                                     COURT OF CHANCERY
                                             OF THE
                                     STATE OF DELAWARE

TAMIKA R. MONTGOMERY-REEVES                                         Leonard Williams Justice Center
      VICE CHANCELLOR                                               500 N. King Street, Suite 11400
                                                                   Wilmington, Delaware 19801-3734



                                 Date Submitted: May 2, 2017
                                 Date Decided: May 31, 2017



       C. Barr Flinn, Esquire                         S. Mark Hurd, Esquire
       Emily V. Burton, Esquire                       Zi-Xiang Shen, Esquire
       Lakshmi A. Muthu, Esquire                      Morris, Nichols, Arsht & Tunnell LLP
       Gregory J. Brodzik, Esquire                    1201 North Market Street
       Young Conaway Stargatt & Taylor, LLP           Wilmington, DE 19899
       1000 North King Street
       Wilmington, DE 19801                           Robert J. Stern, Jr., Esquire
                                                      Blake Rohrbacher, Esquire
                                                      Richards, Layton & Finger, P.A.
                                                      920 North King Street
                                                      Wilmington, DE 19801

            RE:    Timothy Pagliara v. Federal National Mortgage Association,
                   Civil Action No. 12105-VCMR

      Dear Counsel:

            Pending before the Court is a motion to dismiss or to substitute the plaintiff

      in this 8 Del. C. § 220 proceeding. For the reasons stated herein, the motion to

      dismiss is granted.

      I.    BACKGROUND

            The facts in this letter opinion derive from Plaintiff’s Verified Complaint (the

      “Complaint”) and the documents attached to it. Plaintiff Timothy J. Pagliara is a

      preferred stockholder of Federal National Mortgage Association, a federally
Timothy Pagliara v. Federal National Mortgage Association
C.A. No. 12105-VCMR
May 31, 2017
Page 2 of 16

chartered corporation governed by the “corporate governance practices and

procedures of” the Delaware General Corporation Law (“Fannie Mae”). Fannie Mae

was designed by the federal government to create liquidity in the mortgage market

and facilitate the extension of credit to American homebuyers. Between 1968 and

1970, Fannie Mae became largely privately owned and publicly traded on the New

York Stock Exchange.1 But Fannie Mae remained subject to extensive federal

regulation. In 2002, Fannie Mae’s then-regulator, the Office of Federal Housing

Enterprise Oversight, directed Fannie Mae to follow the “corporate governance

practices and procedures of” the law of the jurisdiction containing Fannie Mae’s

principal office, the Delaware General Corporation Law, or the Revised Model

Business Corporation Act.2 Fannie Mae chose the Delaware General Corporation

Law, and a certificate of incorporation was filed in Delaware for Federal National

Mortgage Association, Inc.3

      During the U.S. housing crisis, Congress passed the Housing and Economic

Recovery Act of 2008 (“HERA”) to stabilize the mortgage market. Under HERA,

Fannie Mae’s regulator was replaced by the newly created Federal Housing Finance

1
      Compl. ¶¶ 33-36.
2
      Id. ¶ 43.
3
      Id. ¶ 45, Ex. C.
Timothy Pagliara v. Federal National Mortgage Association
C.A. No. 12105-VCMR
May 31, 2017
Page 3 of 16

Agency (the “FHFA”). HERA authorized the FHFA to put Fannie Mae into

conservatorship or receivership,4 and the FHFA placed Fannie Mae into

conservatorship on September 7, 2008.5

      On the same day, the U.S. Department of the Treasury (the “Treasury

Department”) entered a Preferred Stock Purchase Agreement with Fannie Mae under

which Fannie Mae agreed to issue one million shares of Senior Preferred Stock to

the Treasury Department. The Senior Preferred Stock had an initial liquidation

preference of $1,000 per share and was senior to all other classes of Fannie Mae

stock.6 The Treasury Department also received a warrant to purchase 79.9% of

Fannie Mae’s common stock. The Senior Preferred Stock was entitled to a 10%

cumulative cash dividend or a 12% stock dividend. The Preferred Stock Purchase

Agreement was restated and then amended twice to make minor changes and to

increase the Treasury Department’s funding commitment to Fannie Mae.7

      On August 17, 2012, after Fannie Mae allegedly had become profitable again,

the Treasury Department and Fannie Mae entered the Third Amendment to the


4
      Id. ¶ 55.
5
      Id. ¶ 65.
6
      Id. ¶¶ 84, 88.
7
      Id. ¶¶ 92-95.
Timothy Pagliara v. Federal National Mortgage Association
C.A. No. 12105-VCMR
May 31, 2017
Page 4 of 16

