FAIRHOLME FUNDS, INC. et al v. FEDERAL HOUSING FINANCE AGENCY, et al
Filing
427
MEMORANDUM ORDER granting Motion 23 for Entry of Final Judgment: For the reasons stated in the Memorandum Order, it is hereby ORDERED that plaintiffs' Motion for Entry of Final Judgment is GRANTED. Signed by Judge Royce C. Lamberth on 03/20/2024. (lcrcl3)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
FAIRHOLME FUNDS, INC., et al.,
Plaintiffs,
v.
Case No. 1:13-cv-1053-RCL
FEDERAL HOUSING FINANCE
AGENCY, et al.,
Defendants.
In re Fannie Mae/Freddie Mac Senior
Preferred Stock Purchase Agreement Class
Action Litigations
Case No. 1:13-mc-1288-RCL
This Order relates to:
ALL CASES
MEMORANDUM AND ORDER
More than a decade after plaintiffs filed the first complaint in this case, it is ready for final
judgment. In August of 2023, a jury found for plaintiffs and awarded damages. In October, the
Court ruled that plaintiffs were entitled to prejudgment interest. But the Court has refrained from
entering a final, appealable judgment until it has approved plaintiffs’ plan for allocating damages.
Plaintiffs have now submitted a proposed plan of allocation and have moved for the Court
to approve its plan and enter judgment.1 See Pls.’ Mot., Berkley ECF No. 423; Class ECF No.
415. For the foregoing reasons, the Court will GRANT plaintiffs’ motion. However, it will accept
1
For purposes of this Order, “Berkley ECF No.” refers to the docket in No. 1:13-cv-1053, and “Class ECF No.” refers
to the docket in No. 1:13-mc-1288.
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one of defendants’ objections and will modify the judgment to slightly reduce the damages to be
distributed by the amount of the jury’s damages award attributable to shares held by the few optouts other than the Berkley Plaintiffs. And it will reserve decision on the disposition of unclaimed
funds, as it is unclear whether any funds will actually be left undistributed.
I.
BACKGROUND
The Court assumes familiarity with the relevant factual and procedural background,
detailed at length in numerous opinions. See Berkley Ins. Co. v. Fed. Hous. Fin. Agency, No. 1:13cv-1053 RCL, 1:13-mc-1288 (RCL), 2023 WL 4744155 (D.D.C. July 25, 2023); Berkley Ins. Co.
v. FHFA, Nos. 1:13-cv-1053 (RCL), 1:13-mc-1288 (RCL), 2023 WL 3790739, at *1–2 (D.D.C.
June 2, 2023); Fairholme Funds, Inc. v. FHFA, Nos. 1:13-cv-1053 (RCL), 1:13-mc-1288 (RCL),
2022 WL 4745970, at *1–3 (D.D.C. Sept. 23, 2022); Fairholme Funds, Inc. v. FHFA, Nos. 1:13cv-1439 (RCL), 1:13-mc-1288 (RCL), 2018 WL 4680197, at *1–4 (D.D.C. Sept. 28, 2018); Perry
Capital LLC v. Lew, 70 F. Supp. 3d 208, 214–19 (D.D.C. 2014).
In brief, this case comprises both a class action (brought by the “Class Plaintiffs”) and a
set of individual lawsuits (brought by the “Berkley Plaintiffs”) against defendants including the
Federal Housing Finance Agency (“FHFA”), the Federal National Mortgage Association (“Fannie
Mae”), and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The plaintiffs are
holders of common stock of Freddie Mac and junior preferred stock of Fannie Mae and Freddie
Mac. Plaintiffs filed suit in 2013 to challenge the “Net Worth Sweep” resulting from an
amendment to the Senior Preferred Stock Purchase Agreements between FHFA, in its capacity as
conservator for Fannie Mae and Freddie Mac, and the United States Department of the Treasury.
By the time the case reached the jury, plaintiffs’ sole remaining claim was for breach of the implied
covenant of good faith and fair dealing based on the Net Worth Sweep, which allegedly caused
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plaintiffs damages in the form of loss of value of Fannie Mae preferred shares, Freddie Mac
preferred shares, and Freddie Mac common shares.
