Replies to post #609122 on Fannie Mae-No Politics (FNMA)

[Guido2]

There's a good analysis by ROLG on:

https://howardonmortgagefinance.com/2020/05/05/first-quarter-takeaways/#comments

[RumplePigSkin]

bradford86 - you really should read the ruling in its entirety. Sweeney may be company friendly via derivative claims which helps commons more, but she certainly isn’t Junior Preferred Shareholder friendly because she stated during oral arguments, “purchasing litigation is a risky business” for JPS (Paraphrasing). And, she has ruled as such twice dismissing JPS direct claims.

The meat and potatoes is in the Standing section near the end where Sweeney comments on how overpayment is a derivative issue, not a direct one and JPS gets dinged again. Overpayment is one thing, assigning government ownership in relation to the Tucker Act is another. Overpayment and the return of said overpayment can benefit all shareholders and will benefit common more but JPS will benefit also. Direct claims are dead.

Also, there is a nice tidbit referencing Delaware law below about a restructuring overly benefiting one class vs another during restructuring. Certainly if anything like that were to happen during a possible FnF restructuring, there would certainly be more litigation.

Lastly, this ruling may be a prelude to a positive derivatives claim outcome. Much of the reasoning affirming The derivative claims could be used in Sweeney’s ruling in Fairholme. Summary judgement is definitely in play.

Got tired of bolding. More should’ve been bolded further below.

V. STANDING
In addition to asserting that the court lacks subject-matter jurisdiction to entertain plaintiffs’ claims, defendant challenges plaintiffs’ standing to pursue their claims. A plaintiff bears the burden of demonstrating that it has standing for each claim. Starr Int’l Co. v. United States, 856 F.3d 953, 964 (Fed. Cir. 2017). It must establish, among other things, that it is
-29-

Case 1:13-cv-00698-MMS Document 69 Filed 05/15/20 Page 30 of 34
“assert[ing its] own legal rights and interests, and cannot rest [its] claim[s] to relief on the legal rights or interests of third parties.” Kowalski v. Tesmer, 543 U.S. 125, 129 (2004). Further, the label assigned to a claim is irrelevant; it is the substance of the allegations that control. See Allen v. Wright, 468 U.S. 737, 752 (1984) (“[T]he standing inquiry requires careful examination of a complaint’s allegations to ascertain whether the particular plaintiff is entitled to an adjudication of the particular claim asserted.”), abrogated on other grounds by Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014). Thus, in a suit brought by shareholders, it is the substance of the allegations and not the label assigned to the allegations— i.e., direct or derivative—that matters. See Starr, 856 F.3d at 966-67; see also In re Sunrise Sec. Litig., 916 F.2d 874, 882 (3d Cir. 1990) (“Whether a claim is [direct] or derivative is determined from the body of the complaint rather than from the label employed by the parties.”). A shareholder lacks standing to litigate nominally direct claims that are substantively derivative in nature because its personal request for relief would be based on the rights of the company. See Starr, 856 F.3d at 966-67; see also Weir v. Stagg, No. 09-21745-CIV, 2011 WL 13174531, at *9 (S.D. Fla. Feb. 7, 2011) (“Shareholders do not have standing to bring a direct action for injuries suffered by a corporation, but rather, must bring a derivative action.”). A shareholder, therefore, must establish that the claims it labeled as direct are substantively direct in nature—i.e., premised on its injuries rather than the corporation’s injuries—to have standing to litigate those claims. See Starr, 856 F.3d at 966-67.
The parties disagree on whether plaintiffs have standing to litigate any of their claims. Defendant argues that plaintiffs lack standing to litigate their claims because the claims belong to the Enterprises and are therefore derivative in nature. Defendant contends that plaintiffs’ claims are actually derivative because, to prevail, plaintiffs would need to establish an injury to the Enterprises and any relief would accrue to the Enterprises.
Plaintiffs counter that they assert direct claims because the government (1) targeted private shareholders and (2) discriminated against them by rearranging the Enterprises’ capital structure to plaintiffs’ detriment, which renders the claims for such conduct both direct and
23
action. Defendant also contends that the dual-nature exception is not applicable because Treasury was not a controlling shareholder, the Enterprises did not issue new shares, and the PSPA Amendments did not involve the reallocation of power.
Plaintiffs do not satisfy their burden of establishing standing. Neither theory they advance for why those claims are substantively direct, rather than derivative, is persuasive. First, it is of no import whether the government targeted shareholders with the PSPA Amendments. See Starr, 856 F.3d at 973 (noting that plaintiffs did not “sufficiently explain why the
23 Plaintiffs also assert that their claims must be construed as direct claims to vindicate important federal policies if shareholders cannot assert derivative claims because of HERA. But as this court held in Fairholme II, the shareholders of the Enterprises, notwithstanding HERA, have standing to assert derivative claims because of the FHFA-C’s conflict of interest. 147 Fed. Cl. at 49-51.
Defendant replies that the Federal Circuit rejected the notion that a plaintiff states a direct claim by alleging it was targeted by the challenged
derivative under the dual-nature exception.
-30-