Restated Preferred Stock Purchase Agreement (the “Third Amendment”). The Third

Amendment changed the Treasury Department’s 10% dividend to a “net worth

sweep” such that Fannie Mae would distribute the bulk of its quarterly net worth to

the Treasury Department every quarter for an indefinite period of time.8 As of the

date of Pagliara’s Complaint, the Treasury Department’s Fannie Mae dividends

allegedly had increased by $78.2 billion as a result of the Third Amendment.9

      On January 19, 2016, counsel for Pagliara served a Section 220 demand on

Fannie Mae, which sought documents to investigate whether the decisions to

approve the Third Amendment, Fannie Mae’s subsequent payment of dividends

under the Third Amendment, and certain other Fannie Mae investments constituted

misconduct. Pagliara also sought to communicate with other stockholders regarding

the misconduct and to value his shares. Fannie Mae, through the FHFA, rejected

Pagliara’s demand on January 27, 2016.

      On March 14, 2016, Pagliara filed the Complaint in this action, and on March

25, 2016, Fannie Mae removed the case to federal court. The U.S. District Court for

the District of Delaware remanded the case on March 8, 2017, and Fannie Mae filed



8
      Id. ¶ 119.
9
      Id. ¶ 124.
Timothy Pagliara v. Federal National Mortgage Association
C.A. No. 12105-VCMR
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a motion to dismiss or, in the alternative, to substitute the FHFA as the plaintiff on

March 31, 2017. The Court heard oral argument on the motion on May 2, 2017.

II.   ANALYSIS

      Fannie Mae moves to dismiss under Court of Chancery Rule 12(b)(2) for lack

of personal jurisdiction and under Rule 12(b)(6) for failure to state a claim. I first

consider the Rule 12(b)(2) motion because “[a] court without personal jurisdiction

has no power to dismiss a complaint for failure to state a claim.”10

      A.     Pagliara’s Complaint Survives a Motion to Dismiss for Lack of
             Personal Jurisdiction
      On a Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction, “the

plaintiff bears the burden of showing a prima facie basis for the Court’s exercise of

personal jurisdiction over a nonresident defendant . . . .”11 “[W]hen no evidentiary

hearing has been held, the plaintiffs’ burden is a relatively light one.”12 “‘[T]he

record is construed in the light most favorable to the plaintiff,’ and the plaintiff need

not rely solely on the allegations in the complaint but may employ extra-pleading



10
      Branson v. Exide Elecs. Corp., 625 A.2d 267, 269 (Del. 1993).
11
      Ross Hldg. & Mgmt. Co. v. Advance Realty Gp., LLC, 2010 WL 1838608, at *11
      (Del. Ch. Apr. 28, 2010).
12
      Cornerstone Techs., LLC v. Conrad, 2003 WL 1787959, at *3 (Del. Ch. Mar. 31,
      2003).
Timothy Pagliara v. Federal National Mortgage Association
C.A. No. 12105-VCMR
May 31, 2017
Page 6 of 16

material as a supplement to establish jurisdiction.”13 The Delaware Supreme Court

recognized in General Parts Company v. Cepec that a corporation is subject to

general jurisdiction in its state of incorporation.14

      The Complaint in this case sufficiently alleges a prima facie basis for personal

jurisdiction over Fannie Mae in Delaware. The Complaint alleges that Fannie Mae

filed a certificate of incorporation in Delaware on August 21, 2002, sixteen days

after the Office of Federal Housing Enterprise Oversight’s corporate governance

regulation requiring that Fannie Mae choose a corporation law became effective.15

