In Re: Fannie mae/freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations

• Court: District Court, District of Columbia
• Decided: March 20, 2024
• Docket: Misc. No. 2013-1288
• Status: Published

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

FAIRHOLME FUNDS, INC., et al.,

Plaintiffs,

v. Case No. 1:13-cv-1053-RCL

FEDERAL HOUSING FINANCE AGENCY, et al.,

Defendants.

In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Case No. 1:13-mc-1288-RCL Action Litigations

This Order relates to: ALL CASES

MEMORANDUM AND ORDER

More than a decade after plaintiffs filed the first complaint in this case, it is ready for final

judgment. In August of 2023, a jury found for plaintiffs and awarded damages. In October, the

Court ruled that plaintiffs were entitled to prejudgment interest. But the Court has refrained from

entering a final, appealable judgment until it has approved plaintiffs’ plan for allocating damages.

Plaintiffs have now submitted a proposed plan of allocation and have moved for the Court

to approve its plan and enter judgment.1 See Pls.’ Mot., Berkley ECF No. 423; Class ECF No.

415. For the foregoing reasons, the Court will GRANT plaintiffs’ motion. However, it will accept

1 For purposes of this Order, “Berkley ECF No.” refers to the docket in No. 1:13-cv-1053, and “Class ECF No.” refers to the docket in No. 1:13-mc-1288.

1 one of defendants’ objections and will modify the judgment to slightly reduce the damages to be

distributed by the amount of the jury’s damages award attributable to shares held by the few opt-

outs other than the Berkley Plaintiffs. And it will reserve decision on the disposition of unclaimed

funds, as it is unclear whether any funds will actually be left undistributed.

I. BACKGROUND

The Court assumes familiarity with the relevant factual and procedural background,

detailed at length in numerous opinions. See Berkley Ins. Co. v. Fed. Hous. Fin. Agency, No. 1:13-

cv-1053 RCL, 1:13-mc-1288 (RCL), 2023 WL 4744155 (D.D.C. July 25, 2023); Berkley Ins. Co.

v. FHFA, Nos. 1:13-cv-1053 (RCL), 1:13-mc-1288 (RCL), 2023 WL 3790739, at *1–2 (D.D.C.

June 2, 2023); Fairholme Funds, Inc. v. FHFA, Nos. 1:13-cv-1053 (RCL), 1:13-mc-1288 (RCL),

2022 WL 4745970, at *1–3 (D.D.C. Sept. 23, 2022); Fairholme Funds, Inc. v. FHFA, Nos. 1:13-

cv-1439 (RCL), 1:13-mc-1288 (RCL), 2018 WL 4680197, at *1–4 (D.D.C. Sept. 28, 2018); Perry

Capital LLC v. Lew, 70 F. Supp. 3d 208, 214–19 (D.D.C. 2014).

In brief, this case comprises both a class action (brought by the “Class Plaintiffs”) and a

set of individual lawsuits (brought by the “Berkley Plaintiffs”) against defendants including the

Federal Housing Finance Agency (“FHFA”), the Federal National Mortgage Association (“Fannie

Mae”), and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The plaintiffs are

holders of common stock of Freddie Mac and junior preferred stock of Fannie Mae and Freddie

Mac. Plaintiffs filed suit in 2013 to challenge the “Net Worth Sweep” resulting from an

amendment to the Senior Preferred Stock Purchase Agreements between FHFA, in its capacity as

conservator for Fannie Mae and Freddie Mac, and the United States Department of the Treasury.

By the time the case reached the jury, plaintiffs’ sole remaining claim was for breach of the implied

covenant of good faith and fair dealing based on the Net Worth Sweep, which allegedly caused

2 plaintiffs damages in the form of loss of value of Fannie Mae preferred shares, Freddie Mac

preferred shares, and Freddie Mac common shares.

