Adams Family Trust et al v. Syron et al

Filing 113

MEMORANDUM OPINION Re: Federal Housing Finance Agency's motions to substitute the FHFA as plaintiff. Signed by District Judge Leonie M. Brinkema on 7/27/2009. (stas)

IN THE UNITED STATES DISTRICT COURT FOR THE-'- i " ;- "-'
EASTERN DISTRICT OF VIRGINIA

Alexandria Division

IN RE FEDERAL HOME LOAN MORTGAGE CORPORATION DERIVATIVE LITIGATION
This document relates All Actions to:

) ) ) ) )
)

I
l:08cv773 (LMB/TCB)

MEMORANDUM OPINION

Three groups of shareholders have filed derivative actions on behalf of the Federal Home Loan Mortgage Corporation
Mac"). The Federal Housing Finance Agency ("FHFA"),

("Freddie

the federal

agency acting as conservator of Freddie Mac pursuant to the Housing and Economic Recovery Act of 2008, moved to substitute itself the actions. has intervened and

in place of the plaintiffs in all of the FHFA's motions

For the reasons discussed below,

will be granted.
I. Background

A.

Freddie Mac,

HERA.,

and the FHFA.

Freddie Mac was established in 1970 to compete with the
Federal National Mortgage Association
secondary mortgage market.

("Fannie Mae")

in the

Although technically private

corporations,

both Fannie Mae and Freddie Mac are government
established to facilitate liquidity in the

sponsored enterprises

home mortgage market and to promote homeownership.
National Mortgage Association Charter Act, Stat. 1246, 1252 (1934) ch. 847,

See Federal
§ 301, 48 §§ 1716

(codified as amended at 12 U.S.C.

et sea.);

Federal Home Loan Mortgage Corporation Act,

Pub.

L.

No.

91-351,
12

§ 301,
§§

84 Stat.

450,

451

(1970)

(codified as amended at

U.S.C.

1451 et sea.).x

The Office of Federal Housing Enterprise Oversight
was a federal agency established in 1992

("OFHEO")

to oversee and ensure

the financial soundness of Fannie Mae and Freddie Mac.
general,

In
as

OFHEO's reports about Freddie Mac were positive;

recently as July 2008,

OFHEO's director described Freddie Mac and

Fannie Mae as

"adequately capitalized."2

However,

OFHEO's

forecasts and analyses proved incorrect.
total losses of

Freddie Mac reported

$3.1 billion in 2007,3 and $50.1 billion in

2008.4
On July 30, 2008, Congress passed the Housing and Economic

was converted into a private corporation in 1968. Fannie Mae,

'Fannie Mae was established in 1938 as a federal agency and
See About

http://www.fanniemae.com/aboutfm/charter.jhtml?p=About+Fannie+Mae (Oct. 29, 2008). Freddie Mac was created as an alternative to

Fannie Mae to make the secondary mortgage market more competitive and efficient. See Federal Home Loan Mortgage Corporation Act, §
301.

Lockhart.

2See CNBC.com, Fannie. Freddie Adequately Capitalized:
July 8, 2008, http://www.cnbc.com/id/25584136.

http://www.freddiemac.com/news/archives/investors/2008/2007er-4qO
7.html.

Quarter 2007 Financial Results

3See Press Release, Freddie Mac, Freddie Mac Releases Fourth
(Feb. 28, 2008), available at

available at

Quarter and Full-Year 2008 Financial Results

4See Press Release, Freddie Mac, Freddie Mac Reports Fourth
(Mar. 11, 2009),

http://www.freddiemac.com/news/archives/investors/2008/3q08er.htm
-2-

Recovery Act of 2008, ("HERA"),

Pub.

L.

No.

110-289,

122

Stat.

2654

(2008)

which merged OFHEO and another agency,

the Federal

Housing Finance Board,
Agency ("FHFA").

to form the new Federal Housing Finance
§§ 1301-1314, 122 Stat. at 2794-2799.

