U.S.C. § 706(2)(C), and that Treasury acted arbitrarily and capriciously within the meaning of 5 U.S.C. § 706(2)(A) by executing the Net Worth Sweep;
a. this is the same as their initial complaint (above)
b. Enjoining Treasury and its officers, employees, and agents to return to Fannie and Freddie all dividend payments made pursuant to the Net Worth Sweep or, alternatively, recharacterizing such payments as a pay down of the liquidation preference and a corresponding redemption of Treasury’s Government Stock rather than mere dividends;
in this they hold treasury should pay back all funds distributed to treasury under the NWS, as down payment on the liquidation preference or as redemption of the government stock
c.Vacating and setting aside the Net Worth Sweep, including its provision sweeping all of the Companies’ net worth to Treasury every quarter;
d.Enjoining FHFA and its officers, employees, and agents from implementing, applying, or taking any action whatsoever pursuant to the Net Worth Sweep
With d. they want to forbid FHFA takes any action voluntary take it down amend it or do something to it, so the current lawsuit has no standing
e.Enjoining Treasury and its officers, employees, and agents from implementing, applying, or taking any action whatsoever pursuant to the Net Worth Sweep
e. is basically the same as d. but then for Treasury instead of FHFA
f. Enjoining FHFA and its officers, employees, and agents from acting at the instruction of Treasury or any other agency of the government and from re-interpreting the duties of FHFA as conservator under HERA
in f. they want the court to forbid FHFA is an instrument of treasury and the FHFA should perform it statuary goals not treasury goals, so it can no longer perform the “run for taxpayer profit mantra”, but it should be run for shareholders only
g. Awarding Plaintiffs damages resulting from the breach of fiduciary duty by FHFA, Fannie, and Freddie;
in g. they want money for breaching fiduciary duty, as the relationship between the trustee and a beneficiary is broken by FHFA by the implementation of the 3th amendment
h.Awarding Plaintiffs damages resulting from the breach of contract and breach of the implied covenant of good faith and fair dealing by FHFA, Fannie, and Freddie
In g. they want the court to forbid the still existing 3th amendment, and reinstate the dividend to the preferred
i. Awarding Plaintiffs damages and injunctive relief resulting from the restructuring of dividends on Treasury’s senior preferred stock in violation of Delaware and Virginia law
in i. they state treasury now receives 100% of all profits, but it does not hold 100% of it’s stock and therefore it is not lawful to receive more money percentage wise than the other holders, so either shareholders receive damages or the senior preferred are paid off
j. Awarding Plaintiffs their reasonable costs, including attorneys’ fees, incurred in bringing this action; and k. Granting such other and further relief as this Court deems just and proper.
COUNT I FHFA’s Conduct Exceeded Its Statutory Authority As Conservator COUNT II Breach of Contract Against FHFA, Fannie, and Freddie: Claim for Damages COUNT III Breach of Implied Covenant of Good Faith and Fair Dealing Against FHFA, Fannie, and Freddie: Claim for Damages COUNT IV Breach of Fiduciary Duty Against FHFA, Fannie, and Freddie: Claim for Damages COUNT V The Net Worth Sweep Violates Delaware Law Against FHFA and Fannie: Claim for Damages and Injunctive Relief COUNT VI The Net Worth Sweep Violates Virginia Law Against FHFA and Freddie: Claim for Damages and Injunctive Relief http://www.glenbradford.com/wp-content/uploads/2017/11/13-cv-01053-0067-1.pdf
Plaintiffs’ Requested Materials are Relevant to this Case. Some of the relevant questions that Fairholme has identified in connection with their RFPs are:
* What should the Companies’ private shareholders have reasonably expected in 2008 when the Housing and Economic Recovery Act was enacted and the Companies were forced into conservatorship?
* Did the Companies receive value in exchange for providing Treasury with enhanced disbursement rights through the Net Worth Sweep? If so, to what extent?
* When the Net Worth Sweep was imposed, did the Companies, FHFA, and Treasury understand that the Companies were about to achieve sustained profitability?
* When the Net Worth Sweep was imposed, did the FHFA know that the Company’s profitability would permit them to pay the 10% dividend under the original PSPAs without the necessity of drawing from Treasury?
* Did the Net Worth Sweep permit Treasury to reap enormous benefits in exchange for no new investment?
* Could plaintiffs have reasonably expected that the Companies would give away allof plaintiffs’ residual rights to dividends and liquidation surplus in exchange for no investment and no meaningful consideration at a time when the Companies were highly profitable?
* How did the events surrounding the placement of the Companies into conservatorship affect the reasonable expectations of the parties?
* Did defendants exercise their discretion arbitrarily or unreasonably in a way that frustrated plaintiffs’ expectations under the contract?
