IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

 

FAIRHOLME FUNDS, INC., et al., )
)
Plaintiffs, )
) Case No. 1:13-cv-1053-RCL
V. )
)
THE FEDERAL HOUSING FINANCE )
AGENCY, et al., )
)
Defendants. )
)
MEMORANDUM OPINION

 

In April of 2019, plaintiffs Fairholme Funds, Inc., et al. (“Fairholme”) subpoenaed thirty-
seven requests for production of documents (“RFPs”) from the U.S. Department of the Treasury
(“Treasury”). Treasury has refused to comply with the subpoena, so Fairholme has filed a
Motion to Compel Compliance with Subpoena to the U.S. Treasury for certain RFPs. ECF No.
103. For the reasons set forth below, the Court will grant plaintiff's Motion to Compel and

require Treasury to produce RFPs 1-8, 10-14, 15(a)-(d), 16-26, and 29-30.

BACKGROUND
I. Underlying Dispute
After the economic crash in 2008, Congress enacted the Housing and Economic
Recovery Act of 2008. Pub. L. No. 110-289, 122 Stat. 2654. This statute created the Federal
Housing Finance Agency (FHEA”) and empowered it tb act as conservator or receiver of the
Federal National Mortgage Association (“Fannie Mae’) and the Federal Home Loan Mortgage
Corporation (“Freddie Mac’). The statute also authorized Treasury to purchase securities issued

by Fannie Mae and Freddie Mac (collectively “the GSEs’). FHFA exercised its statutory
|
authority to place the GSEs into conservatorship around the same time that Treasury entered into
Senior Preferred Stock Purchase Agreements (““PSPAs”) pursuant to which Treasury invested
billions of dollars in the GSEs to keep them from defaulting and to maintain their net worth at a
positive level (“Net Worth Sweep”). See Perry Capital LLC ex rel. Inv. Funds v. Mnuchin, 864
F.3d 591, 599 (D.C. Cir. 2017). In exchange for this investment, Treasury received senior
preferred stock with a liquidation preference, warrants to purchase 79.9% of each enterprise’s
common stock, commitment fees, and quarterly dividends as a percentage of the liquidation
preference of its senior preferred stock. In 2012, Treasury and FHFA entered into the Third
Amendment to the PSPAs, thereby replacing the GSEs’ obligation to pay Treasury quarterly
dividends at a fixed rate with a variable dividend equal to the amount, if any, by which the
enterprises’ net worth exceeds a capital buffer. The Third ‘Amendment also suspended the
periodic commitment fee that each GSE would otherwise owe to the taxpayers for the remaining
funding available to the GSEs for as long as the variable dividend remains in effect. Plaintiffs
filed their original complaint challenging the Third Amendment in 2013. ECF No. 1. This case is
now on remand following a decision from the United States Court of Appeals for the District of
Columbia, so only claims against FHFA and the GSEs remain; Treasury is no longer a party to
this action. The ultimate issue in this case is whether defendants are liable for breach of the

implied covenant of good faith and fair dealing.

II. Dispute Regarding Subpoena

Plaintiffs served a third-party subpoena on Treasury on April 9, 2019. Pursuant to an
agreement between the parties, Treasury responded via letter on May 10, 2019. The subpoena
included thirty-seven RFPs seeking information from July 1, 2008 to January 31, 2014. Treasury

determined that due to Toughy regulations, Treasury and its employees could not produce any
documents without prior agency authorization. See United States ex rel. Toughy v. Ragen, 340
U.S. 462 (1951). Treasury therefore denied the requests to produce documents in response to
thirty-six of the thirty-seven RFPs as unduly burdensome, disproportionate to the needs of the
case, and/or seeking documents available from other sources. In July of 2019, plaintiffs filed
their Motion to Compel but dropped RFPs 9, 15(e), 27-28, and 31-37. Their motion seeks full

compliance with the remainder of their Rule 45 subpoena.