See HERA,

HERA further provided that until appointment and confirmation of an FHFA director, of the FHFA. alleged, OFHEO's former director would act as director 122 Stat. at 2662. The plaintiffs have

Id^ § 1101,

and the FHFA has not disputed,

that there is significant
the FHFA.5

overlap between OFHEO's staff and that of

HERA granted the FHFA's director the authority to appoint

the FHFA as conservator or receiver of Freddie Mac, and any Federal Home Loan Bank. September 6, 2008, Pursuant

Fannie Mae, on

to this authority,

FHFA Director James Lockhart appointed the

FHFA as Freddie Mac's conservator.6 established by HERA for conservators,
to all rights, titles, powers,

Under the broad powers the FHFA has "succeedfed]

and privileges of or director of

[Freddie Mac], [Freddie Mac]

and of any stockholder,

officer,

with respect to

[Freddie Mac]

and the assets of

[Freddie Mac],"
[Freddie

and is empowered to "take over the assets of and operate

general

director of OFHEO. In addition, the plaintiffs allege that much of OFHEO's staff and legal team was transferred to the FHFA, and that the FHFA's legal department is directed by OFHEO's former
counsel.

sThe director of the FHFA is James Lockhart,

the former

2008),

6See Statement of FHFA Director James B. Lockhart (Sept. 7,
available at

http://www.fhfa.gov/webfiles/23/FHFAStatement9708final.pdf.
-3-

Mac]

with all the powers of the shareholders,
[Freddie Mac] 12 U.S.C. that, §§

the directors,

and

the officers of [Freddie Mac]."

and conduct all business of 4617(b)(2)(A)(i), (B)(i). The

statute also provides not at issue here,

except under

limited circumstances

"no court may take any action to restrain or

affect the exercise of powers or functions of the
conservator or a receiver." 12 U.S.C § 4617(f).

[FHFA]

as a

B.

These Civil Actions.

These three consolidated cases

- Bassman,

Adams Family

Trust,

and Louisiana Municipal7 - are derivative actions filed by
All of the plaintiffs

shareholders on Freddie Mac's behalf.
assert claims against Freddie Mac's

former board members.

Plaintiff Bassman has also sued other corporations,

including

PricewaterhouseCoopers LLP, American Eapppraiseit,

First American Corporation, Inc.,

First

Washington Mutual,

and several

entities of Countrywide Financial Corporation,8 as well as

("Adams Family"), and l:08cv849, Louisiana Municipal Police Employees Retirement System v. Svron ("Louisiana Municipal"), were filed in this court in July and August 2008, respectively,
and consolidated on October 15, 2008. Civil Action No. l:08cvl247, Bassman v. Svron ("Bassman"). was originally filed in the Southern District of New York in March 2*008, ordered transferred to this court on November 20, 2008, and consolidated

7Civil Action Nos. l:08cv773, Adams Family Trust v. Svron

together with the above actions on December 12, 2008. All three actions are consolidated under Civil Action No. l:08cv773 and have the consolidated caption In re Federal Home Loan Mortgage
Corporation Derivative Litigation.

Countrywide Home Equity Loan Trust,
-4-

8These include Countrywide Financial Corporation,

Country-Wide Bank,

FSB,

officers of those corporations,
Freddie Mac's demise.

for allegedly contributing to

After the plaintiffs made demands on Freddie Mac the claims,
("SLC")

to pursue

Freddie Mac appointed a special litigation committee
to

of three purportedly independent board members

investigate the claims,
investigation.

and retained counsel to assist in the
2008, the SLC met with the Adams to discuss possible to submit a

On September 4,

Family and Louisiana Municipal plaintiffs resolution of the litigation,

invited the plaintiffs

list of suggested corporate reforms,

and conveyed its willingness

to continue discussing the issues raised by the plaintiffs.
the FHFA became Freddie Mac's conservator, including the members of the SLC, the board members,

When

were dismissed.9

After being granted permission by the Court to intervene,
the FHFA moved to substitute itself for the plaintiffs in all of

the consolidated actions, provisions of HERA,

asserting that under the above-quoted

it is the only party with standing to sue on and that allowing the plaintiffs to

behalf of Freddie Mac,

continue pursuing this litigation would interfere with its powers

Countrywide Home Loans,

Inc.,

and Landsafe,

Inc.