The Complaint also points to Fannie Mae’s bylaws, which reference a certificate of

incorporation. The bylaws state that the inclusion of certain provisions in them

“shall constitute inclusion in the corporation’s ‘certificate of incorporation’ for all




13
      Ross Hldg., 2010 WL 1838608, at *11 (quoting Cornerstone Techs., 2003 WL
      1787959, at *3).
14
      Genuine Parts Co. v. Cepec, 137 A.3d 123, 127 (Del. 2016) (“Businesses select
      their states of incorporation and principal places of business with care, because they
      know that those jurisdictions are in fact ‘home’ and places where they can be sued
      generally.”).
15
      Compl. ¶ 45, Ex. C; see Corporate Governance, 67 Fed. Reg. 38,361, 38,363 (June
      4, 2002) (announcing the final regulation with an effective date of August 5, 2002).
Timothy Pagliara v. Federal National Mortgage Association
C.A. No. 12105-VCMR
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Page 7 of 16

purposes of the Delaware General Corporation Law.”16 Thus, Plaintiff argues that

the Complaint establishes a prima facie basis for personal jurisdiction.

      Defendant responds that the certificate does not refer to Fannie Mae because

it incorporates “Federal National Mortgage Association, Inc.” instead of “Federal

National Mortgage Association.” Further, Defendant argues that the certificate of

incorporation was voided in 2004 for failure to pay annual taxes.17 As to the legal

point, Delaware and federal courts have exercised personal jurisdiction over

defendant Delaware corporations that have not filed a certificate of dissolution but

whose certificates of incorporation were voided for failure to pay franchise taxes.18


16
      Compl. Ex. B, § 1.05.
17
      Section 510 of the Delaware General Corporation Law provides that if a Delaware
      corporation “refuses or neglects” to pay franchise taxes for one year, the
      corporation’s certificate of incorporation “shall be void.” 8 Del. C. § 510.
18
      E.g., Wax v. Riverview Cemetery Co., 24 A.2d 431, 436 (Del. Super. 1942) (“Under
      our taxing statute we think that a corporation which has been proclaimed for non-
      payment of taxes is not completely dead. It is in a state of coma from which it can
      be easily resuscitated, but until this is done its powers as a corporation are
      inoperative, and the exercise of these powers is a criminal offense. It still can serve
      as repository of title and as obligor of a debt.”); United States v. Ne. Pharm. &
      Chem. Co., 810 F.2d 726, 746 (8th Cir. 1986) (following Wax v. Riverview
      Cemetery Co. and holding that a Delaware corporation whose charter was voided
      for failure to pay franchise taxes could be sued for violations of federal
      environmental laws); Ross v. Venezuelan-Am. Indep. Oil Producers Ass’n, 230 F.
      Supp. 701, 704 (D. Del. 1964) (following Wax v. Riverview Cemetery Co. and
      holding that a Delaware corporation whose charter was voided for failure to pay
      franchise taxes could be sued on a contract); see also Sanders v. Vari, 143 A.2d 275,
      277 (Del. Ch. 1958).
Timothy Pagliara v. Federal National Mortgage Association
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May 31, 2017
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As to the factual argument regarding Fannie Mae’s name, the alleged facts and

Defendant’s arguments would be sufficient to entitle Pagliara to jurisdictional

discovery to prove whether Fannie Mae is subject to personal jurisdiction in

Delaware. But Plaintiff has requested that “the Court not delay this matter further

for jurisdictional discovery,”19 and Defendant has also argued against jurisdictional

discovery.20 In accordance with the parties’ requests and because, for the reasons

explained below, jurisdictional discovery would be futile, I address the Rule 12(b)(6)

motion to dismiss.

      B.     Pagliara’s Complaint Is Dismissed on Issue Preclusion Grounds

      Fannie Mae moves to dismiss under Court of Chancery Rule 12(b)(6) and

argues that the dispositive issue in this case—whether Pagliara has a right to inspect

Fannie Mae’s books and records—has been decided against Pagliara in Pagliara v.

