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Robinson v. Federal Housing Finance Agency

United States Court of Appeals, Sixth Circuit

November 22, 2017

Arnetia Joyce Robinson, Plaintiff-Appellant,
v.
Federal Housing Finance Agency; Melvin L. Watt; The Department of the Treasury, Defendants-Appellees.

          Argued: July 27, 2017

         Appeal from the United States District Court for the Eastern District of Kentucky at Pikeville. No. 7:15-cv-00109-Karen K. Caldwell, Chief District Judge.

         ARGUED:

          David H. Thompson, COOPER & KIRK, PLLC, Washington, D.C., for Appellant.

          Howard N. Cayne, ARNOLD & PORTER KAYE SCHOLER LLP, Washington, D.C., for Appellees Federal Housing Finance Agency and Watt. Mark B. Stern, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee Treasury Department.

         ON BRIEF:

          David H. Thompson, Charles J. Cooper, Peter A. Patterson, Brian W. Barnes, COOPER & KIRK, PLLC, Washington, D.C., Robert B. Craig, TAFT STETTINIUS & HOLLISTER LLP, Covington, Kentucky, for Appellant.

          Howard N. Cayne, Asim Varma, David B. Bergman, ARNOLD & PORTER KAYE SCHOLER LLP, Washington, D.C., for Appellees Federal Housing Finance Agency and Watt. Mark B. Stern, Abby C. Wright, Gerard Sinzdak, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee Treasury Department.

          Before: BATCHELDER, GIBBONS, and COOK, Circuit Judges.

          OPINION

          ALICE M. BATCHELDER, CIRCUIT JUDGE.

         Appellant Arnetia Joyce Robinson is a stockholder in the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"; collectively, the "Companies"). During the economic recession in 2007-2008, Congress enacted the Housing and Economic Recovery Act of 2008 ("HERA"), which created an agency, Appellee Federal Housing Finance Agency ("FHFA"), and authorized FHFA to place the Companies in conservatorship. The Companies, through FHFA as their conservator, entered into agreements with Appellee Department of the Treasury ("Treasury") that allowed the Companies to draw funds from Treasury in exchange for dividend payments and other financial benefits. The Third Amendment to those agreements modified the dividend payment structure and required the Companies to pay to Treasury, as a quarterly dividend, an amount just short of their net worth. The Third Amendment effectively transferred the Companies' capital to Treasury and prevented dividend payments to any junior stockholders, such as Robinson. Robinson brought suit against FHFA, its Director, and Treasury, alleging that the Third Amendment violated the Administrative Procedure Act ("APA"). The district court found that Robinson's claims were barred by HERA's limitation on court action and that Robinson had failed to state a claim upon which relief can be granted. We AFFIRM.

         I.

         Fannie Mae and Freddie Mac are for-profit, stockholder-owned corporations organized and governed by the federal government, pursuant to the Federal National Mortgage Charter Act, 12 U.S.C. §§ 1716-1723i, and the Federal Home Loan Mortgage Corporation Act, 12 U.S.C. §§ 1451-1459, respectively. Private stockholders own and trade the Companies' securities.[1]

         In 2008, during the economic downturn, Congress enacted the Housing and Economic Recovery Act of 2008 ("HERA"), Pub L. No. 110-289, 122 Stat. 2654 (codified at scattered sections of 12 U.S.C.), which created the Federal Housing Finance Agency ("FHFA") and authorized it to place the Companies in conservatorship or receivership under certain circumstances. HERA authorized FHFA as the Companies' conservator to "take such action as may be-(i) necessary to put the [Companies] in a sound and solvent condition; and (ii) appropriate to carry on the business of the [Companies] and preserve and conserve the assets and property of the [Companies]." 12 U.S.C. § 4617(b)(2)(D). HERA also detailed a "[l]imitation on court action, " stating that, "[e]xcept as provided in this section or at the request of the Director, no court may take any action to restrain or affect the exercise of powers or functions of [FHFA] as a conservator or a receiver." Id. § 4617(f). Moreover, HERA amended the Companies' charters to temporarily authorize Treasury to "purchase any obligations and other securities issued by the [Companies] . . . ." 12 U.S.C. §§ 1455(l)(1)(A), 1719(g)(1)(A). HERA also provided that the "Secretary of the Treasury may, at any time, exercise any rights received in connection with such purchases." Id. §§ 1455(l)(2)(A), 1719(g)(2)(A). The authority to purchase the Companies' securities expired on December 31, 2009. Id. §§ 1455(l)(4), 1719(g)(4).