plaintiffs advised the FHFA of this litigation and inquired as to
how the FHFA would be handling it. The Adams Family and

'Following the establishment of the conservatorship, the

Louisiana Municipal plaintiffs never received a response;
15, 2008. The FHFA has indicated to the Court continuing to evaluate the claims.
-5-

counsel

for the Bassman plaintiffs met with an FHFA attorney on October
that it is

in contravention of HERA's mandate.
FHFA's motions,
the matter,

After hearing argument on
stayed
2009 for

the Court held the motions in abeyance,

and ordered the parties to appear on May 1,

a status hearing.

At the status hearing,

the plaintiffs contended that their

opposition to the FHFA's substitution as plaintiff was buttressed
by the FHFA's alleged failure to file a claim on Freddie Mac's behalf in a recent bankruptcy of Washington Mutual Bank.
Court ordered the FHFA to file a response.

The

The FHFA's response

provided evidence that Freddie Mac, authority, had, in fact,

acting under the FHFA's

filed proofs of claims related to two

separate Washington Mutual entities - one regarding Washington Mutual, Inc. in bankruptcy, and one regarding Washington Mutual

Bank in FDIC receivership - and had also recently entered into a confidential settlement with JP Morgan Chase, the assets of Washington Mutual Bank.10 the purchaser of

Given the FHFA's timely

response to the Court's order concerning the Washington Mutual

proceedings,
cases,

and in light of two recent decisions in similar

the Court finds that the motions to substitute are ripe

for adjudication. II. Discussion

At issue in the FHFA's Motion to Substitute is whether HERA

payment related to Chase's obligations to repurchase mortgages that Washington Mutual Bank had sold to Freddie Mac.
-6-

10Under the settlement, Freddie Mac received a one-time

bars the plaintiffs from maintaining their derivative actions. The FHFA,
law,

relying on the plain language of HERA as well as case

argues that it alone has standing to sue on behalf of

Freddie Mac,

and that allowing plaintiffs to sue would affect
its mandate as conservator. The

FHFA's ability to fulfill

plaintiffs argue that HERA does not bar them from suing

derivatively,

at least on these facts.

Alternatively,

the

plaintiffs have proposed that the Court continue the stay of the motions to substitute until the FHFA has indicated whether or not
it intends to actually litigate the claims raised in their
complaints.

The FHFA's argument has merit.

The FHFA's position is

consistent with the language of HERA,

with the recent decisions
as well as with the Finally,

reached by two other federal district courts,

persuasive case law interpreting an analogous statute.

particularly given the FHFA's involvement in the Washington
Mutual bankruptcy, the Court does not find that the plaintiffs'

concerns of conflicts of interest or bad faith warrant granting
them derivative standing.
A. Shareholder Derivative Suits.

Normally,

a corporation's board of directors has complete

discretion to prosecute the corporation's causes of action.
United Copper Sec.
263 (1917).

See
261,

Co.

v.

Amalgamated Copper Co..

244 U.S.

Shareholders wishing to initiate an action on a

-7-

corporation's behalf must first make a reasonable demand on the board of directors to initiate the action; pursue the claims,
v.

if the board elects to See Meltzer
1964).

it alone has standing to do so.
330 F.2d 946, 949

Atlantic Research Corn..

(4th Cir.

If the shareholders'

demand is refused or ignored,

or if they

demonstrate that a demand would be futile,
derivative action. See id.

they may pursue a

A shareholder derivative complaint in federal court must

"state with particularity any effort by the plaintiff to obtain
the desired action from the directors or comparable authority

and,

if necessary,

from the shareholders or members;

and the

reasons

for not obtaining the action or not making the effort."

Fed.

R.

Civ.

P.

23.l(b)(3).

In this case,

it is undisputed that

the plaintiffs have made proper demands,

and that to date,

neither Freddie Mac's board nor the FHFA has affirmatively
pursued the claims.

B.

HERA's

Impact on the Plaintiffs'

Standing.

1.

Plain Language.

Under HERA, possesses

the FHFA,

as Freddie Mac's powers,

conservator, ...