Federal Home Loan Mortgage Corporation,21 a case from the Eastern District of

Virginia. As such, Defendant argues that this case should be dismissed on issue

preclusion grounds. “This Court will grant a motion to dismiss under . . . Rule

12(b)(6) only if the ‘plaintiff could not recover under any reasonably conceivable

19
      Pl.’s Answering Br. 33.
20
      Def.’s Opening Br. 10 n.7; Oral Arg. Tr. 9.
21
      203 F. Supp. 3d 678 (E.D. Va. 2016).
Timothy Pagliara v. Federal National Mortgage Association
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Page 9 of 16

set of circumstances susceptible of proof.’”22 On a Rule 12(b)(6) motion to dismiss,

the Court “must accept as true all of the well-pleaded allegations of fact and draw

reasonable inferences in the plaintiff’s favor.”23 The Court, however, is “not . . .

required to accept as true conclusory allegations ‘without specific supporting factual

allegations.’”24

      Federal law determines the effect of a federal judgment for issue preclusion

purposes.25 Under federal common law, when state law is the substantive law at

issue, the law of the state where a federal court sits determines the effects of that

court’s judgments.26 When federal law is the substantive law at issue, federal

preclusion law determines the effect of federal court judgments.27 The evaluation of



22
      City of Miami Gen. Empls. v. Comstock, 2016 WL 4464156, at *8 (Del. Ch. Aug.
      24, 2016) (quoting Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC,
      27 A.3d 531, 536 (Del. 2011)).
23
      In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006).
24
      Id. (quoting In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 65–66 (Del.
      1995)).
25
      Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001).
26
      Id.; see also Laborers’ Dist. Council Constr. Indus. Pension Fund v. Bensoussan,
      2016 WL 3407708, at *6 (Del. Ch. June 14, 2016); In re Wal-Mart Stores, Inc. Del.
      Deriv. Litig., 2016 WL 2908344, at *8 (Del. Ch. May 13, 2016).
27
      RESTATEMENT (SECOND) OF JUDGMENTS § 87 cmt. b, illus. 4 (AM. LAW INST.
      1982).
Timothy Pagliara v. Federal National Mortgage Association
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May 31, 2017
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Fannie Mae’s defense under HERA Section 4617(b)(2)(A)(i) is a question of federal

law, and federal preclusion law, thus, applies. Applying federal law, the U.S.

Supreme Court “regularly turns to the Restatement (Second) of Judgments for a

statement of the ordinary elements of issue preclusion.”28 Pagliara also relied on the

Restatement (Second) of Judgments at oral argument and in his brief.29 Under the

Restatement, a party to a prior proceeding is precluded from relitigating an issue

when (1) the “issue of fact or law is actually litigated” in the prior proceeding, (2)

the issue is “determined by a valid and final judgment,” and (3) “the determination

is essential to the judgment.”30 Section 28 of the Restatement includes an exception

when “[t]he issue is one of law and (a) the two actions involve claims that are

substantially unrelated, or (b) a new determination is warranted in order to take

account of an intervening change in the applicable legal context or otherwise to avoid

inequitable administration of the laws.”31

      The Eastern District of Virginia’s judgment in Pagliara is preclusive on the

issue of whether Section 4617(b)(2)(A)(i) of HERA transferred the Fannie Mae


28
      B & B Hardware, Inc. v. Hargis Indus., Inc., 135 S. Ct. 1293, 1303 (2015).
29
      Pl.’s Answering Br. 43 n.21; Oral Arg. Tr. 45.
30
      RESTATEMENT (SECOND) OF JUDGMENTS §§ 27, 29.
31
      Id. § 28.
Timothy Pagliara v. Federal National Mortgage Association
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stockholders’ right to seek books and records to the FHFA. Pagliara had a full

opportunity to oppose the motion to dismiss in Pagliara; he filed a 33-page brief on

that motion; and his counsel appeared and argued at oral argument on the motion.32

The decision was reduced to a final judgment, which Pagliara appealed.33 Pagliara

subsequently voluntarily dismissed his appeal.34 And the interpretation of Section

