United States District Court, S.D. Iowa, Central Division
For Continental Western Insurance Company, Plaintiff: Charles J Cooper, David H Thompson, Peter A. Patterson, Vincent J. Colatriano, LEAD ATTORNEYS, PRO HAC VICE, COOPER & KIRK PLLC, Washington, DC; Matt M Dummermuth, LEAD ATTORNEY, WHITAKER HAGENOW & GUSTOFF LLP, Cedar Rapids, IA; Kendra Lou Mills Arnold, Matthew Whitaker, WHITAKER HAGENOW & GUSTOFF LLP WHG, Des Moines, IA.
For The Federal Housing Finance Agency, in its capacity as Conservator of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, Melvin L. Watt, in his official capacity as Director of the Federal Housing Finance Agency, Defendants: Howard N Cayne, LEAD ATTORNEY, PRO HAC VICE, ARNOLD & PORTER LLP (D.C.), WASHINGTON, DC; Asim Varma, David B Bergman, PRO HAC VICE, ARNOLD & PORTER LLP (D.C.), WASHINGTON, DC; Matthew C McDermott, Stephen H. Locher, BELIN MCCORMICK, P.C., DES MOINES, IA.
For The Department of the Treasury, Defendant: Bradley H. Cohen, LEAD ATTORNEY, U.S. DEPARTMENT OF JUSTICE, Washington, DC; Joel L. McElvain, LEAD ATTORNEY, U S DEPT OF JUSTICE - CIVIL DIVISION FEDERAL PROGRAMS BRANCH, WASHINGTON, DC.
ROBERT W. PRATT, UNITED STATES DISTRICT JUDGE.
Before the Court are two Motions to Dismiss and a Supplemental Motion to Dismiss filed by the Federal Housing Finance Agency (" FHFA" ), Melvin L. Watt (" Watt" ), and the United States Department of the Treasury (" Treasury" ) (collectively " Defendants" ). Continental Western Insurance Company (" Plaintiff" or " Continental Western" ) filed a complaint against Defendants on February 5, 2014. Clerk's No. 1. On April 29, 2014, FHFA and Watt filed a Motion to Dismiss, or in the alternative, a Motion to Transfer or Stay the Action. Clerk's No. 23. Treasury also filed a Motion to Dismiss, or in the alternative, a Motion to Transfer or Stay the Action. Clerk's No. 24. Plaintiff filed a response to both motions on August 29, 2014. Clerk's No. 45. On September 29, 2014, FHFA and Watt filed a reply (Clerk's No. 47), as did Treasury (Clerk's No. 46). Plaintiff filed a supplemental brief in opposition to Defendants' Motions on October 28, 2014 (Clerk's No. 52); Defendants replied on October 30, 2014 (Clerk's No. 54). Defendants collectively filed a Supplemental Motion to Dismiss on October 30, 2014. Clerk's No. 55. Plaintiff responded on November 17, 2014. Clerk's No. 56. Defendants replied on December 5, 2014. Clerk's No. 62. An oral argument on Defendants' Motions to Dismiss and Supplemental Motion to Dismiss was held on December 16, 2014. Clerk's No. 63. The matters are fully submitted.
Continental Western is an Iowa corporation that owns shares of preferred stock in the Federal National Mortgage Association (" Fannie" ) and the Federal Home Loan Mortgage Corporation (" Freddie" ). Compl. ¶ 31. Fannie and Freddie are government-sponsored entities (" GSEs" ) that were created by Congress in part to " promote access to mortgage credit throughout the Nation . . . by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financings." 12 U.S.C. § 1716(4). Since their creation, the GSEs have been reorganized as for-profit, stockholder-owned corporations. Compl. ¶ 29.
In 2008, a major economic and housing crisis was occurring in the United States; as a result, the GSEs incurred significant losses to their portfolios. Id. ¶ ¶ 3, 33-34. To address the crisis, Congress passed the Home and Economic Recovery Act of 2008 (" HERA" ). Id. ¶ 34. HERA created FHFA as an independent agency with power to supervise and regulate Fannie and Freddie. 12 U.S.C. § 4511(b)(2). HERA also authorized FHFA to place the GSEs under conservatorship or receivership. 12 U.S.C. § 4617(b)(2). According to HERA, FHFA as conservator or receiver would " immediately succeed to--(i) all rights, titles, powers, and privileges of the [GSEs], and of any stockholder, officer, or director of such [GSEs] with respect to the [GSEs] and the assets of the [GSEs]." 12 U.S.C. § 4617(b)(2)(A)(i). Importantly, HERA also states that " [e]xcept 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 [FHFA] as a conservator or receiver." 12 U.S.C. § 4617(f).
