Meridian Investments, Inc. v. Federal Home Loan Mortgage Corporation et al
Filing
34
MEMORANDUM OPINION. Signed by District Judge James C. Cacheris on 3/1/2016. (dvanm, )
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division
MERIDIAN INVESTMENTS, INC.
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Plaintiff,
v.
FEDERAL HOME LOAN MORTGAGE
CORPORATION, et al.,
Defendants.
M E M O R A N D U M
1:15cv1463(JCC/IDD)
O P I N I O N
This case comes before the Court on the Defendants’
Motion to Dismiss [Dkt. 20].
For the reasons stated below, the
Court will grant Defendants’ Motion to Dismiss and Dismiss the
Case with prejudice.
I. Background
On September 6, 2008, following the financial crisis,
Defendant Federal Home Loan Mortgage Corporation (“Freddie Mac”)
was placed into a federal statutory conservatorship by Defendant
Federal Housing Finance Agency (“FHFA”).
(Compl. [Dkt. 1] ¶ 7.)
Shortly after FHFA began its conservatorship, FHFA, on behalf of
Freddie Mac, entered into a Senior Preferred Stock Agreement
with the Department of the Treasury (“Treasury”).
Def.’s Mem. in Supp. [Dkt. 21], at 1.)
(Id. at ¶ 56;
That agreement resulted
in a huge capital influx from Treasury in return for, among
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other things, an agreement that Freddie Mac:
Shall not, and shall not permit any of its
subsidiaries to, in each case without the prior
written consent of [Treasury], sell, transfer,
lease, or otherwise dispose of (in one
transaction or a series of related transactions)
all or any portion of its assets (including
Equity interests in other persons, including
subsidiaries), whether now owned or hereafter
acquired (any such sale, transfer, lease or
disposition, a “Disposition”), other than
Dispositions for fair market value: . . . (b) of
assets and properties in the ordinary course of
business, consistent with past practices, [or]
. . . (d) of cash or cash equivalents for cash or
cash equivalents . . . .”
(Compl., Ex. 5 [Dkt. 1-5], at 9.)
Shortly after entering the
conservatorship and entering into the agreement with the
treasury, Freddie Mac and Plaintiff Meridian Investments, Inc.
entered into a Memorandum of Understanding (“MOU”) providing
that Freddie Mac and Meridian would take commercially reasonable
steps in a good faith effort to negotiate a definitive agreement
for the sale of Low Income Housing Tax Credits (“LIHTCs”).
(Compl. ¶ 44, Ex. 2 [Dkt. 1-2], ¶7.)
The MOU explicitly
acknowledges that any definitive agreements would have to be
subject to FHFA’s approval.
(Compl., Ex. 2, ¶3(a).)
Ultimately, the deal for the sale of the LIHTCs fell through
because FHFA, as receiver of Freddie Mac, declined to approve
the deal.
In refusing to finalize the deal, Freddie Mac pointed
to the refusal of the Department of the Treasury to give its
consent to a similar sale by Fannie Mae, pursuant to rights
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Treasury acquired under the Senior Preferred Stock Arrangement.
(Compl. ¶ 55.)
Defendant admits that the deal fell through due
to Treasury’s refusal to consent to the sale of LIHTCs as FHFA
believed was required under the terms of the Senior Preferred
Stock Arrangement.
(Defs.’ Mem. in Supp. at 2.)
Ultimately,
Meridian filed this action for breach of contract as a result of
the deal (often referred to by the parties as the “Project
America” deal) falling through.
Defendants filed this motion to dismiss arguing: (1)
that this action for breach of contract is barred by Virginia’s
five-year statute of limitations for breach of contract causes
of action; (2) that the MOU was a non-binding “agreement to
agree”, in violation of the well settled principle in Virginia
that agreements to agree are too vague and indefinite to be
enforced; and (3) the complaint fails to state a claim because
it provides no plausible allegations suggesting that Defendants
breached the MOU.
(Id.)
For the reasons explained below, the
Court finds that the Plaintiff’s complaint is barred by the
Virginia statute of limitations and that the MOU was a nonbinding “agreement to agree”.
Additionally, as explained below,
the Court finds that paragraph 12 of the MOU requiring the
parties to execute and deliver “formal written definitive
agreements” before the proposed transaction became binding
created a condition precedent which had to be satisfied prior to
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the creation of any obligations or rights relating to the
proposed Project America transaction.