On August 14, 2023, the jury found in favor of the plaintiffs, awarding $281.8 million to

the Freddie Mac junior preferred shareholders, $31.2 million to the Freddie Mac common

shareholders, and $299.4 million to the Fannie Mae junior preferred shareholders. Verdict Form,

Berkley ECF No. 402, Class ECF No. 392. On October 24, 2023, the Court ruled that the Fannie

Mae junior preferred shareholder plaintiffs were entitled to prejudgment interest, and awarded

simple interest on the $299.4 million damage award, accruing from the date August 17, 2012 until

the date on which judgment is entered, at a fixed rate of 5% over the Federal Reserve discount rate

as of August 17, 2012. Fairholme Funds, Inc. v. Fed. Hous. Fin. Agency, No. 1:13-cv-1053 (RCL),

1:13-mc-1288 (RCL), 2023 WL 7002665, at *1, 9 (D.D.C. Oct. 24, 2023).

On November 17, the parties filed a joint statement setting forth their calculation of

prejudgment interest and explaining their disagreement about whether the Court could issue a final,

appealable judgment before approving the plan of allocation. See Berkley ECF No. 417, Class

ECF No. 408. The Court concluded that it could not issue a final, appealable judgment until it had

approved a plan of allocation. See Berkley ECF No. 418; Class ECF No. 409. The Court therefore

ordered the parties to submit a written report outlining plaintiffs’ plan of allocation and proposing

a briefing schedule in the event the parties had concerns for which they sought resolution by the

Court. Id. Once the parties had filed their joint submission, the Court imposed a briefing schedule.

See Berkley ECF No. 420; Class ECF No. 412.

On January 22, 2024, plaintiffs submitted their proposed plan of allocation and proposed

judgment and moved for the Court to approve their plan of allocation and enter judgment. See

Pls.’ Mot., Berkley ECF No. 423; Class ECF No. 415. Defendants filed an opposition. See Defs.’

3 Opp’n, Berkley ECF No. 424, Class ECF No. 417. They challenge three aspects of plaintiffs’

proposals. First, defendants argue that the proposed judgment would distribute the jury’s entire

damages award without reducing the damages to account for the small number of shareholders

(other than the Berkley Plaintiffs) who opted out of the class. Id. at 1. Second, defendants contend

that the proposed plan of allocation would improperly authorize distribution to holders of shares

that were previously owned by shareholders who had opted out of the class. Id. at 1–2. Third,

defendants challenge the legality of plaintiffs’ proposed method of distributing unclaimed funds—

cy pres distribution to an affordable housing charity—and instead assert that any unclaimed funds

should revert to defendants. Id. at 3. Plaintiffs filed a reply. See Pls.’ Reply, Berkley ECF No.

425, Class ECF No. 418.

Plaintiffs’ motion is now ripe for review.

II. LEGAL STANDARDS

In the class action context, a plan of allocation, also known as a distribution plan, typically

establishes who is eligible to receive damages, how individual payments will be allocated among

the eligible class members, and what to do with any unclaimed funds. See 2 Joseph M.

McLaughlin, McLaughlin on Class Actions § 6:23 (20th ed.); Cook v. Rockwell Int’l Corp., 618

F.3d 1127, 1138 (10th Cir. 2010). Any plan of allocation must be approved by the court. “As

with settlement agreements, courts consider whether distribution plans are fair, reasonable, and

adequate.” In re Fed. Nat’l Mortg. Ass’n Sec., Derivative, & “ERISA” Litig., 4 F. Supp. 3d 94,

107 (D.D.C. 2013) (quoting In re Lorazepam & Clorazepate Antitrust Litig., No. 99-ms-276

(TFH), 2003 WL 22037741, at *7 (D.D.C. June 16, 2003)). In evaluating a proposed plan of

allocation, the district court will consider whether it will equitably distribute the settlement

proceeds or damages award. See In re Agent Orange Prod. Liab. Litig., 818 F.2d 179, 181 (2d

Cir. 1987) (“District courts enjoy broad supervisory powers over the administration of class-action

4 settlements to allocate the proceeds among the claiming class members . . . equitably.”) (internal

quotation marks and citation omitted) (alteration in original); Sullivan v. DB Invs., Inc., 667 F.3d

273, 328 (3d Cir. 2011) (en banc) (same); see also 2 McLaughlin, supra, § 6:23 (“The objective in

developing a plan [of allocation] is equitable distribution of finite settlement proceeds.”).