On September 6, 2008, FHFA exercised its power under HERA and placed the GSEs under conservatorship. Compl. ¶ ¶ 35-36. Shortly thereafter, pursuant to authority granted by HERA, Treasury entered into a Preferred Stock Purchase Agreement (" PSPA" ) with FHFA. Id. ¶ 6; see 12 U.S.C. § § 1455(l), 1719(g). Under the PSPA, Treasury committed to provide up to $100 billion to both Fannie and Freddie to ensure that the GSEs maintained a positive net worth. Compl. ¶ 44. On May 6, 2009, FHFA and Treasury agreed to amend the PSPA and increase Treasury's funding cap to $200 billion. Id. ¶ 52. On December 24, 2009, FHFA and Treasury again amended the PSPA, this time to allow Fannie and Freddie to draw unlimited sums of money to cure any negative net worth until the end of 2012, at which time Treasury's funding cap would be fixed according to an agreed-upon formula. Id. ¶ 53.
In return for its funding commitment, Treasury received shares of a newly created class of securities, known as Senior Preferred Stock, in both GSEs. Id. ¶ 6. The stock entitled Treasury to several contractual rights: (1) a senior liquidation preference over other preferred stock of $1 billion which would increase to match the amount of any funds the GSEs drew from Treasury ( id. ¶ 46); (2) quarterly dividend payments from the GSEs equal to 10% of Treasury's existing liquidation preference ( id. ¶ 47); (3) warrants to purchase 79.9% of the common stock of both GSEs ( id. ¶ 45); and (4) a quarterly periodic commitment fee paid by the GSEs to Treasury to compensate Treasury's ongoing support ( id. ¶ 48).
In order to pay Treasury the 10% quarterly dividend required by the PSPA, the GSEs occasionally had to engage in the circular practice of drawing funds from Treasury, which would then be paid directly back to Treasury to meet the dividend obligation (" the circular draws" ). Compl. ¶ 55. On August 17, 2012, Treasury and FHFA entered into a third amendment to the PSPA (" the Third Amendment" ). Id. ¶ 68. The Third Amendment, among other things, altered the dividend obligation by eliminating the quarterly 10% dividend payments and instead requiring the GSEs to make quarterly payments to Treasury equal to their total net worth (" the Net Worth Sweep" ). Id. ¶ 70. The Net Worth Sweep took effect January 1, 2013, and has been in operation since. Id. The GSEs returned to profitability in 2012. Id. ¶ 58.
On July 10, 2013, Continental Western's parent company, Berkley Regional Insurance Company (" Berkley" ), as well as Berkley's parent company, Berkley Insurance Company (collectively " the Berkley plaintiffs" ) filed a lawsuit in the United States District Court for the District of Columbia (" the D.C. court" ). See Clerk's Nos. 23-12, 55-1 at 1-2. That suit was filed against the same Defendants that are involved in this case, and alleged the same seven claims that Continental Western makes here. Compare Compl. ¶ ¶ 94-166 with Clerk's No. 23-12 at 34-46. On September 30, 2014, the D.C. court issued an order dismissing the Berkley plaintiffs' claims for lack of subject matter jurisdiction, among other things. See Perry Capital, Inc. v. Lew,
__ F.Supp.3d __, 2014 WL 4829559 (D.D.C. Sept. 30, 2014). The Berkley plaintiffs appealed the Perry Capital order to the District of Columbia Circuit; the appeal is still pending. See Clerk's No. 55-5.
Continental Western filed this suit on February 5, 2014, alleging that FHFA and Treasury acted outside the statutory authority granted to them by HERA, and that FHFA and Treasury violated the Administrative Procedure Act (" APA" ). Compl. ¶ ¶ 94-136. Continental Western also asserts claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty against FHFA in its role as conservator of the GSEs. Id. ¶ ¶ 137-66. Continental Western requests an order from this Court that, among other things: (1) declares that the actions taken by FHFA and Treasury were arbitrary and capricious and outside the authority granted to them by HERA; (2) vacates the Net Worth Sweep, the circular draws, and any post-2009 payments Treasury made to the GSEs; (3) requires Treasury to return all money obtained in the Net Worth Sweep to the GSEs; (4) enjoins FHFA and Treasury from taking any further action pursuant to the Net Worth Sweep; and (5) awards monetary damages to Continental Western including " contractually-due dividends on the Preferred Stock for each quarter when a dividend based on the net worth of the [GSEs] was paid to Treasury." Id. ¶ 167.
II. THE MOTIONS
A. Defendants' Motions to Dismiss or Transfer/Stay the Action
On April 29, 2014, FHFA and Watt filed a Motion to Dismiss the case for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1). Clerk's No. 23 at 1-2. Treasury also filed a Motion to Dismiss on April 29, 2014, which was substantively similar to the motion filed by FHFA and Watt. See Clerk's No. 24. Defendants assert that HERA bars relief when FHFA, as conservator, is carrying out its statutory powers or functions. Clerk's Nos. 23-13 at 12; 24-1 at 10; see 12 U.S.C. § 4617(f). Defendants also argue that HERA bars Plaintiff's claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty. Clerk's Nos. 23-13 at 24, 24-1 at 20.
B. Defendants' Supplemental Motion to Dismiss
Defendants collectively filed a Supplemental Motion to Dismiss on October 31, 2014. Clerk's No. 55. Defendants argue that the doctrine of issue preclusion applies to this case because Perry Capital already conclusively resolved the same claims asserted herein. Defendants also argue that although Continental Western was not a party to the Perry Capital litigation, two ...