II. Legal Standard
Defendants move to dismiss Plaintiff’s claims pursuant
to Federal Rule of Civil Procedure 12(b)(6).
“While the court
must accept well-pleaded allegations as true when ruling on a
Rule 12(b)(6) motion, the court need not accept as true legal
conclusions disguised as factual allegations.
Iqbal, 556 U.S. 662, 679-81 (2009).
Ashcroft v.
Therefore, a pleading that
offers only a “formulaic recitation of the elements of a cause
of action will not do.”
Iqbal, 556 U.S. at 678; Bell Atl. Corp.
v. Twombly, 550 U.S. 544, 557 (2007).
Equally unacceptable is a
complaint that tenders mere “naked assertion[s]” devoid of
“further factual enhancement.”
550 U.S. at 557.
Iqbal, 556 U.S. at 678; Twombly,
“The purpose of a Rule 12(b)(6) motion is to
test the sufficiency of a complaint; importantly, [a Rule
12(b)(6) motion] does not resolve contests surrounding the
facts, the merits of a claim, or the applicability of defenses.”
Edwards v. City of Goldsboro, 178 F.3d 231, 243-44 (4th Cir.
1999) (citation omitted) (internal quotation marks omitted).
In
the instance where sufficient facts are alleged in the complaint
to rule on an affirmative defense, such as the statute of
limitations, the defense may be reached by a motion to dismiss
filed under Rule 12(b)(6).
This principle only applies,
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however, if all facts necessary to the affirmative defense
“clearly appear[ ] on the face of the complaint.”
Goodman v.
Praxair, Inc., 494 F.3d 458, 464 (4th Cir. 2007) (emphasis in
original).
III. Analysis
The Court begins by examining Defendant’s assertion
that this action is time-barred by the Virginia statute of
limitations for breach of contract actions.
The Court will then
turn to the issue of the MOU’s enforceability as an “agreement
to agree”.
Finally, the Court will examine whether the MOU’s
requirement of executed and delivered formal, written, and
definitive agreements constituted a condition precedent to the
creation of a contract for the Project America transaction.
A.
Statute of Limitations
Plaintiff invokes this Court’s jurisdiction both on
the basis of the parties’ diversity pursuant to 28 U.S.C. §
1332(a)(1) and on the basis of federal question jurisdiction
pursuant to 28 U.S.C. § 1331 and the “sue and be sued clause” of
Freddie Mac’s organic statute, 12 U.S.C. § 1452.
4-5.)
(Compl. at ¶¶
Whatever the basis of this court’s jurisdiction, the
applicable statute of limitations in this case hinges on the
question of whether this is a suit between private parties, or a
suit between a private party and the United States of America or
one of its agencies.
Plaintiff argues that Freddie Mac and FHFA
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have acted as instruments and agents of Treasury, thus making
Freddie Mac and FHFA the United States for purposes of 28 U.S.C.
§ 2401(a) and bringing this action within the six year statute
of limitations prescribed by that statute. As described below,
however, the Court finds that Defendants are private parties
rather than agents or instrumentalities of the United States of
America for purposes of this case.
Accordingly, the six-year
statute of limitations for civil actions brought against the
United States provided by 28 U.S.C. § 2401(a) does not apply in
this case.
As this case is a breach of contract action between
private parties, the five year statute of limitations for breach
of contract actions established by Virginia Code § 8.01-246
applies regardless of whether this Court’s jurisdiction is based
on diversity of citizenship or the “sue and be sued clause” of
12 U.S.C. § 1452. See Smith v. Flagstar Bank, F.S.B., No. 3:14Cv-741, 2015 WL 1221270, at *3 (E.D.Va. Mar. 17, 2015)(“[i]n a
federal diversity action, state law governs the existence and
interpretation of any statute of limitations”);
Kirkpatrick v.
Lenoir Cty. Bd. Of Educ., 216 F.3d 380, 386 (4th Cir.
2000)(holding that in the absence of a specific federal statute
of limitations federal courts “adhere to the ‘borrowing’
doctrine, which requires a federal court to borrow from the
state [with] the most analogous state statute of limitation”).
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Several courts have already determined, and this Court
agrees, that when a federal instrumentality acts as a receiver,
in the interests of the party in receivership, that
instrumentality does not act as the government.