III. DISCUSSION

The Court will consider in turn each of defendants’ challenges to plaintiffs’ proposed

judgment and plan of allocation. It agrees with defendants that the judgment must be revised to

deduct the portion of the damages award attributable to the small number of opted-out shareholders

from the total amount to be distributed. However, defendants’ argument that the plan should not

allocate damages to persons holding shares that were previously held by opted-out shareholders

fails because it is irreconcilable with the definition of the class. Finally, the Court will for now

refrain from deciding on the method of distribution for unclaimed funds, since it is not yet clear

any funds will be left unclaimed.

A. The Court Will Modify the Proposed Judgment to Deduct the Portion of the Damages Award Attributable to Opted-Out Shareholders From the Total Amount To Be Distributed

The Court will modify the judgment to slightly reduce the damages paid to class members

and the Berkley Plaintiffs by the amount of the jury’s damages award attributable to shares held

by opt-outs other than the Berkley Plaintiffs. 2

2 Plaintiffs argue that defendants’ argument should be rejected because defendants “lack any cognizable interest in challenging how the award is distributed among Class members” and therefore lack standing to raise this argument. See Pls.’ Mot. 10. This invocation of standing is puzzling. Standing doctrine “limits the category of litigants empowered to maintain a lawsuit in federal court to seek redress for a legal wrong.” Spokeo, Inc. v. Robins, 578 U.S. 330, 338 (2016). Plaintiffs have cited no authority for the notion that a defendant must meet the requirements of Article III standing to object to aspects of a plaintiff’s plan of allocation. The two cases invoked by plaintiffs involve the standing to object of third parties, rather than defendants. See In re Equity Funding Corp. of Am. Sec. Litig., 603 F.2d 1353, 1361 (9th Cir. 1979); In re Holocaust Victim Assets Litig., 314 F. Supp.2d 155, 168 (E.D.N.Y. 2004). It would be curious if the Court, in exercising its duty to evaluate whether plaintiffs’ proposal would equitably distribute the damages award, could not consider legal arguments of defendants. At any rate, because defendants argue that

5 The defendants object that plaintiffs’ proposed judgment calls for the payment of the entire

amount of damages awarded by the jury to the class members and Berkley Plaintiffs, even though

the jury award reflects damages to both those plaintiffs and opt-outs. See Defs.’ Opp’n 5–9.

Defendants argue, and plaintiffs do not dispute, that “[a]t trial, Plaintiffs presented evidence, and

the jury found damages, based on losses experienced by all shareholders—100% of the relevant

[Fannie Mae and Freddie Mac] shares, including shares held by opt outs.” Id. at 6; Pls.’ Reply 2.

The jury verdict thus includes money owed to the opt outs. But the proposal calls for the entire

damages award to be distributed. According to defendants, they thus “would be forced to pay

class members for harm that the jury found was suffered by opt-outs,” which would violate the

Rules Enabling Act. Defs.’ Opp’n 5.

The Court agrees that the proposal would improperly require defendants to overpay the

class members. To be sure, the difference is minute. According to plaintiffs, only thirty-two

individual shareholders opted out, other than the Berkley Plaintiffs who are of course entitled to

damages. Pls.’ Mot. 11–12; see also Pls.’ Mot., Ex. B, App. C, Berkley ECF No. 423-2, Class

ECF No. 415-2 (listing the thirty-two opt-outs). So, the damages award of approximately $810

million would be reduced by an estimated $200,000. Pls.’ Mot. 11–12. Nonetheless, Federal Rule

of Civil Procedure 23’s “requirements must be interpreted in keeping . . . with the Rules Enabling

Act, which instructs that rules of procedure ‘shall not abridge, enlarge or modify any substantive

right.’” Amchem Prod., Inc. v. Windsor, 521 U.S. 591, 613 (1997) (quoting 28 U.S.C. § 2072(b)).