On August 14, 2023, the jury found in favor of the plaintiffs, awarding $281.8 million to
the Freddie Mac junior preferred shareholders, $31.2 million to the Freddie Mac common
shareholders, and $299.4 million to the Fannie Mae junior preferred shareholders. Verdict Form,
Berkley ECF No. 402, Class ECF No. 392. On October 24, 2023, the Court ruled that the Fannie
Mae junior preferred shareholder plaintiffs were entitled to prejudgment interest, and awarded
simple interest on the $299.4 million damage award, accruing from the date August 17, 2012 until
the date on which judgment is entered, at a fixed rate of 5% over the Federal Reserve discount rate
as of August 17, 2012. Fairholme Funds, Inc. v. Fed. Hous. Fin. Agency, No. 1:13-cv-1053 (RCL),
1:13-mc-1288 (RCL), 2023 WL 7002665, at *1, 9 (D.D.C. Oct. 24, 2023).
On November 17, the parties filed a joint statement setting forth their calculation of
prejudgment interest and explaining their disagreement about whether the Court could issue a final,
appealable judgment before approving the plan of allocation. See Berkley ECF No. 417, Class
ECF No. 408. The Court concluded that it could not issue a final, appealable judgment until it had
approved a plan of allocation. See Berkley ECF No. 418; Class ECF No. 409. The Court therefore
ordered the parties to submit a written report outlining plaintiffs’ plan of allocation and proposing
a briefing schedule in the event the parties had concerns for which they sought resolution by the
Court. Id. Once the parties had filed their joint submission, the Court imposed a briefing schedule.
See Berkley ECF No. 420; Class ECF No. 412.
On January 22, 2024, plaintiffs submitted their proposed plan of allocation and proposed
judgment and moved for the Court to approve their plan of allocation and enter judgment. See
Pls.’ Mot., Berkley ECF No. 423; Class ECF No. 415. Defendants filed an opposition. See Defs.’
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Opp’n, Berkley ECF No. 424, Class ECF No. 417. They challenge three aspects of plaintiffs’
proposals. First, defendants argue that the proposed judgment would distribute the jury’s entire
damages award without reducing the damages to account for the small number of shareholders
(other than the Berkley Plaintiffs) who opted out of the class. Id. at 1. Second, defendants contend
that the proposed plan of allocation would improperly authorize distribution to holders of shares
that were previously owned by shareholders who had opted out of the class. Id. at 1–2. Third,
defendants challenge the legality of plaintiffs’ proposed method of distributing unclaimed funds—
cy pres distribution to an affordable housing charity—and instead assert that any unclaimed funds
should revert to defendants. Id. at 3. Plaintiffs filed a reply. See Pls.’ Reply, Berkley ECF No.
425, Class ECF No. 418.
Plaintiffs’ motion is now ripe for review.
II.
LEGAL STANDARDS
In the class action context, a plan of allocation, also known as a distribution plan, typically
establishes who is eligible to receive damages, how individual payments will be allocated among
the eligible class members, and what to do with any unclaimed funds.
See 2 Joseph M.
McLaughlin, McLaughlin on Class Actions § 6:23 (20th ed.); Cook v. Rockwell Int’l Corp., 618
F.3d 1127, 1138 (10th Cir. 2010). Any plan of allocation must be approved by the court. “As
with settlement agreements, courts consider whether distribution plans are fair, reasonable, and
adequate.” In re Fed. Nat’l Mortg. Ass’n Sec., Derivative, & “ERISA” Litig., 4 F. Supp. 3d 94,
107 (D.D.C. 2013) (quoting In re Lorazepam & Clorazepate Antitrust Litig., No. 99-ms-276
(TFH), 2003 WL 22037741, at *7 (D.D.C. June 16, 2003)). In evaluating a proposed plan of
allocation, the district court will consider whether it will equitably distribute the settlement
proceeds or damages award. See In re Agent Orange Prod. Liab. Litig., 818 F.2d 179, 181 (2d
Cir. 1987) (“District courts enjoy broad supervisory powers over the administration of class-action
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settlements to allocate the proceeds among the claiming class members . . . equitably.”) (internal
quotation marks and citation omitted) (alteration in original); Sullivan v. DB Invs., Inc., 667 F.3d
273, 328 (3d Cir. 2011) (en banc) (same); see also 2 McLaughlin, supra, § 6:23 (“The objective in
developing a plan [of allocation] is equitable distribution of finite settlement proceeds.”).