LEGAL STANDARD

The Federal Rules of Civil Procedure (“Fed. R. Civ. P.”) govern discovery disputes,
including disputes regarding subpoenas. When a party files a motion,to compel, the first
consideration is whether the discovery sought is relevant to any party’s claim or defense. See
Fed. R. Civ. P. 26(b)(1). Courts generally construe the concept of relevance broadly, as
disclosure is favored over nondisclosure. See In re Denture Cream Prod. Liab. Litig., 292 F.R.D.
120, 123 (D.D.C. 2013) (“For purposes of discovery, relevance is liberally construed.”); Zelaya
v. UNICCO Serv. Co., 682 F. Supp. 2d 28, 32 (D.D.C. 2010). Although the low bar for relevance
remains the same for both parties and nonparties alike, courts do attempt to be “generally
sensitive to the costs imposed on third parties.” Watts v. SEC, 482 F.3d 501, 509 (D.C. Cir.

2007).

If the materials sought are relevant, the Court must then determine whether the subpoena
would place “an undue burden” on the person or entity from whom discovery is sought. Watts,
482 F.3d at 508. In assessing whether a discovery request imposes an undue burden, the Court
must analyze whether the request is “unreasonably cumulative or duplicative,” whether it “can be

obtained from some other source that is more convenient, less burdensome, or less expensive,”
and “whether it is proportional to the needs of the case.” Fed. R. Civ. P. 26(b)(1); Fed. R. Civ. P.
26(b)(2)(C). The person or entity “resisting discovery” has the “burden . . . to show that the
documents requested are... unduly burdensome[.]” Jn re Micron Tech., Inc. Sec. Litig., 264
F.R.D. 7, 9 (D.D.C. 2010); see also Buzzfeed, Inc. v. U.S. Dep't of Justice, 318 F. Supp. 3d 347,
356 (D.D.C. 2018). Vague and conclusory assertions are not sufficient; rather, a showing of
undue burden “must be specific” and concrete. See, e.g., Flatow v. Islamic Republic of Iran, 196
F.R.D. 203, 207 (D.D.C. 2000). Assertions of an undue burden without “specific estimates of
staff hours needed to comply” should be “categorically rejected.” Association of Am. Physicians

& Surgeons vy. Clinton, 837 F. Supp. 454, 458 n.2 (D.D.C. 1993).

‘Even if the entity obj Edin to the subpoena proves that there is some burden, that burden
must be balanced against other factors before it can truly be considered undue. Fed. R. Civ. P.
26(b)(1) states that the proportionality inquiry considers “the importance of the issues at stake in
the action, the amount in controversy, the parties’ relative access to relevant information, the
parties’ resources, the importance of the discovery in resolving the issues, and whether the
burden or expense of the proposed discovery outweighs its likely benefit.” Therefore, the undue
burden test essentially considers the totality of the circumstances rather than focusing on any one

particular factor.

ANALYSIS
- As explained in this Section of the Memorandum Opinion, the Court finds that the
materials sought do meet the low threshold for relevance. The Court also finds that Treasury has
not demonstrated with the requisite specificity how granting Fairholme’s Motion to Compel

would constitute an undue burden. The Court will therefore grant the Motion to Compel.
I. Plaintiffs’ Requested Materials are Relevant to this Case.

The materials that Fairholme subpoenaed are relevant to this case. The underlying claim
requires determining whether the Net Worth Sweep violated the parties’ reasonable expectations.
This involves considering whether the contracting party acted unreasonably. Even though
Treasury is no longer a party to this case, the information that it possesses may still be relevant to
Fairholme’s overarching claim. Some of the relevant questions that Fairholme has identified in
connection with their RFPs are:

e What should the Companies’ private shareholders have reasonably expected in 2008
when the Housing and Economic Recovery Act was enacted and the Companies were
forced into conservatorship?