* Was the threat of a downward spiral of circular dividend payments used as mere pretext to justify the Net Worth Sweep?
* Did the Companies need to draw on Treasury’s funds to pay dividends and could the Companies have repaid Treasury for its investment under the pre-Third Amendment dividend structure?
* Did private shareholders in 2008 reasonably expect the conservatorships to be temporary?
Fairholme has specifically identified which RFPs correspond to which of these questions. The Court therefore finds that Fairholme has met the low bar for relevance. In addition to explaining why the RFPs are relevant to the breach of implied covenant claim, Fairholme also explains how the requested documents may be relevant to potential defenses that FHFA and the GSEs could raise. Fairholme also points out that Treasury may have information relevant to damages, which would be critical if plaintiffs were to prevail on the merits of their claim. Although Treasury 1s correct that it is no longer a party to this case, that does not change the fundamental definition of relevance. Relevance is not a particularly high bar, and that bar is met here. Despite being a nonparty, Treasury has been inextricably linked to the underlying facts of : this lawsuit from the beginning. Essentially, because there is a likelihood that Treasury has information relevant to some claim or defense, the Court finds that the requested information is relevant for the purposes of discovery.
CONCLUSION
Based on the foregoing, the Court will GRANT plaintiffs’ Motion to Compel Compliance with Subpoena to the U.S. Treasury.
The Court will ORDER that the U.S. Treasury must timely produce all non-privileged documents that are responsive to the following requests for production attached to the subpoena that is the subject of the foregoing Motion to Compel: RFPs 1-8, 10-14, 15(a)-(d), 16-26, and 29- 30.
The Court will FURTHER ORDER that the U.S. Treasury must also produce a privilege log identifying documents that are responsive to the foregoing requests for production that the U.S. Treasury has withheld on the basis of its assertion of applicable privileges.
Date: November 8, 2019 Royce C. Lamberth, United States District Court Judge
RFP 1 (projections of the expected profitability of the Companies) RFP 2 (Treasury dividend scenarios) RFP 3 (valuation of Treasury warrants) RFP 4 (decision to leave Companies’ capital structure in place during conservatorship) RFP 5 (standards for termination of conservatorships) RFP 6 (Treasury’s authority to prevent termination of conservatorships) RFP 7 (FHFA’s and Government’s commitment to deprive shareholders of access to positive earnings) RFP 8 (policies and actions to contract Companies and reduce their role in mortgage market) RFP 10 (communications between FHFA/Treasury and the Companies about various topics, including the decision to place the Companies in conservatorship, the PSPAs, funding of Treasury dividends, the periodic commitment fee (“PCF”), FHFA’s strategic plan for the conservatorships, and termination of conservatorships) RFP 11 (communications between FHFA and Treasury about the topics covered by RFP 10) RFP 12 (whether Treasury dividends were to advance taxpayer interests and/or prioritize Treasury’s financial interest) RFP 13 (decision to adopt the Net Worth Sweep) RFP 14 (factors considered when Net Worth Sweep was imposed and purposes of Net Worth Sweep) RFP 15 (Treasury communications with rating agencies, market analysts, and Companies’ boards, lawyers, and auditors regarding the Net Worth Sweep) RFP 16 (Federal Housing Finance Oversight Board (“FHFOB,” of which the Treasury Secretary is a member) communications regarding the Net Worth Sweep); RFP 17 (projections relating to the second amendment to the PSPAs) RFP 18 (the PCF and related decisions) RFP 20 (the Companies’ deferred tax assets and loan loss reserves); RFP 21 (decision to award Treasury warrants) RFP 22 (Treasury dividends) RFP 23 (redemption of Treasury stock and reduction of Treasury liquidation preference) RFP 24 (meetings between FHFA and Treasury regarding PSPA amendments) RFP 25 (effect of Net Worth Sweep on Companies’ profitability). RFP 26 (communications between FHFA and Treasury regarding the Companies’ deferred tax assets and loan loss reserves) RFP 29 (communications with shareholders regarding the conservatorships). RFP 30 (communications with shareholders regarding Companies’ pre-conservatorship prospects).
So that is where we stand today, read it slowly, maybe a couple of times and get the scope of what has been going on, now we await the outcome of the RPF’s which they finally starting producing, http://www.glenbradford.com/wp-content/uploads/2019/12/13-mc-01288-0114.pdf While over 65.000 documents are already produced, I get the feeling the most important ones are not. Further proceeding puts the government in a very fragile position, the more they produce the more evidence there is against them, and the harder it is to settle, and if it will be judged by a jury there will be turmoil and the outcome will be even higher for plaintiffs……
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