III.
DISCUSSION
The Court will consider in turn each of defendants’ challenges to plaintiffs’ proposed
judgment and plan of allocation. It agrees with defendants that the judgment must be revised to
deduct the portion of the damages award attributable to the small number of opted-out shareholders
from the total amount to be distributed. However, defendants’ argument that the plan should not
allocate damages to persons holding shares that were previously held by opted-out shareholders
fails because it is irreconcilable with the definition of the class. Finally, the Court will for now
refrain from deciding on the method of distribution for unclaimed funds, since it is not yet clear
any funds will be left unclaimed.
A. The Court Will Modify the Proposed Judgment to Deduct the Portion of the Damages
Award Attributable to Opted-Out Shareholders From the Total Amount To Be
Distributed
The Court will modify the judgment to slightly reduce the damages paid to class members
and the Berkley Plaintiffs by the amount of the jury’s damages award attributable to shares held
by opt-outs other than the Berkley Plaintiffs. 2
2
Plaintiffs argue that defendants’ argument should be rejected because defendants “lack any cognizable interest in
challenging how the award is distributed among Class members” and therefore lack standing to raise this argument.
See Pls.’ Mot. 10. This invocation of standing is puzzling. Standing doctrine “limits the category of litigants
empowered to maintain a lawsuit in federal court to seek redress for a legal wrong.” Spokeo, Inc. v. Robins, 578 U.S.
330, 338 (2016). Plaintiffs have cited no authority for the notion that a defendant must meet the requirements of
Article III standing to object to aspects of a plaintiff’s plan of allocation. The two cases invoked by plaintiffs involve
the standing to object of third parties, rather than defendants. See In re Equity Funding Corp. of Am. Sec. Litig., 603
F.2d 1353, 1361 (9th Cir. 1979); In re Holocaust Victim Assets Litig., 314 F. Supp.2d 155, 168 (E.D.N.Y. 2004). It
would be curious if the Court, in exercising its duty to evaluate whether plaintiffs’ proposal would equitably distribute
the damages award, could not consider legal arguments of defendants. At any rate, because defendants argue that
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The defendants object that plaintiffs’ proposed judgment calls for the payment of the entire
amount of damages awarded by the jury to the class members and Berkley Plaintiffs, even though
the jury award reflects damages to both those plaintiffs and opt-outs. See Defs.’ Opp’n 5–9.
Defendants argue, and plaintiffs do not dispute, that “[a]t trial, Plaintiffs presented evidence, and
the jury found damages, based on losses experienced by all shareholders—100% of the relevant
[Fannie Mae and Freddie Mac] shares, including shares held by opt outs.” Id. at 6; Pls.’ Reply 2.
The jury verdict thus includes money owed to the opt outs. But the proposal calls for the entire
damages award to be distributed. According to defendants, they thus “would be forced to pay
class members for harm that the jury found was suffered by opt-outs,” which would violate the
Rules Enabling Act. Defs.’ Opp’n 5.
The Court agrees that the proposal would improperly require defendants to overpay the
class members. To be sure, the difference is minute. According to plaintiffs, only thirty-two
individual shareholders opted out, other than the Berkley Plaintiffs who are of course entitled to
damages. Pls.’ Mot. 11–12; see also Pls.’ Mot., Ex. B, App. C, Berkley ECF No. 423-2, Class
ECF No. 415-2 (listing the thirty-two opt-outs). So, the damages award of approximately $810
million would be reduced by an estimated $200,000. Pls.’ Mot. 11–12. Nonetheless, Federal Rule
of Civil Procedure 23’s “requirements must be interpreted in keeping . . . with the Rules Enabling
Act, which instructs that rules of procedure ‘shall not abridge, enlarge or modify any substantive
right.’” Amchem Prod., Inc. v. Windsor, 521 U.S. 591, 613 (1997) (quoting 28 U.S.C. § 2072(b)).