e Did the Companies receive value in exchange for providing Treasury with enhanced
disbursement rights through the Net Worth Sweep? If so, to what extent?

e When the Net Worth Sweep was imposed, did the Companies, FHFA, and Treasury
understand that the Companies were about to achieve sustained profitability?

e When the Net Worth Sweep was imposed, did the FHFA know that the Company’s
profitability would permit them to pay the 10% dividend under the original PSPAs .
without the necessity of drawing from Treasury?

e Did the Net Worth Sweep permit Treasury to reap enormous benefits in exchange for no
new investment?

e Could plaintiffs have reasonably expected that the Companies would give away all of
plaintiffs’ residual rights to dividends and liquidation surplus in exchange for no
investment and no meaningful consideration at a time when the Companies were highly

profitable?
e How did the events surrounding the placement of the Companies into conservatorship
affect the reasonable expectations of the parties?

e Did defendants exercise their discretion arbitrarily or unreasonably in a way that
frustrated plaintiffs’ expectations under the contract?

e Was the threat of a downward spiral of circular dividend payments used as mere pretext
to justify the Net Worth Sweep?

e Did the Companies need to draw on Treasury’s funds to pay dividends and could the
Companies have repaid Treasury for its investment under the pre-Third Amendment
dividend structure? —

e Did private shareholders in 2008 reasonably expect the conservatorships to be

temporary?

Fairholme has specifically identified which RFPs correspond to which of these questions.
The Court therefore finds that Fairholme has met the low bar for relevance. In addition to
explaining why the RFPs are relevant to the breach of implied covenant claim, Fairholme also
explains how the requested documents may be relevant to potential defenses that FHFA and the
GSEs could raise. Fairholme also points out that Treasury may have information relevant to
damages, which would be critical if plaintiffs were to prevail on the merits of their claim.
Although Treasury is correct that it is no longer a party to this case, that does not change the
fundamental definition of relevance. Relevance is not a particularly high bar, and that bar is met
here. Despite being a nonparty, Treasury has been inextricably linked to the underlying facts of
this lawsuit from the beginning. Essentially, because there is a likelihood that Treasury has
information relevant to some claim or defense, the Court finds that the requested information is

relevant for the purposes of discovery.
II. Plaintiffs’ Discovery Request Will Not Impose an Undue Burden on Treasury.

Treasury has not convinced this Court that granting Fairholme’s Motion to Compel
would unduly burden the agency. Quite simply, Treasury has not met its “heavy burden to show
that the subpoena should not be enforced.” Millennium TGA, Inc. v. Comcast Cable Communs.
LLC, 286 F.R.D. 8, 11 (D.D.C. 2012) (citing Northrop Corp. v. McDonnell Douglas Corp., 751
F.2d 395, 403 (D.C. Cir. 1984)). As stated above, explanations that are cursory or vague are
insufficient, and Treasury’s arguments are not specific enough to warrant a finding of an undue
burden. Fairholme correctly points out that Treasury has not provided any details regarding the
resources and effort required to produce the requested materials. Treasury makes only vague —
assertions, such as, “[S]everal of the requests implicate documents that are likely to be subject to
various privilege assertions, which will require both Treasury and Justice Department attorneys
to spend significant hours conducting a document-by-document review for responsiveness and
privilege and creating a privilege log.” ECF No. 106 at 21. Similarly, Treasury broadly asserts
that complying with plaintiffs’ subpoena “would take hundreds of hours,” but Treasury fails to
specify how many hundreds of hours. Will it be 100? Will it be 900? How many attorneys will
be required? To be frank, Treasury’s Memorandum of Points and Authorities in Opposition to
Plaintiffs’ Motion to Compel Third-Party Discovery (ECF No. 106) leaves the Court with more
questions than answers. Courts rarely find that relevant requests would constitute an undue

burden, and Treasury has not adequately explained why the Court should find otherwise here.