"all rights,

titles,

and privileges of

any stockholder

...

of

[Freddie Mac]

with respect to

[Freddie

Mac]

and the assets of

[Freddie Mac]," and was granted the power
[Freddie Mac] with all
[Freddie Mac] and

to "take over the assets of and operate
the powers of the shareholders ... of

-8-

conduct all business of

[Freddie Mac]."

12 U.S.C.

§§

4617(b)(2)(A)(i),

(B)(i).

As the FHFA argues,

the plain meaning

of the statute is that all rights previously held by Freddie
Mac's stockholders, including the right to sue derivatively, now

belong exclusively to the FHFA.11
2. Case Law.

The plain language reading of HERA is supported by

persuasive judicial authority.

Two courts have already ruled

that HERA bars derivative suits by shareholders of the affected
companies. See Esther Sadowskv Testamentary Trust v. Svron. No.

08cv5221,

2009 WL 1309776

(S.D.N.Y. May 6,

2009)

("Sadowskv");

In

re Fed. Nat'l Mortgage Ass'n Sec.
MDL No. 1668, 2009 WL 1837757

Derivative,
June 25,

and ERISA Litia..
2009) ("In re

(D.D.C.

Fannie Mae").

Additionally,

the Court is persuaded by decisions

that have reached the same conclusion when interpreting the

Financial Institutions Reform,
1989, Pub. L. No. 101-73,

Recovery,
183

and Enforcement Act of
(1989) ("FIRREA"), whose

103 Stat.

provisions regarding the powers of federal bank receivers and
conservators are substantially identical to those of HERA.12 See

The plaintiffs have asserted that the ability to bring a derivative suit is not a right, but an equitable remedy. The Court does not find this distinction persuasive.
conservators or receivers of banks succeed to "all rights,

I2FIRREA mandates, in relevant part, that federal

titles, powers and privileges of the insured depository institution, and of any stockholder, member, accountholder, depositor, officer, or director of such institution with respect
-9-

Pareto v.

FDIC,

139

F.3d 696,

700

(9th Cir.

1998)

(holding that

under FIRREA,
the FDIC,

"Congress has transferred everything it could to
power or

and that includes a stockholder's right,

privilege to demand corporate action or to sue directors or
others when action is not forthcoming");
Corp., 827 F. Supp. 742, 746 (S.D. Fla.

In re Southeast Banking
1993) (holding that "such

derivative claims belong exclusively to the FDIC").

This

conclusion is also consistent with the most recent Fourth Circuit
ruling on this issue.
Credit Union Admin..
aff'd. 133 F.3d 915,

See Lafavette Fed.
960 F. Supp. 999,

Credit Union v. Mat'l
(E.D.
Jan.

1005

Va.
7,

1997),

1998 WL 2881

(4th Cir.

1998)

(unpublished)

(holding that FIRREA bars shareholders of a credit

union under a federal conservatorship from suing derivatively).13

to the institution and the assets of the institution," and may "take over the assets of and operate the insured depository institution with all the powers of the members or shareholders, the directors, and the officers of the institution and conduct all business of the institution." 12 U.S.C. §§ 1821(d)(2)(A)(i)
(B)(i).

the authority of Bauer v. Sweeny. 964 F.2d 305 (4th Cir. 1992), which the plaintiffs cite in support of their position, is questionable. In Bauer. a 2-1 panel decision, the Fourth Circuit held that "derivative rights of shareholders [of a corporation in receivership] are lost after claims are sold [by the receiver to another entity]." Bauer. 964 F.2d at 308. It also declined to overrule a previous holding that allowed shareholders to pursue a derivative claim when "the receiver manages the . . . assets [of the entity in receivership]," as is the case here. id. at 307. As theFHFA notes, however, the latter statement in Bauer was not essential to the court's decision, and given the more recent affirmance in Lafavette. the Court finds Lafavette more persuasive as applied to the case at bar.
-10-

"in light of the Fourth Circuit's affirmance in Lafavette.

