                        UNITED STATES DISTRICT COURT
                        FOR THE DISTRICT OF COLUMBIA

 In re Federal National Mortgage
 Association Securities, Derivative, and         MDL No. 1668
 "ERISA" Litigation

 Kellmer v. Raines, et al.                       Civil Action No. 07-1173 (RJL)

 Middleton v. Raines, et al.

 Arthur v. Mudd, et al.

 Agnes v. Raines, et al.


                               MEMORANDU~ER
                                     (June zs,-2009)

       Presently before the Court are two motions: 1) the motion of the Federal Housing

Finance Agency ("FHF A"), as conservator for Fannie Mae, to substitute itself for the

shareholder derivative plaintiffs in the above-captioned cases; and 2) the plaintiffs

motion in Agnes v. Raines, No. 08-1093, to sever his accounting-related claims from his

claims related to the subprime crisis. Upon consideration of the motions, the oppositions

filed thereto, and the oral argument held May 7, 2009, the Court will GRANT the motion

to substitute and will DENY without prejudice the motion to sever.

                                    BACKGROUND

       The shareholder plaintiffs in these cases each asserts derivative claims on behalf of

Fannie Mae against certain former officers and directors of Fannie Mae and certain third

parties. The complaints in Kellmer v. Raines, No. 07-1173, and Middleton v. Raines, No.

07 -1221, assert claims arising out of alleged accounting misconduct that occurred prior to



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2005. The complaint in Arthur v. Mudd, No. 07-2130, by contrast, asserts claims related

to the subprime mortgage crisis subsequent to May 2006. And the complaint in Agnes

asserts both accounting and subprime-related derivative claims, as well as a direct claim

relating to Fannie Mae's 2008 Proxy Statement.

       In July 2008, in response to the subprime mortgage crisis, Congress enacted the

Housing and Economic Recovery Act of2008 ("HERA"), Pub. L. No. 110-289, 122 Stat.

2654, codified at 12 U.S.C. § 4617. HERA, among other things, created the FHFA,

which succeeded the Office of Federal Housing Enterprise Oversight ("OFHEO") as the

regulator of the government-sponsored enterprises Fannie Mae and Freddie Mac. On

September 6, 2008, pursuant to the authority granted the FHF A in HERA, id. §

4617 (a)(2), FHF A Director James Lockhart appointed the FHF A conservator for Fannie

Mae. As Conservator, the FHF A acquired the power to take such action as may be

"necessary to put [Fannie Mae] in a sound and solvent condition" and to "preserve and

conserve the assets and property" of Fannie Mae. Id. § 4617(b)(2)(D)(i)-(ii). Further,

and relevant here, the FHFA "immediately succeed[ ed] to ... all rights, titles, powers,

and privileges of [Fannie Mae], and of any stockholder, officer, or director of [Fannie

Mae]," id. § 4167(b)(2)(A)(i) (emphasis added), and acquired the authority to "take over

the assets of and operate [Fannie Mae] with all the powers of the shareholders, the

directors, and the officers of [Fannie Mae] and conduct all business of [Fannie Mae]," id.

§ 46l7(b )(2)(B)(i) (emphasis added). Based on these provisions, the FHFA contends that

it is the sole entity with standing to pursue the derivative claims asserted in these four




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actions and, therefore, is entitled to substitution for plaintiffs immediately.! Plaintiffs,

not surprisingly, disagree, arguing that HERA does not eliminate their standing to

independently pursue the derivative claims in the event the FHF A elects not to pursue

them itself. Thus, plaintiffs argue that substitution should be granted only if the FHF A
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represents that it intends to vigorously prosecute the claims. For the following reasons, I

agree with the FHF A.