Even if Treasury had given more specific details about the production process,
establishing that production would be burdensome is still not enough—production must be
unduly burdensome. Such a determination requires balancing the burden against other factors.

Here; the stakes are clearly quite high, as plaintiffs seek hundreds of billions of dollars in
damages. Treasury also has the resources to complete the requested production, and the Court
will not entertain the preposterous notion that an agency as large as Treasury lacks the manpower
to complete this request. Other government agencies have not claimed undue burden throughout
the discovery process, and Treasury apparently had no difficulty meeting the discovery demands
in the Court of Federal Claims (“CFC”) litigation. The Court is in no way trying to trivialize the
fact that complying with Fairholme’s subpoena will require both time and money; however, the
Court also believes that Treasury is more than capable of utilizing the vast resources at its

disposal to produce the requested documents.

Additionally, plaintiffs accurately note that Treasury is far from a Pantereacd bystander.
Although this Court does not agree with Fairholme’s characterization of Treasury as a third party
“in name only,” (ECF No. 103-1 at 17) Treasury has been involved with the underlying factual
issues in this case from the beginning. When a nonparty “actually has an interest in the outcome
of the case,” that interest is accounted for when analyzing the totality of the circumstances.
Linder vy. Calero-Portocarrero, 180 F.R.D. 168, 177 (D.D.C. 1998). Disclosure is also favored
when the nonparty “was substantially involved in the underlying transaction and could have
anticipated that such transaction could potentially spawn litigation or discovery.” Wells Fargo
Bank, N.A. v. Konover, 259 F.R.D. 206, 207 (D. Conn. 2009). Treasury played an important role
in implementing the Net Worth Sweep and has been heavily involved with the PSPAs. Because
Treasury “was involved in the litigation arising out of the same facts or was substantially
involved in the underlying transaction,” it is inherently “interested in the outcome of the
litigation,” so concerns about the burden placed on the nonparty are not as great as they would be
if Treasury truly had no interest in or involvement with the underlying lawsuit. In re Folliard,

2012 WL 907763, at *3 (D.D.C. March 6, 2012). Furthermore, Treasury is incorrect in arguing
that the materials it turned over during discovery in the CFC litigation are necessarily sufficient
to meet plaintiffs’ needs in this case. It is true that the rules of discovery attempt to limit
cumulative production, but the CFC litigation was more limited than this case. Therefore,
relevant information that was not included in the CFC disclosures could very well be found in

the materials plaintiffs seek here.

Finally, it is worth noting that plaintiffs offered to cut numerous RFPs from their request.
Indeed, plaintiffs’ Motion to Compel seeks an order from this Court only for the following RFPs:
1-8, 10-14, 15(a)-(d), 16-26, and 29-30. This Court commends Fairholme’s efforts to
conitrarhise and believes that Sdinproniive should be rewarded whenever permitted by law.
Fairholme’s willingness ‘to Foiliove certain RFPs from its initial request also-undermines
Treasury’s undue burden argument, as Fairholme removed many of the RFPs that would have
potentially been duplicative or cumulative. For these reasons, the Court finds that the RFPs are

relevant and that complying with the subpoena will not unduly burden Treasury.

CONCLUSION
Based on the foregoing, the Court will GRANT plaintiffs’ Motion to Compel

Compliance with Subpoena to the U.S. Treasury.

The Court will ORDER that the U.S. Treasury must timely produce all non-privileged
documents that are responsive to the following requests for production attached to the subpoena
that is the subject of the foregoing Motion to Compel: RFPs 1-8, 10-14, 15(a)-(d), 16-26, and 29-

30.
The Court will FURTHER ORDER that the U.S. Treasury must also produce a privilege
log identifying documents that are responsive to the foregoing requests for production that the

U.S. Treasury has withheld on the basis of its assertion of applicable privileges.

A separate Order accompanies this Memorandum Opinion.

Date: November 8, 2019 sce Bula

Royce C. Lamberth .
United States District Court Judge

 

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