Case 1:13-cv-00698-MMS Document 69 Filed 05/15/20 Page 31 of 34
Government’s subjective motivations are relevant to the inquiry into direct standing”). The direct-versus-derivative inquiry “turns on the plaintiff’s injury, not the defendant’s motive.” Pagan v. Calderon, 448 F.3d 16, 30 (1st Cir. 2006). Second, plaintiffs have not asserted claims that qualify as both direct and derivative based on the dual-nature exception. The Federal Circuit explained that, pursuant to this exception, shareholder claims may be both direct and derivative “when a ‘reduction in [the] economic value and voting power affected the minority stockholders uniquely . . . .’” Starr, 856 F.3d at 968 (quoting Gentile v. Rossette, 906 A.2d 91, 99 (Del. 2006)). Specifically, shareholder claims are both direct and derivative if
“(1) a stockholder having majority or effective control causes the corporation to issue ‘excessive’ shares of its stock in exchange for assets of the controlling stockholder that have a lesser value,” and “(2) the exchange causes an increase in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders.”
Id. (quoting Gentile, 906 A.2d at 100). The exception does not apply here because Treasury was
24
not a controlling shareholder at the time the PSPA Amendments were executed,
Amendments did not involve the issuance of new shares, and shareholder voting power was not reallocated under the PSPA Amendments. It is not enough, contrary to plaintiffs’ contention, that the government allegedly exacted economic value from the other shareholders by rearranging the corporate structure. See El Paso Pipeline GP Co. v. Brinckerhoff, 152 A.3d 1248, 1264 (Del. 2016) (applying Gentile and holding a plaintiff does not state a direct claim under the dual-nature exception by pleading the “extraction of solely economic value from the minority by a controlling stockholder”). Because plaintiffs have not established that their claims are substantively direct in nature, they cannot demonstrate that they have standing to litigate those claims.
the PSPA
Plaintiffs fare no better if the court moves beyond their arguments for why their claims are substantively direct in nature. Federal law governs whether plaintiffs’ claims are direct or derivative. See Starr, 856 F.3d at 965. But, as the parties acknowledge, federal law in this area is informed by Delaware law. Id.; see also Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 97 (1991) (noting the “presumption that state law should be incorporated into federal common law”). Under Delaware law, the test for whether a shareholder’s claim is derivative or direct depends on the answers to two questions: “(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?” Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004) (en banc). “Normally, claims of corporate overpayment are . . . regarded as derivative [because] . . . the corporation is both the party that suffers the injury (a reduction in its assets or their value) as well as the party to whom the remedy (a restoration of the improperly reduced value) would flow.” Gentile, 906 A.2d at 99, discussed in Starr, 856 F.3d at 965. Such claims are derivative even “though the overpayment may diminish the value of the corporation’s stock or deplete corporate assets that might
24 Treasury is not a controlling shareholder for the reasons set forth in Section IV.C.1, supra.
-31-

