Freddie/Fannie Plantiffs Score Judicial Coup

| About: Fannie Mae (FNMA)

Summary

Judge Lamberth of the DC District Court granted FHFA's Motion to Dismiss in Perry almost 17 months ago. Since then, FNMA/FMCC Plaintiffs appealed Perry and filed new cases, including Saxton.

FNMA/FMCC have not won any motions during this period, although discovery in the Fairholme case has intensified and the promising Hindes/Jacobs case was filed in Delaware.

However, FNMA/FMCC Plaintiffs have finally won an important ruling, as Northern District of Iowa Federal Judge Reade dismissed as "moot" FHFA's Motion to Dismiss in Saxton on February 9, 2016.

Judge Reade did not issue an opinion, so the Court's reasoning is not apparent. Nonetheless, the Court ordered FHFA to produce an administrative record by March 10, 2016.

This creates a major problem for FHFA, as FHFA stated in Perry that it did not compile an administrative record regarding the Net Worth Sweep.

3/3/16 UPDATE

Saxton plaintiffs today filed a motion to file a brief under seal arguing that FHFA's obligation to file an administrative record on or before March 10, 2016 should not be stayed. It is not clear on what basis Judge Reade will decide whether or not FHFA's obligation to file an administrative record by March 10, 2016, since both of the plaintiffs' and FHFA's motions are under seal. Again, while the filing of an administrative record is usually an uneventful procedural act, the filing of an administrative record should be problematic for FHFA, since it has stated in the Perry case that it had not compiled an administrative record.

2/29/16 UPDATE

In a confusing filing referred to in the comments section by S2000M3 yesterday, FHFA filed a motion in Saxton to file a brief under seal arguing that it did not have to file an administrative record.

This is confusing since one would have thought that when FHFA's motion to dismiss was denied or, better put, vacated, as moot due to the filing of Plaintiffs' amended complaint, FHFA was no longer on a one month time schedule to produce its administrative record. As discussed in the text below, the filing of an administrative record should be problematic for FHFA since it has stated in the Perry case that it had not compiled an administrative record.

Since Judge Reade's order "denying as moot" remains under seal, it is difficult to understand the reasoning why FHFA is required to not only refile its motion to dismiss but also file an administrative record. This is simply confusion piled upon further confusion.

2/16/16 UPDATE

In a filing today with the Saxton court, the parties have agreed on a briefing schedule for the filing of defendants' new motions to dismiss, plaintiffs' resistance to these motions, and defendants' reply thereto, over the course of the next three months.

Therefore, it is clear that the court's denial of defendants' motions to dismiss discussed in this article was not on the merits, as I believed it had been, but was occasioned simply by the amendment of the plaintiffs' complaint.

It is unclear why the Saxton court's clerk stated in the court docket that the defendants' motions to dismiss were "denied as moot", inasmuch as the parties' motion filed today makes it clear that the motions were "vacated as moot". Denial and vacate have very different substantive effects. In addition, when the Saxton court clerk reinstated defendants' obligation to file an administrative record rather than allowed leave to amend and refile the motions to dismiss, this reinforced the impression that the court's "denial" was on the merits.

In any event, it is now clear with this latest joint filing that the procedural posture of the case is back to the defendants' ability to file new motions to dismiss within one month.

* * * * *

In a stunning ruling on February 9, 2016, Judge Reade of the Federal District Court, Northern District Iowa, filed an order denying FHFA's Motions to Dismiss in Saxton. The Saxton complaint and FHFA's Motions to Dismiss in Saxton tracked closely the Perry plaintiffs' complaint and FHFA's Motion to Dismiss in Perry, which Judge Lamberth granted when the court dismissed the Perry case on September 30, 2014.

In essence, Judge Reade has repudiated Judge Lamberth's decision by not only denying FHFA's Motion to Dismiss, but also by ordering FHFA to produce an administrative record regarding the Net Worth Sweep by March 10, 2016.

This is an extremely noteworthy development for Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) shareholders, but Judge Reade's order does raise the following questions. Judge Reade did not issue an opinion in connection with the court's denying FHFA's Motion to Dismiss, so the court's reasoning is not readily apparent. Moreover, Judge Reade denied FHFA's Motion to Dismiss on the basis that it was "moot", which raises further questions as to Judge Reade's reasoning.

Nonetheless, the result is that Judge Reade has decided that HERA's anti-injunction provision does not withdraw jurisdiction from federal courts to consider the Net Worth Sweep, which was FHFA's principal argument in favor of dismissal in Saxton, and which was the very argument advanced by FHFA in Perry that persuaded Judge Lamberth to dismiss that case.

In an earlier Saxton ruling, Judge Reade deferred the requirement for FHFA to produce an administrative record because she found that FHFA's Motion to Dismiss could be decided without resort to the facts that would be produced in an administrative record. Judge Reade stated:

"If the motions [to dismiss by FHFA] are denied, then the court will set a deadline for filing the administrative record and, presumably, the parties will file motions for summary judgment."

Now, the Saxton court's order requiring FHFA to produce an administrative record in one month poses a particular quandary for FHFA.

In Perry, FHFA stated that it did not maintain an administrative record, which is an Administrative Procedure Act (APA) requirement whenever an agency takes action. The administrative record sets forth the matters considered by the agency in connection with its determination to take the action in question. When an agency's action is challenged, the agency relies upon its administrative record to defend itself.

Judge Lamberth in Perry ruled that it was "irrelevant" that FHFA did not produce an administrative record, inasmuch as Judge Lamberth ruled that the APA does not require an administrative record to be produced in a case in which the court finds there is no jurisdiction to hear the case.

Judge Reade clearly does not agree with Judge Lamberth as to FHFA's requirement to produce an administrative record. This is an important ruling because failure by the FHFA to produce an administrative record could, by itself, be sufficient for Judge Reade to invalidate the Net Worth Sweep, given the apparent decision by Judge Reade that the court has jurisdiction to decide Saxton's claims.

So, it would appear that Judge Reade has, at least, implicitly, decided that i) the court has jurisdiction to decide the merits as to whether FHFA exceeded its statutory authority in connection with the Net Worth Sweep, and ii) Judge Reade will assess the facts as alleged in the plaintiffs' amended complaint (which was filed under seal and contain assertions of fact obtained from the results of Fairholme's discovery in its Court of Federal Claims case), together with the facts set forth in FHFA's administrative record, if produced, when ruling on the merits of the parties' summary judgment motions.

Assuming FHFA fails to present an administrative record, it is hard to see how FHFA will be able to support any arguments to defeat the plaintiffs' summary judgment motion, since the factual underpinnings to FHFA's defenses would have to be found in its administrative record.

Now, the opacity of Judge Reade's order, by not issuing an opinion explaining the court's reasoning, is compounded by the order the court entered, stating that FHFA's Motion to Dismiss was denied as "moot".

Mootness is a judicial procedural rule in which courts decline to rule on a party's claim or motion because an essential element of that motion no longer exists. Mootness can be understood as the converse of ripeness, in which an essential element of a party's claim or motion has not yet occurred.

In what way did Judge Reade find FHFA's Motion to Dismiss moot? Put another way, what was in that Fairholme discovery that was included in the Saxton plaintiffs' amended complaint? Did the new pleadings based upon the Fairholme discovery suffice, on its own, to moot FHFA's Motion to Dismiss? Without a written opinion, one can only speculate. If there is an update to Judge Reade's order or another development bearing on the court's decision, I will update this article.

Disclosure: I am/we are long FNMA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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