Overcompensating the class would violate the Rules Enabling Act by “alter[ing] defendants’
plaintiffs’ proposal would cause them to pay more in damages than they should, they have asserted a “classic
pocketbook injury.” See Tyler v. Hennepin Cnty., Minnesota, 598 U.S. 631, 636 (2023).
Plaintiffs also argue that defendants waived this challenge by not raising it before or during trial. See Pls.’ Mot. 11–
12; Pls.’ Reply 2–3. But defendants could not have raised an objection to plaintiffs’ proposed judgment before
plaintiffs had unveiled it in the first place.
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substantive right to pay damages reflective of their actual liability.” See McLaughlin v. Am.
Tobacco Co., 522 F.3d 215, 231 (2d Cir. 2008). The amount of aggregate damages must instead
“roughly reflect the aggregate amount owed to class members.” Seijas v. Republic of Argentina,
606 F.3d 53, 58–59 (2d Cir. 2010).
True, courts applying these principles have typically dealt with greater disconnects
between proposed damages and actual liability. See, e.g., McLaughlin, 522 F.3d at 231 (rejecting
as violative of the Rules Enabling Act an aggregate determination of damages that was “likely to
result in an astronomical damages figure that does not accurately reflect the number of plaintiffs
actually injured by defendants and that bears little or no relationship to the amount of economic
harm actually caused by defendants.”). But there is no exception in the Rules Enabling Act
permitting modification of substantive rights so long as the infringement is not too much in the
grand scheme of things. Since approximately $200,000 of the total damages award has nothing to
do with defendants’ actual liability to the class members and Berkley Plaintiffs, the Court cannot
include that sum in the judgment without abridging defendants’ substantive rights.
Perhaps sensing their overreach, plaintiffs have suggested a remedy of reducing the
judgment by the amount attributable to opt-outs. See Pls.’ Mot. 12 n.4. The Court will adopt this
suggestion and will modify the proposed judgment by including the language put forward by
plaintiffs, and not disputed by defendants: “IT IS FURTHER ORDERED AND ADJUDGED that
the judgment amount for each of the Classes shall be reduced by the sum of damages and interest
attributable to “Specified Shares,” as defined by the Plan of Allocation, incorporated herein.” See
id.; Defs.’ Opp’n. 7 (encouraging the Court to correct the proposed plan in the manner suggested
by plaintiffs).
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B. Defendants’ Objection That the Proposed Plan Would Improperly Pay Damages to
Holders of Shares Previously Owned by Shareholders Who Opted Out of the Classes
Is Meritless
The Court rejects defendants’ argument that plaintiffs’ proposed plan would improperly
award damages to holders of shares whose previous owners opted out of the class, because this
contention is flatly inconsistent with the definition of the class adopted by the Court.
Defendants fault plaintiffs’ proposed plan for permitting damages to be paid to holders of
shares whose previous owners opted out of the class. See Defs.’ Opp’n 9–17. According to the
defendants, this would violate common law principles because it would mean that when the optedout shareholder sold their shares to another person, they effectively assigned to the buyer a right
the opted-out seller did not actually possess—the right to participate in class recovery. See id. at
11–13. The plan of allocation therefore “must include a mechanism for identifying and excluding
from payment all opted-out shares, thereby limiting distributions only to class members.” Id. at
10. Any argument by plaintiffs that the subsequent shareholders are not limited to the rights of the
previous, opted-out shareholders, defendants argue, is estopped because plaintiffs have previously
argued in other contexts that the claims travel with the share. See id. at 14–15.
Yet defendants’ theory runs aground on the definitions of the classes adopted by the Court.