The plaintiffs,

however,

argue for the application of a

common-law rule that shareholders of a corporation under federal

conservatorship or receivership may still maintain a derivative

suit if the conservator or receiver does not pursue such an action. This was the general rule in this circuit and elsewhere See Womble v. Dixon. 752 F.2d

before the enactment of FIRREA.
80, 82-83 {4th Cir. 1984)

(holding that derivative suits can "justified in declining to press claims").14 However, FIRREA,

proceed if the receiver is not [the shareholder plaintiffs']

passed in the aftermath of the savings and loan crisis of the 1980s, amended the relevant statute to provide federal receivers
"all rights, titles, powers and privileges

and conservators with

of the

[institution in receivership or conservatorship],
member, accountholder. [or! depositor."

and of
12

any stockholder,

suit must be made upon the receiver or agency possessing the right to assert the corporations' claims."); Landv v. FDIC. 486 F.2d 139, 148 (3d. Cir. 1973) ("A derivative suit by shareholders should not be precluded merely because a bank is in the receivership of the FDIC."); O'Connor v. Rhodes. 79 F.2d 146, 149 (D.C. Cir. 1935) («[W]hile, as a rule, a stockholder's or creditor's suit cannot be maintained until demand has been made upon the receiver, the Comptroller [of the Currency], or the bank, the rule does not apply where the receiver or Comptroller refuses to bring the suit."). But see First Sav. & Loan Ass'n v. First Fed. Sav. & Loan Ass'n of Haw.. 547 F. Supp. 988, 994 (D. Haw. 1982) (holding that shareholders did not have the right to bring a derivative suit on behalf of a bank in the receivership of the Federal Savings and Loan Insurance Corporation).

(5th Cir. 1989) ("A derivative action is not precluded when a bank is placed into receivership; rather, any demand to bring

l4See also Gaubert v. United States. 885 F.2d 1284, 1290 n.6

-11-

U.S.C.

§

1821(d)(2)(A)(i)

(emphasis added).

FIRREA,

unlike the

previous version of the statute,

included "stockholder[s]" in the

list of entities whose powers were inherited by conservators.
See Suess v. U.S.. 33 Fed. Cl. 89, 94 (Fed. Cl. 1995). The plain

meaning of this change is that federal receivers and conservators
of covered entities - which, pursuant to HERA, now include including

Freddie Mac - succeed to all rights of stockholders, the right to bring a derivative suit. As such,

the common-law

rule cited by the plaintiffs is based on an interpretation of
pre-FlRREA statutes and inapplicable to the instant case.

It is true that some courts interpreting FIRREA have reached
the opposite conclusion and have applied the common-law rule

notwithstanding the statutory language. at 94

See Suess,

33 Fed.

Cl.

(holding that the addition of "stockholders" to FIRREA was

meant to ensure that the statute covered shareholder-owned

savings and loans,

and not to preclude stockholders from
Branch v. FDIC. 825 F. Supp. 384, 404

asserting their rights);

(D.

Mass.

1993)

(holding that because Congress provided that

shareholders retain rights to "residual assets of the failed

financial institution," they also retain the ability "to protect the failed institution's interests").15 These cases, however,

demand on a receiver or conservator. See Am. Cas. Co. of Reading. Pa. v. FDIC. 39 F.3d 633, 637 (6th Cir. 1994); in re Sunrise Sec. Litia.. 916 F.2d 874, 879 (3d Cir. 1990). These
-12-

shareholders may bring a derivative suit after an unsuccessful

% l5Other courts have stated in dicta that under FIRREA,

are unpersuasive in light of the broad,

sweeping language of

HERA,

which not only transfers "all rights,

titles,
§

powers,

and

privileges" of stockholders to the FHFA,

12 U.S.C.

4617 (b) (2) (A) (i) , but also bars a court from "restraining] or affect[ing] the exercise of powers or functions of the
12 U.S.C. § 4617(f).

[FHFA]

as

a conservator or a receiver,"

This

language

clearly demonstrates Congressional intent to transfer as much
control of Freddie Mac as possible to the FHFA, including any

right to sue on behalf of the corporation.
at 700. Accordingly,
3.

See Pareto.

139 F.3d

the FHFA is the proper plaintiff.