4617(b)(2)(A)(i) was essential to the court’s decision.35 Pagliara’s Virginia action

sought books and records pursuant to Virginia corporate law from Freddie Mac, a

“regulated entity”36 under HERA like Fannie Mae. The court was faced with the

question of whether Freddie Mac stockholders retained the right to obtain corporate

books and records from a regulated entity pursuant to state corporate law or whether




32
      Pl.’s Opp. to Mot. to Dismiss, Pagliara v. Fed. Home Loan Mortg. Corp., C.A. No.
      1:16-cv-00337-JCC-JFA (E.D. Va. July 19, 2016); Oral Arg. Tr., Pagliara v. Fed.
      Home Loan Mortg. Corp., C.A. No. 1:16-cv-00337-JCC-JFA (E.D. Va. Aug. 4,
      2016).
33
      Notice of Appeal, Pagliara v. Fed. Home Loan Mortg. Corp., C.A. No. 1:16-cv-
      00337-JCC-JFA (E.D. Va. Sept. 21, 2016).
34
      Mot. to Dismiss Pursuant to Fed. R. of App. P. 42(b), Pagliara v. Fed. Home Loan
      Mortg. Corp., No. 16-2090 (4th Cir. Jan. 20, 2017).
35
      Pagliara v. Fed. Home Loan Mortg. Corp., 203 F. Supp. 3d 678, 689 (E.D. Va.
      2016).
36
      12 U.S.C. § 4502(20).
Timothy Pagliara v. Federal National Mortgage Association
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Section 4617(b)(2)(A)(i) divested stockholders of that right.37 The Pagliara court

could not have resolved that question without interpreting Section 4617(b)(2)(A)(i).

As such, the court’s determination on this issue was essential to the judgment.

      Pagliara argues that the “pure legal question” exception to issue preclusion

should apply to the issue of whether Section 4617(b)(2)(A)(i) transferred Fannie

Mae stockholders’ right to books and records to the conservator. Pagliara asserts

that the Pagliara opinion was rejected by the subsequent U.S. Court of Appeals for

the District of Columbia Circuit opinion in Perry Capital LLC v. Mnuchin,38 altering

the legal context. But Perry Capital considered a different issue. Perry Capital

addressed the legal sufficiency of stockholder direct and derivative claims against

Fannie Mae and Freddie Mac arising out of the Third Amendment.39 The D.C.

Circuit agreed with the lower court in Perry Capital and held that Section

4617(b)(2)(A)(i) of HERA transfers the stockholders’ right to bring a derivative

claim—but not a direct claim—to the FHFA in all cases, even if the FHFA has a

conflict of interest.40 Thus, the court held that the stockholders’ derivative claims


37
      Pagliara, 203 F. Supp. 3d at 680.
38
      848 F.3d 1072 (D.C. Cir. 2017).
39
      Perry Capital, 848 F.3d at 1079-80.
40
      Id. at 1104.
Timothy Pagliara v. Federal National Mortgage Association
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were properly dismissed.41 Because Fannie Mae stockholders retain the right to

bring direct claims and a Section 220 claim is a direct claim, Pagliara argues that he

should be entitled to seek books and records. But the Eastern District of Virginia

considered the derivative-versus-direct distinction in Pagliara and held that, while

Pagliara still may enforce his rights through direct claims, he requires an underlying

right in order to state a claim. The court held that Section 4617(b)(2)(A)(i) divested

Fannie Mae and Freddie Mac stockholders of the right to seek books and records

and the derivative-versus-direct distinction was inapposite. Further, unlike Perry

Capital, Pagliara is the only case the parties cite that considered a stockholder action

for books and records. Thus, I do not agree that Perry Capital rejected Pagliara

such that issue preclusion should not apply to this question of law.42

      Pagliara also cites the federal district court’s order in this case as new

authority that has changed the legal context. But the district court’s order considered

only whether there existed federal subject matter jurisdiction over this Section 220