When the Court granted plaintiffs’ motion for class certification, it certified the following classes:
1. All current holders of junior preferred stock in Fannie Mae as of the date of
certification, or their successors in interest to the extent shares are sold after
the date of certification and before any final judgment or settlement (the
“Fannie Preferred Class”);
2. All current holders of junior preferred stock in Freddie Mac as of the date
of certification, or their successors in interest to the extent shares are sold
after the date of certification and before any final judgment or settlement
(the “Freddie Preferred Class”); and
3. All current holders of common stock in Freddie Mac as of the date of
certification, or their successors in interest to the extent shares are sold after
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the date of certification and before any final judgment or settlement (the
“Freddie Common Class”).
Order, Class ECF No. 139. Under the plain meaning of these definitions, a person can be a class
member if they held the relevant share on the date of certification. Or they can be a class member
if they are a successor in interest to such a person and hold a share after certification but before
final judgment. The definitions do not differentiate between successors in interest to those who
remained part of the class and successors in interest to those who opted out. Not only does the
Order contain no caveat excluding the latter category, but the Court-approved notice to class
members lacks any hint of such an exception. See Notice of Class Action, Class ECF No. 140-1.
By imposing such an exception, defendants seek to rewrite the class definitions.
More fundamentally, defendants err in speaking of “shares that were validly opted out of
the classes.” See Defs.’ Opp’n 1, 6. The classes are defined in terms of shareholders, not shares.
So, shareholders could opt out; shares could not. See Notice of Class Action 6 (informing
potential class members that they could “remove [themselves] from or ‘opt out’ of the Class(es)”).
Plaintiffs’ plan is not deficient for not recognizing a non-existent category of tainted shares that
exclude their owners from the class. Similarly, defendants’ argument that “if the claim travels
with the shares, then the opt-out election must do so as well,” Defs.’ Opp’n 12, relies on the faulty
premise that class membership is a feature of the share that may or may not be transferred to a
successor in interest. See id. (asserting that “an opt-out has no right to participate in the class
recovery, and thus they cannot assign a right to participate in the class recovery.”). But under the
Court’s Order granting class certification, a purchaser’s qualification for class membership is not
based on any transferred right, but instead triggered by their identity as a successor in interest to
someone who held shares as of the date of certification. That a person purchased a share from
someone who had previously opted out of the class is simply irrelevant.
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The Court therefore concludes that the proposed plan properly includes shareholders who
are successors in interest to previous owners who opted out of the class.
C. The Court Will Reserve Decision on the Disposition of Unclaimed Funds
Since it is unclear whether any funds will in fact be left unclaimed, the Court will reserve
decision on whether unclaimed funds should revert to defendants or be distributed through cy pres.
Plaintiffs contend that because the plan of allocation provides for disbursement to brokers
and registered shareholders of record, “it is probable that the amount of undistributed funds will
be minimal to non-existent.” Pls.’ Reply 15–16 (citing Plan of Allocation (POA) ¶ 13, Berkley
ECF No. 423–2, Class ECF No. 415-2); see also Pls.’ Mot. 9 (same); POA ¶ 15 (“Given the
Allocation Plan and Distribution Method, Plaintiffs expect there will not be any unclaimed or
undistributed funds in this case.”). Although plaintiffs urge the Court to nonetheless decide
whether unclaimed funds should revert to defendants or be subject to a cy pres decree, they “do
not object to reserving decision as to the appropriateness of a cy pres award until after the
distribution process.” Pls.’ Reply 20.
At this time, there is no need for the Court to decide whether cy pres is a legally valid
remedy, whether the equities favor cy pres or reversion, and whether there is an adequate nexus
between the proposed cy pres beneficiary and this case. “[P]recedent and prudence counsel” courts
“to avoid unnecessary dicta.” Louisiana Env’t Action Network v. Browner, 87 F.3d 1379, 1385
(D.C. Cir. 1996). The Court will therefore refrain from plunging into this thicket unless and until
it must. It will instead modify ¶ 15 of the proposed plan of allocation to replace the sentence about
cy pres with the following: “The Court shall defer decision on the disposition of undistributed
funds until such time as the amount of undistributed funds, if any, has been determined.” See Pls.’
Reply 20.
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