Possible Conflicts of Interest.

The plaintiffs also argue that the FHFA's motions to substitute should be denied, or at least held in abeyance,

because the instant litigation raises concerns of a conflict of

interest and calls into question whether the FHFA will pursue the

claims at issue.
FIRREA,

There is authority for the principle that under

if a federal receiver or conservator is subject to a

manifest conflict of interest,

shareholders can maintain a

derivative suit despite otherwise being barred from doing so.
The Federal Circuit permitted derivative standing where the

plaintiffs'
FDIC,

complaint alleged a breach of contract caused by the

the very federal agency that was the receiver of the

presented.

holdings are unpersuasive because the issue of whether FIRREA divests shareholders of derivative standing was not squarely
-13-

corporation.

See First Hartford Corp.

Pension Plan & Trust v.

United States,

194 F.3d 1279,

1295

(Fed. Cir. 1999).

Similarly,

the Ninth Circuit allowed plaintiffs to sue derivatively where the defendant, receiver, the Office of Thrift Supervision ("OTS"), and the sister agencies"

the FDIC, were "closely-related,

within the federal government that "jointly publish[ed]
regulations, issue[d] reports, and conduct[ed] cooperative

investigations."
1017, 1023-24

Delta Savings Bank v. United States.
2001). In both cases,

265 F.3d

(9th Cir.

the courts

concluded that it was unrealistic to expect the FDIC to be able
to evaluate the claims impartially under the circumstances.

Most of the alleged conflicts in this case involve FHFA's
relationship with its predecessor, OFHEO.16 According to the

plaintiffs,

OFHEO's failures in regulating Freddie Mac would

likely be illuminated in any litigation; many of the FHFA's
current employees, who were previously employees of OFHEO, are

potential witnesses; and the history of OFHEO,

as well as the

circumstances under which the federal government took over Freddie Mac, suggest that the FHFA will not be a scrupulous
The plaintiffs argue that a

government watchdog and litigator.17

OFHEO,

16As noted supra. the FHFA's director was the director of
and, according to the plaintiffs,
the FHFA.

staff now works at

much of OFHEO's former

action, Arnold & Porter, has defended claims brought in prior derivative litigation on behalf of Freddie Mac.
-14-

"Plaintiffs also note that the FHFA's counsel in this

finding of a conflict is supported by the FHFA's failure to indicate whether it intends to pursue the claims in this

litigation despite having been aware of them since September
2008.

These circumstances do not raise conflicts of interest

similar to those in First Hartford and Delta Savings.
Sadowskv. 2009 WL 1309776, at *2; In re Fannie Mae.

See

2009 WL

1837757,

at *2 n.5.

The defendants in the cases at bar are not

the FHFA,

OFHEO,

or any of their directors or employees.

Rather,

they are individual board members of Freddie Mac,

and - in the

Bassman action - other corporations and individuals that the plaintiffs claim adversely impacted Freddie Mac. Thus, the

relationship between the defendants and the FHFA is one between a
regulator and a regulated entity
members).

{or the regulated entity's board
where the

This is not analogous to First Hartford,

defendant was the federal government and the alleged breach of
contract was committed by the federal receiver, or to Delta

Savings, where the receiver - the FDIC - and the defendant - OTS
- were "sister agencies." Given that a court should presume

regularity by government agencies, United States Postal Serv. v. Gregory, 534 U.S. 1, 10 (2001), it would be improper to presume a

conflict of interest based on speculation that the FHFA is acting

-15-

in bad faith.18

Moreover, when the Court gave the plaintiffs an opportunity

to provide an example of how the FHFA was allegedly failing to
protect Freddie Mac's interests, plaintiffs asserted that the FHFA had failed to file a claim in the Washington Mutual

Bankruptcy.