Overcompensating the class would violate the Rules Enabling Act by “alter[ing] defendants’

plaintiffs’ proposal would cause them to pay more in damages than they should, they have asserted a “classic pocketbook injury.” See Tyler v. Hennepin Cnty., Minnesota, 598 U.S. 631, 636 (2023). Plaintiffs also argue that defendants waived this challenge by not raising it before or during trial. See Pls.’ Mot. 11– 12; Pls.’ Reply 2–3. But defendants could not have raised an objection to plaintiffs’ proposed judgment before plaintiffs had unveiled it in the first place.

6 substantive right to pay damages reflective of their actual liability.” See McLaughlin v. Am.

Tobacco Co., 522 F.3d 215, 231 (2d Cir. 2008). The amount of aggregate damages must instead

“roughly reflect the aggregate amount owed to class members.” Seijas v. Republic of Argentina,

606 F.3d 53, 58–59 (2d Cir. 2010).

True, courts applying these principles have typically dealt with greater disconnects

between proposed damages and actual liability. See, e.g., McLaughlin, 522 F.3d at 231 (rejecting

as violative of the Rules Enabling Act an aggregate determination of damages that was “likely to

result in an astronomical damages figure that does not accurately reflect the number of plaintiffs

actually injured by defendants and that bears little or no relationship to the amount of economic

harm actually caused by defendants.”). But there is no exception in the Rules Enabling Act

permitting modification of substantive rights so long as the infringement is not too much in the

grand scheme of things. Since approximately $200,000 of the total damages award has nothing to

do with defendants’ actual liability to the class members and Berkley Plaintiffs, the Court cannot

include that sum in the judgment without abridging defendants’ substantive rights.

Perhaps sensing their overreach, plaintiffs have suggested a remedy of reducing the

judgment by the amount attributable to opt-outs. See Pls.’ Mot. 12 n.4. The Court will adopt this

suggestion and will modify the proposed judgment by including the language put forward by

plaintiffs, and not disputed by defendants: “IT IS FURTHER ORDERED AND ADJUDGED that

the judgment amount for each of the Classes shall be reduced by the sum of damages and interest

attributable to “Specified Shares,” as defined by the Plan of Allocation, incorporated herein.” See

id.; Defs.’ Opp’n. 7 (encouraging the Court to correct the proposed plan in the manner suggested

by plaintiffs).

7 B. Defendants’ Objection That the Proposed Plan Would Improperly Pay Damages to Holders of Shares Previously Owned by Shareholders Who Opted Out of the Classes Is Meritless

The Court rejects defendants’ argument that plaintiffs’ proposed plan would improperly

award damages to holders of shares whose previous owners opted out of the class, because this

contention is flatly inconsistent with the definition of the class adopted by the Court.

Defendants fault plaintiffs’ proposed plan for permitting damages to be paid to holders of

shares whose previous owners opted out of the class. See Defs.’ Opp’n 9–17. According to the

defendants, this would violate common law principles because it would mean that when the opted-

out shareholder sold their shares to another person, they effectively assigned to the buyer a right

the opted-out seller did not actually possess—the right to participate in class recovery. See id. at

11–13. The plan of allocation therefore “must include a mechanism for identifying and excluding

from payment all opted-out shares, thereby limiting distributions only to class members.” Id. at

10. Any argument by plaintiffs that the subsequent shareholders are not limited to the rights of the

previous, opted-out shareholders, defendants argue, is estopped because plaintiffs have previously

argued in other contexts that the claims travel with the share. See id. at 14–15.

Yet defendants’ theory runs aground on the definitions of the classes adopted by the Court.