41
      Id. at 1106. The court, however, did hold that the District Court should have
      dismissed the claims under Rule 12(b)(6) as opposed to Rule 12(b)(1). Id. at 1104.
42
      Even the stockholder plaintiffs in Perry Capital LLC v. Mnuchin recognized that the
      derivative-versus-direct distinction is a different issue from whether stockholders
      possess an underlying right. Letter to Ct., Perry Capital LLC v. Mnuchin, No. 14-
      5243 (D.C. Cir. Aug. 25, 2016) (“Even if HERA deprives shareholders of their right
      to inspect the Companies’ books and records, this ‘does not affect’ their ‘right to
      bring a direct lawsuit.’”).
Timothy Pagliara v. Federal National Mortgage Association
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May 31, 2017
Page 14 of 16

claim. The district court found Perry Capital “persua[sive]” for the proposition that

not “all shareholder rights are categorically preempted by § 4617(b)(2)(A).”43 The

order suggests that that point was important to the district court only because if all

stockholder rights were categorically preempted by Section 4617(b)(2)(A), then all

stockholder causes of action against Fannie Mae may arise under federal law, vesting

the federal courts with jurisdiction over them. The district court wrote as follows:

             At most, Defendants raise a defense under federal law. . .
             . [A] federal defense to a state-law cause of action is not
             enough to establish federal question jurisdiction, and it
             would be improper to deprive the Chancery Court—a
             court very capable of interpreting federal law—of its
             exclusive jurisdiction over § 220 actions.44

The district court was not focused on the merits of Pagliara’s claims; it addressed

only the jurisdictional question. I disagree with Pagliara that the legal context has

materially changed since Pagliara such that it should not be given preclusive effect.

      Further, Pagliara and this case are not substantially unrelated because in both

cases, Pagliara sought books and records for the purpose of investigating misconduct


43
      Pagliara v. Fed. Nat’l Mortg. Ass’n, C.A. No. 16-193-GMS, at 3 n.1 (D. Del. Mar.
      8, 2017) (ORDER).
44
      Id. While a federal defense is not sufficient to vest the federal courts with federal
      question jurisdiction, the interpretation of HERA Section 4617(b)(2)(A)(i) is an
      issue of federal law, and federal law dictates the substantive rights between Pagliara
      and Fannie Mae in this case. Thus, I apply federal preclusion law to the judgment
      from the Eastern District of Virginia for this issue.
Timothy Pagliara v. Federal National Mortgage Association
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Page 15 of 16

related to Treasury Department investments in Fannie Mae and Freddie Mac. The

only material difference is that Pagliara sought books and records from Freddie Mac

in Virginia, and here he seeks books and records from Fannie Mae. Both Freddie

Mac and Fannie Mae are regulated entities under HERA, and Pagliara has pointed

to no reason that these cases are substantially unrelated.

      Pagliara also argues that the Pagliara holding regarding Section

4617(b)(2)(A)(i) was not essential to the judgment in that case because it was an

alternative holding. But the federal court’s holding that Section 4617(b)(2)(A)(i)

bars a stockholder books and records claim was its primary holding. The court also

held that even if it was wrong about Section 4617(b)(2)(A)(i), Pagliara lacked a

proper purpose to inspect books and records under Virginia law. But the proper

purpose holding was the court’s alternative holding.45

      Because the judgment of the Eastern District of Virginia is preclusive on the

issue of whether Section 4617(b)(2)(A)(i) of HERA transferred the stockholder right

to seek books and records to the FHFA, I need not consider the parties’ arguments

on the merits of this claim.


45
      Pagliara v. Fed. Home Loan Mortg. Corp., 203 F. Supp. 3d 678, 692 (E.D. Va.
      2016) (“In sum, the Court concludes that Pagliara does not retain the right to inspect
      corporate records. Even if Pagliara did possess that right, the Court will dismiss the
      Complaint because Pagliara does not have a proper purpose.”).
Timothy Pagliara v. Federal National Mortgage Association
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Page 16 of 16

III.   CONCLUSION

       For these reasons, Defendant’s Rule 12(b)(6) motion to dismiss is granted.

       IT IS SO ORDERED.

                                             Sincerely,

                                             /s/Tamika Montgomery-Reeves
                                             Vice Chancellor