See, e.g.,
O’Melveny & Myers v. Fed. Deposit Ins. Corp., 114 S.Ct. 2048,
2053 (1994)(“the FDIC is not the United States”); Ameristar
Financial Servicing, Co., LLC v. U.S., 75 Fed.Cl. 807
(2007)(holding FDIC is not the United States when it acts as
conservator of newly established bank); Herron v. Fannie Mae,
857 F.Supp.2d 87, 2012 WL 1476051 (D.D.C. Apr. 30, 2012)(“FHFA
stepped into the shoes of Fannie Mae. FHFA as conservator for
Fannie Mae is not a government actor”).
Likewise, courts are in
agreement that Freddie Mac has not become a government actor
simply by virtue of FHFA’s receivership or conservatorship.
See, e.g., Mik v. Fed. Home Loan Mortg. Corp., 743 F.3d 149, 168
(6th Cir. 2014)(“Freddie Mac is not a government actor [for
constitutional purposes].”); Fed. Home Loan Mortg. Corp. v.
Shamoon, 922 F. Supp. 2d 641 645 (E.D. Mich. 2013), appeal
dismissed (Sept. 5, 20132)(FHFA conservatorship “does not and
cannot transform that private corporation [Freddie Mac] into a
government actor” for purposes of constitutional claims);
Syriani v. Freddie Mac Multiclass Certificates, Series 3365, No.
CV 12-003035 2012 WL 6200251, at *4 (C.D.Cal. July 10,
2012)(holding that Freddie Mac is not a governmental actor even
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after FHFA has taken it into receivership).
Therefore, when
FHFA acts in its role as receiver or conservator for Freddie
Mac, neither party acts as the United States.
Plaintiff argues that the specific facts of this case
establish that Freddie Mac and FHFA must have been acting as
agents of the Treasury, otherwise their actions are
inexplicable.
(Pl.’s Mem. in Opp. at 21-23.)
Plaintiff’s
argument is that the deal offered to Freddie Mac under the MOU
was so good that no one could reasonably have objected to it
unless they were motivated by something other than Freddie Mac’s
best interests.
Plaintiff argues that by refusing to consent to
the deal, Treasury was actually ordering Freddie Mac and FHFA to
act in the taxpayer interest and in furtherance of government
objectives, thus converting FHFA and Freddie Mac into government
actors.
(Id.)
Plaintiff relies heavily on Auction Co. of Am. v.
FDIC, 132 F.3d 746 (D.C. Cir. 1997) clarified on denial of
reh’g, 141 F.3d 1198 (D.C. Cir. 1998) in their argument that
FHFA is acting here as an agent of the government.
Auction
dealt with an action against the FDIC as receiver for certain
failed thrifts, and held that 28 U.S.C. § 2401(a) applies when a
“federal instrumentality acts within its statutory authority to
carry out [the government’s] purposes.”
132 F.3d at 749
(alteration in original)(citation omitted).
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The case at bar, however, can be easily distinguished
from the situation at issue in Auction.
In arguing that FHFA is
acting as an agent of the Treasury, rather than in its role as
receiver of Freddie Mac, Plaintiff misunderstands the
relationship between Freddie Mac, FHFA, and the Treasury.
Shortly after FHFA stepped into Freddie Mac’s shoes as receiver,
Treasury entered into a senior preferred stock agreement with
Freddie Mac whereby Treasury provided massive funding
commitments in return for, among other things, an agreement that
Freddie Mac would not “sell, transfer, lease, or otherwise
dispose of” any assets, including LIHTCs, without Treasury’s
written consent.
It was this right to veto major Freddie Mac
transactions, acquired through the purchase of preferred stock
in return for vast amounts of capital, that Treasury exercised
when it refused to consent to the Project America deal.
In
other words, FHFA did not seek Treasury’s approval of the deal
as an instrumentality of the United States Government or as an
agent of the Treasury Department; FHFA sought Treasury’s
approval in its role as receiver of Freddie Mac, a private
entity, because it believed Freddie Mac was contractually
obligated to obtain Treasury’s consent to the proposed deal.1
1
Plaintiff alleges that Treasury’s consent was not required for
the Project America transaction, because Project America fell
outside of the Senior Preferred Stock Purchase Agreement.
(Compl. ¶57.) However, Plaintiff then alleges that Freddie Mac
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Treasury’s motives in refusing to consent to the Project America
deal are irrelevant to Plaintiff’s cause of action.
Under the
facts alleged, FHFA acted strictly within its role as receiver
for Freddie Mac in seeking Treasury’s contractually required
approval.
