This past Wednesday the court heard oral argument in Arrowood Indemnity Co. v. United States, Cacciapalle v. United States, Owl Creek Asia I, L.P. v. United States, and Fairholme Funds, Inc. v. United States, cases that attracted amicus briefs. In these cases, the plaintiffs asserted claims at the Court of Federal Claims based on government actions related to the 2008 financial crisis and ownership of shares of Fannie Mae and Freddie Mac. As explained by the Court of Federal Claims in one of the cases, the “plaintiffs seek the return of money illegally exacted, damages for breach of contract and breach of fiduciary duty, and compensation for a taking pursuant to the Fifth Amendment to the United States Constitution.” The Court of Federal Claims, however, dismissed these claims, finding it “lacks jurisdiction to entertain their fiduciary duty and implied-in-fact-contract claims, and plaintiffs lack standing to pursue any of their claims.” The plaintiffs have now appealed to the Federal Circuit, challenging the lower court’s holdings. The Federal Circuit consolidated these cases for purposes of oral argument. Judges Lourie, Prost, and O’Malley heard Wednesday’s argument. This is our argument recap.
Bruce Bennett argued first, handling the jurisdictional element of the argument for the plaintiffs-appellants. He argued that the determination by the Court of Federal Claims that it had jurisdiction should be affirmed. Further, he argued the Supreme Court in Collins v. Yellen provides support for their claims to be direct claims against the United States and, as a result, conferred standing upon them.
Judge O’Malley interjected to ask whether a conservator government agency, when acting as a market participant, would be as defined by the plaintiffs-appellants to be always acting on behalf of the United States. Bennett in response clarified the plaintiffs-appellants’ position that the conservator would not always be acting on behalf of the United States, but that it was in this case.
Judge Prost asked why derivative claims, outside a constitutional argument, are not precluded from review by statute. In response, Bennett argued that Collins allows some claims to not be barred by statute, and in this way the Court “left the door open” for other claims like the ones at issue in this case.
Hamish Hume argued next for the plaintiffs-appellants. Judge O’Malley asked the result the court should reach if both the claims are found to be derivative and the statutory clause barring claims is found to apply. Hume noted this would mean the plaintiffs-appellants cannot bring direct or derivative claims, but at that point they would ask for an exception to third party standing rules in an effort to allow the derivative claims.
Judge Prost then asked what the property interest of the plaintiffs would be for a derivative claim. Hume responded that in that situation the property interest would be the corporation’s interest in its assets. But Hume noted this argument is different from the argument being made by all plaintiffs-appellants but one. All plaintiffs-appellants but one, according to Hume, have argued their claims are only direct claims because shareholders have brought their claims for their own rights to dividend payments.
Lawrence Rosenberg next argued for the plaintiffs-appellants. He argued that the derivative claims flow from the unique shareholder right. Judge O’Malley interjected to ask whether the harm here was dependent on corporate action. Rosenberg, in response, argued the payment of dividends and who has the right to receive them is “unrelated to the net worth of company.” Further, Rosenberg argued both Delaware and federal law make this “a quintessential direct taking issue.”
Drew Marrocco made a short statement noting that, to bring suit, the plaintiffs-appellants need only have been shareholders when the relevant changes to the corporate dividend formula were made. Marrocco argued it was not necessary to prove ownership of shares before the conservatorship was in place.
Brian Barnes concluded the opening argument on behalf of the plaintiffs-appellants. Unlike the other plaintiffs-appellants, Barnes represented the plaintiff in the case involving derivative claims as well as direct claims.
Barnes first argued that derivative claims involve the taking of a company’s net worth. In response to a question from Judge O’Malley, Barnes disagreed the premise that the plaintiffs were at the whim of the conservator. First, he pointed out that his client owned shares before the conservatorship was put in place. Second, he argued, Collins recognizes that the conservator must act in the public interest. He argued that that those who installed the conservator could not have foreseen or anticipated this type of taking by the conservator; no investor, he argued, could “anticipate the government would take all the money.”
Barnes argued next that constitutional claims of taking should be allowed to go forward even if they run into a bar in the relevant statute in the form of a succession clause. He reasoned that the cannon of construction for constitutional avoidance applies here. Judge Prost interjected to inquire about how the the succession clause has been interpreted by the courts. Barnes replied that he does not think statutory clause has ever been strictly interpreted.
Mark Stern argued for the United States. Judge Prost quickly asked whether, if the plaintiffs-appellants are found to have derivative claims, that would end the discussion for this court. Stern agreed it would foreclose any claims by the plaintiffs-appellants. He reasoned that, when found to be derivative the claims would be barred by the succession clause of the relevant statute. Stern asserted that “this is a classic derivative case, not a direct claim” because, when one looks at who was harmed and to whom recovery would flow, the companies were harmed and any recovery goes to them.
Judge O’Malley then asked how a shareholder would ever be able to bring a constitutional claim if the claims are derivative. Stern argued that “the conservator could assert these claims.” He asserted that, because the rights have been transferred to the conservator, the conservator would have the choice to invoke those rights directly.
Judge O’Malley interjected to ask how panel could avoid a particular precedent “when the language is the same as here.” Stern asserted that the case involved a receiver and not a conservator, which allows for it to be distinguished.
Judge O’Malley inquired if the United States agrees with an amicus brief urging that there has never been a case where Congress foreclosed the possibility of bringing a constitutional claim. Stern in answer argued that the rights to bring these claims were transferred to the conservator and there is no reading of the statutory clause that would allow a derivative claim.
Toward the end of his argument, Stern asserted that renegotiation of agreements is a power of a conservator and not a government action. He argued that the charge given to the conservator is similar to the responsibilities given to a company’s board of directors, and an analysis of the specific action taken by a conservator would determine if the action was governmental in character.
Rosenberg started the rebuttal for the plaintiffs-appellants. He noted a Delaware Supreme Court case held that plaintiffs had direct standing under state law with respect to similar claims. Judge O’Malley, however, noted that case included fraud claims and asked how it applies to this case concerning rights to dividends. Rosenberg responded that the claims in the cases are analogous because the right to dividend payments unlawfully taken away is just like a fraudulent stock transfer. Rosenberg further implored the court to certify a question to the Delaware Supreme Court if the court is unsure of how the claims should be construed under state law.
Finally, Barnes finished the rebuttal for the plaintiffs-appellants. In his time, he addressed some of the government’s arguments regarding derivative claims.
We will keep track of this case and report on any developments.