Opinions / Panel Activity

On February 22, the Federal Circuit issued its opinion 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 appealed to the Federal Circuit, challenging the lower court’s holdings. The Federal Circuit consolidated these cases and issued an opinion affirming in part and reversing in part. This is our opinion summary.

Judges Lourie, Prost, and O’Malley decided the case. In her opinion for the court, Judge O’Malley summarized the relevant background:

Shareholders own stock in Fannie Mae and Freddie Mac (collectively, the Enterprises). The Enterprises suffered devastating financial losses in 2008 when the national housing market collapsed. In response, Congress enacted the Housing and Economic Recovery Act of 2008 (HERA). HERA created the Federal Housing Finance Agency (FHFA), an independent agency tasked with regulating the Enterprises and (if necessary) stepping in as conservator or receiver. . . .

[T]he FHFA’s Director placed the Enterprises into conservatorship in September 2008. . . . The FHFA Director then negotiated preferred stock purchase agreements (PSPAs) with the Department of Treasury (Treasury) in which Treasury agreed to allow the Enterprises to draw up to $100 billion in capital in exchange for: (1) senior preferred non-voting stock having quarterly fixed-rate dividends and an initial liquidation preference of $1 billion and (2) warrants to purchase up to 79.9% of the common stock of each Enterprise at a nominal price. FHFA and Treasury amended the terms of the original PSPAs in the years that followed. Relevant to this appeal, a “net worth sweep” under the PSPAs replaced the fixed-rate dividend formula with a variable one that required the Enterprises to make quarterly payments equal to their entire net worth, minus a small capital reserve amount. . . . . The net worth sweep caused the Enterprises to transfer most, if not all, of their equity to Treasury, leaving no residual value that could be distributed to shareholders. . . .

The government moved to dismiss the claims in every case before the Claims Court in a single, omnibus motion. The Claims Court first granted-in-part and denied-in-part the government’s motion in one case, Fairholme Funds, Inc. v. United States. Specifically, the Claims Court dismissed the shareholders’ direct Fifth Amendment takings and illegal exaction claims for lack of standing because it found them to be substantively derivative in nature. Claims Court also dismissed for lack of subject matter jurisdiction the shareholders’ direct claims for breach of fiduciary duty . . . and breach of implied-in-fact contract. . . . The Claims Court, however, found that Barrett had standing to bring his derivative claims, notwithstanding HERA’s Succession Clause. . . . Having dismissed the direct takings claims in Fairholme, the Claims Court solicited supplemental briefing from the parties in the other cases on the applicability of its holding in Fairholme to those cases. Following supplemental briefing, the Claims Court dismissed each of the other seven cases on appeal for the reasons explained in Fairholme. The shareholders appealed in all seven of those cases; we have jurisdiction under 28 U.S.C. § 1295(a)(3). Because some of Barrett’s claims in the Fairholme case survived, the Claims Court certified its opinion in that case for interlocutory appeal and cross-appeal by the shareholders and the government, respectively, so that we could consider the matters collectively. We possess jurisdiction over the certified interlocutory appeal and cross-appeal under 28 U.S.C. § 1292(d). We, thus, are resolving eight appeals in this single opinion; seven from final judgments and one certified interlocutory appeal.

Judge O’Malley first noted that “the FHFA’s adoption of the net worth sweep is attributable to the United States” because this action is “executive power.” Therefore, she indicated, the shareholders’ claims are “against the United States and the Claims Court properly exercised jurisdiction.”

Judge O’Malley next discussed the direct claims made by the shareholders.

For the direct constitutional claims, Judge O’Malley noted Delaware state law required overpayment of claims to be treated as derivative and there is “nothing in [Federal Circuit case precedent] that compels the conclusion that shareholders’ direct claims are anything but derivative.” The court likewise, with respect to a takings claim, found “no claim . . . upon which relief may be granted.”

For the direct non-constitutional claims, Judge O’Malley first determined that arguments for the existence of an implied-in-fact contract “do not state a claim upon which relief may be granted,” which allowed dismissal. Cacciapalle individually claimed breach of contract due to his unique stock certificates because the certificates included language “guaranteeing him certain rights to dividends, liquidation preferences, and voting rights, and contained an implied covenant of good faith and fair dealing.” Judge O’Malley, however, found “Cacciapalle’s breach of contract claim fails to implicate . . . the requisite privity of contract with the United States.” For breach of fiduciary duty claims, moreover, Judge O’Malley determined “the FHFA could adopt the net worth sweep without regard for the interests of the shareholders” because “the agency owed no fiduciary duties to the shareholders under HERA.”

With respect to the derivative claims, Judge O’Malley agreed “with the government that [one plaintiff] is collaterally estopped from re-litigating whether HERA’s Succession Clause bars his non-constitutional derivative claims” due to issue preclusion. Further, Judge O’Malley determined “[t]he Claims Court . . . erred by not finding collateral estoppel applicable here” when it allowed some derivative claims to move forward. The Federal Circuit also dismissed illegal exaction and separation of powers derivative claims because, respectively, the exaction was within “the scope of the FHFA’s authority under HERA and “the shareholders have already been afforded the only possible remedy available for Barrett’s alleged separation-of-powers violation.”

As a result of her analysis, the Federal circuit affirmed-in-part “because the Claims Court did not err in dismissing shareholders’ direct claims” and reversed-in-part “because the Claims Court improperly failed to dismiss the remaining derivative claims.”