Accordingly, under the facts alleged in the
complaint, neither FHFA nor Freddie Mac acted as agents of the
Treasury in a way that would render them government actors in
this case.
As neither FHFA nor Freddie Mac are government
actors, this case presents a breach of contract claim between
two private parties, and the Virginia five-year statute of
limitations governs.
The Plaintiff’s alternative theory, suggesting that
the parties contractually chose the six-year of statute of
limitations found in 28 USCS § 2401(a) holds no water.
Section
9 of the MOU provides:
This MOU shall be construed, and the right and
obligations of the Parties determined, in accordance
with the laws of the United States of America.
Insofar as there may be no applicable precedent, the
laws of the Commonwealth of Virginia shall be deemed
reflective of the laws of the United States of
America.
had the capacity to carry out the Project America transaction
and should have done so “even if, by doing so, it might have
been in breach of the Senior Preferred Stock Purchase
Agreement.” (Id.) The Court notes that it would not be
unreasonable, or inconsistent with FHFA’s role as receiver, for
FHFA to believe that Treasury’s consent was required under the
Senior Preferred Stock Purchasing Agreement for a sale of this
magnitude (multiple billions of dollars).
10
(Compl., Ex. 2, at 6.)
In light of this Court’s finding that
this case is a breach of contract action between private
parties, Plaintiff can no longer claim that section 2401(a)
provides an “applicable federal precedent” on the statute of
limitations.
Section 2401 applies only to “civil actions
commenced against the United States.”
28 U.S.C. § 2401(a).
As
Plaintiff does not, and cannot point to another specific federal
statute providing a statute of limitations for breach of
contract claims between private parties, this court will “adhere
to the ‘borrowing’ doctrine, which requires a federal court to
borrow from the state [with] the most analogous state statute of
limitation.” Kirkpatrick, 216 F.3d at 386.
The most analogous
state statute of limitations here is provided by Virginia Code §
8.01-246, which provides that actions founded upon a contract
shall be brought within five years of the date after the cause
of action shall have accrued.
B.
Enforceability of the MOU
The Court also finds that the MOU is an unenforceable
“agreement to agree”.
“This Court has long recognized the well-
settled principle in Virginia that agreements to agree in the
future are ‘too vague and too indefinite to be enforced’. . . .”
Zoroastrian Ctr. v. Rustam Guiv Found., No. 1-13-cv-980, 2014 WL
1901290, at *6 (E.D.Va. May 12, 2014)(citation omitted).
A
promise to negotiate in good faith and arrive at a later final
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deal is an unenforceable “agreement to agree” under Virginia
Law.
Space Tech. Dev. Corp. v. Boeing Co., 209 F.App’x. 236,
240 (4th Cir. 2006).
Likewise, “a letter of intent or any other
writing in which the terms of a future transaction or later,
more formal agreement[,] are set out is presumed to be an
agreement to agree rather than a binding contract.”
Va. Power
Energy Mktg., Inc. v. EQT Energy, LLC, No. 3:11-cv-630, 2012 WL
2905110, at *4 (E.D.Va. July 16, 2012).
“Moreover, even if the
parties are fully agreed upon the terms of the contract, [a
finding] that the parties do intend a formal contract to be
drawn up is strong evidence to show that they did not intend the
previous negotiations to amount to an agreement which is
binding.”
Cyberlock Consulting, Inc. v. Info. Experts, Inc.,
939 F.Supp.2d 572, 580 (E.D.Va. 2013), aff’d, 549 Fed.App’x 211
(4th Cir. 2014)(internal quotation marks and citation omitted).
The MOU expressly provided for the future execution of
“formal written definitive agreements.”
(Compl. Ex. 2, ¶ 12.)
Plaintiff argues that paragraphs 7, 3(a), and 1(j) of the MOU
created specific binding obligations which the Defendants
allegedly breached.
Paragraph 7 of the MOU provides that the
parties “agree to cooperate and take such reasonable actions in
order to aid and assist each other in taking such actions as may
be necessary or appropriate to structure and complete the
transaction to carry out the intent of the MOU.”
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(Id. at ¶ 7.)
In paragraph 3(a) of the MOU, the parties agree to take all
commercially reasonable efforts to execute definitive documents
and use their commercially reasonable efforts to reasonably
address those issues not specifically addressed in the MOU, and
promptly consult with, and to the extent required, exercise
commercially reasonable efforts to obtain consent from, FHFA to
proceed with the transactions contemplated by the MOU.