When the Court granted plaintiffs’ motion for class certification, it certified the following classes:

1. All current holders of junior preferred stock in Fannie Mae as of the date of certification, or their successors in interest to the extent shares are sold after the date of certification and before any final judgment or settlement (the “Fannie Preferred Class”);

2. All current holders of junior preferred stock in Freddie Mac as of the date of certification, or their successors in interest to the extent shares are sold after the date of certification and before any final judgment or settlement (the “Freddie Preferred Class”); and

3. All current holders of common stock in Freddie Mac as of the date of certification, or their successors in interest to the extent shares are sold after

8 the date of certification and before any final judgment or settlement (the “Freddie Common Class”).

Order, Class ECF No. 139. Under the plain meaning of these definitions, a person can be a class

member if they held the relevant share on the date of certification. Or they can be a class member

if they are a successor in interest to such a person and hold a share after certification but before

final judgment. The definitions do not differentiate between successors in interest to those who

remained part of the class and successors in interest to those who opted out. Not only does the

Order contain no caveat excluding the latter category, but the Court-approved notice to class

members lacks any hint of such an exception. See Notice of Class Action, Class ECF No. 140-1.

By imposing such an exception, defendants seek to rewrite the class definitions.

More fundamentally, defendants err in speaking of “shares that were validly opted out of

the classes.” See Defs.’ Opp’n 1, 6. The classes are defined in terms of shareholders, not shares.

So, shareholders could opt out; shares could not. See Notice of Class Action 6 (informing

potential class members that they could “remove [themselves] from or ‘opt out’ of the Class(es)”).

Plaintiffs’ plan is not deficient for not recognizing a non-existent category of tainted shares that

exclude their owners from the class. Similarly, defendants’ argument that “if the claim travels

with the shares, then the opt-out election must do so as well,” Defs.’ Opp’n 12, relies on the faulty

premise that class membership is a feature of the share that may or may not be transferred to a

successor in interest. See id. (asserting that “an opt-out has no right to participate in the class

recovery, and thus they cannot assign a right to participate in the class recovery.”). But under the

Court’s Order granting class certification, a purchaser’s qualification for class membership is not

based on any transferred right, but instead triggered by their identity as a successor in interest to

someone who held shares as of the date of certification. That a person purchased a share from

someone who had previously opted out of the class is simply irrelevant.

9 The Court therefore concludes that the proposed plan properly includes shareholders who

are successors in interest to previous owners who opted out of the class.

C. The Court Will Reserve Decision on the Disposition of Unclaimed Funds

Since it is unclear whether any funds will in fact be left unclaimed, the Court will reserve

decision on whether unclaimed funds should revert to defendants or be distributed through cy pres.

Plaintiffs contend that because the plan of allocation provides for disbursement to brokers

and registered shareholders of record, “it is probable that the amount of undistributed funds will

be minimal to non-existent.” Pls.’ Reply 15–16 (citing Plan of Allocation (POA) ¶ 13, Berkley

ECF No. 423–2, Class ECF No. 415-2); see also Pls.’ Mot. 9 (same); POA ¶ 15 (“Given the

Allocation Plan and Distribution Method, Plaintiffs expect there will not be any unclaimed or

undistributed funds in this case.”). Although plaintiffs urge the Court to nonetheless decide

whether unclaimed funds should revert to defendants or be subject to a cy pres decree, they “do

not object to reserving decision as to the appropriateness of a cy pres award until after the

distribution process.” Pls.’ Reply 20.

At this time, there is no need for the Court to decide whether cy pres is a legally valid

remedy, whether the equities favor cy pres or reversion, and whether there is an adequate nexus

between the proposed cy pres beneficiary and this case. “[P]recedent and prudence counsel” courts

“to avoid unnecessary dicta.” Louisiana Env’t Action Network v. Browner, 87 F.3d 1379, 1385

(D.C. Cir. 1996). The Court will therefore refrain from plunging into this thicket unless and until

it must. It will instead modify ¶ 15 of the proposed plan of allocation to replace the sentence about

cy pres with the following: “The Court shall defer decision on the disposition of undistributed

funds until such time as the amount of undistributed funds, if any, has been determined.” See Pls.’

Reply 20.