                                           DISCUSSION

        Plaintiffs collectively make two primary, and related, arguments in opposition to

the motion to substitute. First, they argue that HERA did not explicitly overrule - and

thus left intact - the common law rule that shareholders have standing to assert claims

derivatively on behalf of an entity in conservatorship or receivership if the conservator or

receiver refuses to prosecute the claims itself. See O'Connor v. Rhodes, 79 F.2d 146, 149

(D.C. Cir. 1935) (shareholder may bring a derivative suit where a receiver refuses to do

so or "where it would be a vain thing to make a demand upon [it], and it is shown there is

a necessity for a suit for the protection of the interests of creditors"); Landy v. FDIC, 486

F.2d 139, 148 (3d Cir. 1973) (noting that "[a] derivative suit by shareholders should not

be precluded merely because a bank is in the receivership of the FDIC" because



        FHFA also argues that the HERA's anti-injunction provision, 12 U.S.C. § 4617(f),
compels substitution for the derivative plaintiffs. The anti-injunction provision provides that,
except as otherwise authorized or requested, "no court may take any action to restrain or affect
the exercise of powers or functions of [FHFA] as a conservator." Id.
2
        The plaintiff in the Arthur action takes this position only in the alternative, arguing first
that the motion to substitute should be denied in its entirety regardless of FHF A's litigation
intentions. (PI. Arthur Opp'n at 13-14.) The plaintiff in the Middleton action failed to file a
response to the FHFA's motion, and thus concedes substitution. Local Civil Rule 7(b).


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"Congress has given no indication that it intended to preclude [such] derivative suits").

Second, plaintiffs argue that they retain standing to maintain these derivative suits

because the suits are an equitable remedy - rather than a legal "right" eliminated by

HERA - associated with their beneficial ownership of Fannie Mae shares, which HERA

does not eliminate, but rather leaves intact during the period of conservatorship.

        Plaintiffs' arguments are not persuasive in light of HERA's plain language. When

a federal statute's language is plain and unambiguous, the Court has no discretion but to

follow it. Robinson v. Shell Oil Co., 519 U.S. 337,340 (1997). Here, HERA's plain

language provides, in a broad stroke, that the FHF A succeeds "all rights, titles, powers,

and privileges" of the stockholders of Fannie Mae. 12 U.S.c. § 4617(b)(2)(A)(i); see

also id. § 4617(b)(2)(B)(i). This directive implies no exception, and plaintiffs' fail to

identify any accompanying statutory text to persuade this Court that, when read as a

whole, HERA carved out or otherwise permits the exception they propound. 3

        In this context, the Court finds persuasive the reasoning in the Ninth Circuit's

opinion in Pareto v. FDIC, 139 F .3d 696 (9th Cir. 1998), and in the recent memorandum

order in Sadowsky Testamentary Trust v. Syron, No. 08-5221, 2009 WL 1309776

(S.D.N.Y. May 6,2009) ("Sadowsky"). In Pareto, the Ninth Circuit confronted a similar

provision in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989

("FIRREA"), which, for the first time, vested in the FDIC "all rights, titles, powers, and

privileges" of shareholders when a bank entered FDIC receivership. 12 U.S.C. §


3
       Indeed, plaintiffs' concede that no legislative history exists to support their interpretation.
(Oral Arg. Tr. 27, May 7, 2009.)


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1821(d)(2)(A)(i). The Ninth Circuit held that the provision eliminated shareholders'

standing to pursue derivative claims on behalf of such a bank because "Congress has

transferred everything it could to the FDIC, and that includes a stockholder's right,

power, or privilege to demand corporate action or to sue directors or others when action

is not forthcoming." Pareto, 139 F.3d at 700. Similarly, in Sadowsky, the district court

addressed a nearly identical motion as that presented by the FHF A here. Finding the

reasoning in Pareto persuasive, the court held that HERA's plain language required

granting the FHFA's motion to substitute itself for a derivative plaintiff asserting

derivative claims on behalf of Freddie Mac, noting that such a result was neither absurd

nor impracticable. Sadowsky, 2009 WL 1309776, at * 1-4. Like the courts in Pareto and

Sadowsky, I conclude that HERA's broad grant of authority to the FHFA indicates that

Congress intended to shift as much as possible to the FHFA, including Fannie Mae's

shareholders' power and standing to pursue derivative claims, regardless of whether the
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FHFA decides to pursue the claims itself. See also Pirelli Armstrong Tire Corp. Retiree