¶3.)
(Id. at
Finally, in paragraph 1(j), the parties “agree to use
commercially reasonable efforts to complete the transactions
contemplated by this MOU as soon as possible hereafter.”
at ¶1(j).)
(Id.
Each of these supposed “obligations” is really
nothing more than promises to negotiate in good faith and reach
a future agreement.
A promise to negotiate in good faith and
arrive at a later final deal is an unenforceable “agreement to
agree” under Virginia Law.
Space Tech., 209 F.App’x. at 240.
Accordingly, the Court will find that the MOU created only an
unenforceable “agreement to agree”, and will dismiss Plaintiff’s
claims on those grounds as well.
C.
Condition Precedent
In Virginia, “[a] condition precedent calls for the
performance of some act, or the happening of some event after
the terms of the contract have been agreed upon, before the
contract shall take effect.”
S.E.2d 60, 65 (1985).
Smith v. McGregor, 237 Va. 66, 376
A condition precedent exists where “the
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contract is made in form, but does not become operative as a
contract until some future specified act is performed, or some
subsequent event occurs.”
Morotock Ins. Co. v. Fostoria Novelty
Co., 94 Va. 361, 26 S.E. 850, 852 (1987).
As a general rule,
“the mere fact that a later formal writing is contemplated will
not vitiate an agreement.”
Snyder-Falkinham v. Stockburger, 249
Va. 376, 457 S.E.2d 36, 41 (1995).
However, when the parties
manifest in an agreement that the agreement is “subject to the
execution of a formal agreement, the execution of a formal
agreement constitutes a condition precedent to the existence of
a valid and binding [] agreement.” Bryant v. McDougal, 49
Va.App. 78, 636 S.E.2d 897,900 (2006)(quoting Golding v. Floyd,
261 Va. 190, 539 S.E.2d 735, 738 (2001))(internal alterations in
original omitted).
If the contemplated formal agreement is
never executed and the condition precedent therefore “does not
occur, the defendant cannot be held liable for failure to
perform the contract.”
Space Tech. Dev. Corp. v. Boeing Co.,
209 Fed.App’x 236, 239 (4th Cir. 2006).
Paragraph 12 of the MOU between Meridian and Freddie
Mac expressly provides:
Notwithstanding the terms of this MOU, or any other
past, present, or future written or oral indications
of assent or indications of results of negotiation or
agreement to some or all matter then under
negotiation, it is agreed that no Party hereto (and no
person or entity related to any such Party) will be
under any legal obligation with respect to the
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proposed transaction or any similar transaction,
unless and until formal written definitive agreements
have been executed and delivered by all Parties
intending to be bound; provided, however, that the
obligations set forth in paragraph 1(j) and paragraphs
4, 6, 7, 8, 9, 10, 11, and 12 (the “Binding
Provisions”) hereof will be binding on the Parties
upon execution and delivery of this MOU in accordance
with the terms hereof.
(Compl. Ex. 2, ¶ 12 (emphasis in original).)
The MOU could
hardly be clearer in its stipulation that the Project America
deal will not become binding on either party until “formal
written definitive agreements have been executed and delivered
by all parties.”
(Id.)
The MOU explicitly requires the
execution and delivery of a formal written agreement regardless
of any other “indications of assent or indications of results of
negotiation or agreement to some or all matter then under
negotiation.”
(Id.)
Clearly, the parties intended the Project
America deal to be “subject to execution of a formal agreement,”
and “the execution of a formal agreement [is therefore] a
condition precedent.”
Golding, 539 S.E.2d at 738.
Plaintiff admits that the MOU contemplates future
definitive agreements, but Plaintiff contends that the parties
“eventually completed their negotiations and reached agreement
on those definitive agreements.”
(Pl.’s Mem. in Opp. at 25.)
The parties are in agreement, however, that no formal written
definitive agreements were ever executed.
Because the parties
clearly manifested in the MOU their intent that the Project
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America deal was subject to the execution of finalized, formal
documents and no such documents were executed in this case, no
contract was ever formed and Defendants cannot be held liable
for breach of contract.
IV. Conclusion
For the foregoing reasons, the Court will grant
Defendant’s motion to dismiss.
An appropriate Order shall
issue.
March 1, 2016
Alexandria, Virginia
/s/
James C. Cacheris
UNITED STATES DISTRICT COURT JUDGE
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