Case 1:13-cv-00698-MMS Document 69 Filed 05/15/20 Page 32 of 34
otherwise be used to benefit the stockholders, such as through a dividend.” Protas v. Cavanagh, No. CIV.A. 6555-VCG, 2012 WL 1580969, at *6 (Del. Ch. May 4, 2012); see also Hometown Fin. Inc. v. United States, 56 Fed. Cl. 477, 486 (2003) (“[C]ourts have consistently held that shareholders lack standing to bring cases on their own behalf where their losses from the alleged injury to the corporation amount to nothing more than a diminution in stock value or a loss of dividends.”).
In their complaint, plaintiffs focus on the expropriation of the Enterprises’ assets via compulsory payments of all profits. The gravamen of each claim is the same: The government, via the PSPA Amendments, compelled the Enterprises to overpay Treasury. Regardless of plaintiffs’ label (direct or derivative) or theory (taking, illegal exaction, breach of fiduciary duty, or breach of implied contract) for their claims, the claims are substantively derivative in nature
25
because they are premised on allegations of overpayment.
also Roberts, 889 F.3d at 409 (explaining that the plaintiffs asserted “classic derivative claims” when they alleged that “the [PSPA Amendments] illegally dissipated corporate assets by transferring them to Treasury”). Plaintiffs cannot transform their substantively derivative claims into direct claims by merely alleging that, as a result of overpayments, they were deprived of their stockholder rights to receive dividends or liquidation payments. The claims remain derivative because plaintiffs’ purported “harms are ‘merely the unavoidable result . . . of the reduction in the value of the entire corporate entity.’” Protas, 2012 WL 1580969, at *6 (quoting Gentile, 906 A.2d at 99); see also Agostino v. Hicks, 845 A.2d 1110, 1122 (Del. Ch. 2004) (“[T]he inquiry should focus on whether an injury is suffered by the shareholder that is not dependent on a prior injury to the corporation.”). Because plaintiffs’ claims are derivative in nature, plaintiffs lack standing to pursue those claims on their own behalf.
See Gentile, 906 A.2d at 99; see .
After the initial round of briefing on defendant’s omnibus motion to dismiss was
complete, and after Fairholme II was decided and the court held a status conference regarding
further proceedings in the related cases, plaintiffs raised a new argument—that the Federal
Circuit’s decision in First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279
(Fed. Cir. 1999), compels a finding that they have standing to assert their takings and illegal-
26
exaction claims.
This particular argument was not timely raised and is waived. See United
25 Plaintiffs would remain unsuccessful if their allegations of waste and mismanagement (styled as self dealing, overreach, or abuse of discretion) were construed to be indicative of some action other than overpayment. Any claims premised on waste and mismanagement are derivative in nature. Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 353 (Del. 1988) (noting that “mismanagement resulting in corporate waste, if proven represents a direct wrong to the corporation . . . [that] is entirely derivative in nature”). Plaintiffs’ claims are also derivative in nature to the extent that they are premised on (1) a purported reduction in share price as a consequence of the Enterprises losing assets or (2) the FHFA-C acting unfairly by agreeing to transfer profits pursuant to the PSPA Amendments. See Hometown, 56 Fed. Cl. at 486 (stock prices); In re Straight Path Commc’ns Inc. Consol. S’holder Litig., No. CV 2017-0486-SG, 2017 WL 5565264, at *4 (Del. Ch. Nov. 20, 2017) (“Sale of corporate assets to a controller for an unfair price states perhaps the quintessential derivative claim . . . .”).
26 As defendant notes, the court did not invite plaintiffs, after the status conference held March 5, 2020, to relitigate issues already decided in Fairholme II.
-32-

Case 1:13-cv-00698-MMS Document 69 Filed 05/15/20 Page 33 of 34
States v. Ford Motor Co., 463 F.3d 1267, 1277 (Fed. Cir. 2006) (explaining that “[a]rguments raised for the first time in a reply brief are not properly before this court”); Ironclad/EEI v. United States, 78 Fed. Cl. 351, 358 (2007) (noting that “under the law of this circuit, arguments not presented in a party’s principal brief to the court are typically deemed to have been waived”).
Even if this argument were not waived, the Federal Circuit’s Starr decision remains the binding precedent most on point. The distinction between direct and derivative claims brought by shareholders is the focus of the Federal Circuit’s standing analysis. Starr, 856 F.3d at 963-73. Just as here, the plaintiffs brought takings and illegal-exaction claims related to a government intervention, during a financial crisis, affecting the future of a corporation in which they owned shares. Id. at 958-61. Starr provides the test for determining whether such claims are direct or derivative in nature and requires that nominally direct claims—that are actually derivative claims—be dismissed for lack of standing. Id. at 973.
In face of this binding precedent, the court cannot conclude that the holding in First Hartford regarding direct Fifth Amendment takings claims is more relevant. It is true that in First Hartford shareholders of a bank in receivership could pursue their takings claims as direct claims against the United States. 194 F.3d at 1287. However, First Hartford does not address the distinction between direct and derivative claims. When faced with binding precedent that addresses a crucial distinction, such as Starr, and one that does not, such as First Hartford, the court follows the precedent most on point. Cf. Union Elec. Co. v. United States, 363 F.3d 1292, 1297 (Fed. Cir. 2004) (“[W]e have repeatedly held that the disposition of an issue by an earlier decision does not bind later panels of this court unless the earlier opinion explicitly addressed and decided the issue.” (citing Boeing N. Am., Inc. v. Roche, 298 F.3d 1274, 1282 (Fed. Cir. 2002))).
In sum, plaintiffs have not established that they have standing to litigate their claims because they do not, and cannot, demonstrate that those claims are substantively direct claims. Therefore, the court dismisses plaintiffs’ claims on standing grounds to the extent that it has
27
subject-matter jurisdiction over those claims.
27 As explained above, the court lacks jurisdiction over plaintiffs’ claims for breach

[Brooge warrants cancelled]

whats in 6 days?