4
         In contrast, I do not find persuasive the reasoning in Branch v. FDIC, 825 F. Supp. 384
(D. Mass. 1993) or Suess v. United States, 33 Fed. Cl. 89 (1995). Congress has detennined that
responsibility for deciding how to best preserve and conserve Fannie Mae's assets lies solely
with FHFA for the conservatorship period. That plaintiffs may retain the beneficial ownership of
their shares in Fannie Mae for the duration of the conservatorship does not compel a different
result. See Pareto, 139 F.3d at 701 (shareholders, whose standing to pursue derivative claims
was extinguished by FIRREA, "must simply rely upon the FDIC to do its job"); Sadowsky, 2009
WL 1309776, at *2 ("[W]hatever economic interest the [derivative plaintiff] retains does not
entitle it to overcome or supplement the FHFA's rightful standing .... "). Indeed, allowing
plaintiffs to continue to pursue derivative claims independent of FHFA would require this Court
to take action that would "restrain or affect" FHFA's discretion, which HERA explicitly
prohibits. 12 U.S.C. § 4617(f) ("[N]o court may take any action to restrain or affect the exercise
of powers or functions of [FHFA] as a conservator."). Finally, plaintiffs' concerns that standing
may be lost altogether if the conservatorship concludes before the litigation is resolved is no
more than speculation and has no effect on FHF A's entitlement to substitution at present.


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Med. Benefits Trust ex reI. Fed. Nat '/ Mortgage Ass 'n v. Raines, No. 07-7108 (D.C. Cir.

Dec. 24, 2008) (per curiam order) (granting unopposed FHF A motion to substitute itself

for derivative plaintiffs and withdraw petition for rehearing en banc); Lafayette Fed.

Credit Union v. Nat'/ Credit Union Admin., 960 F. Supp. 999, 1005 (E.D. Va. 1997)

(statute granting conservator of failed credit unions authority to "take over the assets of

and operate the credit union with all the powers of the members or shareholders" vested

in the conservator "the shareholders' former right to bring a derivative suit"), aif'd, 133

F.3d 915, 1998 WL 2881 (4th Cir. Jan. 7,1998) (per curiam, unpublished). Accordingly,

HERA's plain language compels the conclusion that, as Conservator for Fannie Mae,

only the FHF A has standing to pursue the claims asserted in these actions, and therefore

its motion to substitute itself for the shareholder derivative plaintiffs must be granted

immediately.5

                                               ***
       Accordingly, for the foregoing reasons, it is hereby

       ORDERED that the FHFA's motion to substitute itself for the shareholder

derivative plaintiffs in the above-captioned cases is GRANTED. The Clerk shall amend

the caption in each case to list plaintiff as "Federal Housing Finance Agency as

Conservator for the Federal National Mortgage Association ("Fannie Mae") and as legal

5
       Plaintiffs also argue that FHF A is too conflicted to permit substitution here because it
succeeded OFHEO, which had an extensive relationship with Fannie Mae during the lawsuits'
relevant periods. While courts have recognized an exception whereby a conflict between the
conservator or receiver and the defendant saves a derivative plaintiffs standing, see, e.g., Delta
Savings Bank v. United States, 265 F.3d 1017, 1022-23 (9th Cir. 2001); First Hartford Corp.
Pension Plan & Trust v. United States, 194 F.3d 1279, 1295 (Fed. Cir. 1999), OFHEO is not a
defendant here, and therefore this objection is without merit.


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successor to all the rights, titles, powers, and privileges of Fannie Mae and its

shareholders"; it is further

       ORDERED that the FHFA shall submit within 30 days of the date of this order a

status report notifying the Court of the FHFA's position(s) on the motions to dismiss

currently pending in the previously-captioned Kellmer, No. 07-1173, and Middleton, No.

07-1221, actions; and it is further

       ORDERED that the motion to sever filed by plaintiff Agnes and pending in the

previously-captioned Agnes, No. 08-1093, action [Dkt. #50] is DENIED without

prejudice. The FHFA shall submit within 30 days of the date of this order a proposed

order severing the accounting-related claims in that action from the claims related to the

subprime crisis. If plaintiff Agnes wishes to continue to pursue his direct claim relating

to Fannie Mae's 2008 Proxy Statement, Agnes shall submit within 30 days of the date of

this order a proposed order severing that claim, along with a proposed complaint. If

plaintiff Agnes fails to file such a proposed order, the direct claim will be dismissed for

failure to prosecute.

       SO ORDERED.



                                                 ~~~
                                                  United States District Judge




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