The FHFA's response, however,

satisfies the Court

that the FHFA has adequately represented Freddie Mac's interests
in the Washington Mutual bankruptcy proceeding and can be
expected to do so in this litigation as well.19

Finally,

the FHFA's failure to indicate whether it intends
in and

to pursue the claims at issue in this litigation is not,

of itself, sufficient evidence to warrant finding a manifest
conflict of interest as in First Hartford and Delta Savings,

given the mammoth complexity of Freddie Mac's problems and the

Court of any possible conflicts that could impact its ability to
represent the FHFA in this litigation.

action, because it has been representing Washington Mutual, Inc in other proceedings. That the FHFA's retained counsel may have a conflict does not mean that the FHFA itself does. Of course, the Court fully expects counsel for the FHFA to comply with all relevant rules regarding conflicts of interest and to apprise the

the FHFA may have a conflict of interest with regard to Washington Mutual, Inc., which is a defendant in the Bassman

l8ln one filing, the plaintiffs also suggest that counsel for

claims were filed by Freddie Mac's in-house counsel and not by the FHFA itself. This is irrelevant. What is relevant is that under the stewardship of the FHFA, Freddie Mac acted to protect its financial interests (and any residual interests of shareholders), thus undermining plaintiffs' claims that derivative litigation is necessary to protect those interests.
-16-

'"Plaintiffs point out that the Washington Mutual bankruptcy

scope of the conservatorship.

in granting the conservator broad,

sweeping authority over Freddie Mac's assets, Congress made it
clear that it left to the FHFA, not to Freddie Mac's

shareholders,

the discretion to decide how best to manage the
Choosing whether or not to sue particular

assets of Freddie Mac.

entities or persons is certainly within that broad discretion.
Absent a showing of a clear conflict of interest similar to the
conflicts at issue in First Hartford and Delta Savings, plaintiffs lack standing to pursue these claims.20
C. The Effect of 12 U.S.C § 4617(f).

the

Additionally, given that the plaintiffs lack standing and

that the FHFA opposes allowing them to remain in this suit,
FHFA's motions to substitute will be granted because another

the

provision of HERA provides that "no court may take any action to
restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or a receiver." 12 U.S.C § 4617(f). A

court action can "affect" a conservator even if,

as in the cases

at bar,

the litigation is not directly aimed at the conservator

itself.

See Hindes v. FDin. 137 F.3d 148, 159-61

(3d. Cir.

Plaintiffs have also argued that they should be granted standing because even if the FHFA litigated the claims, it might be unable to recover damages from Freddie Mac's board members because of certain exclusions commonly present in directors' and officers^ liability policies that might apply to a suit by the FHFA. Like the allegations of conflicts of interest, this assertion is highly speculative and cannot overcome HERA's
statutory mandate. See Sadowskv. 2009 WL 1309776, at *4
-17-

1998).

Here,

the FHFA has represented that allowing different

groups of shareholder plaintiffs to maintain independent

derivative actions would affect its duties as conservator by

interfering with its ability to manage Freddie Mac's assets, and
pursue any claims on its behalf,
appropriate or necessary.

in the manner which it deems

The Court agrees with the plaintiffs that, if the FHFA were to act beyond statutory or constitutional bounds in a manner that

adversely impacted the rights of others,

§ 4617(f) would not bar
See Coit
561, 575 (1989)

judicial oversight or review of its actions.
Independence Joint Venture v. FSLIP. 489 U.S.

(holding that a similar provision does not divest courts of
subject matter jurisdiction); Chemical Futures & Options,
RTC, 832 F. Supp. 1188, 1192-93 (N.D. 111. 1993) (internal

inc. v.

citation omitted)

(holding that such a provision does not

"elevate the [receiver] to the position of a sacred cow which may
graze upon the rights of others at will, unchecked by the

courts").

However,

in this case,

the FHFA has properly moved to

substitute itself for shareholders who lack standing.

It is

acting well within its statutory authority under HERA, and the shareholders do not have any "rights" that are implicated.

Accordingly, the Court finds that allowing the plaintiffs to
remain in this action would violate § 4617(f) as well.

-18-

III.

Conclusion.

For the above reasons, FHFA's motions to substitute itself

as plaintiff for the shareholders will be granted by an Order to
be issued with this Memorandum Opinion, and all of the
plaintiffs' pending motions will be denied as moot.

Entered this £1 day of July, 2009.
Alexandria, Virginia

United States District Judge

1-eonieM.Briakeiria

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