         FHFA placed the Companies into conservatorship on September 6, 2008, and one day later Treasury entered into materially identical Preferred Stock Purchase Agreements ("PSPAs") with each of the Companies. Under the original PSPAs, Treasury committed to provide up to $100 billion in funding to each of the Companies. In exchange, Treasury received one million shares of government stock[2] in each of the Companies and warrants to purchase 79.9% of the common stock of each of the Companies at a nominal price. Treasury's government stock had an initial liquidation preference of $1 billion for each company. Treasury's liquidation preference increased proportionately (dollar for dollar) to the amount that the Companies withdrew from Treasury pursuant to the PSPAs. In addition to the liquidation preference, the PSPAs provided that Treasury would receive a cumulative cash dividend equal to 10% of the value of the outstanding liquidation preference or an in-kind government-stock dividend.[3] The PSPAs prohibited the Companies from paying dividends on any securities junior to Treasury's government stock unless full cumulative dividends had been paid to Treasury for all current and past dividend periods.

         On May 6, 2009, Treasury and the Companies, through FHFA, entered into the First Amendment to the PSPAs, which increased Treasury's total commitment to each of the Companies from $100 billion to $200 billion. On December 24, 2009, the parties executed the Second Amendment to the PSPAs, which again increased Treasury's funding commitment to the Companies. The Second Amendment established a formula that allowed Treasury's total commitment to each of the Companies to exceed (but not fall below) $200 billion depending upon any financial deficiencies the Companies experienced in 2010-2012 and any surplus existing as of December 31, 2012.

         By August 2012 (and as of December 2015, the date the amended complaint was filed), the Companies had drawn approximately $187 billion from Treasury, and-including the initial $1 billion liquidation preference from each of the Companies-Treasury held a total of $189 billion in liquidation preference between the Companies. The Companies drew approximately $26 billion of that combined amount from Treasury to pay the 10% cumulative dividends owed to Treasury under the PSPAs.

         The focus of this litigation is a third amendment to the PSPAs. On August 17, 2012, Treasury and the Companies, through FHFA, agreed to the Third Amendment, which replaced the previous dividend formula with a requirement that the Companies pay to Treasury a quarterly dividend equal to their entire net worth minus a diminishing capital reserve amount. Robinson refers to this portion of the Third Amendment as the "Net Worth Sweep."[4] The quarterly dividend payments do not reduce Treasury's outstanding liquidation preference or operate to otherwise redeem any of Treasury's government stock. The practical effect of the Net Worth Sweep is that the majority of the Companies' accumulated capital is delivered to Treasury each quarter, Treasury's liquidation preference and stock holdings remain the same, and private stockholders are even less likely to receive a return on their investment while the Net Worth Sweep is in place. Under the dividend structure in the Third Amendment, the Companies paid Treasury approximately $186 billion between the first quarter of 2013 and the final quarter of 2015. Had the Companies instead paid the 10% cash dividends detailed in the original PSPAs, the Companies would have paid Treasury approximately $57 billion over that same time period.

         Robinson alleges that she has owned shares of the Companies' common stock since September 2008. Robinson argues that FHFA and Treasury agreed to the Third Amendment to "[e]xpropriate" private stockholders' investments and to "[e]nsure" that the Companies could not exit conservatorship. Specifically, she alleges that "[t]he Net Worth Sweep . . . unlawfully usurped nearly $130 billion from the Companies and sent it all into Treasury's coffers, " and "plainly prevents the Companies from operating in a sound and solvent manner by prohibiting them from rebuilding their capital." Robinson also alleges that "FHFA agreed to the Net Worth Sweep only at the insistence and under the direction and supervision of Treasury, " abandoning its responsibility to act independently as the Companies' conservator.

         II.

         In October 2015, Robinson filed suit in the United States District Court for the Eastern District of Kentucky, seeking declaratory and injunctive relief against FHFA, Melvin Watt (the Director of FHFA), and Treasury. She argued that the Third Amendment violated the Administrative Procedure Act ("APA"), 5 U.S.C. § 706, because the Third Amendment exceeded FHFA's and Treasury's statutory authority under HERA and Treasury's conduct was arbitrary and capricious. Robinson requested (1) a declaration that the Net Worth Sweep portion of the Third Amendment violated HERA and Treasury acted arbitrarily and capriciously; (2) an injunction requiring Treasury to return all payments received through the Net Worth Sweep or to recharacterize such payments as a pay down of Treasury's liquidation preference and redemption of Treasury's stock; (3) vacatur of the Net Worth Sweep portion of the Third ...


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